M/s Pact Securities & Financial Service Ltd., Hyderabad V. DCIT, Hyderabad

ITA 1028/HYD/2007

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 53624 (ITAT-HYDERABAD)
• Duration Of Justice: 3 year(s) 11 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-09-2011
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 13-09-2011
• Assessment Year: 2004-2005
• Appeal Filed On: 26-10-2007
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: T DIWAKAR PRASAD
• Assessee Lawyers: V L N SUDHAKAR
• Keywords: Bad and doubtful debts

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD A BENCH, HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYA RAGHAVAN, JUDICIAL MEMBER ITA NO.1028/HYD/2007 ASSESSMENT YEAR 2004-05 M/S PACT SECURITIES & FINANCIAL SERVICES LTD., HYDERABAD (PAN AABCP 4438 R) VS THE DY. CIT, 16(3), HYDERABAD APPELLANT RESPONDENT ITA NO.1059/HYD/2007 ASSESSMENT YEAR 2004-05 THE DY. CIT, 16(3), HYDERABAD VS M/S PACT SECURITIES & FINANCIAL SERVICES LTD., HYDERABAD (PAN AABCP 4438 R) APPELLANT RESPONDENT APPELLANT BY : SHRI V.L.N. SUDHAKAR RESPONDENT BY : SHRI T. DIWAKAR PRASAD DATE OF HEARING : 28.9.2011 DATE OF PRONOUNCEMENT : 28/09/2011 ORDER PER CHANDRA POOJARI, A.M. THESE ARE CROSS APPEALS PREFERRED BY THE ASSESSEE AS WELL AS THE REVENUE ARE DIRECTED AGAINST THE ORDER PASSED BY THE CIT(A) V, HYDERABAD DATED 31.8.2007 AND PER TAINS TO THE ASSESSMENT YEAR 2004-05. 2. THE ASSESSEE RAISED THE FOLLOWING GROUNDS IN IT S APPEAL IN ITA NO.1028/H/2007: ITA NOS.1028 & 1059 OF 2007 M/S PACT SECURITIES & FINANCIAL SERVICES LTDE., HYD . 2 1. THE ORDER DATED 31.8.2007, PASSED BY THE CIT(A) IS AGAINST THE ASSESSEE IN SO FAR AS IT IS CONTRARY TO THE FACTS AND LAW OF THE CASE. 2. THE ASSESSEE COMPANY DISPUTES THE CONFIRMATION O F ADDITION ON ACCOUNT OF HYPOTHETICAL INTEREST ON THE LOAN AND NOT TREATING IT AS NON PERFORMING ASSET (NPA) AS CL AIMED BY THE COMPANY. 3. THE CIT(A) OUGHT NOT TO HAVE CONFIRMED THE ADDIT ION OF INTEREST ON HYPOTHETICAL BASIS IN THE CASE OF NON P ERFORMING ASSETS, WHICH AMOUNT IS NOT RECEIVED BY THE ASSESSE E COMPANY FROM M/S PRATHIMA ESTATES. 4. THE CIT(A) ERRED IN CONFIRMING THE ADDITIONS WI THOUT LOOKING INTO THE MANDATORY PROVISIONS FOLLOWED BY T HE ASSESSEE COMPANY, WHICH ARE PRESCRIBED BY THE RBI A ND ACCOUNTING STANDARDS PRESCRIBED AS PER THE ICAI. 5. IN VIEW OF THE ABOVE GROUNDS AND SUCH OTHER GRO UNDS THAT MAY BE URGED AT THE TIME OF HEARING THE ASSESS EE PRAYS FOR THE ALLOWANCE OF THE CLAIMS AND DELETE THE ADDI TIONS. 6. THE ASSESSEE CRAVES LEAVE TO ADD ALTER OR DELET E ANY OF THE GROUNDS AT THE TIME OF HEARING THE APPEAL. 3. THE REVENUE RAISED THE FOLLOWING GROUNDS IN ITS APPEAL IN ITA NO.1059/H/2007: 1. THE CIT(A) ERRED IN HOLDING THAT THE INTEREST I NCOME FROM NETXELL LTD., AS NON PERFORMING ASSET AS THE ASSESS EE COMPANY HAS CLAIMED CREDIT FOR THE TDS CERTIFICATE. 2. THE CIT(A) OUGHT TO HAVE CONSIDERED THAT THE PRO VISIONS OF SECTION 198 HAS TO BE APPLIED FOR THE INTEREST INCO ME ON WHICH TDS WAS DEDUCTED AND SHALL HAVE TO BE INCLUDE D IN THE INCOME OF THE ASSESSEE. 3. THE CIT(A) ERRED IN DELETING THE ADDITION ON ACC OUNT OF BAD DEBTS AS THE PRINCIPLES OF MONEY LENDING WERE NOT F OLLOWED ITA NOS.1028 & 1059 OF 2007 M/S PACT SECURITIES & FINANCIAL SERVICES LTDE., HYD . 3 BY THE ASSESSEE COMPANY AND MOST OF THE LOANS WERE LENT TO ITS SISTER CONCERNS. 4. THE CIT(A) OUGHT TO HAVE APPRECIATED THAT THE LO SS INCURRED BECAUSE OF BAD DEBTS ARE IN THE NATURE OF CAPITAL L OSS AND ARE TO BE DISALLOWED. 