The DCIT, Central Circle-2(2), Gandhinagar V. Kalpataru Power Transmission Ltd., Gandhinagar

ITA 2077/AHD/2011

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 0957 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 11 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-08-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 21-07-2016
• Assessment Year: 2008-2009
• Appeal Filed On: 23-08-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Depreciation; Business expenditure; Question of law; Bad and doubtful debts; Revenue expenditure; Capital expenditure
• Section: 143(3); 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD C BENCH AHMEDABAD BEFORE SHRI R.P. TOLANI, JM, & SHRI MANISH BORAD, AM. ITA NO.2077/AHD/2011 ASST. YEAR: 2008-09 DCIT, CEN. CIRCLE-2(2), AHMEDABAD. VS. KALPATARU POWER TRANSMISSION LTD., 101, PART-III, GIDC ESTATE SECTOR-GANDHINAGAR. APPELLANT RESPONDENT PAN AAACK 8387R APPELLANT BY SHRI PRASOON KABRA, SR.DR RESPONDENT BY SHRI MILIN MEHTA, AR DATE OF HEARING: 21.7.2016 DATE OF PRONOUNCEMENT: 01/8/2016 O R D E R PER MANISH BORAD, ACCOUNTANT MEMBER . THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER OF LD. CIT(A)-III, AHMEDABAD DATED 28/06/2011 IN APPEAL NO .CIT(A)- III/33/DCIT/CC-2(2)/10-11, PASSED AGAINST ORDER U/S 143(3) OF THE IT ACT, 1961 (IN SHORT THE ACT), FOR ASSESSMENT YEAR 2 008-09 FRAMED ON 30/03/2010 BY DCIT, CC-2(2), AHMEDABAD. FOLLOWING G ROUNDS HAVE BEEN RAISED IN THIS APPEAL :- 1. THE LD. CIT(A) ERRED IN LAW AND ON FACTS IN CIRC UMSTANCES OF THE CASE BY DELETING THE ADDITION OF RS.42,48,934/- OUT OF RS.4 5,74,134/- HOLDING IT AS BUSINESS LOSS INSTEAD OF CAPITAL LOSS. ITA NO. 2077/AHD/2011 ASST. YEAR 2008-09 2 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, LD. CIT(A) OUGHT TO HAVE UPHELD THE ORDER OF THE ASSESSING OFFICER ON T HE ABOVE POINT. 2. BRIEFLY STATED FACTS OF THE CASE ARE THAT ASSESS EE BEING A LIMITED COMPANY ENGAGED IN THE MANUFACTURING OF TRANSMISSIO N TOWERS, INFRASTRUCTURE AND REAL ESTATE, FILED ITS RETURN OF INCOME FOR ASST. YEAR 2008-09 ON 30.09.2008 DECLARING TOTAL INCOME AT RS. 144.81 CRORES. THE CASE WAS SELECTED FOR SCRUTINY ASSESSMENT. DURI NG THE COURSE OF ASSESSMENT PROCEEDINGS LD. ASSESSING OFFICER OBSERV ED THAT A SUM OF RS.45,74,134/- HAS BEEN DEBITED TO PROFIT AND LO SS ACCOUNT ON ACCOUNT OF BALANCE WRITTEN OFF, WHICH INCLUDED CRED IT BALANCE OF INSURANCE CLAIM AT RS.6,32,035/-. ACCORDINGLY TOTAL DEBIT BALANCES WRITTEN OFF WAS RS.52,06,169/- AND AFTER SUBTRACTIN G THE INSURANCE CLAIM RECEIVABLE AS INCOME AT RS.6,32,035/-, THE NE T BALANCES WRITTEN OFF SHOWN IN THE PROFIT AND LOSS ACCOUNT WAS AT RS. 45,74,134; WHICH MOSTLY RELATED TO IRRECOVERABLE ADVANCES GIVEN TO J OB WORK CONTRACTOR FOR SUPPLY OF MATERIAL AND LABOUR. THE ASSESSING OF FICER WAS OF THE VIEW THAT THESE IRRECOVERABLE ADVANCES ARE IN NATUR E OF CAPITAL LOSS AND CANNOT BE ALLOWED AS BUSINESS EXPENDITURE. ACCO RDINGLY AFTER DISALLOWING BALANCES WRITTEN OFF EXPENDITURE OF RS. 45,74,134/- INCOME WAS ASSESSED AT RS.145.27 CRORES. 