Delhi High Court
Commissioner Of Income Tax vs Tulip Star Hotels Ltd. on 11 May, 2011
Author: A.K.Sikri
REPORTABLE
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ ITA No.445 of 2008
ITA No.444 of 2008
ITA No.448 of 2008
Reserved On: March 28, 2011
% Pronounced On: May 11, 2011.
1) ITA No.445 of 2008
COMMISSIONER OF INCOME TAX . . . APPELLANT
through : Ms. Suruchi Aggarwal, Sr.
Standing Counsel with Ms.
Shawana Bari, Advocate.
VERSUS
TULIP STAR HOTELS LTD. . . .RESPONDENT
through: Mr. O.S. Bajpai, Sr. Advocate
with Mr. V.N. Jha, Advocate.
2) ITA No.444 of 2008
COMMISSIONER OF INCOME TAX . . . APPELLANT
through : Ms. Suruchi Aggarwal, Sr.
Standing Counsel with Ms.
Shawana Bari, Advocate.
VERSUS
TULIP STAR HOTELS LTD. . . .RESPONDENT
through: Mr. O.S. Bajpai, Sr. Advocate
with Mr. V.N. Jha, Advocate.
3) ITA No.448 of 2008
COMMISSIONER OF INCOME TAX . . . APPELLANT
ITA Nos.445, 444 & 448 of 2008 Page 1 of 19
through : Ms. Suruchi Aggarwal, Sr.
Standing Counsel with Ms.
Shawana Bari, Advocate.
VERSUS
TULIP STAR HOTELS LTD. . . .RESPONDENT
through: Mr. O.S. Bajpai, Sr. Advocate
with Mr. V.N. Jha, Advocate.
CORAM :-
HON'BLE MR. JUSTICE A.K. SIKRI
HON'BLE MR. JUSTICE M.L. MEHTA
1. Whether Reporters of Local newspapers may be allowed
to see the Judgment?
2. To be referred to the Reporter or not?
3. Whether the Judgment should be reported in the Digest?
A.K. SIKRI, J.
1. All these three appeals are between the same parties and the
Assessment Years involved are 1998-99, 1999-2000 and 2003-
04. Some of the questions raised are common to these
appeals. Therefore, we feel it appropriate to take up the
appeal relating to the Assessment Year 1998-99, which will
take care of common questions arising in other appeals as well.
ITA No.445 of 2008: (Assessment Year 1998-99)
2. In this appeal, the following three substantial questions of law
are proposed for adjudication:
"a) Whether the I.T.A.T. was correct in deleting the
disallowance of `122.47/- lacs made by the
Assessing Officer by holding that the alleged debt
had not been incurred in the normal course of
business and is not allowable as deduction?
b) Whether the I.T.A.T. was correct in law in allowing
the deduction of `85 lacs claimed by the assessee
on account of bad debt written off when the said
debt had not become bad and requirements of
Section 36 are not satisfied in this case?
c) Whether the I.T.A.T. was correct in law in holding
that the provisions of Section 35D are application in
the present case although the assessee is not an
industrial undertaking nor an extension of industrial
undertaking?"
3. Facts leading to the aforesaid questions of law may
succinctly be stated as under:
Question (a):
4. This question has arisen under the following circumstances:
`100 lacs was placed by the assessee with Citibank as
fixed deposit in the year 1994-95. The assessee agreed with
Citibank for a lien on the said deposit in consideration of the
said bank disbursing a credit line to Fairmark, a company in
respect of which the assessee company was a co-promoter.
The assessee earned interest income on the said deposit from
Citibank and also earned interest income on the said deposit
from Fairmark. On Fairmark‟s defaulting in payment of the
dues to Citibank, the amount of fixed deposit of `109.06 lacs
(including interest accrued on the fixed deposit) was
appropriated by the said bank against the dues of Fairmark in
August, 1997. The business operations of Fairmark were
controlled by three Non-Resident Indian Directors who have
since abandoned the business affairs of Fairmark. The
assessee had entered into an agreement with the said non-
resident Directors on 11.12.1996 whereby the said Directors
had undertaken to cause Fairmark to repay the dues of
Citibank and pay to the company:
(a) By way of refund of share application money of
`12.50 lacs;
(b) Arrears of interest on the deposit of `100 lacs; and
(c) Share of profit from Fairmark
The assessee has initiated legal proceedings in India against
the Dass Brothers for their failure/misconduct in the discharge
of their fiduciary responsibilities, as Directors are responsible
for the operations of Fairmark and also in U.K. for break of
agreement dated December 11, 1996. Notwithstanding a
partly favourable judicial ruling by the Courts in U.K., the
assessee is not hopeful of recoveries and hence, the amount of
fixed deposit of `100 lacs with Citibank, the interest accrued
thereon which was appropriated by Citibank and the share
application money of `12.50 lacs, all aggregating to `122.47
lacs has been written off as business loss.
