DCIT,Circle-6, Kolkata, Kolkata V. West Bengal Industrial Development Corporation Ltd., Kolkata

ITA 1376/KOL/2009

• Counselvise Citation: 137623514 RSA 2009
• Duration Of Justice: 6 year(s) 4 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-12-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2002-2003
• Appeal Filed On: 10-08-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SRIDHAR BHATTACHARJEE
• Assessee Lawyers: B R; J P KHAITAN SENIOR
• Keywords: Earning of tax free income; Date of conversion; Bad and doubtful debts
• Section: 143(3); 234B; 14A; 28

Judgement Text

I.T.A. NOS. 1376, 1377, 1582 & 1531/KOL./2009 ASSESSMENT YEARS: 2002-03, 2003-04, 2005-06 & 2005- 06 & ITA NO. 166/KOL/2010 ASSESSMENT YEAR: 2006-2007 PAGE 1 OF 20 IN THE INCOME TAX APPELLATE TRIBUNAL, KOLKATA B BENCH, KOLKATA BEFORE SHRI P.M. JAGTAP, ACCOUNTANT MEMBER AND SHRI S.S. VISWANETHRA RAVI, JUDICIAL MEMBER I.T.A. NOS. 1376, 1377, 1582/KOL/2009 ASSESSMENT YEARS: 2002-2003, 2003-2004, 2005-2006 DEPUTY COMMISSIONER OF INCOME TAX,................. .............................APPELLANT CIRCLE-6, KOLKATA, AAYAKAR BHAWAN, P-7, CHOWRINGHEE SQUARE, KOLKATA-700 069 -VS.- WEST BENGAL INDUSTRIAL DEVELOPMENT CORPORATION LIMI TED,..........RESPONDENT 5, COUNCIL HOUSE STREET, KOLKATA-700 001 [PAN : AAACW 3043 Q] & 1531/KOL/ 2009 ASSESSMENT YEAR : 2005-2006 WEST BENGAL INDUSTRIAL DEVELOPMENT CORPORATION LIMI TED,............APPELLANT 5, COUNCIL HOUSE STREET, KOLKATA-700 001 [PAN : AAACW 3043 Q] -VS.- ADDITIONAL COMMISSIONER OF INCOME TAX,............. .........................RESPONDENT RANGE-6, KOLKATA, AAYAKAR BHAWAN, P-7, CHOWRINGHEE SQUARE, KOLKATA-700 069 & I.T.A. NO. 166/KOL/ 2010 ASSESSMENT YEAR : 2006-2007 WEST BENGAL INDUSTRIAL DEVELOPMENT CORPORATION LIMI TED,.....,........APPELLANT 5, COUNCIL HOUSE STREET, KOLKATA-700 001 [PAN : AAACW 3043 Q] I.T.A. NOS. 1376, 1377, 1582 & 1531/KOL./2009 ASSESSMENT YEARS: 2002-03, 2003-04, 2005-06 & 2005- 06 & ITA NO. 166/KOL/2010 ASSESSMENT YEAR: 2006-2007 PAGE 2 OF 20 -VS.- DEPUTY COMMISSIONER OF INCOME TAX,................. ..........................RESPONDENT CIRCLE-6, KOLKATA, AAYAKAR BHAWAN, P-7, CHOWRINGHEE SQUARE, KOLKATA-700 069 APPEARANCES BY: SHRI SRIDHAR BHATTACHARJEE, JCIT, SR. D.R., FOR THE DEPARTMENT SHRI J.P. KHAITAN, SENIOR COUNSEL & SHRI B.R. DUTTA , A.R., FOR THE ASSESSEE DATE OF CONCLUDING THE HEARING : DECEMBER 02, 2015 DATE OF PRONOUNCING THE ORDER : DECEMBER 16, 2015 O R D E R PER SHRI P.M. JAGTAP :- OUT OF THESE FIVE APPEALS, TWO APPEALS BEING I.T.A. NOS. 1376/KOL/2009 & 1377/KOL/2009 ARE THE APPEALS FILED BY THE REVENUE FOR ASSESSMENT YEARS 2002-03 AND 2003-04 RESPECTIVE LY, WHILE THE APPEAL BEING I.T.A. NO. 166/KOL/2010 IS THE APPEAL OF THE ASSESSEE FILED FOR ASSESSMENT YEAR 2006-07 AND THE REMAINING TWO APPEA LS BEING ITA NOS. 1582/KOL/2009 (REVENUES APPEAL) AND 1531/KOL/2009 (ASSESSEES APPEAL) ARE CROSS APPEALS FOR ASSESSMENT YEAR 2005- 06. SINCE THESE APPEALS INVOLVE COMMON ISSUES, THE SAME HAVE BEEN H EARD TOGETHER AND ARE BEING DISPOSED OF BY A SINGLE CONSOLIDATED ORDE R FOR THE SAKE OF CONVENIENCE. 2. FIRST WE TAKE UP THE APPEAL OF THE REVENUE FOR A .Y. 2002-03 BEING ITA NO. 1376/KOL/2009 , WHICH IS DIRECTED AGAINST THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS)-VI, KOLKATA DA TED 27.04.2009. 3. THE SOLITARY ISSUE INVOLVED IN THE APPEAL OF THE REVENUE RELATES TO THE DELETION BY THE LD. CIT(APPEALS) OF THE ADDITIO N OF RS.116.19 LAKHS MADE BY THE ASSESSING OFFICER ON ACCOUNT OF INTERES T ACCRUED ON DEBENTURES BEING NON-PERFORMING ASSETS. I.T.A. NOS. 1376, 1377, 1582 & 1531/KOL./2009 ASSESSMENT YEARS: 2002-03, 2003-04, 2005-06 & 2005- 06 & ITA NO. 166/KOL/2010 ASSESSMENT YEAR: 2006-2007 PAGE 3 OF 20 4. THE ASSESSEE IN THE PRESENT CASE IS A STATE GOVE RNMENT UNDERTAKING, WHICH IS MAINLY ENTRUSTED WITH THE TAS K OF PROVIDING LONG- TERM FINANCE FOR THE INDUSTRIAL DEVELOPMENT IN THE STATE OF WEST BENGAL. IT WAS ALSO MADE RESPONSIBLE FOR THE DEVELOPMENT OF INDUSTRIES IN THE STATE. IN ITS RETURN OF INCOME FILED FOR THE YEAR U NDER CONSIDERATION, THE INTEREST ACCRUED ON DEBENTURES AMOUNTING TO RS.116. 19 LAKHS WAS NOT RECOGNIZED BY THE ASSESSEE AS ITS INCOME. SINCE THE ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING AND INTER EST ON DEBENTURES HAD AUTOMATICALLY ACCRUED DURING THE YEAR UNDER CONSIDE RATION, THE AMOUNT OF RS.116.19 LAKHS WAS TREATED BY THE ASSESSING OFFICE R AS THE INCOME OF THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION AND THE S AME WAS ADDED BY HIM TO THE TOTAL INCOME OF THE ASSESSEE. 5. ON APPEAL, THE LD. CIT(APPEALS) UPHELD THE SAID ADDITION MADE BY THE ASSESSING OFFICER AND ON FURTHER APPEAL, THE TR IBUNAL RESTORED THE MATTER TO THE FILE OF THE ASSESSING OFFICER FOR FRE SH ADJUDICATION. AS PER THE DIRECTION OF THE TRIBUNAL, THE ASSESSING OFFICE R EXAMINED THE ISSUE AGAIN AND HELD THAT INTEREST ON DEBENTURES HAVING B EEN AUTOMATICALLY ACCRUED, THE SAME WAS CHARGEABLE TO TAX IN THE HAND S OF THE ASSESSEE AS PER MERCANTILE SYSTEM OF ACCOUNTING FOLLOWED BY IT. ACCORDINGLY, THE SUM OF RS.116.19 LAKHS ON ACCOUNT OF INTEREST ACCRUED O N DEBENTURES WAS ADDED BY THE ASSESSING OFFICER TO THE TOTAL INCOME OF THE ASSESSEE VIDE ORDER DATED 23.09.2008 PASSED UNDER SECTION 143(3) READ WITH SECTION 254 OF THE INCOME TAX ACT. 6. THE ADDITION MADE BY THE ASSESSING OFFICER ON AC COUNT OF INTEREST INCOME ALLEGEDLY ACCRUED ON THE DEBENTURES WAS AGAI N CHALLENGED BY THE ASSESSEE IN THE APPEAL FILED BEFORE THE LD. CIT(APP EALS) AND THE LD. CIT(APPEALS) DELETED THE SAID ADDITION MADE BY THE ASSESSING OFFICER FOR THE FOLLOWING