Smt. Sarita Bhandari, CHENNAI V. ACIT, CHENNAI

CO 170/CHNY/2009

• Counselvise Citation: [2010] 122 COUNSELVISE.COM (IT) 5228 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 19 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 19-11-2010
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 16-11-2010
• Assessment Year: 2002-2003
• Appeal Filed On: 30-10-2009
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Bad and doubtful debts

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHENNAI BENCH A BEFORE DR.O.K.NARAYANAN, VICE-PRESIDENT AND SHRI HARI OM MARATHA, JUDICIAL MEMBER I.T.A. NOS.1484 & 1485/MDS/2009 ASSESSMENT YEARS : 2002- 03 & 2004-05 THE ASST. COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE II (2), CHENNAI-600 034. VS. SMT. SARITA BHANDARI, NO.20,ERULAPPAN STREET, CHENNAI 600 079. (PAN : AADPB 9261 D) (APPELLANT) (RESPONDENT) C.O.NOS.170 & 171/MDS/2009 I.T.A. NOS.1484 & 1485/MDS/2009 ASSESSMENT YEARS : 2002- 03 & 2004-05 SMT. SARITA BHANDARI, CHENNAI 79. VS. THE DY. COMMISSIONER OF INCOME TAX, CHENNAI 34. (CROSS OBJECTOR) (APPELLANT IN APPEAL) DEPARTMENT BY : SHRI K.E.B.RANGARAJAN CROSS-OBJECTOR BY : SHRI T.BANUSEKAR & SHRI S.P.NIGAM ITA 1484 & 1485/M/09 & CO 170 & 171/M/09 :- 2 -: O R D E R PER DR. O.K.NARAYANAN. VICE-PRESIDENT : THE TWO APPEALS ARE FILED BY THE REVENUE. THE CRO SS OBJECTIONS ARE FILED BY THE ASSESSEE. THE RELEVANT ASSESSMENT YEARS ARE 2002-03 AND 2004-05. THESE APPEALS AND C ROSS OBJECTIONS ARE DIRECTED AGAINST THE ORDERS OF THE C I.T.(APPEALS)-II, AT CHENNAI, BOTH DATED 3.7.2009 AND ARISE OUT OF TH E ASSESSMENTS COMPLETED UNDER SEC.143(3) READ WITH SEC.153C OF TH E I.T.ACT, 1961. 2. THERE WAS A SEARCH UNDER SEC.132, IN THE CASE OF THE ASSESSEES HUSBAND WHO IS CARRYING ON THE BUSINESS AS FILM FINANCIER. IN THE COURSE OF SEARCH, IT WAS BROUGHT TO LIGHT THAT THE ASSESSEE HERSELF WAS ALSO DOING THE BUSINESS OF FIN ANCING FOR FILMS. ON THE BASIS OF THE RECOVERIES AND FINDINGS , THE ASSESSMENTS WERE COMPLETED ON THE ASSESSEE. 3. AS FAR AS THE ASSESSMENT YEAR 2002-03 IS CONCERN ED, THE ASSESSEE HAS CLAIMED DEDUCTION OF ` 10,60,000/- UNDER SEC.36(2) IN THE NATURE OF BAD DEBTS WRITTEN OFF. IN THE COU RSE OF ITA 1484 & 1485/M/09 & CO 170 & 171/M/09 :- 3 -: ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER FOUN D THAT THE ASSESSEE HAD NOT WRITTEN OFF THE DEBTS AS ON 31.3.2 002 AND DEBTS WERE CARRIED ON SUCCEEDING FINANCIAL YEAR 2003-04 A S OPENING BALANCES AND UNDER THE SITUATION, IT WAS NOT POSSIB LE TO HOLD THAT THE CONDITIONS LAID DOWN UNDER SEC.36(2) WERE COMPL IED WITH BY ASSESSEE. ACCORDINGLY, THE CLAIM OF THE ASSESSEE W AS DISALLOWED AND ADDITION WAS MADE TO THE EXTENT OF ` 10,60,000/-. 