Section 14A and bad debt deduction: exemption from income tax alone did not bar the claim, and banking debt write-off was allowable.

Section 14A did not apply because it disallows expenditure only in relation to income that does not form part of total income, and income exempt only from income tax under section 50 of the SIDBI Act was not excluded from total income. The revenue could also not raise that point for the first time in section 260A proceedings. A bad debt written off by a banking assessee was allowable under section 36(1)(vii) read with section 36(2)(i) because the amount represented money lent in the ordinary course of banking business and the statutory condition was satisfied. No substantial question of law arose, and the allowance of the deduction was upheld.

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Issues: (i) Whether section 14A of the Income-tax Act, 1961 applied to disallow the bad debt claim when the income in question was exempt under section 50 of the Small Industries Development Bank of India Act, 1989; (ii) Whether the assessee was entitled to deduction of bad debts under section 36(1)(vii) read with section 36(2)(i) of the Income-tax Act, 1961.

Issue (i): Whether section 14A of the Income-tax Act, 1961 applied to disallow the bad debt claim when the income in question was exempt under section 50 of the Small Industries Development Bank of India Act, 1989.

Analysis: Section 14A applies only where expenditure is incurred in relation to income which does not form part of total income. The exemption under section 50 of the Small Industries Development Bank of India Act, 1989 was only from payment of income tax and did not exclude the income from total income. The issue was also not raised before the authorities below and could not be urged for the first time in an appeal under section 260A.

Conclusion: Section 14A had no application and the revenue could not succeed on that ground.

Issue (ii): Whether the assessee was entitled to deduction of bad debts under section 36(1)(vii) read with section 36(2)(i) of the Income-tax Act, 1961.

Analysis: The assessee was engaged in banking and the amount written off represented money lent in the ordinary course of that business. A bad debt written off as irrecoverable is allowable under section 36(1)(vii), subject to section 36(2)(i). That requirement was satisfied because the debt represented money lent in the ordinary course of the banking business.

Conclusion: The bad debt deduction was allowable and the assessee's claim was rightly accepted.

Final Conclusion: No substantial question of law arose, and the revenue challenge to the allowance of the bad debt deduction failed.

Ratio Decidendi: Section 14A does not apply to an amount merely because it is exempt from tax unless it is expenditure in relation to income excluded from total income, and a bad debt is deductible under section 36(1)(vii) when the assessee carries on banking business and the debt written off represents money lent in the ordinary course of that business, satisfying section 36(2)(i).

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