REASONS GIVEN IN PARAGRAPH NO. 6 OF H IS IMPUGNED ORDER:- I.T.A. NOS. 1376, 1377, 1582 & 1531/KOL./2009 ASSESSMENT YEARS: 2002-03, 2003-04, 2005-06 & 2005- 06 & ITA NO. 166/KOL/2010 ASSESSMENT YEAR: 2006-2007 PAGE 4 OF 20 BY GROUND OF APPEAL NO.3 THE APPELLANT DISPUTES TH E ACTION OF THE AO IN NOT ALLOWING A SUM OF RS.116.19 LAKHS BEI NG INTEREST ON DEBENTURE, PERTAINING TO NON-PERFORMING ASSETS A CCOUNTED FOR ON CASH BASIS. THE LEARNED A. R REFERRED TO THE APPELLANT'S OWN CASE FOR THE ASSESSMENT YEAR 1997-98 DECIDED BY THE HONBLE ITAT B BENCH KOLKATA IN ITA NO.1295/KOL/2001 , WHERE IDENTICAL ISSUE HAS BEEN HELD IN FAVOUR OF THE APPE LLANT. IN PARA 8, THE HONBLE ITAT WHILE ALLOWING THE APPEL LANT'S GROUND ON THIS MATTER HAS HELD AS BELOW: 'HOWEVER, THE TRIBUNAL HAS DECIDED THE SIMILAR ISSU E IN THE ASSESSEE'S OWN CASE IN I.T.A NO.987/C/2001 B Y ORDER DATED 20 TH SEPTEMBER 2002 BY FOLLOWING THE EARLIER ORDERS OF THE TRIBUNAL IN I.T.A NO.1207/C/1994 VIDE ORDER DATED 18TH AUGUST, 1996 AND ALSO I.T.A NO.1368/C/2000 FOR THE ASSTT. YEAR 1995-96 VIDE ORDER DATED 5 TH JULY, 2002 STATING THAT THE ASSESSEE IN ITS ACCOUNTING POLICY HAD CLEARLY INDICATED WITH RESPECT TO ACCOUNTING OF INTEREST ON ADVANCES GIVEN TO BORROWERS WHICH WAS TO BE TAKEN INTO CONSIDERATION ON RECEIPT BASIS AND ACCORDINGLY , THE AO. WAS DIRECTED TO BRING TO TAX THE AMOUNT OF INTEREST ONLY THAT AMOUNT WHICH HAD BEEN RECEIVED DURING THE YEAR. IN VIEW OF THE EARLIER ORDERS OF T HE TRIBUNAL, WE HOLD THAT THE ACCRUED INTEREST ON DEBENTURE OF RS.1,22,535/- IN RESPECT OF NON- PERFORMING ASSETS TO BE CHARGED ONLY ON RECEIPT BASIS.' THE APPELLANT ALSO REFERRED TO THE DECISION OF THE HONBLE ITAT IN I.T.A NO.2498/KOL/2007 (AY-2002-2003). I HAVE GO NE THROUGH THE ASSESSMENT ORDER AND THE SUBMISSIONS OF THE APPELLANT. IN THE ASSESSMENT ORDER THE AO HAS NOT C ONSIDERED THE DECISION OF THE HONBLE ITAT IN ASSESSEE'S OWN C ASE AND SUSTAINED THE EARLIER ADDITION MADE BY THE AO. THE APPELLANT ALSO SUBMITTED THAT IT WAS FOLLOWING CASH SYSTEM OF ACCOUNTING FROM THE FINANCIAL YEAR 1986-87 AS PER THE DECISION TAKEN BY THE BOARD OF DIRECTORS. THE APPELLANT ALSO RELIED O N THE DECISION OF THE HONBLE SUPREME COURT WHERE THEY HAV E DISMISSED THE DEPARTMENT'S SPECIAL LEAVE PETITION A GAINST THE JUDGEMENT OF THE CALCUTTA HIGH COURT WHERE BY THE H IGH COURT AFFIRMED THE ORDER OF THE TRIBUNAL HOLDING THAT INT EREST ON NON- PERFORMING ASSETS WAS NOT INCLUDABLE IN THE TOTAL I NCOME OF THE ASSESSE ON ACCRUAL BASIS, EVEN THOUGH THE ASSESSE W AS FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING. 'CIT-VS- KICM INVESTMENT LIMITED: C.C.NO.29 OF 2009 REPORTED IN 310 ITR(ST) 4.' GOING BY THE FACTS AND DECISIONS OF THE HONBLE ITAT, I HAVE NO OTHER OPTION BUT TO DIRECT THE AO TO DELETE THE ADDITION OF RS.116.19 LAKHS. THIS GROUND OF APPEAL IS ALLOWED. I.T.A. NOS. 1376, 1377, 1582 & 1531/KOL./2009 ASSESSMENT YEARS: 2002-03, 2003-04, 2005-06 & 2005- 06 & ITA NO. 166/KOL/2010 ASSESSMENT YEAR: 2006-2007 PAGE 5 OF 20 7. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES AN D ALSO PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. AS AGREED BY THE LD. REPRESENTATIVES OF BOTH THE SIDES, THIS ISSUE INVOL VED IN THE APPEAL OF THE REVENUE FOR A.Y. 2002-03 IS SQUARELY COVERED IN FAV OUR OF THE ASSESESE BY THE ORDERS OF THE TRIBUNAL IN ASSESSEES OWN CASE F OR THE EARLIER YEARS WHICH HAVE BEEN REFERRED TO AND RELIED UPON BY THE LD. CIT(APPEALS) IN HIS IMPUGNED ORDER TO GIVE RELIEF TO THE ASSESSEE. MOREOVER, AS SUBMITTED BY THE LD. COUNSEL FOR THE ASSESSEE, IT WAS HELD BY THE HONBLE SUPREME COURT IN THE CASE OF INDIAN CEMENT LIMITED VS.- CI T REPORTED IN 60 ITR 52 THAT THE DEBENTURE IS IN THE NATURE OF LOAN AND THEREFORE, THE PROVISIONS OF SECTION 43D ARE APPLICABLE IN CASE OF DEBENTURE ALSO. RESPECTFULLY FOLLOWING THE JUDICIAL PRONOUNCEMENTS, WE UPHOLD THE IMPUGNED ORDER OF THE LD. CIT(APPEALS) DELETING THE ADDITION MADE BY THE ASSESSING OFFICER ON ACCOUNT OF INTEREST ACCRUED ON DEBENTURES AND DISMISS THE APPEAL OF THE REVENUE FOR ASSESSMENT YE AR 2002-03. 8. AS REGARDS THE REVENUES APPEAL FOR A.Y. 2003-04 BEING ITA NO. 1377/KOL/2009 , WHICH IS DIRECTED AGAINST THE ORDER OF LD. CIT(AP PEALS)- VI, KOLKATA DATED 27.04.2009, IT IS OBSERVED THAT T HE SOLITARY ISSUE INVOLVED THEREIN RELATING TO THE DELETION BY THE LD . CIT(APPEALS) OF THE ADDITION OF RS.125.52 LAKHS MADE BY THE ASSESSING O FFICER ON ACCOUNT OF INTEREST ACCRUED ON DEBENTURES IS SIMILAR TO THE ON E INVOLVED IN THE APPEAL FILED BY THE REVENUE FOR A.Y. 2002-03, WHICH HAS ALREADY BEEN DECIDED BY US IN THE FOREGOING PORTION OF THIS ORDE R. SINCE ALL THE MATERIAL FACTS RELEVANT TO THIS ISSUE AS INVOLVED FOR A.Y. 2 003-04 ARE SIMILAR TO THE ONE INVOLVED FOR A.Y. 2002-03, WE FOLLOW THE CONCLU SION DRAWN IN A.Y. 2002-03 AND UPHOLD THE IMPUGNED ORDER OF THE LD. CI T(APPEALS) DELETING THE ADDITION MADE BY THE ASSESSING OFFICER ON ACCOU NT OF INTEREST ACCRUED ON DEBENTURES. THE APPEAL OF THE REVENUE FOR A.Y. 2 003-04 IS ACCORDINGLY DISMISSED. I.T.A. NOS. 1376, 1377, 1582 & 1531/KOL./2009 ASSESSMENT YEARS: 2002-03, 2003-04, 2005-06 & 2005- 06 & ITA NO. 166/KOL/2010 ASSESSMENT YEAR: 2006-2007 PAGE 6 OF 20 9. NOW WE TAKE UP THE CROSS APPEALS FOR A.Y. 2005-06 , WHICH ARE DIRECTED AGAINST THE ORDER OF THE LD. CIT(APPEALS)- VI, KOLKATA DATED 20.06.2009. 10. GROUND NO. 1 OF THE REVENUES APPEAL FOR A.Y. 2 005-06 AND THE SOLITARY GROUND RAISED IN THE APPEAL OF THE ASSESSE E INVOLVES A COMMON ISSUE RELATING TO THE DISALLOWANCE MADE BY THE ASSE SSING OFFICER ON ACCOUNT OF ASSESSEES CLAIM FOR BAD DEBTS WRITTEN O FF, WHICH IS PARTLY SUSTAINED BY THE LD. CIT(APPEALS). 