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Before: Shri A. Mohan Alankamony & Shri Duvvuru RL Reddy
O R D E R
PER DUVVURU RL REDDY, JUDICIAL MEMBER:
This appeal filed by the assessee is directed against the order of the ld. Commissioner of Income Tax (Appeals) 15, Chennai dated 20.06.2016 relevant to the assessment year 2004-05. The only effective ground raised in the appeal of the assessee is that the ld. CIT(A) has erred in holding that the advance written off made to Indchem Communications Limited is not revenue in nature.
It was the submission of the ld. Counsel that during the course of scrutiny assessment under section 143(3) of the Income Tax Act, 1961 [“Act” in short], the debt due from Indchem Communications Ltd. [ICL] was to the tune of ₹.2,79,63,479/-. The said company, i.e., ICL slipped into irrecoverable position and accumulated loss as on 31.03.2004 was ₹.803.97 lakhs as against the share capital of ₹.575 lakhs. Therefore, the advance given by the assessee to ICL was written off as bad debt and debited under the head ‘other expenses’. The Assessing Officer disallowed the claim of the assessee on the ground that on verification of the profit and loss account of ICL, the said company did not admit this remission of liability as its income, though the latter company is assessee’s own subsidiary company. It was a submission that on appeal, the ld. CIT(A) confirmed the disallowance made by the Assessing Officer. The ld. Counsel prayed that the trade advance given to the subsidiary should be treated as revenue in nature.
Per contra, the ld. DR has submitted that to claim the said advance written off as bad debt, it is necessary to satisfy the condition of offering such advance as income in earlier years. Even if the remission of liability is shown as income, it will not have tax implication. However, M/s. ICL, being assessee’s own subsidiary company, has not shown the remission of liability as its income. Accordingly, the ld. DR strongly supported the orders of authorities below.
We have heard both sides, perused the materials available on record and gone through the orders of authorities below. The assessee was holding 49% stake in the joint venture company, M/s. ICL. The ICL accumulated loss of ₹803.97 lakhs as on 31.03.2004 against shareholder fund of ₹.575 lakhs. The Assessing Officer observed that the income from loan was not included in earlier years and ICL has not shown remission of liability. The bad debt even if shown as remission of liability will not have tax implication. The assessee has not shown any income from such advances in earlier years and therefore, the basic condition for claiming it as bad debt is not at all fulfilled.
4.1 Before the Tribunal, the assessee placed reliance on the decision in the case of CIT v. Chemplast Sanmar Ltd. in TCA Nos. 844 & 845 of 2004 dated 12.07.2011. We have perused the decision of the Hon’ble Madras High Court. In that case, on the claim of bad debts, the Tribunal pointed out that the assessee advanced a sum of ₹.24,48,027/- for the subsidiary company Vloryl (India) Ltd. The subsidiary company was later on wound up by the orders of the Hon’ble High Court passed in March, 1990. The amount due to the company was ₹.73,66,911/-. After considering the extent of security available, a sum of ₹.24,48,027/- was treated as not secured and hence written off as not recoverable. The Revenue does not dispute as a matter of fact that the said amount is not covered by any security and that the subsidiary company had already been wound up. Thus, the case law relied upon by the assessee has no application to the facts of the present. Under the above facts and circumstances, the claim of deduction of bad debt under section 36(1)(vii) of the Act stands dismissed.
4.2 The alternative plea raised by the assessee that if the deduction is not granted under section 36(1)(vii) of the Act, the same ought to be allowed under section 37 of the Act. The above alternative plea is not acceptable because, this was not expenditure for earning the income of the assessee as no interest income on the loans and advances was accounted either in the current year or earlier years. Thus, the alternative plea of the assessee has no merits and accordingly, dismissed.
In the result, the appeal filed by the assessee is dismissed. Order pronounced on the 26th April, 2018 at Chennai.