TaxTMI 
TaxTMI 
2009 (1) TMI 356
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....e learned CIT(A) be set aside and that of the AO restored. 5. That the appellant requests for leave to add or amend or alter the grounds of appeal before the appeal is heard and disposed of." 3. The facts relating to first ground are that the assessee is engaged in manufacture and sale of leather goods, shoe upper, soles, etc. On scrutiny of the P&L a/c of the assessee by the AO it revealed that the assessee has claimed an expenditure of Rs. 3,86,63,896 on account of loss due to irrecoverability of direct loan as also loan amount for the execution of standby letter of credit (including charge on it) paid to the wholly-owned subsidiary (in short 'WOS') company in USA. The AO called for the explanation relating to this loss, since the loss does not spring from assessee's business. The assessee submitted before the AO that it is a business loss incurred on account of commercial expediency to be allowed as business loss. The AO was of the opinion that the main object of the assessee is to manufacture and sale of leather, leather goods and footwears and shoe uppers and granting of loans to its subsidiary or standing guarantee for any company including its subsidiary is not the bus....
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....ompany for repayment of the loan advanced to Shri Gandhi and, therefore, the transaction of guarantee cannot be said to have been given in the course of the assessee's business as a financier and, therefore, it has to be held that the deduction claimed is not a business loss or a bad debt arising out of the assessee's business." Further, he relied on the judgment of Hon'ble Madras High Court in the case of K.S. Janakiram vs. CIT (1962) 45 ITR 430 (Mad), wherein it was held as follows: "In that case a freight broker guaranteed a loan of a charter to a shipping line as part of a transaction of charter party. Share of profits from the shipping line (borrower) was the consideration. The shipping line was not able to repay the loan. The result was that the broker had to discharge the loan as a guarantor. He, thereafter, wrote off the amount in his accounts and claimed it as a bad debt. When the matter came to this Court, this Court held that no part of the sum which was guaranteed by the assessee could be treated as a bad debt as furnishing of guarantee is not a normal incident in the course of business of freight brokerage and it is also not customary for freight brokers to under....
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....ult to appreciate the observations of the High Court that it was in the larger interest of the assessee's business that the guarantee was given. In our opinion, the view of the Tribunal was based on a complete misapprehension of the true legal position. The High Court also fell into the same error. The allowance which was claimed did not fall within s. 10(2)(xi). No attempt was made nor indeed could it be usefully made to claim any allowance under s. 10(2)(xv) of the Act." Further, he relied on the judgment of Hon'ble Calcutta High Court in the case of Rampooria Brothers (P) Ltd. vs. CIT (1987) 59 CTR (Cal) 243 : (l987) 167 ITR 859 (Cal), wherein it has been held as under: "On a consideration of the facts and circumstances of the case, the submissions on behalf of the parties and the decisions cited, it appears to us that the Tribunal had sufficient evidence before it to come to the conclusion that the guarantee furnished by the assessee was not a normal business transaction of the assessee and that the same had been furnished on extra commercial considerations. These findings have not been challenged specifically by the assessee. No doubt, the Tribunal has not scanned the re....
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....hich the assessee was substantially interested, the debt must be regarded as directly springing from its business activity and the connection could not be considered too remote for the purpose of the allowance as a trading debt. The test and the approach to be applied in this case must be that of a businessman. (iii) CIT vs. F.M. Chinoy & Co. Ltd. (1969) 74 ITR 780 (Bom), wherein it has been held that mere fact that cl. 13 of the managing agency agreement was so worded as to make it only optional on the part of the assessee to make the advances is not a ground for holding that the amount was not a loss in the course of business. When a loss incidental to business is allowable, and in this case the loss is incidental, the absence of an obligation does not affect the claim. (iv) CIT vs. A. Gajapathy Naidu (1964) 53 ITR 114 (SC), wherein it has been held as under: "Held, that the amount ought to be included in the profits of the year 1950-51 relevant to the asst. yr. 1951-52, and that it could not be related back to the earlier year during which the assessee actually supplied bread to the hospital." (v) CIT vs. Swadeshi Cotton & Flour Mills (P) Ltd. (1964) 53 ITR 134 (SC),....
