Income Tax Appellate Tribunal - Mumbai
Additional Commissioner Of Income Tax vs B.N. Khandelwal on 19 January, 2005
ORDER
K.K. Boliya, A.M.
1. This Departmental appeal arises from the order dt. 21st March, 2001 of CIT(A)-XXXIII, Mumbai. The Revenue has raised the following grounds of appeal:
On the facts and circumstances of the case and in law, the learned CIT(A) erred in:
(i) holding that the assessee is a share broker in the first paragraph of his order when he has sold his membership of Bombay Stock Exchange in asst. yr. 1995-96 and discontinued his business;
(ii) holding that the assessee is engaged in the business of money-lending when no evidence was produced by the assessee before the AO or the CIT(A);
(iii) not upholding the assessment order of the AO wherein on available facts the income shown by assessee from interest and dividend was computed under the head 'Other sources';
(iv) not giving any finding before allowing the claim of the assessee of bad debts under Section 36(1)(vii) as to how the condition of Section 36(2) was fulfilled when the AO in his assessment order, without prejudice to his earlier finding that income is assessable under the head 'Other sources' only, has clearly held that even the condition laid under Section 36(2) is not fulfilled;
(v) holding that the debts have become bad when the AO without prejudice to his other finding has also concluded that the debts, on facts, are not really bad.
2. The grounds of appeal, which are narrative and argumentative in nature, pertain to only one issue, i.e., deletion by the learned CIT(A) of addition of Rs. 35,15,347 made by the AO by disallowing assessee's claim for deduction of bad debts. The relevant facts are that the assessee was a member of the Bombay Stock Exchange and during the previous year relevant to the asst. yr. 1995-96, the assessee sold the Bombay Stock Exchange membership card for a sum of Rs. 1.5 crores. It was claimed by the assessee that even thereafter he was acting as sub-broker and during the course of business of sub-brokering certain amounts, were advanced to various parties. This included a sum of Rs. 15 lakhs to Shri Rajesh Tibrewala and a sum of Rs. 20 lakhs to Shri Sharad Tibrewala. The remaining sum of Rs. 16,347 represents irrecoverable amounts from three other parties. It was contended by the assessee before the AO that the interest income earned by the assessee on these loans was offered in the return of income filed as business income and was assessed as business income. It was contended that the assessee had started carrying on money-lending business and, therefore, the bad debts are deductible. It was also pointed out to the AO that the assessee complained to the Investors Services Cell under Bombay Stock Exchange regarding non-recovery of the abovementioned loans and the loans were written off in the previous year relevant to the asst. yr. 1997-98 as irrecoverable. The AO disallowed the claim on twin grounds. The AO held that conditions of Section 36(2) are not fulfilled and further the debts had not become bad and were prematurely written off without taking any legal action for recovery. The learned CIT(A) allowed the assessee's claim. It was held by the learned CIT(A) that the assessee was the best Judge regarding the time when the debt has become bad and once the debt is written off in the books of account by the assessee, the requirements of Section 36(1)(vii) are fulfilled. The learned CIT(A) relied on the following judgments:
(i) CIT v. Coates of India Ltd. ;
(ii) Kamla Cotton Co. v. CIT .
3. The learned Departmental Representative forcefully argued before us that the income from interest has been assessed by the AO as income from other sources in the present year. In the asst. yrs. 1995-96 and 1996-97, the assessee disclosed income from interest as business income and the returns were accepted under Section 143(1). It is contended that the interest income earned by the assessee is clearly assessable as income from other sources and there is no evidence whatsoever to show that the assessee was carrying on money-lending business. The learned Departmental Representative contended that the mandatory conditions of Section 36(2) have not been fulfilled by the assessee and, therefore, the learned CIT(A) was wholly unjustified in deleting the addition. It is also submitted that the debts are prematurely written off by the assessee. The learned Departmental Representative relied on the following judgments:
(i) Sir Chinnubhai Madhavlal v. CIT (1937) 5 ITR 210 (Bom);
(ii) Indequip Ltd. v. CIT ;
(iii) K.J. Somaiya & Sons (P) Ltd. v. CIT ;
(iv) Godavari Sugar Mills Ltd. v. CIT .
