2014 (11) TMI 675 - AT - Income Tax

ITAT allows appeal, bad debts written off as deductions under Income Tax Act

Pact Securities & Financial Services Ltd. Versus Asst. Commissioner of income tax

The Income Tax Appellate Tribunal (ITAT) allowed the assessee's appeal, deleting the addition of Rs. 54,99,965/- made by the Assessing Officer (AO). The ... Bed debts disallowed – Facts not properly appreciated by CIT(A) - Held that:- Assessee is a NBFC registered with the RBI - so far as the nature of business of the assessee is concerned there cannot be any doubt that money lending is one of its business activities - Only because in regular course of its money lending business it has also advanced loans to sister concerns/related parties, solely on that basis the advances cannot be said to be in the nature of investment, hence, coming in capital field – revenue certainly cannot decide to whom the assessee will advance loan in its regular course of business - the AO is not the competent authority to decide that issue - It is for the RBI to take a decision whether the assessee has actually violated any guidelines or not - the loans advanced by the assessee could not have been termed as investments - CIT(A) has also not properly appreciated the facts but he has simply got swayed away by the observations of the AO that 91% of the loan was to related parties/sister concerns - There is no restriction in advancing loan to sister concerns it cannot be made a factor to conclude that loans advanced to sister concern by itself make them investments. Another important aspect which cannot be ignored is, in respect of two of the creditors i.e. M/s Elgen(India) Ltd and G. Viswanath Rao, the amounts recovered in subsequent assessment year out of the amounts claimed as bad debts written off have been offered as income in the respective assessment years by the assessee - the disallowance of the amount would amount to double addition - in case of loan advanced to Prathima Industries Ltd., has been treated as income at the hands of the said party and which stands confirmed by the CIT(A) - it cannot be treated as investment made by the assessee and again added at his hands - advances made by the assessee are in regular course of its business as NBFC, they have to be treated as revenue in nature - once the advances made are held to be of revenue nature, then, the other consequence of claim of deduction u/s 36(1)(vii) would automatically follow if the assessee actually has written them off in its books of account as bad debt – the order of the CIT(A) is to be set aside – Decided in favour of assessee. Issues Involved:1. Disallowance of bad debts of Rs. 54,99,965/- claimed by the assessee.Detailed Analysis:1. Disallowance of Bad Debts:The primary issue in this appeal is the disallowance of bad debts amounting to Rs. 54,99,965/- claimed by the assessee, a non-banking financial company (NBFC), in its Profit & Loss account. The assessee had originally filed a return of income declaring a total income of Rs. 30,34,932/-. Following a search and seizure operation, the Assessing Officer (AO) issued a notice under Section 153A of the Income Tax Act, calling upon the assessee to file a return of income. The assessee filed the return declaring the same income as initially declared.During the assessment proceedings, the AO observed that the assessee had claimed a deduction for bad debts written off. The assessee explained that the loans were generally serviced and repaid, but bad debts arose in the case of three sister units due to their inability to operate as expected or due to business losses. The AO, however, rejected the claim and assessed the income at Rs. 1,09,27,800/-, including the disallowance of bad debts.The assessee challenged this assessment before the Commissioner of Income Tax (Appeals) [CIT(A)], who deleted the additions made by the AO. The department appealed to the Income Tax Appellate Tribunal (ITAT), which upheld some additions but set aside the issue of bad debts for re-examination by the AO to determine whether the advances were in the capital or revenue field.2. Examination by AO on Remand:Upon re-examination, the AO concluded that the loans were capital in nature, primarily because 91% of the loans were advanced to related parties, and the assessee had violated RBI guidelines. The AO disallowed the claim, adding Rs. 54,99,965/- to the assessee's income.3. Appeal to CIT(A):The assessee argued that the loans were advanced in the ordinary course of business and should be allowed as bad debts if written off in the books. The assessee also noted that similar bad debts were allowed in previous years and that loans to sister concerns were common in closely held companies. The CIT(A), however, upheld the AO's decision, noting that the loans appeared to be investments to establish the businesses of sister concerns and that the write-offs seemed to be a strategy to postpone tax liability.4. Submissions and Findings:The learned Authorized Representative (AR) reiterated the assessee's position, while the Departmental Representative (DR) supported the CIT(A)'s order. The ITAT considered the submissions and the Tribunal's earlier directive to examine whether the advances were in the capital or revenue field.The ITAT noted that the AO's reasons for treating the advances as capital (loans to related parties and violation of RBI guidelines) were not relevant for determining the nature of the advances. As a registered NBFC, the assessee's business includes money lending, and loans to sister concerns cannot be deemed investments solely based on their relationship. The AO is not the competent authority to decide on RBI guideline violations.5. Conclusion:The ITAT concluded that the loans were advanced in the regular course of business and should be treated as revenue in nature. Consequently, the bad debts written off in the books should be allowed as deductions under Section 36(1)(vii) of the Income Tax Act. The ITAT also noted that amounts recovered in subsequent years were offered as income, preventing double addition. Therefore, the ITAT deleted the disallowance of Rs. 54,99,965/-.Judgment:The appeal of the assessee was allowed, and the addition made by the AO was deleted. The judgment was pronounced in the open court on 13.8.2014.