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TMI Blog2011 (6) TMI 273X X X X Extracts X X X X X X X X Extracts X X X X ..... rties as a part of its money-lending business. On April 16, 1999, it lent Rs. 60 lakhs to M/s. Bhav Portfolio. After deducting opening credit balance of Rs. 3.10 lakhs, a sum of Rs. 56.90 lakhs became due to be recovered. However, this amount could not be recovered even after several requests, reminders and legal notice. Ultimately, Rs. 28.45 lakhs (50 per cent. of amount due) was written off in assessment year 2000-01. The balance amount was also written off in the year 2004-05 and the same stands allowed in the assessment made under section 143(1) of the Income-tax Act (for short "the Act"). Similarly, Rs.6,50,000 (being 50 per cent. of the amount due) was written off in the case of M/s. Gallery in the relevant assessment year. 4. The Assessing Officer disallowed the assessee's claim for bad debts holding that under section 36(2), to write off any bad debt the same has to be included in the income for earlier years which was not done in the case of the assessee. 5. The findings of the Assessing Officer were confirmed by both the Commissioner of Income-tax (Appeals) as well as the Tribunal. The Tribunal also observed that the advances made by the assessee were with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e (i) of sub-section (2) which has been reproduced above. 8. For the time being, without going into this interpretation of two parts of clause (i) of sub-section (2), it may be stated that the provision of section 36(1)(vii) read with section 36(2)(i) of the Act would come into play only if; firstly, the amount of loan or part thereof which is claimed as deduction should be established to have become bad debt and, secondly, the amount should have been shown to have become irrecoverable and written off from the accounts of the assessee or from the account in which the claim is made. 9. The Division Bench of our High Court in the case of CIT v. Morgan Securities and Credits P. Ltd. [2007] 292 ITR 339 (Delhi), while interpreting section 36(1)(vii) and 36(2)(i), observed as under (page 343) : "A conjoint reading of section 36(2) and section 36(1)(vii) makes it clear that the assessee would be entitled to a deduction of the amount of any bad debt which has been written off as irrecoverable in its accounts for the previous year. Any lingering doubt would vanish on a careful reading of Circular No. 551, dated January 23, 1990 ([1990] 183 ITR (St.) 7) (the relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advances to different concerns, two of them being those to whom advances were made and which are claimed as bad debts as noted above. In the manner the learned counsel for the appellant has interpreted clause (i) of sub-section (2), he states that the second part of this clause starting from "or represents money lent . . . by the assessee" as highlighted by us deals with the different types of activities, not at all related to those with the first part of business activities. In other words, his submission was that in the case of advances/loans made by any concern doing the business of banking or money-lending, it was not obligatory that such advances/loans or part thereof should be shown to have become irrecoverable and, consequently, written off in the accounts of the assessee in the previous year. This manner of interpretation was not acceptable to the learned counsel for the Revenue who submitted that for claiming deduction of any amount as bad debt it was necessary to establish that the amount has become not only bad debt, but the same was also shown to have become irrecoverable and written off in the accounts of the assessee for the previous year. The interpretation of sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... second limb also and whether that can be done despite the construction of the second limb in the manner which is separated from the first limb by use of "comma" preceding the word "or" which clearly divides the provision into two parts, viz., (i) first part, dealing with non-money lending business ; and (ii) second part, dealing with money-lending business alone and the division is intended to ensure the fulfilment of conditions for allowance of bad debts peculiar to each limb concerned. 12. The controversy that has arisen from the order of the Tribunal is whether the amount of debt itself should be shown as income before the debt qualifies for claim as a bad debt. It is seen that the controversy before the Madras High Court in the case of P. C. Dharmalinga Mudaliar [1985] 152 ITR 588 (Mad) was whether money advanced to a transport company from cloth and yarn business be treated as money advanced in the ordinary course of cloth and yarn business. The Madras High Court's emphasis as required by the second part was that it may be admittedly in relation to money-lending business that debt is advanced in ordinary course of business and if the debt is not advanced in the ordina ..... X X X X Extracts X X X X X X X X Extracts X X X X
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