2004 (3) TMI 343 - AT - Income Tax

Summary

Issues Involved:
Disallowance of the claim of bad debts amounting to Rs. 130 lakhs.

Issue-wise Detailed Analysis:

1. Factual Background:
The assessee, an investment company, had 51.72% shares held by Eicher Tractors Limited (ETL) during the assessment year 1995-96. The company filed its return declaring a net loss, including a bad debt write-off of Rs. 130 lakhs. The Assessing Officer disallowed this claim, citing non-fulfillment of conditions under section 36(2) of the Income-tax Act, 1961. The matter was remanded back by the High Court to the Assessing Officer for reconsideration, who again disallowed the claim, upheld by CIT(A).

2. Events Leading to Dispute:
ETL took over Toto Bubbles India Ltd. (TBIL) in 1991, which was a sick industrial company. ETL prepared a rehabilitation scheme and advanced unsecured loans to TBIL. TBIL took a loan of Rs. 130 lakhs from Basu Associates, which was guaranteed by the assessee. BIFR recommended winding up TBIL, and Basu Associates invoked the guarantee. The assessee paid Rs. 130 lakhs to Basu Associates and wrote off this amount as a bad debt.

3. Assessing Officer's Grounds for Disallowance:
The Assessing Officer disallowed the claim on the grounds that:
- The amount was never taken into account in computing the income of the assessee.
- The guarantee was not part of the business activity of the assessee as no commission was charged.
- The assessee was merely a shareholder in TBIL, and the guarantee was not incidental to its business.

4. CIT(A)'s Findings:
CIT(A) upheld the disallowance, noting:
- The guarantee was given after the loan was placed with TBIL.
- The assessee did not charge any guarantee commission.
- The transaction was not a business transaction but a sham arrangement between group companies.
- The debt had not become bad within the relevant financial year.

5. Assessee's Arguments:
The assessee argued that:
- The deduction should be allowed either as a bad debt or as a business loss.
- The guarantee was part of its business activities to protect its investment in TBIL.
- The loss was incidental to its business of providing guarantees.

6. Department's Arguments:
The Department contended:
- The guarantee transaction was not genuine and was not in the ordinary course of business.
- The guarantee was given voluntarily without legal or contractual obligation.
- The debt had not become bad within the relevant financial year.

7. Tribunal's Analysis:
The Tribunal concluded that:
- The guarantee was not given in the course of business and was not incidental to the business of the assessee.
- The debt was not taken into account in computing the income of the assessee.
- The guarantee transaction was executed much after the loan was advanced and without any consideration.
- The statutory conditions under section 36(1)(vii) read with section 36(2) were not satisfied.

8. Judicial Precedents:
The Tribunal referred to several judicial decisions, including:
- T.N. Krishnaswami's Case: Held that a guarantor cannot claim the amount paid under the terms of the guarantee as a bad debt or business loss unless the guarantee is given as part of or incidental to the business.
- Birla Bros. (P.) Ltd.'s Case: Emphasized that a guarantee given without legal obligation or as part of business cannot be claimed as a deduction.

9. Distinguishing Assessee's Cited Cases:
The Tribunal distinguished the cases cited by the assessee, noting that:
- In Williamson Magor & Co. Ltd.'s Case, the guarantee was furnished during the course of business.
- In Gillanders Arbuthnot & Co. Ltd.'s Case, the loans were advanced as an integral part of business activity.
- In Amalgamations (P.) Ltd.'s Case, the business of the assessee included furnishing guarantees.
- In K.M. Mody's Case, the guarantee was given in the course of business.
- In T.J. Lalvani's Case, the financing was part of the assessee's business.

Conclusion:
The Tribunal upheld the disallowance of the bad debt claim, concluding that the guarantee transaction was not part of the normal business activity of the assessee and did not satisfy the statutory conditions for deduction under section 36(1)(vii) read with section 36(2). The appeal of the assessee was dismissed.