TMI Blog2010 (1) TMI 86X X X X Extracts X X X X X X X X Extracts X X X X ..... y was revenue expenditure. The Assessing officer and the Commissioner (Appeals) disallowed the claim but the tribunal allowed it. - The assessee had advanced sums to its business associated and the agreement specified the rate of interest. The assessee submitted that it had not received such interest and it was not assessable. The Assessing officer and Commissioner (Appeals) held that the amount was assessable but the Tribunal held that it was not assessable. In this case Karnataka High Court-held that except for question related to the obtaining of feasibility/viability report for purchasing national Sirghum Breweries, South Africa was a business expenditure all other questions for this assessment year and all questions for the assessment year 1997-98 are answered in favour of the Revenue and against the assessee. The order of the assessing authority as affirmed by the first appellate authority in so far as it relates to all other findings other than the finding relating to the fee towards obtaining feasibility report for acquiring brewery unit at South Africa are all restored and affirmed. The order of the Tribunal is reversed to the extent mentioned above. While I. T. A. No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shott Robinson of the one part and the company of the other part. b) To carry on the business of brewers and maltsters in all its branches. (c) To carry on all or any of the business of hop merchants and growers, timber merchants and growers, malt factors, corn merchants, wine and spirit merchants, either as exporters or importers and distillers, coopers and bottlers, bottle makers, bottle stopper makers, potters, manufacturers of and dealers in aerated and mineral waters and other drinks, licensed victuallers, beer house keepers, yeast dealers, grain and produce growers, sellers and driers, isinglass merchants and printers. (c-I) To manufacture, repair, alter, improve, process, buy, sell, import, export or otherwise deal in: (i) Electrical or other equipment, appliances, accessories, tools, utensils, products and articles meant for industrial domestic or other purposes, (ii) Cycles and motor-cycles of all sorts and all components and accessories pertaining to them. (iii) Surgical, electro-therapeutic and other instruments, appliances, apparatus, materials and articles. (iv) Screws, nails, bolts, nuts, hinges, window's, louvres, doors, frames and all other such articl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to benefit this company, and to use, exercise, develop or grant licences in respect thereof, or otherwise turn to account the property and rights so acquired. (j) To construct, improve and maintain manufactories, warehouses, shops, stores and other works and conveniences which may seem calculated, directly or indirectly, to advance the company's interests. (k) To sell, exchange, mortgage (with or without a power of sale) assign, lease, sub-let, and generally otherwise deal with the whole or any part of the business, estates, property or undertaking of the company, as a going concern or otherwise, to any person or persons, association or associations, or otherwise, for such consideration as the company may think fit, and either for cash or for shares debentures or securities of any other company having objects altogether or in part, similar to the objects of this company and to hold or distribute among the members in specie or otherwise the whole or part of the consideration for such sale. (l) To promote any company or companies for the purpose of acquiring all or any of the property or liabilities of this company or for any other purpose which may seem directly or indirectly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany's objects, or any of them, and to obtain from any such authority, any rights, privileges, and concessions which the company may think it desirable to obtain, and to carry out, exercise and comply with any such arrangements, rights, privileges and concessions. (x) To do all or any of the above things, in any part of the world, and as principals, agents, contractors, trustees or otherwise, and by or through trustees, agents or otherwise, and either alone or in conjunction, with any other person or association, and to contract for the carrying on of any operation connected with the company's business by any person or other association. (y) To do all such other things as are incidental or conducive to the attainment of the above objects. (c-3) To carry on business of exploration, extraction, manufacture, production, distribution and sale of oil, and all oil products of every description. (c-4) To search for, inspect, examine, carry out drilling and other prospective operations, geological and geophysical surveys to prove and estimate reserves of petroleum, work, take on lease, purchase, construct, erect and commission, hire, charter, purchase or lease oil drilling rigs o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all kinds and varieties, key telephone systems, automatic message recording telephone answering devices, radio frequency microphones, computer rack and panel printed circuits, microswitches and trimmers, including computers, computer peripherals, computer software, hard disc, floppy discs and diskettes, test and measuring instruments, materials for electronics, broadcasting equipment, control instrumentation and industrial and professional electronics and communication equipment. (c-11) To act as consultants and provide advice, services, consultancy in various fields of financial, taxation, management consultancy, mechanical and electrical engineering electronics, computer and computer software, pollution control, oil exploration and material handling