THE ITO 4(2)(1), MUMBAI V. M/S. NIKKO CAPITAL MARKET (P) LTD, MUMBAI

ITA 1681/MUM/2008

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 4982 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 5 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-08-2010
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 09-02-2010
• Assessment Year: 2004-2005
• Appeal Filed On: 07-03-2008
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S S RANACIT
• Assessee Lawyers: N K SUREKA
• Keywords: Capital asset; Recovery proceedings; Business income; Business expenditure; Opportunity of being heard; Bad and doubtful debts

Judgement Text

1 ITA NO1681/MUM/2008 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH B MUMBAI BEFORE SHRI R S SYAL, AM & SHRI R S PADVEKAR, JM ITA NO.1681/MUM/2008 (ASSESSMENT YEAR 2004-05 ) THE INCOME TAX OFFICER WARD 4(2)(1), MUMBAI VS NIKKO CAPITAL MARKET P LD R-410 ROUTUNDA BLDG B S MARG FORT, MUMBAI (APPELLANT) (RESPONDENT) PAN AAACN1543L ASSESSEE BY: SHRI N K SUREKA REVENUE BY: SHRI S S RANA,CIT- DR O R D E R PER R S PADVEKAR: IN THIS APPEAL, THE REVENUE HAS CHALLENGED THE IMPU GNED ORDER OF THE LD CIT(A)-IV, MUMBAI FOR THE ASSESSMENT YEAR 2004-0 5 DATED 27.12.2007. 2 THE FIRST ISSUE IS IN RESPECT OF THE ADDITION OF ` 9,17,22,863/- MADE U/S 41(1) OF THE ACT WHICH WAS DELETED BY THE LD CI T(A) AND THIS ISSUE ARISES FROM GROUND NOS. 1 & 2 TAKEN BY THE REVENUE. 3 THE FACTS PERTAINING TO THE ISSUE WHICH REVEAL FR OM THE RECORDS ARE THAT THE ASSESSEE IS A SHARE BROKER AND ALSO A TRAD ER IN SHARES. THE ASSESSEE FILED ITS RETURN OF INCOME DECLARING NIL INCOME. T HE ASSESSEES CASE WAS SELECTED FOR SCRUTINY AND THE ASSESSMENT WAS COMPLE TED U/S 143(3). THE AO REFERRED THE ASSESSEES CASE FOR THE SPECIAL AUDITO R U/S 142(A) OF THE ACT. IT 2 ITA NO1681/MUM/2008 WAS NOTICED BY THE AO THAT THE ASSESSEE HAS SHOWN O UTSTANDING LOAN OF CENTURIAN BANK LTD OF ` 10,08,67,444/- AS ON 31.3.2004. AS PER THE BANK STATEMENT FURNISHED BY THE ASSESSEE, IT WAS SEEN BY THE AO THAT THE BANK HAD REMITTED THE ENTIRE AMOUNT OF LOAN ON 25.3.2004 BEFORE ENDING THE OF THE FINANCIAL YEAR. AS THERE WAS A CONTROVERSY IN R ESPECT OF THE OUTSTANDING LOAN OF THE CENTURIAN BANK AS PER THE BOOKS OF ACCO UNT OF THE ASSESSEE AND THAT OF THE BANK STATEMENT GIVEN BY THE BANK, THE A O SOUGHT EXPLANATION OF THE ASSESSEE. 