11. IN ITS PROFIT & LOSS ACCOUNT FILED ALONG WITH T HE RETURN OF INCOME, ASSESSEE HAD DEBITED BAD AND DOUBTFUL DEBTS AMOUNTI NG TO RS.4,52,23,820/- AND BAD DEBTS WRITTEN OFF AMOUNTIN G TO RS.23,17,85,186/-. AS NOTICED BY THE ASSESSING OFFI CER, BAD DEBTS WRITTEN OFF WERE INCLUSIVE OF BAD DEBTS AGAINST LOANS AMOUN TING TO RS.22,50,92,520/-, AGAINST THE SEED CAPITAL AMOUNTI NG TO RS.10,20,000/- AND AGAINST MISCELLANEOUS RECEIVABLE AMOUNTING TO R S.56,72,666/-. HE HELD THAT ALTHOUGH THE BAD DEBTS ON ACCOUNT OF MISC ELLANEOUS RECEIVABLE AMOUNTING TO RS.56,72,666/- WERE ALLOWABLE AS DEDUC TION UNDER SECTION 36(2)(I), BAD DEBTS ON ACCOUNT OF SEED CAPITAL AMOU NTING TO RS.10,20,000/- WAS NOT ALLOWABLE AS DEDUCTION. AS R EGARDS THE BALANCE AMOUNT OF RS.22,50,92,520/- WRITTEN OFF ON ACCOUNT OF LOANS, HE FOUND THAT ONLY A SUM OF RS.13,79,04,000/- HAD BEEN WRITT EN BACK IN ACCOUNTS FROM THE PROVISIONS MADE AGAINST SUCH LOANS/ ADVANC ES AND THE BALANCE AMOUNT OF RS.8,72,88,520/-, FOR WHICH NO PROVISION WAS MADE IN THE EARLIER YEAR, WAS DEBITED DIRECTLY TO THE PROFIT & LOSS ACCOUNT. RELYING ON THE PROVISIONS OF SECTION 36(2)(V) OF THE ACT, HE D ISALLOWED THE CLAIM OF THE ASSESSEE FOR DEDUCTION ON ACCOUNT OF BAD DEBTS WRITTEN OFF TO THE EXTENT OF RS.8,72,88,520/-. I.T.A. NOS. 1376, 1377, 1582 & 1531/KOL./2009 ASSESSMENT YEARS: 2002-03, 2003-04, 2005-06 & 2005- 06 & ITA NO. 166/KOL/2010 ASSESSMENT YEAR: 2006-2007 PAGE 7 OF 20 12. THE DISALLOWANCE MADE BY THE ASSESSING OFFICER ON ACCOUNT OF BAD DEBTS WRITTEN OFF TO THE EXTENT OF RS.8,72,88,520/- WAS CHALLENGED BY THE ASSESSEE IN THE APPEAL FILED BEFORE THE LD. CIT(APP EALS) AND AFTER CONSIDERING THE SUBMISSIONS MADE BY THE ASSESSEE AS WELL AS THE MATERIAL AVAILABLE ON RECORD, THE LD. CIT(APPEALS) DECIDED T HIS ISSUE AFTER RECORDING THE FOLLOWING OBSERVATIONS/ FINDINGS IN H IS IMPUGNED ORDER:- I HAVE GONE THROUGH THE SUBMISSIONS MADE BY THE A. R AND ALSO THE ORDER OF THE ASSESSING OFFICER. A'I SEEN FROM THE D ETAILS THE APPELLANT HAS DEBITED A SUM OF RS.23,17,85,184/- AS BAD DEBT IN THE PROFIT & LOSS ACCOUNT WHICH INCLUDED RS.22,50,922/- AGAINST LOAN, RS.10,20,000/- AGAINST SEED CAPITAL AND RS. 5,67,26 6/- AGAINST MISCELLANEOUS RECEIPTS. THE APPELLANTS SUBMISSION T HAT A SUM OF RS.7,94,42,873/-BEING PROVISION CREATED AND ALLOWED UNDER SECTION 36(1)(VIIA) OF THE ACT WAS REDUCED FROM SUCH BAD DE BTS, REFERS TO THE PROVISION OF EARLIER YEARS AS SEEN FROM THE COMPUTA TION OF AO IN THE ASSESSMENT ORDER. THE A.O AT BEGINNING OF PARA 4 OB SERVED THAT THE ASSESSEE IN ITS PROFIT AND LOSS ACCOUNT DEBITED BAD AND DOUBTFUL DEBTS FOR RS.4,52,23,820/- AND BAD DEBTS WRITTEN OF F IS RS.23,17,85,186/-. THE RELEVANT FACT FOR DISCUSSION S IS BAD DEBTS WRITTEN OFF. HOWEVER, THE A.O LATER OBSERVED THAT R S.4,52,24,000/- IS THE PROVISION MADE DURING THE YEAR. A.O. IS DIRECTE D TO VERITY THE NATURE OF THIS AMOUNT. THE APPELLANT HAS WRITTEN BA CK IN ACCOUNTS AND THE BALANCE SUM OF RS.13,79,04,000/- AND NOT WR ITTEN OFF AS BAD DEBTS. THE A.O IN HIS DISCUSSION AT PARA 4 STATED T HAT ONLY A SUM OF RS.13,79,04,000/- HAD BEEN WRITTEN BACK IN ACCOUNTS AND THE BALANCE SUM OF RS.8,72,88,520/- WAS WRITTEN DIRECTLY IN THE PROFIT AND LOSS ACCOUNT. SINCE NO PROVISION HAS BEEN MADE EARLIER F OR THIS SUM, THE AMOUNT OF RS.8,72,88,520/- WAS DISALLOWED BY A.O. ACCORDING TO SEC 36(2)(V), THE DEDUCTION ON ACCOUNT OF BAD DEBTS WHICH ARE WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE IS ALLOWED, ONLY IF THE ASSESSEE HAD DEBIT ED THE ACCOUNT CREATED U/S 36(1)(VIIA) OF THE ACT. ACCORDING TO CO MPUTATION MADE BY A.O, THE PROVISION ALLOWED DURING THE YEAR U/S 3 6(1)(VII) IS RS.73,33,584/-. THE CARRY FORWARD PROVISIONS OF EAR LIER YEAR AS PER COMPUTATION IS RS.7,94,42,873/-. AMOUNT QUALIFYING AS BAD DEBT TOTAL CLAIM OF THE ASSESSEE ON ACCOUNT OF BAD DEBTS............RS.23,17,85,186/ - LESS: SOFT LOAN DESCRIBED AS SEED CAPITAL DISCUSSED IN A SEPARATE GROUND.........................RS.(-)10,20 ,000/- ________________________ RS.23,07,65,186/- I.T.A. NOS. 1376, 1377, 1582 & 1531/KOL./2009 ASSESSMENT YEARS: 2002-03, 2003-04, 2005-06 & 2005- 06 & ITA NO. 166/KOL/2010 ASSESSMENT YEAR: 2006-2007 PAGE 8 OF 20 LESS: PROVISION U/S 36(1)(VIIC) FOR YEAR......................................RS.(- )73,33,585/- _________________________ RS.22,34,31,602/- LESS: PROVISION U/S 36(1)(VIIC) CARRIED FORWARD [I.E. CREDIT BALANCE......................................RS.(- )7,94,42,873/- ___________________________ RS.14,39,88,729/- ___________________________ ACCORDING TO ME RS.14,39,88,729/- IS THE BAD DEBT W HICH SHOULD HAVE BEEN ALLOWED BY THE A.O IT APPEARS THERE WAS SOME C ONFUSION REGARDING BAD DEBTS WRITTEN OFF BY APPELLANT. A.O. IS DIRECTE D TO VERIFY THE CALCULATION ONCE AGAIN, AND IF THE CALCULATION MADE ABOVE IS CORRECT ON FACTS AND FIGURES, THE SAME NEEDS TO BE ALLOWED. TH E ADDITION IS DELETED WITH A DIRECTION TO A.O TO RECOMPUTE THE ALLOWANCE OF BAD DEBTS U/S 36(1)(VII). THE LD. CIT(APPEALS) THUS DIRECTED THE ASSESSING OF FICER TO ALLOW SUBSTANTIAL RELIEF TO THE ASSESSEE ON THIS ISSUE BU T DIRECTED THE ASSESSING OFFICER TO ALLOW SUCH RELIEF AFTER VERIFYING THE FA CTS AND FIGURES SUBMITTED BY THE ASSESSEE BEFORE HIM. 13. AGGRIEVED BY THE ORDER OF THE LD. CIT(APPEALS), THE ASSESSEE AND REVENUE HAVE RAISED THIS ISSUE BY TAKING THE FOLLOW ING GROUNDS:- (REVENUES APPEAL) [ITA NO.1582/KOL/2009] 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE , THE LD. CIT(A) HAS ERRED IN LAW AS WELL AS ON FACTS IN DIRECTING TO CONSIDER RS.14,39,88,729/- AS BAD DEBT S WRITTEN OFF U/S 36(1)(VII). (ASSESSEES APPEAL) [ITA NO.1531/KOL/2009] 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE , THE LD. CIT(A) HAS ERRED IN LAW AS WELL AS ON FACTS IN CONFIRMING THE ORDER OF THE LD. ADDITIONAL COMMISSI ONER OF INCOME TAX IN REDUCING THE APPELLANTS CLAIM FOR BAD DEBT BY A SUM OF RS.73,33,584/- BEING PROVISION CRE ATED U/S 36(1)(VIIA) FOR THE YEAR UNDER CONSIDERATION. I.T.A. NOS. 1376, 1377, 1582 & 1531/KOL./2009 ASSESSMENT YEARS: 2002-03, 2003-04, 2005-06 & 2005- 06 & ITA NO. 166/KOL/2010 ASSESSMENT YEAR: 2006-2007 PAGE 9 OF 20 14. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES A ND ALSO PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. AS SUBMITTED BY THE LD. COUNSEL FOR THE ASSESSEE, THE PROVISIONS OF CLAUSE (VIIA) OF SU B-SECTION 1 OF SECTION 36 BEING APPLICABLE OF THE CASE OF THE ASSESSEE, HIS C LAIM FOR BAD DEBTS WRITTEN OFF IS GOVERNED BY THE PROVISIONS OF SECTIO N 36(1)(VIII) INCLUDING PROVISO THERETO AS WELL AS SECTION 36(2)(V). IN THI S REGARD, HE INVITED OUR ATTENTION TO THE WORKING GIVEN BY THE ASSESSING OFF ICER ON PAGE 8 TO POINT OUT THAT THE OPENING BALANCE IN THE PROVISIONS MADE AS PER SECTION 36(1)(VIIA) WAS RS.7.94 CRORES. HE ALSO INVIRTED OU R ATTENTION TO THE WORKING GIVEN AT PAGE NO. 4 OF THE ASSESSMENT ORDER AND SUBMITTED THAT THE FIGURE GIVEN THEREIN AND WORKING MADE FOR MAKIN G DISALLOWANCE ON ACCOUNT OF ASSESSEES CLAIM OF BAD DEBTS WRITTEN OF F WAS NOT IN ACCORDANCE WITH THE RELEVANT PROVISIONS. HE CONTENDED THAT THE TOTAL CLAIM MADE BY THE ASSESSEE FOR BAD DEBTS WRITTEN OFF WAS MORE THA N THE OPENING BALANCE AND TO THAT EXTENT DEDUCTION WAS CLAIMED BY THE ASS ESSEE UNDER SECTION 36(1)(VII) BY WRITING OFF THE BALANCE AMOUNT TO THE PROFIT & LOSS ACCOUNT. HE HAS CONTENDED THAT THE CLAIM MADE BY THE ASSESES E FOR BAD DEBTS WRITTEN OFF THUS WAS IN ACCORDANCE WITH THE RELEVAN T PROVISIONS OF THE ACT AND ALTHOUGH THE LD. CIT(APPEALS) RIGHTLY ACCEPTED THE CLAIM OF THE ASSESSEE IN PRINCIPLE, HE MADE ONE MISTAKE BY REDUC ING THE CLAIM OF THE ASSESSEE FOR DEDUCTION ON ACCOUNT OF BAD DEBTS WRIT TEN OFF BY THE PROVISION OF RS.73,33,585/- MADE BY THE ASSESSEE UN DER SECTION 36(1)(VIIA) FOR THE YEAR UNDER CONSIDERATION. HE HA S CONTENDED THAT THIS ASPECT OF THE MATTER, THEREFORE, IS RAISED BY THE A SSESSEE IN ITS APPEAL FOR A.Y. 2005-06. LD. D.R., ON THE OTHER HAND, HAS NOT RAISED ANY MATERIAL CONTENTION AND MERELY SUBMITTED THAT IF THE WORKING FURNISHED BY THE ASSESSEE BEFORE THE LD. CIT(APPEALS) IN SUPPORT OF ITS CLAIM FOR DEDUCTION ON ACCOUNT OF BAD DEBTS WRITTEN OFF REQUIRES VERIFI CATION, THE ASSESSING OFFICER MAY BE GIVEN AN OPPORTUNITY TO VERIFY THE S AME. I.T.A. NOS. 1376, 1377, 1582 & 1531/KOL./2009 ASSESSMENT YEARS: 2002-03, 2003-04, 2005-06 & 2005- 06 & ITA NO. 166/KOL/2010 ASSESSMENT YEAR: 2006-2007 PAGE 10 OF 20 15. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PER USING THE RELEVANT MATERIAL AVAILABLE ON RECORD, WE FIND THAT THE RELE VANT PROVISIONS OF LAW GOVERNING THE CLAIM OF THE ASSESSEE FOR DEDUCTION O N ACCOUNT OF BAD DEBTS WRITTEN OFF ARE VERY CLEAR AND AS PER THESE PROVISI ONS, IF SECTION 36(1)(VIIA) IS APPLICABLE IN THE CASE OF THE ASSESS EE, HIS CLAIM FOR DEDUCTION ON ACCOUNT OF BAD DEBTS WRITTEN OFF UNDER SECTION 36(1)(VII) WILL BE GOVERNED BY THE PROVISO TO SECTION 36(1)(VI I) AND CLAUSE 5 OF SUB- SECTION (2) OF SECTION 36. AS PER THE SAID PROVISIO NS, DEDUCTION ON ACCOUNT OF ANY BAD DEBT OR PART THEREOF, WHICH IS IRRECOVER ABLE IN THE ACCOUNTS OF THE ASSESSEE FOR THE PREVIOUS YEAR, IS ALLOWABLE AS DEDUCTION SUBJECT TO THE CONDITION THAT SUCH DEDUCTION SHALL BE LIMITED TO THE AMOUNT BY WHICH SUCH DEBT OR PART THEREOF EXCEEDS THE CREDIT BALANC E IN THE PROVISION FOR BAD AND DOUBTFUL DEBTS ACCOUNTS MADE UNDER SECTION 36(1)(VIIA) AND THAT THE ASSESSEE HAS DEBITED THE AMOUNT OF SUCH DEBTS A RE PART OF DEBT IN THE PREVIOUS YEAR TO SUCH PROVISION. IN THE PRESENT CAS E, THE CASE OF THE ASSESSEE IS THAT THE OPENING CREDIT BALANCE IN THE PROVISIONS MADE UNDER SECTION 36(1)(VIIA) WAS TO THE EXTENT OF RS.7,94,42 ,873/- AND THE BAD DEBT WRITTEN OFF IN EXCESS OF SUCH OPENING CREDIT BALANC E AVAILABLE WAS CLAIMED AS DEDUCTION BY DEBITING THE SAME TO THE PROFIT & L OSS ACCOUNT AFTER DEBITING THE AMOUNT OF SUCH DEBTS TO THE EXTENT OF RS.7,94,42,873/- TO THE PROVISION ACCOUNT. MOREOVER, AS RIGHTLY CLAIMED BY THE ASSESSEE, THE PROVISION OF RS.73,33,584/- MADE UNDER SECTION 36(1 )(VIIA) FOR THE YEAR UNDER CONSIDERATION IS ALLOWABLE AS DEDUCTION SEPAR ATELY AND THE LD. CIT(APPEALS), IN OUR OPINION, IS NOT JUSTIFIED TO R EDUCE THE SAME IN THE WORKING MADE BY HIM WHILE ALLOWING THE CLAIM OF THE ASSESSEE FOR DEDUCTION ON ACCOUNT OF BAD DEBTS WRITTEN OFF TO TH E EXTENT OF RS.14,39,88,729/-. WE ARE, THEREFORE, OF THE VIEW T HAT THE CLAIM OF THE ASSESSEE ON ACCOUNT OF DEDUCTION FOR BAD DEBTS WRIT TEN OFF AS EXPLAINED BY THE LD. COUNSEL FOR THE ASSESSEE IS ALLOWABLE AS PER THE RELEVANT PROVISIONS OF THE LAW. HOWEVER, AS CONTENDED BY THE LD. D.R., IN THE ABSENCE OF CLEAR-CUT WORKING FURNISHED BY THE ASSES SEE IN SUPPORT EITHER I.T.A. NOS. 1376, 1377, 1582 & 1531/KOL./2009 ASSESSMENT YEARS: 2002-03, 2003-04, 2005-06 & 2005- 06 & ITA NO. 166/KOL/2010 ASSESSMENT YEAR: 2006-2007 PAGE 11 OF 20 BEFORE THE ASSESSING OFFICER OR BEFORE THE LD. CIT( APPEALS), THE RELEVANT FACTS AND FIGURES ARE REQUIRED TO BE VERIFIED BY TH E ASSESSING OFFICER BEFORE ALLOWING THE CLAIM OF THE ASSESSEE ON THIS I SSUE. WE, THEREFORE, RESTORE THIS ISSUE TO THE FILE OF THE ASSESSING OFF ICER FOR THE LIMITED PURPOSE OF VERIFYING THE RELEVANT FACTS AND FIGURE FROM RECORD AND TO ALLOW THE CLAIM OF THE ASSESSEE AS PER THE RELEVANT PROVISIONS OF THE LAW AS EXPLAINED ABOVE. SUBJECT TO THIS VERIFICATION, G ROUND NO. 1 OF THE REVENUES APPEAL IS DISMISSED, WHILE THE SOLITARY G ROUND RAISED IN THE APPEAL OF THE ASSESSEE FOR A.Y. 2005-06 IS ALLOWED. 