DCIT, CHENNAI V. M/s. Rambal Properties P. Ltd., CHENNAI

ITA 1271/CHNY/2010

• Counselvise Citation: [2011] 135 COUNSELVISE.COM (IT) 1132 (ITAT-CHENNAI)
• Duration Of Justice: 5 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-02-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 27-01-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 05-08-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: TAPAS KUMAR DUTTA
• Assessee Lawyers: R SIVARAMAN
• Keywords: Depreciation; Business expenditure; Bad and doubtful debts; Revised return; TDS; Set aside; Capital Gains
• Section: 143(3); 115JB; 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHENNAI BENCH C : CHENNAI [BEFORE SHRI HARI OM MARATHA, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER] I.T.A.NO.1271/MDS/2010 ASSESSMENT YEAR : 2006-07 THE DY. CIT COMPANY CIRCLE V(3) CHENNAI VS M/S RAMBAL PROPERTIES P.LTD NO.20, CORPORATION ROAD SEEVARAM, PERUNGUDI CHENNAI 600096 [PAN AAACR3002N ] (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI TAPAS KUMAR DUTTA RESPONDENT BY : SHRI R. SIVARAMAN O R D E R PER HARI OM MARATHA, JUDICIAL MEMBER: THIS APPEAL OF THE REVENUE, FOR ASSESSMENT YEAR 2006-07, IS DIRECTED AGAINST THE ORDER OF THE LD. CIT(A)-V, CHE NNAI, DATED 12.5.2010. 2. THE ASSESSEE-COMPANY, DEALS IN PROPERTY AND REAL ESTATE DEVELOPMENT, FILED ITS RETURN OF INCOME FOR THE YEA R UNDER CONSIDERATION ON 27.11.2006 IN WHICH LOSS OF ` 7,24,36,164/- WAS DECLARED UNDER THE HEAD BUSINESS. BUT WITH REFER ENCE TO SECTION 115JB, IT RETURNED A BOOK LOSS OF ` 2,21,91,16. FINALLY, ASSESSMENT ITA 1271/10 :- 2 -: WAS COMPLETED U/S 143(3) ON 23.12.2008 BY COMPUTING INCOME AT ` 5,02,45,000/- UNDER REGULAR PROVISIONS AND AT ` 3,67,63,837/- U/S 115JB. BUT THE ASSESSING OFFICER HAS DEMANDED TAX AS PER THE REGULAR COMPUTATION OF INCOME AFTER MAKING FOLLOWING OBSERV ATIONS: (A) REGULAR COMPUTATION I) THE ASSESSING OFFICER HELD THAT AS THERE WAS NO BUSINESS ACTIVITY IN THE YEAR, NO EXPENDITURE IS ALLOWABLE. THIS LED TO THE DISALLOWANCE OF AN AMOUNT OF ` 1,47,223/-. II) THE ASSESSEE HAD CLAIMED A DIMINUTION IN THE V ALUE OF INVESTMENTS TO THE EXTENT OF ` 7,22,89,000/- IN RESPECT OF ITS INVESTMENTS IN 1% CUMULATIVE REDEEMABLE CONVERTIBLE PREFERENCE SHARES IN SUPER STOCK ABSORB ERS LTD. THIS WAS DISALLOWED ON THE GROUND THAT IT IS CAPITAL IN NATURE. III) THE APPELLANT HAD CREDITED THE PROFIT AND LOSS ACCOUNT WITH A SUM OF ` 5,02,45,000/- BEING BAD DEBTS RECOVERY IN RESPECT OF AMOUNTS DUE FROM M/S OMAYAL AGRO INDUSTRIES LTD, A BIFR COMPANY, WHICH HAD BEEN WRIT TEN OFF IN THE ACCOUNTING YEAR 2003-04. IN THE RETURN OF INCOME FILED FOR THE ASSESSMENT YEAR 2004-05 , IT H AD CLAIMED IT AS BAD DEBT. HOWEVER, BEFORE THE ASSESSM ENT FOR THAT YEAR WAS COMPLETED BY THE ASSESSING OFFICER, OMAYAL AGRO INDUSTRIES LIMITED ALLOTTED PREFERENCE SHARES ON 30.06.05 TO THE APPELLANT OF THE VALUE OF ` .5,02,45,000/- TO COVER ITS DEBTS TO THE APPELLANT. THUS, THERE WAS RECOVERY OF THE AMOUNT EARLIER WRITTEN OF F AS BAD DEBTS. IV) AS THE APPELLANTS ASSESSMENT FOR 04-05 ASSESSM ENT YEAR WAS OPEN, AND THERE WAS TIME AVAILABLE FOR FIL ING REVISED RETURN, THE APPELLANT FILED A REVISED RETUR N ON 23.03.06, WITHDRAWING THE BAD DEBT CLAIM. THUS IN E FFECT, THERE WAS NO CLAIM FOR BAD DEBT IN THAT ASSESSMENT YEAR IN RESPECT OF THE AMOUNT OF ` 5,02,45,000/-WRITTEN OFF IN THE BOOKS. IN VIEW OF THIS, SINCE THE APPELLANT HAD CREDITED THE RECOVERY OF THE AMOUNT IN THE CURRENT YEAR'S BOOKS, THE APPELLANT CLAIMED THIS INCOME AS A DEDU CTION IN THE INCOME TAX ADJUSTMENT STATEMENT. THE ASSESSI NG ITA 1271/10 :- 3 -: OFFICER HOWEVER, HELD THAT SINCE THE DEBT HAD BEEN