Ita/40/2014 Of The Peninsular Plantations Ltd v. The Assistant Commissioner Of Income Tax

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HON'BLE THE CHIEF JUSTICE DR. MANJULA CHELLUR &THE HONOURABLE MR.JUSTICE A.M.SHAFFIQUE THURSDAY, THE 20TH DAY OF MARCH 2014/29TH PHALGUNA, 1935 ITA.No. 40 of 2014 -------------------------- [ARISING OUT OF ORDER DATED 06/11/2013 OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH, COCHIN IN I.T.A. NO.174/COCH/2013 ASSESSMENT YEAR 2007-2008] .................. APPELLANT/APPELLANT: ------------------------------------- THE PENINSULAR PLANTATIONS LTD., PATTOM PALACE P.O, THIRUVANANTHAPURAM - 695 004 (PAN : AAACT 9419M). BY SRI.JOSEPH MARKOSE, SENIOR ADVOCATE, ADVS.SRI.V.ABRAHAM MARKOS, SRI.BINU MATHEW, SRI.TOM THOMAS (KAKKUZHIYIL), SRI.ABRAHAM JOSEPH MARKOS, SRI.ABRAHAM VARGHESE THARAKAN. RESPONDENT/RESPONDENT: ------------------------------------------- THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-1(1), THIRUVANANTHAPURAM - 695 014. BY SRI.JOSE JOSEPH, S.C. THIS INCOME TAX APPEAL HAVING COME UP FOR ADMISSION ON 20-03-2014, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: Prv. I.T.A. NO.40/2014: APPENDIX PETITIONER'S ANNEXURES: RESPONDENT'S ANNEXURES: NIL. //TRUE COPY// P.A. TO JUDGE. MANJULA CHELLUR,C.J. & A.M.SHAFFIQUE, J. = = = = = = = = = = = = = = = = I.T.A.No.40 of 2014 = = = = = = = = = = = = = = = = = = = = = Dated this the 20th day of March, 2014 JUDGMENT Manjula Chellur,CJ This matter is taken up for final disposal by consent of bothappellant and the Revenue. 2. The following substantial questions of law arise forconsideration:- “1) Whether on the facts and in the circumstances of the case, the Appellate Tribunal is right in confirming thedisallowance of claim for Bad Debts amounting to Rs.30 lakhs? 2) Whether, on the facts and circumstances of the case, there is any material or evidence on record to justify thedecision of the Income Tax Tribunal that the inter-corporatedeposit made by the Appellant is not money lent in the normalcourse of business?” 3. The entire controversy revolves around appellant-assessee's claim of bad debt of advance of a sum of `30 lakhs toanother Public Company, by name M/s.Peermade Tea CompanyLimited during financial year 1996-97. It is not in dispute thatthe accrued interest of `23,76,274/- (Rupees twenty three lakhsseventy six thousand two hundred seventy four only) wasdeclared as outstanding along with principal amount in thereturns of appellant/assessee. According to appellant/assesseethis amount of `30 lakhs pertains to transaction of loan in thenormal course of money lending, which is one of the objects ofthe assessee-company as per Articles of Memorandum ofAssociation. It is also not in dispute, appellant/assesseesubjecting this accrued interest in previous assessment yearswhile computing the income of the assessee. 4. The assessing officer for assessment year 2007-08 opinesthat appellant/assessee is not engaging in the business ofbanking or money lending as it is mainly dealing in shares andhence the loan advanced cannot be held as having lent in theordinary course of business of banking or money lending. Thisopinion of the assessing officer further substantiated saying 4. The assessing officer for assessment year 2007-08 opinesthat appellant/assessee is not engaging in the business ofbanking or money lending as it is mainly dealing in shares andhence the loan advanced cannot be held as having lent in theordinary course of business of banking or money lending. Thisopinion of the assessing officer further substantiated saying major portion of income returned by the assessee is from sale ofshares as well as dividend. However, he also refers to nature of`30 lakhs advanced by appellant/assessee to another publiclimited company as an inter-corporate loan. Ultimately, theassessee's claim of principal amount of `30 lakhs as bad debt isnot allowed, so also the interest provision amounting to`23,76,274/- (Rupees twenty three lakhs seventy six thousand twohundred seventy four only) was rejected on the ground of notfurnishing documentary evidence. 