2017 (2) TMI 223 - AT - Income Tax

Entitlement for the write-off of bad debts under section 36(1)(vii) r.w.s. 36(2)(i) - Held that - In the present case, the total debt due from BRCL included a part relating to irrecoverable consultancy fee, which indeed has been offered for tax and has been taken into consideration while computing the income and, therefore, following the parity of reasoning laid down by the Hon ble Bombay High Court in the case of Pudumjee Pulp & Paper Mills Ltd. (2015 (8) TMI 719 - BOMBAY HIGH COURT) the said fact satisfies the requirement of section 36(2)(i) of the Act even in the context of claim of write-off of the amount of ICD of ₹ 50,00,000/-. Also not disputed that interest on such ICD of ₹ 50,00,000/- advanced to BRCL has also been taken into account for computing the income of the assessee and, therefore, this aspect of the matter also fortifies the decision of the CIT(A) that the requirement of section 36(2)(i) of the Act stands satisfied. It is also notable that the amount due from the BRCL has been written-off as irrecoverable in the account books and, therefore, find no reason to interefere with the decision of the CIT(A) that the claim of the assessee for write off of ₹ 50,00,000/- advanced as ICD to BRCL is allowable as a deduction under section 36(1)(vii) r.w.s.36(2)(i) of the Act. - Decided against revenue

Issues Involved:
1. Entitlement of the assessee to write-off bad debts amounting to ?50,00,000 under section 36(1)(vii) read with section 36(2)(i) of the Income Tax Act, 1961.

Detailed Analysis:

Issue 1: Entitlement to Write-off Bad Debts under Section 36(1)(vii) r.w.s. 36(2)(i):

The Revenue's appeal pertains to the assessment year 2012-13, challenging the CIT(A)'s decision allowing the assessee to write-off bad debts amounting to ?50,00,000. The assessee, a company engaged in management and financial consultancy, advanced an Inter Corporate Deposit (ICD) of ?50,00,000 to M/s. Baroda Rayon Corporation Ltd. (BRCL) under an agreement dated November 2004. This agreement involved providing specialized management and financial support services, including financial assistance for BRCL's restructuring and revival.

The Assessing Officer (AO) disallowed the write-off of the ICD, arguing that the assessee was not in the business of money lending and that the ICD was not credited to the Profit & Loss (P&L) account, thus failing the test under section 36(2)(i) of the Act.

Upon appeal, the CIT(A) allowed the write-off, noting several key points:
1. The ICD was part of the assessee's business as per the agreement with BRCL.
2. The advancement of such funds was within the objects of the assessee company as per its Memorandum and Articles of Association.
3. The write-off occurred in the same financial year BRCL approached the BIFR, indicating it was a last resort.
4. Interest from the ICD had been previously returned by the assessee.
5. The case relied upon by the AO (CIT v. Epsilon Advisors Private Limited) was not applicable as it dealt with a money-lending concern, whereas the assessee was not a money lender.
6. The irrecoverability of the ICD was demonstrated by BRCL's delisting and approach to the BIFR.
7. The money advanced by the ICD had passed through the books of the assessee and was taken into account in computing income for AY 2004-05.

The CIT(A) concluded that the conditions under section 36(1)(vii) and section 36(2) were satisfied, thus allowing the write-off.

The Revenue's appeal to the Tribunal reiterated the AO's objections, emphasizing that the CIT(A) erroneously accepted the consultancy business as money lending and allowed the write-off as a bad debt instead of a capital loss. The Departmental Representative argued that the ICD write-off did not meet the requirements of section 36(2)(i).

In defense, the assessee's representative highlighted that the ICD advancement was part of the business agreement with BRCL and within the company's objects. The interest on the ICD had been taxed in previous years, satisfying the condition under section 36(2)(i).

The Tribunal upheld the CIT(A)'s decision, noting:
1. The advancing of ?50,00,000 to BRCL was part of the comprehensive management and advisory services agreement, forming part of the assessee's business.
2. The CIT(A) correctly observed that the assessee was not a money lender, but the debt was linked to the consultancy agreement.
3. The debt satisfied section 36(2)(i) requirements, as a part of the debt (consultancy fee) was offered for tax, and interest on the ICD was included in previous income computations.

The Tribunal concluded that the write-off of ?50,00,000 as a bad debt under section 36(1)(vii) r.w.s. 36(2)(i) was allowable, dismissing the Revenue's appeal.

Conclusion:
The appeal of the Revenue was dismissed, affirming the CIT(A)'s decision to allow the write-off of ?50,00,000 as bad debts under section 36(1)(vii) read with section 36(2)(i) of the Income Tax Act, 1961. The Tribunal found that the conditions for write-off were satisfied, and the advancing of the ICD was part of the assessee's business activities.

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