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....CIT vs. Birla Bros. (P) Ltd., wherein it has been held that guaranteeing of the loan advanced cannot be said to have indirectly facilitated the carrying on of the assessee's business nor can it be said that during the year in the larger interest of assessee's business that the guarantee was given. Bad debts on this account cannot be allowed. 5.1 Further, she submitted that it is a capital loss and not a trading loss. The capital loss cannot be allowed as deduction. She submitted that s. 37 of the IT Act does not permit the allowability of capital expenditure or the personal expenses as a deduction while computing the income under the head of profits and gains of business or profession and the expenditure laid out and expended wholly and exclusively for the purpose of business shall be allowed as a deduction. She drew our attention to letter dt. 10th July, 2008 written by the AO to the CIT(A), which reads as follows: "The CIT(A), Jalandhar. Sub: Appeal No. 380/200-8-M/s Swarup Tanneries Ltd.-Asst. yr. 2005-06-Regarding. Kindly refer to your office letter No. 89, dt. 6th May, 2008 forwarding therewith submissions of the assessee company on the issue of additions made a....
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....id to bank as guarantor of loans to managed company on becoming irrecoverable and it was business carried on by the assessee in the ordinary course of business. Hence, it was allowed. That fact is missing in this case and that ratio cannot be applied. She entirely relied on the order of the AO. 6. The learned counsel for the assessee relied on the order of the learned CIT(A). He further submitted that as per cl. (9) of the memorandum of articles of association, the object of the assessee is to lend and advance money, either with or without security and give credit to such persons (including Government) and upon such terms and conditions as the company may think fit in connection with its business. Further, he drew our attention to cl. (19) of memorandum and articles of association, which reads as to form incorporate or promote any company or companies whether in India or elsewhere having amongst its or their objects the acquisition of all of the assets of the company or for any other objects or object which in the opinion of the company could or might directly or otherwise prove advantageous to the company and to pay all or any of the costs and expenses indirectly assist the com....
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.... he relied on the decision of Tribunal, Hyderabad Bench, in the case of ITW Signode India Ltd. vs. Dy. CIT (2007) 110 TTJ (Hyd) 170, wherein it was held that short-term inter-corporate deposit once rolled over, cheque issued in respect of which was dishonoured was allowable as bad debt, more so, when AO had himself allowed interest accrued thereon as bad debt. 6.5 Further, the learned Authorised Representative relied on the judgment of Hon'ble Supreme Court in the case of Essen (P) Ltd. vs. CIT, wherein it has been held that there was a proper material before the Tribunal in support of its findings that the debt was incurred in the course of its business so as to make it deductible under s. 10(2)(xi) and that the High Court exceeded its jurisdiction in traversing into finding of fact reach by the Tribunal. Thus, he submitted that in that case the Hon'ble Supreme Court confirmed bad debts written off by the managing agent out of loan given to companies managed by it, are deductible under s. 10(2)(xi); such loan having been advanced in the course of the business of the managing agent on the facts founded by the Tribunal. 6.6 Further, he submitted that the assessee company ma....
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....changed by any act of the assessee or by operation of law, then such loan constitutes as a trade debt. In other words, debt emerges from the trading activity in the course of ordinary business of the assessee, which can be claimed as bad debt. The debt arising out of capital field or emerging from the investment activity of the assessee is not a trade debt. In the capital field, it cannot be treated as debt in ordinary course of business or trading debt, even by unilateral action, the assessee treated the debt in the capital field as trade debt. In order to claim the allowance as bad debt, there should be relation between the debtors and creditors from the date of lending the money till the date of write off of debt as bad debt. The debt arising out of investment activity which is in the capital field, cannot be allowed as bad debt as revenue deduction. To claim bad debt, the business in respect of which such debt has been given must continue to exist in the year for which the bad debt is claimed. As stated earlier, to claim deduction as a bad debt, it should not be too remote from the business carried on by the assessee and if the debt and guarantee given by the company while carr....
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....ductible as business loss, it must be in the nature of trading loss not as a capital loss, springing directly out of its trading activity and must be incidental to the business of the assessee and it is not sufficient that it falls on the assessee in some other capacity or is merely connected with its business. Because the assessee bore the loss of the subsidiary company on account of closure of the subsidiary company that itself cannot be the reason of debt as bad debt. Reliance is also placed on the judgment of Hon'ble Supreme Court in the case of CIT vs. Abdullabhai Abdulkadar (1961) 41 ITR 545 (SC), wherein it has been held as follows: "Held (I) that in order that a loss might be deductible it must be a loss in the business of the assessee and not a payment relating to the business of somebody else which under the provisions of the Act was deemed to be and became the liability of the assessee. Loss was allowable if it 'sprang directly from and was incidental to' the business of the assessee; it was not sufficient that it fell on the trader in some other capacity or was merely connected with his business. The loss which the appellant had incurred was not in its own business b....
