TaxTMI 
TaxTMI 
2005 (1) TMI 316
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....assessee of bad debts under s. 36(1)(vii) as to how the condition of s. 36(2) was fulfilled when the AO in his assessment order, without prejudice to his earlier finding that income is assessable under the head 'Other sources' only, has clearly held that even the condition laid under s. 36(2) is not fulfilled; (v) holding that the debts have become bad when the AO without prejudice to his other finding has also concluded that the debts, on facts, are not really bad." 2. The grounds of appeal, which are narrative and argumentative in nature, pertain to only one issue, i.e., deletion by the learned CIT(A) of addition of Rs. 35,15,347 made by the AO by disallowing assessee's claim for deduction of bad debts. The relevant facts are that the assessee was a member of the Bombay Stock Exchange and during the previous year relevant to the asst. yr. 1995-96, the assessee sold the Bombay Stock Exchange membership card for a sum of Rs. 1.5 crores. It was claimed by the assessee that even thereafter he was acting as sub-broker and during the course of business of sub-brokering certain amounts, were advanced to various parties. This included a sum of Rs. 15 lakhs to Shri Rajesh Tibrewala ....
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....owing judgments: (i) Sir Chinnubhai Madhavlal vs. CIT (1937) 5 ITR 210 (Bom); (ii) Indequip Ltd. vs. CIT (1994) 116 CTR (Bam) 261 : (1993) 202 ITR 417 (Bom); (iii) K.J. Somaiya & Sons (P) Ltd. vs. CIT (1985) 45 CTR (Bom) 174 : (1985) 155 ITR 605 (Bom); (iv) Godavari Sugar Mills Ltd. vs. CIT (1991) 97 CTR (Bom) 141 : (1991) 191 ITR 359 (Bom). 4. The learned counsel appearing on behalf of the assessee strongly supported the order of the learned CIT(A) and contended that the learned CIT(A) has elaborately discussed the relevant facts and circumstances of the case as also the legal position and has arrived at a legally correct view. Regarding the Departmental allegation that debts have been written off prematurely, the learned counsel relied on the Tribunal, Mumbai Third Member decision in the case of ITO vs. Anil H. Rastogi (2003) 80 TTJ (Mumbai)(TM) 696 : (2003) 86 ITD 193 (Mumbai)(TM). It is contended that in the above decision it has been held that after the amendment of s. 36(1)(vii) w.e.f. 1st April, 1989, it is not obligatory for the assessee to place demonstrative proof for establishing a debt as bad. If he has taken steps to write it off in the previous year, it....
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....he assessee and if things would have remained normal the assessee would have been able to recover this amount from the subsidiary, the question of recovery became impossible and thus in all respects, the amount could be treated as a bad debt entitling the assessee to the allowance on account of deduction from its income for the relevant year." 5. We have given a careful consideration to the rival submissions vis-a-vis the facts of the case. First of all, it must be mentioned that the learned CIT(A) has decided the issue on the basis of either irrelevant considerations or incorrect position of law. The learned CIT(A) has failed to record any conclusive finding at all as to whether the assessee is carrying on money-lending business and the relevant loans were advanced by him during the course of carrying on of such money-lending business. The relevant facts with regard to this issue have not been discussed by the learned CIT(A) at all. The learned CIT(A) has observed in his order that the assessee, after selling the Bombay Stock Exchange Card, continued to indulge in share dealing and the loans advanced by the assessee originated from the sale proceeds of Bombay Stock Exchange Car....
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.... of assessee's income. Thus, in the case of a trader, if the sales have been made on credit and the corresponding debt becomes irrecoverable, the said debt can be allowed as bad debt as the sales have gone into computation of assessee's income. Obviously, the assessee does not fulfil this condition and the finding recorded by the learned CIT(A) is legally incorrect. From the above, it would appear that in the case of the assessee, the debt can be allowed as bad debt under s. 36(1)(vii) only if it falls under (b) above, i.e., the debt represents money lent in the ordinary course of money-lending business carried on by the assessee. The moot question is as to whether the assessee can be said to be carrying on money-lending business. In our view, no material or evidence whatsoever is available to even remotely suggest that in the previous year relevant to the asst. yr. 1996-97 when the loans were advanced, the assessee was carrying on money-lending business. Admittedly, the assessee received a sum of Rs. 1.5 crores during that year by sale of BSE Card and this was treated to be capital receipt. As per the balance sheet as on 31st March, 1995, the following items appear on the liabilit....
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.... in the case of K.J. Somaiya & Sons may be reproduced below from pp. 607 and 608 of the report: "The assessee had claimed certain amounts on the basis that they represented bad debts written off in the respective assessment years. For the asst. yr. 196869, the claim came to Rs. 94,402 and for the asst. yr. 1969-70 to Rs. 2,200. The details of eleven parties whose debts were claimed as written off for the first year are furnished, but no such details were furnished for the second year. It was contended by the assessee that it had earned substantial interest for the two assessment years and that all this would indicate that the assessee was carrying on money-lending business. The Tribunal had in its appellate judgment fully considered various submissions made on behalf of the assessee, both factual and legal, and ultimately came to the conclusion that the advances could not have been shown to have been made in the course of any money-lending business. Indeed, the Tribunal refused to concede that the assessee was carrying on any such business. According to the Tribunal, it may be that the assessee had earned some interest from surplus funds given as advances or loans to certain par....
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....est in dispute was earned were advanced in the course of the assessee's business. The Tribunal was justified in its conclusion and the income of Rs. 12,38,387 being interest received on loans and advances was taxable as income from other sources." 7. From the above cases, the principle which emerges is that the assessee must establish beyond any doubt that the loans were advanced during the normal course of carrying on of money-lending business. In the present case, the assessee did not obtain any licence which is a legal requirement for carrying on money-lending business. There is no other evidence or material to show that the assessee was carrying on money-lending business. Merely because the assessee disclosed interest income as business income, it cannot be said that the assessee was carrying on money-lending business. Here, a reference would be appropriate to the Calcutta High Court decision in the case of Turner Morrison & Co. relied upon by the learned counsel for the assessee. In the above case, the loss was primarily allowed by the Calcutta High Court on the ground that the loans advanced to subsidiary were for business purposes and, therefore, non-recovery of loans amo....