2017 (1) TMI 1335 - AT - Income Tax

Amount of advances given in the course of business - whether is allowable expenses while computing the business profit? - Loan liability written back - Held that - The advance was provided on the principal of commercial expediency and for the purpose of the business. It is settled proposition of law that in what manner the assessee should conduct his business is that left to the discretion of the assessee and the assessing officer cannot sit in the arm chair of the businessman to decide what should have been the income earned. Therefore in our considered view we do not find any interfere in the order of ld. CIT(A)in allowing claim - Decided in favour of assessee Amount of loan given in the course of business is allowable expenses while computing the business profit - Held that - The loan given in the course of the business is a business transaction and therefore it should be allowed for deduction while computing the business income of the assessee. Hence the issue raised by the assessee is allowed Loan liability written back has arisen in the normal course of business and therefore chargeable to tax as income - Held that - The loan was given to the mills in the course of the business and in the event of writing off the same in the books as irrecoverable is allowable for deduction. While holding so, we have relied in the case of CIT Vs. Ramaniyam Homes (P) Ltd. (2016 (4) TMI 954 - MADRAS HIGH COURT). Accordingly in our considered view the same ratio is also applicable in the instant issue. Therefore we do not find any reason to interfere in the order of ld. CIT(A).

Summary

Issues Involved:
1. Whether the amount of advances given in the course of business is allowable as expenses while computing the business profit.
2. Whether the amount of loan given in the course of business is allowable as expenses while computing the business profit.
3. Whether the loan liability written back, arising in the normal course of business, is chargeable to tax as income.

Issue-wise Detailed Analysis:

1. Allowability of Advances Given in the Course of Business:

The assessee provided advances to spinning mills for their electricity bills and labor expenses as part of its business operations. The AO disallowed these advances, citing the lack of a written arrangement, no legal action for recovery, and no clause in the amalgamation scheme for writing off such advances. However, the CIT(A) found that these advances were given in the course of business and allowed them as deductible expenses, except for an interest-bearing loan. The Tribunal concurred with the CIT(A), referencing the case of CIT Vs. Mysore Sugar Company Limited, where advances for business purposes were deemed allowable as revenue losses. The Tribunal emphasized that the advances were made on the principle of commercial expediency and for the purpose of business, thus should be allowed while computing business profit.

2. Allowability of Loan Given in the Course of Business:

The assessee also provided an interest-bearing loan to the same spinning mills. The AO and CIT(A) disallowed this loan, considering it a capital account transaction. The Tribunal, however, reversed this decision, noting that the loan was given in the course of business and should be treated similarly to the advances. The Tribunal referenced the case of CIT Vs. Ramaniyam Homes (P) Ltd., where the waiver of a loan was considered business income. It was concluded that the loan given in the course of business is a business transaction and should be allowed as a deduction while computing business income.

3. Taxability of Loan Liability Written Back:

The assessee settled a loan with Punjab National Bank, resulting in a written-back amount of ?6,30,69,408/-, which included a principal amount of ?2,64,54,856/-. The assessee initially offered the entire written-back amount as business income but later contended that the principal amount should not be considered income. The CIT(A) dismissed this claim, stating that the remission of liability arose in the normal course of business and was correctly assessed as income. The Tribunal upheld this decision, reiterating that the loan given in the course of business, when written off, should be treated as business income. The Tribunal again referenced CIT Vs. Ramaniyam Homes (P) Ltd., affirming that the remission of liability is income arising from business activities.

Conclusion:

The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal, concluding that both the advances and the loan given in the course of business are allowable as expenses while computing business profit, and the remission of loan liability is chargeable as business income.