3. AGGRIEVED, ASSESSEE WENT IN APPEAL BEFORE LD. CI T(A) AND GOT PART RELIEF AS LD. CIT(A) DELETED THE DISALLOWANCE EXCEPT ADVANCE OF RS.3,25,200/- BY OBSERVING AS BELOW :- 3. I HAVE CONSIDERED THE SUBMISSIONS OF THE APPELLA NT. IT IS MENTIONED THAT THE APPELLANT WAS AWARDED A CONTRACT FOR PIPELINE LAYIN G AND ASSOCIATED WORKS ITA NO. 2077/AHD/2011 ASST. YEAR 2008-09 3 FROM BHARAT PETROLEUM CORPORATION LTD FOR ITS PROJ ECT NAMED AS MUMBAI- MANMAD-MANGLYA PIPELINE EXTENSION PROJECT PIYALA. F OR THE EXECUTION OF THIS PROJECT, THE APPELLANT HAS GIVEN SOME OF THE J OB TO OTHERS ON JOB WORK BASIS. SOME OF THE PARTIES OF THE JOB WORK COULD N OT PERFORM THEIR PART OF JOB PROPERLY AND THEREFORE, THE APPELLANT HAD TO WR ITE OFF SOME OF THEIR ACCOUNTS IN THE PROFIT AND LOSS ACCOUNT. FROM THE D ETAILS OF BAD DEBTS CLAIMED BY THE APPELLANT, IT IS NOTICED THAT THE DE BTS FROM THE FOLLOWING MAJOR PARTIES HAVE BEEN CLAIMED AS IRRECOVERABLE:' EXPORT BENEFIT (DEPB) 149833 + 745138 ESBEE ELECTRICALS 172402 PARIKAJ SINGH 325200 R.P.CONSTRUCTION 1139020 SANGAM CONSTRUCTIONS 2313118 3.1. AS REGARDS THE-CLAIM OF WRITE -OFF OF EXPORT B ENEFIT (DEPB), IT IS TO BE STATED THAT THE APPELLANT HAS SHOWN THE SAME AS ITS INCOME IN EARLIER YEARS OR THE YEAR UNDER CONSIDERATION. I HAVE VERIFIED THE B OOKS OF ACCOUNTS OF THE APPELLANT AND FOUND THAT THE DEPB HAS BEEN SHOWN BY THE APPELLANT AS ITS INCOME IN EARLIER YEARS/ THIS YEAR AND SINCE THE AP PELLANT DID NOT RECEIVE THE AMOUNTS AS PER THE CALCULATION OF THE APPELLANT, TH E BALANCE AMOUNTS WERE WRITTEN OFF IN THE BOOKS OF ACCOUNTS FOR THE PERIOD RELEVANT TO ASSESSMENT YEAR 2007-08. THEREFORE, THE WRITE OF F OF THE EXPORT BENEFIT (DEPB) IS ALLOWABLE DEDUCTION UNDER SECTION 36 OF THE INCOME TAX ACT. THE AO IS DIRECTED TO DELETE THE ADDITION ON ACCOUNT OF WRITE OFF OF BAD DEBTS ON ACCOUNT OF DEPB. 3.2.' AS REGARDS THE CLAIM OF WRITE OFF OF ESBEE EL ECTRICALS RS. 1,72,402/- IT WAS STATED THAT ADVANCE WAS GIVEN TO THIS PARTY DURING FINANCIAL YEAR 2005-06 FOR CARRYING OUT SOME JOB WORK. THIS PARTY DID NOT DO THE JOB WORK AND AFTER MUCH PERSUASION THE PARTY DID SOME J OB WORK FOR WHICH BILLS WERE RAISED AND CREDITED TO THEIR ACCOUNT. FI NALLY DUE TO NON- EXECUTION OF PART-WORK BY THEM THE APPELLANT ENCASH ED THE BANK GUARANTEE OF RS. 8,42,/- ON 8/1072007 AND CREDITED AGAINST TH E ADVANCES GIVEN TO THEM. THE BALANCE AMOUNT OF