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Adarsh Malhotra (Director)     17 August 2012

Amount paid by guarantor to bank against sarfesai

My partnership firm owns a plot and the same was mortgaged with a natinolised Bank against term loan ( CC limit)of another firm. Borrower firm fails to repay the loan amount & subsequently Bank issued a SARFASEI notice to Borrower as well as Guarantor firm (my firm). Situation got worse, Borrower firm had informed Bank that they had no money & assests to repay the loan and Bank can proceed in whatever manner it deems fit. In order to save my firms plot, firm has repaid the total demand of Bank (including loan, interests & other expenses). Please suggest me where & how to debit the said amount? Will the amount be debited to the plots account? Any other method to treat this amount as expenses or capital addition? The said plot has been shown as Capital assets in B/S of the firm.



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 5 Replies

Ajit Singh Cheema (practising Advocate)     18 August 2012

The money has been paid on account of guarantee for the loan account, this will not effect  the capital account of the plot .The liability of the guarantor is joint and several. After making the payment to the bank , you step in to the shoes of the bank and as such can recover the money from the borrower.The amount paid shall be shown on the asset side of the balance sheet ,being money recoverable from  the borrower whose guarantee you have given. The capital account of the plot is not to be effected on account of this payment.

Adarsh Malhotra (Director)     18 August 2012

Thanks for your reply. The factual position is, that my firm had paid the amount to save the plot as the market value of plot is higher than loan amount. Further, it is next to impossible to recover the said amount from borrower firm. can this amount be treated as loss to firm as non recoverable asset. Pl suggest because keeping this amount in asset side does not do justice with the amount paid to save the plot.

Ajit Singh Cheema (practising Advocate)     18 August 2012

You have saved the day by making payment of the loan , otherwise the may have sold the plot at a throw away price.Now give a l;egal notice to the borrower for recovery of the amount paid under guaratee bond.Dont delay the suit for recovery of the amount paid under guarantee. Get a decree and file execution.Get the properties of the borrower declared under oath / affidavit . Put all pressure for recovery of the amount paid alongwith , costs and interest.The wrirng Off of the amount from your books may not serve a useful purpose.

JANAK RAJ VATSA (ADVOCATE)     18 August 2012

file a recovery suit against the borrower firm for gettting your gurantee amount back with interest.

R RAJAGOPALAN (ADVOCATE)     22 August 2012

I endorse the opinion of  Ajit Singh Cheema. You have clarified further: "..... my firm had paid the amount to save the plot as the market value of plot is higher than loan amount. Further, it is next to impossible to recover the said amount from borrower firm. can this amount be treated as loss to firm as non recoverable asset. Pl suggest because keeping this amount in asset side does not do justice with the amount paid to save the plot."

To claim the amount for deduction as a bad debt,under Section 36(1)(vii) of the Income Tax Act 1961, you have to:

i) prove that you entered into the deal as your commercial activity; and 

ii) write off the debt in your books of account.


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