The Assessee, a manufacturer of electric stabilizers and rectifiers, advanced funds on interest and wrote off a certain amount as unrealizable; the dispute was whether such write-off qualifies as bad debt or otherwise deductible when the Assessee is not a money lender and the principal was never recognized as income.

The Assessee argued that lending/advances were part of commercial expediency and sought allowance either as bad debt under Sec. 36(1)(vii)/36(2) or as expenditure under Sec. 37 read with Sec. 57(iii), emphasizing interest income was earned and suits were pursued for recovery.

The Revenue contended the write-off cannot be allowed since the principal was never recognized as income, the Assessee is not a moneylender, and the interest was returned under “other sources,” and capital loss/expenditure claims are impermissible under Sec. 56-57 for this head of income.

The Hon’ble Tribunal dismissed the appeal, holding that bad debt conditions under Sec. 36(2) were not met and deduction under Sec. 57(iii) is confined to revenue expenditure for earning income under “other sources”.

The Hon’ble Punjab & Haryana High Court dismissed the appeal, affirming the Hon’ble Tribunal, holding that deduction is not allowable since the principal was never recognized as income and the Assessee is not in the business of moneylending; claims under Sec. 57(iii) also fail for being capital in nature.  (AY. 2004-05)