systems and any business which the company is entitled to carry on. (c-12) To carry on the business of manufacturers, importers, exporters and to sell and deal in drugs and pharmaceuticals, bulk drugs, medicines, biologicals, industrial products, chemicals and petro-chemicals of all types including inorganic and organic chemicals and fine and photographic chemicals, man made fibres and films, petroleum and petroleum products, soap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the adjudicating authority and all questions covering these three aspects were held against the asses see in terms of the findings recorded by the first appellate authority also, it is the second appellate authority, the Income-tax Appellate Tribunal which has reversed the findings of the first two authorities covering all three aspects and for the two assessment years and the effect on the Revenue is that, an amount of Rs. 5,38,28,633 had come to be reduced from the total income of the assessee in respect of the return relevant for the assessment year 1996-97 which according to the assessee was an amount representing what is known as "bad debts" and a further amount of Rs. 54,27,363 had been reduced from the total income as an amount allowable by way of deduction under section 37 of the Act being the amount spent by the assessee for honouring the guarantee it had provided in favour of M/s. Tamilnadu Alkaline Batteries Limited for a sum of Rs. 26,43,204.33 which was a company owned by two subsidiary companies of the assessee-company, namely, M/s. Golden Investments Limited and M/s. East Coast Investments Limited and M/s. Tamilnadu Alkaline Batteries Limited having taken loan of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... swering these substantial questions which have been mentioned in paragraphs 29 to 37 of the memorandum of appeal, I. T A. No. 491 of 2001 relating to the assessment year 1996-97 this appeal had been admitted and the said questions read as under: "1. Whether the Tribunal was correct in holding that a sum of Rs. 43,77,633 should be treated as a bad debt when this amount was paid to M/s. Pharmacia United Limited for purchase of share capital by the assessee who had failed to deliver the share and therefore should be treated as a capital loss? 2. Whether the Tribunal was correct in arriving at a conclusion that a sum of Es. 18.48 lakhs claimed by the assessee as wastage on account of defective stock during the assessment year 1994-95 could be written off during the assessment year, i.e., 1996-97 when it is following mercantile system of accounting? 3. Whether the Tribunal was correct in holding that the payment made by the assessee of Rs. 264.75 lakhs to M/s. UB Elastomers Limited to start a Butyl Rubber Project which failed to take off was a revenue loss when this payment made to a different entity to acquire a new business is a capital loss investment and consequently a capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er?" 11. We may mention here itself that in so far as the substantial question No. 8 mentioned hereinabove and raised at paragraph 36 of the appeal was concerned, the Tribunal had answered this question purporting to follow the judgment of this court on identical question for the assessment year 1995-96 in terms of a reported judgment of this court in the case of CIT v. United Breweries Ltd. reported in [2007] 292 ITR 188 in respect of I. T. A. Nos. 24 and 25 of 2000 as per the judgment dated January 25, 2007. 12. In so far as the assessment year 1997-98 is concerned, that part of the order of the Tribunal relevant for this assessment year in the common order dated July 20, 2001, constitutes the subject-matter of I. T. A. No. 89 of 2003 which is an appeal filed later by the Revenue, but which had earlier been part of the memorandum of appeal in I. T. A. No. 492 of 2001 and covering both the assessment years and the questions relating to this assessment year which figured as questions mentioned in paragraphs 38 to 42 of the memorandum of appeal in I. T. A. No. 492 of 2001, are identical questions figuring at paragraphs 14 to 18 of the memorandum of appeal in I. T. A. No. 89 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the two assessment years on which elaborate submissions have been made by Sri Seshachala, learned senior standing counsel for the appellant-Revenue and if not more equally as elaborate submissions are made by Sri Parthasarathi, learned counsel appearing for the respondent-assessee. 15. We have been taken through the orders in question in great detail and learned counsel for the parties have also placed before us several authorities in support of their respective contentions on behalf of their clients. 16. We shall consider the submissions made at the Bar by the learned counsel and the authorities relied upon in support of such submissions in seriatim. 17. In so far as the first aspect of the questions relating to the assessee's claim for writing off certain amount by way of "bad debts", the details are as under: Sl. No. Borrowers Amount (Rs.) 1 Pharmacia United Limited 43,77,633 2 Premier Enterprises 18,48,000 3 U. B. Elastomers 2,64,75,000 4 T. N. Alkaline Batteries Ltd. 32,76,000 5 Marine Products 32,73,000 6 Sunn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hen the joint venture came to an end, the loss being UBL's share had to be absorbed as the new company was unable to repay, owing to the losses accumulated by it. If it is assumed that what we have incurred above is a capital loss, we submit that the same should be set off against the capital gain made by the company.' The assessee-company did not produce any evidence in support of their claim that the original advance was a trade advance. At the same time, the PUL has been claiming in its