TMI Blog2008 (1) TMI 653X X X X Extracts X X X X X X X X Extracts X X X X ..... of the word." 3. The facts of the case stated in brief are that assessee deposited Rs. 50 lakhs as share application money with M/s. Dimension Investment Securities Ltd. No shares were allotted to the assessee. The assessee exercised the option of conversion of share application money into loan. However, M/s. Dimension Investment Securities Ltd. did not agree to convert the share application money into loan. When assessee-company sought legal opinion from its advocate it was opined that more efforts were to be made to get an acknowledgement of the debt from share application money deposited. After waiting for the reply for a period of eight months, the entire amount of share application money was treated by the assessee-company as irrecoverable. The amount of Rs. 50,00,000 was written off in the books of account and claimed as deduction under section 36(1)( vii ) of the Act. 4. However, the Assessing Officer was of the view that loss of share application money invested was simply a loss of investment. Thus, the claim of the assessee as bad debt was not allowable under section 36(1)( vii ) of the Act. Alternatively, it was also pleaded that if the amount Rs. 50 lakhs co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other hand, ld. DR placed reliance on the order of Assessing Officer. 7. We have heard both the parties and perused the material available on record. Ld. AR of the assessee as well as Ld. DR did not mention any case law during the course of hearing. We therefore, decide the issue based on facts and relevant case laws on the issue in hand. The assessee is engaged in the business of advertising, money lending and investment. The assessee deposited Rs. 50 lakhs as share application money with M/s. Dimension Investment Securities Ltd. Since M/s. Dimension Investment Securities Ltd. did not allot the shares, the assessee exercised option to convert the share application money into a loan. However, M/s. Dimension Investment Securities Ltd. did not entertain this request of assessee. From the order of Ld. CIT(A) we find that the Director incharge of the activities of the company directed the write off in terms of his order dated 25-3-2000 as under : " Dimension Investment Securities Ltd. On 5-9-1997 we deposited Rs. 50 lakhs on account of share application money in M/s. Dimension Investment Securities Ltd. New Delhi. Since even after about 9 months no shares were allotted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part thereof which is written off as bad debt is allowable as deduction subject to satisfaction of conditions specified under sub-section (2) of section 36 of the Act. For and from assessment year 1989-90, the conditions requisite for allowance of a debt as bad debt are : I.it must be a proper debt, or a part thereof II.of a revenue nature contradistinguished from capital nature, III.which has been written off as irrecoverable in the accounts of the assessee for the previous year, IV.( a ) which 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 ( b ) which represents money lent in the ordinary course of the business of banking or money lending which is carried on by the assessee. The amount of Rs. 50 lakhs was deposited as share application money and had not lent the money in the ordinary course of the business of money lending carried on by the assessee. Therefore, the contention of the assessee that it had advanced the loan is contrary to the facts of the case. The expression "in the ordinary course of business of banking or mone ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as bad debt." 9. For a moment if it is assumed that amount of Rs. 50 lakhs was converted into loan, even than such an advance will not fall in the expression "in the ordinary course of business of banking or money lending which is carried on by the assessee". Clause 22 of the Memorandum of Association reproduced as under : "(22) To make any loan to any person on any terms whatsoever, provided the company shall not carry on the business of banking as defined under the Banking Regulation Act, 1949 and the granting of such loans shall not tantamount to carry on of banking business." Clause 22 Memorandum of Association provides that any loan granted to any person on any terms whatsoever shall not tantamount to carry on business of banking within the meaning of Banking Regulation Act, 1949 and granting of such loans would not amount to carry on banking business. Thus, deposit of Rs. 50 lakhs as share application money and subsequent attempt of the assessee to get the same converted into loan would not amount to money lent in the ordinary course of the business of money lending carried on by the assessee. We also find that the amount has also not been taken into account in compu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ten off under section 10(2)( xi ). 11. In the case of CIT v. Abdullabhai Abdulkadar [1961] 41 ITR 545 (SC), the assessee carried on business as commission agents supplied goods from India to a non-resident principal, who, on his part, sent cotton to the assessee and others for sale in India. The Income-tax authorities treated the assessee as the agent of the non-resident principal under section 43 of the Income-tax Act, 1922 and assessed it in respect of the income of the non-resident. The assessee had to pay in all Rs. 3,78,491 which after adjustment against amounts payable to the non-resident left a debit balance of Rs. 3,20,162. In the year of account the assessee wrote off the amount, which it was unable to recover and claimed it as a bad debt or a trading loss. Hon ble Supreme Court has held that under clause ( xi ) of section 10(2) of Income-tax Act, 1922 a debt was only allowable when it was a debt and arose out of and as an incident to the trade. Except in money-lending trade, debts could only be so described if they were due from customers for goods supplied or loans to constitute or transactions of a similar kind. In every case the test was: was the debt due as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct of a business other than banking or money-lending is allowable even if it is not in respect of a loan but a debt due in the course of the business of a money-lender is not allowable unless it is in respect of loans made in the ordinary course of business. An accommodation advance is a neutral expression: it may be of the nature of a loan advanced in the ordinary course of business by a money-lender: it may be an advance in the money-lending or other business of the assessee but not in the nature of a loan; or it may be wholly unrelated to the business of the taxpayer." 13. Looking into the facts of the case in the light of decisions of Hon ble Supreme Court referred to above, we find that assessee had deposited money for allotment of shares. The share application money deposited was not converted into the loan as M/s. Dimension Investment Securities Ltd. never agreed for such conversion into loan. The assessee deposited the amount of Rs. 50 lakhs to acquire a capital asset. The amount was neither deposited in the course of the business of advertising and financing nor in the ordinary course of money lending business. The accounting entries made by assessee without cons ..... X X X X Extracts X X X X X X X X Extracts X X X X
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