5. It was found by the Assessing Officer (AO) that the assessee
company had entered into a deal with M/s. Fairmark as a co-
promoter and pledged their fixed deposit receipts with the
Citibank, as a security for loan to be given by Citibank to
Fairmark. It was further seen by the AO that in order to
promote its business, certain advances were also given. After
the borrower failed to offer the money in the Citibank and
security of FDR given by the assessee company was adjusted
by the Citibank against the dues to Fairmark. On perusal of
the documents, it was seen by the AO that Sh. Paul Dass who
was a non-resident has confirmed the valuation and settlement
in U.K. and in India and, therefore, it does not appear to be
clear cut case where the money advanced by the assessee
company could be said to be money advanced in the normal
course of business of money lending. The AO further observed
that the assessee company had advanced this money to
Fairmark as a co-promoter and definitely advancing money to
promote the assessee company is not a part of the business of
the assessee. Once the money was advanced to a company,
the recovery proceedings from the company are to be carried
out with under the provisions of the Companies Act and no
such details regarding the steps being taken for recovery of
money are moved liquidation of that company have been
furnished. Therefore, the AO opined that the necessary
conditions that the debt should have been incurred in the
normal course of business and that it should have become bad
is not fulfilled and therefore, cannot be claimed as deduction by
the assessee.
6. The CIT (A) confirmed the action of the AO, but the Income
Tax Appellate Tribunal (hereinafter referred to as „the Tribunal‟)
reversed the order of the AO as well as CIT (A) with direction
to allow the same as deduction. The Tribunal, in this behalf,
analyzed the facts in the following manner:
"15. We have seen the correspondences and the factual
aspects of the case and found that the assessee had
discharged its onus to prove that the money had become
bad in fact. The objections of the lower authorities that the
assessee is not indulging any money lending activities is
not correct because the assessee was incorporated in 1987
and money lending activities have been done by doing non-
banking financial business. Huge amounts earned on
account of interest was offered for taxation and the same
has taxed in earlier year as well as in the under-
consideration also. We have seen the objects clauses of the
assessee company and found that there are clauses of
objects to run the business of non-banking finance business
and to advance money as inter-corporate deposits and also
business of leasing business."
7. The Tribunal further held that provisions of Section 36(1)(vii)
read with Section 36(2) of the Income Tax Act („the Act‟ for
brevity) were satisfied. It was of the opinion that the business
of a Non-Banking Finance Company (NBFC) apart from leasing
definitely involves lending of money. The assessee had
deposited `100 lacs with the Citibank and stood guarantor for
the money given to Fairmark by Citibank. This act of the
assessee in giving guarantee is a facet of money lending
business, because on the guarantee money of `100 lacs, the
assessee earned interest from bank as well as from Fairmark
@9.125%. This interest earned from Fairmark and from bank
was offered for taxation by the assessee.
8. Learned counsel for the Revenue has argued that there was no
obligation on the part of the assessee to furnish such a
guarantee and in these circumstances, conditions stipulated in
Section 36(1)(vii) read with Section 36(2) of the Act were not
satisfied as held in the case of Commissioner of Income-tax
(Central), Calcutta Vs. Birla Bros. P. Ltd. [77 ITR 751].
Following discussion from the said judgment was specifically
referred to:
".............Now a bad debt means a debt which would have gone
into the balance sheet as a trading debt in the business or
trade. It must arise in the course of and as a result of the
assessee's business. The deduction claimed should not be too
remote from the business carried on by the assessee. In
Madan Gopal Bagla v. Commissioner of Income tax West
Bengali [1956]30ITR174(SC) the principle which was accepted
was that the debt in order to fall within Section 10(2)(xi) must
be one which can properly be called a trading debt i.e. debt of
the trade the profits of which are being computed. It was
observed that the assessee in that case was not a person
carrying on business of standing" surety for other persons nor
was he a money-lender. He was simply a timber merchant.
