TMI Blog2007 (6) TMI 238X X X X Extracts X X X X X X X X Extracts X X X X ..... und that there are clauses of objects to run the business of non-banking finance business and to advance money as inter-corporate deposits and also business of leasing business. In the case of SREI International Finance Ltd.[ 2006 (9) TMI 302 - ITAT DELHI] , has held there was no qualification in section 36(2) that the business of money lending should be understood only in a traditional sense. The business of a NBFC apart from leasing definitely involves lending of money. Similarly, the guarantee stood by the assessee has to be taken as activities of money lending. On the amount of guarantee, the assessee earned interest from bank as well as from Fairmark. The business of Fairmark was abandoned in the year 1996 and whatever the amount due from Fairmark either on account of advances given by Citibank guaranteed by the assessee or some other amount recoverable from Fairmark was treated as the amount recoverable from Fairmark in the year ending on 31-1-1997 and when it is noticed that the same was not recoverable, were claimed as bad debts in the year ending on 31-3-1998. All the conditions provided u/s 36(1)(vii) r/w section 36(2) are satisfied in the present case because the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted in that joint venture. Therefore, the amount guaranteed by the assessee has to be treated as business debt. On this amount, as discussed above, the assessee has earned interest also from bank as well as Fairmark. Therefore, it cannot be said that in any way the amount of outstanding against Fairmark was not business debt. Assessee's one of the objects is of money-lending business and this is an undisputed fact that the assessee was doing non-banking finance business. Therefore, the ratio of the decision of the Supreme Court is not against assessee but supports the case of the assessee. Thus, the assessee on behalf of its joint venture Fairmark stood the guarantee and when Fairmark failed to discharge its onus then only the assessee has claimed the guarantee money as loss. Therefore, we hold that the assessee's claim of bad debt is allowable. However, we noted that in the case of Fairmark, the assessee claimed a sum as their share of Fairmark on 31-1-1997 included in the amount of total bad debts which is not clear that whether the amount have been offered for taxation as profit in assessment year 1997-98 or not - It has been shown in the profit of assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar 1998-99 on November 30, 1998, declaring a loss of Rs. 4,80,020. The assessment was completed on February 28, 2001, under section 143(3) determining an income of Rs. 2,32,09,767. The assessee' s main business as set out in the objects clause was to provide lease finance, to provide hire-purchase finance, to provide finance for assisting in sale of goods/articles, etc., to provide finance to pro mote, establish, support, setting up of or establishment of industrial/trading activity, to provide loans and other form of financial assistance to acquire/buy securities for trade purposes, to provide financial consultancy services and to conduct money charging business. The assessee is a non-banking finance company since its incorporation in 1987 and mainly engaged in providing funds and non-fund based financial services. The assessee also conducts money-changing business as full-fledged money changer. The fund based business activities of the assessee includes giving of loans, providing funds for leasing and hire purchase activities, providing funds for bill discounting facilities, providing funds to entities where the assessee is a promoter. Acquisition of securities for funding/tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he discharge of their fiduciary responsibilities, as directors are responsible for the operations of Fair mark and also in UK for break of agreement dated December 11, 1996. Notwithstanding a partly favourable judicial ruling by the courts in UK the company is not hopeful of recoveries and hence the amount of fixed deposit of Rs. 100 lakhs with Citibank, the interest accrued thereon which was appropriated by Citibank and the share application money of Rs. 12.50 lakhs, all aggregating to Rs. 122.47 lakhs has been written off as business loss. (b) An amount of Rs. 85 lakhs written off in the books of account as explained in note 4(ii) of Schedule 9 to the accounts for the financial year 1997-98 has been written off as business loss. (c) Rs. 22.65 lakhs was paid in the year 1994-95 as advance to various vendors (villagers) for purchase of land at Bangalore for business of development activities. The company subsequently realized that the vendors had misrepresented to the company and entered into agreement(s) of sale by suppressing material facts concerning the transaction. Since money advanced is not recoverable, the entire amount so paid including incidental expenses