Case Note & Summary
The appeal before the Bombay High Court arose from an income tax assessment for Assessment Year 2005-06. The respondent assessee had filed its return of income on 27 October 2005 declaring total income of Rs.8,88,82,290. The Assessing Officer passed an assessment order under Section 143(3) of the Income Tax Act, 1961 on 19 December 2007, assessing income at Rs.14,51,98,159 and disallowing a write-off of interest on deposit of Rs.15,73,952 and a deduction of principal amount of deposit of Rs.4,35,00,000 written off. The assessee had placed deposits aggregating Rs.4,35,00,000 in financial year 2000-01 with Mahindra Construction Company Ltd. (MCCL), a sister concern. For Assessment Year 2005-06, based on an interim assessment of MCCL's financial condition, the assessee provided for a total outstanding of Rs.4,50,73,952 (principal plus accrued interest) to be written off. The Assessing Officer disallowed the claim on the ground that there was no logical explanation for waiving accrued interest, the principal amount was not used for business purpose, the assessee was not in the business of lending money, and hence deduction under Section 37 and Section 36(1)(vii) could not be allowed. The Commissioner of Income Tax (Appeals) upheld the disallowance by order dated 16 December 2010. The Income Tax Appellate Tribunal, by order dated 30 June 2016, allowed the assessee's appeal on the principal amount relying on the Bombay High Court decision in Commissioner of Income Tax-V, Pune vs. Pudumjee Pulp & Paper Mills Limited. The Revenue appealed under Section 260A, proposing three substantial questions of law challenging the allowance of Rs.4.35 crores as bad debt, the treatment of capital loan as integral to interest, and the finding that the loan was given in the ordinary course of business. The High Court examined the factual background: the assessee had made deposits with MCCL in Assessment Year 2001-02 and the interest accrued was offered to tax in that year. Subsequently, the assessee did not account for further interest due to doubtful recovery, and up to Assessment Year 2004-05 the Assessing Officer accepted that MCCL's financial condition was poor. For Assessment Year 2005-06, the assessee claimed the principal amount as bad debt, rejected by tax authorities on the grounds that the assessee was not a money lender and the non-recovery was a capital loss. The High Court considered the Division Bench judgment in Pudumjee Pulp, where a similar situation prevailed, and noted that even if one condition of Section 36(2)(i) is satisfied, bad debts claimed under Section 36(1)(vii) must be allowed. The court also referred to another decision in Commissioner of Income Tax vs. Shreyas S. Morakhia. Based on the reasoning that interest income was offered to tax earlier and the advances were made in the ordinary course of business, the High Court dismissed the Revenue's appeal and upheld the ITAT order allowing the deduction of Rs.4,35,00,000 as bad debt.
Headnote
A) Income Tax - Bad Debts - Allowability of principal loan written off as bad debt - Income Tax Act, 1961, Sections 36(1)(vii), 36(2) - Assessee wrote off inter-corporate deposit of Rs.4,35,00,000 as irrecoverable; Assessing Officer disallowed treating it as capital loss - ITAT allowed relying on Pudumjee Pulp; High Court noted that if interest on loan was offered to tax earlier, condition under Section 36(2)(i) is satisfied even if assessee not in money lending - Held that bad debt deduction allowable (Paras 3, 8). B) Income Tax - Bad Debts - Condition under Section 36(2)(i) of offering debt to tax - Income Tax Act, 1961, Section 36(2)(i) - Interest income of Rs.15,73,952 for AY 2001-02 was offered and assessed to tax as business income; principal amount not separately offered to tax - Division Bench in Pudumjee held that if any condition of Section 36(2)(i) is satisfied, bad debt claim under Section 36(1)(vii) must be allowed - Held that assessee satisfied condition (Paras 6-8). C) Income Tax - Ordinary Course of Business - Loan to sister concern to improve business health - Income Tax Act, 1961, Section 36(1)(vii) - Assessee advanced deposit to MCCL to tide over liquidity problem; Revenue argued not in ordinary course of business as not money lender - Court noted interest income was assessed as business income and advances made to group company - Held that the loan was in ordinary course of business (Paras 3, 7).
Issue of Consideration
Whether the principal amount of inter-corporate deposit written off can be allowed as bad debt under Section 36(1)(vii) read with Section 36(2) of Income Tax Act, 1961 when the assessee is not in money lending business; whether the ITAT erred in allowing Rs.4.35 crores of pure loan as bad debt; whether the loan was given in the ordinary course of business.
Final Decision
Revenue appeal dismissed; ITAT order upheld; deduction of Rs.4,35,00,000 as bad debt allowed.
Law Points
- Bad debt deduction under Section 36(1)(vii) read with Section 36(2) allowed when interest on loan was offered to tax in earlier year
- condition under Section 36(2)(i) satisfied even if assessee not in money lending business
- inter-corporate deposit written off as irrecoverable qualifies as bad debt if interest income assessed as business income
- reliance on Pudumjee Pulp and Paper Mills Limited and Shreyas S. Morakhia