4. The learned Counsel appearing on behalf of the assessee strongly supported the order of the learned CIT(A) and contended that the learned CIT(A) has elaborately discussed the relevant facts and circumstances of the case as also the legal position and has arrived at a legally correct view. Regarding the Departmental allegation that debts have been written off prematurely, the learned Counsel relied on the Tribunal, Mumbai Third Member decision in the case of ITO v. Anil H. Rastogi (2003) 80 TTJ (Mumbai)(TM) 696 : (2003) 86 ITD 193 (Mumbai)(TM). It is contended that in the above decision it has been held that after the amendment of Section 36(1)(vii) w.e.f. 1st April, 1989, it is not obligatory for the assessee to place demonstrative proof for establishing a debt as bad. If he has taken steps to write it off in the previous year, it is sufficient compliance for claiming the debt as bad. The learned Counsel then argued before us that after surrendering the Bombay Stock Exchange membership card, the assessee received a sum of Rs. 1.5 crores and with this fund and with the help of further loans raised, the assessee started money-lending business and during the course of such business, the assessee advanced several loans. It is submitted that money-lending licence is not the legal requirement under the IT Act for carrying on money-lending business. The learned Counsel reiterated that the assessee was carrying on the business as sub-broker and the loans were advanced during the course of normal business activity and the interest income was declared and assessed as business income during the asst. yrs. 1995-96 and 1996-97. The learned Counsel contended that the assessee's case is squarely covered by the Calcutta High Court decision in the case of Turner Morrison & Co. Ltd v. CIT . The learned Counsel invited our attention to the following observations of the High Court at pp. 726 and 727 of the report:
Even a plain reading of Section 36(1)(vii) of the Act, r/w Sub-section (2)(i) thereof clearly suggests that the aforesaid view taken by the Tribunal is incorrect. Further reading of Clause (i) of Sub-section (2) of Section 36 of the Act clearly suggests that deduction as a bad debt being allowable only to a money-lender in the ordinary course of the business of banking or money-lending is not the only aspect of the matter and that bad debt as such can be allowed as a deduction in computing the income of the assessee even if the bad debt comes into existence because of the expenditure by the assessee or because of the advancing of the money to a subsidiary company of the assessee. In the present case, undoubtedly Shalimar Works (P) Ltd. at the relevant time was a subsidiary of the assessee and this company was wound up because of the orders passed by this Court and all the assets of the company were purchased by a wholly owned company of the Government of West Bengal for a sum of Rs. 74,00,000 and the entire amount went to the secured creditor with the result that undoubtedly the assessee had no chance of recovering the amount in question from the aforesaid subsidiary. Under these circumstances, therefore, entirely and obviously since the amount was spent by the assessee and if things would have remained normal the assessee would have been able to recover this amount from the subsidiary, the question of recovery became impossible and thus in all respects, the amount could be treated as a bad debt entitling the assessee to the allowance on account of deduction from its income for the relevant year.
5. We have given a careful consideration to the rival submissions vis-a-vis the facts of the case. First of all, it must be mentioned that the learned CIT(A) has decided the issue on the basis of either irrelevant considerations or incorrect position of law. The learned CIT(A) has failed to record any conclusive finding at all as to whether the assessee is carrying on money-lending business and the relevant loans were advanced by him during the course of carrying on of such money-lending business. The relevant facts with regard to this issue have not been discussed by the learned CIT(A) at all. The learned CIT(A) has observed in his order that the assessee, after selling the Bombay Stock Exchange Card, continued to indulge in share dealing and the loans advanced by the assessee originated from the sale proceeds of Bombay Stock Exchange Card, which is part of the entire share dealings of the assessee and cannot be considered as separate. From such observation, it is implied that the learned CIT(A) was of the view that the advance of loans was part of the share dealing business of the assessee and not of money-lending business. At p. 3 of his order, the learned CIT(A) has also observed as under:
The sources of the amount is by way of receipts from sale of BSE Card. The appellant had paid capital gains tax on the said receipts. The appellant has also declared the interest income originating from sale of card for asst. yr. 1995-96, 1996-97 or 1997-98. Therefore, it cannot be said that the amount has not been subjected to tax or has not been taken into account for the purpose of computing the income of the appellant of the previous year or earlier year.