3.1 IN THE SPECIAL AUDIT REPORT, THE SPECIAL AUDITO R HAD POINTED OUT THE OUTSTANDING BALANCE AT ` 6,36,33,611/- WHICH WAS IN CONFORMITY OF THE OUTSTANDING LIABILITY SHOWN BY THE CENTURIAN BANK A GAINST THE ASSESSEE. THE AO HAS NOTED THAT THE BANK SOLD THE SHARES PLED GED WITH IT AND THE SALE PROCEEDS OF THE SOLD SHARES WERE ADJUSTED AGAINST T HE OUTSTANDING LOAN LIABILITY OF THE ASSESSEE. THE ASSESSEE HAS NOT GI VEN THE EFFECT IN ITS BOOKS OF ACCOUNT AS PER THE ADJUSTMENTS MADE BY THE BANK AND HENCE, THERE WAS A DIFFERENCE IN THE OUTSTANDING LIABILITY SHOWN BY TH E ASSESSEE IN ITS BOOKS OF ACCOUNT AND IN THE BOOKS OF ACCOUNT OF THE BANK. A S PER THE BANK STATEMENT, THE ENTIRE OUTSTANDING LOAN PAYABLE BY T HE ASSESSEE WAS WRITTEN OFF ON 25.3.2004 WITH NARRATION THAT THE SAME IS DO NE VIDE CORPORATE APPROVAL NO.CBL-FIN-10C/03-04-1244 DATED 24.3/2004. AS ON 31/03/04, IN THE ACCOUNTS OF THE BANK, THE LOAN LIABILITY REC OVERABLE FROM THE ASSESSEE WAS SHOWN AT NIL. THE AO SOUGHT EXPLANATION OF THE ASSESSEE. VIDE LETTER DATED 18.6.2007 WHICH WAS REPRODUCED IN THE ASSESSM ENT ORDER AT PAGES 7 3 ITA NO1681/MUM/2008 & 8, THE ASSESSEE CONTENDED THAT NO EFFECT COULD BE GIVEN IN THE ASSESSEES BOOKS OF ACCOUNT AS THE REQUIRED DETAILS WERE NOT R ECEIVED FROM THE BANK AND WHEN THE MATTER WAS REFERRED TO SPECIAL AUDITOR AT THAT TIME, THE ENTIRE RECONCILIATION OF THE OUTSTANDING LOAN LIABILITY WA S DONE AND ALL THE ENTRIES WERE PASSED IN THE F.Y. 2004-05. THE ASSESSEE ALSO CONTENDED THAT AS PER THE RBI GUIDELINES ALL NPA ACCOUNTS ARE REQUIRED TO BE TRANSFERRED TO NPA POOL ACCOUNT KEPT IN CORPORATE OFFICE AND THE APPRO VAL FOR BAD AND DOUBTFUL DEBTS IS TO BE MADE. THE ASSESSEE ALSO EXPLAINED TO THE AO THAT THE SHARES OF ITS CUSTOMERS WERE PLEDGED WITH THE BANK AS SECU RITY AGAINST THE OD FACILITIES AND EVEN AFTER THE ACCOUNT BECAME NPA, T HE CENTURIAN BANK DID NOT TAKE ANY STEPS TO DISPOSE THE SHARES PLEDGED WI TH IT AND THERE WAS A DELAY IN DISPOSAL AND IN CONSEQUENCE, THERE WAS LOS S TO THE ASSESSEE. THE BANK HAD FILED A CASE IN THE DEBT RECOVERY TRIBUNAL (DRT) AT MUMBAI AGAINST THE ASSESSEE FOR RECOVERY OF THE OUTSTANDIN G LOAN LIABILITY. THE ASSESSEE ALSO MADE A COUNTER CLAIM AGAINST THE BANK IN THE DRT AND FINALLY THERE WAS A SETTLEMENT AND THE ASSESSEE HAS ONLY TO PAY ` . 91.45 LACS. IT WAS ALSO CONTENDED BY THE ASSESSEE THAT THOUGH THE AMOUNT WAS WRITTEN OFF BY THE BANK BUT THERE WAS NO INFORMATION TO THE ASS ESSEE COMPANY AS DUE TO THE NEGLIGENCE ON THE PART OF THE BANK FOR DISPO SING THE SHARES PLEDGED WITH IT, LESS LOAN SALE PROCEEDS WERE REALIZED AND THERE WAS A HUGE LIABILITY ON THE ASSESSEE AGAINST ITS CUSTOMERS. 3.2 IN THE OPINION OF THE AO AS THE BANK HAD WRITT EN OFF THE OUTSTANDING LIABILITY OF THE ASSESSEE ON 25.3.2004; HENCE, THE SAME WAS TREATED AS A 4 ITA NO1681/MUM/2008 CESSATION LIABILITY AND IT WAS TAXABLE U/S 41(1) OF THE ACT. THE AO, THEREFORE, MADE THE ADDITION OF ` . 