Dismissed

Pr. Commissioner of Income Tax - 2 v. Mahindra Engineering and Chemical Products Ltd.

Bombay HC27 Oct 2021ITXA/1881/2017

Case brief

AI extract

What is this about?

This income tax appeal challengeled the ITAT's allowance of a Rs.4.35 Crore bad debt deduction. The High Court held that since interest on the deposit was taxed earlier, Section 36(2)(i) was satisfied, dismissing the appeal as devoid of merits without deciding if the assessee was in the money-lending business.

What did the court decide?

The appeal was dismissed with no order as to costs as the substantial questions of law raised were not considered to have merit.

Pr. Commissioner of Income Tax - 2 Vs Mahindra Engineering and… — Income Tax | Bombay HC (2021)

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Digitally signed by PURTI PURTI PRASAD PRASAD PARAB PARAB Date: 2021.11.15 14:35:45 +0530

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IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION

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INCOME TAX APPEAL NO. 1881 OF 2017

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Pr. Commissioner of Income Tax – 2
Aayakar Bhavan, M.K. Road,
Mumbai – 400 020.….Appellant
 V/s.
Mahindra Engineering and Chemical
Products Ltd.
Gateway Building, Appollo Bunder,
Mumbai – 400 001.….Respondent
-----

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Mr. Suresh Kumar for Appellant.
Mr. Sanjiv M. Shah for Respondent.

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 CORAM : K.R. SHRIRAM &
AMIT B. BORKAR, JJ.
 DATED : 27th OCTOBER 2021

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ORAL JUDGMENT : (PER : K.R. SHRIRAM, J.)

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1.Respondent had filed the return of income on 27th October,
2005 declaring total income of Rs.8,88,82,290/-. The Assessment Order
under Section 143 (3) of the Income Tax Act, 1961 (the Act) was passed on
19th December, 2007 wherein the income was assessed at Rs.14,51,98,159/-.
In the Assessment Order, the Assessing Officer had disallowed the interest
on deposit written off of Rs.15,73,952/- and deduction of principal amount
of deposit of Rs. 4,35,00,000/- written off.

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2.As a background to this dis-allowance, respondent had placed
deposits aggregating to Rs. 4,35,00,000/- in financial year 2000-01 with

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Purti Parab

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Mahindra Construction Company Ltd., (MCCL) a sister concern of
respondent. For the Assessment Year 2005-06, respondent based on an
interim assessment of the financial condition of MCCL had provided for total
outstanding of Rs.4,50,73,952/- (Principal amount of deposit of
Rs.4,35,00,000/-) and interest accrued upto 31st March, 2001 of
Rs.15,73,952/- to be written off. According to the Assessing Officer there
was no logical explanation nor any basis for waiving of accrued interest and
the principle amount lent was not used for business purpose and respondent
was also not in the business of lending money and therefore the claim for
deduction under Section 37 of the Act and deductionof written off under
Section 36 (1) (vii) cannot be allowed.

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3.Aggrieved by this order, respondent filed an appeal before the
Commissioner of Income Tax (Appeals) (CIT) (A). By an order dated 16th
December, 2010 CIT (A) upheld the decision of the Assessing Officer.
Impugning this order of CIT (A), respondent filed an appeal before the
Income Tax Appellate Tribunal (ITAT). The ITAT by an order dated 30th
June, 2016 allowed the appeal relying on the decision of this court in the
case of The Commissioner of Income Tax-V, Pune vs.Pudumjee Pulp & Paper
Mills Limited1. The ITAT set aside the order of CIT (A) on the issue of
deduction for principle amount of Rs. 4,35,00,000/- and directed the
Assessing Officer to approve the appropriate relief. Unhappy with this order

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1 . ITA No.1590 of 2013 dated 5^th August, 2015.

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of the ITAT, appellant has preferred this appeal under Section 260 A of the
Act and has proposed for determination the following substantial questions
of law.

