Peninsular Plantations Ltd. vs Assistant Commissioner of Income Tax

Dr. Manjula Chellur, C.J.—This matter is taken up for final disposal by the consent of both the appellant and the Revenue. The following substantial questions of law arise for consideration:

(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in confirming the disallowance of the claim for bad debts amounting to Rs. 30 lakhs?

(2) Whether, on the facts and in the circumstances of the case, there is any material or evidence on record to justify the decision of the income tax Appellate Tribunal that the intercorporate deposit made by the appellant is not money lent in the normal course of business?

The entire controversy revolves around the appellant-assessee''s claim of bad debt of advance of a sum of Rs. 30 lakhs to another public company by name M/s. Peermade Tea Co. Ltd. during the financial year 1996-97. It is not in dispute that the accrued interest of Rs. 23,76,274 (rupees twenty-three lakhs seventy-six thousand two hundred seventy four only) was declared as outstanding along with the principal amount in the returns of appellant-assessee. According to the appellant-assessee, this amount of Rs. 30 lakhs pertains to the transaction of loan in the normal course of money-lending, which is one of the objects of the assessee-company as per the articles of the memorandum of association. It is also not in dispute, the appellant-assessee subjecting this accrued interest in the previous assessment years while computing the income of the assessee.

The Assessing Officer, for the assessment year 2007-08, opines that the appellant-assessee is not engaging in the business of banking or money-lending as it is mainly dealing in shares and, hence, the loan advanced cannot be held as having lent in the ordinary course of business of banking or money-lending. This opinion of the Assessing Officer further substantiated saying major portion of income returned by the assessee is from sale of shares as well as dividend. However, he also refers to the nature of Rs. 30 lakhs advanced by the appellant-assessee to another public limited company as an intercorporate loan. Ultimately, the assessee''s claim of the principal amount of Rs. 30 lakhs as bad debt is not allowed, so also the interest provision amounting to Rs. 23,76,274 (rupees twenty-three lakhs seventy-six thousand two hundred seventy-four only) was rejected on the ground of not furnishing the documentary evidence.

This order came to be challenged before the first appellate authority and at paragraph 4 of the order the first appellate authority opines that the Assessing Officer was justified in not allowing the deduction of Rs. 30 lakhs as bad debt u/s 36(1)(vii). So also the first appellate authority upholds the opinion of the Assessing Officer in rejecting the claim of the interest portion. This came to be challenged by the appellant-assessee before the Tribunal and the Tribunal at paragraphs 12, 13 and 14 with reference to the principal amount of Rs. 30 lakhs and also the interest portion of Rs. 23,76,274 (rupees twenty-three lakhs seventy-six thousand two hundred seventy-four only) made the following observations:

In the instant case, the assessee has not furnished any material to show that the amount of Rs. 30 lakhs was advanced in the regular course of the business activity of lending money. The agreement, if any, entered between the assessee-company and M/s. Peer-made Tea Co. Ltd. was not furnished to prove that it was a loan transaction. Instead, we notice that the assessee has simply placed reliance on clause 22 of the objects clause to contend that it is authorised by the memorandum of association to carry on the money-lending activity. However, the Tribunal in the case of Poysha Oxygen (P.) Ltd. (supra) has held that the object clauses mentioned in the memorandum of association are not relevant for considering whether the activity undertaken by the limited company amounts to business activity or not. The headnotes reported in [2008] 19 SOT 711 are extracted below, for the sake of convenience.

Business income--Business--Relevancy of memorandum of association of company--In considering whether an activity undertaken by a limited company amounts to business or not it is irrelevant to consider whether it is within its powers under its memorandum of association--IRC v. Hyndland Investment Co. Ltd. [1929] 14 TC 694, Kishan Prasad and Co. Ltd. Vs. Commissioner of Income Tax, Punjab, , Commissioner of Income Tax, Madras Vs. P.K.N. Co. Ltd., and COMMISSIONER OF Income Tax, CALCUTTA Vs. J. K. EASTERN INDUSTRIES (PRIVATE) LIMITED., relied on.