WRITTEN OFF IN THE BOOKS OF ASSESSMENT YEAR 04-05 AS BAD DEBT, IT CANNOT BE REVERSED BY FILING A REVISED RETURN SINCE IT IS NEITHER AN OMISSION NOR A WRONG STATEMENT AS PER ACCOUNTS OF THE ASSESSEE. HE THEREFORE HELD THAT TH E ASSESSEE WAS NOT ENTITLED TO FILE THE REVISED RETUR N. HE THEREFORE DID NOT ALLOW THE CLAIM OF DEDUCTION MADE IN THE ADJUSTMENT STATEMENT AND BROUGHT THE AMOUNT OF ` 5,02,45,000/- CREDITED IN THE PROFIT AND LOSS ACCOU NT TO TAX. HE FURTHER HELD THAT AS THERE WAS NO BUSINESS ACTIVITY IN THE RELEVANT PREVIOUS YEAR, IT HAS TO BE TREATED AS INCOME FROM OTHER SOURCES AND TAXED IT UNDER THE HE AD OTHER SOURCES. (B) COMPUTATION U/S 115JB : (I) IN THE COMPUTATION UNDER THE PROVISIONS OF SEC. 115JB, THE ASSESSING OFFICER ADDED THE DIMINUTION IN VALUE OF INVESTMENTS WITH THE REMARK ADD: DIMINUTION IN T HE VALUE OF INVESTMENT IN A CONTINGENT LIABILITY ` 7,22,89,000/- 3. AGGRIEVED, THE ASSESSEE PREFERRED FIRST APPEAL AN D THE LD. CIT(A), VIDE THE IMPUGNED ORDER, HAS DELETED ALL T HE ADDITIONS SO MADE BY THE ASSESSING OFFICER. NOW, THE REVENUE IS AGGRIEVED AND HAS RAISED THE FOLLOWING GROUNDS: 1. THE ORDER OF THE LD. CIT(A) IS CONTRARY TO LAW AND FACTS OF THE CASE. 2.1. THE LEARNED CIT(A) HAS ERRED DIRECTING THE AO TO ALLOW THE EXPENDITURE CLAIM OF ` 1 ,47,223/- AS BUSINESS EXPENDITURE. 2.2 THE LEARNED CIT(A) OUGHT TO HAVE APPRECIATED TH AT THE AO HAS DISALLOWED ON THE GROUND THAT NO BUSINESS WAS CARRIED ON DURING THE YEAR. 3.1 THE LEARNED CIT(A) HAS ERRED IN DELETING THE DISALLOWANCE OF ` 7,22,89,000/- OF THE AMOUNT CLAIMED AS DIMINUTION I N THE VALUE OF INVESTMENT IN 1 % CUMULATIVE REDEEMABLE SH ARES IN SUPER SHOCK ABSORBERS LTD. ITA 1271/10 :- 4 -: 3.2 THE LEARNED CIT(A) OUGHT TO HAVE APPRECIATED THAT THE AMOUNT CLAIMED AS DIMINUTION OF INVESTMENTS, REPRES ENTS LOSS OF VALUE OF SHARES IN SSAL OF THE ASSESSEE AND DOES NOT REFLECT THE LOSS OF VALUE OF STOCK IN TRADE OR ANY CURRENT ASSET OF THE ASSESSEE AND THE AMOUNT HAS BEEN BOOKED AS INVESTMENT IN THE BOOKS OF A/CS. 3.3 HAVING REGARD TO THE DECISION OF THE HON'BLE HI GH COURT OF KERALA IN THE CASE OF KERALA SMALL INDUSTRIES DEVEL OPMENT CORPORATION LIMITED.VS COMMISSIONER OF INCOME-TAX ( 270 ITR 452) AND THE ORDERS OF THIS HON'BLE TRIBUNAL IN THE CASE OF MIS KWALITY FUN FOODS & RESTAURANT P LTD IN ITA NO 283/MDS/2003, THE LEARNED CIT(A) OUGHT TO HAVE UPHE LD THE ORDERS OF THE A.O. 4.1 THE LEARNED CIT(A) HAS ERRED IN DELETING THE AD DITION OF BAD DEBT RECOVERY OF ` 5,02,45,000/- IN M/S UMAYAL AGRO INDIA LTD. 4.2 THE LEARNED CIT(A) FAILED TO APPRECIATE THAT AN Y RECOVERY IN RESPECT OF AMOUNT WRITTEN OFF AS BAD DEBTS HAS TO B E TAXED ONLY IN THE YEAR OF RECOVERY. SHARES WERE ALLOTTED IN LIEU OF LOANS ON 30/06/2005 AND REVISED RETURN FOR AY 2004- 05 WAS FILED ON 23/03/2006. 5.1 THE LEARNED CIT(A) HAS ERRED IN DELETING THE AD DITION OF ` 7,22,89,000/-FOR THE PURPOSE OF SECTION 115JB IN RE SPECT OF DIMINUTION IN THE VALUE OF ASSETS. 5.2 THE LEARNED CIT(A) OUGHT TO HAVE APPRECIATED TH AT THE INVESTMENTS IN SSAL ARE NOT ASSESSEE'S STOCK IN TRA DE AND ANY LOSS CAN BE STATED WITH CERTAINTY ONLY ON SALE OF SUCH SHARES AND TILL SUCH TIME IT IS ONLY IN THE NATURE OF A CONTINGENCY. 5.3 THE LEARNED CIT(A) OUGHT TO HAVE UPHELD THE ACT ION OF THE A.O IN VIEW OF EXPLANATION(C) TO THE SECOND PROVISO OF SEC 115 JB. 6. FOR THESE AND OTHER GROUNDS THAT MAY BE ADDUCED AT THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE LEAR NED CIT(A) MAY BE SET ASIDE AND THAT OF THE ASSESSING OFFICER RESTORED. 4. THE FIRST ISSUE RAISED VIDE GROUND NOS. 2.1 AND 2. 