TaxTMI 
TaxTMI 
2007 (6) TMI 238
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....for the assessment year 1998-99 and Rs. 340 lakhs for the assessment year 1999- 2000. 3. The assessee has also raised legal ground for the assessment year 1999- 2000 against reopening of the assessment under section 147 was not pressed during the course of hearing of this appeal by learned counsel for the assessee, therefore, the same is dismissed as not pressed. 4. The main ground that is confirming the disallowance of bad debts and business loss is disposed of together for both the years since the facts are identical. 4.1 Briefly stated, the facts are that the assessee-company filed its return of income for the assessment year 1998-99 on November 30, 1998, declaring a loss of Rs. 4,80,020. The assessment was completed on February 28, 2001, under section 143(3) determining an income of Rs. 2,32,09,767. The assessee' s main business as set out in the objects clause was to provide lease finance, to provide hire-purchase finance, to provide finance for assisting in sale of goods/articles, etc., to provide finance to pro mote, establish, support, setting up of or establishment of industrial/trading activity, to provide loans and other form of financial assistance to acqui....
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....August 1997, the business operation of Fairmark were controlled by three non-resident Indian directors who have since abandoned the business affairs of Fairmark. The company had entered into an agreement with the said non-resident directors on December 11, 1996, whereby the said directors had undertaken to cause Fairmark to repay the dues of Citibank, and pay to the company : (a) by way of refund of share application money of Rs. 12.50 lakhs, (b) arrears of interest on the deposit of Rs. 100 lakhs, and (c) share of profit from Fairmark. The company has initiated legal proceedings in India against the Dass Brothers for their failure/misconduct in the discharge of their fiduciary responsibilities, as directors are responsible for the operations of Fair mark and also in UK for break of agreement dated December 11, 1996. Notwithstanding a partly favourable judicial ruling by the courts in UK the company is not hopeful of recoveries and hence the amount of fixed deposit of Rs. 100 lakhs with Citibank, the interest accrued thereon which was appropriated by Citibank and the share application money of Rs. 12.50 lakhs, all aggregating to Rs. 122.47 lakhs has been written off as business los....
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....ining these details the Assessing Officer noticed that the claim of the assessee based on three items which are basically advances given for share application money, interest free advances and also for purchase of capital assets. The assessee was required to furnish the justification for claim of the bad debt/business loss claimed in its return. A detailed reply dated February 27, 2001, was filed by the assessee by which it was claimed that the deduction under section 36(1)(vii), read with section 36(2) is truly in the nature of an allowance for a business loss and hence has to be deducted as general principle in order to arrive at the true profits of the business. It was further explained that the conditions for claiming bad debt under section 36(2) is satisfied in the present case as the assessee indulged in the activity of money-lending. The object clauses of the company' s business were also cited before the Assessing Officer. Reliance was also placed on various case law. However, after considering the details and case laws, the Assessing Officer found that the claim of the assessee is not allowable, as the assessee does not deal with the money-lending business. It was also....
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....ill been shown recoverable. As far as ICD (intercorporate deposit) with Makan which had been assigned under agreement by Piem to Rs. 5 crores out of which only Rs. 85 lakhs has been written off in this year. Since the principal debtor of the assessee-company is still Piem, the assessee-company should have furnished the details and steps taken for the recovery of the application money from Piem, which is still carrying on its business. No details of the correspondence undertaken either with the Registrar of Companies or with Piem had been furnished and, therefore, the Assessing Officer was of the view that it is clear that the sum shown to be recoverable from Makan is still recoverable from Piem and, therefore, cannot be considered as a bad debt and accordingly cannot be allowed as deduction. 6. The third issue, which was regarding the advance given for purchase of land for business of the assessee-company. As the assessee-company has gone into liquidation and dealing in land, thus it was seen that the advances were made for purchase of land to acquire the capital asset, therefore, the Assessing Officer opined that the same cannot be claimed as bad debt deduction. 6.1 Accordin....
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....he copies of accounts and evidences showing prospects of the business, interest income on advances given during the course of business, the details of advances, the task of accountancy, the prospectus, approvals and the main objects of the assessee-company. It was further explained that the assessee-company was incorporated some time in the year 1987 and since then the assessee was advancing loans to various subsidiaries for earning of interest. It was further submitted that the interest income earned by the assessee has also offered for taxation and the same has taxed also. Attention of the Bench was drawn on computation sheet of income placed in the records. The circumstances of the amounts recoverable from Fairmark, Piem or Makan and on account of land purchased for its business purposes were explained by the counsel of the assessee. Reliance was also placed on various decisions in CIT v. Crescent Films (P.) Ltd. [2001] 2 48 ITR 67 0 (Mad), Essen Private Ltd. v. CIT [1967] 65 ITR 625 (SC), C. T. Narayanan Chettiar v. CIT [1966] 60 ITR 690 (Mad) and CIT v. S. P. Balasubramaniam [2001] 250 ITR 127 (Mad). The ratio of these decisions were read and explained also and it was submitte....