9,17,22,863/- TREATED THE SAME AS PROFIT CHARGEAB LE TO TAX U/S 41(1) OF THE ACT AFTER REDUCING THE AMOU NT OF RS. ` 91,44,581/- WHICH WAS AGREED BY THE ASSESSEE TO PAY TO THE BAN K AS PER THE CONSENT TERMS FILED IN THE DRT ON 18.8.2004. THE ASSESSEE C HALLENGED THE ISSUE OF ADDITION BEFORE THE LD CIT(A) AND THE LD CIT(A) DEL ETED THE ADDITION. THE LD CIT(A) HELD THAT NO ADDITION CAN BE MADE U/S 41(1) IN RESPECT OF THE OUTSTANDING BANK LOAN, THE ASSESSEE HAD NOT CLAIMED ANY ALLOWANCE OR DEDUCTION. THE LD CIT(A) ALSO RELIED ON THE DECISIO N OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF MAHINDRA & MAHINDRA LTD. VS CI T 261 ITR 501(BOM). THE LD CIT(A) FINALLY HELD THAT THE AMOUNT WRITTEN OFF BY THE BANK CANNOT BE TREATED AS INCOME OF THE ASSESSEE EITHER U/S 41(A) OR U/S 28(IV) OF THE ACT AND HE DIRECTED THE AO TO DELETE THE ADDITION BY GI VING THE FOLLOWING REASONS: C.3 THE AMOUNT WRITTEN OFF BY THE BANK IS NOT ` 9,17,22,863/- BUT IT IS ` .6,36,33,349/- AS POINTED OUT AT P ARA 2.2. OF SPECIAL AUDIT REPORT U/S 142(2A) QUOTED ABOVE. C.4 COMING TO THE APPLICABILITY OF THE PROVISIONS OF SECTION 41(1), THOUGH THE ASSESSING OFFICER HAS QUOTED THE PROVISIONS OF SEC. 41(1) AT PARA 7.8 OF HIS ORDER, HIS CONCLUSION AT PARA 7.10 THAT IN THIS CASE, THE FIRST CONDITION IS SATISFIED AS THE ASSESSEE HAS INCURRED THE TRADING LIABILITY IN EARLIER YEARS IS FACTUALLY AND LEGALLY INCORREC T. C.5. THE FIRST CONDITION OF PROVISION OF SEC. 41(1) IS THAT AN ALLOWANCE AND DEDUCTION HAS BEEN MADE IN THE ASSESSMENT FOR A NY YEAR IN RESPECT OF LOSS, EXPENDITURE OR TRADING LIABILITY I NCURRED BY THE ASSESSEE THOUGH THE ASSESSING OFFICER SAYS THAT TH E ASSESSEE HAS 5 ITA NO1681/MUM/2008 INCURRED THE TRADING LIABILITY IN EARLIER YEARS, TH E ASSESSING OFFICER IS COMPLETELY SILENT IN HIS ORDER AS TO WHEN ALLOWANCE OR DEDUCTION OF SUCH TRADING LIABILITY WAS MADE BY THE ASSESSEE. C.6 THUS, THE FIRST CONDITION IS THAT THE ASSESSEE MUST CLAIM ALLOWANCE OR DEDUCTION IN RESPECT OF TRADING LIABILITY AND IN THE PRESENT CASE THE FIRST CONDITION OF SECTION 41(1) IS NOT FULFILLED A S THE APPELLANT HAS NOT CLAIMED ANY DEDUCTION OR ALLOWANCE WITH RESPECT TO THE LOAN FROM THE BANK IN ANY PREVIOUS YEAR. C.7 UNDER THE CIRCUMSTANCES, AS THE VERY FIST CONDI TION OF SEC. 41(1) IS NOT MET AND, THEREFORE, TREATING THE WRITE OFF OF B ANK LOAN AS INCOME U/ 41(1) IS, THEREFORE, NOT CORRECT. C.8. THE BOMBAY HIGH COURT IN CASE OF MAHINDRA & MA HINDRA LTD VS CIT 261 ITR 501(MUM) HAS HELD IN ORDER TO APPLY SE C. 41(1), THE ASSESSEE SHOULD HAVE OBTAINED A DEDUCTION IN THE AS SESSMENT FOR ANY YEAR IN RESPECT OF LOSS, EXPENDITURE OR TRADING LIA BILITY INCURRED