Rajendra Baburao Shinde., V. Dy. Comm. of Income-tax, Ahmednagar

ITA 1545/PUN/2011

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 4351 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 5 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-05-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2006-2007
• Appeal Filed On: 02-12-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: PRAMOD SHINGHATE
• Keywords: Capital asset; Business income; Rule of consistency; Question of law; Bad and doubtful debts
• Section: 45(2); 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCHES B, PUNE BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER AND SHRI R.S. PADVEKAR, JUDICIAL MEMBER ITA NO. 1545/PN/2011 (ASSESSMENT YEAR : 2006-07) RAJENDRA BABURAO SHINDE KOPARGAON INDUSTRIAL ESTATE, KOPARGAON 423 603 PAN : AEYPS5912H . APPELLANT VS. DY. COMMISSIONER OF INCOME TAX AHMEDNAGAR CIRCLE, AHMEDNAGAR. . RESPONDENT APPELLANT BY : MR. PRAMOD SHINGHATE RESPONDENT BY : MR. RAJESH DAMOR DATE OF HEARING : 25-04-2013 DATE OF PRONOUNCEMENT : 23-05-2013 ORDER PER G. S. PANNU, AM THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST AN ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-I, PUNE DATED 14.02.2011 WHICH, IN TURN, HAS ARISEN FROM AN ORDER DATED 10.11.2008 PAS SED BY THE ASSESSING OFFICER, UNDER SECTION 143(3) OF THE INCOME TAX ACT , 1961 (IN SHORT THE ACT), PERTAINING TO THE ASSESSMENT YEAR 2006-07. 2. IN THIS APPEAL, THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE READS AS UNDER :- 1) THE COMMISSIONER OF INCOME TAX WAS WRONG IN LAW AND IN FACTS IN CONFIRMING THE DISALLOWANCE OF BAD DEBT S OF RS.37,95,118/- BEING DEDUCTION CLAIMED BY THE ASSES SEE. 2) THE COMMISSIONER OF INCOME TAX WAS WRONG IN LAW AND IN FACTS CONFIRMING THE TREATMENT OF SHORT TERM CAP ITAL GAIN OF RS.72,60,675/- AND LONG TERM CAPITAL GAIN OF RS.2,1 1,884/- AS BUSINESS INCOME OF ASSESSEE. ITA NO. 1545/PN/2011 RAJENDRA BABURAO SHINDE A.Y. 2006-07 3) COMMISSIONER OF INCOME TAX WAS WRONG IN LAW AND IN FACTS IN CONFIRMING THE NON APPLICATION OF THE PRIN CIPLES OF SECTION 45(2) OF THE ITA, 1961 WHILE CONVERTING THE CAPITAL ASSET INTO STOCK IN TRADE. 4) COMMISSIONER OF INCOME TAX WAS WRONG IN LAW AND IN FACTS IN CONFIRMING THE EFFECT NOT GIVEN FOR VALUAT ION OF STOCK OF THE ASSESSEE AT COST OR MARKET VALUE WHICHEVER IS LOWER . 3. THE APPELLANT, BEFORE US IS AN INDIVIDUAL, WHO I S CARRYING ON THE BUSINESS OF MANUFACTURING AND FABRICATION OF AL L TYPES OF SPARES AND MACHINERIES USED IN SUGAR FACTORIES. THE ASSESS EE IS DERIVING HIS INCOME FROM JOB WORK. FOR THE ASSESSMENT YEAR U NDER CONSIDERATION HE FILED A RETURN OF INCOME DECLARING TOTAL INCOME OF RS.32,83,210/- AND AGRICULTURAL INCOME OF RS.57,614 /-. THE RETURN OF INCOME FILED BY THE ASSESSEE WAS SUBJECT TO SCRUTIN Y ASSESSMENT UNDER SECTION 143(3) OF THE ACT AND THE TOTAL INCOM E WAS DETERMINED AT RS.1,45,50,887/- AFTER MAKING ADDITIONS/DISALLOW ANCE