4. IN FIRST APPEAL, THE C.I.T.(A) FOUND THAT THE RE TURN WAS FILED BY THE ASSESSEE FOR ASSESSMENT YEAR 2002-03 AFTER T HE SEARCH AND BEFORE FILING THE RETURN OF INCOME, THE ASSESSE E HAS WRITTEN OFF THE DEBTS IN HER BOOKS OF ACCOUNT AND THE BALANCE-S HEET AND ACCOUNT STATEMENTS ACCOMPANYING THE RETURN SHOWED T HE POSITION THAT THE DEBTS WERE WRITTEN OFF. THE C.I.T.(A) HAS ACCEPTED THE CONTENTION OF THE ASSESSEE THAT IT IS NOT NECESSARY THAT DEBT SHOULD BE WRITTEN OFF IN THE VERY PREVIOUS YEAR ITS ELF AND IT WOULD BE SUFFICIENT IF THE DEBTS ARE WRITTEN OF BEFORE FI LING OF THE RETURN. ACCORDINGLY, HE ACCEPTED THE CONTENTION OF THE ASSE SSEE THAT SHE WAS ENTITLED FOR CLAIMING DEDUCTION AGAINST WRITING OFF BAD DEBTS. THE CIT(APPEALS) ALSO HELD THAT THE DEDUCTION IS EQ UALLY AVAILABLE ITA 1484 & 1485/M/09 & CO 170 & 171/M/09 :- 4 -: AS A DEDUCTION UNDER SEC.37 AS A TRADING LOSS. HE DELETED THE ADDITION OF ` 10,60,000/-. 5. THE REVENUE IS AGGRIEVED ON THIS POINT. THIS IS THE ONLY ISSUE RAISED IN THE APPEAL FOR ASSESSMENT YEAR 2002 -03. 6. THE GROUND RAISED BY THE REVENUE IS THAT THE C.I.T.(APPEALS) HAS FAILED TO NOTE THAT THE ASSESSE E HAS NOT WRITTEN OFF DEBTS IN HER BOOKS OF ACCOUNT AS PER CO NDITIONS STIPULATED IN SEC.36(2) OF THE I.T. ACT AND THE ASS ESSEE HAS CARRIED FORWARD THE DEBTS TO SUBSEQUENT YEAR AS IS EVIDENT FROM THE SEIZED MATERIALS WHICH REFLECTS THE REAL STATE OF AFFAIRS AND HENCE, THE ASSESSING OFFICER HAS RIGHTLY DISALLOWED THE CLAIM OF DEBT AS PER THE PROVISIONS OF SEC.36(2) OF THE ACT. 7. WE HEARD SHRI K.E.B.RANGARAJAN, LD. STANDING COU NSEL FOR THE REVENUE AND SHRI T. BANUSEKAR , LD. CHARTERED A CCOUNTANT APPEARING FOR THE ASSESSEE ALONG WITH SHRI S.P.NIGA M, ADVOCATE. 8. THE UNDISPUTED FACT IS THAT THE ASSESSEE HAD FIL ED HER RETURN AFTER THE SEARCH WAS MADE. THE ASSESSEE HAS A LEGI TIMATE RIGHT TO SETTLE HER ACCOUNTS IN A PROPER SHAPE BEFORE FIL ING OF THE RETURN, ON THE BASIS OF MATERIALS AVAILABLE WITH HER. THOS E MATERIALS ITA 1484 & 1485/M/09 & CO 170 & 171/M/09 :- 5 -: WOULD INCLUDE THE ACCOUNTS SEIZED IN THE COURSE OF