Transaction Recognized as Loan; Bad Debt Claim of Rs. 1 Crore Allowed Under Income-tax Act Provisions.

The court concluded that the transaction involving the advance of Rs. 1 crore was a loan transaction within the ordinary course of the assessee's money-lending business. The claim for bad debts of Rs. 1 crore was deemed allowable under section 36(1)(vii) read with section 36(2)(i) of the Income-tax Act. The Third Member's decision supported the assessee's position, recognizing the transaction as a money-lending advance and the interest as business income, thus satisfying the necessary legal provisions for the claim. The appeal will return to the regular Bench for further orders.

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Issues Involved:
1. Whether the transaction relating to the advance of ICD of Rs. 1 crore by the assessee was a loan transaction and represented money lent in the ordinary course of the business of money lending carried on by the assessee.
2. Whether the claim of the assessee for bad debts of Rs. 1 crore is allowable under section 36(1)(vii) read with section 36(2)(i) of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Loan Transaction and Money Lending Business:
The assessee, a company, entered into a tripartite agreement on 7-10-1995 with FMLC (borrower) and GAL (guarantor), agreeing to advance Rs. 1 crore at an interest rate of 30.5% per annum. The agreement was extended multiple times, with GAL eventually becoming the principal borrower. Despite legal proceedings and an arbitrator's award, the amount remained unrecovered, leading the assessee to write off the principal amount of Rs. 1 crore and accrued interest of Rs. 5,52,329 as bad debt.

The Assessing Officer (AO) disallowed the claim, stating that the assessee's memorandum of association did not list money-lending as an object, and thus the transaction was not in the ordinary course of business. The CIT(A) upheld this view, but directed the AO to verify if the interest was assessed as business income in earlier years.

The Judicial Member (JM) accepted the assessee's claim, noting that the interest was assessed as business income in previous years, and the board resolution authorized money-lending. The Accountant Member (AM) dissented, arguing that the transaction was not an inter-corporate deposit (ICD) but a loan for booking cars, and the assessee's main business was not money-lending.

The Third Member concluded that the memorandum of association did authorize money-lending (clause 11), and the transaction terms indicated a loan, not an investment. The board resolution and the assessment of interest as business income supported the assessee's claim. The AM's view that the transaction was an investment was found erroneous.

2. Allowability of Bad Debt Claim:
The assessee claimed the amount as bad debt under section 36(1)(vii) read with section 36(2)(i) of the Income-tax Act. The AO disallowed it, stating the transaction was not in the ordinary course of business. The CIT(A) upheld this but allowed verification for interest.

The JM allowed the claim, noting the interest was assessed as business income, and all recovery efforts had failed. The AM disagreed, stating the transaction was not a money-lending activity, and the memorandum did not authorize such business.

The Third Member held that the transaction was a money-lending advance, and the interest was assessed as business income, satisfying section 36(2)(i). The claim was thus allowable as bad debt.

Conclusion:
1. The transaction relating to the advance of ICD of Rs. 1 crore was a loan transaction and represented money lent in the ordinary course of the business of money-lending carried on by the assessee.
2. The claim of the assessee for bad debts of Rs. 1 crore is allowable under section 36(1)(vii) read with section 36(2)(i) of the Income-tax Act.

The appeal will now be placed before the regular Bench for passing appropriate orders.

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