The Commissioner of Income Tax-5 vs Jindal Iron & Steel Company Ltd.

This appeal under section 260A of the Income Tax Act, 1961 (for short the Act) by the revenue challenges the order dated 31st October, 2012 passed by the Income Tax Appellate Tribunal (the Tribunal). The impugned order is in respect of A.Y.2002-03.

The revenue has urged the following question of law for our consideration :

"Whether on the facts and in the circumstances of the case and in law the Tribunal is right in restoring back the issue of disallowance u/s 14A at Rs. 1,34,56,840/- to the Assessing Officer for fresh consideration?

Whether on the facts and in the circumstances of the case and in law the Tribunal is right in allowing written off amount as irrecoverable as the same has to be allowed as bad debt u/s 36 (1) (vii) r.w.s. 36 (2) as all conditions laid down therein stands fulfilled. The Tribunal has erred in holding that investment in ICDS was part of the business activity as interest accrued therefrom has been treated as business income and loss arising on such investment was allowed as business loss? "

So far as Question No.1 is concerned, Mr. Tejveer Singh learned counsel for the revenue very fairly states that the same stand settled against the revenue and in favour of the respondent-assessee by an order of this Court rendered on 6th October, 2013 in an appeal filed by the revenue in respect of the same respondent-assessee being Appeal No.1894 of 2013 relating to A.Y.2001-02. Consequently, Question no.1 does not give rise to any substantial question of law. Therefore not entertained.

So far as question no.2 is concerned, during the subject Assessment year, the respondent-assessee had debited an amount of Rs. 2.61 crores to the Profit and Loss A/c being the amount written off in respect of Inter-Corporate Deposits (ICDs.) The respondent-assessee had in Assessment year 1995-96 made ICDs in various companies. From that time onwards i.e. Assessment year 1995-96 up to Assessment year 2001-02 interest of Rs. 2.30 crores which had accrued to the assessee was offered as income for tax under the head of ''income from business. However, the respondent was unable to recover a part of the principal amount of ICDs as well as interest thereon. Thus, they entered into a settlement with their debtors under which they received part of the amounts due in full and final settlement. The amount which had remained to be received/recovered was written off in the Books of Account mostly on account of interest to the extent of Rs. 2.19 crores and on account of principal to the tune of Rs. 32 lacs. The aforesaid claim for deduction was made under section 36 (1) (vii) of the Act as irrecoverable and/or under section 28 of the Act as write off and business loss. However, the Assessing Officer by an order dated 31st March 2005 disallowed the claim for deduction on account of the write off as ICDs of Rs. 2.51 crores.

Being aggrieved the appellant filed an appeal to the Commissioner of Income Tax (Appeals. By an order dated 5th July 2010 the Commissioner of Income Tax (Appeals) confirmed and upheld the order dated 31st March 2015 of the Assessing Officer t the extent it directed the claim for deduction on account of write off as ICDS.

On further appeal by the respondent-assessee the Tribunal by the impugned order dated 31st October 2012 held that it is an admitted position that from Assessment year 1995-96 onwards the respondent-assessee had shown interest it had received on ICDs as business income in the Profit and Loss A/c and offered it to tax. In the aforesaid circumstances, it was held that it cannot be disputed that the interest received on ICDs had been offered for tax as ''business income'' and also so accepted by the revenue. As a consequence, once interest had been taxed as business income then the principal amount in the form of ICDs to various companies would necessarily be part of the deposit made by the respondent-assessee''s in the conduct of its business. Thus, the principal amount of Rs. 32 lacs has to be allowed as business loss so far as the interest amount on the ICDs is written off as irrecoverable has to be allowed under section 36 (1) (vii) read with section 36 (2) of the Act as the interest on accrual basis had in the earlier assessment year been offered to tax. Thus allowing the appeal of the respondent assessee. ''

Mr. Tejveer Singh learned counsel appearing for the revenue in support of the appeal submits that it was not open to the assessee to adjust the amounts received from its debtors on ICDs against the interest amount without first adjusting the principal amount. Besides, it is submitted that the respondent-assessee is not engaged in business of banking or money lending and thus the loss on account of ICDs i.e. the principal and interest amount cannot be allowed to determine the petitioner''s income chargeable under the head Profits and gains from business or profession.

We find that it is an undisputed position that the respondent-assessee has made ICDs during the A.Y.1995-96. The interest received on these ICDs was on accrual basis and shown in its Profit and Loss account and offered to tax as part of profits of business. This was accepted from Assessment year 1995-96 onwards up to the assessment year 2001-02. In view of the above acceptance of the interest received as ''business income'' by the revenue in the earlier years it is not open to it to now take up a plea that the amount which are written-off as ''interest not received'' cannot be allowed as loss on account of business. Thus the interest not received can be written off in terms of section 36 (1) (vii) of the Act. Moreover, once the interest received on ICDs is held to be income chargeable to tax under the head ''business income'' the lending on which this amount of interest was earned by the respondent has necessarily to be in the course of its activity of business and therefore allowed as business loss. The contention on behalf of the revenue that the amount received on settlement should have been first adjusted towards the principal amount and only thereafter the interest amount is not acceptable as there is nothing on record to indicate that debtors had directed the respondent to adjust the amount being repaid in a particular manner. Therefore, in view of sections 60 of the Indian Contract Act it is at the option of the person receiving money to adjust the same either against the principal or interest as it deem fit. Therefore, we find no reason to interfere with the order of the Tribunal as it does not give rise to any substantial question of law.

In any event, the entire exercise of revenue to disallow the non-receipt of principal amount as ''business loss'' would be academic. This is so as this Court in The Commissioner of Income Tax, Central-II, Mumbai Vs. Shri Shreyas S. Morakhia, has held in terms of section 36 (2) (i) of the Act where interest income has been offered to tax in earlier assessment year then the principal amount which is outstanding giving rise to interest income would also be covered under the provisions of section 36 (1) (vii) of the Act. This Court had held in Shreyas case that the debt comprises not only brokerage which was offered to tax, but also the principal amount chargeable to tax which was not received and therefore even part of the debt under section 36 (2) (I) of the Act would stand satisfied under first part thereof. Therefore, the principal amount of Rs. 32 lacs would also be allowed as deduction under section 36 (2) (i) of the Act in this case.

This Court in THE COMMISSIONER OF INCOME TAX V PUNE VS PUDUMJEE PULP & PAPER MILLS LTD (Income Tax Appeal No.1590 of 2013) dated 5th August 2015 a contention of the revenue was identical to the contentions raised by Mr. Tejveer Singh namely that the respondent was not engaged in activity of money lending or business of banking consequently, deduction of bad debts is hit by section 36 (2) (i) of the Act. The Division Bench to which one of us (Sanklecha, J) was a member, after taking into consideration the decision of this Court in SHREYAS MORAKHIA (supra). This Court did not entertain the revenue''s appeal on this issue. Therefore, Question no.2 as formulated also does not give rise to any substantial question of law. Thus not entertained. Accordingly, the appeal is dismissed. No order as to costs.