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

By TG Team Income Tax Judiciary September 25, 2015

TaxGuru Citation: 2015 taxguru.in 768
Case Name: Commissioner of Income Tax Vs Pudumjee Pulp & Paper Mills Ltd. (Bombay High Court)
Appeal Number: Only available for paid members
Date of Judgement/Order: Only available for paid members
Courts: All High Courts, Bombay High Court

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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