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QUESTION OF LAW

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1.“Whether on the facts and in the circumstances of the case and in
law, the ITAT erred in allowing Rs.4,35 Crores of pure loan as Bad debt
on the basis of judgment of the Hon’ble Bombay HC given in the case
Pudumjee Pulp and Paper Mills Ltd. without appreciating that the said
judgment was rendered on a different set of facts wherein the amount
written off consisted of capital loan and interest in an integral manner
and thus condition prescribed in Section 36(2) got fulfilled?”.

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2.“Whether on the facts and in the circumstances of the case and in
law, the ITAT erred in allowing the capital loan of Rs.4.35 Crores as
integral to interest separately assessed on accrual basis, to erroneously
apply the law laid by Hon’ble Bombay HC in the case of udumjee Pulp
and Paper Mills Ltd. and Shreyas S. Mokharia?”.

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3.“Whether on the facts and in the circumstances of the case and in
law, the ITAT erred in holding the giving loan of Rs.4.35 Crores as done in
ordinary course of business to improve the business health of the assessee
company when it is an admitted fact that the said loan to the group
company was initially given for 30 days to help them tide over some
liquidity problem facted by the said Mahindra Construction Company Ltd.
which were never recovered, which fact stand even admitted in its letter
dated 24.03.2011 submitted to AO in AY 2002-03 in response to notice of
penalty u/s 271(1)(e), thereby rendering the judgment of ITAT erroneous
in holding the said loan as given in ordinary course of business?”.

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4.In fact, ITAT had allowed respondent’s appeal even with regard
to the addition of Rs.15,73,952/- whereby respondents had impugned the

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action of the Assessing Officer in bringing to tax interest income of
Rs.15,73,952/-. Appellant has not proposed any substantial question of law
for determination, the findings of ITAT on this interest component.

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5.Mr. Suresh Kumar justified the cause of the Assessing Officer as
well as CIT (A) by submitting that respondent could not be said to be in the

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business of banking or money lending and therefore the principle amount
of deposit/advances to MCCL could not be claimed as deduction under
Section 36 (1) (vii) of the Act on account of condition placed in condition
36 (2) of the Act. Mr. Suresh Kumar also submitted that the deposit is more
in the nature of investment and therefore its non-recovery at best can
be treated as capital loss.

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6.Per contra, Mr. Shah submitted that the amount of
Rs.4,35,00,000/- written off in the books of accounts as not recoverable be
allowed as deduction as a bad debt. Mr. Shah pointed out that respondent
fulfills the requirements of Section 36 (1) (vii) read with Section 36 (2) (1)
of the Act. Mr. Shah submitted that amount has been written off as
irrecoverable in the books of accounts and this is also confirmed by the fact
that the interest income for Assessment Year 2001-02 of Rs.15,73,952/- was
offered and assessed to tax as part of business income and therefore, it was
to be understood that the impugned deposits/advances made to MCCL were
in the ordinary course of business.

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7.Factually, it is not disputed that respondent had made deposits/
advances with MCCL in the previous year 2000-01, corresponding to the
Assessment Year 2001-02 amounting to Rs. 4,35,00,000/-. The interest
accrued on such deposits for the Assessment Year 2001-02 amounted to
Rs.15,73,952/- and that was offered to tax in the said Assessment Year.

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Subsequently, respondent has not accountedfor any interest
income on the ground that the aggregate of the principal amount as well as
interest accrued to the Assessment Year 2001-02 was doubtful of recovery.
It is also not a dispute that upto the Assessment Year 2004-05, the Assessing
Officer has accepted that the financial condition of MCCL was poor and
therefore no interest income can be said to have accrued for the purpose of
taxation. For the Assessment Year in question, i.e., 2005-06 respondent’s
claim that the principal amount of Rs. 4,35,00,000/- be considered as bad
debt which has been rejected by the tax authorities, primarily on the ground
that respondent was not engaged in any business of money lending and that
non-recovery was a capital loss.

