R. JAYASIMHA BABU, J.
Having heard counsel and gone through the elaborate order of the Tribunal, we are not in the least satisfied that any reference is called for, as sought by the Revenue.
The respondent-assessee is the Pondichery Industrial Promotion Development and Investment Corporation. In order to protect itself against the likelihood of default in the repayment of monies lent by it to the entrepreneurs to encourage whom the corporation has come into existence, the assessee had obtained a guarantee in respect of such lending to the extent covered by the terms of the guarantee, from the Deposit Insurance and Credit Guarantee Corporation. Under the terms of the guarantee issued by that corporation, that corporation was to pay to the assessee the percentage of the lending with which the guarantee had been provided. It was entitled to subrogation of the assessee's rights for recovery of the amount from the borrower, and in the event of recovery, the amount recovered was to be shared in the proportion in which the amount guaranteed was proportionate to the total amount lent. The assessee was required to make a separate claim in respect of each borrower, who had committed default in repaying the monies.
For the assessment years in question, viz., 1987-88 to 1989-90, the assessee had received a sum of Rs. 16, 48, 657 during the assessment year 1987-88 and the sum of Rs. 3, 52, 079 for the assessment year 1988-89. The Commissioner sought to treat these sums as constituting the income of the assessee. The Tribunal has set aside the order of the Commissioner. While doing so, the Tribunal has summarised the findings recorded by it and the directions given by it after a very full and elaborate consideration of all aspects of the matter in the following terms,
"To sum up, we hold
- first that the guaranteed sums received by the assessee cannot in their entirety be treated as its income;
- secondly, that the assessee is entitled to appropriate the guaranteed sums received by it in a manner least disadvantageous to it. That is to say, it is entitled to appropriate the said sums first towards principal. By the same token, there is no question of treating that part of the guaranteed sums appropriated towards principal as the assessee's income -
- thirdly and concomittantly, there is no question of treating the sums thus appropriated towards principal as bad or doubtful debts for the purposes of section 36(1)(vii) read with section 36(2) even when at a later point of time, the assessee writes off the amount in its books of account with the previous approval of concurrence of DIGGS;
- fourthly and finally, that the interest and other charge component of the guaranteed sum, if any, appropriated towards interest and/or other charges will be brought to tax on receipt basis.
We, therefore, cancel, the impugned order in revision and direct the Assessing Officer to decide the issue involved on the lines indicated above."
The conclusion reached by the Tribunal, on the facts, was the right conclusion. The Tribunal has taken care to direct that if any part of the amount received by the assessee from the Deposit Insurance and Credit Guarantee Corporation is appropriated towards interest, then, to that extent, the amount so appropriated towards interest or other charges will be brought to tax on a receipt basis. This fully protects the Revenue.
The argument advanced by counsel for the Revenue that all amounts received from the Deposit Insurance and Credit Guarantee Corporation constitute income of the assessee, is wholly untenable. The guarantee was in respect of the sums lent. The amount lent was part of the circulating capital of the assessee. If the object of the guarantee was to protect itself against the likelihood of loss of the part of the capital in the event of the borrower committing default, the reimbursement of a part of the amount lent to the corporation under the terms of the guarantee did not constitute any addition to the income of the assessee. It merely replaced in part a portion of the capital, which it was on the verge of losing. The Tribunal has rightly taken note of the principles laid down in the cases of CIT v. Maharajadhiraja Kameshwar Singh of Darbhanga and CIT v. Chidambaram Chettiar (P.S.PL.P.), for holding that it would not invariably be presumed that when the amounts are received under the guara
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ntee, the amount must first be appropriated towards interest, and thereafter, towards principal. This is specially so when the amount received is less than the amount of principal. It is open to the assessee to choose as to how it will adjust the amount. The Tribunal has, in order to safeguard the Revenue, directed that the amount, if any adjusted by the assessee towards interest will be brought to tax in the year of receiptWe, therefore, do not see any merit in the petitions, and the same are dismissed.