SEARCH AS WELL. ONCE THE ASSESSEE DECIDES TO FILE HER RETURN, IT IS WITHIN HER FREEDOM TO FINALIZE THE ACCOUNTS IN ACCORDANCE WITH LAW AND GIVING WEIGHTAGE TO THE FACTS AND CIRCUMSTANCES PRE VAILED FOR THE RELEVANT PREVIOUS YEAR. EVEN IN A NORMAL CASE, SUC H FINALIZATION WILL TAKE PLACE ONLY AFTER THE CLOSING OF THE CONCE RNED PREVIOUS YEAR. THIS DOES NOT CREATE ANY PRACTICAL DIFFICULT Y AND DOES NOT DISTORT THE ACCOUNTS OF AN ASSESSEE AS WRITING OFF THE BAD DEBT IS EFFECTED THROUGH JOURNAL ENTRIES AND NO CASH OR FUN D IS INVOLVED. 9. THEREFORE, WHEN WE LOOK AT THE ISSUE IN THE PROP ER PERSPECTIVE, WE HAVE TO SEE THAT EVEN THOUGH IT WAS THE SEARCH WHICH PROMPTED THE ASSESSEE TO FILE HER RETURN OF I NCOME, SHE HAS FINALIZED HER ACCOUNTS BEFORE FILING OF THAT RETURN . BY THE TIME SHE FILED THE RETURN OF INCOME, THE ASSESSEE HAS WRITTE N OFF THE DEBTS IN HER BOOKS OF ACCOUNT. IN OUR VIEW THAT SATISFIE S THE REQUIREMENTS OF LAW. THE I.T.A.T., SPECIAL BENCH I N THE CASE OF DCIT V. OMAN INTERNATIONAL BANK SAOG (100 ITD 285) HAS HELD THAT THE ASSESSEE IS ENTITLED TO CLAIM DEDUCTION UN DER SEC.36(1) PROVIDED WITH THE DEBTS ARE WRITTEN OF IN THE BOOKS OF ACCOUNT AS BAD. SUBSEQUENTLY, THE HONBLE SUPREME COURT ALSO HELD IN ITA 1484 & 1485/M/09 & CO 170 & 171/M/09 :- 6 -: THE CASE OF T.R.F.LTD. V. CIT (323 ITR 397) THAT IT IS ENOUGH IF THE BAD DEBT IS WRITTEN OFF AS IRRECOVERABLE IN THE ACC OUNTS OF THE ASSESSEE. THEREFORE, IT IS CLEAR THAT IF THE DEBTS ARE WRITTEN OFF BY THE ASSESSEE IN HER BOOKS OF ACCOUNT AS IRRECOVERAB LE, SHE IS ENTITLED FOR CLAIMING DEBTS AS A DEDUCTION. THE ON LY QUESTION WHICH REMAINS TO BE ANSWERED IS WHEN THE ENTRY TO W RITE OFF THE DEBTS ARE TO BE PASSED BY THE ASSESSEE. EVEN IN A NORMAL CASE AS ALREADY STATED ENTRIES ARE PASSED AFTER THE CLOS E OF THE PREVIOUS YEAR, AS THE FINALIZATION OF ACCOUNTS ARE USUALLY DONE AFTER THE PREVIOUS YEAR IS CLOSED. THEREFORE, AT A NY RATE THERE CANNOT BE A CASE THAT THE ENTRIES SHOULD HAVE BEEN PHYSICALLY PASSED IN THE COURSE OF THE RELEVANT PREVIOUS YEAR ITSELF. THE TOUCHSTONE IS THAT THE ENTRIES MUST BE PASSED WHILE FINALIZING THE ACCOUNT AND BEFORE FILING OF THE RETURN OF INCOME. THE OBSERVATION OF THE ASSESSING OFFICER IS THAT THE DEBT BALANCES WERE CARRIED FORWARD TO THE SUCCEEDING PREVIOUS YEAR AS REFLECTE D IN THE BOOKS OF ACCOUNT SEIZED AT THE TIME OF SEARCH. IT IS ONL Y A TECHNICAL OBJECTION. THAT OBJECTION IS RECTIFIED BY THE ASSE SSEE BY PASSING NECESSARY ENTRIES BEFORE FILING OF THE RETURN OF IN COME. ITA 1484 & 1485/M/09 & CO 170 & 171/M/09 :- 7 -: 10. THEREFORE, IN THE FACTS AND CIRCUMSTANCES OF TH E CASE, WE FIND THAT THE CIT(APPEALS) WAS JUSTIFIED IN DELETIN G THE ADDITION OF ` 10,60,000/-. 