TMI Blog2004 (3) TMI 343X X X X Extracts X X X X X X X X Extracts X X X X ..... return of income declaring net loss of Rs. 58,18,510. In the P L account, a sum of Rs.130 lakhs had been debited with the narration "bad debt written off". Assessing Officer made the original assessment vide order dated 13-12-1996 disallowing the claim of deduction of bad debts, inter alia, on the ground that the requisite conditions as envisaged under section 36(2) of the Income-tax Act, 1961 were not satisfied. CIT(A) upheld the disallowance vide order dated8-9-1997, The assessee carried the matter in appeal before the Income-tax Appellate Tribunal and the matter was remanded back to the Assessing Officer for a fresh decision. The High Court admitted reference by the department under section 256(2) of the Income-tax Act, 1961 and passed the following order on30th August, 2000: "In the circumstances, we dispose of this application with the observation that, the Assessing Officer shall reconsider the entire matter taking into consideration the relevant provisions of law in the background of the factual aspects and arrive at its own decision uninfluenced by any observations made by the Tribunal." 4. Assessing Officer made a fresh assessment vide order dated16-3-2001disallowing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an is placed at page 81 of the paper book, which reads as under: "24th February, 1994 M/s. Toto Bubbles India Ltd., E 364-367, Industrial Area, Bhiwadi, Distt. Alwar 301019. Rajasthan. Dear Sirs, With reference to your request made to us for placement of Intercorporate Deposit in your Company, we are placing the said deposit as per terms and conditions given below : Principal Amount - Rs.1,30,00,000.00 Rate of Interest - 19% p.a. Period - 180 days It would be clearly understood that this is an Intercorporate Deposit and no adjustment from this can be made in respect of other debt that we may owe to you. Yours faithfully, For Basu Associates, Sd/- Authorised Signatory" On22-3-1994, the aforesaid loan taken by TBIL from Basu Associates has been ratified by the Board of Directors of TBIL. From the extracts of the minutes of meeting of the Board of Directors, placed^ in the paper book at page 82, it appears that the unsecured loans have been taken by the company from Basu Associates in the normal course of its business. There is no indication regarding any guarantee required to be given by the borrower. According to the assessee c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lakhs has never been taken into account in computing the income of the assessee-company. Assessing Officer further observed that the assessee-company has apparently stood guarantee for the loan taken by the TBIL from ETL and no commission for giving a guarantee has been charged. Any guarantee given by the assessee without charging guarantee commission cannot be considered as part of business activity of the assessee. According to the Assessing Officer, the assessee-company was merely a shareholder holding 25 per cent equity in the share capital of TBIL and any guarantee given for a loan taken by TBIL cannot be considered as part of business activity of the assessee. Assessing Officer further held that neither the claim qualifies for deduction under section 36(1)(vii) as bad debt nor the same can be claimed as a business loss. In support of his findings, Assessing Officer placed reliance on the decisions of Madras High Court in Amarchand Shobhachand v. CIT [1965] 56 ITR 594 and CIT v. T.N. Krishnaswami [1984] 150 ITR 365. 11. In appeal, the CIT(A), vide the impugned order has upheld the findings of the Assessing Officer. CIT(A) has indicated the chronology of events in para 14 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of the Assessing Officer in making the addition on account of bad debts written off of Rs. 1.30 crores and hold that the entire transaction is not a business transaction, but is a sham transaction arranged between companies of the same group. The evidence filed by the A.R. clearly shows that M/s. Basu Associates gave an Inter Corporate Deposit to TBIL for which no guarantee was mentioned at the time of placing such deposit on24-2-1994. There was also no mention of a guarantee on the appellant company when the Board of Directors of TBIL ratified the unsecured loan from Basu Associates on22-3-1994. Subsequently, the appellant company gave the guarantee, terming the same to be a guarantee for an unsecured loan from Basu Associates to TBIL. Giving this guarantee was not a part of the business activity of the appellant company as this is the only guarantee they have given and that also without charging any guarantee commission. The appellant's contention that it did not charge any guarantee commission due to conditions imposed by ICICI is not correct. As the appellant company has made the payment of Rs. 1.30 crores to M/s. Basu Associates vide cheque dated31-3-1995, it cannot be said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... % RIICO 110,000 9% Ld. Counsel further submitted that during revival efforts by ETL, the assessee-company secured a loan for working capital from a third party, Basu Associates giving guarantee of its repayment. Shri Vohra stated that although the assessee-company stepped into the shoes of Basu Associates for recovery from TBIL, there was absolutely no chance of any recovery in view of the adverse financial position of TBIL, as reflected in its balance sheet as on31st March, 1995, showing excess of liabilities over assets amounting to Rs. 19.34 crores. The said balance sheet is placed in the paper book of the assessee-company at pages 83 and 84. Ld. Counsel submitted that the amount of Rs. 130 lakhs was written off in the books as on 31 st March, 1995 and claimed deduction as bad debt/loss incidental to business. Regarding the statutory conditions as contained under section 36(1)(vii) read with section 36(2) of the Act, ld. Counsel submitted that the debt has become bad and has been written off as irrecoverable in the accounts of the assessee-company for the relevant previous year. Alternatively, it is contended that the loss aris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been actually allowed by Basu Associates to TBIL and the only intention for manoeuvre these subsequent developments is to foist liabilities on thd assessee-company for considerations other than business considerations. Ld. CIT (DR) vehemently asserted that the letter dated24-2-1994which purports to be loan agreement does not say a word about the requirement of executing any guarantee by the assessee or by anybody else as a pre-condition to placing the loan with TBIL. The document dated24-2-1994does not indicate that any request has been made by the assessee to Basu Associates for giving any loan to TBIL.Ld. DRemphasized that the ex-post facto consent by the assessee to execute a corporate guarantee after TBIL had already availed of the loan given to them by Basu Associates, was purely voluntary and was without any legal or contractual obligation. 