Commissioner of Income Tax-I vs Smt. Sushila Mallick

Dr. Satish Chandra, J.—Present appeal is filed by the department u/s 260-A of the income tax Act, 1961 against the judgment and order dated 31.01.2011 passed by the Income Tax Appellate Tribunal, Lucknow, in Income Tax Appeal No. 678/LKW/2009, for the assessment year 2006-07. On 11.01.2013, a Coordinate Bench of this Court has admitted the instant appeal on the following substantial question of law:

Whether, the assessee does not fulfil the conditions provided under Clause (i) of Sub-section (2) of Section 36 of the income tax Act, being not engaged in the regular business of money lending and accordingly, the judgment and order of the Tribunal, is substantially illegal?

The brief facts of the case are that the assessee is engaged in the money lending business. The assessee has deposited a sum of Rs. 34.0 lacs in the form of fixed deposit with M/s. City Cooperative Bank Limited; and Badla deposit of Rs. 5 lacs with M/s. Century Consultants Ltd., Lucknow. Thus, the total amount was Rs. 39 lacs in both the deposits. The assessee has written the said amount as bad debt in the books of account. During the scrutiny, the A.O. opined that the said amount is a capital investment and cannot be written off as a bad debt. The CIT(A) has confirmed the order. Being aggrieved, the assessee has filed the second appeal before the Tribunal who has deleted the said addition. Not being satisfied, the department has knocked the door of this Court by filing the present appeal.

With this background, Sri D.D. Chopra, learned counsel for the department submits that to allow the Bad Debt in the instant case, it is required to be proved that depositing the money with the banking company is a part of money lending business and comes within the circumvent of provisions of section 36. In the instant case, it is certainly not found as part of money lending business and even for discussion sake if it is treated as part of money lending business then also the issue has been settled by Hon''ble Supreme Court in the case of Amarchand Sobhachand Vs. Commissioner of Income Tax, Madras, affirmed in Amarchand Sobhachand Vs. Commissioner of Income Tax, Madras, that a general balance due in respect of money lending as well as other dealings such as speculative transactions or agency business, moneys advanced by the assessee to save the other party from a financial crises cannot be written off as a bad debt in the account of the money lending business and claimed as bad debt.

He also submits that the assessee has not proved that how the fixed deposits have become the irrecoverable and be treated as bad debt and how it can be treated as of a revenue nature contradistinction from capital nature.

It is also the submission of the learned counsel that the assessee is not holding a money lending license. The interest income from bank deposits was never treated as "business income" in the earlier year, but the same was shown as "income from other sources". Lastly, he made a request to set aside the Tribunal''s order and restored the order passed by the lower authorities.

On the other hand, Sri Anand Prakash Sinha, learned counsel for the assessee has justified the impugned order passed by the Tribunal. He admits that the assessee was not registered under the Money Lending Act, though, the assessee is engaged in the business of money lending since long. The investment of Rs. 39 lacs was made for earning the higher rate of interest. He also informed that both the banking companies have closed down their business activities and disappeared from Lucknow. So, the assessee is not a position to recover the amount and has rightly claimed the same as bad debt. The learned counsel also read out provisions of Section 36(1)(vii) of the income tax Act, which on reproduction read as:

Section 36(1)(vii): subject to the provisions of sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year.

Provided that in the case of an assessee to which clause (viia) applies, the amount of the deduction relating to pay any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause.

Lastly, he prays to uphold the impugned order.

After hearing both the parties and on perusal of record, it appears that since long, the assessee is engaged in the business of money lending. The income earned from the illegal business is also taxable income. In the instant case, the assessee has made a deposit of Rs. 34 lacs with a banking company namely - M/s. City Cooperative Bank Limited. Similarly; a sum of Rs. 5 lacs was also deposited with another banking company namely - M/s. Century Consultants Limited, Lucknow. When the money was deposited with the banking companies, then the relationship of debtor and creditor was created. There is a loss to the assessee as both the companies have closed down their business and disappeared from town. Recovery of the amount in question is not possible. So, the assessee had written off the amount in the books of accounts as "bad debt".

It may be mentioned that prior to April 1, 1989, in order to claim deduction u/s 36(1)(vii) of the income tax Act, 1961, it was necessary for the assessee to establish that the debt had become bad, but after April 1, 1989, for the debt to be classified as bad, the assessee had only to write it off as irrecoverable in its accounts. The 1989 amendment incorporate not only the year of allow-ability but also dispenses with the requirement of the assessee to prove that the debt has become a bad debt. Circular No. 551 dated January 23, 1990 issued by the Central Board of Direct Taxes stated that the earlier provision generated a considerable amount of litigation on the issue whether the assessee had been able to establish that the debt had become bad. It was to overcome this that the amendment was made resulting in a bad debt now being straightway allowed in the year of write off. This amendment was a conscious decision taken to eliminate litigation with regard to establishing what is a bad debt. By virtue of section 41(4), where a deduction has been allowed in respect of a bad debt, which is irrecoverable and the amount or a part thereof is subsequently recovered, then that amount shall be deemed to be profits and gains of business or profession of that relevant previous year.

Further, to treat the debt as a bad debt had to be a commercial or business decision of the assessee based on the relevant material in the possession of the assessee. Once the assessee records the debt as a bad debt in his books of account that would prima facie establish that it was a bad debt unless the Assessing Officer for good reasons holds otherwise. The writing off in the accounts had to be bona fide. Once that be the case, the assessee was not called upon to discharge any further burden. After the amendment it was neither obligatory nor was the burden on the assessee to prove that the debt written off by him was indeed a bad debt as long as it was bona fide and based on commercial wisdom or expediency as per the ratio laid down in the case of the Director of Income Tax (International) Taxation Vs. Oman International Bank SAOG, .

The legal proceedings are not necessary for the recovery of the bad debt as per the ratio laid down in the case of Commissioner of Income Tax Vs. Late Sri Ram Gupta, .

Lastly, the Hon''ble Supreme Court in the case of TRF (T.R.F.) Limited Vs. Commissioner of Income Tax, Ranchi, has observed that:

After the amendment of section 36(1)(vii) of the income tax Act, 1961 with effect from April 1, 1989, in order to obtain a deduction in relation to bad debts, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable; it is enough if the bad debt is written off as irrecoverable in the accounts of the assessee.

In the instant case, the assessee has written off bad debt when it was felt that the amount is not recoverable. The satisfaction of the assessee is sufficient for claiming write of the bad debt. Moreover, both the companies have disappeared from Lucknow without making any payment.

In the light of the above discussion and by considering the totality of the facts and circumstances of the case, we find no reason to interfere with the impugned order passed by the Tribunal. The same is hereby sustained along with the reasons mentioned therein.

The answer to the substantial question of law is in favour of the assessee and against the revenue. In the result, the appeal filed by the department is dismissed.