Tribunal allows write-off of business loss, citing ordinary course of business and past tax treatment.

The Tribunal upheld the CIT(A)'s decision to allow the write-off of Rs. 5,17,76,297/- as a business loss, dismissing the revenue's appeal. The Tribunal found that the ICD was advanced in the ordinary course of business, and the interest income was previously taxed. The Tribunal considered the legal actions taken to recover the debt and settled for a lesser amount, supporting the write-off as a business loss. The decision aligned with precedent cases allowing such write-offs under similar circumstances.

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Issues Involved:
1. Justification of the CIT(A)'s deletion of the disallowance of Rs. 5,17,76,297/- on account of inter-corporate deposits (ICD) written off.

Issue-Wise Detailed Analysis:

1. Justification of the CIT(A)'s Deletion of the Disallowance of Rs. 5,17,76,297/- on Account of ICD Written Off:

The appeal concerns whether the Commissioner of Income Tax (Appeals) [CIT(A)] was justified in deleting the disallowance of Rs. 5,17,76,297/- made by the Assistant Commissioner of Income Tax (AO) on account of inter-corporate deposits (ICD) written off.

The assessee filed its return of income for the A.Y. 2014-15, declaring a total income of Rs. 14,13,40,880/-. During the assessment proceedings, the AO noted that the assessee had debited Rs. 5,17,76,297/- under "exceptional expenses" in its profit and loss account. This amount was part of an ICD of Rs. 6 Crores given to M/s. Trusted Aerospace Engineering Ltd. in 2010, of which only Rs. 3,25,00,000/- was recovered. The ICD carried an interest rate of 12% per annum, and the interest income was duly offered to tax under "income from business" for the respective assessment years.

The assessee contended that M/s. Trusted Aerospace Engineering Pvt. Ltd. became bankrupt, making the remaining principal and interest doubtful of recovery. Consequently, the assessee filed a criminal complaint under Section 138 of the Negotiable Instruments Act and a legal suit before the Bombay High Court. The supporting documents were provided to the lower authorities. A settlement was reached, and the remaining sum of Rs. 5,17,76,297/- was written off and claimed as a business loss in the return of income.

The AO disallowed the claim, arguing that the assessee's business did not ordinarily involve advancing ICDs and that the provisions of Section 36(2) of the Income Tax Act were not complied with. However, the CIT(A) allowed the write-off as a business loss, relying on the fact that the ICD was advanced in the ordinary course of business, and the interest income was taxed under "income from business" in earlier years.

The Tribunal found that the assessee had undertaken a series of litigations to recover the principal and interest amount, ultimately settling for Rs. 2 Crores, leading to the write-off of Rs. 5,17,76,297/- as a business loss. The Tribunal noted that the placement of ICDs was permitted by the assessee's Memorandum of Association and governed by Section 372A of the Companies Act, 1956, making it a business activity.

The Tribunal also referred to the decision of the Bombay High Court in CIT vs. Pudumjee Pulp & Paper Mill Ltd., which allowed the write-off of ICD as a business loss under similar circumstances. The High Court had held that after 1st April 1989, it is not necessary to prove the debt as irrecoverable, only that it is written off in the accounts. The Tribunal concluded that the write-off of the ICD was a business loss, as the revenue had accepted the interest income on the ICD as "income from business" in earlier years.

In conclusion, the Tribunal upheld the CIT(A)'s decision to allow the write-off of Rs. 5,17,76,297/- as a business loss, dismissing the revenue's appeal. The order was pronounced on 06/10/2020.

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