IN THE ITAT
Dy.
Commissioner of Income-tax, Circle -5(1),
v.
Kanchanjunga
Advertising (P.) Ltd.
d.r. singh, judcial member
and k.d. ranjan, accountant member
It appeal no. 3938 (
[Assessment year 2000-01]
January 4, 2008
Section 36(1)(vii) of the Income-tax Act,
1961 - Bad debts - Assessment year 2000-01 - Assessee-company was engaged in
business of advertising, money lending and investment - Assessee deposited
Rs.50 lakhs as share application money with a company D - Since company D did
not allot shares, assessee exercised option to convert share application money
into a loan - D did not entertain request of assessee and did not convert share
application money into a loan - Assessee, therefore, treated share application
money of Rs.50 lakhs as irrecoverable - Further assessee had written off said
amount in its books of account and claimed deduction of same as bad debts under
section 36(1)(vii) - Whether since memorandum of association of
assessee-company did not authorize assessee to trade in shares and also stated that any loan granted to any person on any
terms whatsoever would not tantamount to carry on business of banking within meaning of Banking Regulation Act, 1949 and
granting of such loans would not amount to carry on banking business, deposit of Rs 50 lakhs as share application
money and subsequent attempt of
assessee to get same converted into loan would not amount to money lent in ordinary course of business of money
lending carried on by assessee
- Held, yes - Whether since accounting
entries made by assessee without consent
of D could not change character of share application money into a loan so as to fall within money lending business carried
on by assessee, amount of Rs.50 lakhs could not be treated as a proper debt of revenue
nature or incurred in ordinary course of money lending business carried on by assessee - Held, yes - Whether, therefore,
assessee was not eligible for deduction under section 36(1)(vii) as claimed -
Held, yes
The
assessee-company was engaged in the business
of advertising, money lending and investment. The assessee deposited Rs.50
lakhs as share application money with a company D. Since the company D did not
allot the shares, the assessee exercised option to convert the share
application money into a loan. However, D did not entertain the request of the
assessee and did not convert the share application money into a loan. The
assessee, therefore, treated the share application money of Rs. 50 lakhs as
irrecoverable. Further the assessee had written off the amount of Rs.50 lakhs
in its books of account and claimed deduction of the same as bad debts under
section 36(1)(vii). The Assessing Officer held that loss of share application money
invested was simply a loss of investment and, accordingly, disallowed
the assessee’s claim for deduction of Rs.50 lakhs as bad debts under section
36(1)(vii).
On appeal,
the Commissioner (Appeals) allowed the assessee’s claim.
On
revenue’s appeal to the Tribunal.
The
memorandum of association of the assessee-company only authorised the assessee
to invest surplus funds. It did not
authorize the assessee to trade in
shares. It had been submitted by the assessee that the board of director's resolution of April 1986 and June 1991 expressly
granted power to the company to invest monies in inter-corporate deposits subject to a cap of Rs 15 crores. Under
section 36(l)(vii), a bad debt
or 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. For and from the
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 by the assessee as share
application money and the assessee had not lent the money in the ordinary course of the business of money lending carried on
by it. Therefore, the contention of the
assessee that it had advanced the loan was contrary to the facts of the case. The expression ‘in the ordinary course of
business of banking or money lending which is
carried on by the assessee’ appearing in sub-section (2)(i) of section 36 would not take into its ambit inter-corporate deposits which
related to investment of surplus funds as
permitted by the memorandum of association of
the assessee-company. To constitute a
business of money lending a systematic business is envisaged in which funds are advanced regularly on day today basis and the principal and
interest are received back regularly. [
For a
moment if it was assumed that amount of Rs. 50 lakhs was converted into loan,
even than such an advance would not fall in the expression ‘in the ordinary
course of business of banking or money lending which is carried on by the
assessee’. The memorandum of association of the assessee-company further
provided that any loan granted to any person
on any terms whatsoever would not tantamount to carry on business of
banking within the meaning of the 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. The amount had also not been taken into account in computing the income of the assessee of the previous year
relevant to assessment year under consideration or of an earlier previous year. [
Therefore,
it was evident that the assessee deposited
the amount of Rs 50 lakhs with D 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 the assessee without consent
of D could not change the character of share application money into a loan so as to fall within the money lending business
carried on by the assessee. Therefore, the amount of Rs.50 lakhs could
not be treated as a proper debt of revenue nature or incurred in the ordinary course
of money lending business carried on by the assessee, which could be allowed as bad debt under section 36(l)(vii)
[Para 13]
Therefore, the
Commissioner (Appeals) was not justified in his view. Therefore, the order
passed by the Commissioner (Appeals) was set aside and that of the Assessing
Officer was restored.
CASE REVIEW:
A.V. Thomas & Co. Ltd. v. CIT, [1963] 48 ITR
67(SC), CIT v. Abdullabhai
Abdulkadar, [1961] 41 ITR 545 (SC), and Amarchand
Sobhachand v.
CIT [1971] 82 ITR 591 (SC) - Followed.