2015 (10) TMI 2370 - AT - Income Tax

Deduction towards bad debts claimed - CIT(A) allowed the claim - whether the principal amount of a term loan, given by the assessee as a NBFC, to be written off as bad debt when the said amount is in the nature of capital of the assessee? - Held that - The assessee s primary business is only money lending through hire purchase scheme and hence the instalments receivable becomes the stock in trade of the assessee and all these monies were advanced during the course of business of the assessee. Hence any loss arising out of it could only be treated as business loss u/s 28 of the Act. We are not inclined to interfere with the findings given by the Learned CITA in this regard. Decided against revenue.

Summary

Issues Involved:
1. Justification of the CIT(A) in allowing the principal amount of a term loan to be written off as bad debt.
2. Justification of the CIT(A) in allowing the principal amount of term debt to be written off and claimed as an allowable expense under section 36(1)(vii) read with section 36(2) when the said amount was never offered by the assessee for taxation as income.

Detailed Analysis:

Issue 1: Justification of the CIT(A) in allowing the principal amount of a term loan to be written off as bad debt.
The assessee, a non-banking finance company engaged in hire purchase financing, claimed a deduction for bad debts amounting to Rs. 11,08,326/-. The assessee had advanced monies under a hire purchase scheme to several parties who defaulted on payments. Despite taking all reasonable recovery steps, the dues were deemed irrecoverable and written off in the books of accounts as per RBI norms. The Assessing Officer (AO) disallowed the deduction, arguing that the provision as per RBI norms is not permissible under section 36(1)(vii) read with section 36(2) of the Income Tax Act, 1961, and that the principal amount was never offered as income by the assessee. The CIT(A) deleted the disallowance, stating that post the amendment in section 36(1)(vii) effective from 1.4.1989, it is only necessary for the debt to be written off as irrecoverable in the accounts, not to establish that the debt has become bad in the previous year. The Tribunal found that the assessee had taken sufficient steps for recovery, and the write-off was bona fide. Citing various judicial precedents, the Tribunal upheld the CIT(A)'s decision, affirming that the principal portion, even if not offered as income, could be written off as bad debt since the assessee's primary business was money lending through hire purchase schemes.

Issue 2: Justification of the CIT(A) in allowing the principal amount of term debt to be written off and claimed as an allowable expense under section 36(1)(vii) read with section 36(2) when the said amount was never offered by the assessee for taxation as income.
The AO contended that since the principal portion of the hire purchase dues was never offered to tax as income, no deduction could be granted for the secured loans under section 36(1)(vii) read with section 36(2). The CIT(A) disagreed, noting that the amendment to section 36(1)(vii) removed the requirement to establish that the debt had become bad, only necessitating the write-off as irrecoverable in the accounts. The Tribunal supported this view, referencing the Supreme Court's decision in TRF Ltd., which clarified that post-amendment, it is sufficient if the bad debt is written off as irrecoverable in the accounts. The Tribunal also emphasized that the assessee's business involved money lending, making the instalments receivable akin to stock in trade, and any loss arising from it should be treated as a business loss under section 28 of the Act. Consequently, the Tribunal dismissed the revenue's appeal, affirming the CIT(A)'s allowance of the bad debt deduction.

Conclusion:
In conclusion, the Tribunal upheld the CIT(A)'s decision to allow the deduction for bad debts claimed by the assessee. The Tribunal emphasized that the post-amendment provisions of section 36(1)(vii) only require the write-off of the debt as irrecoverable in the accounts, without the need to prove that the debt had become bad. The Tribunal also recognized the nature of the assessee's business, treating the instalments receivable as stock in trade, thereby justifying the deduction under section 36(1)(vii) and section 28 of the Act. The appeal by the revenue was dismissed.