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....ing preferential shares and the amount given for preferential shares cannot be transferred to a loan account. It was further explained that nothing is on record to prove that Piem agreed to accept the amount taken for allotment of preferential shares, transferred to another as corporate deposit. A third party has given consent that it will refund the amount to the assessee and has issued cheques also, but it cannot be said that the amount given by the assessee has taken the character of advances given at the end of the assessee. 10.2 The learned Departmental representative further stated that the investments in shares and investment on account of loan advanced cannot be treated on equal footings. The assessee had given money for allotment of preferential shares and not for the purposes of advancing of loans. The assessee on recovery stage only treated the amounts given for allotment as intercorporate deposits (ICD). 10.3 Reliance was placed on a decision in Kailash Investments (P.) Ltd. v. CIT [2005] 281 ITR 92 (Guj) and further reliance was also placed on the decisions considered by the learned Commissioner of Income-tax (Appeals). Regarding the various case law ....
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....k was promoted by the assessee jointly with Taj Trade and Transport Company Ltd. and Dass Brothers NRI' s settled in UK. The assessee had advanced Rs. 12.50 lakhs to Fairmark as equity share application money against which the shares were never allotted by Fairmark. The assessee had also placed Rs. 100 lakhs with Citibank, Mumbai during the financial year 1994-95 as interest bearing deposit. In consideration of Citibank giving financial facility to Fairmark, the assessee agreed to lien on the above deposit and the interest thereon was earned by the assessee. In consideration of the lien on the said deposit, Fairmark agreed to pay the assessee consideration computed at 9.125 per cent. on the above deposit. Thus, the assessee was entitled to receive interest income on the said deposit of Rs. 100 lakhs from Citibank and also from Fairmark. 13.1 Fairmark was incorporated to export designer garments to Euro pean countries. The Dass Brothers were in the garment business in UK for number of years and the business of Fairmark was managed and controlled by Dass Brothers. The assessee and Taj Trade and Transport Co. Ltd., decided to part ways with Dass Brothers and Dass Brothers....
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...., the Commissioner of Income-tax (Appeals) was also confirmed the action of the Assessing Officer. 13. We have seen the correspondences and the factual aspects of the case and found that the assessee has discharged its onus to prove that the money had become bad in fact. The objections of the lower authorities that the assessee is not indulging any money-lending activities is not correct because the assessee was incorporated in 1987 and money-lending activities have been done by doing non-banking financial business. Huge amounts earned on account of interest was offered for taxation and the same has taxed in earlier year as well as in the year under consideration also. We have seen the objects clauses of the assessee-company and found that there are clauses of objects to run the business of non-banking finance business and to advance money as intercorporate deposits and also business of leasing business. 15.1 A Bench of the Delhi Tribunal in the case of Deputy CIT v. SREI International Finance Ltd. [2006] 10 SOT 722 has held that : "there was no qualification in section 36(2) that the business of money lending should be understood only in a traditional sense. The bus....
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....e assessee was offered for taxation in earlier years as well as in the year under consideration and the same has been taxed also. Therefore, the claim of the assessee is allowable as bad debt. 16. Regarding Rs. 85 lakhs recoverable from Piem, the assessee had placed Rs. 500 lakhs on March 31, 1997, with Piem as application money for preference shares of Piem. Until allotment of preference shares by Piem the above advance was to earn income by way of interest. Piem decided against issue of preference capital and the assessee, vide letter dated July 26, 1997, to Piem asked for refund of the above advance with interest. 17. Piem expressed inability to make immediate repayment in view of liquidity constraints and offered to instruct Makan which company during the relevant time owned intercorporate deposits to Piem. As per the instructions of Piem to Makan, vide their letter dated July 29, 1997, Makan issued post dated cheques aggregating to Rs. 500 lakhs to the assessee vide letter dated July 29, 1997. Makan instructed the assessee to deposit the cheques on their given instructions to the assessee. The assessee, therefore, agreed with Piem to discharge Piem against their obligati....
