C.I.T vs. WHIRLPOOL OF INDIA LTD


IN THE HIGH COURT OF DELHI AT NEW DELHI

+ {ITA No.1153 OF 2008}

Judgment reserved on:27.01.2011 Judgment delivered on:31.01.2011

THE COMMISSIONER OF INCOME TAX

... APPELLANT

Through:

Mr. N.P. Sahni, Advocate

VERSUS

WHIRLPOOL OF INDIA LTD.

....RESPONDENT

Through:

Mr. Ajay Vohra, Advocate with Ms. Kavita Jha, Mr. Somnath Shukla,, Advocates.

CORAM :-

HON'BLE MR. JUSTICE A.K. SIKRI HON'BLE MR. JUSTICE M.L. MEHTA

- 1. Whether Reporters of Local newspapers may be allowed to see the Judgment? - 2. To be referred to the Reporter or not? - 3. Whether the Judgment should be reported in the Digest?

A.K. SIKRI, J.


assessee had treated it as bad debt written off. The Assessing Officer, however, disallowed the aforesaid amount and made additions to the extent of ₹ 13,64,000/-. The order of the Assessing Officer reveals that he had asked the assessee to explain the nature of the loan and also as to whether this loan pertains to the business carried on by the assessee. Since the assessee could not give any satisfactory explanation, the Assessing Officer added back this amount holding that it was not covered by provisions of Section 36(1) (a) of the Income Tax Act with reference to the write off of bad debts.


within the time prescribed for the loan agreement, the assessee liquidated the shares given to it by way of security by the HSL. In this manner the loan amount was appropriated by the sale of those shares. However, since the interest amount remained unpaid and could not be realized the assessee had treated the same as bad debt written off in the year in question.

"Having considered the submission of the appellant and finding from the facts of the case there is no doubt that the appellant pursuant to the agreement was entitled to payment of interest on the loan given. Thus according to the system of accounting adopted by the appellant mainly mercantile the amount of interest due for the concerned year was credited in the P & L account of the previous year Assessment 1995-96. Year subsequently such dues are not realized it would only be fair to allow deduction or write off of such amounts in the following year. The claim of the appellant in this regard is quite justified. Incomes accrued but which was never actually realized cannot really be taxed. The disallowance made by the A.O. is therefore to be deleted."


- 4. The ITAT has accepted the aforesaid view taken by the CIT (A). While doing so, however, the reason given by the ITAT was that written off interest formed part of arrears and referring to the decisions of this court, it is held that there was compliance for claiming deductions under Section 36(1)(vii) of the Act. - 5. In the aforesaid factual backdrop this appeal was admitted on the following question of law:

"Whether the ITAT was correct in law in confirming the order or CIT(Appeals) who deleted the addition of Rs.13,64,000/- made by the Assessing Officer by disallowance of the amount under the head interest written off?"


become bad during the period. He thus, argued that unless it is proved that the loan was advanced for business purposes and therefore it was a debt which had become bad, the conditions stipulated in Section 36(1)(vii) read with Section 36(2) had not been fulfilled and therefore, the approach of the authorities was clearly erroneous.

7 On the other hand, in order to show that the loan given by the assessee to HSL was business loan and interest received thereon was treated as business income, Mr. Vohra, learned counsel appearing for the assessee had produced the copy of the balance sheet as on 31st March, 1996 which reflects the figures as on 31st March, 1995 as well. On the basis of entries made in this balance sheet, he has tried to demonstrate that the assessee was in fact into the business of advancing loan as well and substantial income by way of interest from loans was shown in these two years. He also produced copy of the assessment orders passed by the AO in respect of assessment year 1995-96 (i.e. immediately preceding year) when only income from interest was shown and accepted as business income. Learned counsel also produced copy of Memorandum of Association of the assessee in support of his submission that the advancing of loan is one of the objects objectives of the assessee.


"The assessee has written off ₹ 13,64,000/- as outstanding against M/s Harita Stock Ltd. The assessee was asked to explain as to why this write off should not be disallowed. Vide its letter dated 05.10.1998, the assessee submitted that this amount represented interest owned by M/s Harita Stock Ltd. However the assessee has not explained the nature of the loan and also as to whether this loan pertained to the business carried on by the assessee, hence this amount is added back as being not covered by the provisions of Section 36 (1) (viii) with reference to the write off of bad debts."


assessed under the head "business income" in so far as two loan agreements dated 7^th February, 1995 and 24^th March, 1995 with M/s HSL are concerned, his comments were as under:-

Agreement dated 07.02.1995

This agreement is for giving short term loan to M/s HSL amounting to ₹ 600 lakhs without any interest to be repaid in 6 months and M/s HSL pledged 12 lakh equity shares of M/s TVS Whirpool Ltd. (TWL) with signed blank transfer forms. No interest was payable on this loan.

Agreement dated 24.03.1995

As per this agreement a loan of ₹ 23,24,25,000/- was advanced to M/s HSL to be repaid in 12 months and interest @ 10% was to be charged. M/s HSL pledged 46,48,500 equity shares of TWL alongwith signed blank transfer forms. The assessee credited the interest of ₹ 13,64,000/- on this loan amount.


tried to explain the aforesaid aspects and reiterated his submission that the interest income was the business income.

- 11. However, having considered the aforesaid submissions of both the counsel, we are of the view that the matter has not been examined by any of the authorities below in proper perspective. In fact, the documents which have surfaced now before us, have not been considered by these authorities. In order to arrive at a conclusion as to whether the interest income was business income or not, a deep scrutiny of these documents alongwith other evidence would be required. We are in agreement with the submissions of learned counsel for the Revenue to this effect. - 12. We accordingly set aside these orders and remit the case back to the Assessing Officer who shall, on the basis of evidence produced, will record a specific finding as to whether advancing of loan is the business activity of the assessee or not and the loans advanced to M/s HSL was its business income or not. The Assessing Officer shall also be entitled to scrutinize and analyze the loan agreements with M/s HSL and will examine as to whether the sale of shares by the assessee to its parent company had arm length or not. Bases on the findings on these issues, the AO shall determine as to whether the bad debt written is to be allowed under Section 37 of the Act or not.


(30)

A.K. SIKRI) JUDGE

(M.L. MEHTA) JUDGE

January 31, 2011 skb

ITA No.1153 OF 2008