2014 (1) TMI 919 - AT - Income Tax

Disallowance made on account of bad debt and advance written off u/s 36(1)(vii) Held that - The amount of advance given to M/s Dhillon Kool Drinks and Beverages Limited was advanced in the course of business. It is undisputed that the advances became irrecoverable. In such situation, as per the ratio emanating from the decision of the Hon ble Jurisdictional High Court in the case of Mohanmeakin Ltd. vs. C.I.T. 2011 (5) TMI 243 - DELHI HIGH COURT, it is not relevant that the amount was claimed as bad debt. As per the Hon ble High Court decision the amount was deductible as business loss u/s. 37 of the I.T. Act. In this case it was held that claim for deduction of non- recovery of trade advances was allowable on the facts of the case, merely because the bad debt claim was not made out under one particular provision of the Act, but was so made out under another provision of law, assessee cannot be deprived of the benefit of deduction of bad debts the order of the CIT(A) set aside Thus, the assessee is eligible to claim deduction on account of write off Decided in favour of Assessee.

Summary

Issues:
1. Valid initiation of proceedings under section 147 of the Act.
2. Disallowance on account of bad debt and advances written off.

Issue 1: Valid initiation of proceedings under section 147 of the Act:
The appeal challenged the Ld. Commissioner of Income Tax (A)'s decision to uphold the initiation of proceedings under section 147 of the Act. The Assessing Officer reopened the assessment for the year 2003-04 and questioned the bad debt and advances written off by the assessee. The assessee argued that the written-off amounts were of revenue nature and had been considered in computing income in earlier years. The Assessing Officer, however, deemed the amounts as capital in nature and disallowed them. The Ld. Commissioner of Income Tax (A) deleted the disallowance of one amount but upheld the disallowance of another. The tribunal found that the debt was incidental to the business of the assessee and met the conditions for being written off. Therefore, the Assessing Officer's disallowance was deemed unsustainable.

Issue 2: Disallowance on account of bad debt and advances written off:
The main contention revolved around the disallowance of an amount representing interest accrued on loans given to a specific company. The Ld. Commissioner of Income Tax (A) held that the interest accrued did not qualify as a bad debt under section 36(1)(vii) since it was not incidental to the business of the assessee. However, the tribunal disagreed, noting that providing loans to companies involved in the business of manufacturing soft drinks was part of the assessee's business. The tribunal emphasized that the interest amount was offered for taxation as income in a previous assessment year, met the conditions for being written off, and was incidental to the business. Citing relevant legal precedents, the tribunal concluded that the assessee was eligible to claim a deduction for the written-off amount. The tribunal also addressed the issue of the validity of initiating proceedings under section 147 but deemed it of academic consideration after deciding in favor of the assessee on the main issue.

In conclusion, the tribunal allowed the appeal filed by the assessee, setting aside the orders of the authorities below and ruling in favor of the assessee on both issues.