11. THE APPEAL OF THE REVENUE FOR THE ASSESSMENT YE AR 2002- 03 IS LIABLE TO BE DISMISSED. 12. AS FAR AS THE ASSESSMENT YEAR 2004-05 IS CONCE RNED, THE ONLY GROUND RAISED BY THE REVENUE IS THAT THE CIT(A PPEALS) HAS ERRED IN DELETING THE ADDITION TO THE EXTENT OF ` 73,60,000/- MADE BY THE ASSESSING OFFICER TOWARDS UNDISCLOSED INCOME FROM M/S. AISHWARYA COMBINES. THE FACTS ARE THAT THE ASSESSE E HAD FILED A SUIT FOR RECOVERY OF A SUM OF ` 1,33,60,000/- BEFORE THE CIVIL COURT AGAINST M/S. AISHWARYA COMBINES TO WHOM THE ASSESSE E HAD ADVANCED FINANCE. THE SUIT WAS FILED AGAINST M/S. AISHWARYA COMBINES FOR DEFAULT OF REPAYMENT OF LOAN. BUT THE SUIT WAS SETTLED ON COMPROMISE ON THE CONDITION THAT THE ASS ESSEE WOULD BE PAID ` 75,50,000/-. A CHEQUE FOR ` 1,28,20,000/- WAS DELIVERED TO THE ASSESSEE AS A SECURITY AGAINST THE SETTLED AMOUNT. IN FACT, THE CHEQUE WAS NEVER PRESENTED BY THE ASSESSEE IN THE BANK AND IT GOT STALED. THE ASSESS EE RECEIVED A SUM OF ` 75,50,000/-. THE ASSESSEE WAS NOT TO GET THE BALAN CE ITA 1484 & 1485/M/09 & CO 170 & 171/M/09 :- 8 -: AMOUNT OF ` 73,60,000/-. BUT THE ASSESSING OFFICER TREATED TH IS DIFFERENTIAL AMOUNT AS INCOME BY WAY OF INTEREST IN THE HANDS OF THE ASSESSEE. 13. IN FIRST APPEAL, THE CIT(A) HELD THAT THE ASSES SEE WAS FOLLOWING CASH METHOD OF ACCOUNTING AND THEREFORE, INTEREST INCOME COULD NOT BE CONCEIVED AS NO SUCH INCOME WAS RECEIVED BY THE ASSESSEE AND THE SUIT WAS FINALLY SETTLED FO R AN AMOUNT OF ` 75,50,000/-. ACCORDINGLY, HE DELETED THE ADDITION OF ` 73,60,000/-. 14. THE REVENUE IS AGGRIEVED AND THEREFORE, THE SEC OND APPEAL BEFORE US. WE CONSIDERED THE MATTER IN DETAIL. WE DO NOT AGREE WITH THE FINDING OF THE C.I.T.(APPEALS) THAT THE AS SESSEE SHOULD BE EXONERATED FROM THE INCOME BY WAY OF INTEREST ONLY FOR THE REASON THAT THE ASSESSEE WAS FOLLOWING CASH METHOD OF ACCO UNTING. THIS IS BECAUSE IN THE MATTER OF GENERATING OF INTEREST INCOME, THERE CANNOT BE A GENERAL POSITION OF LAW THAT IF AN ASSE SSEE IS FOLLOWING CASH METHOD OF ACCOUNTING, THE ASSESSEE NEED NOT RE FLECT INTEREST INCOME ON