2021 (1) TMI 49 - AT - Income Tax

Disallowance of bad debt claimed as deduction u/s 36(1)(vii) r.w.s 36(2) - amount advanced to M/s Indessa Infotech Pvt Ltd., the contention of the Ld. AR that the loan has become bad, therefore the assessee has claimed deduction of bad debts u/s 36(1)(vii) r.w.s 36(2) - HELD THAT - We find that the assessee has advanced the loan to its sister concerns and the loan is not recoverable and as per the decision of the Hon ble Supreme Court in the case of TRF Ltd 2010 (2) TMI 211 - SUPREME COURT the assessee has to establish that the debt has become bad and was written off. We find that the assessee could not substantiate the efforts made in respect of recovery of loan and further more in the case of sister concern, it will be easy for the assessee considering the advance given in the normal course of trade and place of business is the same. Further, no material was filed before the A.O. or before us to establish that the assessee has made efforts for recovery of debt or correspondence with barrower for non-payment. Even in the assessment order the A.O has only referred to the fact that it is a related concern but could not establish that the verification and enquiry has been conducted. We considering the nature of transactions with the related concern and the assessee could not establish the efforts under taken for the recovery. We set aside the order of the CIT(A) and restore the entire disputed to the file of the A.O for the limited purpose to verify the claim made by the assessee and the efforts made by the assessee in recovery of the loan. Characterization of income - interest income of the appellant - under the head income from other sources as against income from business offered by the appellant - HELD THAT - Since the assessee has consistently follow the method of disclosing as income from business and in the earlier year also the revenue has accepted. We direct the A.O to treat the income as business income and allow the additional ground of appeal.

Summary

Issues:
1. Disallowance of bad debts by the Commissioner of Income Tax (Appeals)
2. Treatment of interest income under income from other sources
3. Disallowance of loss without providing an opportunity to the appellant

Issue 1: Disallowance of Bad Debts
The appellant challenged the disallowance of a sum as bad debts by the Commissioner of Income Tax (Appeals) under sections 143(3) and 250 of the Act. The appellant contended that the bad debt should be allowed as a deduction under section 36(1)(vii) read with section 36(2) of the Act. The appellant had provided a loan to a sister concern, which was treated as bad and not recoverable. The Assessing Officer (A.O) disallowed the claim of bad debts, citing non-compliance with the conditions required for deduction under the Act. The A.O. also noted the absence of a license for the money lending business and lack of substantiation on recovery efforts. The Tribunal set aside the Commissioner's order, directing the A.O. to verify the claim as per the Supreme Court decision in TRF Ltd. vs. CIT, emphasizing the need to establish the bad debt and efforts for recovery. The appellant was granted an opportunity to provide necessary information for verification.

Issue 2: Treatment of Interest Income
An additional ground of appeal was raised regarding the treatment of interest income as income from other sources instead of business income. The appellant argued that despite being engaged in money lending business, the income should be treated as business income, consistent with previous years' treatment by the Assessing Officer. The Tribunal directed the A.O. to treat the income as business income, allowing the additional ground of appeal raised by the appellant.

Issue 3: Disallowance of Loss
The appellant contested the disallowance of a loss without being provided an opportunity to present their case. The Tribunal did not specifically address this issue in the detailed analysis provided in the judgment. However, it can be inferred that since the Tribunal partly allowed the appeal for statistical purposes, it may have indirectly addressed this issue by granting relief to the appellant on other grounds raised in the appeal.

In conclusion, the Tribunal partially allowed the appeal filed by the appellant, primarily focusing on the disallowance of bad debts and the treatment of interest income. The judgment emphasized the need for proper verification of bad debt claims and directed the A.O. to consider the income as business income, in line with the appellant's contentions.