RS, 1,72,402/- WAS SHOW N AS IRRECOVERABLE AND WRITTEN OFF IN THE BOOKS OF ACCOUNTS. ITA NO. 2077/AHD/2011 ASST. YEAR 2008-09 4 3.3. IT MAY BE MENTIONED THAT THE AO HAS DISALLOWED THE CLAIM OF BAD DEBTS ON THE BASIS-OF THE JUDGMENT OF HONOURABLE KO LKATA.HIGH COURT IN THE CASE OF HASIMARA INDUSTRIES LTD 184 ITR 174. IT WOULD BE.NECESSARY TO REPRODUCE THE RELEVANT OBSERVATION OF THE HONOURABL E HIGH COURT AS UNDER: [1990] 184 ITR 174 (CAL.) HIGH COURT OF CALCUTTA HASIMARA INDUSTRIES LTD. VS. CIT SATISH CHANDRA C.J. AND SUHAS CHANDRA SEN, J. INCOME-TAX REFERENCE NO.683 OF 1979 AUGUST 29, 1986 JUDGMENT SUHAS CHANDRA SEN, J. THE FOLLOWING QUESTION OF LAW HAS BEEN REFERRED BY THE TRIBUNAL UNDER SECTION 256(2) OF THE INCOME-TAX ACT, 1961: 'WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE INCOME-TAX APPELLATE TRIBUNAL WAS RIGHT IN DISALLOWING THE LOSS OF IRRECOVERABLE ADVANCE OF RS. TWENTY LAKHS IN COMPUTING THE ASSESSEE'S PROFITS ON THE GROUND THAT THE .AMOUNT W AS SPENT BY SAKSARIA COTTON MILLS LTD. ON THE MODERNISATION AND IMPROVEMENT OF THE MACHINERY?' THE FACTS OF THE CASE ARE SET OUT IN DETAIL IN THE JUDGMENT THAT HAS BEEN DELIVERED IN THE ASSESSEE'S OWN CASE BEING INCOME-TAX REFERENCE NO. 100 OF 1977 : CIT V. HASHIMARA INDUSTRIES LTD. [1989] 175 ITR 477 (CAL). IN THIS REFERENCE, THE DISPUTE IS ABOUT THE ALLOWAB ILITY OF A SUM OF RS. 20,00,000 GIVEN BY WAY OF ADVANCE TO SAKSARIA COTTON MILLS LIMITED FOR MODERN ISATION OF ITS PLANT. THE ASSESSMENT YEAR INVOLVED IS 1968-69 FOR WHICH THE PREVIOUS YEAR END ED ON MARCH 31. 1968. THE ASSESSEE ADVANCED A SUM OF RS. 20,00,000 TO SAK SARIA COTTON MILLS LIMITED IN TERMS OF CLAUSE 13 OF THE LEAVE AND LICENCE AGREEMENT ENTERE D INTO BY THE ASSESSEE-COMPANY WITH SAKSARIA COTTON MILLS LIMITED. THE AGREEMENT ORIGIN ALLY WAS FOR A PERIOD OF THREE YEARS FROM APRIL 1, 1963, TO MARCH 31, 1966. THEREAFTER, IT WAS EXTE NDED BY MUTUAL AGREEMENT UP TO JUNE 30, 1966. THE AMOUNT OF RS. 20,00,000 WAS GIVEN BY WAY .OF AD VANCE FOR MODERNISATION OF THE MILLS. CLAUSE 13 OF THE AGREEMENT PROVIDED: 'IN THE EVENT OF ANY NEW AND COMPLETE UNIT OR PLANT AND/OR MACHINERY AND/OR EQUIPMENT BEING INSTALLED BY THE LICENSEE AT THE LICENSEE'S OWN COS T WITHIN THE LICENSES 1 PREMISES, NO DEPRECIATION WILL BE PAID BY THE LICENSEE TO THE LICENSOR IN RES PECT THEREOF AND ON THE EXPIRY OF THE PERIOD OF THE LICENCE ' ORITS EARLIER DETERMINATION BY THE LICENS OR, THE LICENSEE WILL BE ENTITLED TO REMOVE AND TAK E AWAY AT THE LICENSEE'S OWN COST SUCH NEW. PLANT, MA CHINERY AND EQUIPMENT PROVIDED THAT THE LICENSEE WILL, IN THAT EVENT, RESTORE THE LICENSED PREMISES TO THE CONDITION IN WHICH .THEY WERE AT THE TIME OF THE COMMENCEMENT OF THE .LICENCE AND MA