By C. N. Vaze, Shailesh Kamdar, Chartered Accountants
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12 114 ITD 202 (Delhi)
Tulip Star Hotels Ltd. v. ACIT
A.Ys. : 1998-99, 1999-2000 and 2003-04
Dated : 1-6-2007
S. 36(1)(vii) r/w S. 36(2) — Money-lending activity is a part
of non-banking finance business — Providing funds to entities where assessee was
a promoter was a part of fund-based activities carried on by the company —
Whether where assessee had provided funds to one such assessee, and the said
amount had become irrecoverable, the same could be claimed as bad debts — Also,
where the assessee had given certain amount to an entity for allotment of
preference shares — The entity refused to allot the same, and further the said
amount advanced by the assessee to this entity also became irrecoverable — Held,
the same could be claimed as bad debts.
Facts :
The assessee, a non-banking finance company, was incorporated
in the year 1987, and was mainly engaged in providing fund- and non-fund-based
financial services. In the relevant assessment years,
the assessee had paid certain amount to some villagers as advance for purchase
of land for business of development activities. Further, the assessee had also
advanced money to two companies, ‘F’ and ‘P’. The assessee had promoted ‘F’ and
had deposited certain amount with a bank and stood guarantor for money given to
‘F’ by the bank. On the guarantee money, the assessee earned interest from bank
as well as from ‘F’ and offered the same for taxation. Business of ‘F’ was
abandoned and despite all efforts, the assessee was not able to recover the
amount from ‘F’ and claimed the same as bad debts u/s.36(1)(vii). Further, the
assessee had given certain amount to ‘P’ for allotment of preference shares, but
‘P’ refused to allot the same. The assessee, therefore, asked ‘P’ to refund the
amount with interest and on P’s failure, claimed the said amount as bad debts.
The assessee’s claim was disallowed on the ground that it was
not carrying on any money-lending business.
On appeal before the Tribunal, the Tribunal held the
following :
1. The contention of the lower authorities that the
assessee was not carrying on any money-lending business was incorrect. This
was because; carrying on money-lending activities was a part of doing
non-banking financial business. Huge amounts earned as interest were offered
for taxation, and the same had been taxed in the earlier years as well as the
year under consideration. The objects clause of the assessee-company clearly
stated that the object of the assessee was to run non-banking business and
advance money as intercorporate deposits.
2. The Delhi Bench of the Tribunal has held that there is
no qualification in S. 36(2) that the business of money lending should be
understood only in traditional sense.
3. Further, the guarantee stood by the assessee has to be
taken as an activity of money lending. The assessee has earned interest on the
guarantee amount from the bank as well as from ‘F’. As the business of ‘F’
company was abandoned, whatever amount was recoverable from it by the assessee
was treated as bad debts by the assessee. All the conditions of S. 36(1)(vii)
r/w S. 36(2) being satisfied in this case, amount recoverable from ‘F’ was
allowable as bad debts.
4. With regard to the amount advanced to ‘P’, for allotment
of preference shares, the Tribunal observed that since ‘P’ had refused to
allot the shares, the assessee had asked it to refund the amount. ‘P’ in turn
had instructed its debtor M to pay the said amount to the assessee on its
behalf. The assessee had shown this amount as intercorporate deposit with M,
and interest had also been shown. Therefore, it cannot be said that the said
amount had the character of share application money, as it was in the nature
of intercorporate deposit, on which the assessee was to receive interest. The
conditions of S. 36(2) were satisfied in this case, and the amount recoverable
from ‘P’ was allowable as bad debts u/s.36(1)(vii).
Case referred to :
DCIT v. SREI International Finance Ltd., 10 SOT 722
(2006) (Delhi) (para 11)
