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Income Tax Appellate Tribunal, MUMBAI BENCH “SMC”, MUMBAI
Before: SHRI G.S.PANNU
ORDER The captioned appeal filed by the Revenue pertaining to assessment year 2012-13 is directed against an order passed by CIT(A)-13, Mumbai dated 28/01/2016, which in turn, arises out of an order passed by the Assessing Officer under section 143(3) of the Income Tax Act, 1961 (in short ‘the Act’) dated 25/02/2015.
In this appeal, although Revenue has raised multiple Grounds of appeal, but the only grievance of the Revenue is against the action of the CIT(A) in (Assessment Year 2012-13) holding that assessee was entitled for the write-off of bad debts amounting to Rs.50,00,000/- under section 36(1)(vii) r.w.s. 36(2)(i) of the Act.
3. In this context, the relevant facts are that the respondent- assessee is a company incorporated under the provisions of the Companies Act, 1956 and is, inter-alia, engaged in the business of providing management and financial Consultancy. The Assessing Officer noted that assessee had, inter-alia, claimed a write off of Rs.50,00,000/- as bad debt, which represented a sum of Inter Corporate Deposit (ICD) advance to one M/s. Baroda Rayon Corporation Ltd., ( in short “ BRCL”) in the earlier years. It was noticed that assessee had entered into an agreement with BRCL in November, 2004, a copy of which has also been placed in the Paper Book filed before me at pages 61 to 60. In terms of the said agreement, assessee was to provide specialized management and financial support services to the BRCL. In terms of the agreement, it was also provided that the assessee and its associates would also provide financial support to the BRCL in order to achieve restructuring and revival of BRCL. Further, assessee was also entitled to receive certain consultancy fee, which had been offered to tax over the years. During the year under consideration, it was noticed that assessee had written-off certain amount of outstanding consultancy fee as also the ICD of Rs.50,00,000/- advanced in the earlier years. In so far the write-off of the irrecoverable consultancy fees is concerned, there is no dispute and the Assessing Officer allowed the same. However, in so far as, the write-off of the ICD of Rs.50,00,000/- is concerned, the Assessing Officer has disallowed the write-off primarily on the ground that the assessee is not in the business of money lending and, therefore, the non-recovery of the ICD cannot be allowed as a write off under section 36(1)(vii) r.w.s 36(2)(i) of the Act. Further, the Assessing Officer has also noted that the ICD advanced
(Assessment Year 2012-13) to BRCL was not taken into account while computing the income by not crediting to the P&L account and, therefore, the same does not comply with the test laid down in section 36(2)(i) of the Act.
On appeal by the assessee, the CIT(A) has since allowed the plea of the assessee and the relevant discussion in the order of the CIT(A) reads as under:- “5. Decision – I have carefully considered the AO's order and the appellant’s submissions, after which the following broad propositions are seen to be emerge. Firstly, it is clear that the agreement between the appellant and BRC entered into for rehabilitation and financing of BRC which was dated 1st November 2004 forms the basis for the advance of Rs.50 lakhs made to BRC by way of the ICD. The advance of the ICD thus formed part of the appellant’s business. Secondly, it is also clear that advancing of such monies was very much part of the objects of the appellant- company as seen from its Memoranda and Article of Association. Thirdly, it is noteworthy that the actual write-off has taken place during the very same financial year in which BRC had approached the BIFR. Quite obviously, the action of write-off has come about only as the last resort and was by no means precipitate or premature. Fourthly, it can be seen that the interest from the said ICD has already been returned by the appellant earlier. Fifthly, the decision relied on by the AO [viz. CIT v. Epsilon Advisors Private Limited (supra) had been rendered in the context of bad debts of a money-lending concern. An NBFC (Non-Banking Financial Company) is obliged to be registered as such for commencing operations of money-lending. This have’nt been done, the assessee had been denied relief of write-off of bad debts. In the instant case, the appellant is clearly no money-lender. The debt in question is inextricably linked to the consultancy agreement between BRC and the appellant, whereby the appellant was to provide financial as well as managerial assistance for rehabilitation of BRC. In any case, advancing of funds was one of the objects of the appellant. To this extent, reliance of the AO on the decision in the case of CIT v. Epsilon Advisors Primate Limited (supra) is misplaced. Sixthly, the appellant has relied on the decision in the case of Wendt(India) Limited v. JCIT(supra). Noting that the ICD advanced by the assessee in that case had been partly recovered, the cheques for the balance amount having bounced and the assessee having secured non-bailable warrants against the Directors of the defaulter company, it was held by the Hon’ble Tribunal that the bad debts written off in the books shall be allowed as a deduction. In the appellant’s case, the irrecoverability of the ICD stands demonstrated by the delisting BRC and its approaching the BIFR. Seventhly, there is no doubt that the money advanced by way of the said ICD had actually passed through the P&L a/c of the appellant earlier. Here, the AO has taken an exceedingly narrow interpretation of this proposition. The ICD itself can obviously not be part of the P&L a/c. What is adequately demonstrated by the AR is that the monies advanced by way of the ICD had passed through the books of the appellant and had been taken into account in computing the income for AY 2004-05, the ICD itself
(Assessment Year 2012-13) appearing in the balance sheet for FY 2004-05 in its audited accounts. The relevant provisions for this purpose would be section 36(1)(vii) of Income Tax Act, 1961 (hereinafter referred to as the ‘Act’) read with section 36(2) of the Act. These provisions stipulate two basic conditions for write-off in the context of the appellant. Firstly, the amount in question has to be written off as irrecoverable in the books of the appellant. Secondly, the debt in question should have been taken into account in computing the income of the appellant for the previous relevant to an earlier assessment year. In the appellant’s case, both these conditions are seen to have been satisfied. After taking into consideration the propositions laid down earlier in this paragraph, I am of the considered view that the write-off of the bad debt by way of the ICD for Rs.50 lakhs has to be allowed. The action of the AO to this extent is accordingly directed to be reversed.”