KE GOOD THE DAMAGE, IF ANY, CAUSED TO THE LICENSED PREMISES BY REMOVAL OF SUCH NEW PLANT, MAC HINERY AND EQUIPMENT. IN THE EVENT OF ANY NEW PART OR PARTS OF ANY OF THE MILLS MACHINERY, PI ANT, EQUIPMENT, FITTINGS AND FIXTURES BEING PROVIDED BY THE LICENSEE IN REPLACEMENT OF ANY EXIS TING PART OR PARTS OF-SUCH MACHINERY, THE LICENSEE WILL BE ENTITLED IN LIEU THEREOF TO RETAIN SUCH OLD'PART OR PARTS OF SUCH MACHINERY SO ITA NO. 2077/AHD/2011 ASST. YEAR 2008-09 5 REPLACED AND TO DEAL WITH THE SAME IN SUCH MANNER A S THE LICENSEE DEEMS FIT. IF THE LICENSEE DESIRES THAT THE LICENSOR SHALL BRING ANY NEW PLANT , MACHINERY OR EQUIPMENT OR-UNIT, IT WILL BE IN THE ABSOLUTE AND UNCONTROLLED DISCRETION OF THE LICENSO R WHETHER TO DO SO OR NOT AND ON SUCH TERMS AS MAY BE. AGREED TO AT THAT TIME.' THERE IS NO DISPUTE THAT THE AMOUNT WAS PAID FOR MO DERNISATION OF THE MILLS. THE LOAN WAS NOT REPAID BY SAKSARIA COTTON MILLS LIMITED AT THE EXPI RY OF THE LEAVE AND LICENCE AGREEMENT ON JUNE 30, 1966. THE TRIBUNAL HAS FOUND THAT WITH EFFECT F ROM JULY 1, 1966, SAKSARIA COTTON MILLS LIMITED HAD ITS OWN BUSINESS BUT SUFFERED LOSS ON ACCOUNT O F LABOUR TROUBLE. ULTIMATELY, THE-MILL WAS CLOSED DOWN ON OCTOBER 18, 1967, AND THE COMPANY WE NT INTO LIQUIDATION ON MARCH 12, 1969. IN THE ASSESSEE-COMPANY'S ACCOUNTING YEAR WHICH END ED ON MARCH 31, 1968, THE ASSESSEE CLAIMED THE ADVANCE OF RS. 20,00,000 AS A DEDUCTION ON THE GROUND THAT IT HAD BECOME IRRECOVERABLE ON ACCOUNT OF THE INCAPACITY OF SAKSA RIA COTTON MILLS LIMITED TO REPAY THE LOAN. THE INCOME-TAX OFFICER DISALLOWED THE CLAIM ON THE GROUND THAT THE AMOUNT OF RS. 20,00,000 REPRESENTED MONEY ADVANCED TO SAKSARIA COTTON MILLS LIMITED FOR MODERNISATION OF ITS FACTORY. THE SAID AMOUNT WAS NOT TAKEN INTO CONSIDERATION .I N COMPUTING THE INCOME OF THE ASSESSEE IN ANY ASSESSMENT YEAR. IT ALSO DID NOT REPRESENT THE MONEY LENT IN THE ORDINARY COURSE OF BUSINESS. THE INCOME-TAX OFFICER OBSERVED THAT EVEN OTHERWISE THE SUM WAS NOT ALLOWABLE BECAUSE IT HAD NOT BECOME A BAD DEBT IN THE RELEVANT YEAR OF ACCOU NT. THE ASSESSEE HAD MADE NO EFFORT TO RECOVER THE SUM. THE APPELLATE ASSISTANT COMMISSIONER, HELD THAT THE ADVANCE GIVEN BY THE ASSESSEE-COMPANY WHICH COULD NOT BE RECOVERED FROM SAKSARIA COTTON M ILLS LIMITED HAD TO BE ALLOWED AS DEDUCTION AS REVENUE EXPENDITURE. THE APPELLATE ASSISTANT COM MISSIONER HELD THAT THE ASSESSEE COMPANY COULD NOT HAVE REMOVED THE PLANT AND MACHINERY AS T HE DEBENTURE HOLDERS OF SAKSARIA COTTON MILLS LIMITED HAD LIEN OVER THE ENTIRE PLANT AND MA CHINERY. THE APPELLATE ASSISTANT COMMISSIONER HELD THAT THE AFORESAID AMOUNT OF RS. 20,00,000 REPRESENTED LOSS INCURRED B Y THE ASSESSEE IN THE COURSE OF THE CARRYING