letter that it was an advance against the share capital. The copies of the ledger extracts furnished form the financial year 1990-91 has the entry of balance brought down. Therefore, the account of the PUL was debited earlier to that period. The original entry as appearing in the books at the time of giving the advance was not produced in spite of the sufficient opportunity was given to the assessee-company in support of their claim. And hence I treat Rs. 43, 77,633 claimed by the assessee-company as a bad debt of capital nature, which cannot be allowed as deduction under section 36 or 37 of the Income-tax Act. Therefore the bad debt claimed by the assessee-company is hereby disallowed. (ii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counting, any loss pertaining to the assessment year 1994-95 cannot be allowed in this assessment year. Therefore, the loss claimed on account of wastage/defective stocks amounting to Rs. 14.87 lakhs is hereby disallowed and added to the total income/reduced from the loss returned. The total disallowance is Rs.18.48 lakhs. (iii) Debts written off in the case of M/s. U. B. Elastomers Ltd.: During the course of assessment proceedings, the assessee furnished the details of bad debts written off as on March 31, 1996. They are as under: (Rs.) 1. UBIME 11.94 lakhs 2. U. B. Elastomers 264.75 lakhs 3. Tamil Nadu Alkaline Batteries Ltd. 32.76 lakhs The assessee-company was asked to produce the addresses of the said concerns along with their ledger extracts in the year in which their accounts were debited. However, till date the assessee-company has not been able to produce their addresses in the case of all the concerns referred to above. As regards Pharmacia United Ltd., it has been found that the debt written off was in the nature of share application money and hence it is not a revenue loss as discussed in the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en up. During the course of formulation of the project of U. B. Elastomers Ltd., the assessee-company has made some advances which have been written off during the previous year relevant to this assessment year. Any advances given to a company which is totally a different entity and which is dealing in a product which is totally different from the products dealt by the assessee-company, in that case it is very much clear that the advance given is in the nature of capital advance and not in the nature of trade advance as claimed by the assessee-company. Here I would like to rely upon the decision of the Calcutta High Court in Hasimara Industries Ltd. v. CIT [1990] 184 ITR 174. In the said case, advance made to a mill which was taken over on lease by the assessee for modernisation of mills plant became irrecoverable as the mill went into liquidation. The Calcutta High Court held that the loss was not a trading loss and hence cannot be claimed as a bad debt. I also rely on the decision of the Delhi High Court in Narang Industries Ltd. v. CIT L[967] 66 ITR 316. Therefore, the assessee cannot claim it as a bad debt in its profit and loss account. It is in the nature of capital loss an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se by the assessee for modernisation of mills plant became irrecoverable as the mill went into liquidation. The Calcutta High Court held that the loss was not a trading loss and hence cannot be claimed as a bad debt. I also rely on the decision of the Delhi High Court in Narang Industries Ltd. v. CIT [1967] 66 ITR 316. During the assessment proceedings, the assessce-company relied upon the decision of the Supreme Court in CIT v. Mysore Sugar C Ltd. [1962] 46 ITR 649 in support of its claim. The facts of the said case are totally different from that of the assessee-company as Mysore Sugar Company had given advances to the farmers of sugarcane which is their basic raw material of the business already established and thus it was held as a bad debt in the nature of revenue loss. However, in the case of the assessee-company, the advances given are to a new venture which has not materialised or is yet to be set up. It was not in the regular course of the assessee's existing business and therefore on the facts, the assessee's case is not comparable with that of M/s. Mysore Sugar Company Ltd. Hence, Rs.32.73 lakhs claimed by the assessee-company as bad debt is disallowed. (vii) Debt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shan Ramnarain [1929] AIR 1929 Nag 153; (2) CIT v. Calcutta Agency Ltd. [1951] 19 ITR 191 (SC) ; and (3) Mannalal Ratanlal v. CIT [1965] 58 ITR 84 (Cal). and in so far as for the assessment year 1997-98 relating to disallowances of the claim towards bad debts is concerned, the discussion of the adjudicating authority is to be found in paragraph 9 of the order of adjudicating authority. The first appellate authority in the following discussion affirmed this finding which reads as under "Issue No. 6: Bad debts written off, Rs.1,34,75,416.18. 18. The assessee claimed various sums aggregating to Rs.1,41,27,379 as expenditure by way of bad debts written off in the letter dated Februaiy 27, 2000, the assessee gave the break-up of the bad advances written off as follows: Rs. (i) Western India Entertainment 1,393,404 (ii) Blue Mountain Training Centre 2,232,466 (iii) Best Crompton Engg. Ltd. 1,050,000 (iv) Sivan Company 1,485,820 (v) WIE Digital Electronics 2,500,000 (vi) Vipin Industries 1,100,000 (vii) Eagle El ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charged accounted as part of income of the business. (The assessee was following mercantile system of accounting as the details filed for every year shows). No material or evidence was submitted in this regard. In fact, the accounts for the assessment years 1991-92 to date which I have examined does not show that the assessee accounted any amount as interest. The claim of the assessee in this regard is not substantiated and is against available facts. 