Under section 36 of the Income tax act, 1961 there are number of deductions available along with their conditions. Below we are discussing the summary of the few latest case laws in respect of section 36 which will make us understand the deductions in a better way. The deductions which are covered below are given below.
1. Interest on borrowed capital
2. Bad Debts
3. Employers Contribution to provident fund.
The summary of the case laws is given below:
1. Interest on borrowed capital
(i) Allowability of Interest liability Payable on Deep Discount Bonds - If any Expenditure has not fallen due for payment, but for which is a liability has accrued, the same is to be allowed in computing the income of the assessee when the assessee is consistently following mercantile system of accounting. Refer, Gujarat Toll Road Investment Co. Ltd Vs Asst CIT, ITA No. 2901/AHD/2006 dated 15-5-2009
(ii) In the case of M M Nagalinga nadar Sons 318 ITR 210, the borrowed fund which was suppose to be utilsed only for the business purpose, some part were transferred to partner’s personal account. Hence, proportionate disallowance of interest was justified.
(iii) Loan to Sister Concern/ subsidiaries companies without charging interest :
There are number of case laws in the favour of the assessee, where interest free loan given to sister concern & subsidiaries companies were provided from borrowed cost and that interest is deductible. The refrences of the recent case had been provided below.
(a) CIT Vs Marudhar Chemicals and Pharmaceutical (P) Limited 319 ITR 75.
(b) CIT v Sophisticated Marbles and Granite Industries 3 ITR(Trib)n 220.
(c) Industrial cables (India) Ltd V Add CIT / CIT V Accelerated Freeze Drying Co Ltd, ITTD 322 / 324 ITR 316.
(d) CIT v Lalson Enterprises 324 ITR 426.
(e) Punjab Stainless Steel Inds Limited V CIT 324 ITR 396.
(f) Dalmia Cement Bharat Ltd. 183 Taxman 422.
(g) CIT v. Tulip Star Hotels Ltd 338 ITR 482.
(iv) If there were funds available both interest free and overdraft and / or loans taken a presumption would arise that investment would be out of the interest free funds generated or available with the company, if the interest free funds were sufficient to meet the investments, presumption that the borrowed capital was used for purposes of business hence interest was deductible. Refer, Reliance Utilities and Power Ltd. 313 ITR 340.
(v) Interest on Capital borrowed for business of investment in shares has to be allowed as deduction. Refer, Peninsular Investment Ltd. 120 TTJ 96. Same as also confirmed in the case of CIT v Amola Holdings (P) Limited 328 ITR 275 .
(vi) Interest on funds borrowed for investment in land for business purposes is allowable business expenditure. Refer, Sarnath Infrastructure (P) Ltd. 120 TTJ 216.
(vii) Interest on amount borrowed for expansion of business though capitalized in the books of account is allowable as deduction. Refer, Ashima Syntex Ltd. 120 TTJ 721.
(viii) Interest payable by the assessee on borrowed funds for purchasing shares both by way of investment as well as stock in trade is allowable as deduction u/s. 36(1)(iii) of the Act. The Court also held that for the purpose of claiming deduction u/s. 36(1)(iii) of the Act the object of the loan is irrelevant. Refer, Srishti Securities (P) Ltd. 28 DTR 172 .
(ix) Merely because assessee had its own ample resource at its disposal, It cannot be denoed deduction in respect of interest paid on borrowed funds. Refer, CIT vs. Gautam Motors, 194 Taxmann 21.
(x) Interest paid on funds borrowed for interest and penalty under Sales Tax Act for belated payment allowable as business expenditure. Revenue appeal was dismissed as no substantial question of law. Refer, CIT vs. International Fisheries Ltd. 220 Taxation 11.
(xi) Interest on loan obtained by assessee to settle liability of its sister concern, to retain business premises of assessee the same is allowable. Refer, CIT vs. Neelkanth Synthetics and Chemicals P. Ltd. 330 ITR 463.
(xii) Delhi High Court in the case of CIT vs. Bharti Televenture Ltd. 51 DTR 98 held that Where the assessee was having sufficient non-interest bearing fund by way of share capital and reserves and there was no nexus between the borrowings of the assessee and advances made by it, no disallowance under section 36(1)(iii) of the Act was called for. (A. Y. 2001-02, 2003-04, 2004-05).
(xiii) Interest payable on loans raised by assessee from bank can not be treated as a contingent liability and can not be disallowed merely because the bank has instituted a suit and not shown the accrual of interest in its books of account , more so , when there is nothing to show that the bank has not claimed interest for all three years period .ie., pre suit pendent lite and future interest. ( Asst year 1992â€93). Refer, Friends Clearing Agency (P) Ltd v CIT 58 DTR 109.
