2022 (6) TMI 1268 - AT - Income Tax

Disallowance of claim of bad debts - Amount written off in the books of accounts as non-recoverable loan out of the loan advanced during the regular course of business claimed as bad debt u/s 36(1)(vii) r.w.s 36(2) - Alternative prayer being that if the same is not allowed u/s 36(1)(vii) r.w.s. 36(2) it was allowable u/s 37(1) - HELD THAT - As admitted facts are that the assessee is carrying on money lending business and has been taxed so under the head business for the last 9 years which has been overlooked by the authorities. If the assessee is not in money lending business it cannot lead to the conclusion that when money advanced by the assessee becomes bad, it cannot be written off. Even if the assessee advanced money without money lending business, if the advance becomes bad, it should be allowed as a bad debt in terms of s. 36(1)(vii) r.w. 36(2)(i) - For the purpose of Income tax Act, for grant of claim of assessee as bad debt, holding the money lending business is irrelevant consideration. We have to look into the issue from the point of view of the assessee, whether assessee has advanced money and it became bad debt and same was written off in the books of accounts as bad debt. In the present case, assessee has advanced money in the ordinary course of carrying on business of the assessee and income earned from money lending business was offered to tax from year to year. Due to circumstances beyond the control of assessee, assessee was not able to recognize interest income on the impugned advance made to Pie Education Ltd. The main argument of the ld. DR is that income from these advances made to Pie Education Ltd. has not gone into the computation of income in any assessment year. This has been explained by the assessee that due to circumstances beyond the control of assessee, the debt being non-performing asset, no interest income is recognized on this count which cannot be the reason to disallow the claim of bad debt. For this purpose, we rely on the judgment in the case of CIT v. T. Veerabhadra Rao, K. Koteswara Rao Co 1985 (7) TMI 2 - SUPREME COURT . In our opinion, the advance made by the assessee in the ordinary course of business which is stock in trade is to be valued at cost or market price, whichever is less. In the present case, the debt has become bad and it being stock in trade the value is NIL. Therefore, it has to be considered as business loss and allowed. We find merit in this claim of the assessee. The debt written off by the assessee in the books of account is to be allowed as bad debts and accordingly we allow the grounds taken by the assessee. Disallowance u/s. 14A r.w.r. 8D - HELD THAT - As expenditure debited in the profit loss account and we find that only bank charges, remuneration to auditors, salary and wage, travelling and conveyance, vehicle maintenance are expenses which are general in nature and all other expenses are attributable to the activities other than activity of investment in shares which are likely to yield exempt income. Only the aforesaid expenses can be considered for disallowance under rule 8D(2)(iii). We may also mention here that the mandate of section 14A of the Act is that the expenditure incurred in relation to income which does not, form part of total income has to be determined having regard to the account of the assessee. Therefore, nexus between expenses sought to be disallowed and earning of dividend income has to be seen before applying the provisions of rule 8D of the IT Rules. As far as appeal of the revenue is concerned, there is no merit in the appeal because the law, by now is well settled that disallowance u/s 14A of the Act cannot exceed exempt income earned by the assesse - Thus we direct AO to restrict the disallowance on similar lines.

Issues Involved:

1. Disallowance of bad debts.
2. Disallowance under Section 14A of the Income Tax Act.
3. Denial of tax credit under Section 115JAA.
4. Liability for interest under Sections 234B and 234C.

Detailed Analysis:

1. Disallowance of Bad Debts:
The primary issue was the disallowance of bad debts amounting to Rs. 4,86,14,074/-. The appellant argued that the loan was advanced during the regular course of business and should be allowed as a bad debt under Section 36(1)(vii) read with Section 36(2) of the Income Tax Act. Alternatively, it was argued that if not allowable under these sections, it should be allowed under Section 37(1). The Tribunal noted that the assessee had been engaged in money lending since FY 2004-05, and the income from this activity had been taxed under 'business income' for the past nine years. The Tribunal referenced several case laws, including the Supreme Court's decision in TRF Ltd. v. CIT, which held that it is sufficient if the irrecoverable debt is written off in the books of accounts. The Tribunal concluded that the debt written off by the assessee should be allowed as a bad debt since it was advanced in the ordinary course of business and was written off in the books of accounts. Consequently, the Tribunal allowed the assessee's claim for bad debts.

2. Disallowance under Section 14A:
The next issue was the disallowance of Rs. 13,20,388/- under Section 14A of the Act. The CIT(A) had confirmed this disallowance, stating that the assessee had investments in shares/mutual funds and earned substantial exempt income. The Tribunal referenced its earlier decision in the assessee’s case for AY 2009-10, where it was held that if the assessee had sufficient interest-free funds to cover the investments, no disallowance under Rule 8D(2)(ii) could be made. The Tribunal found that the assessee had sufficient own funds and directed the AO to restrict the disallowance in line with the earlier order, thus partially allowing the appeal on this ground.

3. Denial of Tax Credit under Section 115JAA:
The appellant contested the rejection of tax credit as per Section 115JAA of the Act. The Tribunal did not specifically address this issue in the detailed analysis, suggesting that it might have been resolved or not contested during the hearing. The High Court had remanded the matter to the Tribunal for fresh consideration, but the Tribunal’s order focused on the bad debts and Section 14A issues.

4. Liability for Interest under Sections 234B and 234C:
The appellant denied liability for interest under Sections 234B and 234C, arguing that interest should only be levied on the returned income. The Tribunal did not provide a detailed analysis of this issue in the judgment, implying that it might have been resolved or not contested during the hearing.

Conclusion:
The Tribunal allowed the appeal concerning the disallowance of bad debts and directed the AO to reconsider the disallowance under Section 14A in light of previous Tribunal decisions. The issues regarding tax credit under Section 115JAA and interest under Sections 234B and 234C were not specifically addressed in the detailed analysis, suggesting they were either resolved or not contested during the hearing. The appeal was partly allowed, providing relief to the assessee on the primary issues of bad debts and disallowance under Section 14A.

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