21.2 Merely because the debt is irrecoverable and written off, it is not allowable as deduction under section 36(2) is clear that no deduction for bad debts or part thereof 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 is written off or in any earlier previous year. The assessee has not fulfilled these conditions. I would, thereforc, uphold the disallowance of this item. (ii) M/s. Best Crompton Engg. Ltd. Rs.10,50,000. 22. The assessee submitted before the Assessing Officer that it approached ICRA, a reputed Credit Rating Agency, for obtaining a rating as to enable further equity/debt instruments. ICRA indicated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's responsibility to discharge liabilities of that company in that company is limited by the shares held. The case, therefore, cannot even be that clearing of the debts of Best and Crompton was on account of its position as holding company, or because the adverse financial position, if at all, of B C would have affected the financial reputation of the assessee. (2) ICRA is not the only credit rating agency available. There are a number of well known concerns who enjoy reputation in credit rating. It is not as if the assessee was under compulsion to give the credit rating work only to ICRA and be bound by its dictates that unless the assessee clear the debt of Best and Crompton Engg. Ltd., it would not give the credit rating. If only the assessee did not pay the fees agreed to ICRA because of its failure to give the correct rating, not to speak of clearing of debts of B C, the latter would have suffered. The assessee could have got credit rating from some other famous agency cheaper. On the basis of available material, I would hold that this payment was out of own choice of the assessee and was not dictated by any business compulsion of a genuine nature. (3) The origin of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares only as an investor and not as a trader. It has been showing profit and gains of transaction in shares under the head 'Capital gains' and not as profit of business. 27.2 Section 56(1) require that income from dividend is to be assessed under the head 'Other sources'. Therefore, the expenditure, if any, has to fulfil the requirement of section 57 and not section 36(1)(vii) read with section 36(2) as such section 57 does not have a provision similar to section 36(1)(vii) read with section 36(2). The claim for write off of expenses connected with earning of dividend has to go through the provision of section 57(iii) which provide for deduction of any other expenditure not being in the nature of capital expenditure laid out or expended wholly and exclusively for the purpose of making or earning such income." CIT v. Birla Cotton Spinning and Weaving Mills Ltd. [1971] 82 ITR 166, 169 (SC). The expression 'for the purpose of business' is wider than the expression for the purpose of earning such income used in section 37(1). Section 37(1) covers not only expenses for running of the business and its administration but also measures for the preservation of business and protectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee in the assessment order. 28.2 The Assessing Officer noted that the amounts were given as advance and not trading debts and are therefore not of revenue nature. For allowance of deduction as bad debt written off the business or trading debts should spring directly from carrying on of a business or trade and should be incidental to it and cannot be just any loss sustained by the assessee even if it has some connection with the business indirectly as held by the apex court in Indian Aluminium Co. Ltd. v. CIT [1971] 79 ITR 514. As the bad debts did not go to the balance-sheet as trading debt in the business of the assessee, it can not be allowed as deduction as held by the apex court in the case of CIT v. Birla Brothers P. Ltd. [1970] 77 ITR 751. 29. The appellant objects to the disallowance of these items aggregating to Rs. 73,13,726. However, it is not in a position to throw any light on the nature of these items. 30. This is a case of claim of deduction in the form of bad debts/advances written off. It is the onus of the assessee to prove how the conditions of section 36(l) (vii) read with section 36(2) are fulfilled. The assessee has not done anything in this regard exce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... succeeds on the issue of write off bad debts." In so far as the aspect of honouring the guarantee issued by the assessee-company and as indicated above, the adjudicating authority was of the view that the assessee is not entitled to claim the amount by way of any expenditure under section 37 of the Act by indicating the reasons as under: "(a) Disallowance of expenses relating to M/s. Tamilnadu Alkaline Batteries Limited (TNABL): As per the assessee-company TNABL was engaged in manufacturing of batteries at Chennai which was owned by two subsidiaries of U. B. Ltd. namely Golden Investments Ltd. and East Coast Investments Ltd. TNABL obtained a loan of Rs.16 lakhs from Tamil Nadu Investment Corporation for which Golden Investments Ltd. and East Coast Investments Ltd. were the guarantors by virtue of the deed executed on October 10, 1985. TNABL availed of a loan from Bank of Madura Ltd. and the amount outstanding as on November 8, 1994 was Rs.60.34 lakhs. This amount was guaranteed by East Coast Investments Ltd. and Golden investments Ltd. which were the subsidiaries of the assessee-company and were amalgamated with the assessee-company, with effect from April 1, 1994. On account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atteries