CIT vs. Pudumjee Pulp & Paper Mills Ltd (Bombay High Court)

The Assessee made an inter corporate deposit of Rs.1 Crore with M/s. GSB Capital Markets Ltd. Thereafter, during the subsequent Assessment Years, the interest of Rs.42.65 lakh was received and offered for tax. The amount of Rs.49.82 lakhs being the aggregate of the principal amount as well as the interest was treated as doubtful debts from the Assessment Year 1998-99 onwards. In AY 2004-05, a settlement was arrived at between M/s. GSB Capital Market Ltd. and the Assessee whereby an amount of Rs.15 lakhs was paid to the Assessee and the balance amount of Rs.34.82 lakh were written off by the Assessee as bad debts. The Assessee claimed deduction on account of bad debts of Rs.34.82 lakhs being the debts written off out of inter corporate deposit given to GSB Capital Markets Ltd. The AO did not accept the contention and disallowed the claim for bad debts on the ground that the condition of Sections 36(1)(vi) read with Section 36(2)(i) of the Act were not satisfied inasmuch as the amount of Rs.34.82 lakhs being claimed as bad debts was not the income offered to tax either in the relevant Assessment Year or in the earlier Assessment Years. The claim was allowed by the Tribunal. On appeal by the department to the High Court HELD:

So far as first part of Section 36(2)(i) of the Act is concerned, the 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 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 res integra. This very issue came up for consideration before this Court in Shreyas S. Morakhia 342 ITR 285 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.