2016 (1) TMI 944 - HC - Income Tax

Bad debt claim - ITAT allowed the claim - as per revenue bad debt was never shown as income in the preceeding years and the money was not held as stock in trade as the assessee was not engaged in the business of money lending - Held that - Tribunal as the last fact finding authority has come to the conclusion that more than 50% of the capital of the assessee is deployed in money lending. Therefore, the fact that the assessee is in the money lending business cannot be doubted. All the points advanced by Mrs. Gutgutia have thus been rejected. In the result, the questions formulated at the time of admission of the appeal answered in the negative. - Decided against revenue

Summary

Issues:
1. Whether the Tribunal erred in upholding the order of the Commissioner of Income-tax (Appeals) regarding the bad debt claim.
2. Whether the Tribunal erred in deleting the disallowance made by the Assessing Officer without considering the legal requirements for allowing bad debt.

Analysis:
1. The appellant claimed a bad debt of Rs. 2,74,58,660, with Rs. 2,70,00,000 related to the principal loan amount. The Assessing Officer disallowed the claim for the principal sum as it was not shown as income earlier, and the appellant was not engaged in money lending. However, the C.I.T.(A) allowed the claim, stating that the appellant fulfilled all conditions for bad debt deduction under Section 36(1)(vii) and 36(2). The C.I.T.(A) highlighted that the appellant was engaged in lending and investment business, and the debt was written off as irrecoverable in the accounts. The Gujarat High Court precedent supported this approach. The Tribunal upheld the C.I.T.(A)'s decision, noting the appellant's money lending activities and the irrelevance of the debt being bad in an earlier year post the 1989 amendment to the Act.

2. The Revenue challenged the Tribunal's decision, arguing that the appellant was not a banking company and lacked a money lending license. However, the Tribunal found that over 50% of the appellant's capital was invested in money lending, indicating its business activities. The Tribunal referred to the Gujarat High Court and Calcutta High Court judgments emphasizing the honest judgment of the assessee regarding bad debt. The Court rejected the Revenue's arguments, affirming the Tribunal's findings that the appellant was indeed engaged in money lending. The Court emphasized that the law does not require treating an amount as bad debt until recovery becomes doubtful, as long as the judgment is honest.

In conclusion, the Court dismissed the Revenue's appeal, affirming the Tribunal's decision to allow the bad debt claim based on the appellant's fulfillment of legal conditions and engagement in money lending activities. The judgment underscored the importance of honest judgment in determining bad debt and upheld the applicability of the relevant legal provisions and precedents in such cases.