2 IS IN RELATION TO CLAIM OF EXPENDITURE OF ` 1,47,223/-. THE FACTS APROPOS THIS ISSUE ITA 1271/10 :- 5 -: ARE THAT THE ASSESSEE-COMPANY HAS CLAIMED TOTAL EXP ENDITURE OF ` 1,47,223/- IN THE PROFIT & LOSS ACCOUNT. AS PER THE ASSESSEE, ALTHOUGH THERE WAS NO BUSINESS ACTIVITIES CARRIED ON DURING THE PERIOD BUT THE OFFICE EXPENSES, ETC. WERE INCURRED AS THERE WAS A TEMPORARY STOPPAGE OF BUSINESS. THE ASSESSING OFFICER WAS OF THE OPIN ION THAT THERE BEING NO BUSINESS ACTIVITY DURING THE YEAR, THIS EXPENDIT URE HAS TO BE TREATED AS INCOME OF THE ASSESSEE FROM UNDISCLOSED SOURCES. ON THE CONTRARY, THE LD. CIT(A) HAS DELETED THIS ADDITION BY OBSERVI NG THAT SINCE THE BUSINESS OF THE ASSESSEE WAS NOT ADMITTEDLY DISCONT INUED, SO THIS EXPENDITURE IS ALLOWABLE. 5. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERUSIN G THE RECORDS, WE HAVE FOUND THAT THE ASSESSEE HAS NOT DISCONTINUE D ITS BUSINESS BUT THERE WAS A TEMPORARY LULL IN BUSINESS. THIS FACT HAS BEEN CLEARLY FOUND MENTIONED IN THE NOTES ON ACCOUNTS FORMING PART OF THE BALANCE SHEET AND PROFIT & LOSS ACCOUNT WHICH THE L D. CIT(A) HAS INCORPORATED IN HIS ORDER. THE BUSINESS WAS ONLY T EMPORARILY SUSPENDED DUE TO RECURRING LOSSES. THE ASSESSEE HA S ALSO CREDITED BAD DEBTS RECOVERED IN ITS PROFIT & LOSS ACCOUNT AN D HAS SPENT MONEY IN MAINTENANCE OF OFFICE, ETC. DURING THIS PERIOD, WHICH ACCORDING THE HON'BLE COURTS, INCLUDING THE HON'BLE MADRAS HIGH C OURT IN THE CASE OF ITA 1271/10 :- 6 -: L. VE.VAIRAVAN CHETTIAR VS CIT, 72 ITR 114, IS ALL OWABLE. THE HON'BLE MADRAS HIGH COURT IN THE CASE CITED SUPRA HAS HELD AS UNDER: THERE IS NOTHING OR RECORD TO SHOW THAT THE ASSESS EE COMPLETELY ABANDONED OR CLOSED THE BUSINESS FOR EVE R. ON THE OTHER HAND, HIS BOOKS OF ACCOUNT REVEALED THAT HE WAS MEETING THE ESTABLISHMENT CHARGES AND INTEREST PAYM ENTS AS DETAILED IN THE ACCOUNTS IN THE YEAR OF ACCOUNT. THE COMPANY MAY NOT OBTAIN OR BE ABLE TO EXECUTE A SING LE BUSINESS CONTRACT FOR MONTHS AND YET IT MAY BE DEEM ED TO CARRY ON ITS BUSINESS, IF DURING THE PERIOD OF LULL AND INACTIVITY IT IS KEPT ABOVE AND IF IT RETAINS ITS R EGISTERED OFFICE AND HOLDS MEETINGS. IT IS NOT NECESSARY THAT A BUSI NESS TO BE IN EXISTENCE SHOULD HAVE WORK ALL THE TIME. THER E MAY BE LONG INTERVALS OF INACTIVITY AND A CONCERN MAY S TILL BE A GOING CONCERN, THOUGH IT MAY FOR SOMETIME BE QUIET AND DORMANT. THE MERE FACT THAT A BUSINESS HAS FOR SOME TIME BEEN IN THAT SENSE DOIMANT WOULD NOT MEAN THAT IT H AS CEASED TO EXIST, THE ASSESSEE CONTINUES TO MAINTAIN AN ESTABLISHMENT AND INCUR EXPENSES IN THE EXPECTATION THAT WORK WOULD COME AND THE BUSINESS WOULD BE SUCCESSFU L. HOW LONG HE SHALL REMAIN IN THE HOPE AND IN WHAT MA NNER HE MUST CARRYON HIS WORK TO GAIN SUCCESS IS PRIMARI LY HIS OWN CONCERN. THE MERE FACT THAT FOR SOME TIME HE IS NOT ABLE TO SECURE A CONTRACT OR DO THE WORK WHICH HE S ET OUT TO DO SHOULD NOT DISQUALIFY HIM FROM PLEADING THAT THE EXPENDITURE THAT HE HAD INCURRED WAS EXPENDED FOR T HE PURPOSE OF HIS BUSINESS. THEREFORE THE LOSS IS ALLO WABLE.- ERICHSEN VS. LAST (1881) 3 QBD 414, IRC VS. SOUTH B EHAR RAILWAY CO. LTD. 12 TAX CASES 657 (HL) : TC12R.255, KRIK AND RADAL LTD. VS. DUNN (1924) 8 TAX CASES 663, GEN ERAL CO MORATION LTD. VS. CRT (1935) 3 ITR 350 (MAD) : TC13R.1208 AND RNDERCHAND HARI RAM VS. CRT (1953) 23 ITR 437 (ALL) : TC13R.1175 RELIED ON. 6. ACCORDINGLY, WE CONFIRM THIS FINDING OF THE LD. CIT (A) AND DISMISS GROUND NOS.2.1 AND 2.2 OF THIS APPEAL. 7. THE NEXT ISSUE RAISED VIDE GROUND NO.3.1,3.2 AND 3. 