Ltd. (b) Disallowance of expenses relating to M/s. UNITEL Communications Ltd.: As per the details furnished by the assessee-company, M/s. UNTTEL Communications Ltd. (M/s. UCL) was a company promoted as a joint sector company in the State of Orissa for manufacture of telecom equipments. The main shareholders were three wholly owned subsidiaries of U.B. Ltd. and Orissa State Industrial Development Corporation. The said company became sick and its revival became very difficult When it approached the financial institutions for funds, the financial institutions insisted on the promoters to bring in more funds as capital for the revival of the company. It was at this juncture, that M/s. UCL approached U. B. Ltd. for guarantee to avail of some lease finance and that is how the assessee-company guaranteed to M/s. Nagarjuna Finance Ltd., Vysya Bank Leasing Ltd. and Excel Finance Ltd. during the financial year 1990-91. Thus, from the above sequence of events, it is very much clear that M/s. UCL was a sick company financially. Any prudent guarantor would not have guaranteed the loans of M/s. UCL without properly protecting his own financial interest. However, in spite of knowin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L, Bank of Madura filed a suit against the assessee-company after invoking the guarantee provisions. After negotiation, the amount was settled by the assessee which was acknowledged by the bank vide its letter dated November 8, 1994. 36. The Assessing Officer noted in this context that the liability to pay the guarantee amounts arose not because the assessee was the original guarantors but only as a result of the amalgamation. In the case of Saraswati Industrial Syndicate Ltd. v. CIT [1990] 186 ITR 278 (SC) the apex court held that the amalgamated company is not the same as the subsidiaries which had stood as guarantors and the nature of the liability in the hands of amalgamating company need not be the same in the hands of the amalgamated company. The guarantees were given by the amalgamating companies prior to amalgamation and once the default was committed by TNABL, guarantees should have been invoked on the amalgamating companies long before the date of amalgamation. Whatever the assessee claimed now as a deduction on account of discharge of guarantee obligation should have been claimed by the amalgamating companies in the computation of their income for the periods they ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany in the UB group the lenders invoked the guarantee obligation provisions originally. This, I consider to be deliberate to distract attention from the fact that the guarantee must have been given by Golden Investments Ltd. and East Coast Investment Ltd., or some other concern and the default by TNABL on the loan availed of in the year 1984, should have occurred long time before the previous year relevant to the assessment year 1995-96 and that the lenders could and would have invoked the guarantee provisions only before recovery became barred by limitation. The date on which the lenders invoked the guarantee provision in respect of default of loan given in the year 1984/1985 must have been years before the two companies merged with the assessee. Arguing, without conceding, that the liability on account of guarantee obligations is an allowable expenditure on the ground that the facts are similar to those of Amalgamation Ltd., it is to be noted that could have been an allowable expenditure only in the hands of those two companies for the previous year in which the creditors invoked the guarantee provisions, on mercantile basis followed by them. The relevant previous year had to en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions have to be in the possession of the assessee as the successor to the business of the amalgamating subsidiaries. That it does not produce the details lead to the presumption under the general rules of evidence that the materials and evidence if produced would go against its contentions. 39. In view of the above discussions, I would hold that (1) The liability on account of contractual obligations arises in the year in which the liabilities are accepted, and not in the year in which the payment is effected. In the hands of the amalgamating subsidiaries, (or whichever company gave the guarantee) the liability on account of the guarantee provisions which they had undertaken to discharge, the moment the creditor invoked the guarantee provisions and its allowability or otherwise has to be considered in that previous year. Even if the expenditure is to be allowed as of revenue nature, it could be allowed only in the hands of the amalgamating companies in the year in which the lenders invoked the guarantee provisions. (2) In the hands of the assessee, the liability arose only from April 1, 1994, the effect date of amalgamation, on account of this became its liability. Long befo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assets and also funds for its operations. It approached UB Ltd. for a guarantee so that it can independently avail of some lease finance from various leasing companies as per details given below: Name of the leasing company Date of guarantee by UBL Nagarjuna Finance Ltd. 18-02-91 Vysya Bank Leasing Ltd. 16-01-91 Vysya Bank Leasing Ltd. 01-12-90 Vysya Bank Leasing Ltd. 15-11-90 Excel Finance Ltd. 11-03-91 Consequent to the erosion of net worth, UNITEL was declared as a sick company by the BIFR. The BIFR finally ordered in 1994, to sell assets of the company and ordered the company to be wound up. The assessee claimed deduction of Rs. 67,23,565 and Rs. 26,63,001 paid to Nagarjuna Finance Ltd., Excel Finance Ltd. and Vysya Bank Ltd. as paid in discharge of guarantee obligation during the years ended March 31, 1995, and March 31, 1996, respectively, relevant for the assessment years 1995-96 and 1996-97. 