ON TWO COUNTS, NAMELY, ADDITION ON ACCOUNT OF DISALLOWANCE OF BAD DEBTS AMOUNTING TO RS. 37,95,118/- AND SECONDLY, TREATING THE LONG TERM CAPITAL GAIN AND SHORT TERM CAPITAL GAIN OF RS. 2, 11,884/- AND RS. 72,60,675/- RESPECTIVELY AS BUSINESS INCOME. BO TH THE AFORESAID ADDITIONS WERE CHALLENGED IN APPEAL BEFORE THE CIT( A) WHO HAS SINCE UPHELD THE STAND OF THE ASSESSING OFFICER AND THE A SSESSEE IS IN FURTHER APPEAL BEFORE US. 4. IN SO FAR AS THE GROUND OF APPEAL NO. 1, RAISED BY THE ASSESSEE IS CONCERNED, IT RELATES TO THE BAD DEBTS AMOUNTING TO RS.37,95,118/- WRITTEN-OFF BY THE ASSESSEE IN THE B OOKS OF ACCOUNT. ON BEING SHOW-CAUSED TO JUSTIFY THE BAD DEBTS WRITT EN-OFF ASSESSEE SUBMITTED THE DETAILS AS NOTED BY THE ASSESSING OFF ICER IN PARA 4 OF THE ASSESSMENT ORDER. THE ASSESSEE EXPLAINED THAT T HE DEBTS WERE OUTSTANDING FOR A PERIOD OF MORE THAN TWO TO EIGHT YEARS AND IN ITA NO. 1545/PN/2011 RAJENDRA BABURAO SHINDE A.Y. 2006-07 SUPPORT, COPIES OF SALES INVOICES/PURCHASE ORDERS E TC. WERE ALSO SUBMITTED. THE ASSESSEE ALSO POINTED OUT THAT THE B AD DEBTS WRITTEN- OFF DURING THE YEAR UNDER CONSIDERATION ARE OUT OF BUSINESS TRANSACTIONS AND HAVE BEEN OFFERED FOR TAX IN THE R ELEVANT PREVIOUS YEARS. THE ASSESSING OFFICER AND THEREAFTER THE CIT (A) ALSO HAVE DECLINED THE ASSESSEES CLAIM FOR THE WRITE-OFF OF BAD DEBTS PRIMARILY ON THE GROUND THAT THE ASSESSEE HAD FAILED TO ESTAB LISH THAT THE DEBTS HAVE BECOME BAD DURING THE YEAR UNDER CONSIDE RATION. THE ASSESSING OFFICER FURTHER NOTED THAT THE REAL REASO N FOR THE ASSESSEE TO WRITE-OFF THE BAD DEBTS DURING THE YEAR UNDER CO NSIDERATION WAS ON ACCOUNT OF FACT THAT IN THIS YEAR ASSESSEE HAD DECL ARED SHORT TERM CAPITAL GAIN OF RS.72,60,672/- AND THE LOSS WHICH A ROSE IN BUSINESS ON ACCOUNT OF THE IMPUGNED WRITE-OFF, COULD BE SET- OFF AGAINST SUCH INCOME. THE ASSESSING OFFICER AS WELL AS THE CIT(A) HAVE HELD THAT IN THE ABSENCE OF ANY REASONS TO ESTABLISH THAT THE DEBTS HAVE BECOME BAD, ASSESSEES CLAIM FOR WRITE-OFF OF BAD D EBTS WAS NOT JUSTIFIED. 5. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT THE LOWER AUTHORITIES HAVE UNJUSTLY DENIED THE CLAIM OF THE ASSESSEE IN TERMS OF SECTION 36(1)(VII) OF THE ACT INASMUCH AS THE ASSESSEE HAD ACTUALLY WRITTEN-OFF THE AFORESAID DEB TS IN ITS BOOKS OF ACCOUNT AND IT WAS ALSO UNDISPUTED FACT THAT THE DE BTS WERE TWO TO EIGHT YEARS OLD AND RELATED TO THE BUSINESS TRANSAC TIONS OF THE ASSESSEE. THE LEARNED COUNSEL SUBMITTED THAT IN TER MS OF THE JUDGEMENT OF THE HONBLE SUPREME COURT IN THE CASE OF T.R.F. LTD. VS. CIT (2010) 323 ITR 397 (SC) AND THE JUDGEMENT O F THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. STAR CHEMI CALS (BOMBAY) P. LTD. (2009) 313 ITR 126 (BOM), THE ASSESSEE WAS NOT REQUIRED TO PROVE THAT THE DEBTS WRITTEN-OFF HAD BECOME IRRECOV ERABLE IN THIS YEAR. ITA NO. 1545/PN/2011 RAJENDRA BABURAO SHINDE A.Y. 2006-07 6. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPR ESENTATIVE APPEARING FOR THE REVENUE HAS SUPPORTED THE AUTHORI TIES BELOW BY PLACING RELIANCE ON THE REASONING CONTAINED THEREIN THAT WHICH HAVE ALREADY ADVERTED IN PARA 4 ABOVE AND ARE NOT BEING REPEATED FOR THE SAKE OF BREVITY. 7. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS. SECTION 36(1)(VII) OF THE ACT PROVIDES THAT IN COMPUTING TH E BUSINESS INCOME OF AN ASSESSEE, DEDUCTION SHALL BE ALLOWED FOR THE AMOUNT OF ANY BAD DEBT AND PART THEREOF, WHICH IS WRITTEN-OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE FOR THE PREVIOUS YEAR, SUB JECT TO THE PROVISIONS OF SUB-SECTION (2) OF SECTION 36 OF THE ACT. IN THE PRESENT CASE, IT IS UNDISPUTED THAT THE ASSESSEE HAS WRITTE N-OFF THE IMPUGNED DEBTS AS IRRECOVERABLE IN HIS BOOKS OF ACCOUNT. THE FURTHER CONDITIONS PRESCRIBED IN SUB-SECTION (2) OF SECTION 36 ARE ALSO COMPLIED WITH INASMUCH AS THERE IS NO OBJECTION RAI SED BY THE INCOME TAX AUTHORITIES IN THIS REGARD. THE ONLY OBJ ECTION WHICH IS RAISED IS THAT THE ASSESSEE HAS NOT PROVED THAT THE DEBTS HAVE BECOME BAD IN THIS YEAR AND SECONDLY, ASSESSEE HAS NOT EXPLAINED THE REASONS FOR THE WRITE-OFF, ACCORDING TO THE ASS ESSING OFFICER THE REASON IS TO MERELY OFFSET THE SHORT TERM CAPITAL G AIN DECLARED IN THIS YEAR. AS PER THE ASSESSING OFFICER, THE ASSESSEE WR OTE-OFF THE BAD DEBTS IN THIS YEAR WHICH RESULTED IN LOSS UNDER THE HEAD PROFIT AND GAINS OF BUSINESS WHICH COULD BE SET-OFF AGAINST T HE POSITIVE INCOME DECLARED ON ACCOUNT OF SHORT TERM CAPITAL GAIN. 8. THE HONBLE BOMBAY HIGH COURT IN THE CASE OF STA R CHEMICALS (BOMBAY) P. LTD. (SUPRA) WAS DEALING WITH THE FOLLO WING QUESTION OF LAW :- WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE HONBLE TRIBUNAL IS RIGHT IN CONFIR MING THE ORDER OF ITA NO. 1545/PN/2011 RAJENDRA BABURAO SHINDE A.Y. 2006-07 THE COMMISSIONER OF INCOME-TAX (APPEALS) IN DELETIN G THE DISALLOWANCE OF RS.79,27,211 ON ACCOUNT OF BAD DEBT DESPITE THE DEBT HAS NOT BECOME BAD. THE HONBLE HIGH COURT NOTED THE AMENDMENT MADE TO SECTION 36(1)(VII) OF THE ACT WITH EFFECT FROM 01.04.1989 A ND HELD THAT IF THE ASSESSEE HAS WRITTEN-OFF THE DEBT IN THE ACCOUNT BO OKS, IT WOULD SATISFY THE REQUIREMENTS OF SECTION 36(1)(VII) OF T HE ACT. 9. PERTINENTLY, THE DEPARTMENT HAD CONTENDED BEFORE THE HONBLE HIGH COURT, AS IS EVIDENT FROM A READING OF THE QUE STION OF LAW RAISED BEFORE THE HONBLE HIGH COURT, THAT THE CLAIM COULD NOT BE ALLOWED ON ACCOUNT OF THE FACT THAT THE DEBT HAD NOT BECOME BAD. THE HONBLE HIGH COURT CONSIDERED THE AMENDED PROVISION S OF SECTION 36(1)(VII) OF THE ACT AND THE CBDT CIRCULAR NO. 551 DATED 23.01.1990 AND HELD THAT IF THE ASSESSEE HAS WRITTE N-OFF THE DEBT AS BAD DEBT IT WOULD SATISFY THE REQUIREMENTS OF SECTI ON 36(1)(VII) OF THE ACT. 10. IN OUR VIEW, THE AFORESAID DECISION OF THE HON BLE BOMBAY HIGH COURT IN THE CASE OF STAR CHEMICALS (BOMBAY) P. LTD . (SUPRA) COVERS THE PRESENT CONTROVERSY IN FAVOUR OF THE ASSESSEE I NASMUCH AS THE