ON OF ITS COTTON BUSINESS AND SHOULD BE ALLOWED AS A DEDUCTION ON ORDINARY COMMERCIAL PRINCIPLES. THE TRIBUNAL, ON APPEAL, REFERRED TO THE RESOLUTION S-OF THE BOARD OF DIRECTORS OF THE ASSESSEE- COMPANY IN SANCTIONING THE ADVANCE OF RS. 20,00,000 . IT WAS NOTED THAT IN THE RESOLUTION, IT WAS CLEARLY STATED THAT THE AMOUNT WAS TO BE TREATED AS CAPITAL INVESTMENT. BEFORE THE TRIBUNAL, IT WAS ARGUED ON BEHALF OF THE DEPARTMENT THAT BY MAKING T HIS ADVANCE OF RS. 20,00,000, THE ASSESSEE HAD ACQUIRED AN ADVANTAGE OF ENDURING NATURE AND TH E CLAIM OF THE ASSESSEE WAS NOT ALLOWABLE AS BUSINESS LOSS. THE AMOUNT WAS SPENT ON THE IMPRO VEMENT OF THE MILLS. IT WAS NOT ADVANCED IN THE ORDINARY COURSE OF THE ASSESSEE'S BUSINESS NOR WAS IT INCIDENTAL TO SUCH BUSINESS. ;. ON BEHALF OF THE ASSESSEE, IT WAS ARGUED THAT THE A SSESSEE DID NOT ACQUIRE ANY ADVANTAGE OF AN ENDURING NATURE. THE ASSESSEE WAS ONLY CREDITOR AS INTEREST WAS TO BE RECEIVED ON THE ADVANCE AND THAT THE ADVANCE WAS MADE IN THE NORMAL COURSE OF BUSINESS TO. GET BETTER INCOME FROM THE BUSINESS. ACCORDING TO HIM, THE ADVANCE WAS ONLY IN CIDENTAL TO THE ASSESSEE'S BUSINESS AND THE LOSS WAS A BUSINESS LOSS. THE TRIBUNAL HELD: 'THE ASSESSEE MADE THE ADVANCES FOR THE MODERNISATI ON OF THE MILLS OF SAKSARIA COTTON MILLS LTD. SO FAR AS SAKSARIA COTTON MILLS LTD. ARE CONCERNED, THE EXPENDITURE ON MODERNISATION RESULTED-IN THE IMPROVEMENT OF THE PLANT AND MACHINERY; MAKING OF THE IMPROVEMENT IN THE PLANT AND MACHINERY WAS NOT THE BUSINESS-OF THE ASSESSEE. THE ADVANCE WAS MADE TO OBTAIN IMPROVEMENT IN THE SOURCE OF INCOME. THE ADVANCE OF'RS. 20 LAKH S FOR MODERNISATION, THEREFORE, CANNOT BE SAID TO BE A BUSINESS LOSS.' ITA NO. 2077/AHD/2011 ASST. YEAR 2008-09 6 IT IS WELL SETTLED THAT LOSS OF MONEY LENT ON ADVAN CE WOULD BE A CAPITAL LOSS UNLESS THE LOAN WAS MADE BY A MONEY-LENDER FOR WHOM MONEY WAS HIS STOCK -IN-TRADE. ANY LOSS OF CAPITAL WOULD BE ON CAPITAL ACCOUNT. IN THE CASE OF A BANKING OR MONEY- LENDING'BUSINESS, MONEY IS TREATED AS STOCK- IN-TRADE: ARUNACHALAM CHETTIAR( RM. AR. AR. RM.) V. C/R[1936] 4 ITR 173 AT P. 183 (PC): ALTHOUGH.THE ASSESSEE DID SOME MONEY-LENDING BUSINE SS, THIS AMOUNT OF RS. 20,00,000 WAS NOT.LENT TO SAKSA'RI'A' 'COTTON MILLS LIMNED SIMPLY FOR THE PURPOSE OF EARNING INTEREST. UNDER CLAUSE 13 OF THE AGREEMENT, THE ASSESSEE COULD INST ALL NEW PLANT AND MACHINERY AND REMOVE THE SAME AFTER THE EXPIRY OF THE AGREEMENT. IF THE ASSE SSEE SO DESIRED, SAKSARIA COTTON MILLS LIMITED, AT ITS ABSOLUTE DISCRETION, COULD INSTALL NEW PLANT , MACHINERY AND EQUIPMENT OR UNIT 'ON SUCH TERMS AS MAY BE AGREED AT THAT TIME'. THERE IS NO FINDING OF THE TRIBUHAL AS TO WHETHER THE ASSESSEE REQUESTED SAKSARIA