9911796707
TMI Blog2010 (1) TMI 86X X X X Extracts X X X X X X X X Extracts X X X X ..... e very name suggests, had been established, incidentally also had the object of related activities as indicated in the memorandum of association of the company which read as under: The objects for which the company is established are: (a) Primarily and without prejudice to the generality of the other objects of the company, to purchase or otherwise acquire and take over as going concerns the businesses of brewers and otherwise heretofore carried on under the names of the Bangalore Brewery Company at Bangalore and elsewhere, the Rose and Crown Brewery at Kaity in the District of Nilgiris and elsewhere, the Madras B. B. B. Brewery Company Limited at Madras and elsewhere, and all or any of the assets and liabilities in connection therewith and with a view thereto to enter into and carry into effect (either with or without modification) certain articles of agreement (referred to in article VII of the additions and modifications of the company's articles of association) as being proposed to be made between John Oakshott Robinson of the one part and the company of the other part. b) To carry on the business of brewers and maltsters in all its branches. (c) To carry on all or any of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngines, machinery and other things and to erect and maintain or reconstruct and adapt buildings, mills, plant, engines, machinery and other things found necessary or convenient for the purposes of the company. (h) To enter into partnership or into any agreement for sharing profits, union of interest, co-operation, joint adventure, reciprocal concession, or otherwise, with any person or company, carrying on or engaged in, or about to carry on or engage in any business or transaction which this company is authorised to carry on, or to engage in any business or transaction, capable of being conducted so as directly or indirectly to benefit this company. (i) To purchase or otherwise acquire any patents, brevets d'invention, licences, concessions, and the like, conferring any exclusive or non-exclusive or limited right to use any invention or privilege which may seem capable of being used for any of the purposes of the company, or the acquisition of which may seem calculated, directly or indirectly, to benefit this company, and to use, exercise, develop or grant licences in respect thereof, or otherwise turn to account the property and rights so acquired. (j) To construct, improve an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res, stocks, debentures, or any other interest in any other company, whether British, Colonial, or Foreign, in which the liability of the members is limited by shares. (t) To lend money to any company; partnership, person, or association upon security to their or his undertaking, property, estate, assets and effects, or any part thereof, upon such terms as may be deemed expedient, and take such security, either in the shape of mortgages, mortgage debentures, or debentures, or in any other form. (u) To remunerate any person or company for services rendered in placing or assisting to place or guaranteeing the placing of any shares or debentures or other securities of this company or any other company promoted wholly or in part by this company. (v) To manage, improve, develop and turn to account, or otherwise deal with all or any part of the property of the company. (w) To enter into arrangements with any authorities, municipal, local, or otherwise, that many seem conducive to the company's objects, or any of them, and to obtain from any such authority, any rights, privileges, and concessions which the company may think it desirable to obtain, and to carry out, exercise and comply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contribute to the aforesaid activity. (c-9) To manufacture, buy, sell, deal in, import and export television sets of all types and descriptions and its components, all electric goods, radios, radiograms, loudspeakers, phonograms, cassette and radio cassette players and decks, recording tapes of all kinds, compact disc and video cassette players, amplifiers, personal stereo cassette players of whatever description, dictaphones, all sorts of electric and wireless sets and equipment, radio receiving of transmitting sets of all types. (c-TO) To manufacture, install, maintain, repair, buy, setl, deal in, import and export all types of electronic articles/instruments, components, and equipment including transmitters, receivers, walkie-talkie sets, systems circuits required in military and commercial electrical and electronic industry, including heavy duty weather-proof communications, EPABX and PABX sets and systems, telecommunication and intercommunication sets and systems of all kinds and varieties, key telephone systems, automatic message recording telephone answering devices, radio frequency microphones, computer rack and panel printed circuits, microswitches and trimmers, includin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of section 37 of the Act and as to whether an expenditure of this nature qualifies for deduction. 5. One question relating to the claim towards "legal expenses" incurred for obtaining certain advice and by way of consultation and as to whether it qualifies for deduction under section 37 of the Act is a question related to the assessment year 1996-97 and the other question relating to the interest which had accrued to the assessee-company in respect of the amounts advanced to its business associates, whether could be construed as "not real income" and therefore not taxable, notwithstanding the provisions of section 5 of the Act is a question which arises for the assessment year 1997-98. 