2018 (12) TMI 1811 - AT - Income Tax

Tribunal rules in favor of assessee on NPA provision, interest disallowance, bad debt claim, and capital losses

M/s Merlin Resources Ltd. Versus DCIT, Cir-8, Kol. And ITO, Wd-8 (1), Kolkata Versus M/s Merlin Resources Ltd.

The Tribunal allowed the assessee's appeal regarding the reduction of net profit by provision for NPA/doubtful debts and upheld decisions on disallowance ... Book profit computation u/s 115JB - Entitlement to reduce net profit by the provision for NPA/doubtful debts written back while computing book profit - HELD THAT:- We note that the summary of the provisions made by the assessee and the provision written back in the profit and loss account abundantly explains that assessee is entitled to reduce the profit by the bad debt . It is not a provision, but it is a bad debts actually incurred by the assessee. Assessee made provision for NPA/doubtful debts in the Assessment Years 2003-04& 2004-05. These provisions were added back to the total income of the assessee in normal computation as well as computation u/s 115JB of the Act in the respective years. During the Assessment Year 2008-09, the assessee has actually written back bad debts which he has debited to the profit and loss account as an expenditure and excluded from the computation of the income. Based on the factual position we note that assessee had offered these provisions for taxation in earlier years, hence in the A.Y.2008-09 the assessee is entitled to claim the bad debts written off .Therefore, we direct the Assessing Officer to allow the claim of the assessee in normal computation as well as computation u/s 115JB of the Act. Disallowance of proportionate interest on borrowed loans, given as interest free loans to other parties - A.O noted that the assessee company borrowed funds by way of unsecured loan on which interest was claimed - HELD THAT:- As held in the case of CIT v. Hotel Savera [1997 (11) TMI 37 - MADRAS HIGH COURT] that for making the disallowance of interest or part of it, a finding that the borrowed fund was used for non-business purpose is essential. Since in the case of the assessee, the Assessing Officer has not given such finding and it is also not his case that the borrowed fund has been given to the parties named in the assessment order. AO was not justified in disputing the business necessity of the loan without bringing on record any material to support his bald statement. It is not the case of the Assessing Officer that the funds borrowed on which interest was paid was utilized for non business purpose or for giving the loan to the parties mentioned in the assessment order.That being so, we decline to interfere with the order of Id. C.I T.(A) deleting the aforesaid additions. His order on this addition is, therefore, upheld and the grounds of appeal of the Revenue are dismissed. Disallowance of bad debt - assessee company has partly written off bad debt in the accounting year ending on 31.03.2006. No write off was made in preceding previous year ending on 31.03.2007 and again in instalments, the assessee wrote off a huge amount of ₹ 3,80,00,000/- during the year ended 31.03.2008 - HELD THAT:- We note that the A.O. in the assessment order has observed that the assessee has written off friendly loan advanced to Elbee Services Ltd. The A.O further observed that no interest was charged on this advance from 01.04.2004 onwards and the assessee has written off ₹ 1,97,12,371/- out of this loan in the F.Y 2005-06 and has written off amount of ₹ 3,80,00,000/- in this year. As per the A.O. since the assessee has not brought any evidence to substantiate its claim that the loan has become irrecoverable in this year or the assessee has taken legal action for the recovery of the loan hence this bad debt which is the part of the tax planning and is not allowable. This loan was given during the course of assessee’s money lending business and interest has been charged for the year ending 31.03.1998 to 31.03.2003. The interest charged on the loan was offered as business income in earlier years by the assessee. Since the assessee has written off loan in its books of accounts hence the write off of ₹ 3,80,00,000/- is allowable as bad debt in view of provision of section 36(1)(viii) of the Income Tax Act. We note that the provisions of section 36(1)(vii) has been amended w.e.f. 1.4.1989 and as per the amended section, as held by Hon’ble Supreme Court in the case of T.R.F Ltd. v CIT [2010 (2) TMI 211 - SUPREME COURT] that the assessee need not to establish that the debt has become irrecoverable in the year in which it is written off. The only condition is that the debt should be written off in the books of accounts. Since in the case of the assessee it is not in dispute that the assessee has written off the debt of ₹ 3,80,00,000/- which relates to its money lending business, in its books of accounts therefore, we are of the view that this write off of bad debt of ₹ 3,80,00,000/- is an allowable deduction. That