(xiv) Investment made by the assessee company out of bank overdraft in the shares of its subsidiary company to have control over that company being an integral part of its business ,interest paid by the assessee which is attributable to said borrowings is allowable as deduction under section 36 (1) (iii). Refer, CIT v Phil Corporation 61 DTR 15.
02. Bad Debts
(i) Bad debt on account of Sale of Share is allowable as Bad debt. Refer, CIT V Dalmia Bros Private Limited / DCIT v Shreyas S Mrrakhia, 184 Taxmann 240.
(ii) In the case of TVS finance abd Services (P) Limited V JCIT, 318 ITR 435 it was held that conditions provided in the act will precedent. Hence, write off merely to follow RBI or some other norms will not make bad debt deductible.
(iii) The assessee debiting profit and loss account and creating provision for bad and doubtful debts reducing by corresponding amount from loans and advances debiting the said amount in the profit and loss account and reducing on the asset side of the balance sheet. The assessee was entitled to deduction under section 36(1)(vii), and it was not necessary to close the individual account of each debtor in the books. Refer, Vijay Bank vs. CIT, 231 CTR 209 (SC).
(iv) It is not necessary to prove that bad debt is irrevocable. Only written off the amount is sufficient.. Refer, TRF Limited V CIT, 323 ITR 397.
(v) Loans advanced to subsidiaries can not be allowed as bad debt or business loss. The loss is capital loss. Refer, Jt. CIT vs. Rallies India Ltd, 3 ITR 1 (Mum.) (Trib.).
(vi) Debt taken in to account in computing the income from money lending business. Money lending business discontinued, bad debt is allowable. Refer, CIT vs. Rajini Investment Pvt. Ltd. 216 Taxation 553.
(vii) If brokerage offered to tax, the principal debt qualifies as a “bad debt” u/s 36(1)(vii) r.w.s. 36(2). Refer, DCIT vs. Shreyas S. Morakhia.
(viii) As per the amended provisions if debt has been written off as irrecoverable in accounts of assessee, it would be sufficient for claiming it as bad debts subject to condition that amount so written off has already been accounted for as income in relevant year or in earlier years. Refer, C. B. Richard Ellis Mauritius Ltd. vs. Dy. DIT, 38 SOT 236.
(ix) When banks claims deduction of Bad debt written off in Previous year by virtur of provisio of section 36(1)(vii) they are entitled to claim deduction of such bad debt only to extent it exceeds provisions created and allowed as deduction under clause viia. Refer, CIT v South Indian Bank Limited, 5 taxmann.com 87.
(x) The “Provision for NPA” made in terms of the RBI Directions does not constitute expense for purposes of s. 36(1)(vii). The said Provision is for presentation purposes and in that sense it is notional. Hence deduction not allowable. Refer, Southern Technologies Ltd. 228 CTR 440.
(xi) Assessee is entitled to claim deduction if the debt had been written off as irrecoverable in the books of account and there is no obligation on the assessee to establish that debt had became bad. Refer, Rajendra Y. Shah 313 ITR 3.
(xii) In the case of share broker the loss is allowable as bad debts, though only brokerage has been credited to profit & loss account. Refer, Canon Capital & Finance Ltd. ITA No. 1119/Ahd/2005 Asst. Year 2001-02, Bench ‘D’ dt. 7-11-2008.
(xiii) Where share broker purchasing shares for its clients and paying money against purchase and money receivable from client becoming bad and treated as bad bed. Held that brokerage payable by client is part of bad debt to be taken into account. Refer, Bonanza Portfolio Ltd. 320 ITR 178.
(xiv) Assessee having valid reasons for judging that amount not recoverable. Assessee having obtained a decree to recover debt does not mean that debt was not bad. Assessee was entitled to deduction of bad debt. Refer, Punjab Tractors Ltd. 320 ITR 153.
(xv) As per amended provisions of s. 36(1)(vii), once the assessee has written off debt in his books of account, it is not requirement of law that he should establish that debt has, in fact become bad. Refer, Suresh Gaggal 180 Taxman 90.
(xvi) Assessee is not required to prove that the debt has become bad. Assessee only to write off the debt as bad in its books. Law with effect from Assessment Year 1989-90. Refer, Lawlys Enterprises Pvt. Ltd. 214 Taxation 256.
