THE issue before the Bench is - Whether when assessee engaged in telecom consultancy, earns some interest on inter-corporate deposits, it can be said that it was carrying money lending activity, and deduction for irrecoverable bad debt is allowable u/s 36(1)(vii). NO is the answer of the Hig Court.
Facts of the case
The assessee. a private limited company, provides consultancy services in electronic and telecommunications. In the return filed for the AY 2001-02, the assessee had claimed a total amount of Rs 6.09 crore as advances paid by the assessee company, but which had become not recoverable and therefore written off in the books of accounts during the accounting period corresponding to this AY. Out of this amount, a sum of Rs 75.00 lakh was claimed to be an inter-corporate deposit, deposited with BWTL and the balance Rs 5.34 crore was advanced as interest free advance to the very company. Both amounts were claimed as advance not recoverable and written off, for the reason that M/s BWTL, which was later known as India Paging Services Ltd., had closed down its business activities, as the company’s business of providing paging services to its customers had become outdated due to advancement in technology and therefore that company had closed down its business. As M/s BWTL has closed down its business, the assessee company had claimed the inter-corporate deposit of Rs 75 lakh with that company, which had earned some interest to the assessee company for some time, as also the advance it had made to the other company for its revival and rehabilitation of the said company in the wake of its dwindling business, as bad debts and written off in its books of accounts.
AO while noticed that in so far as the inter-corporate deposit of Rs 75.00 lakh, the assessee had received interest on this deposit from the other company for some time and had also offered it to tax, but when the other company had gone into red, no interest was charged for one year, but nevertheless the AO found justification to allow this amount as an amount irrecoverable and therefore was of the opinion that writing off of it is justified, but did not agree for allowing the balance of Rs 5.34 crore also as bad debt and can be written off in the accounts of the assessee-company, for the reason that amount cannot be considered as part of an advance made in the course of money lending activity of the assessee; that there was no semblance of a lending activity by the assessee company, in so far as this advance is concerned; that the assessee had from the beginning treated it as interest-free loan and lending was not evidenced by way of any supporting documents; that no security or surety had been obtained for the repayment of this amount and the amount was not advanced as part of business activity, but more out of concern for the sinking sister company in which the assessee-company held substantial interest by way of investment in shares and therefore opined that it cannot be treated as bad debt and on par with the other amount of Rs 75.00 lakh which had been allowed so and disallowed the claim to this extent.
The AO also opined that the claim of the assessee that it had written off the said amount as bad debt and as part of business transaction was not justified for the reason that lending of a sum of Rs 5.34 core was not part of any business activity, for the reason that 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 of the assessee or as incidental to the business of money lending purporting to be carried on by the assessee.
One another reason assigned by the AO for not allowing the amount of Rs 5.34 crore as a business loss incurred in the course of the business of the assessee was that even when the amount is recovered, it would not have in any way augmented the income of the assessee and non-receipt or non-recovery of this amount also did not in any way affect the profit or loss of the assessee; that it could never be treated either as a trading receipt or business a expenditure and therefore also the amount was not a debt in the course of business and cannot be claimed as an irrecoverable debt etc. The advance made being interest-free also weighed with the AO in arriving at the said conclusion. On appeal, the Tribunal allowed the appeal of the assessee.
On appeal by the Revenue, the High Court held that,
++ Submission of the appellant-revenue that the amount which qualifies for deduction in terms of Section 36(1)(vii) of the Act that it should be basically a debt and a debt which has become bad and therefore so written off as irrecoverable in the accounts of the assessee for the previous year corresponding to the AY, is an unexceptional legal postulate and has been so noticed judicially also;
++ 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’;
++ A debt may be because of any service provided by the assessee to its customers for which an amount or fees is payable but not so paid or a price payable for any of the goods supplied but not paid by the customer or an amount actually lent out by the assessee as part of the business activity of the assessee and to qualify for deduction under Section 36(1)(vii), it is such debt which has become irrecoverable for various reasons;
++ It is in this background, the business activity, whether it is money lending or otherwise, assumes importance, as in the instant case, it is an amount which had been advanced by the assessee to its sister concern;
++ On an examination of these circumstances, in the exercise undertaken by the AO and the appellate authority it was revealed that the business activity of the assessee was not as a part of advancing of moneys or money lending activity, though the assessee has very vehemently urged that the AO and the appellate authority themselves had confirmed this view that a sum of Rs 75 lakh allowed as deduction, which was an inter-corporate deposit, was part of money lending activity of the assessee and that the assessee had considerable amount of interest income from the deposit made or amount advanced to other customers or associates, that in itself is not the criterion for deciding as to whether the activity was a money lending activity of the assessee or its business was money lending, as the assessee did not hold any permission or licence 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;
++ it is never the case of the assessee that it had been receiving deposits on payment of interest and it was lending money. Either on facts or from the activity carried on by the assessee or from the circumstance, the tribunal could have never used the reasoning of the AO or the appellate authority to conclude that the assessee should be taken to be carrying on the activity of money lending as a business activity and therefore on the same reasoning the amount of Rs 5.34 crore advanced to its sister concern also should be allowed. This view is not supportable for more than one reason that it is not based on any material on record; that 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 and the mere fact that the AO and the appellate authority have opined correctly or otherwise that inter-corporate deposit of Rs 75 lakh qualifies for deduction under Section 36(1)(vii) of the Act being a deposit made in the money lending business activity of the assessee automatically entails the assessee to a like deduction in respect of the advance to the extent of Rs 5.34 crore also as a deduction under the very provision of law without more. The assessee’s main business activity was only in providing services in telecommunication technology and not in money lending activity;
++ While it may be true that in terms of No 23 of the objects clause of Memorandum and Articles of Association of the Company, the assessee could have carried on this activity incidental to its main business, it was not made known as to whether the assessee was carrying this business also in a systematic manner. Mere fact that the assessee had made some inter-corporate deposits and the assessee earned income by way of interest in itself is not a circumstance to conclude that it was carrying on money lending activity as part of its business activity;
++ Recording of a finding to the effect that the amount of Rs 5.34 crore advanced to its sister concern was an interest-free while is borne out from the records and supported by the very stand of the assessee, submission of Sri Parthasarathy to the effect that contrary was made good in terms of certain material that had been placed by the assessee before the tribunal in a paperbook filed by it cannot be accepted for the reason that mere filing a paperbook is not evidence nor the assessee can be permitted to lead evidence contrary to its own admitted case. It is, therefore, we reject this submission for calling for records and reexamine the same and for remanding the matter to the tribunal;
++ in the result, it was concluded that 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. The appeal is allowed, impugned order of the tribunal is set aside and the order of the AO as affirmed by the appellate authority is restored.
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