2010 (8) TMI 992 - AT - Income Tax

Tribunal allows bad debts claim and reverses income addition on NCDs in revenue's appeal

Income Tax Officer, Ward 6 (1) (3), Mumbai Versus Aristo Realty Developers Ltd. (Formerly Lloyds Realty Ltd.)

The revenue's appeal was dismissed as the Tribunal upheld the CIT(A)'s decision to allow the claim of bad debts amounting to Rs. 9,69,363. Additionally, ... - Issues Involved:1. Whether the CIT(A) was justified in allowing the claim of bad debts amounting to Rs. 9,69,363/-.2. Whether the CIT(A) was justified in confirming the addition of Rs. 1,37,20,000/- as income of the assessee being remission of liability on account of Non-Convertible Debentures (NCDs).Issue-Wise Detailed Analysis:1. Allowing the Claim of Bad Debts:The revenue challenged the CIT(A)'s decision to allow the assessee's claim of bad debts amounting to Rs. 9,69,363/-. The AO had disallowed this claim on the grounds that the assessee did not provide sufficient evidence to prove that the debt had actually gone bad, as required under section 36(1)(vii) read with section 36(2) of the Income Tax Act.On appeal, the CIT(A) allowed the claim, leading to the revenue's appeal. The learned DR argued that merely writing off the debt is insufficient, citing the Gujarat High Court's decision in Dhall Enterprises (295 ITR 481). The assessee contended that the conditions of section 36(1)(vii) were satisfied upon writing off the debt in the books of account, relying on the Supreme Court's decision in T.R.F. Ltd v. CIT (323 ITR 397).The Tribunal noted that the AO did not dispute that the amount was part of the sale consideration for the assessment year 2003-04. As per the amended provisions of section 36(1)(vii), it is sufficient for the debt to be written off as irrecoverable in the accounts. The Tribunal upheld the CIT(A)'s decision, stating that in the absence of any findings by the AO that the assessee's decision was dishonest or mala fide, the claim could not be denied. Thus, the revenue's appeal was dismissed.2. Addition of Rs. 1,37,20,000/- as Income on Account of Remission of NCDs:The assessee contested the CIT(A)'s decision to confirm the addition of Rs. 1,37,20,000/- as income, which was remission of liability on account of NCDs. The AO had noted that the assessee had originally taken a loan of Rs. 5 crores from State Bank of India Home Finance Ltd, which was later settled by issuing Zero percent NCDs of Rs. 2,93,00,000/-. The balance amount of Rs. 1,37,20,000/- was claimed by the assessee as remission of capital loan and hence exempted.The AO treated the remission as income, arguing that the NCDs included amounts converted from interest, which had not been claimed as a deduction in earlier years. The CIT(A) upheld this view.Before the Tribunal, the assessee argued that the entire liability of Rs. 2,93,00,000/- was towards the principal amount and no interest was claimed as expenditure in the earlier years. The assessee relied on several judicial precedents, including Polyflex (India) Pvt Ltd v. CIT (257 ITR 343) and Mahindra and Mahindra v. CIT (261 ITR 501).The learned DR contended that the NCDs included interest components and thus the remission should be treated as income. The Tribunal examined the settlement letter from SBI Home Finance Ltd, which clarified that the NCDs were issued against the capitalized portion of the loan and future interest.The Tribunal concluded that since the loan was taken for acquiring a capital asset and no interest was claimed as expenditure, the remission of the NCDs could not be treated as income under section 41(1). The Tribunal distinguished the case from the decisions cited by the DR, noting that the loan was not for trading purposes.The Tribunal allowed the assessee's appeal, setting aside the orders of the lower authorities on this issue.Conclusion:The appeal of the revenue was dismissed, and the appeal of the assessee was allowed. The Tribunal upheld the CIT(A)'s decision on the bad debts claim and reversed the CIT(A)'s decision on the addition of Rs. 1,37,20,000/-.