2015 (12) TMI 1364 - AT - Income Tax

Disallowance of bad debt - Assessing Officer after holding held that the same is related to Debentures held by the Appellant and cannot be deductible either as a bad-debt u/s 36 or as business loss - Held that - acquisition of debentures, on the facts of the case before us, was in the course of the business carried on by the assessee and, therefore, it cannot be seen on standalone basis divorced from the peculiar facts under which the assessee company came to own these debentures and incur the loss on non-redemption of these debentures. The form of transaction is not important. What is important is that the de facto transaction was of finance and the amount advanced during the course of the financing business had become bad. It is a matter of record, as noted by the CIT(A), that the assessee pursued the matter before Hon ble Calcutta High Court in winding up petition against IFB Finance Limited, and all this was essentially, and undisputedly, integral part of the financing business carried on by the assessee. As for the question whether the amount has actually become bad and whether loss can be claimed as a deduction for bad debts in the current year, suffice to note that the assessee has written off the amount in this year and, following the law laid down by Hon ble Supreme Court in the case of TRF Limited Vs CIT 2010 (2) TMI 211 - SUPREME COURT , the deduction is to be allowed in the year of write off. - Decided in favour of assessee. Disallowance of depreciation in respect of sale and lease-back transactions of assets - Held that - We are in respectful agreement with the views so expressed by the coordinate bench. In this view of the matter, we deem it fit and proper to remit the matter to the file of the Assessing Officer for adjudication de novo in the light of the above legal position and the allow the relief, as admissible. As long as assessee is the legal owner of the asset and has used the asset in the course of his business, he is to be allowed depreciation in respect of that asset. The use in leasing business is also a use of the asset. The matter needs to be re-examined in this light. While doing so, the Assessing Officer will give a reasonable opportunity of hearing to the assessee, decide the matter by way of a speaking order and in accordance with the law. Order, accordingly. Disallowance of EMI residual account - CIT(A) deleted the addition - Held that - In the case before us, whatever be certainty of the assessee realizing the profits in future as a result of this arrangement, these profits can only be brought to tax when these actually accrue and arise and that stage comes only when the recoveries are made from the individual borrowers. It is also not in dispute, in the light of the categorical finding given by the CIT(A), that the related incomes are brought to tax in subsequent period when these income accrue and arise. As for the reference to Hon ble Supreme Court s judgment in the case of CIT Vs Shiv Prakash Janak Raj & Co Pvt Ltd 1996 (9) TMI 5 - SUPREME Court , that was a case in which accrual had admittedly taken place. That is not the situation before us. In these circumstances, we see no infirmity in the well reasoned conclusion arrived at by the CIT(A) and decline to interfere in the matter. - Decided against revenue.

Summary

Issues Involved:
1. Disallowance of bad debt of Rs. 1 crore.
2. Disallowance of depreciation on sale and lease-back transactions.
3. Deletion of disallowance of EMI residual account amounting to Rs. 803.40 lakhs.
4. Penalty under section 271(1)(c) of the Income Tax Act, 1961.
5. Disallowance of deduction under section 36(1)(viii) of the Income Tax Act, 1961.

Detailed Analysis:

1. Disallowance of Bad Debt of Rs. 1 Crore:
The assessee claimed a deduction of Rs. 1 crore as a bad debt written off in respect of debentures issued by IFB Finance Ltd. The Assessing Officer disallowed this claim, stating that the money receivable from debentures cannot be considered deductible under section 36(1)(vii). The CIT(A) upheld this disallowance, noting that the debentures were shown as investments rather than stock in trade. However, the Tribunal observed that the loan was advanced in the ordinary course of the assessee's business and the interest was assessed as business income. Citing the Supreme Court's decision in the case of TRF Limited Vs CIT, the Tribunal held that the deduction should be allowed in the year of write-off. Thus, the Tribunal directed the Assessing Officer to delete the disallowance of Rs. 1 crore.

2. Disallowance of Depreciation on Sale and Lease-Back Transactions:
The assessee claimed depreciation on assets covered by sale and lease-back transactions. The Assessing Officer disallowed this claim based on the Tribunal's decision in ICICI Limited Vs DCIT. The CIT(A) agreed with the Assessing Officer but allowed some relief by including only the interest element in the income. The Tribunal noted significant legal developments post the ICICI Bank Ltd decision and remitted the matter back to the Assessing Officer for fresh adjudication. The Tribunal directed that as long as the assessee is the legal owner and uses the asset in the course of business, depreciation should be allowed.

3. Deletion of Disallowance of EMI Residual Account Amounting to Rs. 803.40 Lakhs:
The Assessing Officer added the entire EMI residual amount to the income, arguing that the difference between the recovery value of housing loans and the amount payable should be taxed in the current year. The CIT(A) deleted this addition, stating that income should be taxed only when it accrues. The Tribunal upheld the CIT(A)'s decision, referencing the Supreme Court's judgment in Chainrup Sampatram Vs CIT, which supports the principle that anticipated profits should not be taxed until realized.

4. Penalty Under Section 271(1)(c) of the Income Tax Act, 1961:
The penalty was levied concerning the disallowance of bad debt and depreciation on leased assets. Since the Tribunal deleted the bad debt disallowance and remitted the depreciation issue back to the Assessing Officer, the penalty appeal became infructuous and was dismissed.

5. Disallowance of Deduction Under Section 36(1)(viii) of the Income Tax Act, 1961:
The CIT(A) deleted the disallowance of deduction under section 36(1)(viii) related to prepayment charges and processing fees. The Tribunal upheld this decision, noting that the issue was covered by a coordinate bench's decision in the assessee's own case for the assessment year 1998-99, which had achieved finality.

Conclusion:
For the assessment year 2001-02, the assessee's appeal was partly allowed, and the Assessing Officer's appeal was dismissed. For the assessment year 2002-03, the assessee's appeal was partly allowed, and the Assessing Officer's appeal was dismissed. For the assessment year 2003-04, the Assessing Officer's appeal was dismissed. The Tribunal's decisions were pronounced on 22nd July 2015.