Wednesday, October 5, 2011

Inter Corporate Deposits, Bad Debt





Hindustan MI Swaco Ltd. vs. DCIT bearing ITA No.3774/A/2008
The assessee claimed bad debts of Rs.65,00,000/- on irrecoverability of Inter Corporate Deposits to VHEL Industries Ltd. Assessing Officer raised two objections i.e (a) debt has not become bad as the assessee has filed criminal suit against VHEL Industries Ltd. and (b) the assessee is not engaged into money lending business. CIT(A) confirmed the action of assessing officer. On appeal being filed by the assessee, Tribunal HELD :

(a) First objection is this that the debt has not become bad or doubtful. This aspect is now covered in favour of the assessee by the judgment of Hon'ble Apex Court that after the amendment in the provisions of Section 36(1) (vii) of the Income tax Act,1961 w.e.f. 01.04.1989 that in order to obtain a deduction in relation to bad debt, it is not necessary for the assessee to establish that the debt in fact has become irrecoverable and it is enough if the bad debt is written of as irrecoverable in the account of the assessee. Since in the present case, this is not disputed by the A.O. that the assessee has written off the amount in question in its account, this allegation of the A.O. that the debt has not become bad, is not valid and hence, rejected by respectfully following the judgment of Hon'ble Apex Court in the case of TRF Ltd. (supra).

(b)The 2nd allegation of the A.O. is that the assessee is not in money lending business and hence, the assessee is not eligible for deduction as bad debt for the principal amount of loan given by the assessee. This aspect is now covered in favour of the assessee by the decision of the Tribunal rendered in the case of Poysha Oxygen Pvt. Ltd. (Supra). In that case, the tribunal has decided on this basis that if the interest income for the money lent is being assessed as business income in any earlier year or even in the year in which the bad debt is written off, the requirement of Section 36(2)(i) is satisfied. While holding so, the tribunal has followed the judgment of Hon'ble High Court of Madras rendered in the case of CIT Vs City Motor Service Ltd. 61 ITR 418.


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