5. This order came to be challenged before first AppellateAuthority and at paragraph 4.0 of the order first appellateauthority opines that assessing officer was justified in notallowing the deduction of `30 lakhs as bad debt under Section 36(1)(vii).So also the first Appellate Authority upholds theopinion of the assessing officer in rejecting the claim of interestportion. This came to be challenged by appellant/assessee beforethe Tribunal and the Tribunal at paragraphs 12,13 and 14 withreference to principal amount of `30 lakhs and also interestportion of `23,76,274/- (Rupees twenty three lakhs seventy sixthousand two hundred seventy four only) made following observations:- “12. In the instant case, the assessee has not furnishedany material to show that the amount of Rs.30.00 lakhs wasadvanced in the regular course of business activity of lendingmoney. The agreement, if any, entered between the assesseecompany and M/s.Peermade Tea Company Ltd was notfurnished to prove that it was a loan transaction. Instead, wenotice that the assessee has simply placed reliance on Clause 22of the object clause to contend that it is authorised byMemorandum of Association to carry on money lending activity.However, the Tribunal in the case of Poysha Oxygen (P) Ltd.(supra) has held that the object clauses mentioned in theMemorandum of Association are not relevant for consideringwhether the activity undertaken by the limited companyamounts to business activity or not. The Head notes reported in19 SOT 711 are extracted below, for the sake of convenience. “Business income--Business--Relevancy ofMemorandum of Association of company--Inconsidering whether an activity undertaken by alimited company amounts to business or not it isirrelevant to consider whether it is within its powersunder its Memorandum of Association- CITs of InlandRevenue vs. Hyndland Investment Co.Ltd.(1929) 14Tax Case.694, Kishan Prasad & Co.Ltd. vs.CIT (1955)27 ITR 49(SC), CIT vs.PKN.Co.Ltd.(1996) 60 ITR 65(SC) and CIT vs.J.K.Eastern Industries (P) Ltd.(1965)55 ITR 376 (Cal) relied on.” 13. It is a well settled proposition that the nature oftransaction shall ordinarily be decided by ascertaining the “Business income--Business--Relevancy ofMemorandum of Association of company--Inconsidering whether an activity undertaken by alimited company amounts to business or not it isirrelevant to consider whether it is within its powersunder its Memorandum of Association- CITs of InlandRevenue vs. Hyndland Investment Co.Ltd.(1929) 14Tax Case.694, Kishan Prasad & Co.Ltd. vs.CIT (1955)27 ITR 49(SC), CIT vs.PKN.Co.Ltd.(1996) 60 ITR 65(SC) and CIT vs.J.K.Eastern Industries (P) Ltd.(1965)55 ITR 376 (Cal) relied on.” 13. It is a well settled proposition that the nature oftransaction shall ordinarily be decided by ascertaining the intention of the parties entering into the transaction. Theintention of the parties could be ascertaining on the basis ofevidences available on record and also on the basis ofsurrounding circumstances. In the case of Poysha Oxygen (P)Ltd.(supra), the Third Member has held that the fact that it wasa single transaction was not an impediment to it being calledmoney-lending business. Hence a single transaction ofadvancing money could also fall in the category of moneylending transaction, provided the intention of the parties aremade clear in that regard. In the instant case, as stated earlier,no material was placed before us to show that the amount ofRs.30.00 lakhs was advanced with the intention of lendingmoney in the ordinary course of business and not asinvestment. The assessee has also not shown that he wascarrying on this kind of transactions repeatedly. Hence, in thefacts and circumstances of the case, in our view, the conditionlaid down u/s.36(2)(i) has not been satisfied by the assessee inthis regard. Accordingly, we do not find any infirmity in thedecision of the Ld.CIT(A) in rejecting the bad debt claim ofRs.30.00 lakhs u/s. 36(1)(vii) of the Act. 14. We notice that the tax authorities have rejected thebad debt claim of interest amount of Rs.23,76,274/-. Theassessee has filed before us a paper book, wherein he hasattached account copies of interest received account forfinancial years 1996-97 to 2005-06 relating to the assessmentyears 1997-98 to 2006-07 respectively. The contention of the assessee is that it has accounted for the accrued interest in allthe years and offered the same for taxation. We notice that thisaspect has not been examined by the tax authorities. Theyhave rejected the claim of the assessee only for the reason thatthe assessee could not substantiate that the interest amountwas offered for tax in the earlier years. Since the assessee hasfiled the copies of the interest received account for variousyears, in our view, this matter requires fresh