2007 (6) TMI 238 - AT - Income Tax

Disallowance on claim of bad debt/business loss - Guarantee to debts borrowed by its subsidiary companies - claimed guarantee money as loss - Non-banking finance company (NBFC) - engaged in providing funds and non-fund based financial services - Onus to prove - HELD THAT - We find that the assessee has 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 by doing non-banking financial business. Huge amounts earned on account of interest was offered for taxation and the same has taxed in earlier year as well as in the year under consideration also. We have seen the objects clauses of the assessee-company and found that there are clauses of objects to run the business of non-banking finance business and to advance money as inter-corporate deposits and also business of leasing business. In the case of SREI International Finance Ltd. 2006 (9) TMI 302 - ITAT DELHI , has held there was no qualification in section 36(2) that the business of money lending should be understood only in a traditional sense. The business of a NBFC apart from leasing definitely involves lending of money. Similarly, the guarantee stood by the assessee has to be taken as activities of money lending. On the amount of guarantee, the assessee earned interest from bank as well as from Fairmark. The business of Fairmark was abandoned in the year 1996 and whatever the amount due from Fairmark either on account of advances given by Citibank guaranteed by the assessee or some other amount recoverable from Fairmark was treated as the amount recoverable from Fairmark in the year ending on 31-1-1997 and when it is noticed that the same was not recoverable, were claimed as bad debts in the year ending on 31-3-1998. All the conditions provided u/s 36(1)(vii) r/w section 36(2) are satisfied in the present case because the interest earned on account of guarantee stood by the assessee was offered for taxation in earlier years as well as in the year under consideration and the same has been taxed also. Therefore, the claim of the assessee is allowable as bad debts. Advance given to Makan - allotment of preference shares - Inter-corporate deposit Or share application money - No doubt, the amount was given for allotment of preference shares in assessment year 1997-98. However, Piem refused to allot the same. Therefore, the assessee asked to refund the amount with interest. Piem accepted this request of the assessee and therefore, in these circumstances, Makan was instructed to pay on behalf of Piem to the assessee. The assessee had shown this amount as on 31-3-1998 as inter-corporate deposit with Makan and interest has also shown. The same has taxed also for the year under consideration. Therefore, it cannot be said that the amount has no character of inter-corporate deposit but the character of share application money. The share application money was shown by the assessee as on31-3-1997 and in July 1997 when Piem refused to allot shares, the same was converted into inter-corporate deposit. Inter-corporate deposit is nothing but the deposit on which the assessee was to receive interest. Therefore, we are of the considered view that since the assessee was doing non-banking finance business, therefore, inter-corporate deposits are also to be treated as deposits for the purpose of earning interest which is equal to money-lending business. Once it is seen that the inter-corporate deposits is for earning interest then the same has to be treated advancing under money-lending activities. Accordingly, the conditions of section 36(2) are satisfied here also. Fixed deposit with Citibank - guarantee money as loss - The assessee has given guarantee amount to Citibank on behalf of the Piem on which the assessee earned interest. In the case of Birla Bros (P.) Ltd. 1970 (4) TMI 20 - SUPREME COURT , no interest was given and the Tribunal has given a finding that guarantee was for some selling agent. The observations of the Supreme Court, in our considered view are in support of the case of the assessee. In the present case, the guarantee was given to safeguard the business interest of the assessee because the business with Fairmark was joint venture and the assessee was interested in that joint venture. Therefore, the amount guaranteed by the assessee has to be treated as business debt. On this amount, as discussed above, the assessee has earned interest also from bank as well as Fairmark. Therefore, it cannot be said that in any way the amount of outstanding against Fairmark was not business debt. Assessee's one of the objects is of money-lending business and this is an undisputed fact that the assessee was doing non-banking finance business. Therefore, the ratio of the decision of the Supreme Court is not against assessee but supports the case of the assessee. Thus, the assessee on behalf of its joint venture Fairmark stood the guarantee and when Fairmark failed to discharge its onus then only the assessee has claimed the guarantee money as loss. Therefore, we hold that the assessee's claim of bad debt is allowable. However, we noted that in the case of Fairmark, the assessee claimed a sum as their share of Fairmark on 31-1-1997 included in the amount of total bad debts which is not clear that whether the amount have been offered for taxation as profit in assessment year 1997-98 or not - It has been shown in the profit of assessment year 1997-98 then the assessee is entitled for deduction of this amount also. Otherwise, to this extent the amount cannot be allowed as bad debt because the conditions of section 36(2) that the amount should be taken into profit loss account is not satisfied. If it is found that this amount is not offered for taxation then to this extent the claim of the assessee cannot be allowed. Therefore, to this extent, we restore the issue to the file of the Assessing Officer to examine the same and the remaining amount of Rs. 115.75 lakhs (Rs.122 lakhs - 6.25 lakhs) is allowed as bad debt. The amount of Rs. 85 lakhs on account of Piem/Makan is also allowed. Since we have held that the same is allowable as bad debt, therefore, we are not inclined to consider the alternative contentions of the assessee that the claim is allowable as business loss. In the result, the appeals filed by the assessee are allowed in part as above.