Against the aforesaid decision, the Revenue is in appeal before the Tribunal.
Before me, the Ld. Departmental Representative has assailed the order of the CIT(A) by pointing out that the CIT(A) erred in accepting the consultancy business of the assessee company as business of money lending so as to hold that the advancing of ICD to BRCL was in the course of business. The Ld. Departmental Representative also pointed out that the CIT(A) erred in allowing the write off of Rs.50,00,000/- as bad debt instead of treating it as capital loss since BRCL had been referred to the BIFR as a sick company. The Ld. Departmental Representative also submitted that the CIT(A) erred in accepting that the ICD written-off in the books of account satisfied the requirements of section 36(2)(i) of the Act that it had been taken as a part of the income of the assessee company.
On the other hand, Ld. Representative for the assessee defended the order of the CIT(A) by pointing out that the advancing of ICD to BRCL formed part of the assessee’s business and such an activity was also a part of the objects of the assessee company as evidenced by the Memorandum and Articles of Association. It is also pointed out that it is nobody’s case that (Assessment Year 2012-13) assessee was in the business of money lending, but as per the assessee financing of BRCL was also part of the understanding between assessee and BRCL, whereby assessee was to provide specialized management advisory services including raising of finance for the turnaround of BRCL. Further, it has been pointed out that the interest on such ICDs in the past years have been assessed to tax and that in view of the judgment of the Hon'ble Bombay High Court in the cases of CIT v.Shreyas S.Morarkhia, 19 taxmann.com 64(Bom) and CIT vs. Pudumjee Pulp & Paper Mills Ltd.,343 ITR 285(Bom), the test laid down in section 36(2)(i) of the Act was also satisfied. In sum-and-substance, the Ld. Representative for the assessee has relied upon the order of the CIT(A) in support of the case of the assessee.
I have carefully considered the rival submissions. The respondent assessee is engaged in the business of management and financial consultancy services. In terms of such business, assessee entered into an agreement with the BRCL on 01/11/2004, whereby assessee-company was mandated to work with the promoters and management of BRCL towards implementation of a comprehensive restructuring programme to achieve the turnaround of the said concern. Such comprehensive restructuring programme involved financial, organizational and operational restructuring of the BRCL and it was also proposed that assessee and its associates would also make investments in BRCL. In fact, a copy of the agreement dated 0/11/2004, placed in the Paper Book at pages 61 to 69 show that the restructuring also envisaged a 10% shareholding by the assessee and its associates in BRCL. The assessee was also entitled to receive fees and other out of pocket expenses in terms of the agreement; and, accordingly, assessee has earned management fee from the said concern in the past years, as also in the instant year. In terms of the (Assessment Year 2012-13) agreement dated 01/11/2004, assessee also advanced a sum of Rs.50,00,000/- ICD, which carried interest. At the time of hearing, it has been brought out that the interest received by the assessee on such ICD has also been declared as a part of income in the past years. In the instant year, BRCL was referred to the BIFR as a sick company. Based on such event, assessee wrote-off the amounts due from BRCL as irrecoverable and claimed it as a deduction under section 36(1)(vii) of the Act as “bad debts”. The amounts so written-off comprise of two limbs, namely, the amount receivable on account of management fee, etc., and the amount of ICD of Rs.50,00,000/-. The Assessing Officer objected to the write off of Rs.50,00,000/- under section 36(1)(vii) of the Act, as according to him, assessee is not in the business of money lending and, therefore, such a write-off does not satisfy the requirement of section 36(2)(i) of the Act to the effect that such debt or part thereof has not been taken into account in computing the income of the assessee of the previous year in which the amount is written off or of an earlier year. The aforesaid stand of the Assessing Officer has been reiterated before me by the Ld. Departmental Representative also.
