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TMI Blog2007 (12) TMI 304X X X X Extracts X X X X X X X X Extracts X X X X ..... assessments made under section 143(3) of the Act, after a scrutiny of the claim. He further noticed that for the very same year now under consideration, the CIT(Appeals) had directed the Assessing Officer to verify the position regarding the interest. The learned JM also accepted the assessee s contention that the amount of Rs. 1 crore was advanced in the course of the money-lending business which was carried on under the resolution of the board of directors passed pursuant to the object clause in the memorandum of association permitting the assessee to lend an advance monies to companies on such terms as may be experienced. He also held that there was full justification for the assessee to write off the debt as bad since all the efforts taken by the assessee to realize the monies from GAL had failed. In this view of the matter, he allowed the assessee s claim. learned Accountant Member - He came to the conclusion that the amount advanced to FMLC was not by way of inter-corporate deposit and that it had been given to GAL for booking cars on behalf of FMLC. The learned AM has also observed that since it was not known under what circumstances FMLC, the original borrower of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce. Section 372A of the Companies Act, 1956, deals with inter-corporate loans and investments. These are regulated strictly by the section. Under the Explanation below the section, a loan has been defined to include debentures or any deposit of money made by one company with another company, not being a banking company. The fact that in the income-tax proceedings, the advance has been described as an ICD is neither here nor there; certainly it is not decisive of the question whether it was given in the course of the money-lending business of the assessee. It is well-settled that the nomenclature given by the assessee to a transaction cannot decide its real nature. I have already noticed the several features of the advance including the documentation. All these in my opinion show that the advance was a money-lending advance. If so, the fact that it was a single transaction is not an impediment to it being called money-lending business. I may refer to the judgment in Bharat Insurance Co. Ltd. s case [ 1982 (2) TMI 21 - DELHI HIGH COURT] in which it was held that the frequency or repetition of an activity, though at times a decisive factor, is by no means an infallible test, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in which GAL became the principal borrower in the place of FMLC. This agreement was initially for 3 months but was extended from time to time and the last of the agreements was executed on 14-2-1997. The rate of interest payable by GAL was 30 per cent to 36 per cent per annum. The borrower was required to return the principal amount along with interest after a period of 90 days. Prior to the execution of the last agreement, the assessee had received interest of Rs. 11,83,562 and Rs. 5,52,329 on 2-4-1996 and Rs. 17,26,028 on 14-2-1997. 3. The cheques issued by the borrowers were dishonoured and legal proceedings were commenced against GAL. An arbitrator was appointed and he gave his award on 31-1-2000 directing GAL to return the amount with interest but despite the award nothing was repaid. In February 1998, the Hon ble Delhi High Court ordered liquidation of GAL if the amount was not paid within three months. GAL defaulted again and a liquidator was appointed. Since nothing was realized from GAL the assessee wrote off the principal amount of Rs. 1 crore during the year ended 31-3-2001 as also the interest of Rs. 5,52,329 being interest accrued on the same. The aggregate amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned Judicial Member, who wrote the leading order, accepted the assessee s claim and held that the ICD of Rs. 1 crore was advanced by the assessee to GAL in the course of its money-lending business and was, therefore, rightly allowable as a bad debt. He noticed that the interest accrued on the bad debt in the earlier years was assessed as business income for the assessment years 1996-97, 1998-99 and 2000-01 in assessments made under section 143(3) of the Act, after a scrutiny of the claim. He further noticed that for the very same year now under consideration, the CIT(Appeals) had directed the Assessing Officer to verify the position regarding the interest of Rs. 5,52,329. The learned JM also accepted the assessee s contention that the amount of Rs. 1 crore was advanced in the course of the money-lending business which was carried on under the resolution of the board of directors passed pursuant to the object clause in the memorandum of association permitting the assessee to lend an advance monies to companies on such terms as may be experienced. He also held that there was full justification for the assessee to write off the debt as bad since all the efforts taken by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing recorded the aforesaid finding, the learned AM proceeded to hold that the tripartite agreement cannot be treated to be in consonance with the board resolution because in that case it was not necessary to state in the tripartite agreement that financial assistance was being extended by the assessee to FMLC for the purpose of booking 28 Maruti