BY THE ASSESSEE AND IT WAS CONCLUDED THAT; NO ALLOWANCE OR DEDUCTION HAVING BEEN ALLOWED IN RESPECT OF LOAN BY THE ASSES SEE FOR PURCHASE OF CAPITAL ASSETS, SECTION 41(1) WAS NOT ATTRACTED TO REMISSION OF PRINCIPAL AMOUNT OF LOAN. THE QUESTION OF APPLICABILITY OF SE C. 28(IV) WAS ALSO EXAMINED IN THE SAID JUDGMENT AND IT WAS HELD THAT SECTION 28(IV) DO NOT APPLY TO WAIVER OF PRINCIPAL AMOUNT OF LOAN WHI CH WAS ADVANCED TO ASSESSEE BY THE SUPPLER OF CAPITAL ASSETS. C.9 IN VIEW OF THE ABOVE, THE AMOUNTS WRITTEN OFF BY THE BANK CANNOT BE TREATED TO BE INCOME OF THE APPELLANT EITHER U/ S 41(1) OR U/S 28(IV) OF THE ACT. THE ASSESSING OFFICER IS, THEREFORE, DIREC TED TO DELETE THE ADDITION OF `. 9.17,22,863/- AND APPEAL ON THIS GROUND IS ALLOWED. 6 ITA NO1681/MUM/2008 NOW, THE REVENUE IS IN APPEAL HERE BEFORE US. 4 THE BENCH HAD SOUGHT CERTAIN CLARIFICATIONS AS W ELL AS DOCUMENTS FROM THE ASSESSEE; MORE PARTICULARLY (I) LOAN STATEMENT OF THE CENTURIAN BANK FOR THE PERIOD 1.4.2003 TO 31.3.2004; (II) ORDER OF THE DRT, MUMBAI DATED 18.8.2004; (III) COPY OF THE CORPORATE APPROVAL NO. CBL-FIN-10C/03-04-1244 DATED 24.3.2004 AND (IV) BREAKUP OF THE AMOUNT WAIV ED BY THE BANK SHOWING THE PRINCIPLE AND INTEREST. THE ASSESSEE FI LED FOLLOWING DOCUMENTS: (I)THE STATEMENT OF THE CENTURIAN BANK FOR THE FINA NCIAL YEAR 2001-02 AND 2003-04; (II) COPY OF THE LETTER OF THE ASESSEES ADVOCATE TO THE BANK FOR THE INTIMATING TERMS OF SETTLEMENT; (III) COPY OF THE O RDER OF THE DRT AND CENTURIAN BANK LETTER EXPLAINING THE REASONS FOR W RITTEN OFF THE ASSESSES OUTSTANDING LIABILITY ON 24.3.2004; (IV) THE LETTER OF THE BANK IN RESPECT OF THE SANCTION OF THE OD LIMIT; (V) COPY OF THE SPECIAL A UDITS REPORT PAGE 6 OF SCHEDULE I AND BALANCE SHEET AND P & L A/C. FOR THE YEAR ENDING 31.3.2004. 5 THE LD CIT- DR ARGUED THAT THE BANK HAD FILED A CASE AGAINST THE ASSESSEE IN THE DRT AND THE BANK HAD GIVEN THE DETA ILS IN RESPECT OF THE OUTSTANDING LOAN LIABILITY OF THE ASSESSEE. HE FURT HER ARGUES THAT THERE IS NO DISPUTE IN RESPECT OF THE RECONCILIATION OF THE BAN K LIABILITY AS SHOWN IN PAGE 11 OF THE ORDER OF THE LD CIT(A). HE DREW OUR ATTEN TION TO THE BANK STATEMENT AND SUBMITS THAT THE BANK HAD WRITTEN OFF THE ASSES SEES LIABILITY FROM THE ACCOUNTS IN ITS BOOKS OF ACCOUNT TO THE EXTENT OF ` . 