COTTON MILLS LIMITED TO INSTALL NEW PLANT, MACHINERY AND EQUIPMENT AND, IF SO, THE TERMS ON WHICH SAKSARIA COTTON MILLS LIMITED AG REED TO INSTALL NEW PLANT, MACHINERY, EQUIPMENT, ETC. THE FINDING OF THE TRIBUNAL IS THAT THE MONEY WAS GIVEN BY-WAY OF ADVANCE FOR THE SPECIFIC PURPOSE OF MODERNISATION OF THE COTTON MIL LS. THE ASSESSEE-COMPANY, IN ONE WAY OR ANOTHER, WAS RUNNING THE MILLS SINCE THE SCHEME WAS APPROVED BY THE BOMBAY HIGH COURT IN THE WINDING UP PROCEEDINGS OF SAKSARIA COTTON MILLS LIM ITED. EVEN BEFORE THIS -PARTICULAR AGREEMENT WAS ENTERED INTO, THE ASSESSEE WAS RUNNING THE MILL EITHER SINGLY OR IN PARTNERSHIP SINCE FEBRUARY 28, 1961. THE AGREEMENT THAT WAS ENTERED INTO FOR A PERIOD OF THREE YEARS WITH EFFECT FROM APRIL 1, 1963, TO MARCH 31, 1966, PROVIDED FOR INSTALLATION OF A NEW AND COMPLETE UNIT OR PLANT AND/OR MACHINERY AND/OR EQUIPMENT BY THE ASSESSEE AS LICEN SEE AT ITS OWN ' COST. IF THE ASSESSES ACTUALLY INSTALLED'NEW PLANT, MACHINERY, EQUIPMENT OR UNIT AT ITS OWN COST, THE EXPENDITURE WOULD HAVE BEEN OF CAPITAL NATURE. WHAT THE ASSESSEE DID WAS TO ADVANCE RS. 20,00,000 SO THAT NEW PLANT AND MACHINERY COULD BE BOUGHT BY SAKSARIA COT TON MILLS LIMITED FOR THE USE OF THE ASSESSEE DURING THE PERIOD OF THE AGREEMENT..-IN OTHER WORDS , THE ASSESSEE HAD THE ADVANTAGE OF USING A NEW AND MORE MODERN PROFIT-MAKING APPARATUS. THERE ARE CERTAIN FEATURES OF THE LOAN WHICH MUST A LSO BE NOTED. THE AMOUNT OF RS. 20,00,000 WAS NOT GIVEN BY WAY OF ANY ADVANCE PAYMENT AND WAS NOT TO BE ADJUSTED AGAINST ANY DUES PAYABLE BY THE ASSESSEE-COMPANY. IT WAS NOT A TRADE DEBT AT ALL. IF THE AMOUNT WAS RETURNED, IT WOULD NOT HAVE BEEN SHOWN IN THE PROFIT AND LOSS AC COUNT. FROM THE FINDING OF THE TRIBUNAL, IT APPEARS THAT IT WAS NOT A SIMPLE LOAN OF MONEY BY T HE ASSESSEE-COMPANY IN THE CAPACITY OF A MONEY-LENDER FOR THE PURPOSE OF EARNING INTEREST. T HE MONEY THAT WAS LENT WAS RIOT TREATED, BY THE COMPANY ITSELF ON REVENUE ACCOUNT. THE-AMOUNT W AS TREATED BY THE ASSESSEE ITSELF AS ON CAPITAL ACCOUNT AND THIS WAS EVIDENCED BY THE RESOL UTION PASSED BY THE BOARD OF DIRECTORS OF THE ASSESSEE-COMPANY AT THE TIME OF GRANTING OF LOAN. IT CANNOT BE DENIED FROM THE FINDINGS MADE BY THE T RIBUNAL THAT THE LOAN WAS GIVEN FOR THE PURPOSE OF THE BUSINESS. BUT THAT BY ITSELF IS NOT CONCLUSIVE. IT HAS TO BE SEEN WHETHER THE TRANSACTION WAS ON CAPITAL ACCOUNT OR ON REVENUE AC COUNT. IF THERE IS ANY LOSS ON CAPITAL ACCOUNT, THAT CANNOT BE ALLOWED AS BUSINESS LOSS. . , THERE IS A LINE OF CASES WHERE IT HAS BEEN HELD- TH AT ANY LOSS DIRECTLY CONNECTED WITH THE BUSINESS OPERATION AND INCIDENTAL TO THE CARRYING ON-OF THE BUSINESS OF AN ASSESSEE MUST BE ALLOWED AS BUSINESS LOSS. THIS