2020 (10) TMI 359 - AT - Income Tax

Disallowance on account of inter-corporate deposits written off - said ICD carried an interest rate of 12% p.a and the assessee had duly offered to tax the interest income on such ICD under the head income from business - HELD THAT - Interest income on ICD was taxed by the revenue in earlier assessment years under the head income from business . This action itself goes to prove that revenue had factually accepted the fact that ICD was advanced by the assessee in the ordinary course of its business. When such ICD together with its interest portion thereof had been written off by the assessee due to its non-recovery and due to the fact of borrower expressing its inability to pay and finally arriving at one time settlement thereof, any consequential write off of the remaining figure in ICD would obviously become only business loss incurred by the assessee as the advancing of money there of had been done in the ordinary course of its business. As correctly followed CIT vs. Pudumjee Pulp Paper Mill Ltd. 2015 (8) TMI 719 - BOMBAY HIGH COURT wherein under similar facts and circumstances, the Hon ble Bombay High Court had allowed the claim of write off of ICD as the business loss. No infirmity in the action of the ld. CIT(A) granting relief to the assessee with regard to allowability of write off of ICD amounts as business loss. - Decided against revenue.

Summary

Issues Involved:
1. Justification of the CIT(A)'s deletion of the disallowance of ?5,17,76,297/- on account of inter-corporate deposits (ICD) written off.

Issue-Wise Detailed Analysis:

1. Justification of the CIT(A)'s Deletion of the Disallowance of ?5,17,76,297/- on Account of ICD Written Off:

The appeal concerns whether the Commissioner of Income Tax (Appeals) [CIT(A)] was justified in deleting the disallowance of ?5,17,76,297/- made by the Assistant Commissioner of Income Tax (AO) on account of inter-corporate deposits (ICD) written off.

The assessee filed its return of income for the A.Y. 2014-15, declaring a total income of ?14,13,40,880/-. During the assessment proceedings, the AO noted that the assessee had debited ?5,17,76,297/- under "exceptional expenses" in its profit and loss account. This amount was part of an ICD of ?6 Crores given to M/s. Trusted Aerospace Engineering Ltd. in 2010, of which only ?3,25,00,000/- was recovered. The ICD carried an interest rate of 12% per annum, and the interest income was duly offered to tax under "income from business" for the respective assessment years.

The assessee contended that M/s. Trusted Aerospace Engineering Pvt. Ltd. became bankrupt, making the remaining principal and interest doubtful of recovery. Consequently, the assessee filed a criminal complaint under Section 138 of the Negotiable Instruments Act and a legal suit before the Bombay High Court. The supporting documents were provided to the lower authorities. A settlement was reached, and the remaining sum of ?5,17,76,297/- was written off and claimed as a business loss in the return of income.

The AO disallowed the claim, arguing that the assessee's business did not ordinarily involve advancing ICDs and that the provisions of Section 36(2) of the Income Tax Act were not complied with. However, the CIT(A) allowed the write-off as a business loss, relying on the fact that the ICD was advanced in the ordinary course of business, and the interest income was taxed under "income from business" in earlier years.

The Tribunal found that the assessee had undertaken a series of litigations to recover the principal and interest amount, ultimately settling for ?2 Crores, leading to the write-off of ?5,17,76,297/- as a business loss. The Tribunal noted that the placement of ICDs was permitted by the assessee's Memorandum of Association and governed by Section 372A of the Companies Act, 1956, making it a business activity.

The Tribunal also referred to the decision of the Bombay High Court in CIT vs. Pudumjee Pulp & Paper Mill Ltd., which allowed the write-off of ICD as a business loss under similar circumstances. The High Court had held that after 1st April 1989, it is not necessary to prove the debt as irrecoverable, only that it is written off in the accounts. The Tribunal concluded that the write-off of the ICD was a business loss, as the revenue had accepted the interest income on the ICD as "income from business" in earlier years.

In conclusion, the Tribunal upheld the CIT(A)'s decision to allow the write-off of ?5,17,76,297/- as a business loss, dismissing the revenue's appeal. The order was pronounced on 06/10/2020.