aggregatin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It was further explained that the conditions for claiming bad debt under section 36(2) is satisfied in the present case as the assessee indulged in the activity of money-lending. The object clauses of the company' s business were also cited before the Assessing Officer. Reliance was also placed on various case law. However, after considering the details and case laws, the Assessing Officer found that the claim of the assessee is not allowable, as the assessee does not deal with the money-lending business. It was also found by the Assessing Officer that the assessee-company had entered into a deal with M/s. Fairmark as a co-promoter and pledged their fixed deposit receipts with the Citibank as a security for loan to be given by Citibank to Fairmark. It was further seen by the Assessing Officer that moreover in order to promote business certain advances were also given. After the borrower failed to offer the money in the Citibank and security of FDR given by the assessee-company was adjusted by the Citibank against the dues to Fairmark. On perusal of the documents, it was seen by the Assessing Officer that Shri Paul Dass who was a non-resident has confirmed the valuation and set ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is still recoverable from Piem and, therefore, cannot be considered as a bad debt and accordingly cannot be allowed as deduction. 6. The third issue, which was regarding the advance given for purchase of land for business of the assessee-company. As the assessee-company has gone into liquidation and dealing in land, thus it was seen that the advances were made for purchase of land to acquire the capital asset, therefore, the Assessing Officer opined that the same cannot be claimed as bad debt deduction. 6.1 Accordingly, total claim of the bad debt amounting to Rs. 2,35,36,427 was disallowed by the Assessing Officer. 6.2 Detailed submissions were filed before the Commissioner of Income-tax (Appeals). Reliance was also placed on various case laws. However, the learned Commissioner of Income-tax (Appeals) was of the view that the Assessing Officer was justified in disallowing the claim of the assessee. The Commissioner of Income-tax (Appeals) has taken into con sideration various case law in support of his contention. These decisions are in the case of CIT v. Birla Bros. Pvt. Ltd. [1970] 77 ITR 751 (SC), wherein it was held that : where the assessee guaranteeing loan to s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stances of the amounts recoverable from Fairmark, Piem or Makan and on account of land purchased for its business purposes were explained by the counsel of the assessee. Reliance was also placed on various decisions in CIT v. Crescent Films (P.) Ltd. [2001] 2 48 ITR 67 0 (Mad), Essen Private Ltd. v. CIT [1967] 65 ITR 625 (SC), C. T. Narayanan Chettiar v. CIT [1966] 60 ITR 690 (Mad) and CIT v. S. P. Balasubramaniam [2001] 250 ITR 127 (Mad). The ratio of these decisions were read and explained also and it was submitted that the facts of the assessee' s case are fitting in the facts of these cases and, therefore, the claim of the assessee is allowable. Reliance was placed on the decision of the honourable Supreme Court in the case of Badridas Daga v. CIT [1958] 34 ITR 10 and in Jhalani and Co. v. Asst. CIT [2001] 77 ITD 44 (Delhi) and CIT v. Amalgamations P. Ltd. [1997] 226 ITR 188 (SC). The decisions relied upon by the learned Commissioner of Income-tax (Appeals) were also discussed and it was explained that the ratio of these decisions are not applicable at all as the facts of the present case are different. 7.1 Regarding the claim of bad debt on account of advance given for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated on equal footings. The assessee had given money for allotment of preferential shares and not for the purposes of advancing of loans. The assessee on recovery stage only treated the amounts given for allotment as intercorporate deposits (ICD). 10.3 Reliance was placed on a decision in Kailash Investments (P.) Ltd. v. CIT [2005] 281 ITR 92 (Guj) and further reliance was also placed on the decisions considered by the learned Commissioner of Income-tax (Appeals). Regarding the various case law relied upon by the learned authorised representative, it was submitted that all these case laws are distinguishable on facts. 9. In reply, learned counsel for the assessee firstly placed reliance on the decision of Deputy CIT v. SREI International Finance Ltd. [2006] 10 SOT 722 (Delhi). It was further stated that the assessee is having 50 per cent. interest in Fairmark and Dass Brothers were having 50 per cent. interest in that company. It was further submitted that the honourable Supreme Court in the case of S. A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1 has held that the amount advanced to its subsidiary company has to be taken as an advance given for business purposes for ear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the above deposit. Thus, the assessee was entitled to receive interest income on the said deposit of Rs. 100 lakhs from Citibank and also from Fairmark. 