Canon Capital & Finance Limited, Ahmedabad V. The ACIT, Circle-3, Ahmedabad

ITA 1040/AHD/2007

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 8843 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 11 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-03-2010
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 02-03-2010
• Assessment Year: 2000-2001
• Appeal Filed On: 09-03-2007
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: C K MISHRA
• Keywords: Bad and doubtful debts; Set aside
• Section: 37; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH AHMEDABAD (BEFORE S/SHRI G. D. AGARWAL, VP AND BHAVNESH SAINI , JM) ITA NO.1040 AND 1065/AHD/2007 A. Y.: 2000-01 AND 2001-02 CANON CAPITAL & FINANCE LTD., 204, SARAP, NR. NAVJIVAN PRESS, ASHRAM ROAD, AHMEDABAD PA NO. AAACC 6315P VS THE A. C. I. T., CIRCLE-3, AHMEDABAD (APPELLANT) (RESPONDENT) APPELLANT BY SHRI SANJAY R. SHAH, AR RESPONDENT BY SHRI C. K. MISHRA, DR O R D E R PER BHAVNESH SAINI: BOTH THE APPEALS BY ASSESSEE ARE DIRECTED AGAINST DIFFERENT ORDERS OF THE CIT(A)-VII, AHMEDAB AD DATED 25-1-2007 FOR ASSESSMENT YEAR 2000-01 AND DATED 22-1-2007 FO R ASSESSMENT YEAR 2001-02. 2. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF BOT H THE PARTIES, PERUSED THE FINDINGS OF THE AUTHORITIES BELOW AND C ONSIDERED THE MATERIAL AVAILABLE ON RECORD. ITA NO.1040/AHD/2007 3. THE ASSESSEE CHALLENGED THE DISALLOWANCE MADE BY THE AO IN RESPECT OF CLAIM OF BAD DEBTS WRITTEN OFF IN ITS AC COUNT BY THE ASSESSEE SHARE BROKER IN A SUM OF RS.10,78,962/-. IN THE ALT ERNATE CLAIM THE ASSESSEE CLAIMED IT TO BE A TRADING LOSS AND PRAYED FOR DEDUCTION OF BAD DEBTS AS TRADING LOSS U/S 28 READ WITH SECTION 37 O F THE IT ACT. 4. THE LEARNED COUNSEL FOR THE AT THE OUTSET SUBMIT TED THAT IT IS NOT IN DISPUTE THAT THE ASSESSEE HAD WRITTEN OFF THE BA D DEBTS AS ITA NOS.1040 AND 1065/AHD/2007 CANON CAPITAL & FINANCE LTD. 2 IRRECOVERABLE IN THE ACCOUNT OF THE ASSESSEE FOR TH E PREVIOUS YEAR. HE HAS, THEREFORE, SUBMITTED THAT THE SAME IS ALLOWABL E DEDUCTION U/S 36(1) (VII) OF THE IT ACT. HE HAS SUBMITTED THAT ITAT AHM EDABAD D BENCH IN THE CASE OF THE SAME ASSESSEE IN SUBSEQUENT ASSESSM ENT YEAR 2001-02 IN ITA NO.1119/AHD/2005 VIDE ORDER DATED 07-11-2008 AL LOWED THE CLAIM OF THE ASSESSEE AND EVEN ON ALTERNATE CLAIM ADDITIO N OF SIMILAR NATURE WAS DELETED TREATING THE BAD DEBTS AS TRADING LOSS. COPY OF THE ORDER IS FILED ON RECORD. HE HAS SUBMITTED THAT SINCE THE AS SESSEE HAS WRITTEN OFF THE BAD DEBTS AS IRRECOVERABLE IN THE ACCOUNT OF TH E ASSESSEE FOR THE PREVIOUS YEAR, THEREFORE, THE ASSESSEE COMPLIED WIT H THE REQUIREMENTS OF SECTION 36(1) (VII) OF THE IT ACT AND IS, THEREFORE , ENTITLED FOR DEDUCTION OF THE EXPENDITURE. HE HAS RELIED UPON THE RECENT DECI SION OF THE HONBLE SUPREME COURT IN THE CASE OF T. R. F. LTD. VS CIT I N CIVIL APPEAL NO.5293/2003 DATED 09-02-2010 IN WHICH THE HONBLE SUPREME COURT ALLOWED THE CLAIM OF THE ASSESSEE ON THE SAME REASO NING. COPY OF THE ORDER IS FILED ON RECORD. HE HAS ALSO RELIED UPON T