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TMI Blog2008 (1) TMI 522X X X X Extracts X X X X X X X X Extracts X X X X ..... r under section 143(3) read with section 147 passed by the Assessing Officer on 15-12-2004 are erroneous and prejudicial to the interest of the revenue. 3. In the facts and circumstances of the case as well as in law, the Ld. Commissioner of Income-tax-II, Ahmedabad grossly erred in holding that the Assessing Officer while passing the order under section 143(3) read with section 147 did not properly examine the issue whether the claim for bad debt of Rs. 34.90 crore was admissible or not, whereas in point of facts, the Assessing Officer had examined the issue of admissibility of deduction of the claim for bad debt in depth and the assessment order under section 143(3) read with section 147 was passed with the approval of the Addl. CIT, Range-4, Ahmedabad. 4. In the facts and circumstances of the case as well as in law, the Ld. Commissioner of Income-tax-IT, Ahmedabad grossly erred in holding that the appellant's claim for deduction of bad debt of Rs. 34.90 crore is not admissible disregarding the fact that the appellant company has fulfilled all the conditions as per the provisions of section 36(1)(vii) read with section 36(2) of the Income-tax Act. 2. The brief facts of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts is erroneous in so far as it is prejudicial to the interest of revenue on the basis of reasons given in the show-cause notice. The relevant show-cause notice of the CIT-II, Ahmedabad reads as under:- "The assessment under section 143(3) read with section 147 in your case was completed on 16-12-2004 at an income of Rs. 9,61,650. The Assessing Officer had accepted your claim for bad debt amounting to Rs. 34.90 crores after considering your explanation and the details filed. From a perusal of your record, it appears that the acceptance of your claim of bad debt is erroneous in so far as it is prejudicial to the interest of revenue. It is clear from the record that you have not been engaged in the business of banking or money lending. Even the resolution regarding carrying out of financing and investment business was passed in the meeting of the Board of Directors held on 20-02-1996. On the contrary, a change in the memorandum of association can be effected only in accordance with sections 16, 17, 17A, 18 and 19 of the Companies Act. In your case, the aforesaid provisions of the Companies Act had not been complied with. Further, most of the advances made to the party, M/s. Rajbal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... over a period of time. The company has also earned income over a period of time. Further, please note that as the loan. was given to M/s. Rajbal Finance (P.) Ltd. in the ordinary course of money lending, it is not necessary that income has to be accounted for against the said advance. In view of this, the same is duly allowable under section 36(2) which clearly states that money when advanced represents money lent in the ordinary course of business, the same is allowable. Further, it is on account of advances, on account of ordinary course of business and hence the said loss incidental to the business activities of the company and hence duly allowable under section 28. Reliance is placed on the decision of Gujarat High Court in the case of Abdul Razak Co. 136 ITR 823 and Equitorial (P) Ltd. [1994] Taxation 37(3) - 82." The CIT considered the claim of the assessee and observed that as per the Memorandum of Association and the Articles of Association of the company dated 17-10-1979, which is available on record it can be seen that the Main Object of the assessee was never to act as investment company, much less to carry out the business of money lending. It seems that the Assessi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7A, 18 and 19 of the Companies Act, which is applicable in case of any company registered under the Companies Act. The assessee's contention that the provisions are not applicable in the case of a private limited company is incorrect and misleading. 19.2 Section 17 of the Companies Act provides that any alteration in Memorandum can be made for the purposes specified therein, only by special resolution passed by its members and after confirmation by Company Law Board. Section 18 of the Companies Act provides that the company should file the copy of the Special Resolution passed by its members authorizing the alterations in the Memorandum within one month from the date of such resolution. Section 19 of the Companies Act stipulates that no alterations referred in section 17 shall have any effect until it is duly registered in accordance with the provisions of section 18 of the Companies Act. 19.3 From the perusal of records in the instant case it can be seen that nothing is on record which suggests that the assessee company has altered its Memorandum by special Resolution, after approval of Company Law Board, and has registered the same with the Registrar of Companies. The above r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... debts which is section 36(2). When the claim is not allowable under the Act under a specific section dealing with that item claim, then the general provisions will not be applicable and the same cannot be allowed under any other section of the Act. Reliance in this respect is placed on the judgement of the Hon'ble Bombay ITAT in the case of Shri Harshad J. Chokshi v. ACIT 52 ITD 511 (Bom.), whereby similar arguments of the assessee were rejected. In view of this, the assessee's second contention of the claim of business loss under section 28 of the Income-tax Act is also not acceptable/allowable." And in view of this, finally, he held the order passed by the Assessing Officer under section 143(3) read with section 147 dated 16-12-2004 as erroneous and prejudicial to the interest of revenue vide para-23 of his order which reads as under:- "23. The order under section 143(3) read with section 147 dated 16-12-2004 passed in the case of the assessee did not consider the above factual position as well as the legal provisions of section 36(1)(vii) and section 36(2) of the Income-tax Act, 1961. The Assessing Officer has also failed to consider the fact that the assessee-company has fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... letter dated 7-12-2004 where the details are given and the details from that letter read as under:- "As regards advances given to Rajbal Finance (P.) Ltd., and written off during the year, we would like to state that the company has started giving loans