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TMI Blog2015 (10) TMI 806X X X X Extracts X X X X X X X X Extracts X X X X ..... e. However, the Tribunal had given liberty to the Revenue to file the appeals after removing the defects within a reasonable time. Accordingly, the Revenue has filed the above appeals. ITA No.693/PN/2013 : 3. The grounds raised by the Revenue are as under : "1. On the facts and in the circumstances of the case and in law, the CIT (A), Kolhapur is not justified in granting further relief of Rs. 25,26,000/ - out of the amount of Rs. 37,17,000 / - disallowed by the Assessing Officer being bad debts claimed. 2. On the facts and in the circumstances of the case and in law, the CIT (A), Kolhapur is not justified in granting relief out of bad debts claimed by assessee as business loss on account of "no recovery since 1999", 'parties absconding" and "criminal cases against parties" accepting that the loans given to these parties are actually not recoverable when the AO has rightly disallowed the claim of the assessee as the reasons given for non recovery are vague and no details regarding assets owned by each of the debtors could be furnished. 3. On the facts and in the circumstances of the case and in law, the CIT (A), Kolhapur erred in treating the bad debts as business loss u/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turns nor interest income has been shown. 5. It is mentioned in the assessment order that it is found as a result of search that the assessee was engaged in the money lending activity. Books of account were found to have been maintained for this activity. The income from money lending business was, however, totally kept out of the books. After the search, the assessee declared undisclosed income of Rs. 59.59 lakhs and an additional amount of Rs. 74.69 lakhs to cover up any other liability on account of additions, disallowances, etc. While computing the undisclosed income, it was found by the Assessing Officer that an amount of Rs. 1,68,84,468/- was claimed as bad debts. This claim was not supported by entries in the books. The income of the assessee was computed on the basis of aggregating of assets and expenses incurred during the block period. Investments, according to the table at page 4 of the assessment order aggregated to Rs. 4,88,35,412/-. The assessee, however, submitted a reconciliation statement pointing out certain mistakes in the calculation, bad debts written off in the regular books not taken into account, funds obtained as a result of sale of assets not taken into a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here the debtor had expired. In effect, the disallowance of claim of bad debt was made at Rs. 37,17,000/-, excluding the FDRs with the Pat Sanstha of Rs. 15 lakhs. 11. Before CIT(A) it was submitted that the assessee had maintained memorandum books relating to the business of money lending. These books contained ledger accounts of various borrowers. On the basis of these books, a complete set of books were written for the block period 01-04-92 to 25-07-02. The books were audited by a Chartered Accountant. According to these books, undisclosed income of Rs. 59,59,971/- was declared. A further amount of Rs. 76,40,029/- was also declared on ad hoc basis to provide for any omission/ disallowance in the assessment. The Assessing Officer was not correct in discarding these books and completing the assessment on the basis of investments and expenses. The Assessing Officer had observed that the undisclosed income as shown in these books was very low compared to the assets. He also observed that the assessee had claimed huge deduction on account of bad debts and depreciation. The allowability of bad debts and depreciation was a legal issue. The Assessing Officer could have disallowed the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lending business had been carried out and books of account relating to this business were maintained, the computation of undisclosed income has to be done on the basis of such evidence. According to section 158BB, the total income should be computed in accordance with the provisions and on the basis of evidence found as a result of search or requisition of books of account or other documents or information available with the Assessing Officer and relatable to such evidence. The books of account relating to money lending business are in the nature of evidence found as a result of search. These, therefore, form the basis of computation of undisclosed income according to the provisions laid down in the Act. The provisions of the Act allow for certain deduction and exemptions as well as allowances in arriving at the taxable income. Under the provisions of section 36(1), there is a specific provision for allowance of bad debts subject to certain conditions in computing total income. The provision of sections 69, 69A, 69B and 69C are applicable in the case of block assessment by virtue of special mention in section 158BB. In the case of the appellant, however, the loans given are a part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 16. However, the fact is that the appellant has carried on a money lending business as stated earlier. A loan or advance, which is not recovered is a revenue loss in such business. The loan funds are the stock in trade or working capital. When a loan is not recovered, it is a business loss, which is allowable under section 28. In the appellant's case, loans not recovered would, therefore, be allowed as business loss. It is pertinent to note that the Assessing Officer has also accepted this principle since he has allowed a Joss to the extent of Rs. 7,30,000/- in case of loans given where the borrowers had expired. The Assessing Officer has taken a different view in taxing the net accretion to the loans given by the appellant during the block period as undisclosed income. If the accretion to the loans is taken into consideration, loss suffered as a result of non-recovery of loans should also be allowed to arrive at the real undisclosed income. The aggregate loans and advances on the date of search, has been taken as the basis to compute the net accretion during the black period. The aggregate of loans and advances includes