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TMI Blog2008 (2) TMI 452X X X X Extracts X X X X X X X X Extracts X X X X ..... ry question is whether this amount was an advance or loan to Strong, and according to the Assessing Officer it was and he, therefore, held that the assessee cannot justifiably take a loan by issuing debentures carrying interest of 13 per cent and advance the same monies the very next day to another company, which is not a listed company, at 12 per cent thereby suffering a loss of 1 per cent which made no business sense. He, therefore, calculated the differential rate of interest of 1 per cent for the period3-12-1998to31-3-1999at Rs. 3,26,027 and disallowed the said amount out of the interest claimed as a deduction. 3. It was represented by the assessee before the Assessing Officer that the amount of Rs. 10 crores was advanced to strong not as a loan or advance carrying interest, that it was invested in Strong as application monies for allotment of shares in Strong with the understanding that if shares are ultimately not allotted the amount should be returned with interest at the rate of 12 per cent, that for some reason the shares could not be allotted and the amount came to be returned, that since it was part of the business of the assessee to buy and sell shares and securities t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xtraneous considerations. It was submitted that in the present case, all the three conditions were present in the sense that the assessee had borrowed monies by issue of debentures to Apollo, that the borrowings were for the purpose of the assessee's business in purchase and sale of shares which is indicated by the fact that on the very next day after the date of borrowing the monies were advanced to Strong as share application monies and interest of 13 per cent had been paid to Apollo on the debentures and, therefore, there was no factual or legal justification for disallowing any part of the interest. In addition to the evidence adduced before the Assessing Officer vide letter dated 20-2-2002, our attention was also drawn to another letter dated 15-3-2002 written to he Assessing Officer in which in paragraph 5, the assessee had stated that the application monies were given to Strong for purchase of non-cumulative redeemable preferential shares of the face value of Rs. 10 at a premium of Rs. 490 "with a condition that the application money paid will bear interest at 12 per cent till such time as the shares are allotted". Our attention was also drawn to page 62 of the paper book wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing to Rs. 10 crores. The photocopy of the ledger account of Union Bank ofIndiain the assessee's books was also filed along with the letter and the entry made therein has already been extracted earlier. The entry constitutes contemporaneous evidence of the fact that the amount of Rs. 10 crores was invested in Strong as share application monies for purchase of 12 per cent non-cumulative redeemable preference shares. In the light of the contemporaneous entry made in the books of account maintained by the assessee in the regular course, which have not been rejected by the Assessing Officer, it is not possible to hold that the advancement of the monies to Strong was not for the purpose of assessee's business. The letter dated 15-3-2002 written by the assessee to the Assessing Officer shows that there was a condition that if the shares were not allotted, the monies will be returned by Strong together with interest at 12 per cent. The Assessing Officer has not questioned this statement of the assessee made in writing. In fact, it does appears to us reasonable to infer that since the shares were to be issued with a dividend rate of 12 per cent as shown by the entry in the assessee's books ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loss account which has been added back in the computation of income." The Assessing Officer refused to accept that the assessee was following the NBFC guidelines as the assessee did not disclose the provision for bad and doubtful debts distinctly in the annual accounts. He also held that in any case, the provision of the Income-tax Act will take precedence over the NBFC guidelines. He further held that there was no documentary evidence, except the assessee's statement that legal action is contemplated against the lessee, to substantiate the claim that the lease rent could not be recovered from the lessee. The Assessing Officer also held that there was no debt at all in the first place which could be written off because the assessee had not provided for the lease income in the books of account and, therefore, there was nothing that could be written off. In addition, he also held that the assessee is closely associated with the Apollo group of concerns and that the office of the lessee is located on the 15th floor of the same building in which the assessee's office is situated at the 12th floor. According to him, there was close connection with the lesser and the lessee. For all th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court, following the judgment of the Gujarat High Court in CIT v. Girish Bhagwatparsad [2002] 256 ITR 772, held that a conjoint reading of section 36(1)(vii) and section 36(2) would make it clear that the assessee would be entitled to a deduction of the amount of bad debt which has been written off as irrecoverable in its accounts and that any lingering doubt would vanish on a careful reading of Circular No. 551, dated 23-1-1990 (183 ITR Statute 7). The circular has been reproduced in the judgment. The circular explains the amendment made to the section with effect from1-4-1989. Thereafter the judgment of the Gujarat High Court has been referred to and their Lordships have agreed with the view taken in the Gujarat High Court that after 1-4-1989, all that the assessees had to show was that the bad debts were written off in the accounts as irrecoverable and there is no further requirement that the assessee should establish that the debt became bad during the relevant accounting year, as was the position before the amendment. Their Lordships have also referred to a latter decision of the Gujarat High Court in Dy. CIT v. Patidar Ginni & Pressing Co. [1999] 157 CTR 177 wherein also a si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edited with the lease rent, the corresponding debit goes to "lease rent recoverable account" which will show a debit balance and thus a debt in favour of the assessee. The Explanation below section 36(1)(vii) inserted by Finance Act, 2001 with retrospective effect from 1-4-1989 requires that the bad debt or part thereof should be written off as irrecoverable in the accounts of the assessee and that a mere provision for bad and doubtful debts made in the accounts without actually writing off the debt, would not meet the requirement of write off. The Explanation thus does not require that the debt should be written off in the profit & loss account of the assessee. So long as the debt account is written off and it does not show any closing balance as on the last date of the accounting year, it should, in our humble opinion, be taken as proper write off within the meaning of the said Explanation. This requirement has been satisfied in the present case as we have attempted to show by reference to the accounting entries. We are, therefore, unable to accept the contention of the learned Senior DR that the assessee has not written off the debt in the profit & loss account and, therefore, t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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