Madras H.C : the assessee is in the business of money-lending and on the basis thereof allowing write off of the amounts lent as bad debt

High Court Of Madras

CIT vs. Southern Polymers (P.) Ltd.

Assessment Year : 2000-01

Section : 36(1)(Vii)

Mrs. Chitra Venkataraman And P.P.S. Janarthana Raja, JJ.

Tax Case (Appeal) No. 124 Of 2005

April 12, 2011

JUDGMENT

Mrs. Chitra Venkataraman, J. – The Revenue has preferred this tax case appeal against the order of the Income-tax Appellate Tribunal, Madras “A”. Bench, dated July 15, 2004, in I.T.A. No. 2243/Mds/2003, raising the following substantial questions of law :

“(i)Whether, in the facts and circumstances of the case, the Tribunal was right in holding that the assessee is in the business of money-lending and on the basis thereof allowing write off of the amounts lent as bad debt ?

(ii)Whether, in the facts and circumstances of the case, the Tribunal was right in holding that the amounts given to the parties were for the purpose of and incidental to the business of the assessee and allowing write off of the same as bad debt ?

(iii) Whether, in the facts and circumstances of the case, the transaction between the assessee and M/s. Dyes and Pigments were not for the purpose of evading tax ?”

2. The assessment herein relates to the assessment year 2000-01. The assessee herein is engaged in the manufacture of chemicals of job work basis. Apart from this, the assessee was also stated to have been engaged in money-lending business. Every year, the interest charged on the amount claimed was offered for income-tax and the same was assessed under the head of business income.

3. It is seen from the records placed before this court that the assessee had advanced money on various occasions to M/s. Dyes and Pigments India. The borrower had a running account with the assessee and every year, on the payment of the principal and the interest, there was an adjustment of the same towards the amount due, and the outstanding amount on the closing date was struck.

4. Incidentally, it may also be pointed out that some of the directors of the assessee-company where the partners in the firm by name Dyes and Pigments India and the said firm was dissolved on September 30, 1994. While finalising the assessment, the assessee claimed write off of the amount due and payable by the said firm, on the ground that the recovery was barred by limitation and even if any case was to be filed, it required a huge outlay of funds. Considering the meagre chances of recovery of the amount, by board resolution dated February 16, 2000, the assessee decided to write off the amount due from M/s. Dyes and Pigments India. Thus, a sum of Rs. 1,62,00,909.01, being the principal portion of the debit balance was sought to be written off. The Deputy Commissioner of Income-tax, however, rejected the plea of the assessee. Aggrieved by the same, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals). Going through the contention of the assessee, the Commissioner of Income-tax (Appeals) agreed with the Income-tax Officer to hold that the assessee advanced money to M/s. Dyes and Pigments India and the same was not in the course of a money-lending business and that the advancing of money was for non-business purpose. The assessee had not given justification for the large advances made to the said firm without any security. Thus, rejecting the plea for writing off of the amount, the appeal was dismissed. The assessee went on further appeal before the Tribunal. The Tribunal considered the claim as regards the assessee carrying on business in money-lending to have the interest income and the writing off of the principal amount as a bad debt as in the course of business. It also considered the claim of the assessee as regards the bona fides of writing off of the principal amount as a bad debt. Considering the rival contentions, the Tribunal pointed out that the assessee did have money-lending business and that the interest returned on the amount lent was accepted by the Revenue as part of its business income. It further pointed out that admittedly, the debtor had deducted tax at source before paying interest to the assessee and the TDS return had also been filed with the Department. As regards the objection raised by the Revenue that the memorandum of articles and association of the assessee did not authorise money-lending business, the Tribunal pointed out that the substance of the transaction had to be seen to find out as to whether the assessee had, in fact, entered into money-lending business. Going by the consistent return of interest income as a business income accepted by the Revenue, the Tribunal came to the conclusion that the assessee had business in money-lending.

5. As regards the writing off of the principal amount, the Tribunal found that when the Assessing Officer accepted the interest income as from money-lending business, the same line of reasoning had to be accepted in respect of the principal amount also. In respect of advancing of money to an extent of Rs. 40 lakhs to M/s. Dyes and Pigments India, the Tribunal pointed out that the assessee had advanced the said sum of Rs. 40 lakhs for the purpose of purchasing technical know-how for the manufacture of chemicals. Subsequently, since the purchase of technical know-how did not materialise, the amount advanced was converted as loan and the same was continued in the books of account as a loan. Aggrieved by the same, the present tax case appeal has been filed by the Revenue.

6. Learned standing counsel appearing for the Revenue, although raised serious objection as regards the claim of the assessee that it was carrying on the business of money-lending too, having regard to the finding of fact by the Tribunal, being the highest fact finding body, we do agree with the Tribunal’s finding that the assessee was carrying on business in money-lending.