6. In respect of the questions involving these three aspects, while the adjudicating authority had answered all questions relatable to these issues against the assessee and the first appellate authority the Commissioner of Income-tax (Appeals) has affirmed this view of the adjudicating authority and all questions covering these three aspects were held against the asses see in terms of the findings recorded by the first appellate authority also, it is the second appellate authority, the I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the findings and allowed the deduction of this amount, also by reducing it from the total taxable income of the assessee for the assessment year in question. 9. The third claim for deduction which had been declined by the first two authorities and allowed by the Appellate Tribunal was a sum of Rs. 15 lakhs which had been paid by the assessee-company by way of "legal fee" to M/s. Fraser and Ross, a chartered accountant firm who incidentally also happen to be the auditors of the assessee-company and which amount had been paid to them for eliciting their opinion about the feasibility of the assessee-company taking over a foreign company, namely, M/s. National Sirghum Breweries, a company located in South Africa and being of the view that the consultation fee paid to M/s. Fraser and Ross is an expenditure incurred by way of "revenue expenditure" and not as part of "capital expenditure" as had been opined by the two lower authorities. 10. It is for answering these substantial questions which have been mentioned in paragraphs 29 to 37 of the memorandum of appeal, I. T A. No. 491 of 2001 relating to the assessment year 1996-97 this appeal had been admitted and the said questions read as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y it as bad debt and allowed it as deduction under section 36(1) (vii) when there was no proof for making such payment and there was no effort to recover the debt nor an explanation given as to supervening the impossibility on the part of the debtor to pay? 8. Whether the Tribunal was correct that once the assessee enters into an agreement to stand guarantee and in the case of default such payments made would automatically be in the course of business, even though the party is a separate legal entity carrying on a distinct business without receiving any guarantee commission nor disclosing the profit on account of standing such surety? 9. Whether the sum of Rs.15,00,000 paid to M/s. Frazer and Ross for obtaining the feasibility/viability report for purchasing National Sirghum Breweries, South Africa was a business expenditure allowable under section 37(1) of the Act as held by the Tribunal as a capital investment as held by the Assessing Officer?" 11. We may mention here itself that in so far as the substantial question No. 8 mentioned hereinabove and raised at paragraph 36 of the appeal was concerned, the Tribunal had answered this question purporting to follow the judgment of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 14. Whether the Tribunal was correct in holding that a sum of Rs.74.75 lakhs should be excluded on the principle of real income in accordance with the decision of the apex court in CIT V. Bokaro Steel Ltd. [1999] 236 ITR 315, when the interest income had accrued and reflected in the profit and loss account in the present case and the judgment was not applicable to the facts of the present case?" 13. Out of these questions, question No. 14 alone is a question raised afresh for the assessment year 1997-98 on the theory of "no real income" to the assessee though on accrual basis the income whether it has been realized or not, becomes taxable under the provisions of the Act and the question has to be independently considered and answered for this assessment year. 14. It is covering questions from 1 to 14 mentioned at paragraphs 29 to 42 of the memorandum of appeal in I. T. A. No. 492 of 2001 which are the questions relating to the two assessment years on which elaborate submissions have been made by Sri Seshachala, learned senior standing counsel for the appellant-Revenue and if not more equally as elaborate submissions are made by Sri Parthasarathi, learned counsel appearing for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve account.' Thus from the above submissions made by M/s. PUL before its Assessing Officer, it was very clear that the loss was not a revenue loss as the amounts given by the assessee-company was towards share application money and not towards trade advances as claimed by the assessee-company in its return. The copy of the said letter was made available to the authorised representative of the assessee-company to give an opportunity to make their submissions in this regard. The assessee-company vide letter dated March 11, 1999, submitted as under: 'The point to be noted here is at the time when the original advance was made, it constituted a trade advance in our books as it was part of the pharmaceutical portfolio of the U. B. group. At the same time, when the joint venture came to an end, the loss being UBL's share had to be absorbed as the new company was unable to repay, owing to the losses accumulated by it. If it is assumed that what we have incurred above is a capital loss, we submit that the same should be set off against the capital gain made by the company.' The assessee-company did not produce any evidence in support of their claim that the original advance was a trad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h clear that the assessee-company had written off the amount due from M/s. Premier Enterprises without making any efforts to collect the