16. AS REGARDS GROUNDS NO. 2 TO 4 OF THE REVENUES APPEAL FOR A.Y. 2005-06, IT IS OBSERVED THAT THE COMMON ISSUE RAISE D THEREIN RELATING TO THE DELETION BY THE LD. CIT(APPEALS) OF THE ADDITIO N OF RS.32.42 LAKHS MADE BY THE ASSESSING OFFICER ON ACCOUNT OF INTERES T ACCRUED ON DEBENTURES IS SIMILAR TO THE ONE INVOLVED IN THE AP PEAL FILED BY THE REVENUE FOR A.Y. 2002-03, WHICH HAS ALREADY BEEN DE CIDED BY US IN THE FOREGOING PORTION OF THIS ORDER. SINCE ALL THE MATE RIAL FACTS RELEVANT TO THIS ISSUE AS INVOLVED FOR A.Y. 2005-06 ARE SIMILAR TO THE ONE INVOLVED FOR A.Y. 2002-03, WE FOLLOW THE CONCLUSION DRAWN IN A.Y . 2002-03 AND UPHOLD THE IMPUGNED ORDER OF THE LD. CIT(APPEALS) DELETING THE ADDITION MADE BY THE ASSESSING OFFICER ON ACCOUNT OF INTEREST ACCRUE D ON DEBENTURES. THE APPEAL OF THE REVENUE FOR A.Y. 2005-06 IS ACCORDING LY DISMISSED. 17. NOW WE TAKE UP THE APPEAL OF THE ASSESSEE FOR A .Y. 2006-07 BEING ITA NO. 166/KOL/2010 , WHICH IS DIRECTED AGAINST THE ORDER OF THE LD. CIT(APPEALS)-VI, KOLKATA DATED 20.11.2009. 18. GROUND NO. 1 OF THIS APPEAL RELATES TO THE DISA LLOWANCE OF RS.6,27,37,000/- MADE BY THE ASSESSING OFFICER AND CONFIRMED BY THE LD. CIT(APPEALS) ON ACCOUNT OF ASSESSEES CLAIM FOR DED UCTION OF THE AMOUNT WRITTEN OFF AS A RESULT OF DIMINUTION IN THE VALUE OF SHARES. I.T.A. NOS. 1376, 1377, 1582 & 1531/KOL./2009 ASSESSMENT YEARS: 2002-03, 2003-04, 2005-06 & 2005- 06 & ITA NO. 166/KOL/2010 ASSESSMENT YEAR: 2006-2007 PAGE 12 OF 20 19. THE CLAIM OF THE ASSESSEE FOR DEDUCTION ON ACCO UNT OF BAD DEBTS WAS INCLUSIVE OF AN AMOUNT OF RS.6,27,37,000/- WRITTEN OFF ON ACCOUNT OF PERMANENT DIMINUTION IN THE VALUE OF SHARES HELD AS INVESTMENT INITIALLY AND THEN CLAIMED TO BE CONVERTED INTO STOCK-IN-TRAD E. THIS CLAIM OF THE ASSESSEE WAS EXAMINED BY THE ASSESSING OFFICER DURI NG THE COURSE OF ASSESSMENT PROCEEDINGS AND THE SAME WAS HELD TO BE NOT ALLOWABLE BY HIM FOR THE FOLLOWING REASONS GIVEN IN PARAGRAPH NO . 1.4 OF THE ASSESSMENT ORDER:- 1.4. THE SECOND CATEGORY OF WRITE OFFS RELATE TO W RITE OFF OF INVESTMENTS IN SHARES, VALUE OF WHICH HAS BEEN PERM ANENTLY DIMINISHED. THE ASSESSEE CLAIMED THAT SUCH INVESTME NT IS TO BE CONSIDERED AS MONEY LENT IN ORDINARY COURSE OF BUSI NESS, THEREFORE, QUALIFIES FOR THE DEDUCTIONS. THE CLAIM IS NOT ACCEPTABLE. THERE IS A DIFFERENCE BETWEEN CAPITAL L ENT AS LOAN, WHERE THERE IS A DEFINITE CLAUSE OF RECOVERY OF TH E CAPITAL OUTLAID IN THE FORM OF REPAYMENT BY BORROWER. IN CA SE OF SHARES, IF AS LTD. CO., THERE IS NO SCOPE OF RECOVE RY OF CAPITAL OUTLAID OTHER THAN IN THE FORM DIVIDEND OR BY SELL OF SUCH SHARES, WHICH GIVES RISE TO CAPITAL GAIN OR CAPITAL LOSS. THERE IS A THIRD POSSIBILITY OF BUY BACK OF THE SHARES BY TH E COMPANY ITSELF WHICH ALSO RESULTS CAPITAL GAIN U/S 46A. THE REFORE, WHEN MONEY IS LOST DUE TO PERMANENT DIMINUTION OF VALUE OF EQUITY SHARES, IT IS NOT COVERED U/S 36 OF I.T. ACT, WHICH IS A DEDUCTION TO BE ALLOWED IN CASE OF EVENTS WHICH HAS A DIRECT LINK TO INCOME TO BE COMPUTED U/S 28 UNDER PART D OF CHAPTE R IV OF I.T. ACT. THE CLAIM OF WRITE OFF OF INVESTMENTS IS THERE FORE, TREATED AS A LOSS OF CAPITAL AND THUS OUTSIDE THE AMBIT OF SEC. 36(1(VII). 20. THE DISALLOWANCE MADE BY THE ASSESSING OFFICER ON ACCOUNT OF ITS CLAIM FOR DEDUCTION ON ACCOUNT OF DIMINUTION IN THE VALUE OF SHARES WAS CHALLENGED BY THE ASSESSEE IN THE APPEAL FILED BEFO RE THE LD. CIT(APPEALS) AND THE FOLLOWING SUBMISSIONS WERE MADE ON ITS BEHA LF BEFORE THE LD. CIT(APPEALS) IN SUPPORT OF ITS CASE ON THIS ISSUE: - 1. DURING THE YEAR UNDER CONSIDERATION, A SUM OF RS.16,10,67,000/- WAS WRITTEN OFF IN THE ACCOUNTS O UT OF WHICH A SUM OF RS. 85520205 HAS BEEN ALLOWED LEAVING THE AMOUNT S AS MENTIONED ABOVE AS DISALLOWED. AS PER THE CONSISTENT ACCOUNTI NG POLICY FOLLOWED BY THE APPELLANT, INVESTMENTS WHICH ARE NOT TRADING ASSETS ARE CARRIED AT COST. HOWEVER, IN VIEW OF THE RESOLUTION ADOPTED BY THE BOARD AT ITS I.T.A. NOS. 1376, 1377, 1582 & 1531/KOL./2009 ASSESSMENT YEARS: 2002-03, 2003-04, 2005-06 & 2005- 06 & ITA NO. 166/KOL/2010 ASSESSMENT YEAR: 2006-2007 PAGE 13 OF 20 MEEING ON 20 JANUARY 2006, INVESTMENTS WHICH WERE H ELD AS TRADING ASSETS HAVE BEEN CONVERTED INTO STOCK IN TRADE AT C OST OR MARKET PRICE, WHICHEVER IS LOWER. AS PER ITS ACCOUNTING POLICY, T HE APPELLANT VALUES STOCK IN TRADE REPRESENTING EQUITY SHARES, PREFEREN CE SHARES AND DEBENTURES, HELD AS TRADING ASSETS, AT COST OR MARK ET PRICE WHICHEVER IS LOWER. 2. DURING THE YEAR UNDER CONSIDERATION DUE TO CONVE RSION OF TRADING ASSETS AS STOCK IN TRADE, THE LOSS AMOUNTIN G TO RS.1,76,14,000/- OCCURRED WHICH WAS ADDED BACK IN T HE COMPUTATION AS WAS PREPARED BY THE APPELLANT. DUE TO ITS ACCOUN TING POLICY FOR VALUING STOCK IN TRADE, AT COST OR MARKET PRICE WHI CHEVER IS LOWER, A WRITE DOWN AMOUNTING TO RS.6,27,37,000/- OCCURRED W HICH WAS WRITTEN OFF IN THE ACCOUNTS AND INCLUDED IN THE SAI D SUM OF RS.16,10,67,000/-. 3. THEREFORE, IT WILL BE APPARENT THAT WHAT HAS BEE N WRITTEN OFF IN THE ACCOUNTS IN NOT INVESTMENT BUT STOCK IN TRADE BY VA LUING THE SAME AT COST OR MARKET PRICE WHICHEVER WAS LOWER. WE ENCLOS E (PAGE 9- 11) A STATEMENT WHICH WAS FURNISHED TO THE ASSESSING OFFI CER DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS TO PROVIDE DET AILS OF STOCK IN TRADE WRITTEN OFF IN THE ACCOUNTS DURING THE YEAR U NDER CONSIDERATION. SINCE THE APPELLANT IS FOLLOWING THIS POLICY CONSIS TENTLY, IT IS REQUESTED THAT INVESTMENTS WHICH WERE CONVERTED INT O STOCK IN TRADE DURING THE YEAR UNDER CONSIDERATION AND VALUED AT C OST OR MARKET PRICE WHICHEVER IS LOWER SHOULD BE FULLY ALLOWED AS DEDUCTION. 