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8.We have also considered the judgment of Division Bench of this
court in Pudumjee Pulp and Paper Mills Limited (Supra) which has been
relied upon by ITAT where similar situation had prevailed. In that case the
assessee had made inter-corporate deposit with another concern and in
some of the years interest was offered to tax. Subsequently, part of the debt
was sought to be written off and claimed as bad debts within the meaning
of Section 36 (1) (vii) read with Section 36 (2) of the Act. The claim was
revised by the tax authority primarily on the ground that the conditions of
Section 36 (1) (vii) read with Section 36 (2) of the Act were not applicable
in as much as the assessee was not carrying on business of money lending
and that the principal amount claimed as bad debts was not in fact offered

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to tax either in the relevant Assessment Year or in the earlier Assessment
Year. The Division Bench after considering the submissions observed that
even if one of the conditions of Section 36 (2) (i) of the Act is satisfied then
the bad debts claimed under Section 36 (1) (vii) of the Act has to be
allowed. The Division Bench had also followed another decision of this
court in Commissioner of Income Tax vs. Shreyas S. Morakhia2. Paragraph
Nos.7 to 13 of Pudumjee Pulp and Paper Mills Limited (Supra) reads as

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under :

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7.Mr. Tejveer Singh, learned Counsel appearing for the Appellant
submits that the activity of the Respondent-Assessee is of carrying on
manufacturing and sale of paper. Consequently, the Respondent-Assessee
cannot be said to be engaged in the activity of the
money lending or business of banking Consequently, deduction of bad
debts is hit by Section 36(2)(i) of the Act. Thus, the impugned order calls
for interference.

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8.Mr. Murlidahran, learned Counsel appearing for the Respondent-
Assessee points out that the issue arising in the present facts is covered in
favour of the Respondent-Assessee by the decision of this Court in CIT
v/s. Shreyas S. Morakhia. It is further submitted that the Respondent-
Assessee is entitled to the benefit of Section 36(2)(i) of the Act – on the
ground that the interest income was offered to tax earlier and that the
Assessee was engaged in the business of lending money. In the above
view, it is submitted that the order of the Tribunal calls for no
interference.

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9.The CIT(A) as well the Tribunal have considered Sections 36(1)
(vii) and 36 (2)(i) of the Act which for the purpose of convenience are
reproduced hereunder and read thus:

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“Section 36 :

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Section (1) The deductions provided for in the following clauses
shall be allowed in respect of the matters dealt with therein, in
computing the income referred to in section 28 -

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(i) to (vi) .…

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.... .... ....
(vii) subject to the provisions of sub-section (2), the amount of any bad
debts or part thereof which is written off as irrecoverable in the accounts
of the assessee for the previous year;

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Provided that in the case of an assessee to which clause (viia)
applies, the amount of the deduction relating to any such debt or part
thereof shall be limited to the amount by which such debt or part thereof
exceeds the credit balance in the provision for bad and doubtful debts

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2 . (2012) 342 ITR 285 (Bom)

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account made under that clause,

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Explanation – For the purposes of this clause, any bad debt or part
thereof written off as irrecoverable in the accounts of the assessee shall
not include any provision for bad and doubtful debts made in the
accounts of the assessee.

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(viii) to (xvii)

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.... .... .... ....
(2) In making any deduction for a bad debt or part thereof, the
following provisions shall apply -

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(i)no such deduction 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 the business of banking or money-lending which is
carried on by the assessee.”

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10.So far as Section 36(1)(vii) of the Act is concerned, it is a settled
position in law that after 1 st April, 1989, it is not necessary that the debt
itself must be proved to be irrecoverable. The only requirement is that the
amounts claimed as bad debts should be written off as irrecoverable in
the account of the Assessee (see TKF Ltd. v/s. CIT – 323 ITR 397). The
satisfaction of the above provision is not disputed by the Revenue. The
hub of the controversy is whether the requirement of Section 36(2)(i) of
the Act is satisfied.

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11.It is noticed that Section 36(2)(i) of the Act allows deduction on
account of satisfaction of any of one of the two conditions as under:-
(a)bad debts or part thereof taken into account in computing the
income of the assessee for an earlier Assessment Year before such debt or
part thereof is written off; or

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(b)the debt represents money lent in the ordinary course of business of
banking or money-lending which is carried on by the assessee.
Therefore, even if one of the two conditions of Section 36(2) (i) of
the Act is satisfied, then bad debts claimed under Section 36(1)(vii) of
the Act has to be allowed.

