2019 (9) TMI 1070 - AT - Income Tax

Disallowance u/s 36(l)(vii) r.w.s. 36(2) - bad debts written off in the P L account - CIT-A deleted the addition treating giving and taking of loans as normal business activity of the Assessee Company - HELD THAT - Assessee apart from being a builder and developer is also engaged in the business of financing/money lending. CIT(A) has also given a finding to this effect. This is also supported by the fact that the loans were granted by the assessee in earlier years and the income there from has been offered to tax. When these loans are becoming irrecoverable the writing off of the same is eligible for deduction under section 36(2). We note that section 36 (2) posits that, in making any deduction for a bad debt or part thereof the following provisions shall apply. No such deduction shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof written of more often earlier previous year, or represents money lent in the ordinary course of business of banking or money lending which is carried on by the assessee. Writing off of sums which represent money lent in the ordinary course of business is allowed as deduction. AO has clearly erred in not considering the later part of the aforesaid section. He is clearly into error in holding that for writing off of money lent in ordinary course of business the allowance/deduction can be allowed only if the sum has been computed as income in the earlier assessment year.- Decided against revenue.

Summary

Issues Involved:

1. Whether the giving and taking of loans by the Assessee Company can be considered a normal business activity.
2. Whether the deletion of the addition of ?5,69,78,892/- on account of bad debts by the CIT(A) was justified.

Issue-wise Detailed Analysis:

1. Normal Business Activity of Giving and Taking Loans:

The Assessing Officer (A.O.) contended that the Assessee Company needs to obtain licenses from the Reserve Bank of India (RBI) to function as a money lender. However, the CIT(A) found that the Assessee was engaged in financial transactions as part of its business activities. The memorandum of association of the Assessee Company indicated that apart from real estate, the company was involved in finance services, including lending money. The CIT(A) noted that the Assessee had previously been accepted by the department as carrying on finance business, as evidenced by assessment orders for earlier years. Consequently, the CIT(A) concluded that the Assessee's activities included money lending as a normal business activity.

2. Deletion of Addition on Account of Bad Debts:

The A.O. observed that the Assessee had written off ?6,18,26,741/- as bad debts in the Profit & Loss account, which included principal amounts of loans advanced. The A.O. disallowed the deduction, stating that the principal amounts had not been included in the income of the Assessee in the current or any earlier years, thus not fulfilling the condition under Section 36(2) of the Income Tax Act, 1961.

The CIT(A) overturned this decision, noting that the loans were advanced in the ordinary course of the Assessee's financing business. The CIT(A) highlighted that the interest charged on these loans had been included in the Assessee's income in relevant assessment years. Therefore, the CIT(A) concluded that the write-off of principal amounts satisfied the conditions under the second limb of Section 36(2), which allows for deduction if the debt represents money lent in the ordinary course of business.

Further Analysis and Precedents:

The Tribunal upheld the CIT(A)'s decision, agreeing that the Assessee was engaged in the business of financing/money lending. The Tribunal referenced Section 36(2), which allows for the deduction of bad debts if the debt represents money lent in the ordinary course of business. The A.O. had erred by not considering this provision. The Tribunal also cited relevant case laws, including:

- CIT Vs. Smt. Padma S. Bora (Bombay HC): The court held that the Assessee was entitled to a deduction for bad debts even without a money lending license, as the amount was lent in the ordinary course of business.
- All Grow Finance and Investment P. Ltd. Vs. CIT (Delhi HC): The court ruled that the amounts advanced in the ordinary course of money lending were allowable as bad debts under Section 36(1)(vii) read with Section 36(2).

Conclusion:

The Tribunal affirmed the CIT(A)'s order, allowing the deduction of ?5,69,78,892/- as bad debts written off, and dismissed the Revenue's appeal. The decision emphasized that the Assessee's financing activities were part of its normal business operations and that the write-off of loans was permissible under the relevant provisions of the Income Tax Act.