13.1 Fairmark was incorporated to export designer garments to Euro pean countries. The Dass Brothers were in the garment business in UK for number of years and the business of Fairmark was managed and controlled by Dass Brothers. The assessee and Taj Trade and Transport Co. Ltd., decided to part ways with Dass Brothers and Dass Brothers were to con tinue with their involvement in Fairmark. In December 1996 the assessee and Taj Trade and Transport Co. Ltd., signed a settlement agreement with Dass Brothers pursuant to which the Dass Brothers agreed to the following conditions : (i) To refund Rs. 12.50 lakhs to the assessee, which was paid by the assessee to Fairmark as share application money during the financial year 1994-95. (ii) To pay consideration computed at 9.125 per cent. on the deposit of Rs. 100 lakhs placed with Citibank in consideration of the lien on the deposit by the assessee until the vacation of the lien by Citibank. (iii) To pay Citibank the amount owing by Fairmark to Citibank so that the bank vacate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany and found that there are clauses of objects to run the business of non-banking finance business and to advance money as intercorporate deposits and also business of leasing business. 15.1 A Bench of the Delhi Tribunal in the case of Deputy CIT v. SREI International Finance Ltd. [2006] 10 SOT 722 has held that : there was no qualification in section 36(2) that the business of money lending should be understood only in a traditional sense. The business of a NBFC apart from leasing definitely involves lending of money. This activity of money lending and deriving income therefrom in the form of interest in the business of money-lending. Hence, the assessee was entitled to deduction as claimed. 14. The assessee, as stated above, has promoted a joint venture with Dass Brothers in the name of M/s. Fairmark. As per the information given to the Bench by the learned authorised representative that the assessee was having 50 per cent. interest in Fairmark as a promoter. The business of the Fairmark was of doing garments business. Therefore, it cannot be said that there was no business interest of the assessee in Fairmark. Since Dass Brothers belong to UK and they need funds to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... truct Makan which company during the relevant time owned intercorporate deposits to Piem. As per the instructions of Piem to Makan, vide their letter dated July 29, 1997, Makan issued post dated cheques aggregating to Rs. 500 lakhs to the assessee vide letter dated July 29, 1997. Makan instructed the assessee to deposit the cheques on their given instructions to the assessee. The assessee, therefore, agreed with Piem to discharge Piem against their obligation to repay the advance of Rs. 500 lakhs. Two cheques for Rs. 50 lakhs and Rs. 25 lakhs issued by Makan were encashed on September 19, 1997 and October 31, 1997, respectively. Thereafter, the assessee was requested orally by Makan not to present the cheques for clearing. Subsequently, Makan under their letter dated April 2, 1998 and April 15, 1998 on wholly frivolous and imaginary grounds refused their indebtedness to the assessee. Thereafter, by mutual discussion the assessee agreed with Makan to reduce a sum of Rs. 85 lakhs of the principal amount with the hope the assessee will receive the balance principal amount and interest thereon. Accordingly, the sum of Rs. 85 lakhs was claimed as bad debts during the year under consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned Departmental representative stated that the money was allotted for shares and not for the purpose of advancing business purpose. In our considered view the contentions of the learned Departmental representative are not correct. No doubt, the amount of Rs. 500 lakhs was given for allotment of preference shares in the assessment year 1997-98. However, Piem refused to allot the same. Therefore, the assessee asked to refund the amount with interest. Piem accepted this request of the assessee and, therefore, in these circumstances, Makan was instructed to pay on behalf of Piem to the assessee. The assessee had shown this amount as on March 31, 1998, as intercorporate deposit with Makan and interest has also shown. The same has taxed also for the year under consideration. Therefore, it cannot be said that the amount of Rs. 500 lakhs has no character of intercorporate deposit but the character of share application money. The share application money was shown by the assessee as on March 31, 1997, and in July 1997 when Piem refused to allot shares, the same was converted into intercorporate deposit. Intercorporate deposit is nothing but the deposit on which the assessee was to receiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the assessee was interested in that joint venture. Therefore, the amount guaranteed by the assessee has to be treated as business debt. On this amount, as discussed above, the assessee has earned interest also from bank as well as Fairmark. Therefore, it cannot be said that in any way the amount of outstanding against Fairmark was not business debt. 22. We have seen the decision considered by the Commissioner of Income-tax (Appeals) in the case of A. V. Thomas and Co. Ltd. v. CIT [1963] 48 ITR (SC) 67 and found that the facts are different from the facts of the present case. At page 76, the honourable Supreme Court has observed that : Section 10(2)(xi) is in two parts. One part deals with an assessee who carries on the business of a banker or money-lender. Another part deals with business other than the aforesaid. Since this was not a loan by a banker or money-lender, the debt to be a debt proper had to be one which if good would have swelled the taxable profits. 24.1 Applying this test, the honourable Supreme Court held that money given for acquiring shares was not allowable as bad debts. In the case in hand before the Supreme Court, the assessee' s business was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -company released by the bank had realized Rs. 44,905. Even thereafter the managed company did not improve and there was no prospect of receiving any moneys from it. The appellant written off the sum of Rs. 4,03,203 in its books of account and claimed allowance of the sum as a bad debt. The Tribunal found that the assessee advances to the managed-company and the agreement guaranteeing the loan to the managed company were in pursuance of its objects and were made in the course of its business and allowed the claim. On a reference, the High Court reversed the order of the Tribunal. However, as stated above, the honourable Supreme Court reversed the order of the High Court and confirmed the order of the Tribunal. 27. In the case of CIT v. Williamson Magor and Co. Ltd. [1979] 117 ITR 858 (Cal), the findings of the Tribunal, who found that the furnishing of guarantee for the debt of the managed-company by the assessee was incidental to the carrying on the assessee' s business were confirmed by the honourable Supreme Court. 28. In the case of Lalvani (T. J.) v. CIT [1970] 78 ITR 176 (Bom), the honourable High Court has held that the financing by the assessee of the business of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he joint venture with Dass Brothers. Therefore, it cannot be said that the amount as guaranteed by the assessee is not for its business purposes or for its business interest. 31. We have seen various other decisions relied upon by the learned authorised representative in Badridas Daga v. CIT [1958] 34 ITR 10, Jhalani and Co.' s case [2001] 77 ITD 44 (Delhi) and CIT v. S. P. Balasubramaniam [2001] 250 ITR 127 (Mad) and found that the ratios of these decisions are in favour of the assessee' s case. Therefore, in view of the above facts and the circumstances and in view of various case law discussed above, we hold that the assessee' s claim of bad debt is allowable. However, we noted that in the case of Fairmark, the assessee claimed a sum of Rs. 6.25 lakhs as their share of Fairmark on January 31, 1997, included in the amount of total bad debts of Rs. 122 lakhs which is not clear that whether the amount of Rs. 6.25 lakhs have been offered for taxation as profit in the assessment year 1997-98 or not. It has been shown in the profit of the assessment year 1997-98 then the assessee is entitled for deduction of this amount also. Otherwise, to this extent the amount cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccount of remaining amount recoverable from Piem and Makan as the same is out of total amount of Rs. 500 lakhs. We have discussed the issue in detail while disposing the ground for the assessment year 1998-99. 38. After considering the issue in detail, we have allowed the ground of the assessee in regard to bad debt claim recoverable from Piem and Makan. On the same reasoning, we allow this ground for the year under consideration, i.e., the assessment year 1999-2000 also. 39. Ground No. 3 in appeal for the assessment year 1998-99 is against confirming the public issue expenses of Rs. 1,53,361 under section 35D of the Act. 40. Briefly stated facts of the case are that in the financial year 1995-96 the assessee-company issued 9,10,000 equity shares in public issue and incurred certain expenditure. The Assessing Officer did not allow the deduction under section 35D of the Act. The disallowance was made on the ground that the provisions of section 35D are applicable to the case of industrial undertaking and the assessee is not an industrial undertaking nor it is a case of extension of an industrial undertaking, accordingly the provisions of section 35D were not applicable. The ..... 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