cars. The learned AM thereafter proceeded to examine the objects clause of the memorandum of association of the assessee-company and held that they do not authorise the carrying on of the business of money-lending and at best they only authorise the investment of surplus funds which cannot be considered as money-lending business. According to the learned AM, the main business of the company is to manufacture industrial gas cylinders and not to carry on the money-lending business. The resolution of the Board of Directors has authorised the company to carry on money-lending business only under the "other objects" of the memorandum and not under the main clause. He accordingly held that the amount of Rs. 1 crore advanced to GAL for booking cars was an investment of the assessee-company under clause 10 of the object clause. 9. Thereafter th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vestment at the relevant time. As regards the finding of the learned AM that there was no systematic money-lending activity, he contended that even a single or isolated transaction may constitute business and in support of this proposition, relied on the following judgments : ( i ) CIT v. Khairagarh Timber Traders [1982] 137 ITR 346 (MP) ( ii ) CIT v. Bharat Insurance Co. Ltd. [1983] 142 ITR 342 (Delhi); ( iii ) CIT v. R.M. Meenakshisundaram [1995] 212 ITR 220 (Mad.). The learned representative of the assessee also strongly relied on the order of the Hyderabad Bench of the Tribunal in the case of ITW Signode India Ltd. v. Dy. CIT [2007] 110 TTJ 170, which, it was contended, was on identical facts and it was held therein that the amount advanced as ICD can be allowed as a bad debt if it became irrecoverable. 12. The learned CIT DR, Mrs. Smita Jhingran, besides strongly relying on the findings of the learned AM submitted that FMLC had, simultaneously with the tripartite agreement dated 7-10-1995, given an irrevocable power of attorney in favour of the assessee which would show that the amount advanced by the assessee was neither inter-corporate business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Hon ble Members of the Tribunal and, therefore, it was not open to the department to now question the veracity or credibility of the same. With regard to the contention of the learned CIT DR that the memorandum of association does not authorise money-lending business, the learned representative of the assessee drew my attention to clauses 10 and 11 of the objects clause reproduced at page 4 of the order of the Tribunal and submitted that whereas clause 10 dealt with investment of surplus funds, clause 11 in contrast clearly authorised the company to lend or advance monies on such terms as may be expedient. He submitted that this difference between the two clauses was not kept in view by the learned AM. It was further contended that there was nothing to show that the amount of Rs. 1 crore was deposited with FMLC by the assessee-company; on the contrary it was an amount advanced as a loan at a very high rate of interest and certainly not as an investment with FMLC. As regards the assessment of the interest income under the head "Business", he also drew our attention to the order of the Tribunal for the assessment year 1998-99 (pages 23 to 40 of the paper book) in addition to the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts to business or not but it is permissible to look into the same for the purpose of ascertaining the nature and scope of the activity. In Kishan Prasad Co. Ltd. v. CIT [1955] 27 ITR 49 (SC) it was observed by Hon ble Chief Justice, Mahajan that the circumstance whether a transaction is or is not within the company s power has no bearing on the nature of the transaction, or on the question whether the profits arising therefrom are capital accretion or revenue income. Hon ble Justice Shah observed in CIT v. P.K.N. Co. Ltd. [1966] 60 ITR 65 (SC) that "the fact that a transaction is within the powers of a trading company is relevant but has standing alone not much significance". I may refer to only more judgment, that of the Calcutta High Court in CIT v. J.K. Eastern Industries (P.) Ltd. [1965] 55 ITR 376 in which the court, after finding that the activities carr-ied on by the company were ultra vires the memorandum of association, nevertheless held, after referring to Lord President Clyde s observations ( supra ) and Kishan Prasad Co. Ltd. s case ( supra ), that ". . .it is well-known that whether the activity is within the memorandum of a company or not is irre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure-trustees take care of the interests of debenture-holders who may have invested in the company s debentures. In the preamble to the tripartite agreement, it has been stated that the borrower and the guarantor had approached the assessee for the grant of loan to be exclusively used for the purpose of business of purchasing, stocking and selling Maruti vehicles and it was at the request of the borrower and guarantor that the assessee had agreed to give the loan. The words employed in the agreement and the reason why the money was advanced to FMLC discount the theory of investment of the assessee s funds. Secondly, the rate of interest for which the assessee advanced the money was 30.5 per cent per annum which also indicates that the amount was not an investment in FMLC. The upfront interest was deducted and only the balance was given