2018 (4) TMI 1262 - AT - Income Tax

Disallowance of write off of outstanding loan and interest - whether CIT(A) was justified in upholding the treatment of interest income earned during the year as income from other sources instead of business income? - Held that - It is prerogative of the assessee to charge or not to be charge interest on certain loans. Anyway in case if the revenue alleges that the interest from loan given to certain parties were not for the purpose of business of the assessee, then the law provides alternative remedy of proceeding against the assessee u/s 36(1)(iii) by resorting to disallowance of interest. Admittedly it is not done so in the instant case. This action of the ld. AO itself goes to prove that he accepted the lending activity as part of the business of the assessee, wherein the interest paid has been allowed as business expenditure by the AO. AO all along had been treating the business income only under the head income from business but strangely for the year under appeal, had classified the same as income from other sources. Since, we have already held that the lending activity has been carried out by the assessee only as part and parcel of its normal course of its business, the interest income offered thereon should be assessed only under the head income from business. Write off of bad debt would be squarely allowable as deduction u/s 36(1)(vii) read with Section 36(2) and the ld. AO is directed accordingly to grant the same. The interest income accrued on loans need to be taxed only under the head income from business and not income from other sources. - Decided in favour of assessee.

Summary

Issues:
1. Disallowance of write off of outstanding loan and interest
2. Treatment of interest income as income from other sources

Issue 1: Disallowance of Write Off of Outstanding Loan and Interest:

The appeal arose from the Commissioner of Income Tax(Appeals)'s order against the Assessing Officer's decision under section 143(3) of the Income Tax Act, 1961. The main issue was whether the disallowance of write off of outstanding loan and interest amounting to ?56,94,685 was justified. The assessee, a limited company, argued that it was engaged in money lending business and had written off the bad debt as deduction under section 36(1)(vii) of the Act. The Assessing Officer contended that the debt was not proven to be bad and that the loan given was not incidental to the business. However, the Tribunal found that the assessee had engaged in money lending activities using both own and borrowed funds. The Tribunal held that the conditions of section 36(1)(vii) were met, and the write off was allowable as a bad debt deduction. The Tribunal also noted that interest income from loans should be assessed under the head income from business.

Issue 2: Treatment of Interest Income as Income from Other Sources:

The second issue was the treatment of interest income earned during the year as income from other sources instead of business income. The Tribunal found that the assessee had consistently offered interest income under the head income from business and had complied with the provisions of section 36(2). The Tribunal held that the interest income accrued on loans should be taxed only under the head income from business. Therefore, the grounds raised by the assessee were allowed, and the appeal was granted in favor of the assessee.

In conclusion, the Tribunal ruled in favor of the assessee, allowing the write off of bad debt and directing the Assessing Officer to grant the same. The Tribunal also held that the interest income accrued on loans should be taxed under the head income from business.