to the above company since 1992-93. We arc submitting herewith detailed transactions of loans given and income earned thereof right from the inspection of the transaction with the said company as per Annexure-I, which please find in order. Further, please note that since 2-3 years, the financial position of the company was not so good and hence it has neither given any consideration against loans received nor has it paid any consideration for loans given. As can be found from the attached statement, the company has earned income of Rs. 3,87,83,991 on loans given to the said company from time to time." And this letter was written in response to the show-cause letter dated 6-12-2004 issued by the Deputy CIT, Circle-4, Ahmedabad and the relevant context of the letter under para-2 reads as under:- "2. In your letter dated 19-10-2004 you have stated that the company, over a period advanced Rs. 59.25 Crores to Rajbal Financial (P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r at the time of framing of the original assessment and the Assessing Officer after applying mind and appreciating the facts has allowed the claim of the assessee in regard to bad debts. He argued that as per the Resolution dated 20-2-1996 it was resolved to carry out the business of financing and investments and he referred to the Resolution which is given at assessee's paper book at page-96 and the relevant context of the Resolution reads as under:- "Certified true copy of resolution passed at the meeting of the board of directors of the company held on 20th February, 1996 Resolved that the company do carry out the business of financing and investments and thereby trading in quoted shares/stock/debentures/securities and other financial activities." The learned counsel of the assessee further argued that as per Incidental or Ancillary Objects to the attainment of the above main Objects are very much available regarding the investments and lending, investing or otherwise employing or dealing with money belonging to or entrusted to the Company. The Incidental Clauses 9 and 18 are given in the Memorandum of Association of the Company. The rele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s an erroneous order prejudicial to the interests of the revenue unless the view taken by the ITO is unsustainable in law." In view of these facts he argued that the Assessing Officer has allowed the deduction to the assessee after examining the claim of the assessee along with the relevant provisions of the Act including the conditions laid down under section 36(2) read with section 36(1)(vii) of the Act duly complied with by the assessee and specific finding in this regard was given in the assessment order passed under section 143(3) read with section 147 of the Act. Apart from this the learned counsel of the assessee relied on the latest decision of the Hon'ble Supreme Court in the case of CIT v. Max India Ltd [2007] 295 ITR 282, the copy of which is placed on record, wherein the Hon'ble Apex Court has held that wherever two views are possible, the CIT cannot exercise powers under section 263. The Hon'ble Supreme Court has held as under:- "At this stage we may clarify that under para 10 of the judgment in the case of Malabar Industrial Company Limited this Court has taken the view that the phrase 'prejudicial to the interest of the revenue' under section 263 has to be read ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciation of the assessee-company the Main Object to be pursued is not as regards to lending of money and only ancillary and incidental object is to carry out the business of lending and investing money belonging to or entrusted to the Company. Even as per the provisions of sections 16, 17, 17A, 18 and 19 there is a procedure for alteration of the Main Objects and the assessee-company has not followed the said procedure as prescribed in the provisions of the Companies Act and they have merely relied on the Resolution passed in the meeting of the Board of Directors of the Company held on 20-2-1996. He argued that this Resolution is in violation of the main provisions of the Companies Act, i.e., sections 16, 17, 17A, 18 and 19. He further argued that from the bare reading of the assessment order it can easily be inferred that the Assessing Officer has not gone into the details filed by the assessee at the stage of assessment and once the Assessing Officer has not gone into the details, the CIT(A) can rightly initiate proceedings for revision of the assessment under section 263 of the Act. He has drawn our attention to the assessment order where the Assessing Officer has summarily decid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He cannot remain passive in the face of a return which is apparently in order but calls for further inquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry. It is because it is incumbent on the ITO to further investigate the facts stated in the return when circumstances would make such an inquiry prudent that the word "erroneous" in section 263 include the failure to make such an enquiry. The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct. In this case the facts are that the Assessing Officer has not carried out the relevant inquiry but in the present case before us the Assessing Officer passed the assessment order after considering the submissions and details and after making thorough inquiry. In the case of Rampyari Devi Saraogi v. CIT [1968] 67 ITR 84 the Hon'ble Apex Court has held that all the additional material was supporting material and did not constitute the basic grounds on which the order under section 33B was passed, and even if the facts which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... solution of the Company passed as on 20-2-1996. Even the Assessing Officer has considered the Resolution of Board of Directors of the Company for writing off of bad debts dated 15-3-1999. As per the show-cause notice the allegation of the CIT is that the assessee is not engaged in the business of banking or money-lending and moreover the change in the Memorandum of Association has been effected by the Resolution of Board of Directors dated 20-2-1996 in violation of the provisions of sections 16, 17, 17A, 18 and 19 of the Companies Act. It is the allegation of the CIT that the provisions of sections 36(1)(vii) and 36(2) of the Act are not satisfied and no details or supporting documents were filed before the Assessing Officer to prove that the debt has become bad and irrecoverable. Accordingly, the CIT issued the show-cause notice under the provisions of section 263 of the Act for giving an opportunity to the assessee as regards to claim of bad debts but the CIT finally revised the assessment under section 263 by holding that the order passed by the Assessing Officer allowing the claim of bad debts is erroneous in so far as it is prejudicial to the interest of the revenue. 