6,36,33,349/- BY GIVING THE NARRATION THAT THE AMOUNT WRITTEN OFF AS PER TH E CORPORATE OFFICE 7 ITA NO1681/MUM/2008 APPROVAL. HE FURTHER ARGUES THAT THE LOAN LIABILITY WAS IN RESPECT OF THE OD FACILITY WHICH WAS UTILIZED BY THE ASSESSEE FOR TRA DING PURPOSES. HE, THEREFORE, PLEADED THAT THE SAME IS TO BE ADDED U/S 41(1) OF THE ACT. 5.1 ALTERNATIVELY, HE PLEADED THAT IF IT IS NOT TAX ABLE U/S 41(1), THEN THE SAME SHOULD BE BROUGHT TO TAX U/S 28(IV) OF THE ACT . THE LD CIT-DR VEHEMENTLY ASSAILED THE ORDER OF THE LD CIT(A) WHER E THE LD CIT(A) HAD GIVEN HIS FINDINGS THAT THE AMOUNT WRITTEN OFF BY THE BAN K IS NOT TAXABLE NEITHER U/S 41(1) OR U/S 28(IV) OF THE ACT. THE LD CIT-DR R ELIED ON THE FOLLOWING PRECEDENTS/DECISIONS: A) CIT VS T V SUNDARAM IYENGAR- (222 ITR 344) B) SOLID CONTAINER LTD V/S. DY CIT-(308 ITR 417) C) THE GURUDASPUR CO-OP. SUGAR MILLS V/S. DY CIT-19 DTR(ASR) 209 D) A.P.L.(INDIA) PVT.. LTD-(96 ITD 227) E) JINDAL IRON & STEEL CO. -(25 SOT 27) 6. PER CONTRA, THE LD COUNSEL VEHEMENTLY ARGUED TH AT IN FACT THERE IS NO CESSATION OF THE LIABILITY TO THE ASSESSEE AND NO BENEFIT ACCRUED. HE, THEREFORE, ARGUED THAT THE ASSESSEE HAD PLEDGED THE SHARES OF ITS CUSTOMERS AS SECURITY TO THE CENTURIAN BANK AND DUE TO THE NE GLIGENCE ON THE PART OF THE BANK, THE ASSESSEE HAD UNDERTAKEN THE LIABILITY OF ITS CUSTOMERS AS THE BANK DELAYED IN DISPOSING THE SHARES. HE, FURTHER P LEADED THAT THE EFFECT HAS BEEN GIVEN IN THE IN THE BOOKS OF ACCOUNTS IN F Y 2004-05 I.E. AY 2005- 06 . HE FURTHER SUBMITS THAT AS PER THE DOCUMENTS ON RECORD, THE SETTLEMENT WAS ARRIVED AT BETWEEN THE ASSESSEE AND THE BANK ON 18.8.2004 AND IF AT ALL IT IS PRESUMED THAT THERE WAS A CESS ATION OF THE LIABILITY THAT WAS ONLY IN THE NEXT ASSESSMENT YEAR. HE FURTHER AR GUES THAT THE 8 ITA NO1681/MUM/2008 DEPARTMENT CANNOT BE ARGUED THAT IT IS TO BE TAXED U/S 28(IV) OF THE ACT AS THE AO HAS NOT MADE THE ADDITION OF U/S SECTION. 7 WE HAVE HEARD THE RIVAL SUBMISSIONS AND ALSO PERU SED THE RELEVANT MATERIAL ON RECORD. AS PER THE RECORDS, THE CENTURI AN BANK HAS SANCTIONED OD FACILITY TO THE ASSESSEE FOR WORKING CAPITAL REQ UIREMENT. THE SAID OD FACILITY WAS ENHANCED FROM ` 5 LACS TO ` 7.5 LACS AND BANK GUARANTEE FACILITY FROM ` 7 LACS TO ` 10 LACS. THE BANK HAD PUT CONDITIONS THAT AS A SECURITY COVER, THE ASSESSEE SHOULD PLEDGE THE SHAR ES IN D-MAT FORM WITH 133% COVER. IT APPEAR THAT DUE TO THE FINANCIAL CRI SES OF THE ASSESSEE, THE ASSESSEE DID NOT REPAY THE LIABILITY. MOREOVER, THE ASSESSEES ACCOUNT WAS TREATED AS NPA BY THE BANK. THE BANK FILED ORIGINA L APPLICATION NO.372 IN THE DRT-II, MUMBAI FOR THE RECOVERY OF THE AMOUNT. AS THE SHARES WERE PLEDGED WITH THE BANK, SAID SHARES WERE SOLD AS UND ER: I) FINANCIAL YEAR 2001-02 ` .37,66,215.15 II)SALES PROCEEDS OF THE SHARE FOR ASSESSMENT YEAR 2001-02 BUT RECEIVED IN THE BANK IN ASSESSMENT YEAR 02-03 ` 4,37,869.29 III) SALES PROCEEDS OF THE SHARES SOLD IN THE FY 0 3-04 ` .4,16,15,384.01 7.1 THE BANK ADJUSTED