OBJECTION OF THE REVENUE TO THE EFFECT THAT THE ASS ESSEE OUGHT TO HAVE PROVED THAT THE DEBTS BECAME BAD IS NOT RELEVA NT. FURTHERMORE, SIMILAR IS THE POSITION EMERGING FROM THE SUBSEQUEN T JUDGEMENT OF THE HONBLE SUPREME COURT IN THE CASE OF T.R.F. LTD . (SUPRA). AS PER THE HONBLE SUPREME COURT AFTER THE AMENDMENT OF SE CTION 36(1)(VII) OF THE ACT WITH EFFECT FROM 01.04.1989, IN ORDER TO OBTAIN A DEDUCTION IN RELATION TO BAD DEBTS, IT IS NOT NECESSARY FOR THE ASSESSEE TO ESTABLISH THAT THE DEBT, IN FACT, HAS BECOME IRRECO VERABLE AND THAT IT WOULD BE SUFFICIENT THAT THE BAD DEBT IS WRITTEN-OF F AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE. CONSIDERED IN THE AFO RESAID LIGHT, WE ITA NO. 1545/PN/2011 RAJENDRA BABURAO SHINDE A.Y. 2006-07 THEREFORE FIND NO REASON TO DENY THE ASSESSEES CLA IM FOR DEDUCTION OF RS.37,95,118/- AS BAD DEBTS WITHIN THE MEANING O F SECTION 36(1)(VII) OF THE ACT. WE MAY ALSO OBSERVE THAT THE PLEA OF THE REVENUE THAT THE CLAIM HAS BEEN MADE IN THIS YEAR O NLY ON ACCOUNT OF THERE BEING A POSITIVE INCOME BY WAY OF SHORT TE RM CAPITAL GAIN, WHICH COULD BE SET-OFF AGAINST THE BUSINESS LOSS RE SULTING ON ACCOUNT OF THE CLAIM OF BAD DEBTS, THE SAME IN OUR VIEW IS QUITE IRRELEVANT TO CONSIDER THE CLAIM OF THE ASSESSEE FOR BAD DEBTS UN DER SECTION 36(1)(VII) READ WITH SECTION 36(2) OF THE ACT. IN T HE RESULT, WE SET ASIDE THE ORDER OF THE CIT(A) AND DIRECT THE ASSESS ING OFFICER TO DELETE THE ADDITION OF RS.37,95,118/-. THE ASSE SSEE ACCORDINGLY SUCCEEDS ON THIS GROUND. 11. THE SECOND GROUND RAISED BY THE ASSESSEE IS WIT H REGARD TO THE LONG TERM CAPITAL GAIN OF RS.2,11,884/- AND SHO RT TERM CAPITAL GAIN OF RS. 72,60,675/- ON SALE OF SHARES AND UNITS WHICH HAVE BEEN TREATED BY THE ASSESSING OFFICER AS AN INCOME ASSES SABLE UNDER THE HEAD INCOME FROM BUSINESS AND NOT AS CAPITAL GAINS. THE CIT(A) HAS ALSO UPHELD THE STAND OF THE ASSESSEE AND THE ASSES SEE IS IN FURTHER APPEAL BEFORE US. 12. ON THIS ASPECT, THE PRELIMINARY POINT MADE OUT BY THE LEARNED COUNSEL FOR THE ASSESSEE IS THAT THE LOWER AUTHORIT IES HAVE ERRED IN TREATING THE GAIN ON SALE OF SHARES AS BUSINESS INC OME IN THIS YEAR, WHICH IS INCONSISTENT WITH THE STAND ACCEPTED BY TH E DEPARTMENT FOR THE PRECEDING ASSESSMENT YEARS 2004-05 AND 2005-06. IN THIS REGARD, THE LEARNED COUNSEL FOR THE ASSESSEE HAS RE FERRED TO THE PAPER BOOK IN WHICH THE COPY OF THE INCOME TAX RETU RN ALONG WITH THE FINANCIAL STATEMENTS FOR THE ASSESSMENT YEARS 2004- 05 AND 2005-06 HAVE BEEN PLACED AT PAGES 36 TO 26 AND 16 TO 31 RES PECTIVELY TO POINT OUT THAT THE GAIN/LOSS ON SALE OF SHARES/UNIT S WAS ACCEPTED AS ITA NO. 1545/PN/2011 RAJENDRA BABURAO SHINDE A.Y. 2006-07 ASSESSABLE UNDER THE HEAD CAPITAL GAINS. THE ASSESS MENT ORDERS PASSED UNDER SECTION 143(3) DATED 10.10.2006 AND 26 .12.2007 FOR THE ASSESSMENT YEARS 2004-05 AND 2005-06 RESPECTIVE LY HAVE ALSO BEEN PLACED IN THE PAPER BOOK IN THIS REGARD. IT IS POINTED OUT THAT