Tribunal allows appeal, directs AO to allow Rs. 10 crore bad debt claim as business loss.

The Tribunal allowed the appeal, directing the AO to allow the bad debt claim of Rs. 10 crores as a business loss under Section 28/37 and delete the disallowance of Rs. 6,53,567 under Section 36(1)(iii). The appeal of the assessee was allowed.

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Issues Involved:
1. Disallowance of bad debts of Rs. 10 crores.
2. Disallowance of interest under section 36(1)(iii) of Rs. 6,53,567.

Issue-Wise Detailed Analysis:

1. Disallowance of Bad Debts of Rs. 10 Crores:

The assessee, engaged in real estate development, trading in TDR, and finance, advanced Rs. 10 crores to M/s C. Bhansali Developers Pvt Ltd. for reserving commercial premises. The project did not materialize, and the amount was written off as bad debt. The Assessing Officer (AO) disallowed the claim under Section 36(1)(vii) read with Section 36(2) of the Income Tax Act, stating that the assessee was not engaged in money lending and the amount was not an income of the assessee.

The CIT(A) upheld the AO's decision, noting that the assessee did not have a money lending license or NBFC license. The CIT(A) also rejected the alternative claim under Section 37, stating that the bad debt claim fell under sections 30 to 36 of the Act.

Upon appeal, the Tribunal examined the Memorandum of Association, which included real estate and money lending as business activities. The Tribunal noted that the interest income from lending was treated as business income by the AO. The Tribunal found that the advance was made in the ordinary course of business and was irrecoverable, thus qualifying as a business loss under Section 28/37 of the Act. The Tribunal cited various judicial precedents supporting the claim that non-recoverable advances made in the ordinary course of business are allowable as business losses. The Tribunal directed the AO to allow the claim of Rs. 10 crores as a business loss under Section 28/37 of the Act.

2. Disallowance of Interest under Section 36(1)(iii) of Rs. 6,53,567:

The AO disallowed Rs. 6,53,567, claiming the assessee diverted interest-bearing funds for non-business purposes. The assessee contended that the advances were for purchasing property, a regular business activity, and were made from reserves and surplus, not borrowed funds. The Tribunal referred to the jurisdictional High Court's decision in Reliance Utilities & Power Ltd., which presumes that advances for non-business purposes are made from own funds if reserves exceed the advances.

The Tribunal found that the advances were indeed related to the business and the reserves and surplus were higher than the advances. Therefore, the disallowance under Section 36(1)(iii) was not justified. The Tribunal directed the AO to delete the disallowance.

Conclusion:

The Tribunal allowed the appeal, directing the AO to:
1. Allow the bad debt claim of Rs. 10 crores as a business loss under Section 28/37.
2. Delete the disallowance of Rs. 6,53,567 under Section 36(1)(iii).

Order Pronounced: The appeal of the assessee is allowed as per the order pronounced in the open court on 04/03/2016.

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