ACCRUAL BASIS. IN FACT, INTEREST IS ACCR UING ON A DAILY BASIS EVEN THOUGH PAYABLE AT A STIPULATED DATE. TH EREFORE, REGARDING THE GENERATION OF INTEREST INCOME, THE ME THOD OF ITA 1484 & 1485/M/09 & CO 170 & 171/M/09 :- 9 -: ACCOUNTING EMPLOYED BY AN ASSESSEE CANNOT BE THE SO LE TEST. IT COULD BE A TEST IN CERTAIN CASES WHERE THE DEBT ARO SE OUT OF COMMERCIAL TRANSACTIONS. THEREFORE, WE ARE EXAMINI NG THE PRESENT CASE, OVERLOOKING THE OBSERVATION OF THE C. I.T.(APPEALS) THAT THE ASSESSEE WAS FOLLOWING CASH METHOD OF ACCO UNTING. 15. NOW COMING TO THE CRUX OF THE CASE, WE HAVE TO SEE THAT IRRESPECTIVE OF THE METHOD OF ACCOUNTING FOLLOWED B Y THE ASSESSEE, THE AMOUNT ADVANCED BY THE ASSESSEE HAD B ECOME STICKY. THE ASSESSEE WAS FINDING IT DIFFICULT TO R ECOVER THE AMOUNT. THAT IS WHY A SUIT WAS FILED BEFORE THE CO MPETENT COURT. IT SHOWS THAT THE RECOVERY OF DEBT WAS DOUBTFUL. IN SUCH CIRCUMSTANCES EVEN IF THE PRINCIPLE OF INTEREST ACC RUING ON A DAILY BASIS IS KEPT IN MIND, THE INCOME CANNOT BE RECOGNI ZED. ONE SHOULD SEE THAT ACCRUAL OF INCOME IS DIFFERENT FROM THE RECOGNITION OF INCOME. EVEN IF THE INCOME IS ACCRUING THEORETI CALLY, THE SAID INCOME CANNOT BE RECOGNIZED IF THE RECEIPT OF THE I NCOME IS ULTIMATELY DOUBTFUL. THEREFORE, IT WAS NOT POSSIBL E FOR THE ASSESSEE TO RECOGNIZE THE INCOME ON A STICKY ADVANC E. FINALLY THE CASE WAS SETTLED AS A COMPROMISE AND THE ASSESS EE GOT A LESSER AMOUNT FOR FULL AND FINAL SETTLEMENT. IN SU CH CIRCUMSTANCES, ITA 1484 & 1485/M/09 & CO 170 & 171/M/09 :- 10 - : THE DIFFERENTIAL AMOUNT SACRIFICED BY THE ASSESSEE CANNOT BE CONSTRUED AS HER INCOME. IN THAT PERSPECTIVE, WE A GREE WITH THE FINDINGS OF THE C.I.T.(APPEALS) AND HOLD THAT THE A SSESSING OFFICER WAS NOT JUSTIFIED IN MAKING THE ADDITION OF ` 73,60,000/-. 16. THE APPEAL OF THE REVENUE FOR ASSESSMENT YEAR 2 004-05 IS ALSO LIABLE TO BE DISMISSED. 17. THE CROSS OBJECTIONS FILED BY THE ASSESSEE ARE ONLY SUPPORTIVE OF THE ORDERS PASSED BY THE C.I.T.(APPEA LS). AS THE APPEALS FILED BY THE REVENUE ARE LIABLE TO BE DISMI SSED, THE CROSS OBJECTIONS ALSO HAVE BECOME INFRUCTUOUS. 18. IN RESULT, THE APPEALS AS WELL AS THE CROSS OBJ ECTIONS ARE DISMISSED. ORDER PRONOUNCED ON FRIDAY, THE 19 TH OF NOVEMBER, 2010. SD/- SD/- (HARI OM MARATHA) JUDICIAL MEMBER ( DR.O.K.NARAYANAN) VICE-PRESIDENT CHENNAI : 19 TH NOV.,2010 MPO* COPY TO: APPELLANT/RESPONDENT/CIT(A)/CIT/DR