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12.So far as first part of Section 36(2)(i) of the Act is concerned, i.e.
(a) above, we find that the Respondent-Assesee had during the earlier
Assessment Years offered to tax an amount of Rs.42.65 lakhs received as
interest on the deposit made with M/s. GSB Capital Market Ltd. The
Appellant had since Assessment Year 1998-99 claimed an amount of
Rs.49.82 lakhs as doubtful debts from M/s. GSB Capital Market Ltd. This
consisted of the aggregate of principal and interest payable by M/s. GSB
Capital Market Ltd. It was in the subject Assessment Year that a
settlement was arrived at between the parties and the Respondent-
Assessee received Rs.15 lakhs from M/s. GSB Capital Market Ltd. and the
balance amount of Rs.34.82 lakhs being non-recoverable was being
claimed as bad debts by writing off the same in its books of account. It
would thus be noticed the amount of Rs.34.82 lakhs which constitutes
partly the principal amount of the inter-corporate deposits and partly the
interest which is unpaid on the principal debt. The Assessing Officer's
contention that amount of Rs.34.82 lakhs was not offered to tax earlier
and, therefore, deduction under Section 36(2)(i) of the Act is not
available, is no longer re-integra. This very issue came up for

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consideration before this Court in Shreyas S. Morakhia (supra) wherein
the assessee was a stock broker and engaged in the business of sale and
purchase of shares. The brokerage payable by the client was offered for
tax. Subsequently, it was found that the principal amount which was to
be received from its clients would not be received. The assessee sought to
claim as bad debts not only the brokerage amounts not received but the
aggregate of principal and brokerage amounts not received in respect of
the shares transacted. This Court held that the debt comprises not only
the brokerage which was offered to tax but also principal value of shares
which was not received. Therefore, even if a part of debt is offered to
tax, Section 36(2)(i) of the Act, stands satisfied. The test under the first
part of Section 36(2)(i) of the Act is that where the debt or a part thereof
has been taken into account for computing the profits for earlier
Assessment Year, it would satisfy a claim to deduction under Section
36(1)(vii) read with Section 36(2)(i) of the Act. In fact, the Revenue also
does not dispute the above provisions as no submission in that regard
were made during the course of hearing before us.

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13.Therefore in view of the above self evident position in Section
36(2)(i) of the Act as well as decision of this Court in Shreyas Morakhia
(supra), no substantial question of law arises for our consideration.

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9. In the case at hand, the fact that interest income of respondent
for the Assessment Year 2001-02 relating to the deposit of Rs.4,35,00,000/-

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was indeed taxed as business income has not been disputed. Thus,
advances of deposit is to be understood as having been done in the ordinary
course of business. Therefore, one of the condition required under Section
36 (2) (i) of the Act, i.e., bad debts or part thereof taken into account in
computing income of the assessee for an earlier Assessment Year before such
debt or part thereof is written off is satisfied.

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10.In our view, the Tribunal has not committed any perversity or
applied incorrect principles to the given facts and when the facts and
circumstances are properly analysed and correct test is applied to decide the
issue at hand, then, we do not think that question as pressed raises any

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substantial question of law.

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The appeal is devoid of merits and it is dismissed with no order as to

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costs.

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11.We will hasten to add that, we have not opined on the second
part, i.e., whether or not the assessee is engaged in the business of money
lending or banking since we have confirmed that respondent is entitled to
deduction on bad debts in view of first part of Section 36 (2) (i) of the Act.

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( AMIT B. BORKAR, J.)

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(K.R. SHRIRAM, J.)

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Purti Parab

Pr. Commissioner of Income Tax - 2 v. Mahindra Engineering and Chemical Products Ltd.

Case brief

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What did the court decide?

Pr. Commissioner of Income Tax - 2 v. Mahindra Engineering and Chemical Products Ltd.

Case brief

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