TaxTMI 
TaxTMI 
2007 (12) TMI 304
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....s a company. It entered into a 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. The assessee was described as the lender. According to this tripartite agreement, the assessee agreed to advance Rs. 1 crore to FMLC at the interest of 30.5 per cent per annum. The agreement was extended from time to time. Since the assessee was unable to recover the principal amount of the loan, a fresh agreement was entered into in which GAL became the principal borrower in the place of FMLC. This 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. The rate of interest payable by GAL was 30 per cent to 36 per cent per annum. The borrower was required to return the principal amount along with interest after a period of 90 days. Prior to the execution of the last agreement, the assessee had received interest of Rs. 11,83,562 and Rs. 5,52,329 on 2-4-1996 and Rs. 17,26,028 on 14-2-1997. 3. The cheques issued by the borrowers were dishonoured and legal proceedings were commenced against GAL. An arbitrato....
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....e assessee's business. He also held that the conditions of writing off of the bad debt were not satisfied. He thus affirmed the findings of the Assessing Officer and dismissed the contention. However, as regards the interest of Rs. 5,52,329, he directed the Assessing Officer to verify whether the same was assessed as business income in any earlier year and in case it was so assessed, he directed the Assessing Officer to allow the same as a deduction under section 36(1)(vii). 6. In the appeal filed by the assessee, the learned Judicial Member, who wrote the leading order, accepted the assessee's claim and held that the ICD of Rs. 1 crore was advanced by the assessee to GAL in the course of its money-lending business and was, therefore, rightly allowable as a bad debt. 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 of Rs....
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....ed 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. 8. Having recorded the aforesaid finding, the learned AM proceeded to hold that the tripartite agreement cannot be treated to be in consonance with the board resolution because in that case it was not necessary to state in the tripartite agreement that financial assistance was being extended by the assessee to FMLC for the purpose of booking 28 Maruti cars. The learned AM thereafter proceeded to examine the objects clause of the memorandum of association of the assessee-company and held that they do not authorise the carrying on of the business of money-lending and at best they only authorise the investment of surplus funds which cannot be considered as money-lending bu....
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...., which disproved the finding: (a) that the interest accrued on the amount of Rs. 1 crore has always been assessed under the head "Business" in assessments made under section 143(3) for the assessment years 1996-97 and 1997-98; (b) that in the tripartite agreement terms such as "Lender", "Borrower" and "Guarantor" were used which clearly point to the conclusion that it was a financing arrangement and not an investment and (c) the rate of interest was 30.5 per cent per annum which is unthinkable in the case of an investment at the relevant time. As regards the finding of the learned AM that there was no systematic money-lending activity, he contended that even a single or isolated transaction may constitute business and in support of this proposition, relied on the following judgments : (i) CIT v. Khairagarh Timber Traders [1982] 137 ITR 346 (MP) (ii) CIT v. Bharat Insurance Co. Ltd. [1983] 142 ITR 342 (Delhi); (iii) CIT v. R.M. Meenakshisundaram [1995] 212 ITR 220 (Mad.). The learned representative of the assessee also strongly relied on the order of the Hyderabad Bench of the Tribunal in the case of ITW Signode India Ltd. v. Dy. CIT [2007] 110 TTJ 170, whic....
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....he amount was advanced as ICD and, therefore, it is not open to the learned CIT DR to contend to the contrary. He argued that at any rate, one has to look into the substance of the matter to find out whether it is a money-lending transaction and the fact that the agreement itself was styled as "ICD Agreement" or that the parties had described the advance as ICD was not conclusive. As regards the Board of Resolution, he contended that the same was not doubted by the income-tax authorities or even by the Hon'ble Members of the Tribunal and, therefore, it was not open to the department to now question the veracity or credibility of the same. With regard to the contention of the learned CIT DR that the memorandum of association does not authorise money-lending business, the learned representative of the assessee drew my attention to clauses 10 and 11 of the objects clause reproduced at page 4 of the order of the Tribunal and submitted that whereas clause 10 dealt with investment of surplus funds, clause 11 in contrast clearly authorised the company to lend or advance monies on such terms as may be expedient. He submitted that this difference between the two clauses was not kept in view....