42. In the assessment order for the assessment year 1995-96, the Assessing Officer reasoned that it was clear that UNITEL was a sick company (when the guarantee was given). No prudent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e there being no use of such loss for the subsidiaries which had accumulated loss by that time must have weighed with the assessee to stand as guarantor instead of subsidiaries with the aim of earning toss to set off against its own income for the purpose of income-tax. Considerations of reducing profit so as to avoid the tax liability cannot be taken to be genuine business consideration." The Tribunal on this aspect of the matter, has allowed the claims of the assessee br claiming the amount as deductible expenditure under section 37 of the Act by recording as under: "AS far as guarantee obligation is concerned, this issue is fully covered by the decision of the Income-tax Appellate Tribunal rendered in the assessee's own case for the assessment year 1995-96 in I. T. A. No. 947/BNG/1998. referred to supra. Hence, we direct relief of these sums aggregating to Rs. 53.06 lakhs." purporting to follow its own view taken in respect of the very assessee for the assessment year 1995-96. 23. The third question relating to "legal expenses" is a question answered by the Tribunal being of the view that it is a "revenue expenditure" whereas the earlier two authorities were of the vie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ility or otherwise of an income or an expenditure should be considered only from the point of view of the Income-tax Act and not on the basis of entries which the assessee had passed in the books. In Bokaro Steel Ltd. 's case [1999] 236 ITR 315 cited by the assessee, we find a direct support. The relevant paragraph as appearing in page 324 is reproduced below. 'In the present case also the entry which was initially made as interest was reversed in the next year because in fact the nature of the transaction was changed and the assessee did not receive any real income. The High Court has therefore, rightly held this entry as not reflecting the real income of the assessee and hence not exigible to income-tax,' 53. In the light of the above and relying on the decision of the hon'ble Supreme Court mentioned supra, we hold the decision in favour of the assessee and delete the addition of Rs. 74.75 lakhs and the assessee succeeds on this issue. 54. Ground No. 18 is not pressed by the assessee and hence dismissed." has allowed this claim of the assessee to permit the deletion of addition of Rs. 74.75 lakhs which was an addition by the assessing authority and which had been claimed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 37(1) of the Act. 9. The final issue raised by the assessee is that the Commissioner of Income-tax (Appeals) should have adjudicated on the ground instead of holding that the issue has become final under section 143(1) (a) and could not be agitated in the regular assessment under section 143(3)." 27. The submission relating to the acceptance of deduction by way of "bad debts" by the Tribunal are to be found at paragraphs 10 and 11 of the order of the Tribunal which read as under: "10. The facts of the case are that the assessee UB Ltd. had an export division engaged mainly in the export of goods and articles. During the course of business the assessee gave advances to certain individuals who were operating in the coastal line of Vishakapatnam, Andhra Pradesh. The assessee had entered into an agreement with M/s. Cautam Constructions and Fisheries Limited to the effect that they would identify the boat owners and agents and recommend their names to UB and would remain as guarantor on behalf of the boat owners and agents. Out of the advances, an amount of Rs. 32.69 lakhs was written off as it became irrecoverable. The company filed suit against the said GCFL for recovery of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is an allowable deduction under the Income-tax Act and accordingly the assessee prayed for allowing the same. 11. The next bad debt written off relates UB Elastomers Ltd. The assessee during the course of carrying on its money-lending business had advanced a sum of Rs. 264.75 lakhs to one of its group companies called M/s. UB Elastomers Ltd. The details facts of UB Elastomers had been dealt by the Income-tax Appellate Tribunal, Bangalore Bench, in the assessee's own case in I. T. A. No. 947/BNG/98 for the assessment year 1995-96 on the issue of writing off of guarantee obligation. The assessee claimed that following the decision of the Tribunal cited above, the entire claim should be allowed." 28. The submissions relating to payments towards "guarantee obligation" are to be found in paragraphs 12 and 13 of the order of the Tribunal which read as under: "12. The next item of bad debt relates to Tamilnadu Alkaline Batteries Ltd. In this case, the assessee had advanced 32.67 lakhs which could not be recovered arid a guarantee obligation of Rs. 26.43 lakhs. According to the assessee, similar claim had been allowed by the Tribunal in the assessee's own case for the assessment y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and it is impossible to recover the amount that it can be claimed as irrecoverable debt and, therefore, a "bad debt" can be claimed as an amount to be written off and as a deduction in computing the profits of the year in which it is so written off ; that such is the requirement even in ms of section 36(1)(vii) of the Act which reads as under: "36.