2020 (7) TMI 398 - HC - Income Tax

Bad debt written off as admissible u/s 36(1)(vii) - Investment made by the assessee in a sister concern for purchase of equity shares which into liquidation can be written off as bad debt - HELD THAT - AO has not examined the fact whether or not the assessee has entered an amount as written off as bad debt. In the appeal, the remand report was called for by the Commissioner of Income Tax (Appeals) and the assessing officer has submitted report - from the order passed by the Commissioner of Income Tax (Appeals) also it is evident that he has not recorded a specific finding that the assessee had written off the debt in the books of account. Tribunal also has not recorded a specific finding by assigning reasons that in the books of account the debts have been written off. Only in a single sentence, it is stated that the assessee had in its books of account written off its debt as irrecoverable. Loss of shares in a company which went under liquidation was considered by Gujarat High Court in CIT VS. JAI KRISHNA 1997 (2) TMI 65 - GUJARAT HIGH COURT and it was held that a person who gets nothing on account of liquidation of a company and suffers loss, his loss has to be treated as capital loss by virtue of Section 46(2) of the Act. The tribunal has followed the aforesaid decision and has held that the assessee is entitled to benefit under Section 46(2) of the Act in respect of an amount of ₹ 32,25,000/- for diminution of value of investment made in Gujarat Instruments Ltd. We concur with the view taken by Gujarat High court. In view of preceding analysis, the impugned order passed by the Income Tax Appellate Tribunal is modified and the finding that the assessee is entitled to the benefit of capital loss is set aside. The matter is remitted to the assessing officer who shall decide the same in the light of law laid down by the Supreme Court in the case of T.R.F 2010 (2) TMI 211 - SUPREME COURT .

Summary

Issues Involved:
1. Whether the investment made by the assessee in Gujarat Instruments Ltd., which went into liquidation, can be written off as bad debt.
2. Whether the investment made by the assessee for diminution in the value of investment in Gujarat Instruments Ltd. is permissible under Section 46(2) of the Income Tax Act as capital loss.

Issue-wise Detailed Analysis:

1. Writing off Investment as Bad Debt:
The primary issue was whether the investment of ?3,50,81,381/- made by the assessee in Gujarat Instruments Ltd., which went into liquidation, could be written off as bad debt. The assessing officer initially held that the loss suffered by the assessee was capital in nature since the assessee did not provide sufficient details regarding the investment and its utilization. The Commissioner of Income Tax (Appeals) upheld this view, stating that the investment could not be written off as a revenue loss.

The tribunal, however, referred to the Supreme Court's decision in 'T.R.F LTD. VS. CIT,' which clarified that post-01.04.1989, it is sufficient if the bad debt is written off as irrecoverable in the accounts of the assessee. The tribunal concluded that the assessee was entitled to write off the amount as bad debt. The High Court noted that the tribunal did not specifically confirm whether the debt was written off in the books of account, a crucial requirement as per the Supreme Court's interpretation. Therefore, the High Court remitted the matter to the assessing officer to decide in light of the law laid down by the Supreme Court.

2. Diminution in Value of Investment as Capital Loss:
The second issue was whether the investment of ?32,25,000/- for diminution in the value of investment in Gujarat Instruments Ltd. could be treated as capital loss under Section 46(2) of the Act. The tribunal relied on the Gujarat High Court's decision in 'CIT VS. JAI KRISHNA,' which held that a loss incurred due to the liquidation of a company should be treated as capital loss as per Section 46(2).

The High Court agreed with the tribunal's view, concurring with the Gujarat High Court's interpretation that the loss should indeed be treated as capital loss. However, the High Court emphasized that the tribunal's finding lacked specific reasoning on whether the debt was written off in the books of account, thus necessitating a remand to the assessing officer for a thorough examination.

Conclusion:
The High Court modified the tribunal's order, setting aside the finding that the assessee is entitled to the benefit of capital loss. The matter was remitted to the assessing officer to be decided in accordance with the Supreme Court's interpretation in the case of 'T.R.F LTD. VS. CIT.' Both substantial questions of law were answered by remanding the matter for further examination.