2021 (3) TMI 692 - HC - Income Tax

High Court dismisses revenue's appeal on bad debts write-off, upholding Tribunal decision.

The High Court of Madras dismissed the appeal filed by the revenue regarding the deletion of the addition of Rs. 5 Crores as bad debts. The Tribunal ... Disallowance of bad debts u/s.36[1][vii] read with Section 36[2] - Expenditure under the head “bad debts written off” - loan given was interest free and unsecured loan - unrecovered and unsecured loan - loss suffered by the assessee is irrecoverable advances with respect to real estate business - HELD THAT:- As submission made by the assessee by way of a solemn affidavit sworn to its partner, the assessee is right in contending that the revenue cannot seek to sustain the order passed by the Assessing Officer and seek for disallowance of the loss claimed by the respondent in the assessment for the year 2012-2013 while taxing the recovery of the same in the assessment year 2020-2021 and 2021-2022. Thus, in the light of the subsequent development, the order passed by the CIT(A) requires to be sustained. Appeal filed by the revenue is dismissed. Issues:Challenging the deletion of addition of Rs. 5 Crores as bad debts, Condition for claiming bad debts under Section 36(2), Nature of business activity of the assessee, Subsequent developments affecting the appeal.Analysis:1. Deletion of Addition of Rs. 5 Crores as Bad Debts:The appellant challenged the deletion of the addition of Rs. 5 Crores as bad debts under Section 36(1)(vii) read with Section 36(2). The Assessing Officer found that the loan given to Sandhya Mulchandani was unrecovered and unsecured. However, the Tribunal accepted the assessee's contention that the loan was extended under a bonafide belief and had become irrecoverable, thus justifying its write-off as bad debts. The Tribunal emphasized that even though the loss suffered by the assessee may not strictly qualify as bad debts arising from trade debts, it was a genuine loss incurred during the course of its real estate business, warranting deduction. Citing the TRF Limited case, the Tribunal held that the irrecoverability of the debt need not be established, and directed the Assessing Officer to grant the deduction, leading to the deletion of the addition.2. Condition for Claiming Bad Debts under Section 36(2):The appellant contended that the condition imposed under Section 36(2)(i) for claiming bad debts was not satisfied, as Sandhya Mulchandani had confirmed in letters that the loan was for her personal use and that she would repay it. The revenue argued that the debt could not be classified as bad debts since it was an interest-free and unsecured loan. However, the Tribunal upheld the assessee's position, emphasizing the irrecoverability of the loan and its association with the real estate business of the assessee, thereby justifying the deduction.3. Nature of Business Activity of the Assessee:The revenue disputed the nature of the assessee's business activities, claiming that they were primarily engaged in motor racing and rallying, not money lending. This argument aimed to challenge the direct link between the bad debts and the assessee's business. However, the Tribunal found that the assessee was involved in real estate business, among other activities, and the loan to Sandhya Mulchandani was connected to this business, supporting the deduction claimed by the assessee.4. Subsequent Developments Affecting the Appeal:The respondent presented an affidavit indicating that Sandhya Mulchandani had repaid a significant portion of the loan in subsequent years, offering it as income and paying advance tax. This development rendered the revenue's application for restoration of the Assessing Officer's order untenable, as the recovered amounts had been accounted for and taxed in later assessment years. Consequently, the Tribunal upheld the order passed by the CIT(A) based on these subsequent events, leading to the dismissal of the appeal filed by the revenue.In conclusion, the High Court of Madras dismissed the appeal filed by the revenue, considering the subsequent developments and the actions taken by the respondent regarding the recovery of the loan amount. The substantial questions of law were left open due to the dismissal based on these subsequent events, as detailed in the affidavit provided by the respondent.