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TMI Blog2022 (6) TMI 1268X X X X Extracts X X X X X X X X Extracts X X X X ..... (A) erred in rejecting the tax credit as per provisions of section 115JAA of the Act. 6. The appellant denies liabilities for interest u/s 234B & C. Further prays that the interest if any should be levied only on returned income. 7. For the above and other grounds and reasons which may be submitted during the course of hearing of this appeal, the assessee requests that the appeal be allowed as prayed and justice be rendered." 2. The appeal was disposed of by the Tribunal vide order dated 22.2.2015. The assessee went in appeal before the High Court of Karnataka in ITA No.147/2016 wherein the following substantial questions of law were framed:- "(a) Whether in the facts and circumstances of the case, the tribunal erred in holding that none of the incidental objects mentioned in the memorandum of associations can amount to the business of imparting education to students when the objects of the memorandum of the association of the assessee categorically states "to carryon the business of education and training in technical and other fields'. (b) Whether in the facts and circumstances of the case, tribunal erred in denying the bad debts written off as allowable deductions i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . We therefore, quash the order passed by the tribunal insofar as it pertains to disallowance of the claim of bad debts to the sum of Rs.4,86,14,074/- and disallowance of claim under Section 14A of the Act and remit the matter to the tribunal for decision afresh in accordance with law The orders passed by the Commissioner of Income Tax (Appeals) as well as the tribunal with regard to remaining issues are maintained. Therefore, it is not necessary for us to answer the substantial questions of law framed in this appeal." 4. Thus, this appeal came up for hearing before the Tribunal. 5. The first issue for consideration is with regard to disallowance of the claim of bad debts to the sum of Rs.4,86,14,074. 6. The ld. AR submitted that the appellant is in appeal against the disallowance of Rs.4,03,17,086/- written off in the books of accounts as non-recoverable loan out of the loan of Rs.6,26,14,074/- advanced during the regular course of business claimed as bad debt u/s 36(1)(vii) r.w.s 36(2) of the IT Act. 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). 7. The ld. AR submitted that the assessee as per clause 13 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the income is not a condition precedent for allowing the claim for bad debt from money lending business. The holding of money lending license is also not a pre-requisite for allowing claim of bad debt. It has been held by the Hon'ble Supreme Court in the case of TRF Ltd vs CIT in 323 ITR 397 it is enough if the irrecoverable debt is written off in the books of account which has been duly done by the assessee. The relevant portion is reproduced as under:- ''4. This position in law is well-settled. After 1st April, 1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee...''. CASE LAWS ON THE ISSUE: I) Debt from money lending is different from other businesses: (1) The Hon'ble High Court of Andhra Pradesh in CIT vs T.Veerabhadra Rao, K.Koteswara Rao & Co. in 102 ITR 604 has held as reproduced hereunder (paper book pages 39 to 46): ''4............ Now s. 36(2)(i) reads : "In making any deduction for a bad debt or part thereof, the following provisions shall apply: (i) No such deduction shall be allowed unless such debt or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h mentioned supra has been upheld by the Hon'ble Supreme Court in 155 ITR 152. (2) The Hon'ble Madras High Court in the case of P.C.Dharmalinga Mudaliar vs CIT in 152 ITR 588 has held as reproduced hereunder): ''6. We do not accept learned counsel's construction of s. 36(2)(i)(a) as being supported by any acceptable rule of statutory construction. In the first place, the IT Act, 1961, in which this provision occurs, is an amending and consolidating Act. If a departure from the earlier state of the statute is pleaded, there must be words expressing an intention to bring about a clean break with the past. We should not construe a section by reference to a single word, or merely because it is differently worded, when the provision as a whole does not convey a different statutory result. Even under s. 10(2)(xi) of the Indian IT Act, 1922, the words "in the course of business" were employed with particular reference to banking and money-lending business alone. Nevertheless, a long line of decisions of High Courts and the Supreme Court has held that the requirement of the debt having to be incurred in the ordinary course of the trade is a common feature of both money-lending and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the obvious by saying that money lent in a money-lending or banking business must have been taken into account in the computation of money- lending or banking business. The only requirement which was worthwhile to make mention of in a banking or money-lending business is that it must have been money lent in the course of the business of the assessee. Therefore, taking the provision in s. 36(2)(i)(a) as a whole, it is necessary in every case to find if a debt in a moneylending or banking business or a debt in a non-money-lending or a non-banking business must have been incurred in the course of the assessee's business. The second limb is that in the case of non money-lending or non-banking business, a debt in order to be a bad debt must have been taken into account in the computation of the income of the assessee....'' II) Money lent in the ordinary course of business, claim of bad debt allowable under section 36(1)(vii) rws 36(2)(i), alternatively under section 37(1): (3) The Hon'ble Supreme Court in the case of Narain Swadeshi Weaving Mills vs CEPT in 26 ITR 765 has held as reproduced as hereunder: ''9....The word "business" connotes some real, substantial and systemat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vision corresponding to s. 10(2)(xi) for deduction of such a debt. In answering the question in the affirmative Lord Russell observed : "Although the Act no where in terms authorises the deduction of bad debts of a business, such a deduction is necessarily allowable. What are chargeable to income-tax in respect of a business are the profits and gains of a year ; and in assessing the amount of the profits and gains of a year account must necessarily be taken of all losses incurred, otherwise you would not arrive at the true profits and gains." 