2012 (11) TMI 274 - AT - Income Tax

Interest on REC Bonds Held that - REC Bonds were purchased by the assessee firm for availing the exemption on capital gain in the earlier years, it is clear that the REC bonds were purchased by the assessee for specific purpose of availing the exemption on capital gain and not as business activity of the assessee. This, being the fact, then the interest earned on the REC bonds cannot partake the character of business income - interest on REC bonds to be treated as income from other sources. Writing back of Sundry Creditors u/s 41(1) Held that - Sundry Creditors are related to the business of the assessee and it is not the case of the revenue that the assessee has discontinue the business or close down the business activity - then the income on account of written back of the sundry creditors falls under the head business and profession and not as income from other sources . Electricity expenditure Held that - In absence of documentary evidence, expenses were disallowed. Bank charges expenses and staff welfare expenses are allowable as business expenditure against the business income. Therefore, once the amount of sundry creditors is treated as business income consequently the claim of bank charges and staff welfare are allowed. Interest on capital of partners - Once the interest @ 12% p.a on partners capital is allowable, then to the extent of the amount which could not be set off against the business income would be setting off against the income from other heads and carry forward business loss as provided u/s 71 & 72 of the I T Act - accordingly, the Assessing Officer is directed to take appropriate steps in this regard - grounds are partly allowed. Bad Debts Following the decision of court in case of T. R. F. LTD. v. Commissioner of Income-tax, 2010 (2) TMI 211 - SUPREME COURT Held that - Once the assessee has written off the debt as unrecoverable debts, the same is allowable and there is no need to prove that the debts actually gone bad - In the interest of justice, this issue is set aside to the record of the Assessing Officer for the limited purposes to examine whether the assessee has complied with the conditions as enumerated u/s 36(2) being the amount has already offered as income and then decide the issue - In the result, appeal filed by the assessee is partly allowed.

Summary

Issues:
1. Disallowance of all expenses and interest
2. Disallowance of bad debt of Rs 17,03,609/-
3. Change of head regarding REC bond interest and creditors written back

Analysis:

Issue 1: Disallowance of all expenses and interest
The assessee, a partnership firm, claimed various expenses and interest on REC Bond as business income. However, the Assessing Officer treated the interest income on bond and sundry creditors written back as income from other sources, disallowing the claimed expenses due to lack of business income. The Commissioner of Income Tax(Appeals) upheld this disallowance. The assessee argued that the sundry creditors written back were related to business and should be considered as business income. The Tribunal agreed, allowing the bank charges and staff welfare expenses as business expenditure against business income. The interest on capital of partners was also discussed, with the Tribunal concluding that the interest on REC bonds should be treated as income from other sources, not part of business income.

Issue 2: Disallowance of bad debt of Rs 17,03,609/-
The Assessing Officer disallowed the claim of bad debts due to the absence of business income. The CIT(A) noted non-compliance with sec. 36(2) and disallowed the claim. The Tribunal found that the issue was not thoroughly examined and remanded it to the Assessing Officer to verify compliance with sec. 36(2) and reconsider the claim in light of business income.

Issue 3: Change of head regarding REC bond interest and creditors written back
The Tribunal determined that REC Bonds were not purchased for business purposes, leading to the interest earned on them being treated as income from other sources. However, the written back of sundry creditors was related to business activities, thus falling under business income. The Tribunal partially allowed the appeal, directing the Assessing Officer to take appropriate steps regarding interest on capital and remanding the bad debt issue for further examination.

In conclusion, the Tribunal partially allowed the appeal, addressing the issues of disallowance of expenses and interest, bad debts, and the classification of income from REC bonds and sundry creditors written back. The judgment emphasizes the distinction between business income and income from other sources, providing detailed reasoning for each decision.