3 OF THIS APPEAL RELATES TO DELETION OF ` 7,22,89,000/- ADDED AFTER DISALLOWING THIS AMOUNT WHICH WAS CLAIMED AS DIMINUTION IN THE VALUE OF ITA 1271/10 :- 7 -: INVESTMENT IN 1% CUMULATIVE REDEEMABLE SHARES IN SU PER SHOCK ABSORBERS LTD. THE FACTS OF THIS ISSUE ARE THAT T HE ASSESSEE-COMPANY HELD 72,28,900 SHARES WHICH WERE ACQUIRED DURING TH E COURSE OF ASSESSEES BUSINESS ACTIVITIES OF PROMOTING BUSINE SS AND THE LOSS ARISING FROM WRITING THEM OFF WAS CLAIMED AS REVENU E LOSS. AS PER THE ASSESSEE, THE ASSESSEE-COMPANYS MEMORANDUM & ARTIC LES OF ASSOCIATION DECLARES THAT THE COMPANY IS INVOLVED I N THE PROMOTION OF VARIOUS BUSINESS AND INDUSTRIES BY TAKING OVER SICK COMPANIES WHICH COULD BE REVIVED AND FOR THAT MATTER, IT WOULD MAKE ADVANCES/INVESTMENTS IN SUCH COMPANIES. IN FURTHER ANCE OF THIS OBJECT OF THE COMPANY, IT HAD MADE ADVANCES TO SUPE R SHOCK ABSORBERS LTD, OMAYAL AGRO INDUSTRIES LTD AND MEDIS PAN LTD. BY MAKING INVESTMENTS IN THEIR SHARES AND THESE ADVANC ES WERE MADE OUT OF BORROWED FUNDS ON WHICH THE COMPANY WAS PAYING I NTEREST. AS PER THE ASSESSEE-COMPANY, SUCH ACTIVITY HAS BEEN RECOG NIZED AS BUSINESS ACTIVITY FOR MAKING BUSINESS PROMOTION AND LIKEWI SE INTEREST PAID ON BORROWINGS WAS ALLOWED AS BUSINESS EXPENDITURE BY T HE ASSESSING OFFICER HIMSELF. BUT THE ASSESSING OFFICER WAS NOT AGREEABLE AND DIMINISHED THE VALUE OF INVESTMENT OF ` 7,22,89,000/- IN SHARES AT A FACE VALUE OF ` 10/- PER SHARE. ON THE CONTRARY, THE LD. CIT(A) HA S DELETED THIS ADDITION BY FOLLOWING THE TRIBUNAL ORD ER IN ASSESSEES ITA 1271/10 :- 8 -: OWN CASE FOR EARLIER YEAR, PASSED IN I.T.A.NO.1240/ MDS/2005 FOR ASSESSMENT YEAR 2000-01, DATED 28.2.2007. BUT THE REVENUE IS NOT AGREEABLE AND IT HAS BEEN ARGUED BY THE LD.DR THAT THE LD. CIT(A) HAS COMMITTED A MISTAKE IN DELETING THIS AMOUNT WHICH H AS BEEN CLAIMED AS DIMINUTION IN THE VALUE OF INVESTMENT IN 1% CUMU LATIVE REDEEMABLE SHARES IN SUPER SHOCK ABSORBERS LTD. THE BASIS OF THIS ARGUMENT OF THE LD.DR IS THAT THIS LOSS OF THE ASSESSEE DOES NO T REFLECT LOSS OF VALUE OF STOCK-IN-TRADE OR ANY CURRENT ASSET BUT THIS REP RESENTS LOSS OF VALUE OF SHARES WHICH HAS BEEN BOOKED AS INVESTMENT. IN THIS REGARD, THE LD.DR HAS TRIED TO SUBSTANTIATE HIS CONTENTION WIT H THE HELP OF HON'BLE KERALA HIGH COURTS DECISION RENDERED IN THE CASE OF KERALA SMALL INDUSTRIES DEVELOPMENT CORPORATION LTD VS CIT, 270 ITR 452 AND THE ORDER OF THE TRIBUNAL IN THE CASE OF M/S KWALITY F UN FOODS & RESTAURANT P. LTD IN I.T.A.NO.283/MDS/2003. ON THE OTHER HAND, BY JUSTIFYING THE CLAIM MADE BY THE ASSESSEE, THE LD.A R HAS HEAVILY RELIED ON THE TRIBUNAL ORDER (SUPRA). 8. AFTER COGITATING THE RIVAL SUBMISSIONS, WE HAVE NOT ICED THAT SUPER SHOCK ABSORBERS LTD, A BIFR COMPANY, COULD NO T BE REVIVED AND IT WAS THOUGHT PROPER TO WRITE OFF THE FUNDS PROVID ED TO THIS COMPANY IN THE SHAPE OF CONVERTIBLE PREFERENTIAL SHARES, TH OUGH THIS COMPANY ULTIMATELY FAILED. IT IS ALSO NOTICED THAT THE ASS ESSEE HAS SHOWN THIS ITA 1271/10 :- 9 -: AMOUNT IN THE PROFIT & LOSS ACCOUNT AS DIMINUTION IN THE VALUE OF INVESTMENT. WE HAVE GONE THROUGH THE TRIBUNAL ORD ER AND HAVE FOUND THAT SIMILAR ACTIVITY WAS TREATED AS BUSINESS ACTIVITY OF THE ASSESSEE COMPANY DONE ON ACCOUNT OF BUSINESS OR BUS INESS PROMOTION AND HAS TREATED THIS AMOUNT AS VALUE OF INVESTMEN T WRITTEN OFF. IT IS ALSO NOTICED THAT THE ASSESSEE-COMPANY HAS BEEN ADV ANCING LOANS AND MAKING INVESTMENT IN VARIOUS COMPANIES, INCLUDING S ICK COMPANIES, FROM ITS OWN FUNDS AS WELL AS FROM BORROWED FUNDS. SIMILAR ACTIVITY WAS DONE IN ASSESSMENT YEAR 2000-01 AND THE SAME HA S BEEN DEALT WITH BY THE TRIBUNAL BY MENTIONING THAT THE ASSESSE E HAD TAKEN FINANCIAL ASSISTANCE FROM ITS GROUP COMPANIES AND I T ADVANCED INTEREST FREE LOANS AND MADE INVESTMENTS IN BIFR COMPANIES AND SUCH INVESTMENTS AS ON 31.3.2000 ARE AS UNDER: LOANS ` IN LAKHS INVESTMENTS ` IN LAKHS SUPER SHOCK ABSORBERS LTD 641.67 886.65 OMAYAL AGRO INDUSTRIES LTD 581.44 6.25 MEDISPAN LIMITED 614.42 -- SHRIRAM RISK GUARDIAN -- 206.00 TOTAL 1837.53 1099.80 9. THE TRIBUNAL HAS HELD, IN SUCH CIRCUMSTANCES, THA T THIS ACTIVITY AMOUNTS TO BUSINESS ACTIVITY OF THE ASSESSEE OF DOI NG THE BUSINESS OF ITA 1271/10 :- 10 - : BUSINESS PROMOTION. THE TRIBUNAL HAS OBSERVED IN PARA 17 & 18 OF ITS ORDER AS UNDER: 17. WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE T HROUGH THE PAPER BOOKS, FILED BY THE ASSESSEE AND CASE LAWS CI TED BY BOTH SIDES. WE HAVE ALSO GONE THROUGH THE WRITTEN SUBMI SSIONS SUBMITTED BY THE ASSESSEE. THE ,ASSESSEE COMPANY A PART FROM MANUFACTURING AUTOMOBILE COMPONENTS IS ALSO IN VOLVED IN PROMOTION OF VARIOUS BUSINESS AND INDUSTRIES PER ITS MEMORANDUM OF ASSOCIATION. THE BUSINESS ACTIVITIES OF ASSESSEE COMPANY OF BUSINESS PROMOTION ARE TO IDEN TIFY SICK COMPANIES WHICH LACKED FINANCIAL STRENGTH BUT CAN BE REVIVED IN THE COURSE OF TIME AND IT NECESSITATES INTEREST BEARING BORROWALS. IN THIS PROCESS THE ASSESSEE COMPANY MA KES ADVANCES/INVESTMENTS, BUT IT DOES NOT MAKE THESE ADVANCES/INVESTMENTS WITH A VIEW TO REDEPLOY SURPLU S FUNDS FOR EARNING INCOME THEREFROM. BUT IT TAKES SUBSTANTIAL RISK IN MAKING THE INVESTMENTS AS AN ENTREPRENEUR AND THE P ROFIT AND LOSS THEREFROM CANNOT BE TAKEN IN VIEW OF THE PASSI VE INVESTOR, BUT IT SHOULD BE UNDERSTOOD TO HAVE BEEN MADE IN TH E COURSE OF BUSINESS OF PROMOTING INDUSTRIAL VENTURES. OBJECTI VE OF THE ASSESSEE COMPANY IS TO PROMOTE THE BUSINESS AND FOR THIS PURPOSE, LOANS AND ADVANCES TO VARIOUS CONCERNS ARE MADE IN VIEW OF THE INVESTMENTS. AS A PROMOTER OF BUSINESS , THE COMPANY HAD TO MAKE INVESTMENTS/ADVANCES IN VARIOUS FORMS AS A PART AND PARCEL OF BUSINESS ACTIVITIES. THE A SSESSEE COMPANY BORROWED FUNDS FOR MAKING INVESTMENTS/ADVAN CES TO GET RETURNS THEREOF. THE PORTFOLIO HAS THUS TO BE TAKEN AS ONE COMMON SOURCE OF REVENUE IN ORDER TO ASCERTAIN THE PROFIT AND LOSS IN THE BUSINESS. 18. FROM THE FINANCIAL DETAILS AS BROUGHT OUT BY T HE ASSESSING OFFICER AS WELL AS THE CIT (A) AND AS SUBMITTED BY THE ASSESSEE, IT IS SEEN THAT THERE IS NO DIFFERENCE IN THE FACTS. THE NET FINANCIAL ASSISTANCE PROVIDED BY THE ASSISTING COMPANIES DURING THE YEAR IS 5.67 CRORES AND THE BALANCE INVE STMENT IS OUT OF THE OLD FUNDS. THIS FACT HAS BEEN NARRATED BY T HE CIT (A) IN PARA 7.11.6 OF HIS ORDER WHERE THE TOTAL INVESTMENT S AS ON 31.3.1997 IS 23.40 CRORES AND AS ON 31.3.98 IS ` 31.83 CRORES AND AS ON 31.3.2000 IT IS 35.78 CRORES. WE DO NOT AGREE WITH THE FINDING OF THE CIT (A). THERE IS NO OLD FINANC IAL ASSISTANCE OR INVESTMENTS IN ANY PROJECT EITHER BY ASSISTING C OMPANIES OR BY THE ASSESSEE COMPANY. WITH ITS OLD INVESTMENTS OR ADVANCES PROVIDED DURING THE YEAR, THE TOTAL INVEST MENT IS TO BE TAKEN FOR CALCULATING MGC. THE OBJECT OF THE ASSES SEE COMPANY INCLUDED BUSINESS PROMOTION AND PROVIDING F INANCIAL ITA 1271/10 :- 11 - : ASSISTANCE TO SICK COMPANIES PARTAKES IN THE SUCCES SFUL IMPLEMENTATION OF THE REVIVAL POLICY AS DIRECTED BY BIFR. MONEY WAS ADVANCED BY WAY OF LOANS AND INVESTMENTS IN SSAL ADOPTED AS PER BIFR ORDER DATED 27.8.97 AND THE ASS ESSEE COMPANY HAS BEEN IDENTIFIED DEVELOPING ANOTHER SICK COMPANY CALLED SIL THAT LACKED FINANCIAL ASSISTANCE, BUT IT CAN BE REVIVED IN THE COURSE OF TIME AND BUSINESS PROMOTION. THE ASSESSEE HAS EXTENDED ACTIVITIES TO FINANCE MONEY PERIODICAL LY TO MEDISPAN LTD, A PHARMA COMPANY TO MAKE IT VIABLE IN THE COURSE OF TIME. OVER AND ABOVE THE ABOVE THREE COM PANIES, THE ASSESSEE HAS MADE INVESTMENTS IN SHARES AND ADV ANCED LOANS TO