INCOME-TAX ACT, 1961

--Business deduction under section 36(1)(vii)--Bed debts Fixed deposits and security deposit written off in accounts--The assessee filed the return of income declaring an income of Rs. 1,12,44,524. The case was selected for scrutiny. During the course of assessment proceedings, the assessing officer noticed that the assessee had claimed bad debts of Rs. 39 lacs. assessing officer pointed out that the assessee did not offer any cogent evidence as to why the capital investment of Rs. 34,00,000 in the form of fixed deposits with the City C Bank Ltd. and Badla deposit of Rs. 5 lacs with M/s C Consultants Ltd., be allowed as bad debts. According to the assessing officer a deduction for bad debts or part thereof under section 36(2)(i), cannot be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year, or represents money lent in the ordinary course of business of banking or moneylending which is carried on by the assessee. According to the assessing officer the claiming of bad debts of Rs. 39 lacs did not relate to any debt or part thereof, which had been taken into account in computing the income of the assessee of the previous year or any earlier previous year and that the making of fixed deposit with bank could not be treated as moneylending business in ordinary course of business and similarly depositing money with share broker (C Consultants Ltd.) for Badla transactions in stock market also could not be treated as lending money in ordinary course of business. He was of the view that making of deposits with the bank and putting security deposit with share broker for Badla transactions were capital investments and could not be treated as revenue expenditure and that the assessee had already been showing interest income on fixed deposits with the bank under the head 'Income from other sources'. Therefore, on the one hand, the assessee had treated interest on fixed deposits under the head 'Income from other sources', while on the other hand she had claimed making of fixed deposit with the bank as part of moneylending business. The assessing officer was of the view that a general balance due in respect of moneylending as well as other dealings, such as, speculative transactions or agency business, moneys advanced by the assessee to save the other party from a financial crisis could not be written off as a bad debt in the account of the moneylending business and claimed as a bad debt. The AO held that the assessee had never proved that the interest income from bank deposits was treated as business income in any year. He, therefore, disallowed Rs. 39 lacs and added to the income of the assessee. The Commissioner (Appeals) observed that the assessee had failed to prove that making fixed deposit with the bank was part of moneylending business. Therefore, the assessing officer was justified in rejecting the claim and in making the addition of Rs. 39 lacs. Held: The assessee has doing money lending business and interest income was showed in the income tax return in past during the year under consideration, no such interest income was earned since the parties were absconding. It is also noticed that the assessee had written off the amount as bad debts in its books of account. It is not the case of the assessing officer that the assessee was in a position to recover the amount which was claimed as bad debts. there bad debts was therefore, rightly allowable to assessee.