TMI Blog1993 (11) TMI 106X X X X Extracts X X X X X X X X Extracts X X X X ..... al, the major source of its finance is refinance from the Industrial Development Bank of India. It also takes loans from the IDBI under various schemes such as New Debt Insurance Scheme. 4. With a view essentially to improving the financial position in general and the working capital requirements in particular of which institution the Deposit Insurance and Credit Guarantee Corporation (DICGC for short) evolved a scheme called 'Small Loans (Small Scale Industries) Guarantee Scheme, 1981'. The objective of the said scheme was to provide 'guarantees to a substantial extent in respect of loans to borrowers engaged in industrial activity on a small scale and also in respect of credit facilities granted to organisations which may be assisting workers, artisans and other self-employed persons engaged in industrial activity'. Under the scheme, eligible credit institutions (the assessee before us, it is common ground, is one such institution) were provided by the DICGC a guarantee on account of the credit facility, that is to say, financial assistance, including a loan or advance, cash credit, etc. provided by the eligible credit institutions to persons engaged in the manufacture, process ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are now before us, guarantee funds from the DICGC as detailed below: Asst. Year 1987-88 (previous year ... Rs. 16,48,657 ending on 31-3-1987) Asst. year 1988-89 (previous year ending ... Rs. 3,52,079 on 31-3-1988) It may here be highlighted that the DICGC released guarantee funds neither in a lump sum nor in time-based instalments. It used to release guarantee funds against each item of credit facility provided by the assessee which, according to the assessee, had become bad or doubtful of recovery and in respect of which the assessee had entered into an agreement with DICGC. 6. From the very nature of its operation, the major source of the assessee's income was interest received by it on the credit facilities provided by it to eligible persons. The assessee also derived income by way of rent and miscellaneous income such as investigation fees, supervision charges and the like. The assessee filed its return of income for the assessment years 1987-88 and 1988-89 disclosing its income under the three heads aforesaid. In the assessments for the said two assessment years, which were completed respectively on 30-8-1989 and 5-5-1990, the Assessing Officer did not at all adver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (s) of account been written off as bad and doubtful debts. Therefore, if at all any addition was called for in the assessment for the assessment year 1987-88, it should be restricted to the sum of Rs. 5,41,622 by virtue of the provisions of section 41(4) of the Act. No such claim was made in relation to the assessment year 1988-89 because, we are told, the aggregate sum of Rs. 4,52,079 received during the previous year relevant to that assessment year did not include any such items of credit in respect of which deduction had earlier been claimed under section 36(1)(vii) of the Act. 9. None of the aforesaid contentions found favour with the C.I.T. starting from the proposition that money constituted the stock-in-trade of the assessee, the C.I.T. went on to hold that the sums received by the assessee from DICGC were nothing but insurance money received for loss of stock-in-trade and that consequently, it was a revenue receipt taxable as such. Secondly, the assessee's claim for deduction on account of bad and doubtful debts (that is, stock-in-trade lost) cannot be allowed because the bad and doubtful debts in question had not been written off in the books of account of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p, the funds received by the assessee under the scheme is qualitatively different from interest income which is chargeable to tax. 14. In view of the foregoing, therefore, contended Shri Philip George, the C.I.T. was not justified in passing the impugned order in revision. 15. As before the C.I.T., so before us, the assessee's counsel raised an alternative contention in relation to the assessment for the assessment year 1987-88. He contended that the aggregate sum of Rs. 16,48,657 received by the assessee from DICGC included an aggregate sum of Rs. 5,41,622 which related to bad and doubtful debts which had been written off in the books of account of the assessee and in respect of which revenue deduction had been allowed to the assessee in the earlier year(s). According to Shri Philip George, if at all any addition was called for in the assessment for the assessment year 1987-88, the addition should be restricted to the said sum of Rs. 5,41,622, by virtue of the provisions of section 41(4) of the Act. As a corollary to the aforesaid proposition, Shri Philip George contended that the balance amount relating to the assessment year 1987-88 and the entirety of the sum of Rs. 3,52, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act that under the scheme the assessee could not write off bad and doubtful debts without the previous approval of DICGC is neither here nor there. Under the scheme of the Income-tax Act, a revenue deduction is not available to the assessee unless the bad and doubtful debts are written off in the books of account of the assessee. In this case, the major part of the loans relating to the assessment year 1987-88 and the entirety of the loans relating to the assessment year 1988-89 had not been written off by the assessee in its books of account. Therefore, the assessee cannot get the benefit of revenue deduction in respect of bad and doubtful debts in question. Finally, Shri Argal summed up his arguments as follows: (i) The funds received by the assessee from DICGC was nothing but insurance amount relating to the assessee's stock-in-trade, namely, money. (ii) Consequently, the receipts is question were on revenue account and are taxable as such. (iii) The "salvage value", that is the amounts recovered by the assessee from its debtors after it had received the funds from the DICGC are no doubt to be shared by the assessee with said Corporation; but that is separate and distinct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... argument of the assessee's counsel was that if the guaranteed sums received by the assessee were to be brought to charge, then the assessee should be given the benefit of deduction under section 36(1)(vii) of the Act, even though the majority of the bad debts covered by the guaranteed sums received by the assessee were not written off in its books of account. This is particularly because of the fact that under the scheme, the assessee could not write off the debts in question as bad or doubtful of recovery without the prior approval or consent of the Corporation. This argument also will have to be rejected, because it too fails to take into account the legal consequences of the Scheme. 