(xvii) Amount written off bonafide in AY 2000-01 and charged to Profit & Loss account in that year but claimed deduction for the first time in AY 2001-02 could be allowed as bad debt in later year. Refer, EDS Electronic Data Systems (India) (P) Ltd. 23 DTR 10.
(xviii) It is not requirement of law that assessee has to establish that debts which were written off as bad debts have in fact become bad. Refer, Innovative Brokerages (P) Limited v ITO 9 Taxmann.com 252.
(xix) If Not ‘Bad Debt’, ‘Business Loss’ claim sans specific ground invalid : The assessee claimed advances of Rs. 10.85 lakhs as a “bad debt” u/s 36(1)(vii). The AO & CIT (A) rejected the claim on the ground that as the debt had not been accounted as income, the conditions of s. 36(2) were not satisfied and the claim was not allowable. The alternate claim as a “business loss” was also rejected by the CIT (A). Before the Tribunal, the assessee raised a ground only on “bad debt” (and not “business loss”). At the hearing, it conceded the claim for “bad debt” and pressed for the claim for “business loss”. HELD dismissing the appeal: Manori Properties Pvt Ltd vs. ITO
(xx) Debt must be shown in accounts as income of assessee - Assets and Liabilities of L taken over by assessee and another company. Refer, CIT v Lal Woolen and Silk Mills (P) Limited 333 ITR 254.
(xxi) A mere write-off of bad debt was sufficient under section 36 (1)(vii) and that it was not necessary for the assessee to establish that debt had actually become bad. The law settled by the Supreme Court was binding on all including the Assessing Officer , under article 141 of the Constitution of India. (T.R.F. Ltd v CIT (2010) 323 ITR 397 (SC). ( Asst year 2005 -06). Refer, Assst. CIT v Safe Enterprises. 9 ITR ( Trib) 553.
(xxii) Assessee being a non banking financial company ,its activity of giving guarantee on behalf of another company was part of its money lending business and ,therefore the security amount adjusted by the bank against the dues of the said company following default on the part of the latter which has became irrecoverable is allowable as bad debt.( Asst Years 1998â€99, 1999â€2000 & 2003â€04). CIT v Tulpi Star Hotels Ltd 57 DTR 210.
(xxiii) Where the assessee had written off certain debts as bad in its books of accounts, there is no further requirement to prove that the debts was a trade debt or the fact that it is irrecoverable.(A. Y. 1996â€97 & 98â€99). Refer, CIT & Anr. vs. Krone Communication Ltd 53 DTR 120.
(xxiv) In the present case following the Special Bench decision in the case of Shreyas Morakhia { 40 SOT 432}, it was held that in order to satisfy the conditions stipulated in section 36(2)(i), it is not necessary that the entire amount of debt has to be taken into account in computing the income of the assessee and it will be sufficient even if part of such debt is taken into account in computing the income of the assessee. This principle applies to a share broker. The amount receivable on account of brokerage is a part of debt receivable by the share broker from his client against purchase of shares and once such brokerage is credited to the profit and loss account and taken into account in computing his income, the condition stipulated in section 36(2) (i) of the Act gets satisfied. The bad debt therefore claimed by the broker was allowed.( A.Y.2003â€2004.). Refer, DCIT v/s IIT Investrust Ltd 45 SOT 1.
3. Employers Contribution to provident fund.
(i) Employer’s contribution to provident fund if not paid within the due date the employer was not entitled to deduction. Omission of second proviso to s. 43B w.e.f. 1-4-2004 is not retrospective in nature. Contribution of provident fund dues after closing of the accounting period, but before due date of filing returns are made, then it was not allowable as deduction. Refer Pamwi Tissues Ltd. 313 ITR 137.
(ii) Employer’s contribution towards provident fund though paid beyond the due date but before the end of the relevant financial year is allowable deduction. Refer Polyplex Corporation Ltd. 176 Taxman 57.
(iii) Amounts paid by employer towards provident fund contributions after due date prescribed under Employees, Provident Fund Act but before due date for furnishing of return of income are allowable in view of s. 43B r.w.s. 36(1)(va). Refer, P.M. Electronics Ltd. 177 taxmann1
(iv) Section 43B cannot be pressed into service in a case where deduction is not otherwise allowable u/s 36(1)(va). Refer, DCIT v Bengal Chemicals & Pharmaceuticals Limited. 10 Taxmann.com 26.
The author below provided only the summary of the case laws and no personal view on that had been added. Hope this will make you understand the deductions under section 36 in a better way. I welcome your suggestions at my e mail ID mr_manish_ca@yahoo.com or you can also visit my blog at http://taxbymanish.blogspot.com/ to get the latest tax updates on daily basis.
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