(l)(vii) Subject to the provisions of sub (2) the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year: Provided that in the case of an assessee to which clause (via) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause. Explanation. For the purposes of this clause, any bad debt or part thereof written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee." and in the absence of any material either to indicate that it was a "debt" in the first instance or that any effort ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s incomprehensible and, therefore, the order passed by the Tribunal in reversing the findings of the two lower authorities on this aspect is nothing short of perverse finding, liable to be reversed and these questions to be answered in favour of the Revenue. 35. It is also pointed out by Sri Seshachala, learned senior standing counsel appearing for the Revenue that the assessee cannot blow hot and cold and claim it as either under section 36 (1) (vii) of the Act as a bad debt written off or if it is not so possible to claim as deductible expenditure in terms of section 37 of the Act. 36. In this regard, it is submitted that what does not pass muster in terms of the statutory stipulations of section 36(1)(vii) of the Act to claim it as an irrecoverable bad debt, cannot be brought back for claiming a deduction through the back door of section 37 of the Act ; that which is not permissible directly and in fact prohibited cannot be achieved through the back door method of section 37 of the Act and it is only such expenditure which is not expressly covered or expressly excluded under any of the earlier provisions and which fails to so qualify, that can be relegated to the residua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on in one assessment year to the same opinion in a subsequent year is not because of any principle of res judicata but because of the theory of precedent or the precedential value of the earlier pronouncement. Where facts and law in a subsequent assessment year are the same no authority whether quasi-judicial or judicial can generally be permitted to take a different view. This mandate is subject only to the usual gateways of distinguishing the earlier decision or where the earlier decision is per incuriam. However, these are fetters only on a co-ordinate Bench which, failing the possibility of availing of either of these gateways may yet differ with the view expressed and refer the matter to a Bench of superior strength or in some cases to a Bench of superior jurisdiction" 40. It is submitted this proposition is well supportcd by a good number of other authorities and therefore the finding of the Tribunal that the assessee was entitled to claim deduction in respect of expenditure said to be incurred for honouring the guarantee on behalf of the subsidiary company, does not qualify for deduction under section 37 of the Act when the question is examined independently for the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of State Bank of Travancore v. CIT reported in [1986] 158 ITR 102 and in particular reliance is placed on paragraph 31 which reads as under (page 152): "The concept of reality of the income and the actuality of the situation are relevant factors which go to the making up of the accrual of income but once accrual takes place and income accrues, the same cannot be defeated by any theory of real income. Reference may be made to Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC)." 44. The further submission of Sri Seshachala on this aspect is that when once the assessee has adopted the mercantile system of accounting, interest income has to be necessarily brought to tax on accrual basis and there was no escape for the assessee, but to offer the amount by way of income and even if it was not realised later to put forth claims thereafter in terms of the statutory provisions and not by excluding the amount itself from the income of the assessee for the year in question. 45. Reliance is placed on the judgment of the Supreme Court in the case of CIT v. Shiv Prakash Janak Raj and Co. P. Ltd. reported in [1996] 222 ITR 583 (SC) in support of the submission regarding the consequences ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this line of business providing its product by way of credit is an inevitable course of business activity and impossibility of realizing certain advances is also a real and a concomitant incidence of such business activity and when the assessee had in fact demonstrated that all the companies in whose favour the assessee-company had advanced the amounts had become either sick or have become defunct or have gone out of existence and with there being no possibility of realizing the advances given to its business associates, irrespective of any other material or evidence being not produced by the assessee, the amount should necessarily be allowed as a "bad debt" under section 36(1)(vii) of the Act and if the Tribunal has done the very same thing, there is no need for interfering with such an order of the Tribunal to the detriment of the assessee and therefore submits the question should be answered against the Revenue and appeals should be dismissed. 48. It is submitted that the amounts written off as bad debt were all inevitably part of the business transaction and therefore the amounts did qualify for claiming deduction in terms of section 36(1) (vii) of the Act and even with re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned counsel for the respondent for remanding the matter to the Tribunal to record a proper finding and with reasons, we find that a request of this nature can not be acceded to for the reason that a remand is not for the sake of remand but only when it is warranted and when a finding of fact is conspicuously absent notwithstanding there being supporting material or evidence to arrive at a finding on the facts, based on the evidence available on record. 