TaxTMI 
TaxTMI 
2004 (3) TMI 343
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.... Eicher Limited. For assessment year 1995-96, the assessee company filed its return of income declaring net loss of Rs. 58,18,510. In the P&L account, a sum of Rs.130 lakhs had been debited with the narration "bad debt written off". Assessing Officer made the original assessment vide order dated 13-12-1996 disallowing the claim of deduction of bad debts, inter alia, on the ground that the requisite conditions as envisaged under section 36(2) of the Income-tax Act, 1961 were not satisfied. CIT(A) upheld the disallowance vide order dated8-9-1997, The assessee carried the matter in appeal before the Income-tax Appellate Tribunal and the matter was remanded back to the Assessing Officer for a fresh decision. The High Court admitted reference by the department under section 256(2) of the Income-tax Act, 1961 and passed the following order on30th August, 2000: "In the circumstances, we dispose of this application with the observation that, the Assessing Officer shall reconsider the entire matter taking into consideration the relevant provisions of law in the background of the factual aspects and arrive at its own decision uninfluenced by any observations made by the Tribunal." 4. A....
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....M/s. Basu Associates. The letter of Basu Associates dated24-2-1984regarding the loan is placed at page 81 of the paper book, which reads as under: "24th February, 1994 M/s. Toto Bubbles India Ltd., E 364-367, Industrial Area, Bhiwadi, Distt. Alwar 301019. Rajasthan. Dear Sirs, With reference to your request made to us for placement of Intercorporate Deposit in your Company, we are placing the said deposit as per terms and conditions given below : Principal Amount - Rs.1,30,00,000.00 Rate of Interest - 19% p.a. Period - 180 days It would be clearly understood that this is an Intercorporate Deposit and no adjustment from this can be made in respect of other debt that we may owe to you. Yours faithfully, For Basu Associates, Sd/- Authorised Signatory" On22-3-1994, the aforesaid loan taken by TBIL from Basu Associates has been ratified by the Board of Directors of TBIL. From the extracts of the minutes of meeting of the Board of Directors, placed^ in the paper book at page 82, it appears that the unsecured....
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....he I.T. Act, 1961. 10. The Assessing Officer did not allow the claim of bad debt mainly on the ground that the conditions as stipulated under section 36(2) have not been fulfilled inasmuch as the amount of Rs. 130 lakhs has never been taken into account in computing the income of the assessee-company. Assessing Officer further observed that the assessee-company has apparently stood guarantee for the loan taken by the TBIL from ETL and no commission for giving a guarantee has been charged. Any guarantee given by the assessee without charging guarantee commission cannot be considered as part of business activity of the assessee. According to the Assessing Officer, the assessee-company was merely a shareholder holding 25 per cent equity in the share capital of TBIL and any guarantee given for a loan taken by TBIL cannot be considered as part of business activity of the assessee. Assessing Officer further held that neither the claim qualifies for deduction under section 36(1)(vii) as bad debt nor the same can be claimed as a business loss. In support of his findings, Assessing Officer placed reliance on the decisions of Madras High Court in Amarchand Shobhachand v. CIT [1965] 56 ITR....
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....on31-3-1995. Thus, it cannot be said that the appellant company made any efforts to realize the debt from TBIL and that such efforts had failed during the previous year. 16. In view of the above discussion, I uphold the order of the Assessing Officer in making the addition on account of bad debts written off of Rs. 1.30 crores and hold that the entire transaction is not a business transaction, but is a sham transaction arranged between companies of the same group. The evidence filed by the A.R. clearly shows that M/s. Basu Associates gave an Inter Corporate Deposit to TBIL for which no guarantee was mentioned at the time of placing such deposit on24-2-1994. There was also no mention of a guarantee on the appellant company when the Board of Directors of TBIL ratified the unsecured loan from Basu Associates on22-3-1994. Subsequently, the appellant company gave the guarantee, terming the same to be a guarantee for an unsecured loan from Basu Associates to TBIL. Giving this guarantee was not a part of the business activity of the appellant company as this is the only guarantee they have given and that also without charging any guarantee commission. The appellant's contention that it....
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....; 76,000 6% Malbros Investments Limited 312,000 25% Eicher Finance Limited 312,000 25% Pivotal Investments & Finance Pvt. Ltd. 300,000 24% Other Financial Companies: ICICI 70,000 5.5% IFCI &nbs....