THE SALE PROCEEDS REALIZATION THE SALE OF SHARES BY GIVING THE CREDIT TO THE ASSESSEE AGAINST ITS OUTST ANDING LIABILITY. THE ASSESSEES CASE WAS REFERRED FOR SPECIAL AUDIT U/S 142(2A) OF THE ACT AND THE SPECIAL AUDITOR RECONCILED ALL THE LOAN ACCOUNT OF THE ASSESSEE WITH CENTURIAN BANK. THE ASSESSING OFFICER CALLED FOR TH E ACCOUNT STATEMENT OF THE CENTURIAN BANK AND IT WAS NOTICED BY THE ASSESS ING OFFICER THAT THE BANK HAS WRITTEN OFF THE ENTIRE LOAN LIABILITY AGAI NST THE ASSESSEE ON 24/25.3.2004 WITH THE NARRATION THAT WRITTEN OFF TH E ENTIRE OUTSTANDING LIABILITY OF THE ASSESSEE TO THE EXTENT OF ` 6,36,33,349/- WITH THE NARRATION 9 ITA NO1681/MUM/2008 THAT AS PER THE CORPORATE APPROVAL NO.CBL/FIN/IOC/ 03-04/1244 DATED 24.3.2004. THE ASSESSING OFFICER, THEREFORE, HELD T HAT IT WAS THE PROFIT CHARGEABLE TO TAX U/ 41(1) OF THE ACT. ON PERUSAL OF BANK LOAN A/C. STATEMENT FLED BEFORE US, IT IS SEEN THAT THE BANK HAS WRITTEN OFF THE ENTIRE LIABILITY OF THE ASSESSEE ON 25.3.2004. WHEN THE M ATTER WAS CARRIED BEFORE THE LD CIT(A), HE HELD THAT THE AMOUNT WRITTEN OFF CANNOT BE TAXED IN THE HANDS OF THE ASSESSEE EITHER U/S 41(1) OR U/S 28(I V) OF THE ACT. 8 IT APPEARS THAT THE ASSESSEE FILED A CERTIFICATE FROM THE BANK BEFORE THE LD CIT(A) AND AS PER THE SAID CERTIFICATE, THE BAN K HAD WRITTEN OFF THE LIABILITY ON 25.3.2004 IN ITS BOOKS OF ACCOUNT FOR INTERNAL PURPOSES. (THE ORIGINAL CERTIFICATE IS AT PAGE 18 OF THE PAPER BOO K). IN OUR OPINION LD.CIT(A) SHOULD HAVE CALLED FOR REMAND REPORT FROM THE A.O. WHEN FOR THE FIRST TIME THE ASSESSEE FILED CERTIFICATE FROM THE CENTURIAN B ANK THAT THE ENTIRE LIABILITY WAS WRITTEN OFF WHEN ADMITTEDLY AS PER DOCUMENT BEF ORE US THE RECOVERY PROCEEDINGS WERE PENDING IN THE DRT-II, MUMBAI. MOR EOVER, THE CERTIFICATE OF THE BANK IS VERY VAGUE AND DOES NOT GIVE DETAILS OF THE CORPORATE OFFICE LETTER DT 24/03/04. THE LD CIT(A) WITHOUT EXAMINING THIS ISSUE IN THE PROPER PERSPECTIVE, HAS GIVEN CLEAN CHIT TO THE ASSESSEE; EVEN IF THE BANK HAS WRITTEN OFF THE ENTIRE OUTSTANDING LIABILITY PAYABL E BY THE ASSESSEE BEFORE 31.3.2004. THE FIRST ASPECT TO BE CONSIDERED IS WHE THER IN FACT ENTIRE LIABILITY WAS WRITTEN OFF ON 25/03/04 OR WAS IT MERELY TRANSF ERRED TO SOME OTHER ACCOUNT AS PLEADED BY THE LD. COUNSEL. THIS FACT NE EDS TO BE VERIFIED FIRST. IF THE BANK HAS MERELY TRANSFERRED ASSESSEES LOAN A/C . BY MAKING INTERNAL ADJUSTMENT THEN IT CAN NOT BE SAID THAT SAID LOAN H AS BEEN WRITTEN OFF. AS THE COPY OF CORPORATE OFFICE LETTER DT. 24/03/04 OF THE CENTURIAN BANK, WHICH REFERENCE IS GIVEN IN BANK STATEMENT, IS NOT MADE AVAILABLE BEFORE US, HENCE, WE ARE UNABLE TO GIVE ANY FINDING ON THIS FA CT AS THE CERTIFICATE ISSUED BY THE CENTURIAN BANK DOES NOT DISCLOSE SPECIFIC RE ASONS. IF IT IS MERE CASE OF INTERNAL ADJUSTMENT BETWEEN BANK AND ITS CORPOR ATE OFFICE AND THEN IT CAN NOT BE SAID THAT THE LIABILITY/LOAN WAS WRITTEN OFF IN THE FINANCIAL YEAR 2003- 04 AND SAME CAN NOT BE CONSIDERED FOR ADDITION AT A LL IN THE A. Y. 2004-05. 