TaxTMI 
TaxTMI 
2014 (11) TMI 675
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.... A search and seizure operation was conducted in case of the assessee. As a consequence of which the AO issued notice u/s 153A of the Act, calling upon the assessee to file his return of income. In response to the said notice, assessee filed return of income on 04/11/2010 declaring the same income of Rs. 30,34,932/- as was declared in the return filed by it originally. During the assessment proceeding, the AO noticed that the assessee has claimed deduction of Rs. 54,99,965/- in the P&L A/c towards bad debts written off. When asked to explain, the assessee stated that it has lent monies to both related and unrelated parties and the loans are generally serviced and repaid. It was submitted that most of the monies that are lent in the ordinary course of business are outstanding as standard assets meaning thereby that they are duly servicing the interest from time to time. Only in case of three sister units bad debts arose. These were written off because those concerns either could not take off their operations to the expected scale or are forced out of operations due to continued and accumulating business losses. AO however rejecting the claim of the assessee completed the assessment ....
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.... same premises where the off ice of the assessee is located i.e. Prathima House, Erramanzil, Hyderabad. 5. The AO accordingly, concluded that loans advanced are in the nature of capital, hence, loss incurred on that account would only be a capital loss. On the aforesaid premises, the AO disallowed assessee's claim and added the amount of Rs. 54,99,965/-. Being aggrieved of the addition made, the assessee preferred appeal before the CIT(A). 6. During the appeal proceedings, the assessee reiterating the submissions made before the AO submitted that since the main activity of the assessee is lending money the amount advanced in ordinary course of business cannot be treated as investment. It was therefore submitted that if in its ordinary course of business any amount advanced turns doubtful or bad the same would have to be allowed as a bad debt if it is actually written off in the books of account irrespective of the fact, whether it was advanced to sister concern or third party. The assessee submitted that in earlier assessment years also bad debts emanating out of monies lent to sister concerns were duly allowed. Hence, in the present assessment year the AO cannot divide the m....
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....r business. He further observed that the fact that no agreements were entered into by the assessee for advancing such amounts also show that these were not ordinary loans as advanced by NBFC in the ordinary course of business, but, were the assessee's investments therein. The CIT(A) observed that as 91% of the total loans given by the assessee were to sister concerns it indicates that there is intra group movement of funds made by the assessee with a view to look after the financial interest of the entire group. Therefore, even if the concerns in the group are separate legal entities, the amount advanced by the assessee to them are in the nature of investments and not ordinary loans as given by any NBFC to unrelated parties. Further considering the fact that in few cases the parties concerned have repaid back certain amounts in subsequent years the CIT(A) observed that fact itself shows the write off bad debts was made by the assessee only with a view to help out those concerns and at the same time postpone its own tax liability for the year even though the amounts actually were not turned bad. With the aforesaid observation, the CIT(A) confirmed the addition made by the AO. 8. ....
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....s has violated the guidelines of RBI. 12. In our view, none of the above considerations are relevant to come to a conclusion regarding the nature of advance whether capital or revenue. Undisputedly, assessee is a NBFC registered with the RBI. Therefore, 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. The Departmental authorities certainly cannot decide to whom the assessee will advance loan in its regular course of business. That certainly remains within the discretion of the assessee considering the business expediency. So far as the other allegation of the AO that the assessee has not adhered to the guidelines of the RBI, in our view, 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. In aforesaid view of the matter, the loans advanced by ....