HE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS BONA NZA PORTFOLIO LTD. 226 CTR 468 (DEL). COPY OF THE ORDER IS FILED ON RE CORD. THE LEARNED COUNSEL FOR THE ASSESSEE BY REFERRING TO THE ASSESS MENT ORDER AND THE IMPUGNED ORDER FURTHER SUBMITTED THAT IN THE CLAIM FOR DEDUCTION OF BAD DEBTS OF RS.10,78,962/-, THERE IS AN AMOUNT WRITTEN OFF OF RS.65,885/- WHICH WAS DUE FROM HCL INFO SYSTEM AND FALCON COMPU TER SYSTEM IN THE FORM OF ADVANCE GIVEN TO THEM FOR COMPUTERS. HE HAS SUBMITTED THAT THIS WAS CAPITAL LOSS BECAUSE THE ADVANCE COULD NOT BE RECOVERED. THEREFORE, THE ASSESSEE WOULD NOT BE PRESSING FOR D EDUCTION IN RESPECT OF THE AFORESAID AMOUNT OF RS.65,885/-. HE FURTHER SUB MITTED IN THE ALTERNATE CONTENTION THAT THE BAD DEBTS MAY BE ALLO WED AS TRADING LOSS. 5. ON THE OTHER HAND, THE LEARNED DR RELIED UPON TH E ORDERS OF THE AUTHORITIES BELOW. ITA NOS.1040 AND 1065/AHD/2007 CANON CAPITAL & FINANCE LTD. 3 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PER USED THE MATERIAL AVAILABLE ON RECORD. SECTION 36(1) (VII) O F THE IT ACT PROVIDES AS UNDER: (1) THE DEDUCTIONS PROVIDED FOR IN THE FOLLOWING C LAUSES SHALL BE ALLOWED IN RESPECT OF THE MATTERS DEALT WITH THE REIN, IN COMPUTING THE INCOME REFERRED TO IN SECTION 28 . (VII) SUBJECT TO THE PROVISIONS OF SUB-SECTION (2), THE AMOUNT OF [ANY BAD DEBT OR PART THEREOF WHICH IS WRITTEN O FF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE FOR T HE PREVIOUS YEAR]: THE LEARNED CIT(A) NOTED THAT AFTER ANALYZING EACH OF THE CASES WHOSE AMOUNT OF BAD DEBTS HAS BEEN WRITTEN OFF, OUT OF TO TAL CLAIM OF RS.46,36,635/- AO HAS DISALLOWED THE CLAIM TO THE E XTENT OF RS.10,78,962/-. THESE DEBTS RELATE TO SEVERAL PARTI ES. THE AO HELD THAT THE AMOUNTS WRITTEN OFF AGAINST EACH OF THESE PARTI ES CANNOT BE TREATED AS TRADING LOSS IN TERMS OF SECTION 28 OF THE IT AC T. THE COMMON REASON GIVEN IN ALL THE CASES ARE THAT THE ASSESSEE HAS TR ANSACTIONS AND MOST OF THE TRANSACTIONS WITH THESE PARTIES WERE CARRIED ON DURING JANUARY TO MARCH 2000. THE ASSESSEE HAS SHOWN TRANSACTIONS WIT H THESE PARTIES DURING THE LAST QUARTER OF THE ACCOUNTING YEAR, THE AO WAS, THEREFORE, OF THE VIEW THAT THE AMOUNT WRITTEN OFF AGAINST EACH O F THESE PARTIES CANNOT BE STATED TO BE IRRECOVERABLE AND TREATED AS TRADIN G LOSS AS THE ASSESSEE HAS NOT TAKEN ENOUGH STEPS FOR RECOVERY OF THOSE DU ES FROM THESE PARTIES. THE LEARNED CIT(A) ALSO CONFIRMED THE ADDITION BECA USE THE TRANSACTION HAD HAPPENED IN THE LAST QUARTER AND THAT NO STEPS HAVE BEEN TAKEN FOR RECOVERY. THE ABOVE FACTS, THEREFORE, SHOW THAT THE ASSESSEE BEING A SHARE BROKER HAS THE DEALINGS WITH THE SEVERAL PART IES AND THE BAD DEBTS WERE WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNT OF THE ASSESSEE FOR THE PREVIOUS YEAR. THE ABOVE FACTS HAVE NOT BEEN DISPUT ED BY THE LEARNED DR BEFORE US. IN THE SUBSEQUENT ASSESSMENT YEAR 2001-0 2 IN ITA NO.1119/AHD/2005, SIMILAR ISSUE WAS CONSIDERED BY T HE TRIBUNAL VIDE ITA NOS.1040 AND 1065/AHD/2007 CANON CAPITAL & FINANCE LTD. 4 ORDER DATED 07-11-2008 AND ADDITION HAS BEEN