THEM AS PART OF ITS BUSINESS PROMOTION ACT IVITIES. INVESTMENT MADE BY WAY OF LOANS AND ADVANCES FOR PU RCHASING SHARES IN THE COMPANIES IDENTIFIED FOR BUSINESS PRO MOTION. IT WAS CLARIFIED THAT DUE DILIGENCE WAS DONE REGARDING VIABILITY OF THE ASSISTED COMPANIES BEFORE INVESTING AND IT WAS DONE AS PER BIFR GUIDELINES. SECURITY WAS ALSO PROVIDED TO THE ASSISTING GROUP COMPANIES AS PER AGREEMENT. THOUGH AS PER AGREEMENT, MGC IS PAYABLE ONLY AFTER PERIOD OF FIVE YEARS AFTER EVALUATIN OF ITS ASSETS, THE COMPANY CONSIDERED IT EXPEDIENT AND DESIRABLE THAT MGC SHOULD BE PROVIDED AND MADE APPROPRIATE DEBIT IN THE PROFIT & LOSS ACCOUNT IN CONFORMITY WITH THE ACCOUNTING PRACTICE. THE MGC WAS FIXED AT 27% WHICH IS THE RATE NORMALLY CHARGED BY THE ASSISTING COMPA NIES AS PER MARKET CONDITIONS. THE ASSESSEE FILED THE DETAILS THAT THE MGC PAYABLE AS ON THE YEAR ENDING 31.3.99 IS AT ` 12.07 CRORES, AT THE YEAR ENDING 31.3.00 IS AT ` 14.59 CRORES, BUT NO AMOUNT WAS PARTLY ALLOWED FOR THE YEAR ENDING 31.3.99 AND ` 2.50 CRORES WAS PAID FOR THE YEAR ENDING 31.3.00 TO THE ASSISTI NG COMPANIES. THE THREE COMPANIES, NAMELY SHRIRAM TRA NSPORT FINANCE CO LTD., SHRIRAM CITY UNION FINANCE LTD., A ND SHRIRAM INVESTMENTS LTD HAVE SHOWN THE MGC IN THEIR INCOME TAX FOR ASSESSMENT YEAR 2000-01 AT ` 197.07 LAKHS, ` 52.85 LAKHS AND ` 389.35 LAKHS AS INCOME IN THEIR RETURNS. 10. A VERY PERUSAL OF THE ABOVE EXCERPT OF THE TRIBUN AL ORDER MAKES IT AMPLY CLEAR THAT THE TRIBUNAL HAS GIVEN A FINDING IN FAVOUR OF THE ASSESSEE AND WE ARE BOUND TO FOLLOW THE SAME IN THIS YEAR. THE DECISIONS RELIED ON BY THE DEPARTMENT ARE RENDERED ON DISTINGUISHABLE FACTS BUT THE TRIBUNAL ORDER IN THIS CASE IS EXACTL Y ON IDENTICAL FACTS ITA 1271/10 :- 12 - : WHICH HAS A BINDING EFFECT ON US. THEREFORE, BY RE SPECTFULLY FOLLOWING THE TRIBUNAL ORDER (SUPRA), WE CANNOT INTERFERE IN THIS FINDING OF THE LD. CIT(A). ACCORDINGLY, THE GROUNDS RAISED IN RESPECT OF THIS ISSUE ARE DISMISSED. 11. THE NEXT ISSUE TAKEN VIDE GROUND NOS. 4.1 AND 4.2 R ELATES TO DELETION OF ADDITION MADE ON ACCOUNT OF BAD DEBT RE COVERY AMOUNTING TO ` 5,02,45,000/- INVESTED IN M/S OMAYAL AGRO INDUSTRIE S LTD. IN THE ASSESSEES PROFIT & LOSS ACCOUNT FOR THE YEAR ENDED 31.3.2006, A CREDIT OF ` 5,02,45,000/- WAS SHOWN AS RECOVERY OF DUES FROM OM AYAL AGRO INDUSTRIES LTD . THIS AMOUNT HAD BEEN WRITTEN OFF AS BAD IN THE BOOKS FOR THE YEAR ENDED 31.3.2004 AND HAS BEEN CLAIMED A S BAD DEBT IN THE ORIGINAL RETURNS FILED FOR ASSESSMENT YEAR 2004-05. THE ORIGINAL RETURN WAS FILED ON 28.12.2004. THE ASSESSEE RECOVERED TH IS AMOUNT ON 30.6.2005 DURING THE ASSESSMENT YEAR UNDER CONSIDER ATION I.E 2006- 07, WHICH WAS STILL GOING ON. THE ASSESSEE REVIS ED ITS RETURN FILED FOR THAT YEAR BY FILING A REVISED RETURN ON 23.3.2006 I N WHICH THE CLAIM OF BAD DEBT WAS WITHDRAWN AND THE REVISED RETURN WAS ACCEPTED BY THE ASSESSING OFFICER. RECOVERY OF THIS DEBT ALTHOUGH CREDITED IN THE PROFIT & LOSS ACCOUNT IN ASSESSMENT YEAR 2006-07 BUT THE S AME CANNOT BE TAXED AS IT WAS NOT ALLOWED IN EARLIER YEARS. BUT THE CASE OF THE ASSESSING OFFICER IS THAT THE ASSESSEE IS NOT ENTIT LED TO FILE REVISED ITA 1271/10 :- 13 - : RETURN FOR ASSESSMENT YEAR 2004-05 BUT IN FACT, YET THE ADMITTED FACT REMAINS THAT HE HAD ACCEPTED THE REVISED RETURN AND HAD COMPUTED THE BUSINESS LOSS STARTING FROM THE BUSINESS LOSS O F ` 4,96,49,725/- RETURNED IN THE REVISED RETURN IN THAT YEAR. THE R ELEVANT PORTION OF COMPUTATION OF INCOME AS ARRIVED AT BY THE ASSESSIN G OFFICER IN ASSESSMENT ORDER DATED 28.12.2006 FOR ASSESSMENT YE AR 2004-05, IS AS UNDER: BUSINESS LOSS RETURNED ` 4,96,49,752 LESS: DISALLOWANCE OF