2014 (4) TMI 214 - HC - Income Tax

Claim of bad debt of advances paid - Assessee contended that the amount pertains to transaction of loan in the normal course of money lending, which is one of the objects of the assessee-company as per Articles of Memorandum of Association Held that - If object clause is already in existence well and good, but even in the absence of such object clause, it is possible for one corporate company to lend money to another corporate company for various reasons - What actually forms basis to allow the benefit of claim as bad debt would be whether a particular transaction was in the ordinary course of business with an intention to lend money or something else - Unless factual material is looked into, one cannot straightaway come to conclusion that a particular transaction is either money lending activity or not - there has to be fresh consideration of the matter, so far as lending of ₹ 30 lakhs and also the interest accrued with reference to whether it was disclosed in the earlier assessment years or not as interest due the order of the Tribunal is set aside and the matter us remitted back to the AO for fresh adjudication as to the amount claimed as bad debt Decided in favour of Assessee.

Summary

Issues:
1. Disallowance of claim for Bad Debts amounting to Rs.30 lakhs.
2. Justification of the decision that the inter-corporate deposit made by the Appellant is not money lent in the normal course of business.

Analysis:
1. The appellant- assessee claimed a bad debt of advance of Rs. 30 lakhs to another Public Company, M/s. Peermade Tea Company Limited during the financial year 1996-97. The assessing officer opined that since the appellant was mainly dealing in shares and not in the business of banking or money lending, the loan advanced could not be considered as lent in the ordinary course of business. The claim for bad debt and interest provision was rejected due to lack of documentary evidence.

2. The first Appellate Authority upheld the assessing officer's decision, which was further challenged before the Tribunal. The Tribunal noted that the appellant did not provide material to show that the amount was advanced in the regular course of money lending business. The Tribunal emphasized that the intention of the parties entering the transaction determines its nature. Since no evidence was presented to prove the amount was advanced with the intention of lending money in the ordinary course of business, the claim was rejected under Section 36(1)(vii) of the Act.

3. The Tribunal also rejected the bad debt claim of the interest amount, but upon reviewing the account copies of interest received for previous years, it directed the matter to be re-examined by the Assessing Officer. The appellant argued that the object clause in the Memorandum of Association should not be the sole criterion to determine if the transaction was in the ordinary course of business. The Court agreed, emphasizing the need for fresh consideration of the lending of Rs. 30 lakhs and the accrued interest to ascertain if it was disclosed in earlier assessment years.

4. The Court allowed the appeal, setting aside the Tribunal's order and directing the Assessing Officer to re-examine the matter, giving the appellant an opportunity to present any existing material or furnish additional information. The judgment favored the appellant-assessee, emphasizing the importance of factual analysis in determining whether a transaction qualifies as a money-lending activity in the ordinary course of business.