7.1 In my considered opinion, there is no denying the fact that the advancing of Rs.50,00,000/- to the BRCL is based on a comprehensive management and advisory services agreement dated 01/11/2004 entered into by the assessee with BRCL. Under these circumstances, I find no reason to disagree with the CIT(A) that advancing of ICD formed part of assessee’s business. In fact, the Revenue has misdirected itself in contending that the CIT(A) has held the assessee to be a money lender whereas the CIT(A) is quite clear in observing that the assessee is “ no- money lender” but according to him the debt in question is inextricably linked to the consultancy agreement
(Assessment Year 2012-13) between assessee and BRCL, whereby assessee was to provide financial as well as managerial assistance for the rehabilitation of the BRCL; and there is also no denying the fact that advancing of funds is, in any case, one of the objects of the assessee company; under this situation the CIT(A) concluded that the advancing of ICD was a part of assessee’s business. In my view, the CIT(A) made no mistake in holding that advancing of the ICD to BRC was a part of the business of the assessee.
7.2 Now coming to the objection as to whether such a debt satisfies the condition prescribed in section 36(2)(i) of the Act. As per section 36(2)(i) it is prescribed that no deduction shall be allowed for the bad debt 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 of or of an earlier previous year or represents money lent in the ordinary course of business of banking or money lending which is carried on by the assessee. In the present case, the debt in question, is neither money lent in the ordinary course of the business of banking or money lending since such businesses are not carried on by the assessee. I am concerned with the third limb of section 36(2)(i) of the Act, whereby the stand of the Assessing Officer is that such debt has not been taken into account in computing the income of the assessee. In this context, I may refer to the judgment of the Hon'ble Bombay High Court in the case of Shreyas S. Morakhia(supra). In the case before the Hon'ble High Court, assessee was in broking business and had claimed deduction by way of bad debts under section 36(1)(vii) r.w.s. 36(2) of the Act in respect of amounts which could not be recovered by him from his clients in respect of transactions effected by him on behalf of the clients. Such amount was claimed as a deduction after having been written-off irrecoverable
(Assessment Year 2012-13) in the books of account. The claim was denied by the Revenue on the ground that the condition stipulated in section 36(2)(i) was not satisfied. The Hon'ble High Court noted that the debt of the assessee comprised, inter-alia, of the value of shares transacted and the brokerage payable by the client on whose behalf transaction took place and only brokerage having been credited to the P&L Account, it was evident that a part of the debt was taken into account in computing the income of the assessee and, therefore, the requirement of section 36(2)(i) was fulfilled. Accordingly, the Hon'ble High Court allowed the claim of the assessee for deduction under section 36(1)(vii) r.w.s. 36(2) of the Act. To the similar effect is the judgment of Hon'ble Bombay High Court in the case of Pudumjee Pulp & Paper Mills Ltd., (supra). In the said case assessee was a paper manufacturer, who advanced ICD to another concern. The assessee earned interest on such ICD which was offered for tax. In the subsequent year, which was before the Hon'ble High Court assessee could not recover the amount and arrived at a settlement with the other concern, whereby recovered only a part of principal and interest and balance amount was written-off which comprised principal amount as well as interest. A part of such write-off relating to the principal amount of ICD was denied on the ground that such an amount has not been taken into account for computing profits for any assessment year and, thus, it did not satisfy the requirement of section 36(2)(i) of the Act . Hon'ble Bombay High Court referred to its earlier judgment in the case of Shreyas S. Morakhia (supra) and noted that even if a part of the debt was offered to tax it would meet the requirement of section 36(2)(i) of the Act. It was noticed by the Hon'ble High Court that in the earlier years, the interest income was offered to tax and, therefore, a part of the debt having been taken into account in computing the income of the assessee, it met with the requirement of section 36(2)(i) of the Act .
7.3 In the present case, the total debt due from BRCL included a part relating to irrecoverable consultancy fee, which indeed has been offered for tax and has been taken into consideration while computing the income and, therefore, following the parity of reasoning laid down by the Hon'ble Bombay High Court in the case of Pudumjee Pulp & Paper Mills Ltd. (supra), the said fact satisfies the requirement of section 36(2)(i) of the Act even in the context of claim of write-off of the amount of ICD of Rs.50,00,000/-. Moreover, it is also not disputed that interest on such ICD of Rs.50,00,000/- advanced to BRCL has also been taken into account for computing the income of the assessee and, therefore, this aspect of the matter also fortifies the decision of the CIT(A) that the requirement of section 36(2)(i) of the Act stands satisfied. It is also notable that the amount due from the BRCL has been written-off as irrecoverable in the account books and, therefore, considering the entirety of facts and circumstances of the case, I find no reason to interefere with the decision of the CIT(A) that the claim of the assessee for write off of Rs.50,00,000/- advanced as ICD to BRCL is allowable as a deduction under section 36(1)(vii) r.w.s.36(2)(i) of the Act.
In the result, appeal of the Revenue is dismissed. Order pronounced in the open court on 30/11/2016