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2012 (7) TMI 20

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..... iness activity of the assessee. as arising out of the order dated 26-8-2005, passed by the Income Tax Appellate Tribunal, Bangalore Bench 'A', in ITA No 3613/Bang/2004, whereby the tribunal had allowed the appeal of the assessee and had reversed the orders of the assessing officer and the appellate commissioner relating to the question as to whether a sum of Rs 5.34 crore can be allowed as a deduction by way of bad debts written off by the assessee during the accounting period corresponding to the assessment year 2001-01, being an amount that had been advanced to another company in which the assessee company being a substantial shareholder and that the other company virtually fading out of business, the assessee had advanced the amount to the other company for its revival, but revival not taking place and the company who had received this amount closing its business activities, had claimed this amount as an irrecoverable debt or bad debt and being the amount advanced during the course of business activity of the assessee company and can be claimed as deductible expenditure in the accounting year in which, had been written off in the books of accounts of the assessee-company. 3. T .....

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..... also offered it to tax, but when the other company had gone into red, no interest was charged for one year, but nevertheless the assessing officer found justification to allow this amount as an amount irrecoverable and therefore was of the opinion that writing off of it is justified, but did not agree for allowing the balance of Rs 5.34 crore also as bad debt and can be written off in the accounts of the assessee-company, for the reason that amount cannot be considered as part of an advance made in the course of money lending activity of the assessee; that there was no semblance of a lending activity by the assessee company, in so far as this advance is concerned; that the assessee had from the beginning treated it as interest-free loan and lending was not evidenced by way of any supporting documents; that no security or surety had been obtained for the repayment of this amount and the amount was not advanced as part of business activity, but more out of concern for the sinking sister company in which the assessee-company held substantial interest by way of investment in shares and therefore opined that it cannot be treated as bad debt and on par with the other amount of Rs 75.00 l .....

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..... mpany, while money lending activity was mentioned as an object incidental or ancillary to the attainment of main object, the fact that advance of Rs 5.34 crore did not carry any interest, belied the claim of the assessee that it was part of money lending activity of the assessee; that advancing a huge sum of Rs 5.34 crore for a period of two years and without any expectation of return was not any business activity, much less as part of money lending business activity, though the assesses claimed as such, but more an advance due to other considerations such as relationship between the assessee company and the other company in which the assessee had interest and may be even to save its investment in the other company. 10. Appellate authority also noticed that the assessee company not taking precautionary steps for safeguarding the advance or securing advance was another circumstance to support the view that it was not part of any money lending activity of the assessee, but the appellate authority found that it was not even part of normal business activity of the assessee. 11. Referring to the provisions of Section 36(1)(vii) of the Act, appellate authority held that for an amount t .....

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..... is represented by Sri M Thirumalesh, learned standing counsel. We have heard the learned counsel for the parties. 15. Sri Thirumalesh has vehemently urged that the tribunal has virtually recorded a perverse finding in opining that the assessee carries on the business of money lending and that the amount claimed as bad debt is part of its business activity of lending money to its customers and others; that the tribunal has not recorded a finding relating to the nature of the transaction viz., advance of Rs 5.34 crore being interest-free advance and therefore did not qualify as part of a transaction in the course of money lending activity of the assessee; that a. clear finding that this advance was interest free and as even admitted by the assessee has been virtually given a go-by and a wrong analogy is drawn by equating the inter-corporate deposit being allowed as bad debt due to closure of the company with which the deposit had been made to the advance made to the company; that the advances were not part of business activity of the assessee; that it was more out of sympathy and as a measure to protect its own interest in the other company and therefore submits that the view taken .....

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..... the judgment and ratio laid down by the Supreme Court in the case of CIT v. Birla Bros Pvt Ltd [[1970] 77 ITR 751] as also in the case of A V Thomas & Co Ltd. v. Commissioner of Income Tax [[1963] 48 ITR 67] and the discussion relating to what constitutes a 'debt' in these judgments are all relied upon to submit that advance of Rs 5.34 crore in favour of the sister concern never qualified as debt incurred by the assessee in the course of its business activity and therefore submits that on the ratio of the judgments in these decisions, the view taken by the tribunal is not sustainable in law also and seeks to reverse the view taken by the tribunal. 19. Attention is also drawn to parts of the orders of the assessing officer and the appellate authority, wherein it is clearly mentioned that advance was interest free and that was the very case of the assessee even in terms of the reply given before the assessing officer as per its letter dated 5-5-2003 as is evident from the following paragraphs: The advances having become irrecoverable and bad has been written off in the books of the company during the year and deduction has been claimed as bad debt in the light of the fact that the .....

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..... that inter-corporate deposit of Rs. 75 lakh was as part of money lending activity of the assessee, the assessing officer as well as the appellate authority could not have made a distinction of this logic in so far as it relates to the advance of Rs. 5.34 crore in favour of M/s BWTL; that both advances were on par and therefore was fully justified in admitting the claim of the assessee as a claim towards bad debt and written off in the books of accounts of the assessee for the same accounting period in respect of a sum of Rs. 5.34 crore as admissible under Section 36(1)(vii) of the Act and therefore no interference is warranted in this appeal. 22. Sri Parthasarathy has also submitted that the tribunal has examined the possibility of admitting this claim vis-à-vis permitted activities of the assessee in terms of its memorandum of association; that money lending activity was being one of the permitted activities of the assessee and the assessing officer as well as the appellate authority having affirmed for the purpose of inability of the sister concern to refund or repay the deposit of Rs. 75 lakh, as an amount so permissible and an advance made in the course of money lendin .....

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..... er, the question to be answered in this appeal is as to whether the tribunal has committed an error in law in reversing the finding of the assessing officer and affirming order of the appellate authority and in taking the view that the assessee qualifies for claiming deduction in respect of the sum of Rs. 5.34 crore and if not as to whether the finding recorded by the tribunal is not sustainable as being one perverse and warrants interference? 28. Submission of Sri Thirumalesh, learned standing counsel for the appellant-revenue that the amount which qualifies for deduction in terms of Section 36(1)(vii) of the Act that it should be basically a debt and a debt which has become bad and therefore so written off as irrecoverable in the accounts of the assessee for the previous year corresponding to the assessment year, is an unexceptional legal postulate and has been so noticed judicially also. 29. Expression 'debt' as noticed and discussed by this court in the case of United Breweries (supra) is the view evolved over a period of time and in the context of examination of the expression 'debt' even as it occurs in the corresponding provisions of the Income Tax Act, 1922 i.e. Sections .....

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..... case, it is an amount which had been advanced by the assessee to its sister concern. 34. On an examination of these circumstances, in the exercise undertaken by the assessing officer and the appellate authority it was reveals that the business activity of the assessee was not as a part of advancing of moneys or money lending activity, though Sri Parthasarathy, learned counsel for the assessee has very vehemently urged that the assessing officer and the appellate authority themselves had confirmed this view that a sum of Rs. 75 lakh allowed as deduction, which was an inter-corporate deposit, was part of money lending activity of the assessee and that the assessee had considerable amount of interest income from the deposit made or amount advanced to other customers or associates, that in itself is not the criterion for deciding as to whether the activity was a money lending activity of the assessee or its business was money lending, as it pointed out by Sri Thirumalesh, learned standing counsel for the appellant-assessee that the assessee did not hold any permission or licence or was recognized as a money lender nor was it recognized as a financial institution, banking or non-bankin .....

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