9911796707
TMI Blog2025 (3) TMI 226X X X X Extracts X X X X X X X X Extracts X X X X ..... , the Borrowers had defaulted in payment of the amounts due to the Lender and therefore, it is clearly doubtful whether the commission could be recovered. In the given circumstances, non-recording of income by way of commission on bank guarantees could not be a ground for rejecting the expense of bad debts suffered if the same was during the course of its business. We find no infirmity with the decision of the learned ITAT in not accepting the AO's decision that the bad debts were not allowable as expense as the Assessee had not recognized the commission receivable in respect of guarantees as income in the given facts. The first question projected by the Revenue is not a substantial question of law in the given facts of this case. Whether the amount of bad debts as claimed by the Assessee is allowable as an expense under Section 36 (1) (vii) read with Section 36 (2) (i) of the Act and whether the Assessee's claim for this allowance is a colorable device to reduce the tax liability - ITAT has misdirected itself. The issue flagged by the AO and learned CIT(A) was that the Assessee had deliberately refrained from taking any steps for recovering the dues from CIPL as it was a group ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment order dated 29.12.2017 passed under Section 143 (3) of the Income Tax Act, 1961 (hereafter the Act). The Assessing Officer (AO) assessed the Assessee's income at Rs. 28,08,43,048/- by making the following additions: (a) Rs. 27,38,96,372/- on account of long-term capital gains from sale of property; (b) disallowance of bad debts amounting to Rs. 27,76,90,000/-; and (c) disallowance of legal charges amounting to Rs. 35,80,000/-. 3. Aggrieved by the same, the Assessee preferred an appeal before the learned CIT(A). The learned CIT(A) did not interfere with the additions made by the AO towards long term capital gains amounting to Rs. 27,38,96,372/-, and disallowance of bad debts amounting to Rs. 27,76,90,000/-. However, insofar as disallowance of legal charges is concerned, the learned CIT(A) restricted the same to Rs. 28,60,000/-. 4. Aggrieved by the said decision, the Assessee preferred an appeal before the learned ITAT. As noted above, the Assessee's grievance before the learned ITAT was on three fronts: (a) addition of Rs. 27,38,96,372/- on account of long-term capital gains; (b) addition of Rs. 27,76,90,000/- on account of bad debts; and, (c) addition of Rs. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of farmland owned by Guarantors, which could potentially be developed into residential dwellings. In terms of the Commitment Agreement, the Guarantors agreed to fully indemnify the Lender and provide the additional security as required. In consideration for the same, the Borrowers agreed to pay a commission of Rs. 20 crores, which would accrue after the expiry of three years from the date of the Commitment Agreement or expiry of the guarantee obligations. It was also agreed that in the event, the guarantees were invoked and the Guarantors were required to repay the loan amount to the Lender, they would also be entitled to a further sum of Rs. 20 crores as damages. It was also agreed that if the Borrowers are unable to repay the consideration, the Guarantors would also be entitled to recover any loss suffered by them due to default on the part of the Borrowers and the parties would mutually negotiate the terms on which the Borrowers would compensate or indemnify the Guarantors. 8.3 The Borrowers defaulted in the repayment obligations to the Lender. It was also stated that the shares pledged by the Borrowers with the Lender, which were to serve as security for the Guarantors if they ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee. And lastly, it was a colorable device to reduce tax liability by setting it off against capital gains. As noted above, the learned CIT(A) confirmed the said addition. IMPUGNED ORDER 10. The learned ITAT set aside the deletion of bad debts as it found that the Assessee was engaged in the business of lending and advancing money and therefore, furnishing a guarantee to the Lender fell within the scope of its business. The learned ITAT accepted the Assessee's explanation that it was unable to recover the guarantee commission as CIPL was not in the financial condition to pay the same. The learned ITAT also rejected the contention that the entire transaction was a colorable device. The relevant extracts of the learned ITAT's decision is set out below: "21. As mentioned elsewhere, the assessee is engaged in the business of financing which included lending, advancing money, standing guarantor etc. and in its ordinary course of business, the assessee gave guarantee to the borrowings made by CIPL. As per the Agreement, CIPL was supposed to transfer shares held by it in the listed companies after repayment of its loan from IBFSL. Since IBFSL sold the shares held by it as security ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Commitment Agreement. However, by that time, the Borrowers had defaulted in payment of the amounts due to the Lender and therefore, it is clearly doubtful whether the commission could be recovered. In the given circumstances, non-recording of income by way of commission on bank guarantees could not be a ground for rejecting the expense of bad debts suffered if the same was during the course of its business. We find no infirmity with the decision of the learned ITAT in not accepting the AO's decision that the bad debts were not allowable as expense as the Assessee had not recognized the commission receivable in respect of guarantees as income in the given facts. 13. The first question projected by the Revenue is not a substantial question of law in the given facts of this case. 14. The second issue to be considered is whether the amount of bad debts as claimed by the Assessee is allowable as an expense under Section 36 (1) (vii) read with Section 36 (2) (i) of the Act and whether the Assessee's claim for this allowance is a colorable device to reduce the tax liability. 