being so, we decline to interfere in the order passed by the ld. CIT(A), his order on this issue is hereby upheld and grounds of appeal raised by the Revenue is dismissed. Long term capital loss and short term capital computation - admission of additional evidence - HELD THAT:- We note that before the ld CIT(A), the assessee had filed copy of purchase note and sale bill etc. of shares of M/s Galaxy Entertainment Corp. Ltd. These documents were sent by the ld CIT(A), to the AO, during the appellate proceedings. The AO in his remand report had objected to the admission of these documents. The ld CIT(A) admitted these documents stating that purpose of assessment proceedings is to assess the correct tax liability of the assessee in accordance with law.[ National Thermal Power Corporation Vs.CIT [1996 (12) TMI 7 - SUPREME COURT]. The ld CIT(A), considering the facts of the assessee`s case, directed the assessing officer to work out the long term capital loss and short term capital loss. We are of the view that there is no infirmity in the order of ld CIT(A) in directing the AO to compute the long term/short term capital loss. That being so, we decline to interfere in the order passed by the ld. CIT(A), his order on this issue is hereby upheld and grounds of appeal raised by the Revenue is dismissed. Issues Involved:1. Assessee's entitlement to reduce net profit by provision for NPA/doubtful debts written back while computing book profit u/s 115JB.2. Charging of interest u/s 234B.3. Initiation of penalty proceedings u/s 271(1)(c).4. Disallowance of proportionate interest on borrowed loans given as interest-free loans.5. Disallowance of claim of bad debt.6. Relief related to long-term and short-term capital loss.Detailed Analysis:1. Assessee's Entitlement to Reduce Net Profit by Provision for NPA/Doubtful Debts Written Back:The assessee contended that the provision for NPA/doubtful debts written back should be deducted while computing book profit u/s 115JB. The AO disallowed this deduction, and the CIT(A) upheld the AO's decision. However, upon appeal, it was noted that the assessee had made provisions for NPA/doubtful debts in earlier years, which were added back to the income in those years. Since the bad debts were actually written off in the current year, the assessee was entitled to claim the deduction. The Tribunal directed the AO to allow the deduction in both normal computation and u/s 115JB.2. Charging of Interest u/s 234B:The assessee's second ground pertained to the charging of interest u/s 234B. This issue was deemed consequential and did not require separate adjudication as it depended on the outcome of the primary issues.3. Initiation of Penalty Proceedings u/s 271(1)(c):Similar to the interest issue, the initiation of penalty proceedings u/s 271(1)(c) was also considered consequential and did not require separate adjudication.4. Disallowance of Proportionate Interest on Borrowed Loans Given as Interest-Free Loans:The AO disallowed proportionate interest on borrowed loans given as interest-free loans, citing lack of 'commercial expediency.' The CIT(A) deleted this disallowance, and the Tribunal upheld CIT(A)'s decision. It was noted that the loans were either repaid or deemed irrecoverable and provided as bad debts in earlier years. The Tribunal referenced the Supreme Court's decision in S.A. Builders Ltd. v. CIT, which stated that revenue authorities should not question the business decisions of the assessee unless there is clear evidence of non-business use of borrowed funds.5. Disallowance of Claim of Bad Debt:The AO disallowed the claim of bad debt of Rs. 3,80,00,000, arguing that the assessee did not prove the irrecoverability of the debt. The CIT(A) deleted this disallowance, and the Tribunal upheld CIT(A)'s decision. The Tribunal noted that the loan was given during the course of the assessee’s money-lending business, and interest was charged in earlier years. Since the debt was written off in the books, it was allowable under section 36(1)(vii) as per the Supreme Court's decision in T.R.F Ltd. v. CIT.6. Relief Related to Long-Term and Short-Term Capital Loss:The AO disallowed long-term capital loss of Rs. 5,92,14,631 and short-term capital loss of Rs. 46,56,642, arguing that the transactions were not genuine. The CIT(A) deleted this disallowance, and the Tribunal upheld CIT(A)'s decision. It was noted that the assessee provided necessary documentation, and the transactions were genuine. The Tribunal directed the AO to compute the capital losses correctly.Conclusion:The Tribunal allowed the assessee's appeal regarding the reduction of net profit by provision for NPA/doubtful debts and upheld the CIT(A)'s decisions on disallowance of interest on borrowed loans, bad debt claim, and capital losses. The issues related to interest u/s 234B and penalty proceedings u/s 271(1)(c) were deemed consequential and did not require separate adjudication. The revenue's appeal was dismissed, and the assessee's appeal was allowed.