DCIT 6(1), MUMBAI vs. BLUE NILES HOLDINGS LTD, MUMBAI

We heard the parties and perused the record. The assessee is an investment and non-banking finance company registered with RBI as NBFC. The assessee’s claim of bad debts of the two items referred above was rejected by the AO. Since the Ld CIT(A) has allowed the claim, the revenue has filed this appeal before us.

The first item of bad debts claim relate to the Inter Corporate Deposit (ICD) made with M/s RPG Satellite Communications Ltd. The ICD amount

At the time of hearing, a specific query was asked to Ld A.R as to whether the assessee has received any interest income from the ICD kept with M/s RPG Satellite Communications Ltd. Though the Ld A.R agreed to furnish the relevant details, but till date no such details have been furnished. No doubt, the conditions prescribed u/s 36(1)(vii) read with Section 36(2)(i) have been complied with by the assessee. However, a careful study of whole gamut of transactions, in our view, would show that the holding company of the assessee simply shifted its loss upon the assessee by way of entering into a deed of assignment. We have come to such a conclusion on the following reason:-

Since the assessee has failed to establish the nature of financial position of M/s RPG Satellite Communications Ltd and further since the assessee has failed to show that it had actually received interest on ICD, we have no other option, but to take the view that the assessee has merely accommodated its holding company by taking the ICD under the deed of assignment, i.e., the loss that should have occurred to the holding company has been transferred to the assessee company. The condition prescribed in sec. 36(2)(i) for allowing the bad debts claim made u/s 36(1)(vii) states that the amount so written off represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee. In our view the expression “in the ordinary course of the business of banking or money lending” are crucial, i.e., it has to be shown that the assessee has taken all the precautions that are normally taken by a prudent business man before lending money to a person, which inter alia, includes examination of financial position of the client. Since the facts and 4 M/s. Blue Niles Holdings Ltd. ICD on assignment, we are of the view that the ICD amount so purchased by it cannot be considered to be the money lent in the ordinary course of the business of money lending, in which case the condition prescribed u/s 36(2)(i) cannot be said to have been complied with. On this reasoning, we are of the view that the AO was justified in rejecting the claim of bad debts of Rs.33.00 lakhs referred above. In view of the above, we set aside the order of Ld CIT(A) on this issue and restore the addition made by the AO.

The next issue relates to the write off Rs.7.18 crores, being the advance given by the assessee company to another group company named M/s RPG Telephones Ltd. It is stated that the assessee gave this loan @ 8% to the above said company, which was promoted as special purpose vehicle for setting up and carrying on business of telecommunication. It is further stated that M/s RPG Telephones Ltd could not execute the project due to litigations and ultimately lost its ligation in July, 2005. In view of the above, the net worth of M/s RPG Telephones Ltd became negative and hence the recovery of the advance of Rs.7.18 crores given to it became doubtful. Hence the assessee wrote off the same as bad debts. The AO disallowed the same on the reasoning that the loss has occurred on capital account and further the provisions of sec. 36(2)(i) have not been complied with. The Ld CIT(A) allowed the same by holding that the assessee has lent the money to M/s RPG Telephones Ltd in the ordinary course of its business and it has complied with the conditions prescribed u/s 36(2)(i) of the Act.

We heard the parties on this issue. The assessee has lent a sum of Rs.7.18 crores to one of its group companies named M/s RPG Telephones Ltd. It is stated that M/s RPG Telephones Ltd was established as a Special Purpose Vehicle (SPV) for carrying on telecommunication business. The record does not contain the dates on which the advance of Rs.7.18 crores given by the assessee to the above said company. Though it is stated that the above said loan of Rs.7.18 crores was given @ 8% interest, yet the details

If the assessee has actually lent the money to M/s RPG Telephones Ltd in the ordinary course of business of money lending, then the claim of the assessee is allowable u/s 36(1)(vii) of the Act. However, we are of the view that the details relating to the same requires further clarification.

The assessee has filed Cross objection, wherein it is contended that the claim of the assessee should be allowed as trading loss u/s 28 of the Act or as expenditure u/s 37(1) of the Act.

The alternative claim of the assessee is not admissible in respect of the claim of Rs.33.00 lakhs, since we have held that the said claim was only an accommodation arrangement. In respect of claim of Rs.7.18 crores, the alternative claim may be made before the AO, since we have restored the matter to his file.

In the result, the appeal of the revenue and the cross objection of the assessee are treated as partly allowed for statistical purposes.