Debt Written Off in Books of Account is to be Allowed as Bad Debts: ITAT directs AO to delete Addition of Rs. 6.69 crore [Read Order]

The Chennai bench of the Income Tax Appellate Tribunal ( ITAT ) has directed the Assessing Officer ( AO ) to delete the addition of Rs. 6.69 crore after ruling that debt written off in the books of accounts should be allowed as bad debts.

The appellant Shri. Moolchand Kiran Kumar Jain was a proprietor of M/s. A K Exports and also Promoter of M/s. Lalitha Jewellery Mart Private Ltd. The appellant has filed its return of income for the assessment year 2020-21 on 13.01.2021, declaring total income of Rs. 37,910/- and claimed current year loss of Rs. 55, 85, 04,251/-. The appellant had also filed a return of income for the assessment year 2021-22 on 09.02.2022, declaring total income of Rs. 1,87,79,210/-.

A search and seizure operation under Section 132 of the Income-tax Act, 1961  was conducted in the group case of M/s. Lalitha Jewellery Mart Private Ltd on 04.03.2021, and in the said search proceedings, the residential premises of the appellant was also covered.

During the course of search operations, no incriminating documents or materials were found with regard to the appellant. Consequent to search proceedings, notice under Section 153A of the Act, dated 22.12.2021 was issued and served on the assessee. In response to notice, the assessee filed return of income declaring total income of Rs. 37,910/- and current year loss of Rs. 55,85,04,251/-, which was the same income as declared in the return of income filed for the relevant assessment year under Section 139(1) of the Act.

Mr. D. Anand, representing the assessee submitted that the CIT(A) was erred in sustaining the disallowance of bad debts written off under Section 36(1)(vii) r.w.s. 36(2) of the Act, without appreciating the fact that the appellant has clearly demonstrated that the impugned loans given to M/s. Dilip Chabbria Designs Pvt Ltd, became bad debts and the same has been written off in books of accounts as per the requirement of Section 36(1)(vii) r.w.s. 36(2) of the Income Tax Act

Further submitted that the CIT (A) ought to have seen that once the appellant has lent money in the ordinary course of its business and offered the interest income to tax as business income, then the activity of the appellant of lending money is a business activity and thus, the debt is qualified for deduction under Section 36(1)(vii) of the Income Tax Act. He, referring to ITR filed for assessment years 2016-17, 2017-18 and 2018-19, submitted that the assessee has received interest from M/s. Dilip Chabbria Designs Pvt Ltd, for three assessment years and offered to tax.

It was submitted that the write off of bad debts pertains to loans and advances given to M/s. Dilip Chabbria Designs Pvt Ltd, shall qualify to be allowed as deduction under Section 37(1) of the Income Tax Act as business loss, because the assessee has given loans and advances to said company for the purpose of acquiring controlling interest and said activities of the assessee comes under commercial expediency or business expediency.

Mr. V Nandakumar, on the other hand, supported the order of the CIT(A) submitted that, in order to claim deduction towards bad debts under Section 36(1)(vii) of the Income Tax Act, four conditions should be satisfied. There must be a debt and said debt must be incidental to the business or profession of the assessee further, debt must have been taken into account in computing assessable income and debt must have been written off in the books of accounts of the assessee

The bench found that there was no dispute with regard to the fact that the appellant has given loans and advances to M/s. Dilip Chabbria Designs Pvt Ltd from assessment years 2015-16 to 2019-20 aggregating to Rs. 71.14 crores. It is also not in dispute that the assessee has received interest income from said loans for the assessment years 2016-17 and 2017-18 and said interest income has been offered to tax. These are undisputed facts relates to write off of bad debts under Section 36(1)(vii) r.w.s. 36(2) of the Income Tax Act. The provisions of section 36(1)(vii) deals with deduction towards bad debts.

The two member bench of the tribunal comprising V.Durga Rao (Judicial member) and Manjunatha G (Accountant member) found merit in this claim of the assessee. The debt written off by the assessee in the books of account is to be allowed as bad debts and accordingly, the ITAT allowed the grounds taken by the assessee. However, as already held that it is to be allowed as bad debt.

Further assessee has satisfied conditions prescribed under Section 36(1)(vii) r.w.s. 36(2) of the Income Tax Act, for claiming deduction towards bad debts written off in respect of loans given to M/s. Dilip Chabbria Designs Pvt Ltd. The CIT (A), without considering relevant facts simply sustained additions made by the Assessing Officer towards disallowance of bad debts. Thus, we reverse the findings of the CIT (A) on this issue and direct the Assessing Officer to delete additions made toward disallowance of bad debts written off under Section 36(1)(vii) r.w.s. 36(2) of the Income Tax Act. Accordingly, appeal filed by the assessee for assessment years 2020-21 & 2021-22 are partly allowed

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