9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2025 (4) TMI 1207 - AT - Income TaxRejection of bad debts claimed - AO took the view the write off of loans as bad debts is a colourable device/sham transaction adopted by the assessee to create loss with the purpose of setting off the same against the Long term capital gains earned by it - HELD THAT - The first reason cited by the assessee is that the son-in-law of the main director of the assessee company is one of the common directors in both the borrower companies referred above. We notice that the assessee has explained that the above said son-in-law is not a share holder in both the borrower companies. Hence it cannot be said that the son-in-law had any interest in the borrower companies. Hence in our view this reason cannot be a ground to suspect the claim of the assessee. Next reason cited by the AO is related to assignment agreements found during the course of survey operations - AO has also referred to an opinion given by a legal consultant wherein he has expressed the view that the transfer of shares has taken place on 1.4.2015 and hence the capital gains will be taxable in AY 2016-17. It so happened that the agreement for sale of shares was entered in March 2015 but the actual transfer took place on 1.4.2015. Hence the assessee obtained a legal opinion. We notice that the AO has linked the Assignment agreements with the legal opinion given by the legal consultant and accordingly took the view that the writing off of bad debts was purposely shifted to AY 2016-17 in order to set off the same against the capital gains. However we notice that the AO has rejected explanations given by the assessee without examining it at all i.e. the AO could have conducted enquiry with the Assignees in order to find out the veracity of the explanations given by the assessee which is not justified. Accordingly we are of the view that the AO has come to such a conclusion only on presumptions and surmises. In our view the above said observations of the AO are not required to be considered since the claim of bad debts is allowed u/s 36(1)(vii) of the Act wherein the requirement is that the debt should be written off as bad in the books of accounts and further the conditions prescribed in sec.36(2) should be fulfilled i.e. there was no necessity for the assessee to establish that the debt has really become bad. Thus we are of the view that the various reasoning given by the AO in support of his view that the writing off bad debts was a colourable device or sham transaction are based upon sound reasoning but based upon on surmises and conjectures. Further the AO has arrived at such a conclusion without conducting enquiry of any type or bringing any material on record to support his view. We noticed that the various reasoning given by the AO will not be relevant for allowing deduction u/s 36(1)(vii) of the Act. We have also seen that the assessee is eligible to claim deduction of bad debts u/s 36(1)(vii) of the Act and also fulfilled the conditions prescribed u/s 36(2) of the Act. Accordingly we hold that the bad debts claimed by the assessee cannot be rejected. Accordingly we set aside the order passed by the Ld CIT(A) on this issue and direct the AO to delete the disallowance of bad debts claimed by the assessee. Appeal filed by the assessee is allowed.
The core legal issue considered by the Tribunal is whether the bad debts written off by the assessee in the relevant assessment year can be allowed as a deduction under section 36(1)(vii) read with section 36(2) of the Income Tax Act, despite the Revenue's contention that the write-off was a colourable device to set off long-term capital gains and thus not genuine.
The Tribunal examined the following key questions:
Regarding the statutory framework, the Tribunal noted that section 36(1)(vii) allows deduction for bad debts or part thereof written off as irrecoverable in the accounts of the assessee for the previous year, subject to the conditions in section 36(2). Section 36(2)(i) requires that the debt must have been taken into account in computing income in the previous year in which it is written off or an earlier year, or represent money lent in the ordinary course of banking or money-lending business. The Tribunal found no dispute that the assessee is an NBFC engaged in money lending and had lent substantial sums to the two companies in question. The assessee had also received and offered to tax interest income from these loans in prior years, satisfying the requirement that the debt was taken into account in computing income. The loans were written off as bad debts in the books during the relevant year, fulfilling the statutory requirement of write-off. Precedents cited included the Supreme Court decision which clarified that after amendment to section 36(1)(vii), it is sufficient that the debt is written off in the accounts, and the assessee is not required to prove that the debt has actually become bad. The commercial wisdom of the assessee in writing off the debt is determinative, subject to the conditions in section 36(2). The Tribunal also referred to a High Court ruling emphasizing that bad debts should be allowed based on facts of each case and not on mere suspicion. The Revenue's primary contention was that the write-off was a colourable device to create artificial loss to set off long-term capital gains earned in the same year. The AO relied on the following points:
In analyzing these contentions, the Tribunal found that the mere presence of a common director who was not a shareholder did not establish any interest or control warranting suspicion. The fact that one borrower was a subsidiary did not negate the genuineness of the loan or the bad debt claim, especially since interest was received and taxed in earlier years. The Tribunal emphasized that the AO cannot substitute his commercial judgment for that of the assessee or act as an owner to question business decisions. Regarding the assignment agreements, the assessee explained that these were not acted upon, the assignee companies were non-performing assets, and the agreements were abandoned following professional advice. The small consideration received under these agreements was adjusted against outstanding balances. The AO's rejection of these explanations was based on presumptions without any inquiry or evidence from the assignees. The Tribunal held that such conclusions based on surmises and conjectures were not justified. The Tribunal underscored that the statutory provisions require only that the debt be written off in the accounts and that the conditions of section 36(2) be met. The timing of the bad debt write-off vis-`a-vis capital gains is irrelevant for the purpose of allowance of deduction. The Tribunal relied on authoritative rulings which held that the commercial expediency of writing off the debt suffices for claiming deduction, and the burden to prove actual badness of debt was removed by legislative amendment. Furthermore, the assessee, as an NBFC, was governed by RBI prudential norms which classified these loans as Non-Performing Assets (NPAs), reinforcing the commercial basis for write-off. The Tribunal observed that even if the AO's view of postponement of write-off was accepted, the deduction under section 36(1)(vii) would still be allowable in the year of write-off. In conclusion, the Tribunal found the AO's and CIT(A)'s disallowance of bad debts to be unfounded, as it was based on unsubstantiated assumptions without proper investigation or evidence. The statutory conditions for claiming the deduction were fulfilled by the assessee, and the commercial wisdom exercised in writing off the debts was entitled to deference. The Tribunal set aside the orders of the lower authorities and directed the AO to allow the bad debts claimed. Significant holdings include the following authoritative legal principles: "Subsequent to the amendment to the language of section 36(1)(vii), it is sufficient if the bad debt or part thereof is written off as irrecoverable in the accounts of the assessee based on commercial expediency. The legislature has sought to exclude the burden on the assessee to prove that the debt is bad debt and leaves it to the commercial wisdom of the assessee to treat the debt as bad debt once it is written off as irrecoverable in the accounts of the assessee." The Tribunal reaffirmed that mere suspicion or conjecture, without supporting material or inquiry, cannot justify denial of deduction. It emphasized that the Revenue cannot question the business wisdom of the assessee in writing off debts once the statutory conditions are met. Accordingly, the final determination was that the bad debts written off by the assessee in the relevant year are allowable deductions under section 36(1)(vii) read with section 36(2) of the Income Tax Act, and the disallowance by the AO and CIT(A) was set aside.
|