EXPENSE OF CAPITAL IN NATURE (I) IRRECOVERABLE ADVANCES WRITTEN OFF 2,15,76,000 (II) BUILDING ADVANCE WRITTEN OFF 2,78,30,000 ` 4,94,06,000 NET BUSINESS LOSS (-) ` 2,43,725 12. THE COMPUTATION BASED ON REVISED RETURN IN THE ASSE SSMENT YEAR 2004-05 IS AS UNDER: LOSS AS PER ACCOUNTS 479949454 1. CAPITAL GAINS ON SALE OF LAND DEALT SEPARATELY 12027957 2. INTEREST ON TDS REFUND DEALT UNDER OTHER SOURCES 117823 12145780 492095234 ADD: MINIMUM GUARANTEE CHARGES W/ORR-DISALLOWED 392200509 ADD: BAD DEBTS W/OFF, NOW REVERSED 50245000 BUSINESS LOSS 49649725 ITA 1271/10 :- 14 - : 13. THE LD. CIT(A) WAS NOT AGREEABLE WITH THE ASSESSING OFFICER AND HAS DELETED THE IMPUGNED ADDITION. 14. AFTER HEARING BOTH SIDES, WE HAVE NOTICED THAT IN T HE REVISED RETURN, THIS LOSS HAD BEEN ARRIVED AT AFTER DISALLO WING THE BAD DEBT AMOUNTING TO ` 5,02,45,000/- MEANING THEREBY THAT BAD DEBT HAS NOT BEEN CLAIMED AND HAD NOT BEEN ALLOWED ALSO IN ASSES SMENT YEAR 2004- 05 AND IN EFFECT, THE ASSESSEE HAD SUFFERED TAX IN THAT VERY YEAR ON THIS AMOUNT. WHEN THE ASSESSEE HAS RECOVERED THIS AMOUNT IN THIS ASSESSMENT YEAR WHICH IS UNDER CONSIDERATION, THIS CANNOT BE AGAIN TAXED AS IT WOULD AMOUNT TO DOUBLE TAXATION WHICH I S NOT PERMISSIBLE IN LAW. IN THE BACKDROP OF THESE FACTS, THE RECOVERY OF THE BAD DEBT AND CREDITING IT IN THE PROFIT & LOSS ACCOUNT OF THE AS SESSMENT YEAR UNDER CONSIDERATION, CANNOT BE TAXED AGAIN IN THIS YEAR B ECAUSE THIS AMOUNT HAS ALREADY BEEN TAXED IN ASSESSMENT YEAR 2004-05 P ARTICULARLY WHEN THE REVISED RETURN FOR THAT YEAR HAS BEEN ACCEPTED BY THE ASSESSING OFFICER HIMSELF. IN OUR CONSIDERED OPINION, THERE IS NO FALLACY IN THIS FINDING OF THE LD. CIT(A) HENCE, WE CONFIRM THE SAM E. ACCORDINGLY, WE DISMISS GROUND NOS 4.1 AND 4.2 OF THIS APPEAL AS WE LL. 15. THE LAST ISSUE OF THIS APPEAL RELATES TO DELETION O F ADDITION OF ` 7,22,89,000/- FOR THE PURPOSE OF SECTION 115JB OF T HE ACT IN RESPECT ITA 1271/10 :- 15 - : OF DIMINUTION IN THE VALUE OF ASSETS. THE CASE OF THE REVENUE IS THAT THIS IS NOT ASSESSEES STOCK-IN-TRADE. AS WE HAVE ALREADY DISCUSSED, ANY LOSS, IF AT ALL ARISES, CAN ARISE ONLY ON THE A CTUAL SALE OF SHARES UNTIL THAT, THE NATURE OF THIS LOSS CAN BE ONLY CON TINGENT. THE LD.DR HAS DRAWN OUR ATTENTION TOWARDS EXPLANATION (C) APP ENDED TO SECTION 115JB(2) OF THE ACT IN SUPPORT OF REVENUES ACTION . ON THE OTHER HAND, THE LD.AR HAS RELIED ON THE TRIBUNAL ORDER IN ASSESSEES OWN CASE CITED SUPRA. AS STATED EARLIER, THE ASSESSEE-COMPA NY WAS HOLDING 1% CUMULATIVE REDEEMABLE CONVERTIBLE PREFERENTIAL SHAR ES OF ` 10/- EACH OF SUPER SHOCK ABSORBERS LTD WHOSE TOTAL VALUE COME S TO ` 7,22,89,000/-. THIS COMPANY FINALLY FAILED AND THA T IS WHY THE ASSESSEE CHOSE TO WRITE OFF THIS INVESTMENT. IN TH E BALANCE SHEET ENDED 31.3.2006, THE VALUE OF THIS AMOUNT HAS BEEN SHOWN AT NIL SO IN OUR CONSIDERED OPINION, THIS IS NOT EVEN A LIABI LITY MUCH LESS A CONTINGENT LIABILITY OF ASSESSEE-COMPANY. THE ASSE SSEE HAS NOT EVEN MADE A PROVISION FOR DIMINUTION IN THE VALUE OF ASS ETS BUT IT IS AN ACTUAL WRITE OFF. THE PROVISION TO WHICH THE LD.DR HAS BEEN REFERRING TO I.E EXPLANATION (C) APPENDED TO SECTION 115JB(2) OF THE ACT , ADMITTEDLY, CAME INTO EFFECT IN RESPECT OF AMOUNTS SET ASIDE AS PROVISION FOR DIMINUTION IN THE VALUE OF ASSETS. I N THIS REGARD, LD.AR HAS PLACED RELIANCE ON THE DECISION OF HON'BLE SUPR EME COURT RENDERED ITA 1271/10 :- 16 - : IN THE CASE OF APOLLO TYRES 122 TAXMAN 562. THIS D ECISION MANDATES THAT THE ASSESSING OFFICER IS NOT EMPOWERED TO MAKE ANY ADJUSTMENT OTHER THAN THOSE MENTIONED IN EXPLANATION APPENDED TO SECTION 115JB(2). WE FIND THAT THIS WRITE OFF DOES