2011 (5) TMI 686 - AT - Income Tax

Deduction of bad debts under section 36(1)(vii)of the Income Tax Act - ordinary business transaction - Shares were shown under the head investments non-trade in Schedule 5 to the balance sheet - assessee had declared the loss arising on the sale of the shares under the head capital gains in the return filed - if assessee did not claim the benefit of cost indexation while computing the long term capital loss on the sale of shares it does not mean that assessee treated the sale of shares as sale of business asset not an ordinary business transaction deduction is not allowed - appeal is allowed

Summary

Issues:
- Allowance of deduction of bad debts under section 36(1)(vii) of the Income Tax Act.

Detailed Analysis:

Issue: Allowance of deduction of bad debts under section 36(1)(vii) of the Income Tax Act

Background: The appeal by the revenue contested the CIT(A)'s decision to allow the claim for deduction of bad debts under section 36(1)(vii) of the Income Tax Act. The dispute arose from the assessment for the year under appeal being set aside by the Commissioner under section 263 of the Act due to the claim of bad debts amounting to Rs.95 lakhs from a company not being properly examined by the Assessing Officer.

Tribunal's Decision: The Tribunal opined that the Assessing Officer had not thoroughly examined the issue of bad debt during the assessment proceedings, leading to the conclusion that the claim could not be allowed under section 36(1)(vii). The Tribunal also noted that the claim of bad debt was wrongly made as a business deduction without proper examination by the Assessing Officer.

Assessing Officer's Decision: The Assessing Officer disallowed the claim of bad debts amounting to Rs.95 lakhs, stating that the transaction involving the shares was a transfer of capital asset and not part of the business activities of the assessee. The Officer rejected the claim as a business loss, treating it as a capital loss of the earlier year.

CIT (A)'s Findings: The CIT (A) disagreed with the Assessing Officer's decision, emphasizing that the shares were held for trading purposes and the loss arising from such activities should be considered as business profit or loss. The CIT (A) highlighted that the Assessing Officer had accepted the claim of bad debt after thorough examination and that the transaction was a regular business activity related to financing and investments.

Tribunal's Final Decision: The Tribunal, after considering all arguments, reversed the CIT (A)'s decision and restored the disallowance of Rs.95 lakhs made by the Assessing Officer. The Tribunal found that the basic conditions for allowing bad debt were not met, as the amount claimed had not been taken into account in computing the business income in any earlier year. The Tribunal also criticized the contradictory stand taken by the assessee regarding the nature of the shares and the inconsistency in treating the loss on the sale of shares as a capital loss.

Conclusion: The Tribunal's final decision reversed the CIT (A)'s decision and upheld the disallowance of the bad debt claim. The Tribunal emphasized the importance of meeting the conditions stipulated in the Income Tax Act for claiming bad debts and highlighted the inconsistencies in the assessee's position regarding the nature of the shares and the treatment of losses.