same. As per the said letter, M/s. Premier Enterprises have accepted a debt of Rs. 3.61 lakhs and to that extent the assessee-company's claim of bad debt warrants disallowance. As regards the process wastage/claims paid on account of defective stock, the assessee-company has not produced any documents/correspondence in this regard. Further, if the claim was relating to the assessment year 1994-95 (relevant to the previous year 1993-94) then the assessee-company should have accepted the claim of the assessee or rejected in the same assessment year. As the assessee-company is following the mercantile system of accounting, any loss pertaining to the assessment year 1994-95 cannot be allowed in this assessment year. Therefore, the loss claimed on account of wastage/defective stocks amounting to Rs. 14.87 lakhs is hereby disallowed and added to the total income/reduced from the loss returned. The total disallowance is Rs.18.48 lakhs. (iii) Debts written off in the case of M/s. U. B. Elastomers Ltd.: During the course of assessment proceedings, the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roject and the said project was to be started by M/s. U. B. Elastomers Ltd. The later company entered into collaboration with few companies abroad for importing of technology for their proposed plant. However, the project could not be implemented because of financial reasons and also because of some disagreements with the foreign collaborators. Though the agreement for the project was finally signed with some foreign collaborator in February 1989, but due to the foreign exchange crisis in 1991 and also due to the new policy of economic liberalisation and consequent reduction in the import duties in line with the international standards, made the project unviable and thus had to be given up. During the course of formulation of the project of U. B. Elastomers Ltd., the assessee-company has made some advances which have been written off during the previous year relevant to this assessment year. Any advances given to a company which is totally a different entity and which is dealing in a product which is totally different from the products dealt by the assessee-company, in that case it is very much clear that the advance given is in the nature of capital advance and not in the nature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not receive the money back fill March 31, 1996. The assessee-company is basically engaged in the manufacture and sale of beer. It wanted to venture into a new line of business of marine export. The assessee-company has claimed that they have exported the marine product for which no evidence as produced during the assessment proceedings. Therefore, I feel that these advances were made by the assessee-compariy for a totally new line of business and therefore it cannot be claimed as a bad debt of revenue nature. This was decided by the Calcutta High Court in Hasi m Industries Ltd. v. CIT [1990] 184 ITR 174. In the said case, advance made to a mill which was taken over on lease by the assessee for modernisation of mills plant became irrecoverable as the mill went into liquidation. The Calcutta High Court held that the loss was not a trading loss and hence cannot be claimed as a bad debt. I also rely on the decision of the Delhi High Court in Narang Industries Ltd. v. CIT [1967] 66 ITR 316. During the assessment proceedings, the assessce-company relied upon the decision of the Supreme Court in CIT v. Mysore Sugar C Ltd. [1962] 46 ITR 649 in support of its claim. The facts of the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Therefore, I am of the opinion that the assessee-company has not satisfactorily proved the circumstances in which the debts relating to M/s. Sunny Enterprises have become bad and irrecoverable. The burden of proof lies on the assessee-company to clearly establish and furnish all the particulars regarding the claim made in the return of income. No such particulars were filed nor any documents were produced to show that the debt has really become bad and its efforts to recover did not bear fruit. Therefore, the bad debt claim Rs. 145.79 lakhs is hereby disallowed. In this regard, I rely upon the following three decisions in support of my view (1) CIT v. Radhakishan Ramnarain [1929] AIR 1929 Nag 153; (2) CIT v. Calcutta Agency Ltd. [1951] 19 ITR 191 (SC) ; and (3) Mannalal Ratanlal v. CIT [1965] 58 ITR 84 (Cal). and in so far as for the assessment year 1997-98 relating to disallowances of the claim towards bad debts is concerned, the discussion of the adjudicating authority is to be found in paragraph 9 of the order of adjudicating authority. The first appellate authority in the following discussion affirmed this finding which reads as under "Issue No. 6: Bad debts written off, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y-lending business and therefore, this should be considered as incurred in course of money-lending business. 21. In this relevance, I requested the authorised representative to submit evidence to substantiate this claim by showing the debt as a part of business turnover in the year in which the amount was advanced, the rate of interest, if any, agreed on such loan alleged to be given during the course of money-lending business, and the interest charged accounted as part of income of the business. (The assessee was following mercantile system of accounting as the details filed for every year shows). No material or evidence was submitted in this regard. In fact, the accounts for the assessment years 1991-92 to date which I have examined does not show that the assessee accounted any amount as interest. The claim of the assessee in this regard is not substantiated and is against available facts. 