4. WITHOUT PREJUDICE TO THE SAID CONTENTION, IT IS SUBMITTED THAT EVEN OTHERWISE, THE SAID AMOUNT OF RS. 6,27,37,000/- SHO ULD HAVE BEEN ALLOWED BY THE ASSESSING OFFICER AS BUSINESS LOSS W ITHIN THE AMBIT OF SECTION 28/29 OF THE ACT. 5. THE MAIN OBJECT FOR WHICH THE APPELLANT COMPANY WAS ESTABLISHED IS TO SECURE AND ASSIST IN THE EXPEDITI OUS AND ORDERLY ESTABLISHMENT, GROWTH AND DEVELOPMENT OF INDUSTRIES IN THE STATE OF WEST BENGAL. AMONG ITS ANCILLARY OBJECTS IT HAD THE FOLLOWING OBJECTIVES. '4. TO ADVANCE LOANS AND PARTICIPATE IN THE SHARE C APITAL OF COMPANIES, FIRMS AND ASSOCIATIONS ENGAGED IN INDUST RIES TO BE ESTABLISHED WITHIN THE STATE'. '6. TO PROCURE CAPITAL FOR OR TO PROVIDE MACHINERY, EQUIPMENTS, AND OTHER FACILITIES TO ANY COMPANY, PERSON OR ASSOCIAT ION FOR THE PURPOSE OF CARRYING INTO EFFECT ANY OBJECTIVE CONNECTED WIT H THE INDUSTRIAL DEVELOPMENT OF THE STATE AND TO SUBSCRIBE FOR OR UN DERWRITE OR OTHERWISE, DEAL WITH SHARES, DEBENTURES, AND SECURI TIES OF ANY SUCH COMPANIES OR PERSONS OR ASSOCIATIONS'. I.T.A. NOS. 1376, 1377, 1582 & 1531/KOL./2009 ASSESSMENT YEARS: 2002-03, 2003-04, 2005-06 & 2005- 06 & ITA NO. 166/KOL/2010 ASSESSMENT YEAR: 2006-2007 PAGE 14 OF 20 6. WE ENCLOSE*(PAGE 12-19) A COPY OF THE MEMORANDUM OF ASSOCIATION (MOA) OF THE APPELLANT FOR YOUR KIND READY REFERENC E. 7. FROM THE MOA, PARTICULARLY OBJECT CLAUSES, YOU W ILL KINDLY NOTICE THAT PARTICIPATION IN SHARE CAPITAL OF COMPANIES ET C IS ONE OF THE OBJECTIVES OF THE APPELLANT. IN OTHER WORDS, INVEST MENTS IN THE SHARE CAPITAL OF THE COMPANIES WERE MADE AS PER THE OBJEC T CLAUSES OF THE MOA IN THE ORDINARY COURSE OF THE APPELLANT'S BUSIN ESS. THE INVESTMENTS SO MADE WERE ITSELF ONE OF THE BUSINESS ES OF THE APPELLANT. SUCH INVESTMENTS ARE MADE TO FULFIL THE APPELLANT'S MAIN OBJECTIVE AS STATED IN ITS MOA. BY MAKING SUCH INVESTMENTS, THE APPELLANT WAS ASSISTING THE COMPANIES ETC FOR THEIR ESTABLISHMENT IN THE STATE OF WEST BENGAL. 8. THE LOSS ON ACCOUNT OF WRITE OF IS INCIDENTAL TO THE CARRYING ON OF THE BUSINESS AND HAS ARISEN DIRECTLY FROM CARRYING OUT OF A BUSINESS OPERATION OF THE APPELLANT. IN THIS CONNECTION, PLE ASE REFER TO A DECISION OF THE HON'BLE SUPREME COURT IN THE CASE O F CIT -V- ABDULLABHAI ABUDULLAKADAR 41 ITR 545. A REFERENCE M AY ALSO BE MADE TO A DECISION OF THE HON'BLE CALCUTTA HIGH COURT IN THE CASE OF CIT -V- HOWRAH & CO. PVT. LTD, 44 TAXMAN 409 WHERE IT HAS B EEN HELD THAT LOSS INCURRED IN CARRYING OUT OF THE OPERATION OF THE BU SINESS AND INCIDENTAL TO THAT OPERATION HAS TO BE ALLOWED WHILE COMPUTING THE TOTAL INCOME. THERE IS A DIRECT AND PROXIMATE NEXUS BETWEEN THE B USINESS OPERATION AND THE LOSS AS WITHOUT SUCH INVESTMENT OR ADVANCES THE APPELLANT COMPANY WOULD NOT BE IN A POSITION TO FULFIL ITS OB JECTIVES A DEFINED IN THE MOA. THE AMOUNTS WERE INVESTED OR THE ADVANCES WERE MADE WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE APPELLANT'S BUSINESS AND THERE WAS NOTHING UNUSUAL IN THE APPELLANT MAKING SUCH IN VESTMENT OR ADVANCES. THUS, LOSS INCURRED IN THE PROCESS COULD BE SAID TO ARISE OUT OF AND AS AN INCIDENT OF THE BUSINESS OF THE APPELL ANT. REFERENCE MAY ALSO BE MADE TO A DECISION OF THE HON'BLE SUPREME C OURT IN THE CASE OF CIT-V- MSORE SUGAR COMPANY LTD. 46 ITR 649 WHERE AD VANCE MADE BY THE COMPANY WAS ALLOWED AS BUSINESS LOSS ON THE SAM E BECOMING IRRECOVERABLE. IT MAY BE STATED THAT ASSESSEE IS AN INDUSTRIAL DEVELOPMENT CORPORATION WHOSE BUSINESS CONSISTS OF INTER ALIA, INVESTMENT IN SHARES, DEBENTURES, ETC THEREFORE, SU CH WRITE OFF SHOULD BE REGARDED AS A TRADING LOSS AS THE SAME IS CLOSEL Y LINKED UP WITH THE APPELLANT'S BUSINESS. IN THIS CONNECTION, A REFEREN CE MAY KINDLY BE MADE TO A DECISION 0 THE RAJASTHAN HIGH COURT IN TH E CASE OF REJASTHAN FINANCIAL CORPORATION -V- CIT 65 ITR 112. FURTHER R EFERENCE MAY ALSO BE MADE TO TWO DECISIONS OF THE ANDHRA PRADESH HIGH COURT. 1. ANDHRA PRADESH STATE FINANCIAL CORPORATION LTD - V- CIT 150 ITR 533. 2. STATE BATIK OF HYDERAABAD -V- CIT 151 ITR 703. 3. STATE BANK OF HYDERABAD -V- CIT 171 ITR 232. I.T.A. NOS. 1376, 1377, 1582 & 1531/KOL./2009 ASSESSMENT YEARS: 2002-03, 2003-04, 2005-06 & 2005- 06 & ITA NO. 166/KOL/2010 ASSESSMENT YEAR: 2006-2007 PAGE 15 OF 20 21. THE ABOVE SUBMISSIONS MADE BY THE ASSESSEE DID NOT FIND FAVOUR TO THE LD. CIT(APPEALS), WHO PROCEEDED TO CONFIRM THE DISALLOWANCE MADE BY THE ASSESSING OFFICER ON THIS ISSUE FOR THE FOLLOWI NG REASONS GIVEN IN PARAGRAPH NO. 4.2 OF HIS IMPUGNED ORDER:- 4.2. I HAVE GONE THROUGH THE SUBMISSIONS OF THE A PPELLANT AND ALSO THE ORDER OF THE A.O. THE APPELLANT HAS WRITTE N OFF THE INVESTMENTS IN SHARES WHICH WERE HELD AS TRADING AS SETS AFTER CONVERTING THEM INTO STOCK IN TRADE. IT IS A FACT T HAT THE APPELLANT HAS WRITTEN OFF ONLY THE INVESTMENT CONSIDERING THE MEMORANDUM OF ASSOCIATION OF THE APPELLANT. IT IS NOT IN THE REGU LAR COURSE OF BUSINESS OF THE APPELLANT THAT THIS STOCK IN TRADE, VALUED AT COST OR MARKET PRICE WHICHEVER IS LOWER SHOULD BE ALLOWED A S DEDUCTION. AS SEEN FROM THE DETAILS SUBMITTED BY THE APPELLANT TH ESE ARE UNQUOTED EQUITY SHARES FULLY PAID UP, WHICH CANNOT BE VALUED AT MARKET PRICE. THE VALUE OF THESE SHARES HAS PERMANENTLY DIMINISHE D. SUCH INVESTMENT CANNOT BE CONSIDERED AS MONEY LENT IN TH E COURSE OF REGULAR BUSINESS OF THE APPELLANT. IN CASE OF SHARE S OF LTD COMPANY