7. It is seen from the order of the Tribunal that it had, in an elaborate manner, considered the claim of the assessee as well as the Revenue, on the aspect of the assessee doing business in money-lending. A perusal of the order of the Tribunal and the assessment order shows that right from the assessment years 1991-92 to 2000-01, the assessee had been consistently receiving interest from the money-lending business as a business income and the same was offered as business income, the Revenue accepted the claim of the assessee in the assessment made for the earlier years under section 143(3) of the Income-tax Act. Even for the assessment year 2000-01, the interest arising out of the same transaction was offered as business income, which was allowed by the Assessing Officer. Having considered the detailed working of the assessee as regards the interest received by the assessee from the various borrowers right from the assessment years 1991-92 to 1999-2000, the Tribunal pointed out that admittedly, the debtor had deducted tax at source before paying interest to the assessee. The Tribunal found that the copies of the statement filed before it showed that the assessee had been continuously receiving interest income and the same was offered for assessment and had, in fact, been assessed so. Having regard to the abundant material available in this regard that the assessee had money-lending business, the Tribunal rightly held that apart from manufacturing activity, the assessee was doing money-lending business, as part of its business. Even though the finding of the Tribunal as regards the memorandum and articles of association containing the clause on carrying on of the business may not be correct, yet, there are hardly any material before us to support the Revenue’s case that the assessee did not have money-lending business as part of its business. The Tribunal considered the decision of this court reported in Ace Investments ( P.) Ltd. v. CIT [2000] 244 ITR 166 (Mad), as regards the need to look at the substance of the transaction for the purpose of finding out whether the assessee could be said to have business in money-lending. The reference as regards the substance of the transaction assumes relevance in a case where the transaction itself is of such a dubious character that one may not know whether the transaction falls under a particular character as, namely, money-lending business. A perusal of the statement filed before the authorities below shows that apart from M/s. Dyes and Pigments India, the assessee had money transactions with other concerns too, which were treated as part of the money-lending business. In the circumstances, we have no hesitation in confirming the finding of the Tribunal that the assessee had money-lending business also as part of its business. Given the fact that the assessee had been carrying on business in money-lending, which had been accepted so by the Revenue, and in the absence of any other material to show that the memorandum and articles of association of the company did not permit carrying on of money-lending business, the only question that survives for us to consider is whether the amount advanced by the assessee to the extent of Rs. 40 lakhs was really in the nature of a loan.

8. The Tribunal found, as a matter of fact, that the amount advanced was originally for purchase of technical know-how ; however, the same was treated as a loan by reason of the fact that the purchase of technical know-how did not materialise. The amount was advanced on April 7, 1993. The amount was subsequently treated as a loan in the course of the said year, after the dissolution of the firm on September 30, 1994. The assessee is said to have received interest income from the dissolved firm’s partners. The interest offered by the assessee in respect of the said amount of Rs. 40 lakhs was accepted by the Revenue as income from business.

9. As regards the assessee writing off the principal amount as irrecoverable, the Tribunal found that there was no justification for disallowing the claim of the assessee in respect of the principal amount. The Tribunal rightly rejected the reliance placed on the decision of this court in Ace Investments (P.) Ltd . v. CIT [2000] 244 ITR 166 (Mad) by distinguishing the said case to the facts herein, considering the consistent treatment of the transactions of the assessee as one of business in nature and the income therefrom as a business income. As regards the money lent to the close relatives who happened to be the partners of the debtor firm and incidentally the directors of the company too, the Tribunal held that the Department had, had the knowledge that the directors of the company and the partners of the firm were closely related, yet, the Assessing Officer accepted the bona fides of the claim and allowed the interest arising from the same transaction as a business income, although on the claim of bad debt, he rejected the assessee’s contention. The status or relationship between the parties, by itself, is not a ground for rejecting the claim of the assessee, particularly when the Revenue itself had accepted the interest arising out of the same transaction as business income. In the absence of any material at the hands of the Revenue, the Tribunal rightly held that the claim of the assessee could not be rejected. Having regard to the pure finding of fact by the Tribunal, we have no hesitation in confirming the order of the Tribunal.

10. It may also be pointed out herein that with the amendment introduced to section 36(1)(vii), on and after April 1, 1989, it is not necessary for the assessee to establish that the debt, in fact, had become irrecoverable. Rightly, the assessee is supported in his contention by placing reliance on the decision reported in T.R.F. Ltd. v. CIT [2010] 323 ITR 397 (SC). Thus, even going by the settled law declared by the apex court, apart from the findings of fact by the Tribunal, we have no hesitation in confirming the order of the Tribunal and rejecting the appeal.

11. In the result, this tax case appeal stands dismissed.

[Citation : 339 ITR 540]

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