21.2 Merely because the debt is irrecoverable and written off, it is not allowable as deduction under section 36(2) is clear that no deduction for bad debts or part thereof shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted the profit earning capacity of the assessee-company. Therefore, the payment made on behalf of the assessee-company is held as capital payment which cannot be allowed as a bad debt as claimed. The appellant objects to this and reiterates the contentions before the Assessing Officer. 24. In this relevance, the following aspects are to be noted: (1) Best & Crompton Engg. Ltd. is not a subsidiary of the assessee and the assessee's responsibility to discharge liabilities of that company in that company is limited by the shares held. The case, therefore, cannot even be that clearing of the debts of Best and Crompton was on account of its position as holding company, or because the adverse financial position, if at all, of B & C would have affected the financial reputation of the assessee. (2) ICRA is not the only credit rating agency available. There are a number of well known concerns who enjoy reputation in credit rating. It is not as if the assessee was under compulsion to give the credit rating work only to ICRA and be bound by its dictates that unless the assessee clear the debt of Best and Crompton Engg. Ltd., it would not give the credit rating. If only the assessee did n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en the two. The advance given to the share broker was not having revenue nature, as the assessee is not a dealer in shares. The advances given was payment towards capital payment and hence cannot be allowed under section 36 of the Income-tax Act. He disallowed the claim. 26. The appellant objects to the disallowance. It has not added anything to clarify the position. 27. It would not that the assessee has been acquiring shares only as an investor and not as a trader. It has been showing profit and gains of transaction in shares under the head 'Capital gains' and not as profit of business. 27.2 Section 56(1) require that income from dividend is to be assessed under the head 'Other sources'. Therefore, the expenditure, if any, has to fulfil the requirement of section 57 and not section 36(1)(vii) read with section 36(2) as such section 57 does not have a provision similar to section 36(1)(vii) read with section 36(2). The claim for write off of expenses connected with earning of dividend has to go through the provision of section 57(iii) which provide for deduction of any other expenditure not being in the nature of capital expenditure laid out or expended wholly and exclusively f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ese are our suppliers of capital items and the amount has remained outstanding for a long time on account of certain disputes. During the year, it was decided that the amounts are written off." No further details were furnished to the Assessing Officer who has referred to the submissions of the assessee in the assessment order. 28.2 The Assessing Officer noted that the amounts were given as advance and not trading debts and are therefore not of revenue nature. For allowance of deduction as bad debt written off the business or trading debts should spring directly from carrying on of a business or trade and should be incidental to it and cannot be just any loss sustained by the assessee even if it has some connection with the business indirectly as held by the apex court in Indian Aluminium Co. Ltd. v. CIT [1971] 79 ITR 514. As the bad debts did not go to the balance-sheet as trading debt in the business of the assessee, it can not be allowed as deduction as held by the apex court in the case of CIT v. Birla Brothers P. Ltd. [1970] 77 ITR 751. 29. The appellant objects to the disallowance of these items aggregating to Rs. 73,13,726. However, it is not in a position to throw any li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -lending business, the same should be allowed under the Income-tax Act. The Department had not brought out any reason for denying the claim of the assessee. Hence, we direct the Assessing Officer to allow the entire claim of the assessee, amounting to Rs.554 lakhs. 19. Thus, the assessee succeeds on the issue of write off bad debts." In so far as the aspect of honouring the guarantee issued by the assessee-company and as indicated above, the adjudicating authority was of the view that the assessee is not entitled to claim the amount by way of any expenditure under section 37 of the Act by indicating the reasons as under: "(a) Disallowance of expenses relating to M/s. Tamilnadu Alkaline Batteries Limited (TNABL): As per the assessee-company TNABL was engaged in manufacturing of batteries at Chennai which was owned by two subsidiaries of U. B. Ltd. namely Golden Investments Ltd. and East Coast Investments Ltd. TNABL obtained a loan of Rs.16 lakhs from Tamil Nadu Investment Corporation for which Golden Investments Ltd. and East Coast Investments Ltd. were the guarantors by virtue of the deed executed on October 10, 1985. TNABL availed of a loan from Bank of Madura Ltd. and the amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t exhausting the remedies that the guarantor has to recover the amount from the assets of the TNABL. In the light of the above discussion, I hereby disallow an amount of Rs.26,43,204.33 claimed by the assessee for discharge of guarantee obligation in respect of Tamilnadu Alkaline Batteries Ltd. (b) Disallowance of expenses relating to M/s. UNITEL Communications Ltd.: As per the details furnished by the assessee-company, M/s. UNTTEL Communications Ltd. (M/s. UCL) was a company