CHAITANYA BUILDERS & LEASING (P) LTD.,CHENNAI vs. ACIT, CHENNAI

ITA No.1829/Mds/2015 :- 3 -: was a trader in goods and there was nothing to indicate that it used to lend monies in the course of its business. In West Bengal Financial Corporation and Another v. DClT, 263 ITR 332 (Cal), it was held on the facts obtaining in that case that the shares were not treated as stock-in-trade by the assessee but as investments and therefore writing off made by the assessee of the same as bad debts could not be sustained. In CIT v. Epsilon Advisers (P) Ltd [2012] 22 taxmann.com 284 (Kar), the court was ceased with the matter where the assessee company engaged in the business of providing consultancy services in electronic and telecommunications lent Rs.5.34 crores to a company, a sister concern and later on being irrecoverable claimed deduction as bad debt u/s.36(1)(vii). Referring to provisions of s.36(i)(vii), it was held that for an amount to qualify under this provision it should not only be a debt incurred in normal course of the business but it should also become irrecoverable within the meaning of s.36(2). The court took the view that it was not part of the assessee’s business activities of money lending in the course of its business and hence the write off could not be allowed. It was further underscored, the purpose for which the amount was given, the nature of the lending, nature of the activity carried on by the assessee, which constitutes business activity, of the assessee, are all factors which are to be considered in determining as to whether an amount given by the assessee is one which qualifies as a debt”. In this case, the assessee did not hold any permission or licensee or was recognized as a money lender nor was it recognized as a financial institution, banking or non-banking which has the business of receiving deposits., and lending money, both for interest. The assessee’s main business, on the contrary, was only in providing services in telecommunication technology and not in money lending activity. Finally, in Bharti Televentures Ltd v. Addl/JCIT [2013] 29 taxrnann.com 326 (Del), the court was ceased with the matter concerning the write off of Rs.2,33,76,617/- as bad debts alternatively as business loss amongst others. Here it was argued that the assessee was also engaged in the business of money lending through inter corporate deposits in the course or such business which generated substantial interest. During the assessment years concerned certain amounts could not be recovered and were treated as bad debt which was claimed as such. The Hon’ble Court adjudicating in the matter supported the view that though it is true that Memorandum and Articles of Association of the company is not conclusive on the question whether activities of a company amounts to carrying on of business, but it shows sufficiently the intention of the assessee to pursue certain main objects. The frequency of the activity is sought to be highlighted as giving rise to a continuous and organized activity. It was further noticed that it is the first year of business operation of the company and it cannot be said that it was a continuous activity carried out in a normal organized manner. As held by the assessing officer the main activity of the assessee company was the business of promoting, establishing telecom services. By no stretch of imagination can it be said that the assessee was engaged in the business of money lending. Since the business of the assessee was not that of money lending, it cannot be said that the sum in question represents money lent in the ordinary course of the business of money lending carried on by the assessee. Therefore, the claim of the assessee did not fall within the parameters of provisions of section 36(1)(vii) read with section 36(2) of the Act. The alternative claim of the assessee that the sum in question should be allowed as a deduction as a business loss cannot also be accepted, since the sum in question was not incurred as expenditure in the ordinary course of business of the assessee. The sum in question has, therefore, to be considered as a capital loss and the assessee was not entitled to claim the same as deduction. It may also be mentioned here that everything associated or connected with the business cannot be said to be incidental thereto. It is not enough if there is some close proximity of the deposit to the business carried on by the assessee, as such but it should also be an integral part of the carrying on of the business.

5.1.1 In the case of the appellant a disallowance of Rs.37,73,155/- representing advance to M/s.Casserole Foods P Ltd, a sister concern was sought to be written off as bad debt u/s.36(2)(i) which was denied by the AO while finalizing the assessment u/s.143(3). The observation made by the AO was that the claim was not allowable as the impugned amount was not routed through the P & L a/c. At the appeal stage, it was argued that the advance was made in the course of business wherein the appellant company had promoted a company styled M/s.Casserole Foods P Ltd., which was incorporated on 10th March, 1998, during the period prior to 2003, and had advanced a total sum of Rs.37,73,155/- to the said associate company which became dormant on account of recurring losses, it was argued further that clause 14 of the Memorandum of Association of the appellant company empowers it to carry on its business and enter into other transactions to benefit the ITA No.1829/Mds/2015 :- 4 -: appellant company in pursuance of which it had promoted and financially supported M/s.Casserole Foods P Ltd., as a part of its activity. That the AO had erred in disallowing the claim u/s.36(2)(i). The appellant had extracted the object clauses of the Memorandum of Association as also other objects to drive home the point. To support its claim the judgment of the jurisdictional Madras High Court in CIT v. V. Ramakrishna & Sons Ltd [2010] 326 ITR 315 was pressed into service.