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....td. [1977] 108 ITR 895 (Mad.) (e) CIT v. KM. Mody [1983] 141 ITR 903 (Bom.) 14. Mrs. Sudarshan Parashar, ld. CIT DR, putting up a stout defence of the impugned order of the ld. CIT(A) submitted that with a view to delineate the contours of the controversy arising before us, the following three questions would need adjudication: "(a) Whether on the facts and circumstances of the case, the guarantee transaction resulting in the creation of a debt by TBIL in favour of the appellant company on 31-3-1995 was a genuine transaction or a sham transaction; (b) Whether on the facts and circumstances of the case, the appellant company had executed guarantee in favour of TBIL in the ordinary course of its business. (c) Whether on the facts and circumstances of the case, the debt of Rs. 130 lakhs had become bad on31-3-1995itself when the appellant company paid this amount to M/s. Basu Associates." 15. Regarding the first question, ld. DR submitted that the letter of Basu Associates dated24-2-1994placing an inter-corporate deposit of Rs. 130 lakhs in TBIL for a period of 180 days at 19 per cent interest does not speak of any corporate guarantee given by the assessee-company. Sh....
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.... No. 116 of Paper Book dated9-12-2002filed by the appellant is a letter dated21-2-1994purported to have been written by the appellant to M/s. Basu Associates. This letter is a futile attempt on the part of the appellant to create an impression that the appellant had given its guarantee dated22-4-1994because the lender M/s. Basu Associates had asked for it. At best it can only be a conjecture. But there is nothing on record in the form of any letter from the lender from which it can be conclusively established that the lender had made it very clear to the appellant that unless a corporate guarantee was given in their favour and that too by the appellant they would not release the loan of Rs. 130 lakhs. On the other hand the letter dated 21-2-1994 purporting to be the to be the loan agreement is an unequivocally worded document containing specific terms and conditions of loan and this document does not contain any condition of a corporate guarantee to be given by the appellant either before or after releasing the loan to TBIL. A unilateral or voluntary surety or guarantee as proposed in the appellant's letter dated 21-2-1994 cannot be equated with a legally binding guarantee as conte....
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....s of providing such corporate guarantees to its customers. It is also not denied by the appellant that it had not given any such guarantee previously in the course of its normal business and this was its first such guarantee. Moreover, if the appellant had to give any such corporate guarantee on behalf of any other person such as TBIL then it should have charged, as a normal business practice, some guarantee commission, may be at concessional rate. While the normal guarantee commission charged by banks and other financial bodies ranges between one to two per cent, the appellant in this case has not charged any guarantee commission. If TBIL could agree to an interest burden @19 per cent on the loan it could have certainly agreed to a guarantee charge of 1 per cent or so which would have amounted to a petty amount of Rs.one lakh and thirty thousand only. Clearly, the guarantee was given by the appellant for other than normal business considerations whatever those may have been. The Assessing Officer was therefore justified in drawing support from the decision of Madras High Court in the case of T.N. Krishnaswami where it has been held that if the assessee did not receive any consider....
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....itten against para 57 in Annexure V of Form A of the Reference to BIFR. Please see paras 3 & 4 above and pages 206 and 207 of the appellant's paper book dated9-12-2002. With all this information available to the appellant, when it decided through its resolution in March 1994 to give guarantee to M/s. Basu Associates for Rs. 130 lakhs it was crystal clear to everybody that the appellant, for reasons best known to it but for certainly imprudent reasons or reasons unconnected with its business, was sinking its good money without any legal obligation to do so. 32. The appellant was certainly living in a world of make-believe if it expected that TBIL, with its chronic industrial sickness, would be able to recover to good health in a short period of only six months because the ICD of Rs. 130 lakhs had been placed with lit only for six months and that also at the high interest rate of 19 per cent when actually it had asked for earlier debt to be waived and fresh funding at a nominal cost repayable over 12 years. Please see para (II)(a) at page 207 of the appellant's paper book dated9-12-2002." 21. Mrs. Parashar, learned CIT (DR) concluded the Department's case with the following obs....
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.... asking for return of their money. Under these circumstances and in accordance with the decisions of the various judicial authorities the debt cannot be said to have become bad and cannot be, therefore, allowed as a deduction. In fact, if one were to accept that the amount became bad debt immediately on its payment to M/s. Basu Associates one has no option but also to accept that the moment of giving the guarantee itself the amount had become bad. In other words, it must be said that giving of guarantee was not a commercial decision and in the ordinary course of assessee's business because it could not be assessee's business to guarantee the payment of bad and irrecoverable amounts. Obviously, there is no escape from the conclusion that the appellant had given guarantee to M/s. Basu Associates for some extraneous considerations." 22. In the rejoinder filed by Shri Ajay Vohra, ld. Counsel, it has been contended that even though the corporate guarantee has been executed with Basu Associates on22-4-1994after loan has been given to TBIL, the assessee has assured Basu Associates vide letter dated21-2-1994regarding the execution of the corporate guarantee for repayment of the loan. Ld....