promoted as a joint sector company in the State of Orissa for manufacture of telecom equipments. The main shareholders were three wholly owned subsidiaries of U.B. Ltd. and Orissa State Industrial Development Corporation. The said company became sick and its revival became very difficult When it approached the financial institutions for funds, the financial institutions insisted on the promoters to bring in more funds as capital for the revival of the company. It was at this juncture, that M/s. UCL approached U. B. Ltd. for guarantee to avail of some lease finance and that is how the assessee-company guaranteed to M/s. Nagarjuna Finance Ltd., Vysya Bank Leasing Ltd. and Excel Finance Ltd. during the financi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f deed executed on October 10, 1985. TNABL also availed of a loan of Rs.60.34 lakhs from Bank of Madura Ltd. for which also these two subsidiaries stood as guarantors. The two subsidiaries got amalgamated with the assessee, with effect from April 1, 1994. On default of TNABL, Bank of Madura filed a suit against the assessee-company after invoking the guarantee provisions. After negotiation, the amount was settled by the assessee which was acknowledged by the bank vide its letter dated November 8, 1994. 36. The Assessing Officer noted in this context that the liability to pay the guarantee amounts arose not because the assessee was the original guarantors but only as a result of the amalgamation. In the case of Saraswati Industrial Syndicate Ltd. v. CIT [1990] 186 ITR 278 (SC) the apex court held that the amalgamated company is not the same as the subsidiaries which had stood as guarantors and the nature of the liability in the hands of amalgamating company need not be the same in the hands of the amalgamated company. The guarantees were given by the amalgamating companies prior to amalgamation and once the default was committed by TNABL, guarantees should have been invoked on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tation of facts by the assessee, it would be seen that the assessee uses the expressions like guarantee given "by the UB group of companies", negotiation between "UB group of companies and lenders, etc." The assessee has avoided mentioning, when and against which company in the UB group the lenders invoked the guarantee obligation provisions originally. This, I consider to be deliberate to distract attention from the fact that the guarantee must have been given by Golden Investments Ltd. and East Coast Investment Ltd., or some other concern and the default by TNABL on the loan availed of in the year 1984, should have occurred long time before the previous year relevant to the assessment year 1995-96 and that the lenders could and would have invoked the guarantee provisions only before recovery became barred by limitation. The date on which the lenders invoked the guarantee provision in respect of default of loan given in the year 1984/1985 must have been years before the two companies merged with the assessee. Arguing, without conceding, that the liability on account of guarantee obligations is an allowable expenditure on the ground that the facts are similar to those of Amalgamati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt to the assessment year, nothing prevented the assessee from coming out with details and evidence in support of the same. It is the onus of the assessee to disclose the details and prove its case of deduction. The relevant materials throwing full light on the transactions have to be in the possession of the assessee as the successor to the business of the amalgamating subsidiaries. That it does not produce the details lead to the presumption under the general rules of evidence that the materials and evidence if produced would go against its contentions. 39. In view of the above discussions, I would hold that (1) The liability on account of contractual obligations arises in the year in which the liabilities are accepted, and not in the year in which the payment is effected. In the hands of the amalgamating subsidiaries, (or whichever company gave the guarantee) the liability on account of the guarantee provisions which they had undertaken to discharge, the moment the creditor invoked the guarantee provisions and its allowability or otherwise has to be considered in that previous year. Even if the expenditure is to be allowed as of revenue nature, it could be allowed only in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t UNITEL will once again approach the financial institutions for a rehabilitation loan. The financial institutions, on the other hand, insisted that the promoters should infuse more funds for the revival of the company. In the meanwhile, UNITEL required some assets and also funds for its operations. It approached UB Ltd. for a guarantee so that it can independently avail of some lease finance from various leasing companies as per details given below: Name of the leasing company Date of guarantee by UBL Nagarjuna Finance Ltd. 18-02-91 Vysya Bank Leasing Ltd. 16-01-91 Vysya Bank Leasing Ltd. 01-12-90 Vysya Bank Leasing Ltd. 15-11-90 Excel Finance Ltd. 11-03-91 Consequent to the erosion of net worth, UNITEL was declared as a sick company by the BIFR. The BIFR finally ordered in 1994, to sell assets of the company and ordered the company to be wound up. The assessee claimed deduction of Rs. 67,23,565 and Rs. 26,63,001 paid to Nagarjuna Finance Ltd., Excel Finance Ltd. and Vysya Bank Ltd. as paid in discharge of guarantee obligation during the years ended March 31, 1995, and March 31, 1996, respectively, relevant for the assessment years 1995-96 and 1996-97. 