53. In so far as the evidence/proof to constitute the supporting material for the claim of the assessee towards written off bad debts in terms of section 36(1) (vii) of the Act is concerned, we find that the record does not disclose any material at all to support either that the assessee had incurred a debt or that it had become irrecoverable for any reason, particularly, after the assessee had put in some efforts in this regard for recovery and had failed. 54. Except for the correspondence and letters written to the assessing authority and other subsidiary or other business associates and a letter written directly by the business associate of the company to the assessing authority, there is no other material forthcoming. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... another, including not only obligation of debtor to pay but right of creditor to receive and enforce payment. BAD DEBT: Uncollectible account receivable, under National Bank Act, an unsecured debt on which interest or payment is past due for at least six months. A debt which is uncollectible; a permissible deduction for tax purposes in arriving at taxable income. Different tax treatment is afforded business and non-business bad debts. A business debt is defined by the Internal Revenue Code as a debt created or acquired in connection with a trade or business of the taxpayer, or a debt which becomes worthless in the taxpayers, trade or business. Loans between related parties (family members) generally are classified as non-business. A deduction is permitted if a business account receivable subsequently becomes worthless providing the income arising from the debt was previously included in income. The deduction is allowed only in the year of worthlessness. According to Chambers 21st Century Dictionary DEBT: 1. something which is owed. 2. the state of owing something in someone's debt under an obligation, not necessarily financial, to them." 57. As the phrase and word o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xation matters, it does not constitute res judicata as each assessment year is different and on this aspect, reliance placed by Sri Seshachala, learned senior standing counsel appearing for the Revenue on the decision of the Supreme Court in the case of CIT v. Birla Brothers P. Ltd. [1970] 77 ITR 751. Each and every expenditure incurred cannot be characterized as a legal obligation and a necessary expenditure incurred by the assessee when it has a remote proximity to the business necessities of the assessee and therefore while the expenditure claimed by way of discharging legal obligation cannot be allowed, we find that the judgment of this court in fact does not positively spell out the reasons but only indicates that no error was found in the order of the Tribunal. 62. In fact, the judgment of the Supreme Court in Birla Brothers P. Ltd. [1970] 77 ITR 751 was not brought to the notice of this court on the earlier occasion and therefore the judgment of this court in the case of the very assessee for the assessment year 1995-96 reported in CIT v. United Breweries Ltd. [2007] 292 ITR 188 (Karn) has also to be characterized as a decision rendered per incuriam decision of the Supre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case [1999] 236 ITR 315 to the effect that the income being not one reaching the assessee and therefore "no real income" is not attracted to the facts of the case as in the case decided by the Supreme Court, on the facts, it had been demonstrated by the assessee that the entire nature of transaction had been changed and therefore the income ceased to exist in favour of the assessee as the very agreement became non est and it was substituted by some other agreement which in legal parlance can be called novation and if so it is such part of the income which is attributable to the substituted contract which can be looked into for the purpose of taxation and not a contract which had ceased to exist and operate in law. But, in the present case, while even admittedly, the transaction between the assessee and its business associate in whose favour amount had been advanced was required to be repaid with 21 per cent. interest, continued to remain in operation and the assessee had not taken any steps to terminate the contract or writing off of principal amount by way of bad debt, nevertheless, claiming the accrued interest as not real income does not work in law as section 5 of the Act takes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the character of "capital expenditure" but is only a "revenue expenditure" and the Tribunal has rightly allowed this amount as "deductible expenditure" though has not spelt out the reason either elaborately or succinctly in its order. Be that as it may, we answer question No. 9 relatable to paragraph No. 37 of the memorandum of appeal in I. T. A. No. 492 of 2001 in favour of the assessee and against the Revenue. 71. In the wake of our findings above, except for question occurring at paragraph 37 of the memorandum of appeal in I. T. A No. 492 of 2001 which is substantial question No. 9 referred to above and relating to the assessment year 1996-97, all other questions for this assessment year and all questions for the assessment year 1997-98 are answered in favour of the Revenue and against the assessee. 72. The order of the assessing authority as affirmed by the first appellate authority in so far as it relates to all other findings other than the finding relating to the fee towards obtaining feasibility report for acquiring brewery unit at South Africa are all restored and affirmed. The order of the Tribunal is reversed to the extent indicated above. 73. While I. T. A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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