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M/s. Alwarpet Benefit Fund Ltd. Versus Deputy Commissioner of Income Tax, Company Circle 1 (1) , Chennai

Reopening of assessment u/s.148 - Held that:- The fact that the assessee had changed its method by treating the accrued interest on cash basis as against mercantile basis came to light only during the assessment proceeding for the assessment year 2007-08. Therefore, there was a valid reason for the Assessing Officer to believe that the certain income had escaped assessment. In these circumstances, we find that the Ld. CIT (A) was justified to reopen the assessment of the assessee invoking the pr .....

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direct the Ld. Assessing Officer to allow deduction to the assessee for its claim of bad debts on account of irrecoverable interest income which was treated as the income of the assessee during the earlier years and loss incurred due to irrecoverable loans and advances made by the assessee during the course of its money lending business subject to verification of the fact that the interest income were actually offered to the income of the assessee during the earlier years and the loans and advan .....

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not be allowed to be carry forward unless the return of income is filed within the due date specified U/s.139(3) of the Act - Decided against assessee. - I.T.A.No.1376/Mds./2014 - Dated:- 3-9-2015 - SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER AND SHRI V. DURGA RAO, JUDICIAL MEMBER For The Appellant : Mr.A.Kanagaraj,C.A For The Respondent : Mr.S.Dasgupta, JCIT, D.R ORDER PER A.MOHAN ALANKAMONY , ACCOUNTANT MEMBER: This appeal is filed by the Assessee , aggrieved by the order of the Learned Commis .....

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ad Debts written off in the books of accounts of the assessee relating to interest accrued on advances ₹ 2,32,15,838/- & Principal amount ₹ 1,62,43,282/-, when the assessee is a Non-Banking Financial Institutions (NBFC). (iii) The Ld. CIT (A) had erred by holding that the business losses cannot be allowed as set off in the case of the assessee due to non filing of return before the due date without considering extraordinary circumstances faced by the assessee in finalizing its ac .....

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assessee had stopped crediting its accrued interest on unrealizable loans and adopted cash method for recognizing such interest income. For the above stated reason the Ld. Assessing Officer opined that the interest waived during the relevant assessment year cannot be claimed as deduction because the same was not offered for income in the earlier years. Since the assessee had not disclosed material information on these aspects, the Ld. Assessing Officer was of the view that income chargeable to .....

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Subsequently the assessment was completed u/s.143(3) r.w.s 147 of the Act on 08.12.2010 wherein the Ld. Assessing Officer disallowed ₹ 3,94,59,120/- being the claim of the assessee towards rebate and discount and denied to carry forward the assessee s business loss of earlier years where the return of income was not filed within the time limit prescribed U/s.139(3) of the Act. 4.1 While doing so, the Ld. Assessing Officer observed as under:- Rebate & discount on loan ₹ 3,94,59,1 .....

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fered to tax earlier is held to be allowable, the same is not so in the assessee s case. Hence, rebate & discounts claimed are disallowed and ₹ 3,94,59,120/- is added to returned income. 4.2 Further, the Ld. Assessing Officer held that the carry forward of business loss cannot be allowed to the relevant assessment year because the assessee had not filed its return of income for the assessment years 1999-2000, 2000-01 & 2001-02 within the time limit provided U/s.139(1) of the Act. 5 .....

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e-assessment and reduced the claim from the losses returned by the appellant in his re-assessment U/s.147. Further, it is the prerogative of the Assessing Officer to verify the correctness of the claim by reopening the assessment U/s.147 by following due procedure. Therefore, the objection raised by the appellant for reopening the assessment does not merit much. Further the reopening of assessment is considered valid in the following decisions. (i) Hon ble Gujarat High Court reported in 33 taxma .....

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Assessing Officer has found in the course of time that certain amounts which should have been brought to tax have escaped assessment. The powers were clearly enacted U/s.149 rws 151 of the Act. As per these provisions what the Assessing Officer is supposed to fulfill is to see whether the escapement of income of at least ₹ 50,000/- is there or not if it is within four years and ₹ 1 lakhs if it is beyond four years, whether it is a case of 143(3) and whether he has taken approval fro .....

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scount, the Ld. CIT (A) agreed with the view of the Ld. Assessing Officer by stating as follows:- I have carefully considered the facts and circumstances of the case. When loans are advanced, either as a finance company or as a regular business house, the interest will be credited to the P&L a/c and the balance receivable on account of principle and unpaid interest, if any, in the balance-sheet as sundry debtors receivables. From the facts of the case as observed by the Assessing Officer, I .....

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to the extent of unabsorbed depreciation, however denied the business losses to be carry forward and set off because the assessee had not filed the return of income within the time limit provided U/s.139(1) of the Act. 6.1 Before us, Ld. A.R submitted with respect to all the three issues i.e., in regard to reopening of assessment u/s.148 of the Act, disallowance of bad debts and disallowance of the claim of set off of unabsorbed business losses of the earlier years as follows:- 6.2. Reopening o .....

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the basis of wrong reasoning is not valid in law. 6.3. Disallowance of bad debts:- The Ld. A.R. submitted that the interest portion written off during the relevant assessment year was already credited as income in the hands of the assessee for the earlier assessment years and only such interest portion which has become bad and irrecoverable has been written off in the books of account during the relevant assessment year. Therefore the presumption of the Revenue that the interest written off dur .....

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; Rowlat J.Curtis V.J. & G. Old field Ltd (1925 9TC 319). It was therefore pleaded that both the irrecoverable amount of interest and principle arising out of money lending business may be allowed as deduction for the relevant assessment year. 6.4. Disallowance of the claim of set off of unabsorbed business losses of the earlier year:- On this issue Ld. A.R submitted before us that the company was taken over by the Commissioner s appointed by the Hon ble High Court of Madras in order to inve .....