5. ANY OTHER GROUND THAT MAY ARISE AT THE TIME OF H EARING BEFORE THE TRIBUNAL. 4. FIRST WE WILL TAKE UP THE ASSESSEE APPEAL. THE CRUX OF THE ABOVE GROUNDS ARE WITH REGARD TO RECOGNITION OF INTEREST INCOME ON NON PERFORMING ASSET (NPA). 5. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIALS AVAILABLE ON RECORD. BOTH THE PARTIES AR E FAIRLY CONCEDED THAT THIS ISSUE WAS RIGHTLY CONSIDERED BY THE HONBLEBLE MADRAS HIGH COURT IN THE CASE OF T.N. POWER FINANCE AND INFRASTRUCTURE DEVELOPMENT CORPORATION LTD. VS. JCIT (280 ITR 491) (MDS. HC) WHEREIN IT WAS HEL D THAT: MERELY BECAUSE THE RBI HAD DIRECTED THE ASSESSEE T O PROVIDE FOR NON PERFORMING ASSETS, THAT DIRECTION COULD NOT OVERRIDE THE MANDATORY PROVISIONS OF THE IT ACT CONTAINED IN SECTION 36(1)(VIIA) WHICH STIPULAT E A DEDUCTION NOT EXCEEDING 5% OF THE TOTAL INCOME ONLY IN RESPECT OF THE PROVISION FOR BAD AND DOUBTFUL DE BTS WHICH ARE PREDOMINANTLY REVENUE IN NATURE OR TRADE RELATED AND NOT FOR PROVISIONS FOR NON PERFORMING ASSETS WHICH ARE OF PREDOMINATELY CAPITAL NATURE. THE ASSESSEE WAS NOT ENTITLED TO DEDUCTION, IN VIEW OF THE EXPLANATION TO SECTION 36(1)(VII) WHICH SAYS TH AT THE PROVISION FOR BAD AND DOUBTFUL DEBTS MADE IN TH E ACCOUNTS OF THE ASSESSEE IS NOT AN ALLOWABLE DEDUCTION. ITA NOS.1028 & 1059 OF 2007 M/S PACT SECURITIES & FINANCIAL SERVICES LTDE., HYD . 4 6. IN VIEW OF THE ABOVE JUDGEMENT OF THE MADRAS H IGH COURT, WE ARE INCLINED TO DECIDE THE ISSUE IN DISPU TE IN FAVOUR OF THE DEPARTMENT. ACCORDINGLY THE GROUNDS RAISED BY THE ASSESSEE ARE DISMISSED AND IN THE RESULT, TH E ASSESSEE APPEAL DISMISSED. 7. NOW COMING TO THE REVENUE APPEAL IN GROUND NOS .1 & 2 AS REFERRED ABOVE, THESE GROUNDS HAVE BECOME INFRUCTUOUS AS WE HELD IN THE ASSESSEES APPEAL THA T INTEREST INCOME ON NON PERFORMING ASSET ARE TO BE B ROUGHT TO TAX. ACCORDINGLY, THE FIRST TWO GROUNDS RAISED BY THE REVENUE ARE DISMISSED. 8. THE SECOND GROUND IS WITH REGARD TO TREATMENT OF BAD DEBTS LEND A SISTER CONCERN. 9. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIALS AVAILABLE ON RECORD. THE CONTENTION OF T HE DEPARTMENT IS THAT THE MONEY WAS NOT ADVANCED TO SI STER CONCERN IN THE ORDINARY COURSE OF ITS BUSINESS. TH E MONEY ADVANCED TO SISTER CONCERN IS A CAPITAL INVESTMENT AS SUCH IT IS A CAPITAL LOSS. BUT, IN OUR OPINION, THESE F ACTS ARE TO BE EXAMINED BY THE LOWER AUTHORITIES. IF THE MONIES A DVANCED IN THE ORDINARY COURSE OF THE BUSINESS OF THE ASSES SEE AND IT BECOME BAD, IT IS TO BE ALLOWABLE AS DEDUCTION IN V IEW OF THE JUDGEMENT OF THE SPECIAL BENCH IN THE CASE OF OMAR INTERNATIONAL BANK (SA OG) 100 ITD 285 (MUM) (SB). IF IT IS OTHERWISE, IT IS A CAPITAL LOSS AND IT CANNOT BE AL LOWED. AS SUCH, WE SET ASIDE THESE ENTIRE ISSUE TO THE FILE O F ASSESSING OFFICER TO GIVE FINDINGS REGARDING THE NATURE OF AD VANCE WHETHER IT IS IN THE CAPITAL FIELD OR IN REVENUE FI ELD AND DECIDE ACCORDINGLY. ITA NOS.1028 & 1059 OF 2007 M/S PACT SECURITIES & FINANCIAL SERVICES LTDE., HYD . 5 10. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS D ISMISSED AND THAT OF REVENUE APPEAL IS PARTLY ALLOWED FOR ST ATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT 30.9.2011 SD/ - (ASHA VIJAYA RAGHAVAN) SD/ - (CHANDRA POOJARI) JUDICIAL MEMBER ACCOUNTANT M EMBER DATED THE 30 TH SEPTEMBER, 2011 COPY FORWARDED TO: 1. M/S PACT SECURITIES AND FINANCIAL SERVICES LTD., 6 -3- 252/2/6, NAVEEN NAGAR, ERRAMANZIL, HYDERABAD-82. 2. THE DY. CIT, CIRCLE 16(3), HYDERABAD 3. THE CIT(A) V, HYDERABAD 4. THE CIT, RANGE-16, HYDERABAD 5. THE DR, ITAT, HYDERABAD NP/