28. The case of the Department, it may be recalled, proceeds on the basis of setting up a parallel between the sums received under an insurance policy on the one hand, and the guaranteed sums received by the assessee under the Scheme, on the other. The said parallel is sought to be drawn on the ground that money is the stock-in-trade of the assessee and that the insurance sum received under a policy of insurance to guard against loss of stock-in-trade is a receipt on revenue account. The parallel i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that for a moneylender money or cash is stock-in-trade. This concept has a limited application, namely, to allow a revenue deduction to a moneylender or banker in respect of the losses of the type referred to above. But the parallel cannot be extended to the extent canvassed by the Department. 31. Similarly, the treatment to be given to salvage value of the goods or assets insured cannot be extended to the case of a moneylender. 32. In view of the foregoing, therefore, we reject the contentions of both the assessee's counsel and the Department, and proceed to resolve the issue before us in the light of the legal consequences of the 1981 Scheme and the transactions put through thereunder. 33. The genesis and rationale of the Scheme is not far to seek. The assessee was set up to promote industrial development particularly in the small-scale sector. The said objective was sought to be achieved by a two-pronged approach. The first was to provide finance as and by way of term and other loans to eligible persons. The said loans carry interest which, in the hands of the assessee, is clearly taxable. The second approach was to up infrastructural facilities in the form of industri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the eligible credit institutions will have to enter into an agreement with the said Corporation. In relation to the amount in default, the guarantee provided by DICGC is not 100%. The percentage of guarantee varies from 50% through 75% to 90% as stipulated in paragraph 9 of the Scheme. 37. When an eligible credit institution finds that a loan advanced by it has become bad or doubtful of recovery, it invokes the guarantee in terms of paragraph 10 of the Scheme. To invoke the guarantee, the eligible credit institution participating in the Scheme will have to make a claim in the prescribed proforma. Thereafter, the DICGC processes the application, determines the guarantee amount to be paid to the applicant, inter alia, in accordance with the provisions of paragraph 9 of the Scheme and pays the amount thus determined to the applicant. It may here be highlighted that separate applications will have to be made in respect of each loan that has become bad or doubtful of recovery. 38. One other feature of the Scheme is to be noticed and that is the provision of the guarantee by the DICGC to the eligible credit institutions is subject to the stipulation that the latter shall not, without ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e all feasible steps including enforcement of the security. Any recoveries effected, irrespective of whether these relate to the guaranteed account or a non-guaranteed account of the borrower, and also irrespective of the manner of their actual appropriation, shall after deducting reasonable expenses incurred in that connection, be shared with the Corporation in the manner and to the extent indicated in clauses (1) to (3) of paragraph 12." 40. As we see it, read as a whole the Scheme makes it clear that the guarantee provided by the DICGC which covers a specified percentage of the "amount in default" (including interest and other fees that had become due and payable by the borrower) is somewhat akin to a bank guarantee. True, the guarantee is not obtained and provided by the borrower to the credit institution but, as a matter of State policy, the DICGC provides the guarantee directly to the credit institution. The contingency on the occurrence of which the guaranteed amount is payable under the scheme is the default committed by the borrower to pay to the concerned credit institution the amounts (including interest) by the due date(s). 41. Now, what, in the context of the Guara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sections deal with the order of priority in which an open payment will be adjusted against a plurality of outstanding debts and though they do not expressly mention appropriation towards interest they have been applied to principal and interest, by treating them as distinct debts. Thus, where interest is outstanding on a principal sum due and the creditor receives an open payment from the debtor without any appropriation of the amount as between capital and interest, the sum received is first appropriated to interest and only thereafter to capital. The rationale behind the said principle is that it is to the creditor's advantage to attribute payments to interest in the first place, leaving the interest-bearing capital intact. 44. The said proposition, it is well settled, applies to transactions as between a creditor and a debtor. Where, however, it is a question between an assessee to tax and the revenue, the aforesaid rule of appropriation has no universal application. As has been pointed out by Lord Macmillan in the Privy Council case of CIT v. Maharajadhiraja Kameshwar Singh of Darbhanga [1933] 1 ITR 94, "there is authority for the proposition that in a question with the reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as between capital and interest in the manner least disadvantageous to himself. 47. The case before us is, no doubt, one of open payment. But it is not one between the creditor and his debtor. In this case, the open payment came to be made by the DICGC. But as we have already pointed out, the DICGC has, in essence, paid the guaranteed sums for and on behalf of the debtors. In the circumstances, therefore, we are of the opinion that we would be justified in applying to the facts of the case before us the general rule of appropriation. 48. The question that then arises for consideration is whether the normal rule of appropriation is to apply or the special rule. As we see it, having regard to the fact that the recovery of the principal itself is in jeopardy, we would be justified in applying the special rule. That is to say, the guaranteed sums would first be appropriated towards the principal-component of the amount in default and the excess, if any, will thereafter be appropriated towards the interest and other charges-component of the amount in default. We hold accordingly. 49. There is a related matter that needs to be dealt with now. Since we have held that in the facts a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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