ACIT, circle-16(1), Hyderabad V. M/s. National Minernal Development Corpn Ltd, Hyderabad

ITA 1774/HYD/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 66099 (ITAT-HYDERABAD)
• Duration Of Justice: 9 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-08-2012
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2003-2004
• Appeal Filed On: 14-10-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: V SRINIVAS
• Assessee Lawyers: LAXMINIVAS SHARMA
• Keywords: Opportunity of being heard; Wholly owned subsidiary; Bad and doubtful debts
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD B BENCH, HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO.1791/HYD/2011 ASSESSMENT YEAR : 2003-04 NMDC LTD., HYDERABAD. .... APPELLANT PAN:AAACN 7325 A VS. DY. CIT,, CIR-16(1), HYDERABAD. RESPONDENT ITA NO.1774/HYD/2011 ASSESSMENT YEAR : 2003-04 ACIT, CIR-16(1), HYDERABAD. .... APPELLANT VS. NMDC LTD., HYDERABAD. RESPONDENT ASSESSEE BY : SHRI LAXMINIVAS SHARMA DEPARTMENT BY : SHRI V. SRINIVAS (SR.DR) DATE OF HEARING : 05-06-2012 DATE OF PRONOUNCEMENT: 03-08-2012 ORDER PER SAKTIJIT DEY, J.M.: THESE CROSS APPEALS FILED BY THE ASSESSEE AND DEPARTMENT, ARE DIRECTED AGAINST ORDER DATED 8-8-2011 OF CIT (A)-V, HYDERABAD PASSED IN ITA NO.0306/JCIT- 2 ITA NO1791 AND 1774 OF 2011 NMDC LTD., HYD. 16/CIT(A)/2010-11 AND IT PERTAINS TO THE ASSESSMENT YEAR 2003- 04. FOR THE SAKE OF CONVENIENCE, THESE APPEALS ARE TAKEN UP TOGETHER AND DISPOSED OF BY THIS COMBINED ORDER. 2. FIRST, LET US DEAL WITH ITA NO. 1774/HYD/2011 FI LED BY THE REVENUE. REVENUE HAS RAISED FOUR GROUNDS. GROUND NOS. 2 AND 3 ARE EFFECTIVE GROUNDS. GROUND NO.2 RELATES TO T HE DECISION OF CIT (A) ALLOWING BAD DEBTS WRITTEN OFF OF RS.52.85 LAKHS. 3. BRIEFLY THE FACTS ARE, THE ASSESSEE IS A PSU OF THE CENTRAL GOVERNMENT WORKING UNDER THE MINISTRY OF STEEL. INI TIALLY, ASSESSMENT WAS COMPLETED U/S 143(3) OF THE ACT IN C ASE OF THE ASSESSEE. SUBSEQUENTLY, FINDING THAT THERE WAS ESC APEMENT OF INCOME TO THE TUNE OF RS.3,53,30,050/- ASSESSMENT W AS REOPENED U/S 147. IN COURSE OF THE REASSESSMENT PROCEEDING T HE AO ASKED THE ASSESSEE TO EXPLAIN WHY THE BAD DEBTS WRITTEN O FF OF THE AMOUNT OF RS.3,53,30,050 BEING THE ADVANCES GIVEN S HOULD NOT BE TREATED AS CAPITAL LOSS. THE ASSESSEE SUBMITTED BE FORE THE AO THAT UNDER CLAUSE 24 OF THE MEMORANDUM OF ASSOCIATI ON THE ASSESSEE IS AUTHORISED TO INVEST MONEY OF THE COMPA NY NOT REQUIRED FOR THE TIME BEING FOR ANY OF THE PURPOSES OF THE COMPANY IN INVESTMENTS OTHER THAN SHARES AND STOCKS IN THE COMPANY. KEEPING IN VIEW THE ABOVE CLAUSE IN MOA T HE ASSESSEE OUT OF ITS SURPLUS CASH RESERVES HAS ADVANCED INTER -CORPORATE LOANS TO SISTER PSUS AND DEPOSITS WITH BANKS. THE INVESTMENTS MADE BY THE ASSESSEE ARE IN NORMAL COURSE OF BUSINE SS. INTEREST EARNED ON THE ADVANCES HAS BEEN OFFERED TO TAX AS B USINESS INCOME HENCE ANY LOSS ARISING ON ACCOUNT OF