10 ITA NO1681/MUM/2008 9. THE LD CIT(A) ALSO RECORDS HIS FINDING THAT EVE N IF THE ENTIRE OUTSTANDING LOAN LIABILITY HAS BEEN WRITTEN OFF BY THE BANK, THE SAME CANNOT BE TAXED IN THE HANDS OF THE ASSESSEE U/S 41(1) OR U/S 28(IV) OF THE ACT. WE ARE NOT IN AGREEMENT WITH THE ARGUMENTS OF THE LD C OUNSEL THAT THE DISALLOWANCE WAS RESTRICTED TO SEC. 41(1) AND HENCE , THE REVENUE CANNOT TAKE A PLEA THAT THE SAID CAN BE TAXED U/S 28(IV) OF THE ACT FOR THE REASONS THAT THE LD CIT(A) HAS GIVEN A FINDING WHETHER THE WRIT ING OFF OF THE LIABILITY CONSTITUTE ANY BENEFIT ARISING FROM THE BUSINESS UN DER SEC. 28(IV) OF THE ACT AND THIS ISSUE ALSO ARISES FROM THE ORDER OF THE LD .CIT(A) AS RIGHTLY ARGUED BY THE LD. CIT DR. 10. IN THIS CASE, AS PER THE RECORDS FILED BEFORE U S, THE SUIT/APPLICATION FILED BY THE BANK WAS FINALLY DISPOSED OFF VIDE ORD ER DATED 18.6.2004 (PAGE 11 OF THE PB). ON PERUSAL OF THE ORDER OF THE LD CI T(A), WE FIND THAT AT THE ONE END THE BANK HAD WRITTEN OFF THE ENTIRE LIABILI TY IN ITS BOOKS OF ACCOUNT AND AT THE OTHER END GIVES A CERTIFICATE TO THE ASS ESSEE STATING THAT FOR INTERNAL PURPOSES THAT THE LIABILITY WAS WRITTEN OF F; EVEN THE RECOVERY PROCEEDINGS AGAINST THE ASSESSEE IS PENDING IN THE DRT. ANOTHER, ASPECT TO BE CONSIDERED IS A BIFURCATION OF PRINCIPAL AND INT EREST COMPONENT IN THE AMOUNT OF LOAN WRITTEN OFF. THE COMPONENTS OF INTER EST AND PRINCIPAL ARE TO BE CONSIDERED INDEPENDENTLY. IN OUR OPINION, THIS I SSUE NEEDS RE- EXAMINATION AS REQUIRED VERIFICATION HAS NOT BEEN D ONE BY BOTH THE AUTHORITIES. WE, THEREFORE, CONSIDER IT FIT TO REMA ND THE ISSUE BACK TO THE FILE OF THE ASSESSING OFFICER WITH THE DIRECTIONS THAT H E SHOULD CALL FOR THE COPY OF THE CORPORATE OFFICE APPROVAL DATED 24.3.2004 RE FERRED BY THE BANK IN ITS STATEMENT FROM CENTURIAN BANK FOR ASCERTAINING REAS ON FOR WRITING OFF OF THE ENTIRE OUTSTANDING LOAN OF THE ASSESSEE ON 25.3.200 4. THE ASSESSING OFFICER SHOULD ALSO CONSIDER THE CERTIFICATE ISSUED BY THE BANK TO THE ASSESSEE ON 3.10.2007. THE ASSESSING OFFICER IS ALSO DIRECTED TO GIVE REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE AND DECI DE THE ISSUE DE-NOVO IN 11 ITA NO1681/MUM/2008 THE LIGHT OF OUR ABOVE OBSERVATIONS . ACCORDINGLY, GROUND NOS 1 & 2 TAKEN BY THE REVENUE ARE ALLOWED FOR STATISTICAL PURPOSE. 