2017 (4) TMI 1105 - HC - Income Tax

Disallowance towards the claim of Bad Debts/Business loss - Held that - When assessee s case has travelled to the Tribunal in the second round and assessee had sufficient opportunity to prove the genuineness of the claim of bad debt of ₹ 30,47,240/-and then also he has been unable to satisfy the lower authorities and even before us, during the course of hearing, we do not find any reason to accept the contentions and claim made by the assessee in this ground relating to disallowance of bad debt of ₹ 30,47,240/-in the given circumstances and we dismiss the same and uphold the order of ld. CIT(A). In nut shell in the ground no.1 raised by assessee towards disallowance of business expenses at ₹ 54,29,508/-we delete the addition of ₹ 23,82,268/-and sustain the remaining part at ₹ 30,47,240/-. Disallowance towards the claim of interest paid for business consideration - Held that - Tribunal has independently considered the disallowance of interest of ₹ 23,54,592/-and has confirmed the disallowance claimed by the assessee towards interest paid for business consideration on the ground that the amount of interest has been paid on loans taken has actually been diverted towards investment in shares and other non interest bearing investment. Assessee appeal dismissed.

Summary

Issues Involved:
1. Disallowance of ?30,47,240 towards the claim of Bad Debts / Business loss.
2. Disallowance of ?23,54,592 towards the claim of interest paid for business consideration.

Issue-wise Detailed Analysis:

1. Disallowance of ?30,47,240 towards the claim of Bad Debts / Business loss:

The appellant filed a return of income for AY 1996-97 declaring a total income of ?41,58,551. The assessment was completed under Section 143(3) r/w Section 144A, determining the income at ?1,19,50,490. The AO observed that the appellant had become a proprietor of Lab Enterprises, which did not conduct any business activities during the year. Despite this, the appellant claimed various business expenses, including Bad Debts, totaling ?54,29,508, which were disallowed by the AO, resulting in a total income determination of ?1,19,50,490. Upon appeal, the CIT(A) provided partial relief, reducing the total income to ?19,42,652, but upheld the disallowance of ?54,29,508.

The Tribunal, on remand, confirmed the disallowance of ?30,47,240 towards Bad Debts / Business loss. The appellant contended that the Tribunal had previously acknowledged the continuation of business activities for AY 1997-98 and allowed deductions, which were disallowed for AY 1996-97 without justification. The Tribunal noted discrepancies in the appellant's financial statements and found that the Bad Debts claim lacked substantiation, as no revenue was booked in the current year. The Tribunal concluded that the appellant failed to prove the genuineness of the Bad Debts claim, thus upholding the disallowance of ?30,47,240.

2. Disallowance of ?23,54,592 towards the claim of interest paid for business consideration:

The AO disallowed the interest claim of ?23,54,592, observing that the interest-bearing loans were diverted towards non-interest-bearing investments, including shares and advances. The CIT(A) upheld this disallowance. The appellant argued that the Tribunal, in the first round, had accepted the business activities and allowed interest deductions, which should apply to the current assessment.

The Tribunal analyzed the provisions of Section 57(iii) of the Act, which allows deductions for expenses incurred wholly and exclusively for earning income under Section 56 (income from other sources). The Tribunal found that the appellant declared an interest income of ?5,34,557 but claimed interest expenses of ?45,54,551. The AO allowed ?21,99,959 and disallowed the remaining ?23,54,592, as the appellant failed to prove that the expenses were incurred to earn the declared interest income. The Tribunal upheld the AO's observation that the interest expenses were diverted towards investments in shares and other non-interest-bearing investments, thus confirming the disallowance of ?23,54,592.

Conclusion:

The High Court agreed with the Tribunal's findings, stating that the Tribunal had not erred in confirming the disallowances. The Tribunal's decisions were based on the merits of the case, not on the ground that the appellant was not carrying on business during the relevant year. The appeal was dismissed, with the Court finding no substantial question of law arising from the Tribunal's order.