TaxTMI 
TaxTMI 
2008 (1) TMI 522
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....Commissioner of Income-tax-II, Ahmedabad grossly erred in holding that the order under section 143(3) read with section 147 passed by the Assessing Officer on 15-12-2004 are erroneous and prejudicial to the interest of the revenue. 3. In the facts and circumstances of the case as well as in law, the Ld. Commissioner of Income-tax-II, Ahmedabad grossly erred in holding that the Assessing Officer while passing the order under section 143(3) read with section 147 did not properly examine the issue whether the claim for bad debt of Rs. 34.90 crore was admissible or not, whereas in point of facts, the Assessing Officer had examined the issue of admissibility of deduction of the claim for bad debt in depth and the assessment order under section 143(3) read with section 147 was passed with the approval of the Addl. CIT, Range-4, Ahmedabad. 4. In the facts and circumstances of the case as well as in law, the Ld. Commissioner of Income-tax-IT, Ahmedabad grossly erred in holding that the appellant's claim for deduction of bad debt of Rs. 34.90 crore is not admissible disregarding the fact that the appellant company has fulfilled all the conditions as per the provisions of section 36(1)....
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.... by the Deputy CIT, Circe-4, Ahmedabad dated 16-12-2004 allowing the claim of bad debts is erroneous in so far as it is prejudicial to the interest of revenue on the basis of reasons given in the show-cause notice. The relevant show-cause notice of the CIT-II, Ahmedabad reads as under:- "The assessment under section 143(3) read with section 147 in your case was completed on 16-12-2004 at an income of Rs. 9,61,650. The Assessing Officer had accepted your claim for bad debt amounting to Rs. 34.90 crores after considering your explanation and the details filed. From a perusal of your record, it appears that the acceptance of your claim of bad debt is erroneous in so far as it is prejudicial to the interest of revenue. It is clear from the record that you have not been engaged in the business of banking or money lending. Even the resolution regarding carrying out of financing and investment business was passed in the meeting of the Board of Directors held on 20-02-1996. On the contrary, a change in the memorandum of association can be effected only in accordance with sections 16, 17, 17A, 18 and 19 of the Companies Act. In your case, the aforesaid provisions of the Companies Act had....
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....ending and finance and the company has also advanced funds to M/s. Rajbal Finance (P.) Ltd. over a period of time. The company has also earned income over a period of time. Further, please note that as the loan. was given to M/s. Rajbal Finance (P.) Ltd. in the ordinary course of money lending, it is not necessary that income has to be accounted for against the said advance. In view of this, the same is duly allowable under section 36(2) which clearly states that money when advanced represents money lent in the ordinary course of business, the same is allowable. Further, it is on account of advances, on account of ordinary course of business and hence the said loss incidental to the business activities of the company and hence duly allowable under section 28. Reliance is placed on the decision of Gujarat High Court in the case of Abdul Razak & Co. 136 ITR 823 and Equitorial (P) Ltd. [1994] Taxation 37(3) - 82." The CIT considered the claim of the assessee and observed that as per the Memorandum of Association and the Articles of Association of the company dated 17-10-1979, which is available on record it can be seen that the Main Object of the assessee was never to act as invest....
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....rectors, but for the same there is an elaborate procedure as contemplated in sections 16, 17, 17A, 18 and 19 of the Companies Act, which is applicable in case of any company registered under the Companies Act. The assessee's contention that the provisions are not applicable in the case of a private limited company is incorrect and misleading. 19.2 Section 17 of the Companies Act provides that any alteration in Memorandum can be made for the purposes specified therein, only by special resolution passed by its members and after confirmation by Company Law Board. Section 18 of the Companies Act provides that the company should file the copy of the Special Resolution passed by its members authorizing the alterations in the Memorandum within one month from the date of such resolution. Section 19 of the Companies Act stipulates that no alterations referred in section 17 shall have any effect until it is duly registered in accordance with the provisions of section 18 of the Companies Act. 19.3 From the perusal of records in the instant case it can be seen that nothing is on record which suggests that the assessee company has altered its Memorandum by special Resolution, after approv....
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....ore not tenable under section 36(2) of the Act. There is a specific section for allowing claim of bad debts which is section 36(2). When the claim is not allowable under the Act under a specific section dealing with that item claim, then the general provisions will not be applicable and the same cannot be allowed under any other section of the Act. Reliance in this respect is placed on the judgement of the Hon'ble Bombay ITAT in the case of Shri Harshad J. Chokshi v. ACIT 52 ITD 511 (Bom.), whereby similar arguments of the assessee were rejected. In view of this, the assessee's second contention of the claim of business loss under section 28 of the Income-tax Act is also not acceptable/allowable." And in view of this, finally, he held the order passed by the Assessing Officer under section 143(3) read with section 147 dated 16-12-2004 as erroneous and prejudicial to the interest of revenue vide para-23 of his order which reads as under:- "23. The order under section 143(3) read with section 147 dated 16-12-2004 passed in the case of the assessee did not consider the above factual position as well as the legal provisions of section 36(1)(vii) and section 36(2) of the Income-ta....