It is a well settled proposition that the nature of transaction shall ordinarily be decided by ascertaining the intention of the parties entering into the transaction. The intention of the parties could be ascertaining on the basis of evidences available on record and also on the basis of surrounding circumstances. In the case of Poysha Oxygen (P.) Ltd. (supra), the Third Member has held that the fact that it was a single transaction was not an impediment to it being called money-lending business. Hence, a single transaction of advancing money could also fall in the category of money-lending transaction, provided the intention of the parties are made clear in that regard. In the instant case, as stated earlier, no material was placed before us to show that the amount of Rs. 30 lakhs was advanced with the intention of lending money in the ordinary course of business and not as investment. The assessee has also not shown that he was carrying on this kind of transactions repeatedly. Hence, in the facts and in the circumstances of the case, in our view, the condition laid down u/s 36(2)(i) has not been satisfied by the assessee in this regard. Accordingly, we do not find any infirmity in the decision of the learned Commissioner of income tax (Appeals) in rejecting the bad debt claim of Rs. 30 lakhs u/s 36(1)(vii) of the Act.

We notice that the tax authorities have rejected the bad debt claim of the interest amount of Rs. 23,76,274. The assessee has filed before us a paper book, wherein he has attached account copies of interest received account for the financial years 1996-97 to 2005-06 relating to the assessment years 1997-98 to 2006-07, respectively. The contention of the assessee is that it has accounted for the accrued interest in all the years and offered the same for taxation. We notice that this aspect has not been examined by the tax authorities. They have rejected the claim of the assessee only for the reason that the assessee could not substantiate that the interest amount was offered for tax in the earlier years. Since the assessee has filed the copies of the interest received account for various years, in our view, this matter requires fresh examination at the end of the Assessing Officer. Accordingly, we set aside the order of the learned Commissioner of income tax (Appeals) on this issue and restore the matter to the file of the Assessing Officer with a direction to examine the same afresh and take appropriate decision in accordance with law.

According to the first appellate authority and the second appellate authority, the Tribunal in the case of (2008) 19 SOT 711 held that the objects clauses in the memorandum of association are not relevant for considering whether a particular activity undertaken by the limited company amounts to business activity or not, therefore, opined that mere terms or objects clauses in the articles of memorandum of association cannot form the criterion to consider the said issue and rejected the claim of write off as bad debt u/s 36(1)(vii) of the income tax Act. So far as the interest portion is concerned, the account copies of interest received account for the previous years right from 1996-97 to 2005-06 indicate that the assessee had subjected accrued interest to tax, therefore, there is some force in the contention of the assessee. Accordingly, the order of the Commissioner of income tax (Appeals) on the issue of rejecting the bad debt claim of interest was set aside restoring the matter to the file of Assessing Officer to re-examine the same, afresh and take appropriate decision in accordance with law.

Learned senior counsel arguing for the appellant contends that the Assessing Officer who had the opportunity of analysing the factual situation never opined that there was deficit material or no material, so far as transaction of lending Rs. 30 lakhs to another corporate company by the assessee-company. In that view of the matter, there was no justification on the part of the first appellate authority and the Tribunal to opine that no material was placed by the appellant-assessee in support of their contention that Rs. 30 lakhs was lent to another company in the normal course of business as money-lending. So far as the opinion of the first appellate authority and the second appellate authority, the objects clauses in the memorandum of association cannot be the basis to come to such conclusion. But, however, to understand the claim of a particular assessee, first of all one has to see whether the object of the company was to conduct business even in money-lending or not. It is also possible to do occasional money-lending in commercial world without having such objects clause also. Therefore, the objects clause cannot be the basis to form such opinion.

In the instant case, if the objects clause is already in existence well and good, but even in the absence of such objects clause, it is possible for one corporate company to lend money to another corporate company for various reasons. What actually forms basis to allow the benefit of the claim as bad debt would be whether a particular transaction was in the ordinary course of business with an intention to lend money or something else. Unless the factual material is looked into, one cannot straightaway come to a conclusion that a particular transaction is either money-lending activity or not.

In that view of the matter, we are of the opinion, there has to be fresh consideration of the matter, so far as lending of Rs. 30 lakhs and also the interest accrued with reference to whether it was disclosed in the earlier assessment years or not as interest due. Accordingly, the appeal is allowed. We set aside the order of the Appellate Tribunal, even with regard to Rs. 30 lakhs the principal amount claimed as bad debt, directing the Assessing Officer to examine the same afresh, after giving an opportunity to the appellant-assessee to point out the material, if it is already on record and furnish necessary information if it is needed. With these observations, the appeal is answered in favour of the appellant-assessee.