2012 (7) TMI 20 - HC - Income Tax

Consultancy advance not bad debt under Income Tax Act; High Court reverses Tribunal decision

Commissioner of Income-tax Versus Epsilon Advisers (P.) Ltd.

The High Court held that the sum of Rs. 5.34 crore advanced to M/s BWTL by the consultancy service provider could not be treated as bad debt and written ... Bad debts - advance given to sister concern - dis-allowance on ground that advance has been given to sister concern to tide over its financial situation, and cannot be treated as bad debt when the assessee is not carrying on money lending business or having lent this amount in the course of business activity of the assessee - Held that:- Purpose for which the amount was given, the nature of the lending, nature of the activity carried on by the assessee, which constitutes business activity of the assessee, are all factors which are to be considered in determining as to whether an amount given by the assessee is one which qualifies as a 'debt'. A debt may be because of any service provided by the assessee to its customers for which an amount or fees is payable but not so paid or a price payable for any of the goods supplied but not paid by the customer or an amount actually lent out by the assessee as part of the business activity of the assessee and to qualify for deduction u/s 36(1)(vii), it is such debt which has become irrecoverable for various reasons. In present case, mere fact that the assessee had made some inter-corporate deposits and the assessee earned income by way of interest in itself is not a circumstance to conclude that it was carrying on money lending activity as part of its business activity. The assessee's main business activity was only in providing services in telecommunication technology and not in money lending activity. Therefore, interest-free amount of Rs. 5.34 crore advanced to its sister concern cannot qualify as bad debt u/s 36(1)(vii) - Decided in favor of Revenue. Issues Involved:1. Whether the Tribunal was correct in holding that the sum of Rs. 5,34,00,000/- can be written off as bad debt.2. Whether the assessee carrying on the profession of consultancy service can treat the advanced sum as bad debt and write it off as expenses.Issue-Wise Detailed Analysis:1. Whether the Tribunal was correct in holding that the sum of Rs. 5,34,00,000/- can be written off as bad debt:The Tribunal allowed the appeal of the assessee, reversing the orders of the assessing officer and the appellate commissioner. The Tribunal opined that the sum of Rs. 5.34 crore advanced to M/s BWTL, a group company, which had become irrecoverable, could be written off as bad debt. The Tribunal based its decision on the fact that the assessee's memorandum of association included money lending as one of its activities. It also noted that if the inter-corporate deposit of Rs. 75 lakh was allowed as a bad debt, the same logic should apply to the Rs. 5.34 crore advance.However, the High Court found that the Tribunal's decision was not based on material evidence. The assessing officer and appellate authority had correctly opined that the sum of Rs. 5.34 crore was not advanced in the course of the assessee's business activity, nor was it part of any money lending activity. The High Court emphasized that the assessee was primarily engaged in consultancy services, not money lending. The advance was interest-free and lacked documentation to support it as a business transaction. Thus, the High Court concluded that the Tribunal had committed an error in law by reversing the findings of the lower authorities.2. Whether the assessee carrying on the profession of consultancy service can treat the advanced sum as bad debt and write it off as expenses:The High Court examined the nature of the transaction and the business activities of the assessee. It noted that the assessee's primary business was providing consultancy services in electronics and telecommunications, not money lending. The advance of Rs. 5.34 crore to M/s BWTL was interest-free and aimed at reviving the sister company, not as part of any money lending business.The High Court referred to Section 36(1)(vii) of the Income Tax Act, which allows the deduction of bad debts only if they are incurred in the normal course of business. The Court found that the advance did not qualify as a debt incurred in the course of the assessee's business activities. The assessee's claim that the advance was part of its money lending activity was not supported by evidence. The Court also noted that the assessee was not recognized as a money lender or financial institution.The High Court concluded that the Tribunal's decision to allow the deduction of Rs. 5.34 crore as bad debt was unsustainable. It emphasized that the assessee's main business activity was consultancy services, and the advance to M/s BWTL was not part of any systematic money lending business. The Tribunal's finding was deemed perverse and not based on material evidence.Conclusion:The High Court allowed the appeal by the revenue, setting aside the Tribunal's order and restoring the order of the assessing officer as affirmed by the appellate authority. The Court held that the sum of Rs. 5.34 crore advanced to M/s BWTL could not be written off as bad debt under Section 36(1)(vii) of the Income Tax Act, as it was not incurred in the normal course of the assessee's business activities.