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.... the debts from the date the loan was advanced till it was written off was also filed. He referred to the letter dated 7-12-2004 where the details are given and the details from that letter read as under:- "As regards advances given to Rajbal Finance (P.) Ltd., and written off during the year, we would like to state that the company has started giving loans to the above company since 1992-93. We arc submitting herewith detailed transactions of loans given and income earned thereof right from the inspection of the transaction with the said company as per Annexure-I, which please find in order. Further, please note that since 2-3 years, the financial position of the company was not so good and hence it has neither given any consideration against loans received nor has it paid any consideration for loans given. As can be found from the attached statement, the company has earned income of Rs. 3,87,83,991 on loans given to the said company from time to time." And this letter was written in response to the show-cause letter dated 6-12-2004 issued by the Deputy CIT, Circle-4, Ahmedabad and the relevant context of the letter under para-2 reads as under:- "2. In your letter date....
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....------------------------------ 3. 1994-95 69555297 168775500 1318000 25730365 262743162 ------------------------------------------------------------------ 4. 1995-96 262743162 14848847 7992000 109477584 414187223 ------------------------------------------------------------------ 5. 1996-97 414187223 178683466 5937500 0 586933189 ------------------------------------------------------------------ 6. 1997-98 586933189 5645541 0 0 592578730 ------------------------------------------------------------------ 7. 1998-99 592578730 16815029 167955024 0 592598735 ------------------------------------------------------------------ Total ....
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....and shares or other movable or immovable property or without security upon such terms and in such manner as may be thought proper and from time to time very such transactions and investments in such manner as the Directors may think fit." In view of these facts he argued that the assessee's case is covered by the decision of the Hon'ble Apex Court in the case of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83, wherein it is held:- "A bare reading of provisions of section 263 makes it clear that the prerequisite to exercise of jurisdiction by the CIT suo motu under it, is that the order of the ITO is erroneous insofar as it is prejudicial to the interest of the revenue. The CIT has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the revenue. It is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. If due to an erroneous order of the ITO, the revenue is losing tax lawfully payable by a person, it will certainly be pr....
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....hen stood the view taken by the Assessing Officer was unsustainable in law and therefore the Commissioner was right in invoking section 263 of the Income-tax Act. In this connection he has further submitted that in fact 2005 amendment which is clarificatory and retrospective in nature itself indicates that the view taken by the Assessing Officer at the relevant time was unsustainable in law. We find no merit in the said contentions. Firstly it is not in dispute when the order of the Commissioner was passed there were two views on the word 'profit' in that section. The problem with section 80HHC is that it has been amended eleven times. Different views existed on the day when the Commissioner passed the above order. Moreover the mechanics of the section have become so complicated over the years that two views were inherently possible. Therefore, subsequent amendment in 2005 even though retrospective will not attract the provision of section 263 particularly when as stated above we have to take into account the position of law as it stood on the date when the Commissioner passed the order dated 5-3-1997 in purported exercise of his powers under section 263 of the Income-tax Act." ....
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....venue only if it is found that the assessment was made on the basis that the income had been earned by the assessee which was assessable. Where an income has not been earned and is not assessable, merely because the assessee wants it to be assessed in his or her hands, in order to assist some one else who would have been assessed to a larger amount, an assessment so made will be erroneous and prejudicial to the revenue and the Commissioner has jurisdiction under section 33B of the Income-tax Act, 1922. Before the Hon'ble Apex Court in this case two views are not possible. Here only one view is possible even in the case where whether particular person is assessed on a larger amount or smaller amount it is immaterial. Hence, this decision is distinguishable on facts. In the case of Gee Vee Enterprises v. Addl. CIT [1975] 99 ITR 375 (Delhi), the Hon'ble Apex Court has held that it is not necessary for the Commissioner to make further inquiries before cancelling the assessment order of the ITO. The Commissioner can regard the order as erroneous on the ground that in the circumstances of the case the ITO should have made further inquiries before accepting the statements made by the a....