LINE OF DECISIONS WAS REVIEWED BY THE SUPREME COURT IN THE CASE OF RAMCHANDAR SHIVNARAYAN V. CIT [1978] 111 ITR 263. IF MONEY IS EMBEZZLED BY EMPLOYEES OR IF MONEY KEPT BY BANK OR THE MONEY-LENDER AS STOCK-IN- TRADE IS STOLEN OR IF MONEY IS HANDLED IN THE COURSE OF BUSINESS AND IS LOST ON ANY ACCOUNT, SUCH LOSS MAY BE SHOWN ON REVENUE ACCOUNT. IN SUCH CASES, IT MAY NOT BE VERY RELEVANT TO FIND OUT WHETHER THE MONEY WAS BEING HELD AS STOCK-IN- TRADE OF THE COMPANY OR NOT. BUT IN THIS CASE MONEY HAS BEEN ADVANCED BY WAY OF TRANSFER OF CAPITAL AND IT HAS NOT BEEN POSSIBLE TO RECOVER THE LOAN. FOR CLAIMING AN IRRECOVERABLE LOAN AS BUSINESS LOSS, IT MUST BE ESTABLISHED THAT THE LOAN WAS NOT GIVEN ON CAPITAL ACCOUNT. THERE ARE SOME CASES WHERE DEDUCTION WAS ALLOWED WH ERE MONEY WAS LENT IN THE USUAL COURSE OF BUSINESS BY MANAGING AGENCIES TO MANAGED COMPANI ES. BUT THOSE CASES ARE OF NO RELEVANCE FOR THE PURPOSE OF THE INSTANT CASE. HERE, THE ASSE SSEE-COMPANY WAS: .NOT MANAGING SAKSARIA COTTON MILLS LIMITED. IT HAD MERELY TAKEN THE-MILLS OF THE COMPANY ON LEASE OR ON LEAVE AND ITA NO. 2077/AHD/2011 ASST. YEAR 2008-09 7 LICENCE AGREEMENT. THE RIGHT OF THE ASSESSEE-COMPAN Y WAS TO USE THE COTTON MILLS. THE ASSESSEE-COMPANY DID NOT HAVE ANY OTHER INTEREST IN THE MANAGEMENT OF SAKSARIA COTTON MILLS LIMITED. IF THE ASSESSEE DID NOT WANT SAKSARIA COTT ON MILLS LIMITED TO MODERNISE ITS PLANT AND MACHINERY, NO QUESTION WOULD HAVE ARISEN OF ANY LOA N BEING ADVANCED. THE MODERNISATION TOOK PLACE AT THE BEHEST OF THE ASSESSEE SO THAT THE ASS ESSEE COULD HAVE USE OF BETTER PLANT AND MACHINERY. IN VIEW, OF THE AFORESAID FACTS AND CIRCUMSTANCES A ND ESPECIALLY IN VIEW OF THE RESOLUTION PASSED BY THE BOARD OF DIRECTORS OF THE ASSESSEE-COMPANY A T THE TIME OF GRANTING THE LOAN TO TREAT THE LOAN AS ON CAPITAL ACCOUNT, IN MY JUDGMENT, THE TRI BUNAL WAS ENTITLED TO COME TO THE CONCLUSION THAT THE LOAN THAT WAS GIVEN WAS ON CAPITAL ACCOUNT AND COULD NOT BE ALLOWED AS DEDUCTION IN COMPUTING THE ASSESSEE'S CGRR.RF.ERCIAL PROFIT. . THE QUESTION IS, THEREFORE, ANSWERED IN THE AFFIRMA TIVE AND IN FAVOUR OF THE REVENUE. THERE WILL BE NO ORDER AS TO COSTS. SATISH CHANDRA C.J. I AGREE. IN VIEW OF RETIREMENT OF SATISH CNANDRA C. J., THIS JUDGMENT MAY BE FILED AS THE JUDGMENT OF THE DIVISION BENCH ON THE BASIS OF THE PRINCIPLE EMBODI ED IN RULE 3 OF CHAPTER XVI OF THE ORIGINAL SIDE RULES.' 