8. Now ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies and the relevant Resolution is reproduced in para-5 at page-9 of this order hereinabove. These facts were disclosed to the Assessing Officer at the time of assessment and vide letter dated 17-12-2004 the assessee-company to the Assessing Officer has written that the advances given to Rajbal Finance (P.) Ltd., was for the purpose of the business of giving loans and the assessee has also earned the income on these loans given to the said company from time to time. The relevant context of the letter is reproduced in para-5 at page-8 of this order hereinabove. 10. In view of these facts, whether the Assessing Officer's order is erroneous or prejudicial to the interest of the revenue particularly when he has discussed all these facts and after considering all these facts and documents, he has allowed the claim of the assessee. The Assessing Officer has taken one view which is a possible view, whereas the CIT has taken view that the Assessing Officer has failed to consider the provisions of section 36(1)(vii) and section 36(2) of the Act and also failed to comply with the provisions of the Companies Act, i.e., sections 16, 17, 17A, 18 and 19. On the other hand, after going through ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Companies Act. The assessee has carried on business of finance, which is duly covered by the Memorandum of Association. No change under the Memorandum of Association is required if the company carries on ancillary and other objects. Memorandum of Association lays down the various objects for which the company is incorporated. Which of the objects out of the various objects laid down in the Memorandum of Association should be carried out is the prerogative of the Board of Directors. When a company wants to carryon a new business as stipulated in the Memorandum of Association, no question of any alteration in the Memorandum of Association arises. 12. Clause 17 on page 4 of the Memorandum of Association authorizes the company to carryon the business of financiers which is given hereunder:- "17. To lend money and other property, to guarantee the performance of contracts and obligations of all kinds, to act as agents in the management, sale and purchase and generally to transact business as capitalists and financiers." It can be clearly seen from the above clause that the business of financing has been included in the Memorandum of Association of the company and there is no s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee referred to the case law in the case of CIT v. City Motor Service Ltd. [1966] 61 ITR 418, wherein the Hon'ble Madras High Court has observed that in order that a debt may be allowable as a bad debt under section 10(2)(xi) of the Income-tax Act, 1922, it is not sufficient that the debt was advanced in the course of business. The debt should further be of a revenue nature, i.e., it should be such that, if it was recovered, it would have gone to swell the profits. The assessee-firm had advanced certain loans to a limited company. The loans were held in previous assessments to have been made in the course of business and the interest thereon was assessed to income-tax. An amount of Rs. 56,300 was found due to the assessee on 1-4-1956, and as the company was not able to pay, a sum of Rs. 55,040, which remained irrecoverable, was written off by the assessee on 31-3-1957, and the assessee claimed it as a bad debt in the assessment year 1957-58. The department contended that even assuming that the loans were advanced in the course of business, the nature of the debt was not such that it would have gone to swell the profits of the assessee, if recovered and, therefore, it was no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deal with the alteration of the clauses in the Memorandum of Association. Sections 17 17A of the Companies Act deal with the procedure for the alteration of the Memorandum of Association. Section 18 of the Companies Act deals with the alteration relating to the registered office of the company. Section 19 of the Companies Act states that no alteration under section 17 can be carried out until it is duly registered with the Registrar of Companies. Therefore, the provisions of sections 16, 17, 17A, 18 and 19 of the Companies Act were not applicable in the case of the assessee. The CIT has incorrectly applied the aforesaid provisions of the Companies Act to the case of the assessee for revising the assessment order. 14. Even if any irregularity or illegality has been committed under the Companies Act (although no such default was committed by the assessee), it will not affect the chargeability and the computation of income under the Income-tax Act. The income has to be computed even from such activities under the head "Income from business" and all the provisions relating to the deduction of the expenditure as applicable for computing income under the head "business" will be duly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company is an investment company. For this purpose of its business, the company has taken huge loans, both secured and unsecured. Correspondingly, the company has also advanced huge amount of loans to various parties. There can be no denying of the fact that the company has been engaged in the business of investment and financing in its ordinary course of business are interrelated and hence incidental to the attainment of the main objects of the company's formation. In view of these facts, we arc of the considered opinion that on merits the bad debts are allowable and the Assessing Officer has rightly allowed the bad debts while framing the assessment under section 143(3) read with section 147 of the Act. Accordingly, the order passed by the Assessing Officer is neither erroneous nor prejudicial to the interests of revenue. Even on jurisdictional issue, the Assessing Officer while framing the assessment has gone into the issue of allowance of bad debts and the assessee has furnished complete details of the bad debts written off, justification for writing off and the Assessing Officer after satisfying the provisions of section 36(1)(vii) and 36(2) allowed the claim of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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