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TaxTMI 
TaxTMI 
TaxTMI 
2011 (5) TMI 567
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....uction of Rs. 85 lacs claimed by the assessee on account of bad debt written off when the said debt had not become bad and requirements of Section 36 are not satisfied in this case? c) Whether the I.T.A.T. was correct in law in holding that the provisions of Section 35D are application in the present case although the assessee is not an industrial undertaking nor an extension of industrial undertaking?" 3. Facts leading to the aforesaid questions of law may succinctly be stated as under: Question (a): 4. This question has arisen under the following circumstances: Rs. 100 lacs was placed by the assessee with Citibank as fixed deposit in the year 1994-95. The assessee agreed with Citibank for a lien on the said deposit in consideration of the said bank disbursing a credit line to Fairmark, a company in respect of which the assessee company was a co-promoter. The assessee earned interest income on the said deposit from Citibank and also earned interest income on the said deposit from Fairmark. On Fairmark‟s defaulting in payment of the dues to Citibank, the amount of fixed deposit of Rs. 109.06 lacs (including interest accrued on the fixed deposit) was ap....
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.... company, the recovery proceedings from the company are to be carried out with under the provisions of the Companies Act and no such details regarding the steps being taken for recovery of money are moved liquidation of that company have been furnished. Therefore, the AO opined that the necessary conditions that the debt should have been incurred in the normal course of business and that it should have become bad is not fulfilled and therefore, cannot be claimed as deduction by the assessee. 6. The CIT (A) confirmed the action of the AO, but the Income Tax Appellate Tribunal (hereinafter referred to as „the Tribunal) reversed the order of the AO as well as CIT (A) with direction to allow the same as deduction. The Tribunal, in this behalf, analyzed the facts in the following manner: "15. We have seen the correspondences and the factual aspects of the case and found that the assessee had 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 b....
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....t he had from time to time obtained finances for his business by procuring loans on the joint security of himself and some other person. But it was not established that he was in the habit of standing surety for other persons along with them for the purpose of securing loans for their use and benefit. Even if such had been the case any loss suffered by reason of having to pay a debt borrowed for the benefit of another would have been a capital loss to him and not a business loss at all. A businessman may have to stand surety for someone in order 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); see Commissioner of Income tax Bombay v. Abdullabhai Abdulkadar [1957]31ITR72(Bom) ............" 9. Further reliance was placed on the judgment of the Karnataka Hi....
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....did not qualify for deduction either under Section 36 or Section 37 of the Act. In contrast, in the present case, findings of fact have been established on record and found by the Tribunal on the following: (i) The assessee is in the a non-banking financial company and thus, its business activity is not limited to leasing, but involves lending of money as a whole. (ii) Act of the assessee in giving guarantee on behalf of M/s Fairmark was a part of money lending business. (iii) The assessee had, in fact, earned by giving the aforesaid bank guarantee earning in terms of interest, not only from the said bank, but also from M/s Fairmark for whom it stood guaranteed. (iv) The interest earned was offered for taxation. Such transaction of the assessee which is an NBFC would clearly be a business transaction and this guarantee amount would be treated as debt. When it became irrecoverable, it would qualify as bad debt entitling the assessee to claim as such. 11. Thus, the order of the Tribunal on this score is without any blemish. Question No. (b): 12. The assessee company had deposited a sum of Rs. 500 lacs for allotment of preference....
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....was still carrying on its business. No such details were furnished and therefore, the AO formed the view that the amount could not be treated as bad debt, as the same shown to be irrecoverable from Makan was still recoverable from Piem. 15. The CIT (A) affirmed this view of the AO holding that the amount of Rs. 500 lacs given by the assessee to Piem was for allotment of preference shares, which were never allotted and the amount was not advanced in ordinary course of business as financier. According to the CIT (A), agreement with Makan did not make any change in the nature and therefore, provisions of Section 36 were not satisfied. 16. The Tribunal has, however, allowed the claim of the assessee for both years. It accepted the contention of the assessee that Makan belonged to a reputed Global Tele System Ltd. and the assessee in good faith discharged Piem on receipt of payment through cheque from Makan. As per the Tribunal, though money was initially given to Piem for allotment of shares, but the shares were not allotted and the assessee had asked Piem to refund the amount with interest. Piem had accepted this request and in these circumstances, instructed Makan to pay the....
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....um of Rs. 85 lacs had become bad debt. Since it was a part of inter-corporate deposit, it could clearly be treated as debt. Such debt becoming bad would clearly qualify for deduction under Section 36(1)(vii) of the Act. The embargo put by Clause (1) of Sub-section (2) of Section 36 could not have come in the way of the assessee in view of the findings of the Tribunal that money was lent in the ordinary course of business of money lending which is carried on by the assessee. 20. The entire thrust of the learned counsel for the Revenue was on the transaction between the assessee and Piem on the basis of which it was submitted that since the amount was given for allotment of shares, it was not a transaction of money lending and in support of this, the learned counsel relied upon the judgment of the Karnataka High Court in the case of United Breweries Ltd. (supra). 21. However, that became history. When Piem decided not to issue any shares and agreed to refund the money thereupon, an arrangement was arrived at between the parties as per the said money was payable by Makan on behalf of Piem, which arrangement was accepted by the assessee discharging Piem and treating the....