42. In the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king any gain from the venture, but with the deliberate intention of courting loss. It is possible that considerations like there being no use of such loss for the subsidiaries which had accumulated loss by that time must have weighed with the assessee to stand as guarantor instead of subsidiaries with the aim of earning toss to set off against its own income for the purpose of income-tax. Considerations of reducing profit so as to avoid the tax liability cannot be taken to be genuine business consideration." The Tribunal on this aspect of the matter, has allowed the claims of the assessee br claiming the amount as deductible expenditure under section 37 of the Act by recording as under: "AS far as guarantee obligation is concerned, this issue is fully covered by the decision of the Income-tax Appellate Tribunal rendered in the assessee's own case for the assessment year 1995-96 in I. T. A. No. 947/BNG/1998. referred to supra. Hence, we direct relief of these sums aggregating to Rs. 53.06 lakhs." purporting to follow its own view taken in respect of the very assessee for the assessment year 1995-96. 23. The third question relating to "legal expenses" is a question answered by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d advocate for the assessee submitted that as decided by the hon'ble Supreme Court in various cases, the taxability or otherwise of an income or an expenditure should be considered only from the point of view of the Income-tax Act and not on the basis of entries which the assessee had passed in the books. In Bokaro Steel Ltd. 's case [1999] 236 ITR 315 cited by the assessee, we find a direct support. The relevant paragraph as appearing in page 324 is reproduced below. 'In the present case also the entry which was initially made as interest was reversed in the next year because in fact the nature of the transaction was changed and the assessee did not receive any real income. The High Court has therefore, rightly held this entry as not reflecting the real income of the assessee and hence not exigible to income-tax,' 53. In the light of the above and relying on the decision of the hon'ble Supreme Court mentioned supra, we hold the decision in favour of the assessee and delete the addition of Rs. 74.75 lakhs and the assessee succeeds on this issue. 54. Ground No. 18 is not pressed by the assessee and hence dismissed." has allowed this claim of the assessee to permit the deletion o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifth issue relates to legal fees paid to M/s. Fraser and Ross as revenue expenditure under section 37(1) of the Act. 9. The final issue raised by the assessee is that the Commissioner of Income-tax (Appeals) should have adjudicated on the ground instead of holding that the issue has become final under section 143(1) (a) and could not be agitated in the regular assessment under section 143(3)." 27. The submission relating to the acceptance of deduction by way of "bad debts" by the Tribunal are to be found at paragraphs 10 and 11 of the order of the Tribunal which read as under: "10. The facts of the case are that the assessee UB Ltd. had an export division engaged mainly in the export of goods and articles. During the course of business the assessee gave advances to certain individuals who were operating in the coastal line of Vishakapatnam, Andhra Pradesh. The assessee had entered into an agreement with M/s. Cautam Constructions and Fisheries Limited to the effect that they would identify the boat owners and agents and recommend their names to UB and would remain as guarantor on behalf of the boat owners and agents. Out of the advances, an amount of Rs. 32.69 lakhs was written o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich was made during the course of money-lending business and which could not be recovered, is an allowable deduction under the Income-tax Act and accordingly the assessee prayed for allowing the same. 11. The next bad debt written off relates UB Elastomers Ltd. The assessee during the course of carrying on its money-lending business had advanced a sum of Rs. 264.75 lakhs to one of its group companies called M/s. UB Elastomers Ltd. The details facts of UB Elastomers had been dealt by the Income-tax Appellate Tribunal, Bangalore Bench, in the assessee's own case in I. T. A. No. 947/BNG/98 for the assessment year 1995-96 on the issue of writing off of guarantee obligation. The assessee claimed that following the decision of the Tribunal cited above, the entire claim should be allowed." 28. The submissions relating to payments towards "guarantee obligation" are to be found in paragraphs 12 and 13 of the order of the Tribunal which read as under: "12. The next item of bad debt relates to Tamilnadu Alkaline Batteries Ltd. In this case, the assessee had advanced 32.67 lakhs which could not be recovered arid a guarantee obligation of Rs. 26.43 lakhs. According to the assessee, similar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee to recover the amount and it is only when such efforts have failed and it is impossible to recover the amount that it can be claimed as irrecoverable debt and, therefore, a "bad debt" can be claimed as an amount to be written off and as a deduction in computing the profits of the year in which it is so written off ; that such is the requirement even in ms of section 36(1)(vii) of the Act which reads as under: "36.(l)(vii) Subject to the provisions of sub (2) the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year: Provided that in the case of an assessee to which clause (via) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause. Explanation.