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TMI Blog2014 (11) TMI 675X X X X Extracts X X X X X X X X Extracts X X X X ..... loan to sister concerns it cannot be made a factor to conclude that loans advanced to sister concern by itself make them investments. Another important aspect which cannot be ignored is, in respect of two of the creditors i.e. M/s Elgen(India) Ltd and G. Viswanath Rao, the amounts recovered in subsequent assessment year out of the amounts claimed as bad debts written off have been offered as income in the respective assessment years by the assessee - the disallowance of the amount would amount to double addition - in case of loan advanced to Prathima Industries Ltd., has been treated as income at the hands of the said party and which stands confirmed by the CIT(A) - it cannot be treated as investment made by the assessee and again added at his hands - advances made by the assessee are in regular course of its business as NBFC, they have to be treated as revenue in nature - once the advances made are held to be of revenue nature, then, the other consequence of claim of deduction u/s 36(1)(vii) would automatically follow if the assessee actually has written them off in its books of account as bad debt – the order of the CIT(A) is to be set aside – Decided in favour of assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment order before the CIT(A). The CIT(A) deleted the additions made by the AO. Being aggrieved the department preferred appeal before the ITAT. The ITAT while disposing off the department s appeal upheld a couple of additions made by the AO. However, so far as, deduction claimed towards bad debts is concerned, ITAT set aside the matter to the file of the AO to examine whether the advances made were in capital or revenue field and thereafter decide the issue. In pursuance to the direction of the ITAT, the AO initiated assessment proceeding again. 4. In course of assessment proceeding, the AO after examining the details and considering the submissions of the assessee noted that the assessee had advanced about 91% of the loans to parties who are related either to the company or the directors. From these, the AO concluded that since loan advanced to outsiders are in meager percentage the advances loose the character of business and become capital. AO observed that assessee has also violated the guidelines of RBI while advancing loans to sister concerns. Examining in detail the advances in respect of which the deduction was claimed the AO noted as under: S. N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctive of the fact, whether it was advanced to sister concern or third party. The assessee submitted that in earlier assessment years also bad debts emanating out of monies lent to sister concerns were duly allowed. Hence, in the present assessment year the AO cannot divide the monies advanced into two categories i.e. loans to sister concerns as investment and to third parties as loans. It was submitted that in case of a small closely held company effort is always made to lend money to known parties as recovery of money lent is one of the most important risk it carries. Explaining the debt written off in respect of individual loanees it was submitted that out of ₹ 15,68,000/- written off in case of Elgen (India) Ltd. the said company had repaid debt to the extent of ₹ 13,70,000 in FY 2005- 06 which has also been offered to tax by the assessee in the corresponding assessment year thereby leaving a very small net bad debt. In respect of bad debt written off of ₹ 27,50,000 in respect of Prathima Industries Pvt. Ltd., it was submitted that the amount was added back at the hands of the said company in assessment made u/s 143(3) which has also been confirmed in the first ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he write off bad debts was made by the assessee only with a view to help out those concerns and at the same time postpone its own tax liability for the year even though the amounts actually were not turned bad. With the aforesaid observation, the CIT(A) confirmed the addition made by the AO. 8. The learned AR through his submissions made at the time of hearing as well as the written submissions filed before has mostly reiterated the stand taken by the departmental authorities. 9. The learned DR on the other hand strongly supported the order of the CIT(A). 10. We have considered the submissions of the parties and perused the material on record as well as the orders of the revenue authorities. In the earlier round when the matter was remitted back to the file of the AO the Tribunal in its order in ITA No.1028 1059/Hyd/2007 dated 30/09/2011 directed as under: 9. We have heard both the parties and perused the materials on available on record. The contention of the department is that the money was not advanced to sister concern in the ordinary course of its business. The money advanced to sister concern is a capital investment as such it is a capital loss. But, in our opi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO that the assessee has not adhered to the guidelines of the RBI, in our view, the AO is not the competent authority to decide that issue. It is for the RBI to take a decision whether the assessee has actually violated any guidelines or not. In aforesaid view of the matter, the loans advanced by the assessee could not have been termed as investments. The CIT(A), in our view, has also not properly appreciated the facts. He has simply got swayed away by the observations of the AO that 91% of the loan was to related parties/sister concerns. There being no restriction in advancing loan to sister concerns it cannot be made a factor to conclude that loans advanced to sister concern by itself make them investments. Another important aspect which cannot be ignored is, in respect of two of the creditors i.e. M/s Elgen(India) Ltd and G. Viswanath Rao, the amounts recovered in subsequent assessment year out of the amounts claimed as bad debts written off have been offered as income in the respective assessment years by the assessee. That being the case, the disallowance of the said amount would amount to double addition. Similarly in case of loan advanced to Prathima Industries Ltd., has be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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