From the above, the learned CIT(A) has expressed a view that since the income by way of capital gains and the interest income have been brought to the charge of tax, the conditions of Section 36(2) are fulfilled. Obviously, the learned CIT(A) has taken a legally incorrect view Section 36(2) reads as under:
36(2) In making any deduction for a bad debt or part thereof, the following provisions shall apply--
(i) no such deduction 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 of such debt or part thereof is written off or of an earlier previous year, or represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee;
From the above provisions, it is clear that before any deduction for bad debt can be allowed, either of the following two mandatory conditions must be fulfilled by the assessee:
(a) the debt has been taken into account in computing the income of the assesses of the relevant previous year in which it is written off or in an earlier previous year; or
(b) the debt represents money lent in the ordinary course of the business of banking or money-lending, which is carried on by the assessee.
The learned CIT(A) has wrongly observed that the condition (a) above is fulfilled as capital gains and the interest income has been gone into computation of income. As a matter of fact, the legal requirement is that the amount of bad debt must have gone into computation of assessee's income. Thus, in the case of a trader, if the sales have been made on credit and the corresponding debt becomes irrecoverable, the said debt can be allowed as bad debt as the sales have gone into computation of assessee's income. Obviously, the assessee does not fulfil this condition and the finding recorded by the learned CIT(A) is legally incorrect. From the above, it would appear that in the case of the assessee, the debt can be allowed as bad debt under Section 36(1)(vii) only if it falls under (b) above, i.e., the debt represents money lent in the ordinary course of money-lending business carried on by the assessee. The moot question is as to whether the assessee can be said to be carrying on money-lending business. In our view, no material or evidence whatsoever is available to even remotely suggest that in the previous year relevant to the asst. yr. 1996-97 when the loans were advanced, the assessee was carrying on money-lending business. Admittedly, the assessee received a sum of Rs. 1.5 crores during that year by sale of BSE Card and this was treated to be capital receipt. As per the balance sheet as on 31st March, 1995 (copy at p. 44 of the paper book), the following items appear on the liability side of the balance sheet:
Particulars Amount (Rs.) Professional tax 665.00 B.N. Khandelwal HUF a/c 4,59,540.44 Stock Exchange Membership Deposit 1,50,00,000.00 Unique investment 5,175.00 Bank of India a/c 81,536.34 B.N. Khandelwal a/c 8,84,586.17
From the above, it is seen that there are no outside loans on the liability side. On the assets side, there are several loans along with various other assets. The assessee obviously has invested his capital with a view to earn interest income and unless it is established by producing material and evidence, it cannot be said that the assessee was carrying on money-lending business.
6. At this stage, the cases relied upon by the learned Departmental Representative may be referred to. In the case of Indequip Ltd. (supra), it was held by the Bombay High Court that business loss on account of bad debt must arise directly from carrying on of assessee's business. If the loss is not incidental to the assessee's business, the amount written off is not deductible as bad debt or as business loss. In the case of Sir Chinnubhai Madhavlal (supra), the assessee was engaged in money-lending business and also made investment in debenture loans. It, was held by the Hon'ble High Court that loss of investment in debenture loans cannot be said to be business loss incidental to the money-lending business. The observations of the Hon'ble Bombay High Court in the case of K.J. Somaiya & Sons (supra) may be reproduced below from pp. 607 and 608 of the report:
The assessee had claimed certain amounts on the basis that they represented bad debts written off in the respective assessment years. For the asst. yr. 1968-69, the claim came to Rs. 94,402 and for the asst. yr. 1969-70 to Rs. 2,200. The details of eleven parties whose debts were claimed as written off for the first year are furnished, but no such details were furnished for the second year. It was contended by the assessee that it had earned substantial interest for the two assessment years and that all this would indicate that the assessee was carrying on money-lending business. The Tribunal had in its appellate judgment fully considered various submissions made on behalf of the assessee, both factual and legal, and ultimately came to the conclusion that the advances could not have been shown to have been made in the course of any money-lending business. Indeed, the Tribunal refused to concede that the assessee was carrying on any such business. According to the Tribunal, it may be that the assessee had earned some interest from surplus funds given as advances or loans to certain parties, but this by itself would not establish the indicium of trade. The Tribunal had sought various details from the assessee. The Tribunal pointed out that the assessee failed to give information which had been sought for. This is set down by the Tribunal in the following passage:
'If the assessee had conducted money-lending business, it could have certainly informed us as to what was the total capital in the said business, what was the extent of loans taken from outside parties, what was the total interest paid by the assessee, whether it owned a money-lending licence or whether it advanced funds only to traders, what was the extent of rolling of the circulating capital and such other relevant factors. No such evidence has been produced before us. The only material before us is that the assessee invested considerable amounts in purchase of shares and the interest paid on these advances was claimed against dividend income, of course after debiting the interest received from surplus funds advanced to a few parties. On the basis of this material, it is not possible for us to come to the conclusion that the assessee was doing money-lending business.' Once the aforesaid portion of the appellate judgment of the Tribunal is perused, we must come to the conclusion that this is a finding given by the Tribunal which is predominantly based on the perusal of the factual material made available to it.
The ratio of the case of Godavari Sugar Mills Ltd. (supra) may also be reproduced below from the headnote:
The Tribunal had held interest amounting to Rs. 12,38,387 to be income from other sources in the asst. yr. 1967-68, inter alia, on the grounds (i) that the interest paid by the assessee on borrowings was allowed as business expenditure and, therefore, those borrowings must have been used by the assessee for the purpose of its business; (ii) it inferred from the aforesaid fact that the monies available for advancing loans, thus, had or could have their sources in the assessee's own reserves and surpluses from the profits; and (iii) it may be taken on the basis of the Tribunal's order for asst. yr. 1966-67 that the advances were mostly to the assessee's subsidiary companies and its other allied concerns. On a reference:
Held, that the assessee had not placed any material before the Departmental authorities or the Tribunal that these monies on which the interest in dispute was earned were advanced in the course of the assessee's business. The Tribunal was justified in its conclusion and the income of Rs. 12,38,387 being interest received on loans and advances was taxable as income from other sources.
7. From the above cases, the principle which emerges is that the assessee must establish beyond any doubt that the loans were advanced during the normal course of carrying on of money-lending business. In the present case, the assessee did not obtain any licence which is a legal reguirement for carrying on money-lending business. There is no other evidence or material to show that the assessee was carrying on money-lending business. Merely because the assessee disclosed interest income as business income, it cannot be said that the assessee was carrying on money-lending business. Here, a reference would be appropriate to the Calcutta High Court decision in the case of Turner Morrison & Co. (supra) relied upon by the learned Counsel for the assessee. In the above case, the loss was primarily allowed by the Calcutta High Court on the ground that the loans advanced to subsidiary were for business purposes and, therefore, non-recovery of loans amounted to business loss. The learned Counsel for the assessee was informed by the Bench about the Bombay High Court decision in the case of Phaltan Sugar Works Ltd. v. CIT the ratio of which is reproduced below from the headnote:
Section 36(1)(iii) of the IT Act, 1961 provides for deduction for payment of interest only if the assessee borrows capital for its own business. A subsidiary company is a separate legal entity and the business of the subsidiary company cannot be considered as the business of the assessee itself . Thus, the interest on money borrowed by the assessee for advancing to its subsidiary company could not be deducted from the income of the assessee under Section 36(1)(iii) of the Act.
From the above, it is clear that the Bombay High Court, in the above case, has held that advance of loan to subsidiary cannot be said to be for the purposes of business. Thus, the Calcutta High Court decision is at variance with the Bombay High Court decision, which is binding for our purposes. It is true that the assessee is entitled to write off the debt in a year in which the assessee feels that the debt has become irrecoverable and the assessee is not reguired to lead any demonstrative evidence as held in the case of Anil H. Rastogi (supra). However, the mandatory conditions of Section 36(2) have to be fulfilled for a claim of bad debt to be allowed. In our view these conditions have not been fulfilled by the assessee and, therefore, we hold that the learned CIT(A) was not justified in deleting the addition made by the AO by disallowing the assessee's claim for deduction of bad to amounting to Rs. 35,15,347. The order of the learned CIT(A) is, therefore, reversed and that of the AO restored.
8. In the result, the Departmental appeal stands allowed.