11. NEXT ISSUE FROM GROUND NO. 3 IS WHETHER THE INC OME FROM DIVIDEND, INTEREST ON FDS AND INTEREST ON IT REFUND CAN BE TR EATED AS BUSINESS INCOME AS AGAINST INCOME FROM OTHER SOURCES AS HEL D BY THE ASSESSING OFFICER. 11.1 IN THE P&L ACCOUNT, THE ASSESSE HAS DECLARED T HE FOLLOWING INCOME: I) DIVIDEND ` 3,000/- II)INTEREST ON FDS ` 5,20,136/- THE ASSESSING OFFICER TREATED THE ENTIRE INCOME OF ` 5,37,183/- AS INCOME FROM OTHER SOURCES AND DISALLOWED THE ENTIRE CLAIM IN RESPECT OF THE EXPENSES. THE ASSESSEE CARRIED THE ISSUE OF DISALLO WANCE OF BUSINESS EXPENSES CLAIMED BY THE ASSESSEE BEFORE THE LD CIT( A). THE LD CIT(A) WAS OF THE OPINION THAT THOUGH THE ASSESSEE HAD NOT CREDIT ED ANY AMOUNT UNDER THE HEAD INCOME FROM BUSINESS OR PROFESSION, THE FACT REMAINS THAT THE ASSESSEE WAS VERY MUCH DOING THE BUSINESS AND THE E XPENSES DEBITED BY THE ASSESSEE WERE NECESSARY TO KEEP THE BUSINESS OF THE ASSESSEE RUNNING. HE, THEREFORE, DIRECTED THE ASSESSING OFFICER TO ALLOW THE EXPENSES. NOW, THE REVENUE IS IN APPEAL HERE BEFORE US. 11.2 THOUGH IN THE GROUND NO.3, THE REVENUE HAS STA TED THAT THE LD CIT(A) ERRED IN TREATING THE DIVIDEND, INTEREST ON FDS AND INTEREST ON IT REFUND AS BUSINESS INCOME; BUT IN OUR OPINION THE SAID ISSUE IS NOT ARISING FROM THE ORDER OF THE LD CIT(A); THEREFORE, THIS GROUND IS IN FRUCTUOUS. 12 ITA NO1681/MUM/2008 12. GROUND NO.4 IS IN RESPECT OF DISALLOWANCE OF TH E ENTIRE BUSINESS EXPENSES BY THE ASSESSING OFFICER. 12.1 WE HAVE PERUSED THE ORDER OF THE LD CIT(A); MO RE PARTICULARLY PARA 3.2 IN WHICH THE DETAILS OF THE EXPENSES ARE GIVEN. IT IS AN ADMITTED FACT THAT IN THE ASSESSMENT YEAR 2004-05, THE ASSESSEE HAS NOT D ECLARED ANY INCOME FROM BROKERAGE OR TRADING OF THE SHARES BUT AT THE SAME TIME, NOTHING IS THERE ON RECORD TO SHOW THAT THE ASSESSEE HAD CLOSE D ITS BUSINESS. MOREOVER, AFTER EXAMINING THE NATURE OF THE EXPENDITURE CLAIM ED BY THE ASSESSEE, WE FIND THAT THE SAID EXPENDITURE IS REQUIRED TO KEEP THE BUSINESS RUNNING. IN OUR OPINION NO INTERFERENCE IS CALLED FOR IN THE FI NDINGS OF THE LD CIT(A); THEREFORE, WE CONFIRM ORDER OF THE LD. CIT(A) ON TH IS ISSUE. ACCORDINGLY, THE GROUND NOS 3 & 4 ARE DISMISSED. 13 GROUND NO.5 & 6 ARE GENERAL IN NATURE. 14 IN THE RESULT, THE APPEAL FILED BY THE REVENUE I S ALLOWED PARTLY FOR STATISTICAL PURPOSE. ORDER PRONOUNCED ON THE 27 TH , DAY OF AUG 2010. SD/- SD/- ( R S SYAL ) ACCOUNTANT MEMBER (R S PADVEKAR ) JUDICIAL MEMBER PLACE: MUMBAI : DATED: 27 TH , AUG 2010 RAJ* 13 ITA NO1681/MUM/2008 COPY FORWARDED TO: 1 APPELLANT 2 RESPONDENT 3 CIT 4 CIT(A) 5 DR /TRUE COPY/ BY ORDER DY /AR, ITAT, MUMBAI