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....ed was erroneous but in the present case before us the facts are distinguishable, in view of the facts narrated above. 7. We have heard the rival contentions and gone through the facts and circumstances of the case. We have also perused the case records including the assessment order framed by the Assessing Officer under section 143(3) read with section 147 dated 16-12-2004 and the revision order passed by the CIT under section 263. We have also perused the documents filed by the assessee, case law referred by both the sides as well as the two paper books consisting of pages 1 to 107 and pages 1 to 58. The Assessing Officer while framing the assessment has gone into the issue of allowance of bad debts and the assessee was asked to furnish complete details of bad debts written off, justification for writing off of the bad debts and also the satisfaction of the provisions of section 36(2)/36(1)(vii) of the Act. The assessee has filed the complete details of loans advanced to Rajbal Finance (P.) Ltd. during the financial years 1992-93 to 1998-99 and the assessee-company has earned income by way of interest during these years and the assessee has offered the same in the total income....
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....t 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." From the perusal of section 36(2) of the Act it can be seen that the bad debt or part thereof can be allowed as deduction which has been offered for taxation in any of the years if such debt represents money lent in the ordinary course of business of money-lending carried on by the assessee. In the present case the assessee has claimed the bad debts on account of money lent during the financial years 1992-93 to 1998-99 and on these advances the assessee-company has earned income by way of interest and the same have been declared in the returns of Income or the respective assessment years for taxation purpose. 9. Whether the assessee's business is of money-lending or not? First of all we have to go through the Memorandum of Association of the assessee-company and the relevant Clauses 9 and 18 to the Objects incidental and ancillary to the attainment of the Main Objects are to carryon the busin....
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....onclusion, no useful purpose would be achieved. Though it is expected of the CIT to record his final conclusion in the order passed in the revision but he must at least indicate in his order, how the order of the Assessing Officer is erroneous and prejudicial to the interest of the revenue. In the present case, the facts are very clear and even before the CIT during the revision proceedings the assessee-company has filed the complete details which were available to the Assessing Officer at the time of framing of the assessment. Even from the perusal of the order of CIT it comes to our notice that the finding in that order is perverse to the extent that the assessee has not declared any income on the loans given to Rajbal Finance (P.) Ltd., whereas the facts narrate the different story as the assessee has filed the complete details which shows that the assessee has declared the interest income in the respective assessment years year-wise and the details are reproduced in para-5 at page-9 of this order hereinabove. The assessee-company has earned the interest income to the extent of Rs. 3,87,83,991 for the various assessment years. The Assessing Officer has allowed the deduction afte....
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....ny from time to time on current account. It also guaranteed along with a director of the managed-company a loan of Rs. 2 lakhs obtained from a bank. The managed company failed in its business and upon the bank pressing 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 it 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 wrote of[ the sum of Rs. 4,03,203 in its books and claimed allowance of that sum as a bad debt. The Tribunal found that the advances to the managed-company and the agreement guaranteeing the loan to the managed-company were in pursuance of its objects and were made in the course of its business and allowed the claim. On a reference of the question whether the debt was incurred in the course of its business so as to make its loss deductible under section 10(2)(xi) of the Indian Income-tax Act, 1922, the High Court held that the appellant acquired the managing agency on condition of giving loans and making advances and the loss arising out of such advances was only a capit....
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....er of Income-tax (Appeals) found that the amended provisions of section 36(1)(vii) of the Income- tax Act, 1961, were applicable under which the assessee was not required to establish that the debt had become bad in the previous year and mere writing 0[[ of the amount as bad debt was sufficient. Even on the merits, the first appellate authority found that there was no chance for the assessee to recover the amount and hence, the debt really became bad. The Tribunal also upheld the contention of the assessee on the basis of the provisions of section 36(1)(vii) of the Act which came into force from 1-4-1989, and upheld the findings of the first appellate authority. On an application filed under section 256(2) of the Act for directing the Tribunal to refer a question of law, the Hon'ble Jurisdictional High Court has held, that, under the provisions of section 36(1)(vii) of the Act, deduction had to be allowed in computing the income referred to in section 28 of the Act of the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year subject to the provisions of sub-section (2). Prior to the amendment from 1-4-1989....
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....d debts of an amount of Rs. 34.90 crores in the return of income filed for the assessment year 1999-2000. During the course of re-assessment proceedings, the assessee explained that the said sums were advanced by them to various concerns and the advance given to M/s. Rajbal Finance (P.) Ltd., was written off as the same had become irrecoverable. As per the provisions of section 36(2) reproduced at page-6 of this order hereinabove, it can be seen that even money lent in the ordinary course of business of banking or money-lending carried on by the assessee, if irrecoverable are to be allowed as deduction for bad debts. 16. Since the assessee-company had been lending money to various concerns from the time of its incorporation, it can be clearly seen that the business of money-lending was a business carried on by the assessee in its ordinary course of business, even though it may not have been the main business of the company. The main business of the company as can be seen from its Memorandum of Association was that of Technical and Management Consultancy Services but then there is no prohibition for the company not to carry out any other related or ancillary business along with i....