Section 36(2)(i)- Loan- Bad Debts allowable if assessee offered interest income to tax in earlier years

Brief of the case

Assesse received interest on inter-coporate deposit which was offered to tax in earlier years. Subsequently, assesse made certain provision for bad debts. A settlement arrived at in terms of which assesse received a part of loan amount. Assesse claim for balance, as bad debts was rejected on ground that said amount was not offered for tax. Revenue challenged assesse claim on ground that since assessee cannot be said to be engaged in activity of money lending or business of banking, provision of bad debts could not be made according to Section 36(2)(i). High Court held that even if a part of debt was offered to tax, requirement of Section 36(2)(i), stands satisfied. Since assesse had offered interest income to tax in earlier years, HC held that its claim for bad debts was to be allowed.

Facts of the case

• The Assessee was engaged in the business of manufacture and sale of paper. It made Inter-corporate Deposits of Rs. 1 Cr with M/s ‘G’ i.e. GSB Capital Markets Ltd and received interest on them.
• The certain amount being aggregated of Principal amount and interest , was treated as doubtful debts by assesse in its books.
• However , during relevant assessment year a settlement was arrived between assesse and M/s. G, and assesse received part of loan amount, and balance amount being irrecoverable, it was claimed as ‘bad debts’ u/s 36 (2)(i) .
• The CIT (A) held that said amount was lent in the ordinary course of business, received on the inter­corporate deposit was offered to tax. Thus, the claim for deduction to assesse was allowed under Section 36(1)(vii) read with Section 36(2)(i) of the Act.
• The Tribunal upheld CIT (A) order.
• On revenue’s appeal

Contention of Revenue

The activity of the assessee is of carrying on manufacturing and sale of paper. Consequently, the assessee cannot be said to be engaged in the activity of the money lending or business of banking. Consequently, deduction of bad debts is hit by Section 36(2)(i) of . Thus, the impugned order calls for interference.

HELD by HIGH COURT

• So far as Section 36(1)(vii) of the Act is concerned, it is a settled position in law that after 1st April, 1989, it is not necessary that the debt itself must be proved to be irrecoverable. The only requirement is that the amounts claimed as bad debts should be written off as irrecoverable in the account of the Assessee . The satisfaction of the above provision is not disputed by the Revenue. The hub of the controversy is whether the requirement of Section 36(2)(i) of the Act is satisfied.
• It is noticed that Section 36(2)(i) of the Act allows deduction on account of satisfaction of any of one of the two conditions given in said section.Therefore, even if one of the two conditions of Section 36(2) (i) of the Act is satisfied, then bad debts claimed under Section 36(1)(vii) of the Act has to be allowed.
• So far as first part of Section 36(2)(i) of the Act is concerned, i.e. (a) above, it was found that the assesee had during the earlier Assessment Years offered to tax an amount of Rs.42.65 lakhs received as interest on the deposit made with M/s. GSB Capital Market Ltd. The Appellant had since Assessment Year 1998­99 claimed an amount of Rs.49.82 lakhs as doubtful debts from M/s. GSB Capital Market Ltd. This consisted of the aggregate of principal and interest payable by M/s. GSB Capital Market Ltd. It was in the subject Assessment Year that a settlement was arrived at between the parties and the assessee received Rs.15 lakhs from M/s. GSB Capital Market Ltd. and the balance amount of Rs.34.82 lakhs being non­recoverable was being claimed as bad debts by writing off the same in its books of account. It would thus be noticed the amount of Rs.34.82 lakhs which constitutes partly the principal amount of the inter­corporate deposits and partly the interest which is unpaid on the principal debt. The Assessing Officer’s contention that amount of Rs.34.82 lakhs was not offered to tax earlier and, therefore, deduction under Section 36(2)(i) of the Act is not available, is no longer re­integra. This very issue came up for consideration before the Court in CIT v/s. Shreyas S. Morakhia wherein , it was found that the principal amount which was to be received from its clients would not be received. The assessee sought to claim as bad debts not only the brokerage amounts not received but the aggregate of principal and brokerage amounts not received in respect of the shares transacted. This Court held that the debt comprises not only the brokerage which was offered to tax but also principal value of shares which was not received.
• Therefore, even if a part of debt is offered to tax, Section 36(2)(i) of the Act, stands satisfied. The test under the first part of Section 36(2)(i) of the Act is that where the debt or a part thereof has been taken into account for computing the profits for earlier Assessment Year, it would satisfy a claim to deduction under Section 36(1)(vii) read with Section 36(2)(i) of the Act. In fact, the Revenue also does not dispute the above provisions as no submission in that regard were made during the course of hearing before us. 13 Therefore in view of the above self evident position in Section 36(2)(i) of the Act as well as decision of this Court in Shreyas Morakhia (supra), no substantial question of law arises for our consideration. 14 It is clarified that in view of the assessee being entitled to deduction on bad debts in view of first part of Section 36(2)(i).