16. Ld. DR next referred to assessee's letter dated25-4-1994placed in the paper book at page 117. The corporate guarantee dated22-4-1994was sent to Basu Associates under this letter.Ld. DRpointed out that this letter brings out two clear admissions by the assessee. First, M/s. Basu Associates never insisted that only the appellant s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany would be executing a corporate guarantee in their favour. Such a resolution should have preceded the letter dated21-2-1994. Further, even the resolution dated25-3-1994neither mentions the letter dated21-2-1994nor ratifies the contents thereof or actions taken thereunder. Clearly, the letter dated21-2-1994is an unauthorized document and no cognizance can be taken of it. It has to be ignored." Ld. DRplaced reliance on the decision of Supreme Court in the case of CIT v. Birla Bros. (P.) Ltd. [1970] 77 ITR 751 and extracted the following observations of the Hon'ble Supreme Court at page 755 of the report: "Neither under any custom nor under any statutory provision or any contractual obligation was the assessee bound to guarantee the loan advanced by the bank to the selling agent. It is difficult to see how it was in the interest of the assessee's business that the guarantee was given. There was even no material to establish that the managed company was under any legal obligation to finance the selling agent or to guarantee any loans advanced to the selling agent by a third party. It is incomprehensible in what manner the guaranteeing of the loan advanced to the selling agent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tten submissions, Mrs. Parashar disputing any nexus or connection between the corporate guarantee and the assessee's own business, observed vide para 30 onwards as under: "30. There is no real link or proximity between the corporate guarantee and the assessee's own business interest. At page 222 of the paper book dated9-12-2002the appellant has stated that "if the appellant had directly advanced the money, it would have had to be advanced without interest. By so arranging a debt that a third party advanced the money on a guarantee of the appellant, the appellant saved its funds for better alternative utilization". The appellant had also submitted before the Assessing Officer and before CIT(A)-XV that "the issuing of guarantee was also guided by the consideration that if TBIL could raise the necessary resources and overcome the liquidiaty crunch, TBIL would make substantial profits, which would subsequently enhance the value of investments held by the appellant in TBIL". Therefore, according to the appellant, the guaranteeing of debt was directly related to its business interest. 31. But when this claim of the appellant is tested against the actual facts and ground realities it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the business interest of the appellant is too weak and far-fetched and too remote to justify the appellant's act of giving guarantee and, therefore, in the light of the decision of Supreme Court in the case of CIT v. Birla Bros. Pvt. Ltd. 71 ITR 751 (SC) the deduction on account of bad debt cannot be allowed. The whole arrangement between the appellant, TBIL and M/s. Basu Associates was a sham arrangement aimed at wrongfully claiming the deduction of Rs. 130 lakhs for the purpose of reducing the tax liability of the appellant. 34. The debt of Rs. 130 lakhs had not become bad debt on31-3-1995and therefore, it could not be allowed as deduction in the accounting year relevant to assessment year 1995-96. In terms of para 3 at page 2 of the corporate guarantee, the lender M/s. Basu Associates had agreed to have assigned all their claims in favour of the appellant - guarantor upon such payment being received by the lender from the appellant guarantor. The appellant paid the amount of Rs. 130 lakhs to M/s. Basu Associates vide their cheque dated31-3-1995of Indian Overseas Bank, Greater Kailash,Delhi. This cheque was sent to them at theirCalcuttaaddress. Obviously, the cheque could no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the guarantee. He stated that the Eicher group genuinely believe that given its proven track record and management expertise, it could turn around TBIL. Ld. Counsel disputed the submission of the ld. CIT DR that the corporate guarantee given without authorization by a special resolution of the Board of Directors of the assessee company was invalid and contrary to Companies Act. Shri Vohra submitted that since the assessee company is engaged in business of financing industrial enterprises, provisions of section 370(2)(b)(v) of the Companies Act, 1956, would be applicable and no such special resolution is required to be passed prior to execution of the corporate guarantee. Ld. Counsel further submitted that the deduction of Rs. 130 lakhs claimed as bad debt/business loss deserves to be allowed to the assessee. 