15. In terms of Section 36 (2) (i) of the Act, no deduction on account of bad or doubtful debts is allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a part of the objects, which are incidental or ancillary to the main objects and therefore, it is difficult to accept that the Assessee had furnished guarantees as a part of its ordinary course of business. 18. It was also found that the Assessee had not entered into any similar transaction whereby it had stood as a surety/guarantor for any other entity for a consideration. It is apparent that the Assessee had furnished a guarantee for the loan availed by the Borrowers (its group companies) as an isolated transaction. Plainly, the same was not a transaction that was entered into in its ordinary course of business. The learned ITAT had observed that the Assessee was engaged in the business of financing, which includes lending, advancing money, and standing guarantor. However, there is no material on record to substantiate that the Assessee was carrying on such activities in its ordinary course of business or on a regular basis. The main objects of the company are confined to the specific fields of financing such as managing investments, undertaking bill discounting, to purchase, discount, re-discount, bills of exchange, to invest etc. There is also no material on record to establ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant who has to recover its "so claimed" debt. Thereby, it is a basic element of human probability that a lender (as is claimed to be by the appellant) would obviously vouch in to control every component of financial statements/transactions of its borrowers (as is claimed to be by the appellant). Accordingly, in the present case, it is a bare and basic fact that the appellant would very much ensure that CIPL pays up the maximum, it can. The element of control remains a more specific prerequisite in the case of the applicant, especially because the appellant and CIPL are under the control of a common umbrella, controlled and operated by the common set of people or promoters or ultimate promoters, thereby granting control of the financial prudence or spending of its group companies. It is not the fact of the appellant that the borrower company is directly related to the appellant, with the said fact has been accepted by the appellant as well in its submissions. Further, since the appellant held substantial amount of stake in the debt of CIPL, it cannot be denied the appellant possessed the necessary powers, authorities and responsibilities to intervene in CIPL, In light of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en the said debt has already been considered as an income of the assessee, in the year or earlier years; or ii. When the assessee is in the business of money lending In the present case, the appellant claims to be under the second limb of Sec 36(2), it has been claimed by the appellant that the appellant is into the business of "lending, financing, investing and guaranteeing". To this effect, the appellant has also taken cognizance of its ancillary objects in the memorandum, wherewith, it has been claimed that the appellant is into the business of "money lending". However, the AO has noted that the activities of the appellant speak of otherwise than being into the business of money lending. The AO, as an example of this, has also supplied the reasoning that the appellant did not earn any commission on issuance of guarantee to CIPL." 23. It is material to note that the Assessee did not dispute that it had not taken any effective steps for recovery of the amounts from CIPL. It was the Assessee's case that the same was not considered prudent to do so since CIPL had suffered losses. However, the Assessee did not dispute that CIPL had during the same financial year made a donation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the trade, the profits of which are being computed. Judged by that test, it is difficult to see how the debt in the present case can be said to be a debt in respect of the business of the assessee. The assessee is not a person carrying on a business of standing surety for other persons. Nor is he a moneylender. He is simply a timber-merchant. There seems to have been some evidence before the Appellate Assistant Commissioner that he had from time to time obtained finances for his business by procuring loans on the joint security of himself and some other person. But it is not established, nor does it seem to have been alleged, that he in his turn was in the habit of standing surety for other persons along with them for the purpose of securing loans for their use and benefit. Even if such had been the case, any loss suffered by reason of having to pay a debt borrowed for the benefit of another, would have been a capital loss to him and not a business loss at all." 27. It is also relevant to refer to the decision of the Supreme Court in Commissioner of Income Tax v. Birla House (P) Ltd.: (1970) 2 SCC 88. In that case, the assessee was engaged in the business of banking and finan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preciate the observations of the High Court that it was in the larger interest of the assessee's business that the guarantee was given. In our opinion the view of the Appellate Tribunal was based on a complete misapprehension of the true legal position. The High Court also fell into the same error. The allowance which was claimed did not fall within Section 10 (2) (xi). No attempt was made nor indeed it could be usefully made to claim any allowance under Section 10 (2) (xv) of the Act." 28. The provisions of Section 10 (2) (xi) are pari materia to the provisions of Section 36(1)(vii) read with Section 36 (2) (i) of the Act. Clause (i) of Section 36 (2) of the Act is set out below: "No such deduction shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year, or represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee." 29. It is apparent from the above that the allowance in respect of bad debts [Under Section 36(1)(vii) of the Act] is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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