1993 (11) TMI 106 - AT - Income Tax

Summary

Issues Involved:
1. Delay in filing appeals.
2. Nature of guaranteed sums received under the DICGC scheme.
3. Taxability of guaranteed sums.
4. Appropriation of guaranteed sums towards principal and interest.
5. Deduction under section 36(1)(vii) read with section 36(2) of the I.T. Act.

Detailed Analysis:

1. Delay in Filing Appeals:
The short delay of 16 days in the filing of the appeals is condoned after hearing both the sides.

2. Nature of Guaranteed Sums Received under the DICGC Scheme:
The assessee-corporation participated in the 'Small Loans (Small Scale Industries) Guarantee Scheme, 1981' by DICGC, which provided guarantees for loans given to small-scale industries. The guaranteed sums were received by the assessee from DICGC for loans that had become bad or doubtful of recovery. The Commissioner of Income-tax (CIT) viewed these sums as insurance money received against loss of stock-in-trade, thus considering them as revenue receipts taxable as such.

3. Taxability of Guaranteed Sums:
The CIT held that the guaranteed sums received by the assessee from DICGC were on revenue account and should have been credited to the Profit & Loss A/c. of the assessee and brought to charge. The Assessing Officer had omitted to do so, leading the CIT to revise and enhance the assessments. The assessee argued that these sums were on capital account and not on revenue account. The Tribunal, however, decided that the guaranteed sums were akin to a bank guarantee and were payments towards the "amount in default," which included both principal and interest.

4. Appropriation of Guaranteed Sums Towards Principal and Interest:
The Tribunal held that the guaranteed sums should first be appropriated towards the principal component of the amount in default and the excess, if any, towards the interest and other charges component. This appropriation is in line with the principle that in cases where the recovery of the principal itself is in jeopardy, the taxpayer is entitled to appropriate payments in a manner least disadvantageous to himself.

5. Deduction Under Section 36(1)(vii) Read with Section 36(2) of the I.T. Act:
The Tribunal rejected the assessee's argument that if the guaranteed sums were treated as revenue receipts, the assessee should be allowed a deduction for bad and doubtful debts under section 36(1)(vii) read with section 36(2) of the Act. The Tribunal clarified that the part of the guaranteed sums appropriated towards the principal cannot be treated as the assessee's income and, consequently, no deduction can be claimed for these amounts even when written off later with the approval of DICGC. However, the interest and other charges component of the guaranteed sum, if any, will be brought to tax on receipt basis.

Summary:
- The guaranteed sums received by the assessee from DICGC cannot in their entirety be treated as its income.
- The assessee is entitled to appropriate the guaranteed sums first towards the principal, and the sums appropriated towards the principal are not taxable as income.
- There is no question of treating the sums appropriated towards the principal as bad or doubtful debts for purposes of section 36(1)(vii) read with section 36(2) even when written off later.
- The interest and other charges component of the guaranteed sum, if any, will be brought to tax on receipt basis.

Conclusion:
The impugned order in revision by the CIT is canceled, and the Assessing Officer is directed to decide the issue in accordance with the Tribunal's findings. The assessee's appeals are partly allowed.