23. We have carefully considered the rival submissions and also gone through the facts and material on record. Various judicial pronouncements relied upon by both sides have also been gone through by us. In our considered opinion, the assessee company is not entitled to deduction of Rs. 130 lakhs either as a bad debt under section 36(1)(vii) read with section 36(2) or as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as loan has been given by TBIL on24-2-1994. Regarding the contention of the Ld. Counsel that the assessee had given an assurance to Basu Associates vide letter dated 21-2-1994 that corporate guarantee would be executed for repayment of the loan by TBIL, ld. CIT DR strenuously countered by urging that such a letter is merely a self-serving document produced by the assessee which has no legal significances We feel that the circumstances of the case clearly indicate that the loan transactions had been entered into on 24-2-1994 in the absence of any legal or contractual obligation on the part of the assessee guaranteeing repayment of the said loan to Basu Associates. The corporate guarantee has been executed much after the date of loan without any consideration received from TBIL and in any case, there was no contractual or legal obligation on the assessee company to execute any such guarantee after the loan has already been allowed by Basu Associates on the terms and conditions as specified in the loan agreement dated 24-2-1994 available at page 81 of the paper book. 25. At this stage, we need to consider the argument of the ld. counsel that one of the objects as included in the obj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venue on the ground that giving of the guarantee was not a part of the business activity of the assessee-company as this is the only guarantee they have given and that too without charging any guarantee commission. The contention of the assessee that it did not charge any guarantee commission due to conditions imposed by ICICI is not correct. We have already reproduced above relevant extracts from the rehabilitation scheme dated 21-7-1992, available at pages 111 to 115 of the paper book, whereby it was laid down that TBIL shall obtain from ETL unsecured interest free loans of about Rs. 282 lakhs for financing a part of the cost of rehabilitation scheme. The said loan had already been advanced by ETL during the period 1991-93. There was thus no restriction either on ETL or for that matter on any other company for furnishing guarantees for loans to TBIL without consideration. Moreover, there was no legal or contractual obligation on the assessee company to furnish any guarantee for repayment of loan to TBIL without consideration. The contention of the ld. Counsel is, therefore, liable to be rejected. 27. The string of judicial authorities cited by the ld.CIT DRon behalf of the reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bad debt or as a business loss. 28. TheMadrasHigh Court in its aforesaid judgment has referred to various decisions involving more or Jess similar fact situations. The High Court referred to the decision of Punjab High Court in Brij Mohan Laxmi Narain v. CIT [1959] 36 ITR 147. In that case the assessee whose main business was money-lending stood surety for pertain loans advanced by a bank to a company of which the assessee was a director. When the bank pressed for payment, the assessee sold his house and paid a certain sum towards satisfaction of the loan. The amount borrowed by the company became irrecoverable. The assessee claimed the amount paid by him as an allowable deduction either as a bad debt under section 10(2)(xi) or as a business expenditure. The court held that the transaction of guarantee did not arise out of the assessee's money-lending business and was not related to it in any way, that there was no consideration for the guarantee given by the assessee to the bank and the loss which the assessee sustained in the enforcement of the guarantee was a capital loss and did not amount to a business loss and, therefore, the assessee |vas not entitled to claim deduction ei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... course of business of the assessee. The High Court took note of the fact that the revenue had not challenged this basic finding and, therefore, allowed the claim of bad debt. Tnis decision has been rendered in the context of admitted facts of the case and does not support assessee's case. 32. The next decision cited by the ld. Counsel in Gillanders Arbuthnot Co. Ltd's case. This decision has been rendred in the backdrop of entirely distinguished set of facts and circumstances of the case. The assessee-company bought up the share capital of the subsidiary and advanced unsecured loans to it. There was a running account between the assesee-company and the subsidiary on account of which there was a debit balance of Rs. 87,546 which was written off by the assessee during the relevant assessment year and was claimed as a bad debt. The Tribunal recorded, inter alia, the finding that loans were advanced to the subsidiary as an integral part of business activity of the assessee-company. According to the High Court, the finding of fact arrived at by the Tribunal was not unreasonable or perverse and the loss was an allowable deduction. In the instant case, in view of the entirely distingu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his agreement as to be repaid at 6 per cent interest by annual instalments as specified therein, and as a security for the loan and interest, the plant and machinery including tools and equipments as well as the business assets and the stock-in-trade were hypothecated under the agreement. The Maharaja of Baroda changed his mind and the assessee made the advance contemplated by the agreement of17th June, 1950, out of his own funds and resources. Two repayments of Rs. 1 lakh each were made by Ebrahim Lookmanji out of this advance in June and July, 1951. The rest of the amount together with interest thereon remained outstanding and onthe 31st March, 1953, a sum of Rs. 4,43,498 was due and payable by Lookmanji to the assessee in respect of the said advance in the finance account. In the general goods account, which the assessee had with Lookmanji, there was a balance of Rs. 3,11,453 onthe 27th February, 1954. In respect of these outstandings, which totalled Rs. 7,54,951, two suits were brought by the assessee against Lookmanji in the Bombay High Court. A consolidated decree in the two suits was passed by consent and in execution of the said decree, properties of Lookmanji were attached ..... X X X X Extracts X X X X X X X X Extracts X X X X
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