2007 (12) TMI 304 - AT - Income Tax

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 ... Disallowance of Bad debts - provisions contained u/s 36(1)(vii) read with u/s 36(2)(i) not satisfied - business income or Not - transaction relating to advance of Inter-Corporate Deposit (ICD) - loan transaction and represents money lent in the ordinary course of the business of money lending - Difference of opinion between the learned Members - Third Member Order - Tripartite agreement on 7-10-1995 with M/s. First Maruti Leasing Company (FMLC) which was known as a borrower and M/s. Ganga Automobiles Limited (GAL), called the guarantor - assessee was described as the lender - agreement was initially for 3 months but was extended from time to time and the last of the agreements was executed on 14-2-1997. learned Judicial Member - HELD THAT :- He noticed that the interest accrued on the bad debt in the earlier years was assessed as business income for the assessment years 1996-97, 1998-99 and 2000-01 in assessments made under section 143(3) of the Act, after a scrutiny of the claim. He further noticed that for the very same year now under consideration, the CIT(Appeals) had directed the Assessing Officer to verify the position regarding the interest. The learned JM also accepted the assessee’s contention that the amount of Rs. 1 crore was advanced in the course of the money-lending business which was carried on under the resolution of the board of directors passed pursuant to the object clause in the memorandum of association permitting the assessee to lend an advance monies to companies on such terms as may be experienced. He also held that there was full justification for the assessee to write off the debt as bad since all the efforts taken by the assessee to realize the monies from GAL had failed. In this view of the matter, he allowed the assessee’s claim. learned Accountant Member - He came to the conclusion that the amount advanced to FMLC was not by way of inter-corporate deposit and that it had been given to GAL for booking cars on behalf of FMLC. The learned AM has also observed that since it was not known under what circumstances FMLC, the original borrower of the loan, was substituted by GAL who was the original guarantor, the very genuineness of the tripartite agreement was in doubt. He further noted that no money was in fact deposited by the assessee with GAL on 14-2-1997 and that the taking over of the liability of FMLC (by GAL) is in continuation of the loan given originally on 7-10-1995. According to the learned AM, this loan given originally was not an inter-corporate deposit. Thereafter held that the assessee cannot also be said to be carrying on the business of banking. He proceeded to refer to several cases in support of his conclusion that to constitute money-lending business there should be systematic advancing of monies on day-to-day basis and the principal and interest must be received regularly. Third Member Order - The submission of the learned CIT-DR was that this indicated that the amount advanced to FMLC was not an inter-corporate deposit or money-lending advance. I am unable to accept the submission. As already noted, the power of attorney executed by FMLC in favour of the assessee can at best be viewed as some sort of security against the monies lent. Again as already stated, if there is material to show that the assessee had minimised its losses by realising the security, the allowance to that extent must be reduced. But there is no material to show any such fact. Therefore, the existence of a power of attorney in favour of the assessee takes the case of the revenue no further. It is pertinent to mention that against the direction of the CIT(Appeals), no appeal has been preferred by the department before the Tribunal. The relief given by the Assessing Officer in his order dated 16-8-2004 has thus become final, as also the finding that the interest was earlier assessed as business income of the assessee. In the light of these facts, I am unable to agree with the learned AM when he says that the bad debt claimed by the assessee has not been taken into account in computing the assessee’s income in any of the earlier previous years or in the impugned year. Whether the fact that the assessee described the advance of Rs. 1 crore to FMLC as 'inter-corporate deposit' or ICD in short is fatal to its claim - An inter-corporate deposit is a deposit made by one corporate entity with another corporate entity. It is not a legal term. It appears to be a term which has gained in commercial parlance. Section 372A of the Companies Act, 1956, deals with inter-corporate loans and investments. These are regulated strictly by the section. Under the Explanation below the section, a loan has been defined to include debentures or any deposit of money made by one company with another company, not being a banking company. The fact that in the income-tax proceedings, the advance has been described as an ICD is neither here nor there; certainly it is not decisive of the question whether it was given in the course of the money-lending business of the assessee. It is well-settled that the nomenclature given by the assessee to a transaction cannot decide its real nature. I have already noticed the several features of the advance including the documentation. All these in my opinion show that the advance was a money-lending advance. If so, the fact that it was a single transaction is not an impediment to it being called money-lending business. I may refer to the judgment in Bharat Insurance Co. Ltd.’s case [1982 (2) TMI 21 - DELHI HIGH COURT] in which it was held that the frequency or repetition of an activity, though at times a decisive factor, is by no means an infallible test, and a transaction though repeated may not amount to a trade or business and conversely an isolated adventure may fall within the definition of business. I am, therefore, of the opinion that the advance of Rs. 1 crore to FMLC was a money-lending advance. Thus, I concur with the order of the learned JM. The points of difference referred to me are answered thus : (i) On the facts and in the circumstances of the case, 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; (ii) On the facts and in the circumstances of the case, the claim of the assessee for bad debts of Rs. 1 crore is allowable in view of the provisions contained in 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. 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.