Summary

Issues Involved:
1. Disallowance of bad debt/business loss claims.
2. Reopening of assessment under section 147.
3. Disallowance of public issue expenses under section 35D.
4. Charging of interest under section 234B.
5. Write-off of unrealized interest on advances.

Detailed Analysis:

1. Disallowance of Bad Debt/Business Loss Claims:
Assessment Years 1998-99 and 1999-2000:
The main issue involved was the disallowance of bad debt/business loss claims due from M/s. Fairmark Apparels (India) Ltd. (Fairmark) and Makan Investment and Trading Co. Ltd. (Makan). The assessee claimed Rs. 122 lakhs from Fairmark and Rs. 85 lakhs from Makan for the assessment year 1998-99, and Rs. 340 lakhs for the assessment year 1999-2000.

Findings:
- The assessee, a non-banking finance company, claimed deductions for advances written off as bad debts/business losses, arguing that these were incurred in the normal course of business.
- The Assessing Officer disallowed the claims, asserting that the advances were not part of the money-lending business and that the assessee did not furnish sufficient evidence to prove the debts had become bad.
- The Commissioner of Income-tax (Appeals) upheld the disallowance, relying on various case laws that supported the non-deductibility of advances given for capital assets or not incidental to the business.

Tribunal's Decision:
- The Tribunal found that the assessee had been engaged in money-lending activities since its incorporation in 1987 and had offered interest income for taxation.
- The Tribunal held that the advances to Fairmark and Makan were part of the assessee's business activities and that the conditions of section 36(1)(vii) read with section 36(2) were satisfied.
- The Tribunal allowed the bad debt claims for Rs. 115.75 lakhs from Fairmark (excluding Rs. 6.25 lakhs which needed verification) and Rs. 85 lakhs from Makan.

2. Reopening of Assessment under Section 147:
Assessment Year 1999-2000:
The assessee raised a legal ground against the reopening of the assessment under section 147, which was not pressed during the hearing and therefore dismissed as not pressed.

3. Disallowance of Public Issue Expenses under Section 35D:
Assessment Years 1998-99 and 2003-04:
The issue involved the disallowance of public issue expenses claimed under section 35D. The Assessing Officer and the Commissioner of Income-tax (Appeals) disallowed the claim on the grounds that the assessee was not an industrial undertaking.

Tribunal's Decision:
- The Tribunal restored the issue to the file of the Assessing Officer for fresh consideration in light of the decision of the Mumbai Tribunal in the case of HSBC Securities India Holding Ltd.

4. Charging of Interest under Section 234B:
Assessment Years 1998-99 and 1999-2000:
The assessee contested the charging of interest under section 234B, which was deemed consequential in nature.

Tribunal's Decision:
- The Tribunal directed the Assessing Officer to allow consequential relief, if any, to the assessee.

5. Write-off of Unrealized Interest on Advances:
Assessment Year 1999-2000:
The assessee claimed a write-off of Rs. 93,986 as unrealized interest on advances, which was disallowed by the Assessing Officer and the Commissioner of Income-tax (Appeals).

Tribunal's Decision:
- The Tribunal allowed the claim, stating that the assessee was engaged in the business of money-lending and the interest received on advances, which was not recoverable, should be allowed as bad debt. The decision was supported by the Special Bench of the Tribunal in the case of Deputy CIT v. Oman International Bank SAOG and CIT v. Morgan Securities and Credits P. Ltd.

Conclusion:
The Tribunal allowed the appeals in part, granting the claims for bad debts and directing the Assessing Officer to reconsider the public issue expenses under section 35D and to provide consequential relief for interest under section 234B. The disallowance of Rs. 27.89 lakhs for advances given for acquiring capital assets was confirmed.