THESE T RANSACTIONS CANNOT BE TREATED AS CAPITAL LOSS. THE AO REJECTED THE EXPLANATION OF THE ASSESSEE BY OBSERVING THAT ADVAN CING LOANS TO THE SISTER CONCERNS IS NOT THE NORMAL BUSINESS ACTI VITY OF THE ASSESSEE. SINCE THE ASSESSEE HAD ADVANCED THE LOAN OUT OF THE 3 ITA NO1791 AND 1774 OF 2011 NMDC LTD., HYD. SURPLUS FUNDS ANY LOSS OCCURRING ON ACCOUNT OF IRRE COVERABILITY OF THE ADVANCE IS TO BE TREATED AS CAPITAL LOSS. THE AO ON THE AFORESAID CONCLUSION DISALLOWED THE CLAIM OF HE ASS ESSEE AND ADDED IT TO THE TOTAL INCOME. THE ASSESSEE CHALLEN GED THE ADDITION BY FILING AN APPEAL BEFORE THE CIT(A). I N RESPECT OF RS.52.85 LAKHS ADVANCED TO NMDC, SARL, MADAGARCAR T HE CIT (A) FOUND IT TO BE A WHOLLY OWNED SUBSIDIARY OF THE ASS ESSEE AND THE AMOUNT WAS ADVANCED TO IT FOR ITS OPERATIONS. THE SUBSIDIARY COULD NOT CONDUCT BUSINESS PROPERLY WHICH RESULTED IN THE AMOUNT BECOMING IRRECOVAERABLE. THE CIT (A) FOUND THAT TH E ASSESSEE IN ASSESSMENT YEAR 2004-05 ALSO HAD ADVANCED SIMILAR L OAN TO ANOTHER OF ITS 100% SUBSIDIARY M/S NAM INDIA MINERA L DEVELOPMENT CORPORATION, NAMBIA AND THE LOAN BECAME IRRECOVERABLE ON ACCOUNT OF LACK OF PROPER OPERATIO NS BY THE SUBSIDIARY. THE CIT (A) IN THAT CASE ALLOWED THE C LAIM OF BAD DEBT. FOLLOWING THE ORDER PASSED FOR THE ASSESSMEN T YEAR 2004- 05 THE CIT (A) ALLOWED THE CLAIM OF THE ASSESSEE IN WRITING OFF THE ADVANCE AS BAD DEBTS. 4. THE LD. DR SUPPORTING THE DISALLOWANCE MADE BYTH E AO SUBMITTED THAT THE CLAIM OF BAD DEBT WRITTEN OFF BE ING IN THE NATURE OF CAPITAL LOSS SHOULD NOT HAVE BEEN ALLOWED AS AN EXPENDITURE BY THE CIT (A). 5. THE LEARNED AR SUBMITTED THAT THE ASSESSEE HAVIN G ADVANCED THE MONEY TO ITS SUBSIDIARY IN NORMAL COUR SE OF BUSINESS THE CIT (A) WAS JUSTIFIED IN ALLOWING THE EXPENDITURE U/S 36(1)(VII) OF THE ACT. 6. `WE HAVE HEARD RIVAL SUBMISSIONS AND PERUSED MAT ERIALS ON RECORD. BAD DEBT WRITTEN OFF AS IRRECOVERABLE IS A LLOWABLE AS AN EXPENDITURE U/S 36(1)(VII) PROVIDED THE LOAN WAS AD VANCED FOR THE PURPOSE OF BUSINESS AND IN NORMAL COURSE OF BUSINES S. AS SEEN 4 ITA NO1791 AND 1774 OF 2011 NMDC LTD., HYD. FROM THE ORDERS PASSED BY THE REVENUE AUTHORITIES W HILE THE AO HAS DISALLOWED THE BAD DEBT WRITTEN OFF AS A CAPITA L LOSS BY OBSERVING THAT ADVANCING LOANS TO SISTER CONCERNS I S NOT THE NORMAL BUSINESS ACTIVITY OF THE ASSESSEE. THE CIT (A) HAS ALLOWED THE CLAIM OF THE ASSESSEE BY SIMPLY FOLLOWING THE O RDER PASSED BY THE CIT (A) FOR THE ASSESSMENT YEAR 2004-05. NEITH ER THE CIT (A) NOR THE AO HAS DEALT WITH THE BASIC FACTS AS TO WHA T IS THE ACTUAL PURPOSE OF ADVANCING THE LOAN TO THE SUBSIDIARY AND WHETHER IT IS FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. IT HA S ALSO TO BE ASCERTAINED WHETHER THE WRITING OFF WAS APPROVED BY THE BOARD OF DIRECTORS. SINCE THESE FACTS HAVE NOT BEEN GONE IN TO BY THE CIT (A) OR THE AO WE RESTORE THE MATTER BACK TO THE FIL E OF THE AO FOR EXAMINING THE ISSUE AFRESH KEEPING IN MIND THE OBSE RVATIONS MADE BY US IN THIS REGARD. THE AO SHALL AFFORD A R EASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 7. GROUND NO.3 RELATES TO INTEREST LEVIED U/S 115P BY HE AO AND DELETED BY THE CIT (A). 