EVEN IN THE INSTANT ASSESSMENT YEAR, THE GAIN ON TH E SALE OF SHARES/UNITS IS LIABLE TO BE CONSIDERED IN THE SAME LIGHT AS IN THE TWO PRECEDING ASSESSMENT YEARS AND THERE IS NO CHANGE I N FACTS AND CIRCUMSTANCES. IN SUPPORT, THE LEARNED COUNSEL HAS RELIED UPON THE JUDGEMENT OF THE HONBLE BOMBAY HIGH COURT IN THE C ASE OF CIT VS. GOPAL PUROHIT (2011) 336 ITR 287 (BOM.). THE HONBL E BOMBAY HIGH COURT IN THE CASE OF GOPAL PUROHIT (SUPRA) WAS CONS IDERING AN ISSUE AS TO WHETHER THE INCOME FROM TRADING IN SHARES WAS TO BE CONSTRUED AS BUSINESS INCOME OR CAPITAL GAINS. IN THE CASE BE FORE THE HONBLE BOMBAY HIGH COURT, IN THE PRECEDING YEARS THE ACTIV ITY FROM THE TRADING IN SHARES WAS CONSIDERED AS AN INVESTMENT A CTIVITY LIABLE FOR CAPITAL GAINS. THE HONBLE HIGH COURT UPHELD THE VI EW OF THE TRIBUNAL HOLDING THAT THE PRINCIPLE OF CONSISTENCY MUST BE A PPLIED AND DID NOT APPROVE OF TREATING THE TRADING IN SHARES AS BUSINE SS INCOME ACTIVITY. IN VIEW OF THE PROPOSITION LAID DOWN BY THE HONBLE JURISDICTIONAL HIGH COURT, THE PRELIMINARY PLEA OF THE ASSESSEE IS RELE VANT. IN THIS BACKGROUND, THE LEARNED DEPARTMENTAL REPRESENTATIVE WAS REQUIRED TO EXPLAIN THE POSITION IN THE LIGHT OF THE MATERIA L REFERRED TO BY THE ASSESSEE, WHICH IS PLACED ON RECORD. OSTENSIBLY, IN THE EARLIER ASSESSMENT YEARS ASSESSEE HAS CARRIED OUT SIMILAR T RANSACTIONS AND THEIR CHARACTERIZATION AS INVESTMENT ACTIVITY GIVIN G RISE TO THE INCOME UNDER THE HEAD CAPITAL GAINS, HAS BEEN ACCEPTED THE ASSESSING OFFICER IN ASSESSMENTS MADE UNDER SECTION 143(3) OF THE ACT. THEREFORE, IN THE LIGHT OF THE PRINCIPLE OF CONSIST ENCY, IN THIS YEAR ALSO, THE INCOME FROM THE SALE OF SHARES IS LIABLE TO BE TREATED AS INCOME FROM CAPITAL GAINS AS DECLARED BY THE ASSESS EE IN ITS RETURN OF INCOME. NOTABLY, THE DEPARTMENT HAS NOT SHOWN AN Y CHANGE IN ITA NO. 1545/PN/2011 RAJENDRA BABURAO SHINDE A.Y. 2006-07 FACTS AND CIRCUMSTANCES IN THIS YEAR, SO AS TO WARR ANT ANY DEPARTURE FROM THE POSITION ACCEPTED IN THE PAST YEARS. CONSE QUENTLY, ON THIS PRELIMINARY ISSUE, THE ORDER OF THE CIT(A) IS SET-A SIDE AND THE ASSESSING OFFICER IS DIRECTED TO TREAT THE INCOME F ROM THE SALE OF SHARES AND UNITS AS ASSESSABLE UNDER THE HEAD CAPI TAL GAINS AND NOT AS BUSINESS INCOME. THE ASSESSEE SUCCEEDS ON TH IS GROUND. 13. THE GROUND NOS. 3 AND 4 ARE ALTERNATIVE TO GROU ND NO. 2 RAISED AS ABOVE WHICH WE HAVE ALREADY BEEN DECIDED IN FAVOUR OF THE ASSESSEE AND THEREFORE THE SAME ARE RENDERED AC ADEMIC. ACCORDINGLY, GROUND NOS. 3 AND 4 ARE DISMISSED AS I NFRUCTUOUS. 14. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 23 RD MAY, 2013. SD/- SD/- (R.S. PADVEKAR) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE, DATED: 23 RD MAY, 2013 SUJEET COPY OF THE ORDER IS FORWARDED TO : - 1) THE ASSESSEE; 2) THE DEPARTMENT; 3) THE CIT(A)-1, PUNE; 4) THE CIT-1, PUNE; 5) THE DR, B BENCH, I.T.A.T., PUNE; 6) GUARD FILE. BY ORDER //TRUE COPY// PRIVATE SECRETARY I.T.A.T., PUNE