examination at theend of the Assessing Officer. Accordingly, we set aside theorder of the Ld.CIT(A) on this issue and restore the matter tothe file of the Assessing Officer with a direction to examine thesame afresh and take appropriate decision in accordance withlaw. “ 6. According to the First Appellate Authority and the 2[nd]appellate authority, the tribunal in the case of Poysha Oxygen(P) Ltd. Vs.ACIT [(2008) 19 SOT 711 (Delhi) (TM)] held that theobject clauses in the Memorandum of Association are notrelevant for considering whether particular activity undertakenby the limited company amounts to business activity or not,therefore, opined that mere terms or object clauses in theArticles of Memorandum of Association cannot form the criterionto consider the said issue and rejected the claim of written of , asbad debt under Section 36(1)(vii) of the Income Tax Act. So far 6. According to the First Appellate Authority and the 2[nd]appellate authority, the tribunal in the case of Poysha Oxygen(P) Ltd. Vs.ACIT [(2008) 19 SOT 711 (Delhi) (TM)] held that theobject clauses in the Memorandum of Association are notrelevant for considering whether particular activity undertakenby the limited company amounts to business activity or not,therefore, opined that mere terms or object clauses in theArticles of Memorandum of Association cannot form the criterionto consider the said issue and rejected the claim of written of , asbad debt under Section 36(1)(vii) of the Income Tax Act. So far as interest portion is concerned, the account copies of interestreceived account for previous years right from 1996-97 to 2005-06 indicate that assessee had subjected accrued interest to tax,therefore, there is some force in the contention of assessee.Accordingly, the order of CIT(A) on the issue of rejecting the baddebt claim of interest was set aside restoring the matter to thefile of assessing officer to re-examine the same, afresh and takeappropriate decision in accordance with law. 7. Learned senior counsel arguing for appellant contendsthat the assessing officer who had the opportunity of analyzingthe factual situation never opined that there was deficit materialor no material, so far as transaction of lending `30 lakhs toanother corporate company by the assessee company. In thatview of the matter, there was no justification on the part of thefirst appellate authority and the tribunal to opine that nomaterial was placed by the appellant-assessee in support of theircontention that `30lakhs was lend to another company in thenormal course of business as money lending. So far as theopinion of the first appellate authority and 2[nd] appellateauthority, object clauses in the Memorandum of Association cannot be the basis to come to such conclusion. But, however, tounderstand the claim of a particular assessee, first of all one hasto see whether object of company was to conduct business evenin money lending or not. It is also possible to do occasionalmoney lending in commercial world without having such objectclause also. Therefore, object clause cannot be the basis to formsuch opinion. 8. In the instant case, if object clause is already inexistence well and good, but even in the absence of such objectclause, it is possible for one corporate company to lend money toanother corporate company for various reasons. What actuallyforms basis to allow the benefit of claim as bad debt would bewhether a particular transaction was in the ordinary course ofbusiness with an intention to lend money or something else.Unless factual material is looked into, one cannot straightawaycome to conclusion that a particular transaction is either moneylending activity or not. 9. In that view of the matter, we are of opinion, there hasto be fresh consideration of the matter, so far as lending of `30lakhs and also the interest accrued with reference to whether it I.T.A.No.40 of 2014 was disclosed in the earlier assessment years or not as interestdue. Accordingly, the appeal is allowed. We set aside the orderof appellate tribunal, even with regard to `30 lakhs principalamount claimed as bad debt, directing the assessing officer toexamine the same afresh, after giving opportunity to theappellant assessee to point out the material, if it is already onrecord and furnish necessary information if it is needed. Withthese observations, the appeal is answered in favour ofappellant-assessee. MANJULA CHELLUR,CHIEF JUSTICE A.M.SHAFFIQUE, JUDGE. sj 21/03