8. BRIEFLY THE FACTS ARE THE ASSESSEE COMPANY DECLA RED A DIVIDEND OF RS.39,64,71,600 ON 24-9-2003 AND PAID T HE TAX ON DIVIDEND ON 3-10-2003. THE AO WHILE COMPLETING THE ASSESSMENT HELD THAT IN THE PROFIT & LOSS A/C.,THE PROPOSED DI VIDEND OF RS.39,64,71,600/- HAS BEEN SHOWN AS PROFIT AVAILAB LE FOR APPROPRIATIONS. SINCE ACCOUNTS HAVE BEEN PREPARED ON 31-3- 2003 THE DECLARATION OF DIVIDEND MUST BE DEEMED TO HAVE BEEN DECIDED ON 31-3-2003. THE APPROVAL OF THE BOARD IS ONLY A FORMALITY. ON THE ABOVE FINDING THE AO LEVIED INTE REST AMOUNTING TO RS.41,88,097 U/S 115P OF THE ACT. 9. THE ASSESSEE CHALLENGED THE LEVY OF INTEREST IN APPEAL BEFORE THE CIT (A). THE CIT (A) HELD THAT DECLARATION OF DIVIDEND IS A SPECIFIC DECISION TO BE TAKEN BY THE BOARD AND CANN OT BE EQUATED 5 ITA NO1791 AND 1774 OF 2011 NMDC LTD., HYD. WITH FINALISATION OF ACCOUNTS. DIVIDEND DECLARATIO N IS NOT AUTOMATIC UPON THE PRESENCE OF PROFITS OR RESERVES. DECISION REGARDING DECLARATION OF DIVIDEND HAS TO BE TAKEN B Y THE MANAGEMENT. THE CIT (A) FOUND THE PAYMENT OF TAX O N DIVIDEND TO BE IN CONFORMITY WITH THE PROVISION CONTAINED U/ S 115P AND DELETED THE INTEREST LEVIED U/S 115P OF THE ACT. 10. WE HAVE HEARD RIVAL SUBMISSIONS AND PERUSED MAT ERIALS ON RECORD. WE FULLY AGREE WITH THE CIT (A) THAT DECLA RATION OF DIVIDEND IS NOT AUTOMATIC UPON FINALISATION OF ACCO UNTS AND PRESENCE OF PROFITS AND RESERVES. THE DECLARATION OF DIVIDEND IS WITHIN THE DOMAIN OF BOARD OF DIRECTORS AND THE MAN AGEMENT AND THE DATE OF DECLARATION OF DIVIDEND IS WHEN IT IS A CTUALLY DECLARED BY THE BOARD. FROM THE MATERIALS ON RECORD IT IS VE RY MUCH CLEAR THAT THE DECLARATION OF DIVIDEND WAS MADE ON 24-9-2 003 AND THE TAX ON DIVIDEND WAS PAID ON 3-10-2003 WHICH IS WITH IN THE TIME LIMIT PRESCRIBED U/S 115-O(3). THERE BEING NO FAILU RE ON THE PART OF THE ASSESSEE IN COMPLYING TO THE PROVISION OF SE CTION 115-O(3) LEVY OF INTEREST U/S 115P WAS NOT JUSTIFIED. WE TH EREFORE UPHOLD THE ORDER OF CIT (A) AND DISMISS THE GROUND RAISED BY THE REVENUE. 11. IN THE RESULT, THE APPEAL BY THE REVENUE IS ALL OWED IN PART AS INDICATED ABOVE. ITA NO.1791/HYD/2011- (ASSESSEES APPEAL) : 12. THE ASSESSEES APPEAL IS AGAINST DISALLOWANCE F BAD DEBTS WRITTEN OFF OF RS.3.00 CRORES PAID TO FCI. 13. BRIEFLY THE FACTS ARE IN COURSE OF THE REASSESS MENT PROCEEDING THE AO ASKED THE ASSESSEE TO EXPLAIN WHY THE ADVANCE OF RS.3,53,30,050/- BEING CAPITAL IN NATURE SHOULD NOT BE TREATED AS CAPITAL LOSS. THE ASSESSEE EXPLAINED THAT CLAUS E 24 OF THE 6 ITA NO1791 AND 1774 OF 2011 NMDC LTD., HYD. MEMORANDUM OF ASSOCIATION AUTHORISES THE ASSESSEE T O INVEST ANY