There was some evidence that he had from time to time
obtained finances for his business by procuring loans on the
joint security of himself and some other person. But it was not
established that he was in the habit of standing surety for
other persons along with them for the purpose of securing
loans for their use and benefit. Even if such had been the case
any loss suffered by reason of having to pay a debt borrowed
for the benefit of another would have been a capital loss to
him and not a business loss at all. A businessman may have to
stand surety for someone in order to get monies for his own
business. There may be a custom of the business by which
that may be the only method whereby he could get money for
the purpose of his own business. If he is to discharge a surety
debt and if any such custom is established it would be a
business debt. If the assessee has made a payment not
voluntarily but to discharge a legal obligation which arises
from his business he would be entitled to have the amount
deducted as a bad debt under Section 10(2)(xi); see
Commissioner of Income tax Bombay v. Abdullabhai
Abdulkadar [1957]31ITR72(Bom) ............"
9. Further reliance was placed on the judgment of the Karnataka
High Court in the case of Commissioner of Income Tax and
Anr. Vs. United Breweries Ltd. [231 CTR 28] wherein it
was held that the amount advanced simply for holding a
business associate cannot constitute debt. That was a case
where advances were made to business associates for issue of
shares in future. The High Court held that such amount
advanced could not constitute a debt when the assessee had
not placed any material to indicate that the business associate
had a legal obligation for repayment of the amount and
advance given for the issue of share in future was capital
expenditure, which did not qualify for deduction under Section
36(1)(vii) of the Act or Section 36 of the Act. Explaining this
provision in the light of aforesaid facts before it, the Court
observed that even on the accepted legal principles, a „debt‟ is
an expression well-known in legal parlance and is an amount
which is a legal obligation which if not discharged will give rise
to a claim in favour of the creditor. As the phrase and word of
technical and legal content and meaning and an amount which
is said to be simply advanced for helping a business associate
definitely cannot constitute a debt when the assessee had not
placed any material to indicate that the business associate or
any associate of the subsidiary of the assessee had a legal
obligation for repayment of the amount. Even here, the
amount advanced are more towards the issue of shares in
future if a company is to be brought into existence and in the
hope of getting shares allotted in the company. An
expenditure incurred for securing shares per se is a „capital
expenditure‟ and never „revenue expenditure‟ and therefore the
amount never qualifies for deduction either under Section 36 or
Section 37 of the Act.
10. The aforesaid two judgments would not be applicable to the
facts and circumstances of the present case. In Birla Bros. P.
Ltd. (supra), it was a recorded fact that expenditure was not
incurred in the course and as a result of the assessee‟s
business. He stood surety, though it was not a part of his
normal business. Likewise in United Breweries Ltd.
(supra), the advances were made to business associate for
issue of shares in future and this expenditure incurred for
securing shares was treated per se a capital expenditure and
not revenue expenditure. On this premise, it was held that the
amount did not qualify for deduction either under Section 36 or
Section 37 of the Act. In contrast, in the present case, findings
of fact have been established on record and found by the
Tribunal on the following:
(i) The assessee is in the a non-banking financial
company and thus, its business activity is not
limited to leasing, but involves lending of money as
a whole.
(ii) Act of the assessee in giving guarantee on behalf of
M/s Fairmark was a part of money lending
business.
(iii) The assessee had, in fact, earned by giving the
aforesaid bank guarantee earning in terms of
interest, not only from the said bank, but also from
M/s Fairmark for whom it stood guaranteed.
(iv) The interest earned was offered for taxation. Such
transaction of the assessee which is an NBFC would
clearly be a business transaction and this
guarantee amount would be treated as debt. When
it became irrecoverable, it would qualify as bad
debt entitling the assessee to claim as such.
11. Thus, the order of the Tribunal on this score is without any
blemish.
Question No. (b):
12. The assessee company had deposited a sum of `500 lacs for
allotment of preference shares of Piem Hotels Ltd. (hereinafter
referred to as „Piem‟). Shares were not allotted. Until
allotment of those preference shares by Piem, the above
advance was to earn income by way of interest. Piem decided
against issue of preference capital and the assessee vide letter
dated 26.07.1997 to Piem asked for refund of the above
advance with interest. Piem expressed inability to make
immediate repayment in view of liquidity constraints. Instead,
it offered to instruct M/s. Makan Investment and Trading Co.