the advances some of which are claimed to be doubtful of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccur some loans, which have been given prior to the block period. They are as follows : i) Parag Deshmukh - 01/01/96 - Cheque No.23945 Gadhinglaj Urban a. Bajirao Shelke - 26/03/96 - Co-op. Bank Cheque No.23510 In both the above cases, the loans have been given in instalments where one of the instalments falls prior to the block period although the other instalments have been given during the block period. In the list furnished, the amount which is advanced prior to the block period, has not been given. The Assessing Officer should, verify the amount, which is given prior to the block period and exclude the amount from the bad debts/business loss to be allowed. The loans given to the above two individuals during the block period will be dealt with separately later in this order. It is seen that in the final list given by the appellant, loan to Shri Ashok Chipre has been shown at Rs. 2 lakhs. This amount has been given during the block period. In the earlier list, the loan was shown at Rs. 8 lakhs, which included Rs. 6 lakhs given prior to the block period. 21. It is seen from the list that in case of the foll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... repay. The appellant has filed cases in the court against the persons and a warrant has been issued. As regards Shri Dharangutti, a criminal case has been filed for recovery of dues. Shri R. Joshi is absconding. The above details would show that the loans given to the parties are actually not recoverable. The total amount represented by these loans is Rs. 25,26,000/-. This amount should be allowed as a business loss while computing the undisclosed income from the money lending business conducted by the appellant during the block period." 15. Aggrieved with such order of the CIT(A) the Revenue is in appeal before us. 16. We have considered the rival arguments made by both the sides, perused the orders of the AO and the CIT(A) and the paper book filed on behalf of the assessee. We find the assessee before the Tribunal had challenged the order of the CIT(A) restricting the bad debts to Rs. 25,26,000/- as against the claim of Rs. 1,46,54,468/-. We find the Tribunal while deciding the appeal filed by the assessee has held that revenue authorities are not justified in restricting the claim of bad debts/business loss to Rs. 25,26,000/- as against the claim of Rs. 1,46,54,468/- made by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. There being reliable evidence found during the search that a business of money lending was carried on and books of account including ledgers were maintained. Having said so that the income from money lending was business income "the assessee was entitled to deductions as envisaged by S. 28 to 44 of the Act and Bad debts, which are allowed under S. 36(1)(vii) should also be allowed. It can be argued that one of the conditions of allowability of bad debts is that it should have been written off in the books of account and income from such debts should have been offered for tax in an earlier year. Both these conditions are not fulfilled in the appellant's case. The bad debts are not written off in regular books maintained upto the date of search. Since the debts themselves have not been declared in the returns, there is no doubt that the income from such loans etc. have not been offered to tax earlier. In case of appellant, therefore, the provisions of S. 36(1)(iii) are not practically applicable in its strict sense. 19. It is undisputed fact that both the authorities below have admitted that appellant was carrying on the money lending business. But both the authorities failed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be read in the second limb also and whether that can be done despite the construction of the second limb in the manner which is separated from the first limb by use of "comma" preceding the word "or" which clearly divides the provision in two parts, viz., (i) first Part, dealing with non-money lending business; and (ii) second part, dealing with money lending business alone and the division is intended to ensure the fulfilment of conditions for allowance of bad debts peculiar to each limb concerned. The only condition laid down in second part of sub-so (2) of s. 36 is that the amount should be advanced in the ordinary course of business which by itself proves its revenue nature and no further conditions are required to be satisfied which are only applicable with regard to debt qualifying as bad debt in the first part of sub-so (2). The authorities below are not justified in holding that the amount of Rs. 34,95,000 was not allowable as bad debt under s. 36(1)(vii) r/w second limb of sub-section (2) of S. 36." 21. In view of the above legal discussions we hold that Revenue authorities were not justified in restricting the claim of bad debts/business loss to Rs. 25,26,000/- as again ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arampuri, Kolhapur 35,000/- Lingraj Mangal, Rajarampuri, Kolhapur 25,000/- Gaikwad Shankar Kerli, Kolhapur 3,00,000/- Karanjkar Ramesh (Bhushan Rang Bhandar) 35,000/- Total 6,45,000/- 20. It was submitted that the account extracts which was a part of the seized material were already produced at the time of hearing of the appeal. It was submitted that an amount of Rs. 8 lakhs was advanced to Shri Ashok Chipare out of which Rs. 6 lakhs was outside the block period. The inability of the person to pay back debt was furnished through the affidavit. Similarly, in the case of Shri Shankar Gaikwad to whom a sum of Rs. 3 lakhs was advanced was also placed on record along with copy of criminal complaint asking for non-bailable warrant. 21. Based on the arguments advanced by the assessee and the various submissions made the Ld.CIT(A) granted further relief of Rs. 3,50,000/-, the details of which are as under : 1. Vasant Khavare Gandhinglaj Rs. 50,000/- 2. Gaikwad Shankar Kerli Rs. 3,00,000/- 22. Aggrieved with such order of the CIT(A) the Revenue is in appeal before us. 23. We have considered the rival arguments made by both the sides. As mentioned in ITA No.6 ..... 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