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ess loss was denied since there was a delay in filing of the return specified U/s.139 of the Act. It was therefore pleaded that in view of the extraordinary circumstances the set off of business losses may be allowed. 7. Ld. D.R vehemently argued in support of the orders of the Revenue and pleaded that the orders of the Ld. CIT (A) may be confirmed. 8. We have heard both the parties and carefully perused the materials available on record. 8.1 Ground No.1 - Reopening U/s.148 of the Act. From the .....

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was a probability that the assessee could have claimed bad debts erroneously on the interest that was not offered as income in the earlier years, the Ld.A.O had re-opened the assessment. The fact that the assessee had changed its method by treating the accrued interest on cash basis as against mercantile basis came to light only during the assessment proceeding for the assessment year 2007-08. Therefore, there was a valid reason for the Assessing Officer to believe that the certain income had es .....

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8.2 Ground No.2 - Disallowance of bad debts The assessee had claimed bad debts on account of accrued interest for ₹ 2,32,15,838/- and loss of advances made during the course of its money lending business for ₹ 1,62,43,282/-. The claim of the assessee was that it had recognized ₹ 2,32,15,838/- as its income during the earlier years and since the same was found not recoverable, the assessee had written off the same from its books of accounts treating it as bad debts. Similarly t .....

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f the assessee had credited the accrued interest in its books of accounts, on account of loans and advances and subsequently if the same has become irrecoverable, the assessee is entitled to write off the same as bad debts in its books of accounts and claim deduction as per the provisions of the Act. Similarly since the business of the assessee is money lending, the loans and advances made by the assessee, if it becomes irrecoverable, the same shall be allowed as deduction provided it is written .....

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lf is enough to claim the deduction of bad debt under Section 36(2) of the Act. He submitted that this section does not require that the entire money lent, which has become irrecoverable, need to be shown as income in the case of a non-banking money lending business. He submitted that the only requirement is that the money should have been lent in the ordinary course of business in the hope of earning interest. On the other hand, learned counsel for the revenue submitted that the debt or part th .....

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uction shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year, or represents money lent in the ordinary course of business of banking or money lending which is carried on by the assessee;l 7. Learned counsel for the appellant/assessee has tried to interpret the section in two parts. He submitted that the requirement of .....

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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 (2007) 292 ITR 339, while .....

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(1) read with Subsection (2) of the section laid down conditions necessary for allowability of bad debts. It was provided that the debt must be established to have become bad in the previous year. This led to enormous litigation on the question of allowability of bad debt in a particular year, because the bad debt was not necessarily allowed by the Assessing officer in the year in which the same had been written off on the ground that the debt was not established to have become bad in the year. .....

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r allowing deduction for a bad debt in an earlier or later previous year, if the Income Tax Officer was satisfied that the debt did not become bad in the year in which it was written off by the assessed. These clauses have become redundant, as the bad debts are now being straightway allowed in the year of write off. The Amending Act, 1987 has, Therefore, amended these clauses to withdraw them after the assessment year 1988- 89. 7. It is our view that the Circular Number 551 leaves no scope for d .....

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osition of law as interpreted by the decision of our High Court in the case of Morgan Securities (supra). However, the present case relates to assessee which is undisputedly a NBFC and is in the business of money lending and has been making 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 p .....

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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 section 36(2) clause (I) came before the Division Bench of Madras H .....

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for the previous year or for an earlier previous year. It is implicit in this express condition that the debt should have arisen in the course of carrying on his business. In the second limb of s. 36(2)(i)(a), this condition is not repeated, for the simple reason that the second limb deals with money-lending and banking business in which the money itself is regarded as a stock-in-trade and, therefore, the money lent would certainly come into the revenue account, and, hence, it was perhaps though .....

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money- lending or banking business or a debt in a non-money-lending or a non-banking business must have been incurred in the course of the assessee s business. The second limb is that in the case of non-moneylending or non-banking business, a debt in order to be a bad debt must have been taken into account in the computation of the income of the assessee. This particular requirement takes care to exclude what may be called capital debts from qualifying for write-off as bad debts 11. In the prese .....

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clearly divides the provision in 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 fulfillment 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 .....

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not qualify for deduction as a bad debt. Thus, according to Madras High Court itself money lent as part of money lending business being stock-in-trade automatically comes into revenue account. In other words, it need not be taken into account in computing the income as required in the first limb in relation to non money lending business to prove that it is on revenue account. Madras High Court correctly emphasizes as required as per second limb that it should be found out in relation to money l .....

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applicable with regard to debt qualifying as bad debt in the first part of sub-section 2 in the manner as interpreted above. 14. For the aforesaid reasons, we are in agreement with the submissions of learned counsel for the appellant/assessee as regards the interpretation of sub-section 2(i) of Section 36 and that being so, we are of the view the authorities below are not justified in holding that the amount of ₹ 34,95,000I- was not allowable as bad debt under Section 36(1)(vii) read with .....

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which was treated as the income of the assessee during the earlier years and loss incurred due to irrecoverable loans and advances made by the assessee during the course of its money lending business subject to verification of the fact that the interest income were actually offered to the income of the assessee during the earlier years and the loans and advances were made during the course of the money lending business of the assessee. Accordingly, this issue is remitted back to the file of the .....

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. Sec.80 : Notwithstanding anything contained in this Chapter, no loss which has not been determined in pursuance of a return filed in accordance with the provisions of sub-section(3) of section 139, shall be carried forward and set off under subsection(1) of section 72 or sub-section(2) of section 73 or sub-section(1) or subsection(3) of section 74 or sub-section(3) of section 74A. Sec.32(2): Where, in the assessment of the assessee, full effect cannot be given to any allowance under sub-sectio .....

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