-For the purposes of this clause, any bad debt or part thereof written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee." and in the absence of any material either t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claim that it is a "written off bad debt" is something which is incomprehensible and, therefore, the order passed by the Tribunal in reversing the findings of the two lower authorities on this aspect is nothing short of perverse finding, liable to be reversed and these questions to be answered in favour of the Revenue. 35. It is also pointed out by Sri Seshachala, learned senior standing counsel appearing for the Revenue that the assessee cannot blow hot and cold and claim it as either under section 36 (1) (vii) of the Act as a bad debt written off or if it is not so possible to claim as deductible expenditure in terms of section 37 of the Act. 36. In this regard, it is submitted that what does not pass muster in terms of the statutory stipulations of section 36(1)(vii) of the Act to claim it as an irrecoverable bad debt, cannot be brought back for claiming a deduction through the back door of section 37 of the Act ; that which is not permissible directly and in fact prohibited cannot be achieved through the back door method of section 37 of the Act and it is only such expenditure which is not expressly covered or expressly excluded under any of the earlier provisions and which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d parties to the opinion expressed in a decision in one assessment year to the same opinion in a subsequent year is not because of any principle of res judicata but because of the theory of precedent or the precedential value of the earlier pronouncement. Where facts and law in a subsequent assessment year are the same no authority whether quasi-judicial or judicial can generally be permitted to take a different view. This mandate is subject only to the usual gateways of distinguishing the earlier decision or where the earlier decision is per incuriam. However, these are fetters only on a co-ordinate Bench which, failing the possibility of availing of either of these gateways may yet differ with the view expressed and refer the matter to a Bench of superior strength or in some cases to a Bench of superior jurisdiction" 40. It is submitted this proposition is well supportcd by a good number of other authorities and therefore the finding of the Tribunal that the assessee was entitled to claim deduction in respect of expenditure said to be incurred for honouring the guarantee on behalf of the subsidiary company, does not qualify for deduction under section 37 of the Act when the ques ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion of the Supreme Court in the case of State Bank of Travancore v. CIT reported in [1986] 158 ITR 102 and in particular reliance is placed on paragraph 31 which reads as under (page 152): "The concept of reality of the income and the actuality of the situation are relevant factors which go to the making up of the accrual of income but once accrual takes place and income accrues, the same cannot be defeated by any theory of real income. Reference may be made to Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC)." 44. The further submission of Sri Seshachala on this aspect is that when once the assessee has adopted the mercantile system of accounting, interest income has to be necessarily brought to tax on accrual basis and there was no escape for the assessee, but to offer the amount by way of income and even if it was not realised later to put forth claims thereafter in terms of the statutory provisions and not by excluding the amount itself from the income of the assessee for the year in question. 45. Reliance is placed on the judgment of the Supreme Court in the case of CIT v. Shiv Prakash Janak Raj and Co. P. Ltd. reported in [1996] 222 ITR 583 (SC) in support of the submission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ending beer; that in this line of business providing its product by way of credit is an inevitable course of business activity and impossibility of realizing certain advances is also a real and a concomitant incidence of such business activity and when the assessee had in fact demonstrated that all the companies in whose favour the assessee-company had advanced the amounts had become either sick or have become defunct or have gone out of existence and with there being no possibility of realizing the advances given to its business associates, irrespective of any other material or evidence being not produced by the assessee, the amount should necessarily be allowed as a "bad debt" under section 36(1)(vii) of the Act and if the Tribunal has done the very same thing, there is no need for interfering with such an order of the Tribunal to the detriment of the assessee and therefore submits the question should be answered against the Revenue and appeals should be dismissed. 48. It is submitted that the amounts written off as bad debt were all inevitably part of the business transaction and therefore the amounts did qualify for claiming deduction in terms of section 36(1) (vii) of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hi, learned counsel for the respondent for remanding the matter to the Tribunal to record a proper finding and with reasons, we find that a request of this nature can not be acceded to for the reason that a remand is not for the sake of remand but only when it is warranted and when a finding of fact is conspicuously absent notwithstanding there being supporting material or evidence to arrive at a finding on the facts, based on the evidence available on record. 53. In so far as the evidence/proof to constitute the supporting material for the claim of the assessee towards written off bad debts in terms of section 36(1) (vii) of the Act is concerned, we find that the record does not disclose any material at all to support either that the assessee had incurred a debt or that it had become irrecoverable for any reason, particularly, after the assessee had put in some efforts in this regard for recovery and had failed. 54. Except for the correspondence and letters written to the assessing authority and other subsidiary or other business associates and a letter written directly by the business associate of the company to the assessing authority, there is no other material forthcoming. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding not only obligation of debtor to pay but right of creditor to receive and enforce payment. BAD DEBT: Uncollectible account receivable, under National Bank Act, an unsecured debt on which interest or payment is past due for at least six months. A debt which is uncollectible; a permissible deduction for tax purposes in arriving at taxable income. Different tax treatment is afforded business and non-business bad debts. A business debt is defined by the Internal Revenue Code as a debt created or acquired in connection with a trade or business of the taxpayer, or a debt which becomes worthless in the taxpayers, trade or business. Loans between related parties (family members) generally are classified as non-business. A deduction is permitted if a business account receivable subsequently becomes worthless providing the income arising from the debt was previously included in income. The deduction is allowed only in the year of worthlessness. According to Chambers 21st Century Dictionary DEBT: 1. something which is owed. 2. the state of owing something in someone's debt under an obligation, not necessarily financial, to them." 57. As the phrase and word of technical and le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstitute res judicata as each assessment year is different and on this aspect, reliance placed by Sri Seshachala, learned senior standing counsel appearing for the Revenue on the decision of the Supreme Court in the case of CIT v. Birla Brothers P. Ltd. [1970] 77 ITR 751. Each and every expenditure incurred cannot be characterized as a legal obligation and a necessary expenditure incurred by the assessee when it has a remote proximity to the business necessities of the assessee and therefore while the expenditure claimed by way of discharging legal obligation cannot be allowed, we find that the judgment of this court in fact does not positively spell out the reasons but only indicates that no error was found in the order of the Tribunal. 62. In fact, the judgment of the Supreme Court in Birla Brothers P. Ltd. [1970] 77 ITR 751 was not brought to the notice of this court on the earlier occasion and therefore the judgment of this court in the case of the very assessee for the assessment year 1995-96 reported in CIT v. United Breweries Ltd. [2007] 292 ITR 188 (Karn) has also to be characterized as a decision rendered per incuriam decision of the Supreme Court. 63. It is therefore we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome being not one reaching the assessee and therefore "no real income" is not attracted to the facts of the case as in the case decided by the Supreme Court, on the facts, it had been demonstrated by the assessee that the entire nature of transaction had been changed and therefore the income ceased to exist in favour of the assessee as the very agreement became non est and it was substituted by some other agreement which in legal parlance can be called novation and if so it is such part of the income which is attributable to the substituted contract which can be looked into for the purpose of taxation and not a contract which had ceased to exist and operate in law. But, in the present case, while even admittedly, the transaction between the assessee and its business associate in whose favour amount had been advanced was required to be repaid with 21 per cent. interest, continued to remain in operation and the assessee had not taken any steps to terminate the contract or writing off of principal amount by way of bad debt, nevertheless, claiming the accrued interest as not real income does not work in law as section 5 of the Act takes care of the situation and the moment there is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "revenue expenditure" and the Tribunal has rightly allowed this amount as "deductible expenditure" though has not spelt out the reason either elaborately or succinctly in its order. Be that as it may, we answer question No. 9 relatable to paragraph No. 37 of the memorandum of appeal in I. T. A. No. 492 of 2001 in favour of the assessee and against the Revenue. 71. In the wake of our findings above, except for question occurring at paragraph 37 of the memorandum of appeal in I. T. A No. 492 of 2001 which is substantial question No. 9 referred to above and relating to the assessment year 1996-97, all other questions for this assessment year and all questions for the assessment year 1997-98 are answered in favour of the Revenue and against the assessee. 72. The order of the assessing authority as affirmed by the first appellate authority in so far as it relates to all other findings other than the finding relating to the fee towards obtaining feasibility report for acquiring brewery unit at South Africa are all restored and affirmed. The order of the Tribunal is reversed to the extent indicated above. 73. While I. T. A. No. 492 of 2001 is allowed in part levying cost of Rs.10,000 o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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