MONEY, WHICH IS NOT REQUIRED FOR TIME BEING IN SUCH INVESTMENTS NOT BEING SHARES OR STOCKS IN THE COMPANY. THEREF ORE, THE ASSESSEE HAS PARKED THE TEMPORARY SURPLUS FUND IN INTER- CORPORATE LOANS TO SISTER PSUS AND AS DEPOSITS WITH BANKS. THE AO DID NOT ACCEPT THE EXPLANATION AND DISALLOWED TH E BAD DEBT WRITTEN OFF AS CAPITAL LOSS. THE CIT (A) WHILE DEC IDING THE APPEAL HELD SO FAR AS LOAN OF RS.3 CRORES TO FCI IS CONCE RNED, IT IS NOT A SUBSIDIARY OF THE ASSESSEE AND THE LOAN IS ALSO NOT PART OF THE BUSINESS OPERATIONS OF THE ASSESSEE AND ALSO NOT IN ORDINARY COURSE OF BUSINESS. ON THE AFORESAID CONCLUSION TH E CIT (A) DISALLOWED BAD DEBT WRITTEN OFF IN RESPECT OF LOAN OF RS.3 CRORES BY TREATING IT AS CAPITAL LOSS. 14. WE HAVE HEARD RIVAL SUBMISSIONS AND PERUSED MAT ERIALS ON RECORD. UNDISPUTEDLY GIVING LOANS AND ADVANCES ARE NOT THE BUSINESS OF THE ASSESSEE. FCI IS ALSO NOT A SISTER CONCERN OF THE ASSESSEE. THE LD. AR HAS SUBMITTED AS PER CLAUSE 2 4 OF THE MEMORANDUM OF ASSOCIATION THE ASSESSEE PARKS ITS SU RPLUS FUNDS INTER-CORPORATE LOANS TO SISTER PSUS AND DEPOSITS W ITH BANKS. IF THE ASSESSEE HAD THE OPTION OF DEPOSITING ITS SURPL US FUNDS WITH BANKS WHERE ITS INVESTMENT WOULD HAVE BEEN MORE SEC URE, IT WAS NOT PRACTICAL TO PARK ITS INVESTMENT IN INTER CORPO RATE LOAN TO FCI WITH THE RISK OF NOT ABLE TO RECOVER IT. THAT APAR T ADVANCING LOAN TO FCI APPARENTLY WAS WITHOUT ANY BUSINESS CONSIDER ATION. THEREFORE THE CIT (A) WAS CORRECT IN HOLDING THAT I T IS IN THE NATURE OF CAPITAL LOSS HENCE CANNOT BE ALLOWED AS A N EXPENDITURE U/S 36(1)(VII). HOWEVER THE LD. AR HAS SUBMITTED B EFORE US THAT OUT OF RS. 3 CRORES LOAN GIVEN TO FCI OF AN AMOUNT OF RS.150 LAKHS HAS BEEN RECOVERED FROM FCI AND INCLUDED INCOME AND TAX HAS ALSO BEEN PAID THEREON. IT APPEARS FROM THE ORDER OF THE CIT (A) 7 ITA NO1791 AND 1774 OF 2011 NMDC LTD., HYD. THAT THOUGH THIS FACT WAS ALSO PLACED BEFORE HIM IT HAS NOT AT ALL BEEN CONSIDERED. WE THEREFORE DIRECT THE AO TO VERI FY WHETHER THE AMOUNT OF RS.1.5 CRORES RECOVERED FROM FCI HAS BEEN OFFERED AS INCOME BY THE ASSESSEE. IF THE AFORESAID AMOUNT HA S BEEN SHOWN IN THE INCOME AND TAX HAS BEEN PAID THEN DISALLOWAN CE HAS TO BE RESTRICTED TO RS.1.5 CRORES. THE AO SHALL GIVE REA SONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE BEFORE FINAL ISING THE PROCEEDINGS. 15. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE E IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE COURT ON 3 - 8-2012. SD/- SD/- (CHANDRA POOJARI) ACCOUNTANT MEMBER (SAKTIJIT DEY) JUDICIAL MEMBER HYDERABAD, DATED THE 3 RD AUGUST, 2012. COPY TO:- 1) CHAIRMAN, NMDC LTD., KHANIJ BHAVAN, 10-3-311/A, CASTLE HILLS, MASAB TANK, HYDERABAD. 2) DCIT, CIR-16(1), HYDERABAD. 3) THE CIT (A)-V, HYDERABAD 4) THE CIT CONCERNED, HYDERABAD 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDERABA D. JMR* 8 ITA NO1791 AND 1774 OF 2011 NMDC LTD., HYD.