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....that the fact that a particular activity is described in the objects clause of the memorandum of association as investment is not conclusive "because the question is not what business does the taxpayer profess to carry on, but what business does he actually carry on. . .". In Lakshminarayan Ram Gopal & Son Ltd. v. Government of Hyderabad [1954] 25 ITR 449, the Supreme Court observed that the memorandum of association of a company is not conclusive as to whether a particular activity amounts to business or not but it is permissible to look into the same for the purpose of ascertaining the nature and scope of the activity. In Kishan Prasad & Co. Ltd. v. CIT [1955] 27 ITR 49 (SC) it was observed by Hon'ble Chief Justice, Mahajan that the circumstance whether a transaction is or is not within the company's power has no bearing on the nature of the transaction, or on the question whether the profits arising therefrom are capital accretion or revenue income. Hon'ble Justice Shah observed in CIT v. P.K.N. Co. Ltd. [1966] 60 ITR 65 (SC) that "the fact that a transaction is within the powers of a trading company is relevant but has standing alone not much significance". I may refer to only ....
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.... agreement, the assessee has been described as the "lender", FMLC as the "borrower" and GAL as the "guarantor". As rightly pointed out on behalf of the assessee, these terms are inconsistent with the claim that the transaction was an investment and not a money-lending transaction. In an investment, generally there is no guarantor who would guarantee the return of the investment or the rate of interest barring exceptional cases of debentures where the debenture-trustees take care of the interests of debenture-holders who may have invested in the company's debentures. In the preamble to the tripartite agreement, it has been stated that the borrower and the guarantor had approached the assessee for the grant of loan to be exclusively used for the purpose of business of purchasing, stocking and selling Maruti vehicles and it was at the request of the borrower and guarantor that the assessee had agreed to give the loan. The words employed in the agreement and the reason why the money was advanced to FMLC discount the theory of investment of the assessee's funds. Secondly, the rate of interest for which the assessee advanced the money was 30.5 per cent per annum which also indicates that....
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....ad not referred to the same in the past. I am, however, inclined to hold that the resolution does advance the assessee's case because it is in conformity with clause 11 of the objects clause of the memorandum of association and the non-advertence to the same in the past was presumably because the assessee's claim that the interest should be assessed under the head 'Business' was never called in question and the assessee was never required to show that the money-lending activity was backed by board resolution. The reason the learned AM held that there was no approval of the board of directors for the activity started by the assessee was that in his view, the advancing of the money to FMLC was only an investment and not a money-lending activity. If the activity is viewed as an investment then of course it is true to say that the board resolution did not approve of it as an investment but that does not carry matters further because in my view, as already demonstrated, the advance was a money-lending advance having regard to the requirement of FMLC and GAL as borrower and guarantor respectively and the object of the advance was to enable FMLC to book 28 Maruti cars. The board resolutio....
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....ed to FMLC did not represent money lent in the ordinary course of the business as money-lender. This point has already been discussed by me and I have held that the amount represented money-lending advance. In the case of money-lending advance, the only way in which the conditions stipulated in section 36(2)(i) of the Act, namely, that the debt should have been "taken into account" in computing the income of the assessee of the previous year in which the debt is written off or of an earlier previous year, can be satisfied is to see if the interest on the advance was assessed as the assessee's business income. I must here refer to the judgment of the Madras High Court in CIT v. City Motor Service Ltd. [1966] 61 ITR 418 in which judgment this aspect was considered. That case resembles the present case on facts. The company had the power under its memorandum of association to advance monies for interest. In respect of advances given to Sungo Limited, the revenue brought to charge the interest due as business income of the assessee. In fact, in years where the assessee did not offer any income on the footing that it did not realise the same the revenue insisted that since Sungo Limited....
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....n off. What has been laid down in the judgment of the Madras High Court has found expression in section 36(2)(i). It is notewo-rthy that the present section uses the same language which the judgment uses at pages 421-422 of the report, as can be seen from the sentence (in the judgment): "It is no doubt true that the amount lent as principal will not by itself swell the profits and what is meant is that it is taken into account in the context of computation of income" (herein italic). Therefore, if the interest of Rs. 17,40,984 was assessed as business income of the assessee in the assessment order for the assessment year 1996-97 and the interest on the loan was similarly assessed in the assessment order for the assessment year 1997-98, both in orders passed under section 143(3) of the Act, the revenue cannot turn around now and say that the advance to FMLC was not a money-lending advance. I do not, therefore, see with respect, any basis for the observation of the learned AM in paragraph 19 of the order that "Admittedly the amount of bad debt claimed by the assessee has not been taken into account in computing the income of the assessee in any of the previous year". This observation....