Ltd. (hereinafter referred to as „Mekan‟), which company during
the relevant time owned inter-corporate deposits to Piem.
Piem issued instructions in this behalf to Makan vide letter
dated 29.07.1997 to make payment to the assesses on its
behalf. Acting upon the above instruction, Makan issued post
dated cheques aggregating to `500 lacs to the assessee along
with covering letter of even date. It was also requested by
Makan to the assessee to deposit these cheques only when
advised to do so. After receiving these cheques, the assessee
agreed to discharge Piem against the liability to repay the said
amount of `500 lacs. Two cheques of `50 lacs and `25 lacs
issued by Makan were encashed on 19.09.1997 and
31.10.1997 respectively. Thus, a payment of `75 lacs was
received by the assessee in this manner. However, thereafter
Makan requested the assessee not to produce remaining
cheques for clearing, as Makan refused its indebtedness to the
assessee. Thereafter, discussions took place between the
assessee and Makan, whereby it was mutually agreed by the
assessee to reduce a sum of `85 lacs of principal amount with
the hope that the assessee would receive the balance amount.
In these circumstances, a sum of `85 lacs was claimed as bad
debt during this year.
13. We may point out at this stage that the assessee could not
receive the balance amount of `340 lacs as well and for this
reason, it claimed that amount as bad debt in the Assessment
Year 1999-2000.
14. The AO, however, refused the treat the same as bad debt on
the ground that the assessee was not in the business of money
lending. Further, according to the AO, the principal debtor of
the assessee was still Piem and therefore, the assessee should
have furnished the details and steps taken by it for recovery of
the application money for Piem, which was still carrying on its
business. No such details were furnished and therefore, the
AO formed the view that the amount could not be treated as
bad debt, as the same shown to be irrecoverable from Makan
was still recoverable from Piem.
15. The CIT (A) affirmed this view of the AO holding that the
amount of `500 lacs given by the assessee to Piem was for
allotment of preference shares, which were never allotted and
the amount was not advanced in ordinary course of business as
financier. According to the CIT (A), agreement with Makan did
not make any change in the nature and therefore, provisions of
Section 36 were not satisfied.
16. The Tribunal has, however, allowed the claim of the assessee
for both years. It accepted the contention of the assessee that
Makan belonged to a reputed Global Tele System Ltd. and the
assessee in good faith discharged Piem on receipt of payment
through cheque from Makan. As per the Tribunal, though
money was initially given to Piem for allotment of shares, but
the shares were not allotted and the assessee had asked Piem
to refund the amount with interest. Piem had accepted this
request and in these circumstances, instructed Makan to pay
the amount on behalf of Piem. On receiving the cheques from
Makan, the assessee had discharged Piem from liability and
had shown this amount on 31.03.1998 as inter-corporate
deposit with Makan and had also show interest thereupon. The
same was taxed also for the year under consideration.
Therefore, the amount could be treated as inter-corporate
deposit by the assessee to Makan. Since the assessee was
doing non-banking finance business, this inter-corporate
deposit had to be treated as deposit for the purpose of earning
interest, which was equal to money lending business. Giving
this hue to the transaction in question, the Tribunal held that
the conditions stipulated under Section 36(2) of the Act were
satisfied and hence, the amount had become irrecoverable, it
could be treated as bad debt.
17. Insofar as interest of transaction is concerned as explained by
the Tribunal, there was no plausible ground for the Revenue to
dispute the same. Thus, we have to proceed on the premise
that the assessee is a non-banking finance company and it had
given inter-corporate deposit to Makan for earning interest.
Thus, the same had to be treated as advancing the amount
under money lending activities.
18. Section 36(1)(vii), as it existed at the relevant time, aloowed
deduction in respect of the amount for "any debt, or the part
thereof, which is established become a bad debt in the
previous year". It is subject to the provisions of Sub-Section
(2) of Section 36. Relevant portion thereof reads as follows:
"(36) (2) In making any deduction for a bad debt or
part thereof, the following provisions shall
apply -
(i) No such deduction shall be allowed 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
off or of an earlier previous year, or
represents money lend in the ordinary course
of the business of banking or money-lending
which is carried on by the assessee;"
19. As noted above, against the cheques of `500 lacs given to the
assessee by Makan, cheque worth of `75/- lacs had been
cleared. However thereafter, Makan started raising dispute
about its indebtedness. At that stage, there was a mutual
understanding vide which the assessee agreed to forego a sum
of `85 lacs. It is clear that in these circumstances, the said
sum of `85 lacs had become bad debt. Since it was a part of
inter-corporate deposit, it could clearly be treated as debt.
