Even a single instance of loan given can be considered as money lending business for bad debts allowance – ITAT
In a recent judgment, the Hon’ble ITAT has allowed deduction for bad debts written off holding that even a single instance of loan given to single party can be considered as adventure in the nature of trade, commerce or business, if the intention of the assessee is to carry out such business.
ABCAUS Case Law Citation:
ABCAUS 3956 (2024) (04) ITAT
Important Case Laws relied upon:
TRF Limited vs CIT [2010] 323 ITR 397
M/s. TRF Limited vs CIT [2010] 323 ITR 39
Pranava Electronics Pvt Ltd vs DCIT
Courtis v. J & G Oilfield Ltd. (1925) 9 Tax cas 319
In the instant case, the assessee had challenged the order passed by the CIT(A) in confirming disallowance of bad debts written off u/s 36(1)(vii) r.w.s. 36(2) of the Income Tax Act, 1961 (the Act).
The Assessing Officer (AO) on analysis of ITR for the relevant assessment year noticed that the assessee had debited a large amount as bad debts written off in respect of amount lent to one party. The assessee in last six years, had advanced loan to the said party and in preceding three years also offered interest received on said loans to tax.
The assessee had not received or accounted interest on loans for the last two assessment years and thus, no interest income was offered to tax for last two assessment years. The assessee had written off loans and advances given as irrecoverable bad debts and debited to profit and loss account.
The Assessing Officer, disallowed bad debts written off and debited to profit and loss account in respect of the said loan on the ground that the assessee was not into money lending business and thus, advances given in the ordinary course of business cannot be treated as loans and advances for the purpose of section 36(1)(vii) of the Act and further, the assessee did not satisfy the conditions prescribed u/s. 36(1)(vii) r.w.s. 36(2) of the Act, to claim deduction towards bad debts written off.
On appeal, the CIT(A) sustained additions made by the Assessing Officer towards bad debts written off.
Before the Tribunal, the assessee contended that he had lent money in the ordinary course of its business and offered the interest income to tax as business income, then the activity of
the appellant of lending money was a business activity and thus, the debt is qualified for deduction u/s. 36(1)(vii) of the Act.
The assessee referring to ITR filed for preceding three assessment years submitted that the assessee had received interest for three assessment years and offered it to tax. The assessee had not received interest for subsequent two assessment years, because the debtor neither paid interest nor repaid loans given by the assessee. Therefore, the appellant had written off loans given to the party as bad debt and claimed deduction in terms of section 36(1)(vii) of the Act. The assessee claimed that he had satisfied conditions prescribed u/s. 36(2) of the Act.
The assessee relied upon the decision of Hon’ble Supreme Court and also the decision of Co-ordinate Bench of ITAT Bangalore.
The assessee, further submitted that the write off of bad debts pertains to loans and advances shall qualify to be allowed as deduction u/s. 37(1) of the Act as business loss, because the assessee had given loans and advances to said company for the purpose of acquiring controlling interest and said activities of the assessee comes under commercial expediency or business expediency.
Four conditions for allowance of bad debts written off
On the other hand, the Department opposed the contentions of the assessee and stated that in order to claim deduction towards bad debts u/s. 36(1)(vii) of the Act, four conditions should be satisfied namely, (i) there must be a debt, (ii) the debt must be Incidental to the Business or Profession of the Assessee, (iii) debt must have been taken into account in computing assessable Income and (iv) the debt must have been written off in the Books of Account of the Assessee.
It was stated that the assessee had given loans and advances to the company which was in different line of business, which had nothing to do with the business activity of the assessee. Therefore, it cannot be said that loans and advances given by the assessee was incidental to the business or profession of the assessee.
Further, it was stated that the main activity and business of the assessee was manufacture and sale of gold jewellery and as such the loan did not relate to the assessee’s business or profession. The provision of Section 36(2) of the Act applies to money lent in the ordinary course of the business of banking or money lending which is carried on by the assessee.
It was shown that in the computation of total income furnished by the assessee for the relevant AY, the assessee in the ITR had stated his “Nature of Business or Profession” as “wholesale of other products n.e.c – 09027” and had not stated as money lending business.
Further, The Auditor in his tax audit report in Form 3CD at column 10(1) “Nature of business or profession” had not certified that the assessee has been carrying on any money lending business in any of the AYs including the impugned AY. Thus, clearly the assessee was not in money lending business.
The Tribunal opined that whether loan given was incidental to the business or profession of the assessee should be decided from nature of activities carried out for the relevant period
The Tribunal observed that apart from the other business, the assessee was also into business of money lending, which is evident from the financial statements filed by the assessee. In fact, the department had accepted the case of the assessee that he was into money lending business, which was evident from interest income offered by the assessee under the head income from business, interest on loans given to above period.
The Tribunal further observed that the Assessing Officer, never disputed the fact that the assessee was into money lending business, but, rejected the claim of the assessee for the simple reason that the assessee does not possess money lending license to carry out money lending business.
The Tribunal opined that if the assessee carried out money lending business as ancillary or incidental to attainment of its main business activity, then merely for the reason that there was no license to carry out said business, the genuine business activity carried out by the assessee cannot be doubted.
Even a solitary instance of loans can be considered as money lending business
Further, the Tribunal noted that the Assessing Officer made one observation that, except to a single solitary instance of loans and advances given, the assessee had not filed any evidences to prove that he had given loans to other parties as a money lending activity.
The Tribunal opined that there was no merit in reasons given by the Assessing Officer, for the simple reasons that even a solitary instance of loans given to single party can be considered as adventure in the nature of trade, commerce or business, if the intention of the assessee is to carry out such business.
In the instant case, the Tribunal opined that from the conduct of the assessee, it was undisputedly clear that the assessee was into money lending business and same had been carried out for many years. Therefore, the assessee had also satisfied second condition prescribed u/s 36(1)(vii) of the Act.
The Tribunal observed that the third condition to be satisfied for claiming bad debts is, debt must have been taken into account in computing assessable income. The assessee had fulfilled this condition as interest income relatable to said loans had been offered to tax for earlier two assessment years.
In money lending business, advances given is nothing but stock in trade
The Tribunal opined that in the money lending business, advances given in the course of business is nothing but stock in trade and reduction in value of said stock in trade can be claimed as expenditure. Since, the assessee has offered income relatable to said loans for tax in earlier assessment years, the assessee had satisfied the third condition prescribed for claiming deduction towards bad debts.
Further, the Tribunal observed that the last condition for claiming deduction towards bad debts u/s. 36(1)(vii) of the Act, is debt must have been written off in the books of accounts of the assessee. In the present case, the assessee has satisfied the last condition, which is evident from the fact that debt has been actually write off in the books of accounts of the assessee by debiting to profit and loss account and crediting to respective party accounts in the books of accounts maintained by the assesse.
With respect to the argument of the Assessing Officer that, the assessee had not proved the fact that said debt was bad or not, the Tribunal opined that as per the decision of the Hon’ble Supreme Court, once the assessee has written off bad debts by debiting to profit and loss account and crediting to parties account in the books of accounts, then the conditions prescribed for claiming deduction towards bad debts written off are satisfied and the assessee is not required to prove to the Assessing Officer that said debt is bad debt or not. Therefore, in our considered view, the assessee has also satisfied other conditions prescribed for claiming bad debt.
The Tribunal held that the assessee had satisfied conditions prescribed u/s. 36(1)(vii) r.w.s. 36(2) of the Act, for claiming deduction towards bad debts written off.
Accordingly, the ITAT reversed the findings of the CIT(A) on this issue and directed the Assessing Officer to delete additions made toward disallowance of bad debts written off.
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