Non Trading bad debts can not be allowed in computing taxable Income of the Assessee

The appellant has purchased debts of amount due to Rose Patel Mercantile Co. Ltd. for Rs.10,85,000/- by paying the said amount on 10-1-1996 Rs. 5,00,000/- and on 29-1-1996 Rs. 5,85,000/-. The amount was due from Qualitron Components Ltd. Unfortunately due to losses the company closed down its operations and ultimately wound up by the order of Gujarat High Court. The Assessing Officer has clearly pointed out that the said debts of Rs. 10,85,000/- was not trading debt. Therefore the conditions specified u/s. 16(1)(vii) r.w.s. 36(2) is not fulfilled as the amount has not been taken into consideration while arriving to the profit of the appellant company.

The amount is also not money lended in the ordinary course of business of banking company or money lending which is carried on by the assessee. the appellant has also not made any such claim that the debts has been taken into account in computing the income of the assessee of the previous year in which the amount of such debts or part thereof is written off or of earlier year. The appellant has also not claimed that it is doing the business of banking of money lending. Moreover no interest either accrued or received has been debited in P &L account by the appellant in respect of amount of debts of Rs. 10,85,000/-. Therefore the Assessing Officer has rightly disallowed the claim of bad debts amounting to Rs. 10,85,000/- u/s.36(1)(vii) r.w.s. 36(2) of the I.T. Act. The action of the Assessing Officer is justified and confirmed. The case laws relied upon by the appellant are distinguishable on facts and not applicable in the case of the appellant.

BEFORE SHRI R.V.EASWAR, PRESIDENT & SHRI T.R.SOOD, ACCOUNTANT MEMBER

I.T.A. No. 5950/Mum/2008 – A.Y 2003- 04

Manori Properties Pvt. Ltd., Vs. Income Tax Officer 6(3)(3), Mumbai.

O R D E R

Per T.R.SOOD, AM:

In this appeal, the assessee has raised the following ground:

“The Learned Commissioner of Income Tax Appeals, Mumbai [hereinafter referred to as CIT[A] ] erred in confirming a sum of .10,85,000/- being Bad Debts written off in the Profit & Loss Account by your appellant.”

2. After hearing both the parties, we find that during the assessment proceedings, AO noticed that the assessee had made a claim of Rs. 10,85,000/- on account of bad debts written off. On enquiry, it was further found that assessee has purchased the debt amount from Rose Mercantile Co. Ltd. and the amount was due from Qualitron Components Ltd. The AO observed that this was not a debt which was originally accounted for by computing the income of previous year and it was not even money lent in the ordinary course of business and,therefore, the claim was not allowable. After discussing various case laws, he disallowed the claim.

3. Before the CIT[A] it was mainly submitted that after the amendment in law w.e.f. 1-4-1989, it was no more a requirement that for claiming a debt, the same could not really become bad. A mere writing off of the debt is sufficient compliance with the requirement of sec.36(1)(vii). Alternatively, it was argued that the same should be allowed as a business loss. The ld. CIT[A] decided the issue vide paras 2.3 and 3 as under:

2.3 I have carefully considered the reply given by the appellant and perused the assessment order. The appellant has purchased debts of amount due to Rose Patel Mercantile Co. Ltd. for Rs.10,85,000/- by paying the said amount on 10-1-1996 Rs. 5,00,000/- and on 29-1-1996 Rs. 5,85,000/-. The amount was due from Qualitron Components Ltd. Unfortunately due to losses the company closed down its operations and ultimately wound up by the order of Gujarat High Court. The Assessing Officer has clearly pointed out that the said debts of Rs. 10,85,000/- was not trading debt. Therefore the conditions specified u/s. 16(1)(vii) r.w.s. 36(2) is not fulfilled as the amount has not been taken into consideration while arriving to the profit of the appellant company. The amount is also not money lended in the ordinary course of business of banking company or money lending which is carried on by the assessee. the appellant has also not made any such claim that the debts has been taken into account in computing the income of the assessee of the previous year in which the amount of such debts or part thereof is written off or of earlier year. The appellant has also not claimed that it is doing the business of banking of money lending. Moreover no interest either accrued or received has been debited in P &L account by the appellant in respect of amount of debts of Rs. 10,85,000/-. Therefore the Assessing Officer has rightly disallowed the claim of bad debts amounting to Rs. 10,85,000/- u/s.36(1)(vii) r.w.s. 36(2) of the I.T. Act. The action of the Assessing Officer is justified and confirmed. The case laws relied upon by the appellant are distinguishable on facts and not applicable in the case of the appellant.

3. As regards alternative claim of the assessee regarding allowing write off of Rs. 10,85,000/- as business loss u/s.37(1) is concerned, the claim of appellant is also not acceptable. Firstly, the amount of Rs. 10,85,000/- is not an expenditure which has been incurred for the purpose of business of the assessee rather it is a capital expenditure as the appellant has purchased debts of defunct companies which has been ultimately written off as the said company has been wind up due to order of Gujarat High Court. The Assessing Officer has discussed in detail regarding the claim of business loss of the appellant and rightly held that the loss is not allowable as business loss being a colourable device to reduce the profit of business. The findings of the Assessing Officer in this regard is justified and confirmed.”

6. We have considered the rival submissions carefully. Admittedly, the bad debt was purchased from a third party and had not arisen during the course of business from the ordinary trading transactions of the assessee. Therefore, the conditions prescribed u/s.36(2) for claim of bad debt are not fulfilled. Hence, the claim for bad debt has been rightly rejected by the ld. CIT[A]. We also find force in the submission of the ld. DR that since no ground has been taken regarding the claim of business loss, though the ld. CIT[A] has dealt with that issue and, therefore, that issue cannot be entertained now in the absence of a specific ground.

7. The Ld. Counsel of the assessee had also submitted that, in any case, she is entitled to support the order of the CIT[A] on any ground which has been decided against the assessee under Rule 27 of the Appellate Tribunal Rules, 1963. However, when we pointed out to her that Rule 27 is applicable to the respondent, but since it was the appeal of the assessee therefore she could not invoke Rule 27 and rather the assessee ought to have taken a specific ground challenging the decision of the CIT[A] that the claim was allowable as a business loss. At this point she did not pursue the matter further and, accordingly, this contentions is also dismissed.

8. In the result, assessee’s appeal is dismissed.

Order pronounced in the open Court on this day of 20/05/2011.

Mumbai: 20/05/2011.