TMI Blog2015 (11) TMI 1704X X X X Extracts X X X X X X X X Extracts X X X X ..... le with the company, if the interest-free funds were sufficient to meet the investments - addition not justified. Disallowance of Bad Debts - case of Revenue is that conditions of subsection (2) of section 36 have not been fulfilled - Held that: - The Hon’ble High Court of Karnataka in the case of Krone Communication Ltd., [2010 (7) TMI 631 - Karnataka High Court] decided the issue in favor of the assessee, following the decision of the Hon’ble Supreme Court in the case of T.R.F. Ltd., [2010 (2) TMI 211 - SUPREME COURT] wherein it was held that after 1.4.1989, it was not necessary for the assessee to establish that the debt, in fact, has become irrecoverable; it is enough if the bad debt is written off as irrecoverable in the accounts of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... noted that a loan of ₹ 2,26,07,88,659 has been taken from various concerns, out of which ₹ 68,35,95,390 has been diverted for other than business purpose. The AO stated that ₹ 31,55,47,240 has been invested in mutual funds and ₹ 36,80,48,150 has been deposited in various FDs in banks. According to the AO, the assessee has debited ₹ 32,02,98,420 as interest on various loans. Considering the diversion of loans for non-business purposes, interest of ₹ 9,68,22,773 has been disallowed by the AO and added back to the returned income. 6. The CIT(Appeals) observed that though the AO stated that the amount has been diverted for non-business purposes, but the reasons for arriving at such a conclusion have not be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of interest of ₹ 2,66,17,276 and the AO has not pointed out that interest expenditure of ₹ 9.68 crores has been incurred on earning this amount which is against the principles of commercial prudence. He further pointed out that the assessee has sated that it had sufficient reserve and capital which were far in excess of mutual fund investments of ₹ 31,55,47,240 and the AO has not specifically pointed out that any interest bearing funds have been utilised for the purpose of earning the dividend from mutual funds. 8. The CIT(Appeals) held as follows:- 5.6 After examining the facts, it would emerge that interest income earned from the FD s has been offered as income from other sources. It is an established proposi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest on loans without appreciating the fact that the assessee company diverted the loans taken from various concerns/bank/financial institutions on interest payable basis for investment in mutual funds and FDs which is not the business purpose of assessee, as held by the AO. 10. The ld. counsel for the assessee took us through cash flow statement for the year ended 31.3.2011 at page 54 of the assessee s PB and pointed out that the assessee was have a closing balance of cash of ₹ 390,813,736 which was sufficient to make investments in mutual fund. He also pointed out to page 70 of the PB where under specific terms conditions with respect to loan sanctioned by Oriental Bank of Commerce, it has been stated as follows:- 15. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad raised a loan it can be presumed that the investments were from the interest-free funds available. In our opinion, the Supreme Court in East India Pharmaceutical Works Ltd. v. CIT [1997] 224 ITR 627 had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd. [1982] 134 ITR 219 where a similar issue had arisen. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evidence that it is allowable. According to the AO, the conditions of subsection (2) of section 36 have not been fulfilled. He therefore disallowed the same. 18. On appeal before the CIT(Appeals), the assessee submitted that the AO failed to consider the fact of small amounts of individual loans ranging from ₹ 10 to ₹ 48,203, number of branches involved (over 200), the maximum ceiling of ₹ 50,00 and the number (8249) of loans involved in the write off rendering negotiation, arbitration, statutory limitation, bankruptcy, liquidation and such other criteria laid down by the AO were commercially impractical to follow. The assessee reiterated that it has not created a provision for doubtful debts, but has actually written o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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