2011 (5) TMI 567 - HC - Income Tax

Disallowance of deduction u/s 35D - Capital or revenue expenditure - Held that - As decided in Commissioner of Income Tax and Anr. Vs. United Breweries Ltd. 2010 (1) TMI 86 - KARNATAKA HIGH COURT the advances were made to business associate for issue of shares in future and this expenditure incurred for securing shares was treated per se a capital expenditure and not revenue expenditure 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 money payable by Makan to assessee as inter corporate deposit - Since the matter is to be examined afresh and no prejudice is caused to the Revenue in any manner, no question of law arises - The question of law as proposed, is clearly misconceived, as the Tribunal has not given any finding holding that provisions of Section 35D of the Act are applicable. Appeal is allowed by way of remand

Issues Involved:
1. Deletion of disallowance of Rs. 122.47 lacs as business loss.
2. Allowing deduction of Rs. 85 lacs as bad debt.
3. Applicability of Section 35D of the Income Tax Act regarding the expenditure incurred for issuing equity shares.

Issue-wise Detailed Analysis:

Issue 1: Deletion of Disallowance of Rs. 122.47 lacs as Business Loss

The first issue revolves around whether the Income Tax Appellate Tribunal (I.T.A.T.) was correct in deleting the disallowance of Rs. 122.47 lacs made by the Assessing Officer (AO). The amount in question was written off as a business loss by the assessee due to a fixed deposit placed with Citibank, which was appropriated by the bank against the dues of Fairmark, a company co-promoted by the assessee. The AO disallowed the deduction, arguing that the debt was not incurred in the normal course of business and did not fulfill the necessary conditions to be considered a bad debt.

The Tribunal reversed the AO's decision, stating that the assessee, a non-banking financial company (NBFC), was involved in money lending activities, including giving guarantees. The Tribunal found that the provisions of Section 36(1)(vii) read with Section 36(2) of the Income Tax Act were satisfied. The Tribunal noted that the assessee had earned interest from the fixed deposit and from Fairmark, which was offered for taxation. The Tribunal concluded that the guarantee given was a business transaction and the amount, when it became irrecoverable, qualified as a bad debt.

The High Court upheld the Tribunal's decision, emphasizing that the assessee's activities as an NBFC included money lending and that the transaction was a business transaction. The Court distinguished the present case from previous judgments cited by the Revenue, noting that the assessee's business activities involved lending money and giving guarantees, unlike the cases referenced by the Revenue.

Issue 2: Allowing Deduction of Rs. 85 lacs as Bad Debt

The second issue concerns whether the I.T.A.T. was correct in allowing the deduction of Rs. 85 lacs claimed by the assessee as a bad debt. The assessee had deposited Rs. 500 lacs for allotment of preference shares of Piem Hotels Ltd., which were not allotted. Piem instructed Makan Investment and Trading Co. Ltd. to repay the amount to the assessee. After receiving partial payment, Makan requested the assessee not to deposit the remaining cheques, leading to a mutual agreement where the assessee agreed to forego Rs. 85 lacs.

The AO refused to treat the amount as a bad debt, arguing that the assessee was not in the business of money lending and that the principal debtor was still Piem. The CIT (A) affirmed this view. However, the Tribunal allowed the claim, stating that the transaction was an inter-corporate deposit for earning interest, which fell under the assessee's non-banking finance business activities. The Tribunal held that the conditions under Section 36(2) were satisfied, and the amount, when it became irrecoverable, qualified as a bad debt.

The High Court agreed with the Tribunal's findings, noting that the assessee was engaged in non-banking finance business and the transaction with Makan was an inter-corporate deposit. The Court emphasized that the debt had become bad and qualified for deduction under Section 36(1)(vii) of the Act.

Issue 3: Applicability of Section 35D of the Income Tax Act

The third issue involves the applicability of Section 35D of the Income Tax Act concerning the expenditure incurred by the assessee for issuing equity shares in a public issue. The AO disallowed the deduction, arguing that Section 35D applies only to industrial undertakings, and the assessee did not fall under this category. The CIT (A) confirmed the AO's decision.

The Tribunal remitted the case back to the AO to decide afresh in light of a similar case decided by the Mumbai Tribunal Bench. The High Court noted that the Tribunal had not given any finding on the applicability of Section 35D but had left the matter to be examined by the AO. Therefore, no question of law arose, and the Tribunal's order did not prejudice the Revenue.

In conclusion, the High Court upheld the Tribunal's decisions on the first two issues, allowing the deductions claimed by the assessee, and found no question of law on the third issue, as it was to be re-examined by the AO.

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