NOT FIT IN ANY OF THE ITEMS MENTIONED IN THIS EXPLANATION. THIS EXPLANATION RE ADS AS UNDER: EXPLANATION FOR THE PURPOSE OF THIS SECTION, BOO K PROFIT MEANS THE NET PROFIT AS SHOWN IN THE PROFIT AND LOS S ACCOUNT FOR THE RELEVANT PREVIOUS YEAR PREPARED UNDER SUB-S ECTION (2) AS INCREASED BY (A) THE AMOUNT OF INCOME-TAX PAID OR PAYABLE, AND THE PROVISION THEREFORE; OR (B) THE AMOUNTS CARRIED TO ANY RESERVES, BY WHATEV ER NAME CALLED [OTHER THAN A RESERVE SPECIFIED UNDER SECTIO N 33AC], OF (C) THE AMOUNT OR AMOUNTS SET ASIDE TO PROVISION S MADE FOR MEETING LIABILITIES, OTHER THAN ASCERTAINED LIABILI TIES; OR (D) THE AMOUNT BY WAY OF PROVISION FOR LOSSES OF S UBSIDIARY COMPANIES; OR (E) THE AMOUNT OR AMOUNTS OF DIVIDENDS PAID OR PRO POSED; OR (F) THE AMOUNT OR AMOUNTS OF EXPENDITURE RELATAB LE TO ANY INCOME TO WHICH [ SECTION 10[(OTHER THAN THE PROVISIONS CONTAINED IN CLAUSE (23G) THEREOF) OR SECTION 10A O R SECTION 10B OR SECTION 11 OR SECTION 12 APPLY ]. 16. IT BECOMES CRYSTAL CLEAR FROM THE ABOVE THAT THE A SSESSEE HAS ACTUALLY WRITTEN OFF THE VALUE OF THE ASSETS AND IT IS NOT AT ALL A PROVISION DEBITED TO PROFIT & LOSS ACCOUNT, TO ATT RACT THIS PROVISION. IN THE BALANCE SHEET ALSO THIS AMOUNT HAS BEEN WRITTEN OFF AND IT IS NOT PLACED UNDER THE HEAD PROVISIONS IN THE LIABILITY SIDE OF THE BALANCE ITA 1271/10 :- 17 - : SHEET. IN THE ASSETS SIDE ALSO THE VALUE OF THE SH ARES HAS BEEN SHOWN AS NIL. THEREFORE, THE RATIO OF THE DECISION OF APOLLO TYRES(SUPRA) WHICH IS REPRODUCED BELOW, SQUARELY APPLIES TO THIS ISSUE: SECTION 115J OF THE INCOME-TAX ACT, 1961 READ WIT H PARTS II AND III OF SCHEDULE VI TO THE COMPANIES ACT, 19 56 ZERO-TAX COMPANIES ASSESSEE COMPANY, WHILE DETERMINING ITS NET PROFIT HAD PROVIDED FOR ARREARS OF DEPRECIATION IN ITS PROFIT & LOSS ACCOUNT WHICH ACC ORDING TO REVENUE WAS NOT IN ACCORDANCE WITH PARTS II AND III OF SCHEDULE VI TO THE COMPANIES ACT, 1956. HENCE, ASSESSING OFFICER WHILE CONSIDERING CASE OF ASSESSE E- COMPANY UNDER SECTION 115J, RECOMPUTED SAID PROFIT AND LOSS ACCOUNT SO AS TO EXCLUDE PROVISIONS MADE FOR A RREARS OF DEPRECIATION ACCOUNTS OF ASSESSEE-COMPANY WERE CERTIFIED BY AUDITORS AS HAVING BEEN MAINTAINED IN ACCORDANCE WITH PROVISIONS OF THE COMPANIES ACT. T RIBUNAL HELD THAT ASSESSING OFFICER HAD NO AUTHORITY TO REO PEN ACCOUNTS OF A COMPANY WHICH WERE CERTIFIED BY AUDIT ORS OF COMPANY AS HAVING BEEN MAINTAINED IN ACCORDANCE WIT H PROVISIONS OF THE COMPANIES ACT AND WHICH ACCOUNT H AD BEEN ACCEPTED IN GENERAL MEETING OF COMPANY AS WELL AS BY REGISTRAR OF COMPANIES WHETHER WHILE COMPUTING INCOME UNDER SECTION 115J, ASSESSING OFFICER HAS ON LY POWER OF EXAMINING WHETHER BOOKS OF ACCOUNT ARE CER TIFIED BY AUTHORITIES UNDER COMPANIES ACT AS HAVING BEEN PROPERLY MAINTAINED IN ACCORDANCE WITH COMPANIES AC T AND THEREAFTER, HE HAS LIMITED POWER OF MAKING ADDI TIONS AND REDUCTIONS AS PROVIDED FOR IN EXPLANATION TO SA ID SECTION HELD YES WHETHER, THEREFORE, ASSESSING OFFICER DOES NOT HAVE JURISDICTION TO GO BEHIND NET PROFIT SHOWN IN PROFIT & LOSS ACCOUNT EXCEPT TO EXTENT PROVIDED IN EXPLANATION TO SECTION 115J HELD YES WHETHER TR IBUNAL HAD RIGHTLY SET ASIDE ORDER OF ASSESSING OFFICER HELD, YES ITA 1271/10 :- 18 - : 17. THEREFORE, BY RESPECTFULLY FOLLOWING THE HON'BLE S UPREME COURT DECISION (SUPRA) WE CANNOT INTERFERE IN THIS FINDIN G OF THE LD. CIT(A) AS WELL. 18. IN THE RESULT, THE APPEAL OF THE REVENUE STANDS DIS MISSED. THE ORDER PRONOUNCED IN THE OPEN COURT ON 4.2.11. SD/- SD/- (B. RAMAKOTAIAH) ACCOUNTANT MEMBER ( HARI OM MARATHA ) JUDICIAL MEMBER DATED: 4 TH FEBRUARY, 2011 RD COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR