Write-off of loans to sister concern not allowable u/s 36(1)(vii) unless it is a business of money lending – Karnataka HC


CIT v Epsilon Advisers (P.) Ltd. [IT APPEAL NO. 23 OF 2006 dtd. 13.06.2012] Karnataka High Court

Background:

The assessee is a private limited company providing consultancy services in electronic and telecommunications. In the return filed for AY 2001-02, the assessee had claimed deduction for write-off of Rs 75.00 lakh  as inter-corporate deposit (deposited with M/s BPL Wireless Telecommunication Services Ltd (BWTL) and the Rs 5.34 crore as interest free advance. As M/s BWTL has closed down its business, the assessee-company had claimed bad-debts u/s 36(1)(vii) for the aforesaid amounts. The assessee held substantial interest by way of investment in sharesin BTWL.

The AO allowed the amount of inter-corporate deposit of Rs 75 lakhs as an amount irrecoverable and but did not agree for allowing the balance of Rs 5.34 crore also as bad debt for the reason that amount cannot be considered as part of an advance made in the course of money lending activity.

The AO also reasoned that there was no semblance of a lending activity for this advance is concerned. The advance was not evidenced by way of any supporting documents and no security or surety had been obtained. Even the shares held by the assessee-company in M/s BWTL were not treated as part of stock-in-trade, but as long term investment in that company and therefore lending of a sum of Rs 5.34 crore by the assessee company cannot be considered as part of any business activity.

Assessee’s contentions

  • The main reason for advance is that M/s BWTL needed funds for its expansion for providing paging services; that the advance was to enable the sister concern to tide over the competition from other entrants
  • Even as per Article No 23 of the objects clause of Memorandum and Articles of the Company, money lending activity was mentioned as an object incidental or ancillary to the attainment of main object.
  • Bombay High Court in the case of CIT v. Investa Industrial Corporation [[1979] 119 ITR 380] to has held that advance made to a business associate by an assessee, if becomes irrecoverable, can be claimed as loss in trade and qualifies for deduction in terms of Section 36(1)(vii) of the Act.
  • Mere fact that the assessee had made an advance to its sister concern cannot in any way detract from eligibility for claiming deduction under this provision.
  • If the assessing officer could allow a sum of Rs 75 lakh which was inter-corporate deposit, there was no reason to make a distinction between this claim and the claim towards Rs 5.34 crore

Revenue’s contentions

  • It is only such debt which the assessee has incurred in the course of its business activity which has become irrecoverable which alone qualifies for deduction under section 36(1)(vii);
  • Any and every advance does not qualify as a debt for the purpose of Section 36(1)(vii) of the Act;
  • The word ‘debt’ had been judicially examined by several decisions of the Supreme Court.
  • Reliance is placed on CIT v. United Breweries Ltd [[2010] ITR 546] (Kar) to submit that in the present case also the assessee had not produced any material to substantiate any of its claims such as it was carrying on money lending activity.

HELD:

  • 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.
  • In the case of A.V. Thomas & Co. Ltd. ([1963] 48 ITR 67), the Supreme Court noticed that the expression ‘debt’ should be viewed in the background of the nature of the activity that is carried by an assessee as its business activity and the amount being allowable as deduction in computing the profits and loss of the business; that it should be an activity incidental to the business and an amount which was not by way of a debt for any capital investment etc.; mere fact that a particular activity is a permitted activity in the memorandum of association by itself cannot be the determinative factor.
  • Following factors to be considered for determining whether an amount given by the assessee is one which qualifies as a ‘debt’:
    – Purpose for which the amount was given
    – Nature of the lending
    – Nature of the activity carried on by the assessee, which constitutes business activity of the assessee
  • There was nothing on record to indicate that the assessee had been recognized as money lender in terms of any legal provisions or business practice
  • The assessee’s main business activity was only in providing services in telecommunication technology and not in money lending activity.
  • The tribunal has committed an error in answering the two questions posed for our examination and we answer the questions in the negative and in favour of the revenue.

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