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.... on13-7-1991with TBIL taking over management and control of the said company. The assessee-company acquired in July 1992, 3,12,000 shares in TBIL which is 25 per cent of its share capital. Despite acquiring 25 per cent shareholding in TBIIL, this by itself would not justify the contention that guarantee given to Basu Associates for the loan allowed to TBIL is a part of business of the assessee company. No commission or consideration for giving the guarantee to Basu Associates has been received by the assessee. Assessee has not carried out any business of giving guarantees for loans and no such guarantee has been given to any other lender by the assessee. Therefore, the guarantee transaction is not related to business of the assessee and claim of deduction cannot be allowed either as a business loss or as a bad debt under section 36(1)(vii). 24. A very intriguing feature of the guarantee transaction to which our attention has been invited by the ld. CIT DR is that the guarantee transaction is much later to the date of advancing the money by Basu Associates to TBIL. As per the loan agreement at page 81 of the paper book, loan of Rs. 130 lakhs has been granted on24-2-1994on the ter....
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.... in fact, no guarantee has been given to any party for repayment of loan. The impugned guarantee transaction is the solitary transaction which has been entered into without charging of any commission. For these reasons, we are inclined to concur with the contention of the ld. CIT DR that the guarantee furnished by the assessee to Basu Associates was not in the normal course of assessee's business and is, therefore, not liable for deduction either as a bad debt under section 36(1 )(vii) or as a business loss. 26. Insofar as statutory conditions for allowing deduction of bad debt as per section 36( l)(vii) are concerned, clause (i) of sub-section (2) of section 36 lays down: "(2) In making any deduction for a bad debt or part thereof, the following provisions shall apply - (i) no such deduction shall 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 the business of banking or money-lending which is carried on by the assessee." The aforesaid condi....
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.... of guarantee to a company for the loan given by the company to one G for a sum of Rs. 50,000 guaranteeing due repayment of the said sum of Rs. 50,000 together with the interest thereon. On G defaulting in the payment, the company recovered. the sum of Rs. 50,000 together with interest of Rs. 2,083 from the assessee. As the steps taken by the assessee to recover the sum from G did not materialize, the assessee wrote off the sum of Rs. 52,083 as a bad debt and claimed deduction thereof in his assessment for the year 1973-74. This claim was rejected by the ITO. The Tribunal, however, held that though the transaction as a result of which the assessee came to pay Rs. 52,083 to the company was not one in the course of the assessee's money-lending business, the payment of the said amount by the assessee to the company in discharge of the loan taken by G should be taken to have arisen in the course of the money-lending business carried on by the assessee and, hence the assessee was entitled to claim the amount as a bad debt for the year 1973-74. The High Court held that the Tribunal had specifically found that the furnishing of guarantee had not been done in respect of any other borrower ....
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....n Birla Bros. (P.) Ltd.'s case relied by the ld. CIT (DR), the assessee-company carried on business of banking and financing and also of managing agency. One of the managed companies appointed a selling agent and the assessee-company stood as guarantee for a loan of Rs. 6 lakhs which was advanced by a bank to the said selling agent. The selling agent failed to pay the loan which at the relevant time stood at Rs. 5,60,199 and, thereafter, the assessee treated the selling agent as his debtor for the amount. The selling agent ultimately went into liquidation and the assessee was not able to recover any part of the amount. He, therefore, wrote off the sum of Rs. 5,60,199 in its accounts and claimed deduction thereof as a bad debt under section 10(2)(xi) of the Act. The Supreme Court laid down the proposition that unless the guarantor is under a legal obligation to give the guarantee, or the guarantee has been given as part of or incidental to the assessee's business, the guarantor cannot claim the amount he was forced to pay under the terms of the guarantee as a bad debt or as a business loss or as a business expenditure. 30. In our considered opinion, the aforesaid decisions cited ....
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....of K.M. Mody. The facts as recorded by the Tribunal in this case are that the said assessee carried on a composite business, one of the facets of which was film financing business and guaranteeing of loans was one of the modes of film financing. The assessee furnished guarantee for repayment of loan advanced by Western India Theatres Ltd. to his brother for production of a film Jhansi Ki Rani. The High Court held that there was valid and sufficient consideration for the execution of the guarantee agreement. The financier was a leading distributor and had taken on lease a number of cinema theatres owned by the said assessee. The picture was a failure and the loss incurred as guarantor was allowed as business loss. The facts of the said case are thus entirely distinguishable inasmuch as the guarantee has been given during the course of business wherein giving of guarantee was an essential ingredient. The decision does not help the case of the assessee. 35. The next decision cited by the ld. Counsel is T.J. Lalvani's case. The facts in this case are that the assessee was a dealer and commission agent in paper on a larger scale. One Ebrahim Lookmanji, a big consumer of paper, had hu....