DELETE D. THE FINDINGS IN PARA 6 IN THIS ORDER ARE REPRODUCED AS UNDER: 6. HAVING HEARD THE RIVAL SUBMISSIONS AND ON PERUS AL OF THE RECORD, WE FIND THAT THE ASSESSEE IS A BROKER D EALING OF SHARES AND EARNED BROKERAGE INCOME. WE FIND FORCE I N THE SUBMISSIONS OF THE ASSESSEE THAT WHEN THE ASSESSEE PURCHASED SHARES ON BEHALF OF HIS CLIENTS, IT BECOM ES LIABLE TO PAY FULL AMOUNT OF PURCHASE PRICE OF THE SHARES TO T EH STOCK EXCHANGE. HOWEVER, THE SAME WAS REIMBURSABLE FROM T HE CLIENTS AND HENCE, THE AMOUNT WAS NOT DEBITED TO TH E PROFIT & LOSS ACCOUNT BUT WAS DEBITED TO THE ACCOUNT OF CLIE NTS. FURTHER THE ACCOUNTS OF THE CLIENTS WERE DEBITED WITH THE B ROKERAGE AMOUNT WHICH WAS CREDITED IN THE PROFIT & LOSS ACCO UNT. THIS DEBIT IN THE ACCOUNT OF CLIENTS WAS THE DEBIT OF TH E ASSESSEE WHICH BECAME BAD AND HENCE IT CANNOT BE SAID THAT A NY PART OF SUCH DEBT WAS NOT TAKEN INTO ACCOUNT WHILE COMPU TING THE INCOME OF THE ASSESSEE. BESIDES, IT IS NOT IN DISPU TE THAT THE AFORESAID DEBTS WHICH BECAME BAD WERE INCIDENTAL TO THE NORMAL BUSINESS OF THE ASSESSEE AND THE SAID DEBT W AS NOT CAPITAL IN NATURE. HENCE, LOSS OF T4HE AMOUNT IS OT HERWISE ALSO ALLOWABLE TO THE ASSESSEE U/S. 28 OF THE ACT. ON ID ENTICAL SET OF FACTS, THE ITAT, B BENCH, AHMEDABAD IN THE CASE OF PARKAR SECURITIES LTD. (SUPRA), RELIED ON BY THE ASSESSEE, HAS TAKEN SIMILAR VIEW. FOLLOWING THE SAID DECISION OF THE IT AT, WE DELETE THE ADDITION OF RS.10,55,427. 6.1 THE HONBLE SUPREME COURT IN THE CASE OF T. R. F. LTD. (SUPRA) CONSIDERING THE PROVISIONS OF SECTION 36(1) (VII) O F THE IT ACT RECENTLY HELD AS UNDER: THIS POSITION IN LAW IS WELL-SETTLED. AFTER 1 ST APRIL, 1989, IT IS NOT NECESSARY FOR THE ASSESSEE TO ESTABLISH THAT TH E DEBT, IN FACT, HAS BECOME IRRECOVERABLE. IT IS ENOUGH IF THE BAD DEBT IS WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE. HOWEVER, IN THE PRESENT CASE, THE ASSESSING OFFICER HAS NOT EXAMINED WHETHER THE DEBT HAS, IN FACT, BEEN WRITTE N OFF IN ACCOUNTS OF THE ASSESSEE. WHEN BAD DEBT OCCURS, THE BAD DEBT ACCOUNT IS DEBITED AND THE CUSTOMERS ACCOUNT IS CR EDITED, THUS, CLOSING THE ACCOUNT OF THE CUSTOMER. IN THE C ASE OF COMPANIES, THE PROVISION IS DEDUCTED FROM SUNDRY DE BTORS. AS STATED ABOVE, THE ASSESSING OFFICER HAS NOT EXAM INED WHETHER, IN FACT, THE BAD DEBT OR PART THEREOF IS W RITTEN OFF IN THE ACCOUNTS OF THE ASSESSEE. THIS EXERCISE HAS NOT BEEN UNDERTAKEN BY THE ASSESSING OFFICER. HENCE, THE MAT TER IS ITA NOS.1040 AND 1065/AHD/2007 CANON CAPITAL & FINANCE LTD. 5 REMITTED TO THE ASSESSING OFFICER FOR DE NOVO CONSI DERATION OF THE ABOVE-MENTIONED ASPECT ONLY AND THAT TOO ONLY T O THE EXTENT OF THE WRITE OFF. 6.2 THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS BONANZA PORTFOLIO LTD. (SUPRA) HELD AS UNDER: MONEY RECEIVABLE BY ASSESSEE SHARE BROKER FROM A C LIENT AGAINST PURCHASE OF SHARES BY THE ASSESSEE ON BEHAL F OF THE LATTER HAS TO BE TREATED AS DEBT AND, THEREFORE, NON- REALIZATION OF SAID AMOUNT BY THE ASSESSEE IS ALLOW ABLE AS BAD DEBT. 7. CONSIDERING THE FACTS OF THE CASE AND