5. It is likewise well settled that profits and gains which are liable to be taxed under s. 10(1) are what are understood to be such according to ordinary commercial principles. "The word 'profits'......is to be understood", observed Lord Halsbury in Gresham Life Assurance Society vs. Styles (1892) AC 309, 315 : 3 Tax Cases 185,188, in its natural and proper sense-in a sense which no commercial man would misunderstood". Referring to these observations, Lord Macmillan said in Pondicherry Railway Co. vs. CIT (1931) ILR 54 Mad 691 : "English authorities can only be utilized with caution in the consideration of Indian IT cases owing to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Under the Explanation below the section, a loan has been defined to include debentures or any deposit of money made by one company with another company, not being a banking company. The fact that in the income-tax proceedings, the advance has been described as an ICD is neither here nor there; certainly it is not decisive of the question whether it was given in the course of the money-lending business of the assessee. It is well-settled that the nomenclature given by the assessee to a transaction cannot decide its real nature. (Para 20) The advance was a money-lending advance. If so, the fact that it was a single transaction is not an impediment to it being called money-lending business. The transaction relating to the advance of ICD of Rs. 1 crore by the assessee was a loan transaction and represented money lent in the ordinary course of the business of money-lending carried on by the assessee; and the claim of the assessee for bad debts of Rs. 1 crore is allowable in view of the provisions contained in s. 36(1)(vii) r/w s. 36(2)(i). (Paras 21 & 22)' (9) The Hon'ble Delhi High Court in the case of Mohan Meakin Ltd vs CIT in 348 ITR 109 has held as reproduced hereunder (p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to allow the claim: (12) The Hon'ble Calcutta High Court in the case of CIT vs Gillanders Arbuthnot & Co Ltd in 138 ITR 763 has observed as under (paper book pages 109 to 112): '' 3......."We have given careful and anxious thought to the rival submissions made by both the sides. In our opinion, the assessee's case is well founded. From the facts as narrated in the earlier portion of this order, it would be clear that the assessee-company was engaged in various business activities, one of which was to guide the destinies of the subsidiaries by financing them or advancing loans to them in a sustained fashion and over a period of time. ........The memorandum of association permitted the assessee-company to advance the loans and the fact that the assessee did not charge any interest to this particular subsidiary, in fact, speaks well of the business prudence of the assessee-company and does not indicate any mala fides. It was only when the subsidiary concern went into liquidation and when the liquidator clearly wrote on 31st March, 1965, to the assessee-company that there were absolutely no chance of effecting any recovery from the subsidiary that the assessee chose to writ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness 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) of the Act. For the purpose of Incometax 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. As per the decision of Supreme Court in the case of TRF Ltd. v. CIT, 323 ITR 397, it is enough if the irrecoverable debt has been written off in the books of accounts of assessee which is advanced in the ordina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ound of the assessee. 13. After hearing both the parties, we are of the opinion that this issue came for consideration before this Tribunal in assessee's own case in AY 2009-10 in ITA No.84/Bang/2019 and the Tribunal by order dated 17.7.2019 held as under:- "8. We have heard rival submissions and perused the relevant material on record. As far as disallowance u/s 14A r.w. rule 8D(2)(ii) is concerned, plea of the assessee is that it had sufficient funds out of which it made investments in shares which are likely to yield income which is exempt in the form of dividend. To substantiate its case, the learned counsel for assessee has drawn our attention to the balance-sheet of the assessee as on 31/3/2009 to demonstrate the availability of own funds to the extent of Rs.57,47,51,114/-. Our attention was also drawn to the fact that total investment as on 31/3/2009 was Rs.51,48,12,527/- and as on 31/3/2008 the same was Rs.61,33,82,572/-. There was, thus, decrease in investments to the tune of Rs.9,85,70,045/-. Out of investments as on 31/3/2009, dividend yielding investments and non-yielding investments are the sum of Rs.23,27,03,595/- and Rs.28,21,08.,931/- respectively. The break-up o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the activities other than activity of investment in shares which are likely to yield exempt income. Therefore, 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. In that view of the matter, we direct that disallowance of expenses should be restricted to the items as set out above.
9. 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 assessee."
14. In the light of the above order of the Tribunal and following the same, we direct the AO to restrict the disallowance on similar lines.
15. In the result, the appeal by the assessee is partly allowed.
Pronounced in the open court on this 06th day of April, 2022. X X X X Extracts X X X X X X X X Extracts X X X X
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