THERE IS VERY LITTLE SCOPE OF RECOVERY OF THE CAPIT AL OUTLAID OTHER THAN IN THE FORM OF DIVIDEND OR BY SALE OF SUCH SHA RES WHICH GIVES RISE TO CAPITAL GAIN OR CAPITAL LOSS. I AGREE WITH THE A.O THAT MONEY LOST DUE TO PERMANENT DIMINUTION IN THE VALUE OF EQ UITY SHARES, IS NOT COVERED U/S 36 OF I.T ACT, WHICH IS A DEDUCTION TO BE ALLOWED IN CASE OF EVENTS WHICH HAS A DIRECT LINK TO INCOME TO BE COMPUTED U/S 28 UNDER PART - D OF CHAPTER - VI OF IT ACT. THE DE CISIONS RELIED ON THE APPELLANT HAVE NO RESEMBLANCE OF FACTS TO THE F ACTS OF THE APPELLANT CASE. MONEY DOES CONSTITUTE THE STOCK IN TRADE IN CASE OF BUSINESS OF BANK OR INVESTMENT COMPANY. IN THE DECI SIONS REFERRED TO BY THE APPELLANT THE COURTS HAVE HELD THAT SURPL US REALISED ON SALE OF SECURITIES WAS ASSESSABLE AS BUSINESS INCOM E. IN APPELLANT'S CASE, IT IS NOT SALE OF INVESTMENTS, BUT WRITE OFF OF INVESTMENTS. THIS CANNOT BE ALLOWED AS BAD DEBT OR AS BUSINESS LOSS. THE ACTION OF THE A.O IS CONFIRMED. DEBENTURE INTEREST THE APPELLANT HAD WRITTEN OFF A SUM OF RS.20,34,035 /- BEING INTEREST RECEIVABLE ON DEBENTURES AS BAD DEBT WHICH WAS NOT ALLOWED BY THE ASSESSING OFFICER ON THE GROUND THAT THIS INCOME WAS NOT RECOGNIZED IN THE ACCOUNTS IN THE EARLIER YEARS . WE HAVE BEEN REQUESTED BY OUR CLIENT TO STATE THAT SUCH DEBENTUR E INTEREST PERTAINS TO THE PERIOD UP TO FINANCIAL YEAR 1985-86 WHEN SUCH DEBENTURE INTEREST WAS BEING ACCOUNTED FOR ON ACCRU AL BASIS. THEREFORE, THE WRITE OFF OF THE SAME AS BAD DEBT WA S PERFECTLY JUSTIFIED AND THE SAME SHOULD HAVE BEEN ALLOWED BY THE AO AS BAD DEBT. I.T.A. NOS. 1376, 1377, 1582 & 1531/KOL./2009 ASSESSMENT YEARS: 2002-03, 2003-04, 2005-06 & 2005- 06 & ITA NO. 166/KOL/2010 ASSESSMENT YEAR: 2006-2007 PAGE 16 OF 20 22. AT THE TIME OF HEARING BEFORE US, THE LD. COUNS EL FOR THE ASSESSEE HAS MAINLY REITERATED BEFORE US THE SUBMISSIONS MADE BY THE ASSESSEE IN SUPPORT OF THIS ISSUE BEFORE THE LD. CIT(APPEALS). HE HAS ALSO RELIED ON THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CA SE OF CIT VS.- COLGATE PALMOLIVE (INDIA) LIMITED VS.- CIT REPORTED IN 370 ITR 728 IN SUPPORT OF THE ASSESSEES CASE ON THIS ISSUE. 23. LD. D.R., ON THE OTHER HAND, STRONGLY RELIED ON THE IMPUGNED ORDER OF THE LD. CIT(APPEALS) IN SUPPORT OF THE ASSESSEE S CASE ON THIS ISSUE AND CONTENDED THAT THE ORDER OF THE LD. CIT(APPEALS) DE CIDING THIS ISSUE AGAINST THE ASSESSEE BEING WELL REASONED AND WELL F OUNDED DESERVES TO BE UPHELD. 24. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PE RUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. IT IS OBSERVED THAT A LTHOUGH THE RELEVANT SHARES HELD EARLIER AS INVESTMENT WERE CLAIMED TO B E CONVERTED BY THE ASSESESE INTO STOCK-IN-TRADE ON 20.01.2006, THE PRO FIT OR LOSS ARISING ON SUCH CONVERSION WAS NOT COMPUTED BY THE ASSESSEE. I N ANY CASE, EVEN IF THERE WAS A LOSS ON SUCH CONVERSION, THE SAME WAS N OT ALLOWABLE TO THE ASSESSEE IN THE YEAR UNDER CONSIDERATION AS THE REL EVANT SHARES WERE ADMITTEDLY NOT SOLD BY THE ASSESSEE AND THE SAME WA S ALLOWABLE ONLY IN THE YEAR OF SALE OF THE SAID SHARES TO THE THIRD PA RTY. NO DOUBT, THERE WAS DIMINUTION IN THE VALUE OF THE SAID SHARES, WHICH I S STATED TO BE A PERMANENT DIMINUTION, BUT THE AMOUNT OF SUCH DIMINU TION IN THE VALUE OF SHARES WAS WRITTEN OFF BY THE ASSESSEE IN ITS BOOKS OF ACCOUNT PRIOR TO THE DATE OF CONVERSION, I.E. 20.01.2006 WHEN THE SHARES WERE ADMITTEDLY HELD BY THE ASSESSEE AS INVESTMENT. HAVING REGARD TO ALL THESE FACTS OF THE CASE, WE FIND OURSELVES IN AGREEMENT WITH THE AUTHORITIES BELOW THAT THE LOSS AS A RESULT OF DIMINUTION IN THE VALUE OF SHARES HELD BY THE ASSESSEE AS INVESTMENT AT THE RELEVANT TIME IS NOT ALLOWABLE AS DEDUCTION, ESPECIALLY WHEN THERE WAS NO SALE OF SUCH SHARES TO THIRD PART Y. IN THE CASE OF CIT I.T.A. NOS. 1376, 1377, 1582 & 1531/KOL./2009 ASSESSMENT YEARS: 2002-03, 2003-04, 2005-06 & 2005- 06 & ITA NO. 166/KOL/2010 ASSESSMENT YEAR: 2006-2007 PAGE 17 OF 20 VS.- COLGATE PALMOLIVE (INDIA) LIMITED REPORTED IN 370 ITR 728 CITED BY THE LD. COUNSEL FOR THE ASSESSEE, THERE WAS ACTUAL SALE OF SHARES IN THE RELEVANT YEAR AND, THEREFORE, THE CLAIM OF THE ASSE SSEE FOR LOSS ARISING ON SUCH SALE WAS HELD TO BE ALLOWABLE BY THE HONBLE B OMBAY HIGH COURT. THE SAID CASE CITED BY THE LD. COUNSEL FOR THE ASSESSEE THUS IS DISTINGUISHABLE ON FACTS AND THE RELIANCE PLACED BY HIM THEREON TO SUPPORT THE CASE OF THE ASSESSEE ON THE ISSUE UNDER CONSIDERATION IS CLEARL Y MISPLACED. AS SUCH, CONSIDERING ALL SUCH FACTS OF THE CASE, WE FIND NO INFIRMITY IN THE IMPUGNED ORDER OF THE LD. CIT(APPEALS) CONFIRMING T HE DISALLOWANCE MADE BY THE ASSESSING OFFICER ON THIS ISSUE AND UPHOLDIN G THE SAME, WE DISMISS GROUND NO. 1 OF THE ASSESSEES APPEAL. 25. GROUND NO. 2 INVOLVING THE ISSUE OF DISALLOWANC E ON ACCOUNT OF INTEREST RECEIVABLE ON DEBENTURES AMOUNTING TO RS.6 ,68,294/- HAS NOT BEEN PRESSED BY THE LD. COUNSEL FOR THE ASSESSEE AT THE TIME OF HEARING BEFORE US. THE SAME IS ACCORDINGLY DISMISSED AS NOT PRESSED. 26. THE ISSUE INVOLVED IN GROUND NO. 3 RELATES TO T HE DISALLOWANCE OF RS.1,07,74,993/- MADE BY THE ASSESSING OFFICER AND CONFIRMED BY THE LD. CIT(APPEALS) ON ACCOUNT OF ADVANCES AGAINST EQUITY SHARES WRITTEN OFF IN THE YEAR UNDER CONSIDERATION. 