as a loan. This also strongly indicates that the amount was not an investment. Thirdly, the advance was authorised by the board resolution dated 7-7-1995 which is prior to the date of the tripartite agreement. Fourthly and most importantly, the interest on the advance of Rs. 1 crore was assessed in the assessment years 1996-97 and 1997-98 as business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... money-lending activity was backed by board resolution. The reason the learned AM held that there was no approval of the board of directors for the activity started by the assessee was that in his view, the advancing of the money to FMLC was only an investment and not a money-lending activity. If the activity is viewed as an investment then of course it is true to say that the board resolution did not approve of it as an investment but that does not carry matters further because in my view, as already demonstrated, the advance was a money-lending advance having regard to the requirement of FMLC and GAL as borrower and guarantor respectively and the object of the advance was to enable FMLC to book 28 Maruti cars. The board resolution was thus the first step in the implementation of clause 11 of the objects clause of the memorandum of association. 18. I must now notice a point made by the learned CIT-DR to the effect that there is no information as to what happened to the Maruti cars. I do not see how that is relevant to the present case. The assessee advanced the amount of Rs. 1 crore to FMLC to enable FMLC to book the cars. Whether that purpose was achieved or not is not relevan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he debt is written off or of an earlier previous year, can be satisfied is to see if the interest on the advance was assessed as the assessee s business income. I must here refer to the judgment of the Madras High Court in CIT v. City Motor Service Ltd. [1966] 61 ITR 418 in which judgment this aspect was considered. That case resembles the present case on facts. The company had the power under its memorandum of association to advance monies for interest. In respect of advances given to Sungo Limited, the revenue brought to charge the interest due as business income of the assessee. In fact, in years where the assessee did not offer any income on the footing that it did not realise the same the revenue insisted that since Sungo Limited was in a sound financial position the assessee ought to have charged interest and thus added interest as its business income. When the assessee could not recover the debt and claimed it as bad debt under section 10(2)( xi ) of the 1922 Act [forerunner of section 36(1)( vii ) of the 1961 Act] the revenue contended that the assessee was not entitled to the allowance since the debt, if realised, would not have gone to "swell the profits" of the busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of computation of income" (herein italic). Therefore, if the interest of Rs. 17,40,984 was assessed as business income of the assessee in the assessment order for the assessment year 1996-97 and the interest on the loan was similarly assessed in the assessment order for the assessment year 1997-98, both in orders passed under section 143(3) of the Act, the revenue cannot turn around now and say that the advance to FMLC was not a money-lending advance. I do not, therefore, see with respect, any basis for the observation of the learned AM in paragraph 19 of the order that "Admittedly the amount of bad debt claimed by the assessee has not been taken into account in computing the income of the assessee in any of the previous year". This observation, again with respect, seems to run contrary to the past history of assessments. That apart the learned representative of the assessee did raise a valid point when he submitted that even in the order passed by the Assessing Officer for the year under appeal on 16-8-2004 to give effect to the directions of the CIT (Appeals), he had allowed deduction in respect of the interest of Rs. 5,52,329 which is the interest for the very year under appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a transaction cannot decide its real nature. 21. It was also submitted on behalf of the department that there was no systematic activity of lending monies which can be said to constitute business. The advance of Rs. 1 crore to FMLC has to be described as money-lending advance if it contains all the indicia of such an advance. I have already noticed the several features of the advance including the documentation. All these in my opinion show that the advance was a money-lending advance. If so, the fact that it was a single transaction is not an impediment to it being called money-lending business. I may refer to the judgment of the Hon ble Delhi High Court in Bharat Insurance Co. Ltd. s case ( supra ) in which it was held that the frequency or repetition of an activity, though at times a decisive factor, is by no means an infallible test, and a transaction though repeated may not amount to a trade or business and conversely an isolated adventure may fall within the definition of business. I am, therefore, of the opinion that the advance of Rs. 1 crore to FMLC was a money-lending advance. 22. For the above reasons, I concur with the order of the learned JM. The points of d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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