IN THE LI GHT OF THE ABOVE DECISIONS, IT IS CLEAR THAT THE TRIBUNAL HAS ALLOWE D THE CLAIM OF THE ASSESSEE BECAUSE THE DEBT HAS BECOME IRRECOVERABLE AND THAT THE BAD DEBT HAS WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUN T OF THE ASSESSEE. THE REQUIREMENTS OF THE ABOVE PROVISIONS ARE, THEREFORE , CLEARLY MET BY THE ASSESSEE. WE ACCORDINGLY SET ASIDE THE ORDERS OF TH E AUTHORITIES BELOW AND DELETE THE ABOVE ADDITION EXCEPT THE ADDITION O F RS.65,885/- WHICH THE LEARNED COUNSEL FOR THE ASSESSEE DID NOT PRESS AND SUBMITTED THAT THE SAME IS CAPITAL LOSS IN NATURE. 8. IN VIEW OF THE ABOVE FINDINGS WE SET ASIDE THE O RDERS OF THE AUTHORITIES BELOW AND DELETE THE ADDITION OF RS.10, 78,962/- MINUS RS.65,885/-. 9. AS A RESULT, THE APPEAL OF THE ASSESSEE IS PARTL Y ALLOWED. ITA NO.1065/AHD/2007 10. THE AO IN THE PENALTY ORDER NOTED THAT WHILE FR AMING THE ASSESSMENT, THE AO MADE THE ADDITION ON ACCOUNT OF DISALLOWANCE U/S 40A(2), DISALLOWANCE OF SOFTWARE EXPENSES AND PROFI T CHARGEABLE TO TAX U/S 41OF THE IT ACT. THE AO ALSO NOTED THAT T HESE ADDITIONS HAVE BEEN DELETED. HOWEVER, ON ACCOUNT OF BAD DEBTS THE AO MADE THE ADDITION OF RS.10,55,429/- AND THE LEARNED CIT(A) C ONFIRMED THE ITA NOS.1040 AND 1065/AHD/2007 CANON CAPITAL & FINANCE LTD. 6 DISALLOWANCE OF BAD DEBTS OF RS.8,334/- AND RS.5,76 ,393/-. THE PENALTY PROCEEDINGS WERE ACCORDINGLY INITIATED AND THE AO H ELD THAT PENALTY U/S 271 (1) ( C ) OF THE IT ACT IS CLEARLY LEVIABLE ON THE DISALLOWANCE OF RS.5,84,727/- (RS.8,334/- PLUS RS.5,76,393/-). VIDE SEPARATE ORDER PENALTY WAS ACCORDINGLY IMPOSED. THE LEARNED CIT(A) CONFIRMED 4THE PENALTY, HOWEVER, MINIMUM PENALTY WAS IMPOSED. 11. THE LEARNED COUNSEL FOR THE ASSESSEE AT THE OUT SET SUBMITTED THAT ITAT D BENCH AHMEDABAD IN THE CASE OF THE SAME ASSE SSEE IN ASSESSMENT YEAR 2001-02 IN ITA NO.1119/AHD/2005 (SU PRA) DELETED THE ENTIRE ADDITION ON ACCOUNT OF BAD DEBTS. THE ORDER IS ALREADY REPRODUCED ABOVE IN ITA NO.1040/AHD/2007. THE LEARNED COUNSEL FOR THE ASSESSEE, THEREFORE, SUBMITTED THAT THERE IS NO BASIS LEFT FO R IMPOSITION OF PENALTY. THE LEARNED DR RELIED ON THE ORDER OF THE AO. 12. ON CONSIDERATION OF THE ABOVE FACTS, WE ARE OF THE VIEW THAT SINCE THE ENTIRE ADDITION ON QUANTUM ON ACCOUNT OF BAD DE BTS HAS BEEN DELETED BY THE TRIBUNAL IN ITA NO.1119/AHD/2005 (SUPRA), TH ERE IS NO BASIS LEFT FOR IMPOSITION OF PENALTY. WE ACCORDINGLY SET ASIDE THE ORDERS OF THE AUTHORITIES BELOW AND CANCEL THE PENALTY. AS A RESU LT, THE APPEAL OF THE ASSESSEE IS ALLOWED. 13. AS A RESULT, THE APPEAL OF THE ASSESSEE IN ITA NO.1040/AHD/207 IS PARTLY ALLOWED WHEREAS THE APPEAL IN ITA NO.1065/AH D/2007 IS ALLOWED. ORDER PRONOUNCED ON 05-03-2010 SD/- SD/- (G. D. AGARWAL) VICE PRESIDENT (BHAVNESH SAINI) JUDICIAL MEMBER DATE : 05-03-2010 LAKSHMIKANT/- ITA NOS.1040 AND 1065/AHD/2007 CANON CAPITAL & FINANCE LTD. 7 COPY OF THE ORDER FORWARDED TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE CIT(A) CONCERNED 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE BY ORDER D Y. REGISTRAR, ITAT, AHMEDABAD