Such debt becoming bad would clearly qualify for deduction
under Section 36(1)(vii) of the Act. The embargo put by
Clause (1) of Sub-section (2) of Section 36 could not have
come in the way of the assessee in view of the findings of the
Tribunal that money was lent in the ordinary course of business
of money lending which is carried on by the assessee.
20. The entire thrust of the learned counsel for the Revenue was
on the transaction between the assessee and Piem on the basis
of which it was submitted that since the amount was given for
allotment of shares, it was not a transaction of money lending
and in support of this, the learned counsel relied upon the
judgment of the Karnataka High Court in the case of United
Breweries Ltd. (supra).
21. However, that became history. When Piem decided not to
issue any shares and agreed to refund the money thereupon,
an arrangement was arrived at between the parties as per the
said money was payable by Makan on behalf of Piem, which
arrangement was accepted by the assessee discharging Piem
and treating the money payable by Makan to assessee as inter
corporate deposit. When a sum of `85 lacs was treated as bad
debt, it was in the hands of Makan and it is the transaction
between the assessee and Makan, which is to be looked into for
this purpose and not the original transaction between the
assessee and the Piem, which no longer survived. Therefore,
the judgment of Karnataka High Court in United Breweries
Ltd. (supra) would not be applicable to the facts of the
present case.
22. It is held by the Madras High Court in the case of
Commissioner of Income Tax Vs. V. Ramakrishna and
Sons Ltd. 326 ITR 315 that the question as to whether the
debt has become bad or not is a pure question of fact.
Moreover, the amount payable by Makan to the assessee has
to be treated as debt (which had become bad) as is clear from
the meaning of „debt‟ explained by the Karnataka High Court in
the case of United Breweries Ltd. (supra).
23. This question is accordingly answered in favour of the assessee
and against the Revenue.
Question No. (c):
24. Insofar as this question is concerned, we may note that in the
Financial Year 1995-96, the assessee company issued 9,10,000
equity shares in a public issue and incurred certain
expenditure. The Assessing Officer did not allow the deduction
of the said expenditure under Section 35D of the Act. The
disallowance was made on the ground that the provisions of
Section 35D of the Act are applicable to the case of industrial
undertaking and the assessee is not an industrial undertaking,
nor it is a case of extension of an industrial undertaking.
Accordingly the provisions of Section 35D were not applicable.
The CIT (A) also confirmed the action of the AO.
25. The Tribunal had simply remitted the case back to the AO to
decide the same afresh in the light of the decision of the
Mumbai Tribunal Bench in the case of HSBC Securities India
Holding Ltd., as can be discerned from the following
discussion:
"43. The learned counsel for the assessee, who appeared
before the Tribunal stated that the matter should be sent
back to the file of the Assessing Officer to decide the same
in light of the decision of the H Bench of the Mumbai
Tribunal in the case of HSBC Securities India Holding Ltd.
decided in 1394/Mum/2000 for A.Y. 96-97 vide order dated
20.09.2004, as the facts in the case in hand and the facts
in the case of HSBC are similar. On the other hand, the Ld.
Departmental Representative placed reliance on the orders
of the authorities below.
44. After considering the submissions and perusing the
material on record, we restore this issue to the file of the
Assessing Officer to decide the same afresh in the light of
the decision of the Tribunal in the case of HSBC Securities
India Holdings Ltd. (supra) and in view of the provisions of
law after affording reasonable opportunity of being heard to
the assessee. We order accordingly."
26. Since the matter is to be examined afresh and no prejudice is
caused to the Revenue in any manner, no question of law
arises. The question of law as proposed, is clearly
misconceived, as the Tribunal has not given any finding holding
that provisions of Section 35D of the Act are applicable. This
aspect is left to be examined by the AO.
(A.K. SIKRI)
JUDGE
(M.L. MEHTA)
JUDGE
MAY 11, 2011
pmc
