2021 (4) TMI 812 - AT - Income Tax

Trading loss allowable as deduction u/s 28 OR bad debt u/s 36(1)(vii) - Disallowance of National Spot Exchange Limited ( NSEL ) loss (described as bad debts claim ) - HELD THAT - The transactions in commodities have been undertaken by the assessee in NSEL platform, which is the coordinating authority between the buyers and sellers. It is the responsibility of the NSEL to settle the accounts of the assessee. Due to closure of NSEL on account of large scale frauds, the realisation of the amount has become doubtful. In the instant case, it is the NSEL which has failed to pay the money due to the assessee. Hence, in my opinion, the amount of ₹ 29.33 lakhs lost by the assessee in NSEL was not a bad debt, but it is a case of business loss. Hence it is a case of trading loss allowable as deduction u/s 28 of the Act and not as bad debt u/s 36(1)(vii) of the Act. Hence, in my view, there is no requirement to refer to the provisions of sec.36(1)(vii) of the Act. Even though the assessee wrote off entire amount of ₹ 29.33 lakhs in one go in his books of account, he chose to claim the deduction in a staggered manner in three years. The major portion of the amount has been claimed in AY 2014-15 2015-16. The possibility of staggered claim could be that the assessee might have expected that he could realize some amount of ₹ 29.33 lakhs. Since, it did not happen, the assessee has claimed the remaining amount of ₹ 6.61 lakhs in the year under consideration. When the claim of the assessee had been allowed in AY 2014-15 and 2015-16 and further, since it is a trading loss, the assessee was justified in making claim during the year under consideration. However, as rightly admitted before Ld CIT(A), this amount is deductible against the business income only. Accordingly, set aside the order passed by Ld CIT(A) on this issue and direct the AO to allow the claim against the business income. Disallowance of interest expenditure - assessee had taken loan against fixed deposits kept with Banks - interest paid on that loan has been claimed as deduction against interest income declared under the head Income from other sources - HELD THAT - There should not be any dispute that the impugned interest expenditure is allowable as deduction against business income of the assessee. There is also no dispute with regard to the fact that the assessee had availed loan against fixed deposits in order to pay the interest liability arisen on overdraft facilities availed by the assessee. A.O. has also recorded that the overdraft facility has been used by the assessee during the course of business/trading activity carried on by the assessee, meaning thereby the loan against fixed deposit has also been availed for business purposes only. In that case, the interest expenditure is also allowable as deduction against income from business. CIT(A) has observed that the assessee has not furnished any supporting document in respect of this claim. The same is not the point of dispute arising from the assessment order. The issue is whether the interest expenditure is allowable as deduction against interest income. If it is not allowable as deduction against interest income, then whether it is allowable as deduction against business income. The interest expenditure is allowable as deduction against business income only. Accordingly, set aside the order passed by Ld. CIT(A) on this issue and direct the A.O. to allow the above said interest expenditure as deduction against business income. If both the claims discussed above are allowed against business income, then the income from business may result in a negative figure, in which event, the A.O. is directed to allow intrahead adjustments as per provisions of section 71 of the Act. Appeal filed by the assessee is allowed.

Summary

Issues Involved:
1. Disallowance of "bad debts claim" of ?6,61,216.
2. Disallowance of interest expenditure claim of ?1,59,969.

Analysis:

Issue 1: Disallowance of "bad debts claim" of ?6,61,216:
The appellant challenged the disallowance of the bad debts claim by the Ld. CIT(A) and appealed before the Tribunal. The bad debts claim arose from transactions with the National Spot Exchange Limited (NSEL), which faced allegations of fraud and subsequently closed down. The appellant had claimed the bad debt deduction against "interest income" under "Income from other sources," which was disallowed by the Assessing Officer (AO) citing no provision under section 57 of the Income-tax Act, 1961. The Ld. CIT(A) upheld the disallowance, stating that bad debt deduction is allowable in the year the debt is written off. However, the Tribunal held that the loss incurred by the appellant in NSEL was a trading loss under section 28 of the Act, not a bad debt under section 36(1)(vii). The Tribunal allowed the claim of ?6,61,216 against business income, setting aside the Ld. CIT(A)'s order.

Issue 2: Disallowance of interest expenditure claim of ?1,59,969:
The second issue concerned the disallowance of interest expenditure claimed by the appellant against interest income under "Income from other sources." The AO disallowed the claim, stating it was a business expense and should be deducted against business income. The Ld. CIT(A) confirmed the disallowance, citing lack of supporting documents. The Tribunal observed that the interest expenditure was indeed a business expense incurred during business activities and should be allowed as a deduction against business income. Therefore, the Tribunal directed the AO to allow the interest expenditure of ?1,59,969 against business income. Additionally, if both claims resulted in a negative business income figure, the AO was directed to allow intra-head adjustments as per section 71 of the Act.

In conclusion, the Tribunal allowed the appeal filed by the assessee, overturning the decisions of the lower authorities and directing the AO to allow both the bad debts claim and interest expenditure claim against business income.