27. IN THE ASSESSMENT COMPLETED UNDER SECTION 143(3 ), THE CLAIM OF THE ASSESSEE FOR DEDUCTION ON ACCOUNT OF ADVANCES AGAIN ST ISSUE OF EQUITY WRITTEN OFF AMOUNTING TO RS.1,07,74,993/- WAS DISAL LOWED BY THE ASSESSING OFFICER HOLDING THAT THE SAME WAS NOT ALL OWABLE AS DEDUCTION UNDER SECTION 36(1)(VII). FOR COMING TO THIS CONCLU SION, HE RELIED ON THE REASONS GIVEN BY HIM IN PARAGRAPH NO. 1.4 OF THE AS SESSMENT ORDER WHILE DISALLOWING THE CLAIM OF THE ASSESSEE FOR DEDUCTION ON ACCOUNT OF DIMINUTION IN THE VALUE OF SHARES. BEFORE THE LD. C IT(APPEALS), IT WAS CLAIMED BY THE ASSESSEE THAT THE DEDUCTION ON THIS COUNT SHOULD BE I.T.A. NOS. 1376, 1377, 1582 & 1531/KOL./2009 ASSESSMENT YEARS: 2002-03, 2003-04, 2005-06 & 2005- 06 & ITA NO. 166/KOL/2010 ASSESSMENT YEAR: 2006-2007 PAGE 18 OF 20 ALLOWED AS BUSINESS LOSS UNDER SECTION 28/29 OF THE ACT IF NOT UNDER SECTION 36(1)(VIII). THIS ALTERNATIVE CLAIM OF THE ASSESSEE, HOWEVER, WAS NOT ACCEPTED BY THE LD. CIT(APPEALS) ON THE GROUND THAT THE ASSESSEE COULD NOT PRODUCE ANY DOCUMENTS OR AGREEMENT TO SUB STANTIATE THE SAME. 28. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES A ND ALSO PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. THE LIMITED CONTENTION RAISED BY THE LD. COUNSEL FOR THE ASSESSEE ON THIS ISSUE IS T HAT THE ALTERNATIVE CLAIM OF THE ASSESSEE AS MADE BY THE ASSESSEE ON THIS ISS UE BEFORE THE LD. CIT(APPEALS) TO ALLOW THE AMOUNT IN QUESTION AS LOS S UNDER SECTION 28/29 OF THE ACT IS DULY SUPPORTED BY THE RELEVANT DOCUME NTARY EVIDENCE, BUT NO OPPORTUNITY WAS GIVEN BY THE LD. CIT(APPEALS) TO TH E ASSESSEE TO PRODUCE THE SAME. HE HAS CONTENDED THAT AN OPPORTUNITY MAY, THEREFORE, BE GIVEN TO THE ASSESSEE TO SUPPORT AND SUBSTANTIATE ITS ALT ERNATIVE CLAIM BY PRODUCING THE RELEVANT DOCUMENTARY EVIDENCE AND THE MATTER MAY BE SENT BACK TO THE ASSESSING OFFICER FOR GIVING SUCH OPPOR TUNITY. SINCE THE LD. D.R. HAS ALSO NOT RAISED ANY OBJECTION FOR GIVING S UCH OPPORTUNITY TO THE ASSESSEE HAVING REGARD TO THE FACTS AND CIRCUMSTANC ES OF THE CASE, WE SET ASIDE THE IMPUGNED ORDER OF THE LD. CIT(APPEALS) ON THIS ISSUE AND RESTORE THE MATTER TO THE FILE OF THE ASSESSING OFFICER FOR GIVING THE ASSESSEE AN OPPORTUNITY TO SUPPORT AND SUBSTANTIATE ITS ALTERNA TIVE CLAIM ON THIS ISSUE BY PRODUCING THE RELEVANT DOCUMENTARY EVIDENCE. THE ASSESSING OFFICER SHALL VERIFY THE CLAIM OF THE ASSESSEE IN THE LIGHT OF SUCH EVIDENCE AND DECIDE THE ISSUE IN ACCORDANCE WITH LAW. GROUND NO. 3 IS ACCORDINGLY TREATED AS ALLOWED FOR STATISTICAL PURPOSE. 29. AS REGARDS THE ISSUE INVOLVED IN GROUNDS NO. 4 & 5 RELATING TO THE DISALLOWANCE MADE BY THE ASSESSING OFFICER AND CONF IRMED BY THE LD. CIT(APPEALS) UNDER SECTION 14A READ WITH RULE 8D, I T IS OBSERVED THAT THE DISALLOWANCE UNDER SECTION 14A WAS COMPUTED BY THE ASSESSING OFFICER AS WELL AS BY THE LD. CIT(APPEALS) BY APPLYING RULE 8D , WHICH AS RIGHTLY I.T.A. NOS. 1376, 1377, 1582 & 1531/KOL./2009 ASSESSMENT YEARS: 2002-03, 2003-04, 2005-06 & 2005- 06 & ITA NO. 166/KOL/2010 ASSESSMENT YEAR: 2006-2007 PAGE 19 OF 20 CONTENDED BY THE LD. COUNSEL FOR THE ASSESSEE, IS N OT APPLICABLE TO THE YEAR UNDER CONSIDERATION. THE SAID RULE IS MADE APP LICABLE FOR A.Y. 2008- 09 THE DISALLOWANCE UNDER SECTION 14A FOR THE YEARS PRIOR TO AY 2008-09 IS REQUIRED TO BE WORKED OUT ON SOME REASONABLE BAS IS. IN THIS REGARD, LD. COUNSEL FOR THE ASSESSEE HAS FAIRLY SUBMITTED THAT EVEN THOUGH THE DISALLOWANCE OF 1% OF THE EXEMPT INCOME HAS BEEN CO NSIDERED AS REASONABLE BY THE TRIBUNAL IN ASSESSEES OWN CASE F OR THE A.Y. 2004-05, THE ASSESSEE ITSELF HAVING OFFERED SUCH DISALLOWANC E IN THE YEAR UNDER CONSIDERATION DURING THE COURSE OF ASSESSMENT PROCE EDINGS BEFORE THE ASSESSING OFFICER AT 5% OF THE DIVIDEND INCOME, THE DISALLOWANCE UNDER SECTION 14A MAY BE RESTRICTED TO 5% OF DIVIDEND INC OME. WE, THEREFORE, MODIFY THE IMPUGNED ORDER OF THE LD. CIT(APPEALS) O N THIS ISSUE AND DIRECT THE ASSESSING OFFICER TO RESTRICT THE DISALL OWANCE UNDER SECTION 14A TO 5% OF THE EXEMPT INCOME. GROUNDS NO. 4 & 5 O F THE ASSESSEES APPEAL ARE THUS PARTLY ALLOWED. 30. AS REGARDS THE ISSUE INVOLVED IN GROUND NO. 6 R ELATING TO THE REDUCTION OF ASSESSEES CLAIM FOR BAD DEBTS BY A SU M OF RS.86,23,118/- BEING PROVISION CREATED UNDER SECTION 36(1)(VIIA), IT IS OBSERVED THAT A SIMILAR ISSUE HAS ALREADY BEEN DECIDED BY US IN FAV OUR OF THE ASSESSEE WHILE DISPOSING OF THE APPEAL OF THE ASSESSEE FOR A .Y. 2005-06 IN THE FOREGOING PORTION OF THE ORDER. FOLLOWING OUR CONCL USION DRAWN IN A.Y. 2005-06, WE DECIDE THIS ISSUE IN FAVOUR OF THE ASSE SESE AND ALLOW GROUND NO. 6 OF THE ASSESSEES APPEAL. 31. THE ISSUE INVOLVED IN GROUND NO. 7 RELATING TO THE LEVY OF INTEREST UNDER SECTION 234B IS CONSEQUENTIAL IN NATURE. THE ASSESSING OFFICER IS ACCORDINGLY DIRECTED TO ALLOW CONSEQUENTIAL RELIEF TO THE ASSESSEE ON THIS ISSUE. I.T.A. NOS. 1376, 1377, 1582 & 1531/KOL./2009 ASSESSMENT YEARS: 2002-03, 2003-04, 2005-06 & 2005- 06 & ITA NO. 166/KOL/2010 ASSESSMENT YEAR: 2006-2007 PAGE 20 OF 20 32. IN THE RESULT, THE APPEALS BEING ITA NOS. 1376, 137 7 & 1582/KOL/2009 FILED BY THE REVENUE ARE DISMISSED. T HE APPEAL BEING ITA NO. 1531/KOL/2009 FILED BY THE ASSESSEE I S ALLOWED, WHILE THE APPEAL BEING ITA NO. 166/KOL/20110 OF THE ASSES SEE IS PARTLY ALLOWED AS INDICATED ABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON DECEMBER 16, 2015. SD/- SD/- (S.S. VISWANETHRA RAVI) (P.M. JAGTAP) JUDICIAL MEMBER ACCOUNTANT MEMBER KOLKATA, THE 16 TH DAY OF DECEMBER, 2015 COPIES TO : (1) DEPUTY /ADDITIONAL COMMISSIONER OF INCOME TAX, CIRCLE-6, KOLKATA, AAYAKAR BHAWAN, P-7, CHOWRINGHEE SQUARE, KOLKATA-700 069 (2) WEST BENGAL INDUSTRIAL DEVELOPMENT CORPORAT ION LIMITED, 5, COUNCIL HOUSE STREET, KOLKATA-700 001 (3) COMMISSIONER OF INCOME-TAX (APPEALS)- VI, KOL KATA (4) COMMISSIONER OF INCOME TAX, KOLKATA (5) THE DEPARTMENTAL REPRESENTATIVE (6) GUARD FILE BY ORDER ASSISTANT REGISTRAR, INCOME TAX APPELLATE TRIBUNAL, KOLKATA BENCHES, KOLKATA LAHA/SR. P.S.