2021 (11) TMI 578 - HC - Income Tax

Deduction u/s 36 (1) (vii) - ITAT allowing pure loan as Bad debt - respondent could not be said to be in the business of banking or money lending and therefore the principle amount of deposit/advances to MCCL could not be claimed as deduction u/s 36 (1) (vii) on account of condition placed in condition 36 (2) - whether amount written off consisted of capital loan and interest in an integral manner and thus condition prescribed in Section 36(2) got fulfilled? - HELD THAT - Advances of deposit is to be understood as having been done in the ordinary course of business. Therefore, one of the condition required under Section 36 (2) (i) of the Act, i.e., bad debts or part thereof taken into account in computing income of the assessee for an earlier Assessment Year before such debt or part thereof is written off is satisfied. Tribunal has not committed any perversity or applied incorrect principles to the given facts and when the facts and circumstances are properly analysed and correct test is applied to decide the issue at hand, then, we do not think that question as pressed raises any substantial question of law. The appeal is devoid of merits and it is dismissed with no order as to costs. We have not opined on the second part, i.e., whether or not the assessee is engaged in the business of money lending or banking since we have confirmed that respondent is entitled to deduction on bad debts in view of first part of Section 36 (2) (i) of the Act.

Issues Involved:
1. Disallowance of interest on deposit written off.
2. Disallowance of deduction of the principal amount of deposit written off.
3. Applicability of Section 36(1)(vii) and Section 36(2) of the Income Tax Act, 1961.
4. Interpretation and application of the precedent set by Pudumjee Pulp & Paper Mills Limited case.

Detailed Analysis:

1. Disallowance of Interest on Deposit Written Off:
The Assessing Officer disallowed the interest on deposit written off amounting to ?15,73,952/-. The respondent had placed deposits aggregating to ?4,35,00,000/- with a sister concern, Mahindra Construction Company Ltd. (MCCL), and had provided for the total outstanding amount to be written off based on an interim assessment of MCCL's financial condition. The Assessing Officer found no logical explanation or basis for waiving the accrued interest and thus disallowed the interest deduction.

2. Disallowance of Deduction of Principal Amount of Deposit Written Off:
The Assessing Officer also disallowed the deduction of the principal amount of the deposit written off, amounting to ?4,35,00,000/-, on the grounds that the principal amount lent was not used for business purposes and the respondent was not in the business of lending money. Consequently, the claim for deduction under Section 37 and the deduction of written off under Section 36(1)(vii) was not allowed.

3. Applicability of Section 36(1)(vii) and Section 36(2) of the Income Tax Act, 1961:
The respondent's appeal to the Commissioner of Income Tax (Appeals) (CIT(A)) upheld the Assessing Officer's decision. However, the Income Tax Appellate Tribunal (ITAT) allowed the appeal, relying on the decision in the case of Pudumjee Pulp & Paper Mills Limited. The ITAT directed the Assessing Officer to approve the appropriate relief, which led to the appellant filing an appeal under Section 260A of the Act, proposing substantial questions of law.

4. Interpretation and Application of the Precedent Set by Pudumjee Pulp & Paper Mills Limited Case:
The ITAT's decision was based on the precedent set by the Pudumjee Pulp & Paper Mills Limited case, where the court had allowed bad debts under Section 36(1)(vii) read with Section 36(2) of the Act. The Division Bench in that case observed that even if one of the conditions of Section 36(2)(i) is satisfied, the bad debts claimed under Section 36(1)(vii) must be allowed. The court noted that the interest income for the Assessment Year 2001-02 related to the deposit was taxed as business income, fulfilling one of the conditions required under Section 36(2)(i).

Conclusion:
The High Court dismissed the appeal, stating that the ITAT did not commit any perversity or apply incorrect principles. The court confirmed that the respondent is entitled to a deduction on bad debts as the interest income was taxed as business income in an earlier Assessment Year, satisfying one of the conditions under Section 36(2)(i). The court did not opine on whether the assessee is engaged in the business of money lending or banking, as the first part of Section 36(2)(i) was sufficient to decide the issue. The appeal was dismissed with no order as to costs.

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