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..... 500 lakhs for allotment of preference shares but Piem refused to allot the shares and then the assessee asked for refund of the same. At this stage Piem instructed Makan from whom some dues were recoverable by M/s. Piem. Makan has also accepted to repay Rs. 500 lakhs to the assessee and it is evidenced from the facts that Makan had issued cheques of Rs. 500 lakhs. Two cheques of Rs. 50 lakhs and Rs. 25 lakhs given to the assessee were encashed also. Thereafter, on account of some dispute and in hope of recovery of principal amount with interest the assessee agreed to accept the amount less by Rs. 85 lakhs. In these circumstances the amount of Rs. 85 lakhs was claimed as bad debt during the year under consideration. 20. The learned Departmental representative stated that the money was allotted for shares and not for the purpose of advancing business purpose. In our considered view the contentions of the learned Departmental representative are not correct. No doubt, the amount of Rs. 500 lakhs was given for allotment of preference shares in the assessment year 1997-98. However, Piem refused to allot the same. Therefore, the assessee asked to refund the amount with interest. Piem....
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.... to get monies for his own business. There may be a custom of the business by which that may be the only method whereby he could get money for the purpose of his own business. If he is to discharge a surety debt and if any such custom is established it would be a business debt. If the assessee has made a payment not voluntarily but to discharge a legal obligation which arises from his business he would be entitled to have the amount deducted as a bad debt under section 10(2)(xi)." 23.2 These observations of the Supreme Court, in our considered view are in support of the case of the assessee. In the present case, the guarantee was given to safeguard the business interest of the assessee because the business with Fairmark was joint venture and the assessee was interested in that joint venture. Therefore, the amount guaranteed by the assessee has to be treated as business debt. On this amount, as discussed above, the assessee has earned interest also from bank as well as Fairmark. Therefore, it cannot be said that in any way the amount of outstanding against Fairmark was not business debt. 22. We have seen the decision considered by the Commissioner of Income-tax (Appeals)....
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....rmark stood the guarantee and when Fairmark failed to discharge its onus then only the assessee has claimed the guarantee money as loss. 26. In the case of Essen Private Ltd. v. CIT [1967] 65 ITR 625, the honourable Supreme Court, reversing the decision of the honourable High Court, that the findings given by the Tribunal were correct findings and the amount on account of guarantee claimed as bad debt was held as allowable. 28.1 In this case, the concerned assessee stood guarantee along with a director of the managed-company for a loan of Rs. 2 lakhs obtained from a bank. The managed-company failed in its business and upon the pressing the bank for payment, the appellant, in accordance with its guarantee, paid the bank Rs. 81,593 and out of the goods of the managed-company released by the bank had realized Rs. 44,905. Even thereafter the managed company did not improve and there was no prospect of receiving any moneys from it. The appellant written off the sum of Rs. 4,03,203 in its books of account and claimed allowance of the sum as a bad debt. The Tribunal found that the assessee advances to the managed-company and the agreement guaranteeing the loan to the managed c....
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....taken into consideration the contentions of the learned Departmental representative that the assessee is not advancing money to Fairmark, which can be equated with the business of the asses see. In the case of S. A. Builders Ltd. [2007] 288 ITR 1, the honourable Supreme Court has held that the amount advanced to its subsidiary amounted to advance given to an independent party and any interest received from the subsidiary is an income of the assessee because the subsidiary is an independent entity. In this case, the honourable Supreme Court has reversed the decision of the Bombay High Court in the case of Phaltan Sugar Works Ltd. v. CWT [1994] 208 ITR 989. In the present case, the assessee has stood guarantee of Rs. 100 lakhs on which the interest is earned in accordance with the joint venture with Dass Brothers. Therefore, it cannot be said that the amount as guaranteed by the assessee is not for its business purposes or for its business interest. 31. We have seen various other decisions relied upon by the learned authorised representative in Badridas Daga v. CIT [1958] 34 ITR 10, Jhalani and Co.' s case [2001] 77 ITD 44 (Delhi) and CIT v. S. P. Balasubramaniam [2001] 250 IT....
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....he money advanced for acquiring capital assets cannot be allowed as business loss. 36. Learned counsel for the assessee could not controvert this findings of the learned Commissioner of Income-tax (Appeals) as he simply placed reliance on the decision in CIT v. Anjani Kumar Co. Ltd. [2003] 259 ITR 114 (Raj). The decision relied upon by the learned authorised representative is on some different facts, therefore, we are not inclined to interfere with the findings of the learned Commissioner of Income-tax (Appeals) to this extent. Accordingly, the disallowance of Rs. 27.89 lakhs is confirmed. 37. The assessee for the assessment year 1999-2000 has raised a ground against upholding the disallowance of Rs. 340 lakhs on account of bad debts. This amount of Rs. 340 lakhs is on account of remaining amount recoverable from Piem and Makan as the same is out of total amount of Rs. 500 lakhs. We have discussed the issue in detail while disposing the ground for the assessment year 1998-99. 38. After considering the issue in detail, we have allowed the ground of the assessee in regard to bad debt claim recoverable from Piem and Makan. On the same reasoning, we allow this ground for the y....