5.1.2 I have carefully perused the decision relied upon and find that in the facts obtaining in that case the assessee was carrying on money lending business and had been advancing monies to its subsidiary companies and various other concerns and charged interest on the amount advanced to its subsidiary company. The interest was offered by the subsidiary company and was assessed as business income in its hands. Thereafter, due to commercial expediency, the assessee did not charge interest to the subsidiary account. The subsidiary company became weak and in order to prop-up the financial business interest the assessee advanced further amounts to its subsidiary and as on September 30, 1988 a total sum of Rs.26,07,278/- was due from which after collecting a sum of Rs.10,000/- the balance was written off as bad debt. As may be seen this case related to an assessee which was carrying on money lending business and therefore the advances were made during the course of business and the same being irrecoverable qualified to be written off u/s 36(1)(vii). The acts as exemplified in the foregoing paragraphs relating to the appellant are on a different footing. The appellant is engaged in the business of construction and sale of residential flats over years and was not remotely engaged in the business of money lending etc. This being transaction relating to an isolated case does not partake the nature of regular business of advancing loans. Therefore, the ratio of the case relied upon would not apply to the facts obtaining in the case of the appellant. For a debt to be written off two necessary ingredients have to be present viz., it should have been taken into account in computing the income of the assessee previous year in which a 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 [section 36(2)(i)]. I am, therefore, of the considered view that the claim made by the appellant does not qualify to be written off as bad debt u/s.36(1)(vii) r.w.s.36(2). Further the same does not also qualify to be written off as a trading / business loss as it does not flow from the business of the appellant. The loss is a capital loss or loss of capital, not eligible to be considered for set off under the Income-tax Act. The grounds raised in appeal on the issue are disposed off accordingly. The order of the AO is upheld. The ground Nos.2 to 6 are dismissed.

4.0 Appearing for the assessee, the Ld.AR argued that M/s.Casserole Foods Pvt. Ltd. is an associate of the assessee company with sons of the Directors of the assessee company as Directors in M/s.Casserole Foods Pvt. Ltd. Therefore, the company has advanced a sum of Rs.37,73,155/-, since there was no possibility of recovering the debt the same was written off and claimed as a bad debt, in the books of the assessee.

Alternatively, the assessee claimed it as a business loss. The assessee also relied on the decision of CIT vs. Gilanders Arbuthnot & Co. Ltd. (1982) 138 ITR 0763 (Cal) and jurisdictional The Hon’ble High Court in the case of CIT Ramakrishna and Sons Ltd. The Ld.AR argued that the ITA No.1829/Mds/2015 :- 5 -: advance given to M/s.Casserole Foods Pvt. Ltd., should be considered as business expenditure and the deduction should be allowed as business loss.

5.0 We heard the rival submissions and perused the material placed on record. M/s.Casserole Foods Pvt. Ltd. was in corporated on 10th March, 1988 by Shri Arun Reddy and Shri Suman Reddy sons of Shri Vasant Kumar Reddy, Director of the assessee company and Shri Manu Reddy is a son of Shri Ramesh Kumar Reddy who is another Director of the assessee company. From the above facts, it is evident that M/s.Casserole Foods Pvt. Ltd. is a company floated by the sons of the Directors of the assessee company. The assessee company is neither a shareholder of M/s.Casserole Foods Pvt. Ltd., is nor the subsidiary company of the assessee. Both the companies are independent companies carried on their business activity independently and separately. There was no business interest of the assessee company with M/s.Caserolls Pvt. Ltd. The assessee company has advanced sums to M/s.Caserolls Pvt. Ltd. as and when required. The amounts advanced are neither the interest bearing advances nor the investments made by the assessee company.