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....f the assessee and a debt was something more than a mere advance and meant something which was related to the business or resulted from it. It was an outstanding which, if recorded, would have swelled the profits, and not merely money handed over to someone for purchasing a thing which that person failed to return even though no purchase was made. The amount due from the was could not, therefore, be described as a debt for the purpose of claiming deduction as bad debt. The capital loss cannot be claimed to be written off under the guise of bad trade debt. A debt arising from the industrial investment activity of the assessee is a debt in the capital field, that cannot be treated as a trading debt. 7.3 In the case of B.D. Bharucha vs. CIT (1967) 65 ITR 403 (SC), the Hon'ble Supreme Court has held that if an advance made in ordinary course of the business of the assessee as a part of the business activity that debt emerges from that activity can be allowed as a bad debt and treated as a revenue loss. If the amount was incurred for ensuring any investment which is very source of his business and that advance is not incidental to the trading activity of the assessee. The advance in ....
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.... has been held: "That as the assessee company was neither a banker nor a money-lender, the advances paid by the assessee company to the private company to purchase the shares could not be said to be incidental to the trading activities of the assessee. A debt, for the purposes of s. 10(2)(xi), was something more than a mere advance and meant something which was related to the business or resulted from it. It was an outstanding advance which, if recorded, would have swelled the profits, and not merely money handed over to someone for purchasing a thing which that person failed to return even though no purchase was made. The amount due from the private company could not, therefore, be described as a debt for the purchase of s. 10(2)(xi) and the assessee was not entitled to claim allowance of the balance of the advances as a bad debt written off under s. 10(2)(xi)." In view of the above judgment of Hon'ble Supreme Court, we have not considered the judgments of Hon'ble Bombay High Court in the case of Vassanji Sons & Co. (P) Ltd. vs. CIT and also in the case of CIT vs. Investa Industrial Corporation Ltd. 7.7 In the case of CIT vs. H.P. Mineral & Industrial Development Corporat....
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.... as a bad debt and the AO has allowed the same. Therefore, considering the facts of the case, the claim of the assessee for deduction of Rs. 1 crore is allowed. In the above case, inter-corporate deposit was made in the usual course of business and the assessee used its surplus funds to make it inter-corporate deposit for a short period of 90 days. At the end of this 90 days' period. it was rolled over again for another 90 days. At the end of the second period of 90 days the recipient/depositee issued a cheque which it could not honour. Hence. the assessee wrote it off as bad debt and the same was allowed by the Tribunal as it was made by the assessee on commercial expediency in the ordinary course of business. The assessee's counsel made one more argument that the question of capital loss or trading loss cannot be taken up at this stage by the Department since there was no discussion of this issue in the assessment order. This argument of the assessee was having no force. Since the AO disallowed this expenditure on the reason that the expenditure was not incidental to its business or profession. Thus, it means that it is not a business expenditure as envisaged under s. 37 of....
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....bsp; (A.V. Kalyanaraman) Asstt. General Manager" So, the loss is not related to the assessment year under consideration. Each assessment year is an independent assessment unit expenses and income of each year is to be recognised and is to be recorded. The income and expenses are recognised for a particular period, statutorily for one year on the basis of the method of accounting employed by the assessee. Income or loss is cumulative result of the working carried on by the assessee and the method for that particular assessment. Therefore, there is no immediate nexus between the expenditure incurred and assessment year under consideration. The expenses are not crystallised in the assessment year under consideration and are not allowable as deduction while computing....
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....e approval of the RBI to close was w.e.f. 16th June, 2004 and there is no record showing this fact other than mentioning of this date in assessee's letter dt. nil filed with CIT(A), placed at p. 10 of the paper book. On this ground also, this expenditure is not allowable. 9.1. Further, the CIT(A) relied on the judgment of CIT vs. A. Gajapathy Naidu for the proposition that the expenses relating to earlier year when paid subsequently in the year the liability crystallised, are eligible for deduction in the year payment is made. 9.2 But in the present case, the fact is that the liability was crystallised not in the assessment year under consideration as observed earlier in para, as this was crystallised in the asst. yr. 2004-05 as write off of the investment was approved by the RBI vide letter dt. 6th Oct., 2003 and this is falling in the financial year 2003-04 relevant to asst. yr. 2004-05 and not in the asst. yr. 2005-06. 9.3 The judgment relied on by the CIT(A) in the case of CIT vs. Swadeshi Cotton & Flour Mills (P) Ltd., the Hon'ble Supreme Court held that the bonus was settled by an award of the Industrial Tribunal. An employer who follows the mercantile system of acco....