Both the companies are independent, companies run by the different Directors independently as two separate entities, and the assessee failed to demonstrate the business connection or business expediency of the assessee with M/s.Caserolls Pvt. Ltd. The assessee company has not ITA No.1829/Mds/2015 :- 6 -: made any investment in M/s.Caserolls Pvt. Ltd., and the amount of advance never travelled through Profit & Loss A/c. The assessee is not in the money lending activity and therefore the advance is not covered u/s 36(2) of IT Act and the same was not admitted as income in the earlier years and accordingly not allowable u/s 36(1)(vii) of IT act and we hold that the Ld.CIT(A) has rightly upheld the order of the AO holding that the amount written off of was neither a trading loss nor a business loss.

6.0 The assessee relied on the decision of CIT vs. Gilanders Arbuthnot & Co. Ltd. (1982) 138 ITR 0763 (Cal). The decision of the Hon’ble High Court which is related to the amount due from subsidiary company. In the case of Gilander Arbuthnot & Co it had many subsidiaries to which it had advanced loans. The subsidiaries were controlled by the assessee company and some of them were appointed the assessee company as their managing agents. The company bought up the share capital and advanced unsecured loans to it. There was a runnig account between the assessee company and the subsidiary on account of which there was a debit balance of Rs.87,546/-which was written off by the assessee during the relevant year and was claimed as bad debt. The loans advanced was not an isolated transaction and there was an intimate connection between the business interests of the assessee and the subsidiaries. In the instant case, M/s.Caserolls Pvt. Ltd. was not a subsidiary company of the assessee company and there was no control of M/s.Caserolls Pvt. Ltd. by the assessee company. The assessee has failed to establish the business

ITA No.1829/Mds/2015 :- 7 -: interest of the assessee in the M/s.Caserolls Pvt. Ltd. Therefore, case law relied upon by the assessee is of no help.

7.0 In the case of the Hon’ble jurisdictional High Court judgment in 326 ITR 315, the assessee was carrying on money lending business and the assessee company had advanced the moneys to subsidiary companies and various other concerns and charged the interest on amounts advanced to its subsidiary company from the A.Y 1970-71 to 1977-78.

The interest was offered by the assessee company as income in its hand.

The amounts were advanced in the ordinary course of business. In instant case, the assessee is not engaged in the money lending business and the amounts were not advanced in the ordinary course of business.

Therefore, the Hon’ble jurisdictional High Court’s decision in the case of CIT v. Ramakrishnan is not applicable in the assessee’s case. The Ld.DR relied on the decision of Apex Court in the case of CIT vs. Abdullabhai Abdulkadar and catch none of the above decision is re-produced as under:

Section 36(1)(vii) of the Income Tax Act, 1961 [Corresponding to section 10(2)(xi) of Indian Income Tax Act, 1922] – Bad debts – Assessment year 1553-54 – whether u/s.10(2)(xi) a debt is only allowable when it is a debt and arises out of and as an incident to trade carried on by assessee – Held, yes.

Since the debt in the case of the assessee was not resulted as an incident of trade the Hon’ble Apex Court’s decision also not applicable to the assessee.

ITA No.1829/Mds/2015 :- 8 -:

8.0 The Ld.DR relied on the decision of the Hon’ble Madras High Court in the Vijay Kumar Mills Ltd. v. CIT wherein the Hon’ble jurisdictional High Court held as under: Therefore, we are of the opinion that the Tribunal has come to the correct conclusion in holding that the amounts are not liable to be deducted as business debts either as bad debts or trading losses as the advances were not made for the business purposes of the assessee.

9.0 The assessee’s case has squarely covered by the decision relied upon by the Ld.DR. From the discussion in the foregoing paragraphs the assessee company diverted it’s funds to other companies and no business interest or business expediency has been established. Therefore, we uphold the order of the Ld.CIT(A) and dismiss the appeal of the assessee.

10.0 In the result, the appeal of the assessee is dismissed.

Order pronounced in the Open Court on 3rd May, 2017, at Chennai.