3.4. IT MAY BE MENTIONED THAT THE DECISION OF KOLKA TA HIGH COURT WAS CONFIRMED .BY HONOURABLE .SUPREME COURT, IT WOULD B E ALSO RELEVANT.TO REPRODUCE .THE HEAD NOTES FROM THE JUDGMENT OF THE HONOURABLE APEX COURT AS UNDER: [I998] 98 TAXMAN 352 (SC) SUPREME COURT OF INDIA HASIMARA INDUSTRIES LTD. V. COMMISSIONER OF INCOME-TAX MRS. SUJATA V. MANOHAR AND S. RAJENDRA BABU, JJ. CIVIL APPEAL NO. 4766 OF I989 MAY 13, 1998 SECTION 28(I) OF THE INCOME-TAX ACT, 1961 -BUSINESS LOSS - ALLOWABILITY OF- ASSESSEE-COMPANY IN BUSINESS OF MANUFACTURE AND SALE OF TEA ACQUIRED OP ERATING RIGHTS OF A COTTON MIH UNDER LEAVE AND . LICENCE AGREEMENT AND ADVANCED RS. 20 LAKH S FOR ITS MODERNISATION - THIS WAS CLAIMED AS BUSINESS LOSS WHEN IT BECOME IRRECOVERABLE - WHETHE R SINCE ASSESSEE ITSELF TREATED IT AS CAPITAL ADVANCE FOR PURPOSE OF ACQUIRING A NEW AND MODERN P ROFIT-MAKING APPARATUS AND NOT AS LOAN OR MONEY-LENDING TRANSACTION, LOSS SUFFERED HAD TO BE TREATED AS CAPITAL LOSS - HELD, YES FACTS THE ASSESSEE-COMPANY, ENGAGED IN BUSINESS OF MANUFACT URE AND SALE OF TEA, ENTERED INTO A LEAVE AND LICENCE AGREEMENT WITH COTTON MILL 'S' WHICH W AS UNDER LIQUIDATION. THE ASSESSEE- COMPANY PAID AN ADVANCE OF RS. 20 LAKHS TO 'S' FOR MO DERNISATION OF ITS MACHINERY. AFTER EXPIRY OF THE PERIOD OF-AGREEMENT AS 'S' WAS UNABLE TO REPAY THE. ADVANCE AND THE ADVANCE BECAME IRRECOVERABLE, THE ASSESSEE-COMPANY CLAIMED THE AMOUNT AS BUSINESS LOSS. THE ASSESSING OFFICER DISALLOWED THE CLAIM. ON APPEAL, THE AA C REVERSED- THE ORDER OF THE ASSESSING OFFICER AND ALLOWED THE CLAIM AS REVENUE EXPE NDITURE. ON THE REVENUE'S APPEAL, THE TRIBUNAL DISALLOWED THE CLAIM HOLDING THE AMOUNT AS C APITAL LOSS. ON REFERENCE, THE HIGH COURT AFFIRMED THE FINDINGS OF THE TRIBUNAL. ON APPEAL TO SUPREME COURT: ITA NO. 2077/AHD/2011 ASST. YEAR 2008-09 8 HELD IT WAS CLEAR FROM THE FINDINGS RECORDED BY THE TRIB UNAL AND THE HIGH COURT THAT THE ASSESSEE'S BUSINESS WAS MANUFACTURE AND SALE OF TEA AND WAS NO T ENGAGED IN COTTON MANUFACTURING BUSINESS AT ALL; THAT WHILE IT .INTENDED TO ENTER I NTO COTTON MANUFACTURING PURPOSES, DID NOT SET UP A COTTON MILL, BUT OBTAINED OPERATING RIGHTS FROM A NOTHER COMPAY UNDER THE LEAVE AND LICENCE AGREEMENT FOR THE PURPOSE OF ACQUIRING THE PROFIT-M AKING APPARATUS FOR A DURATION OF THREE YEARS OR A LITTLE MORE; THAT THE BUSINESS OF RUNNING A CO TTON MILL WAS NOT ITS OWN,- BUT WAS ONLY OPERATING THE SAID MILL UNDER LEAVE AND LICENCE AGREEMENT; TH AT THE AMOUNT OF ADVANCE IN A SUM OF RS. 20 LAKHS WAS GIVEN NOT FOR ITS OWN PURPOSE BY WAY OF B USINESS EXPENDITURE FOR MODERNISING THE MILL, BUT AS CAPITAL TO THE LESSOR WHO IN-TURN HAD TO MOD ERNISE THE MILL. IN THE RESOLUTIONS MADE BY THE BOARD OF DIRECTORS, IT WAS CLEAR THAT THE TRANSACTI ON ENTERED INTO WAS NOT IN THE NATURE OF A LOAN TRANSACTION OR A MONEY LENDING TRANSACTION AND, THU S, THE LOSS SUFFERED BY THE ASSESSEE WAS A CAPITAL LOSS AND, HENCE, THE AMOUNT COULD NOT BE DE DUCTED FROM THE ASSESSEE'S INCOME AS BUSINESS LOSS. THE APPEAL WAS, THEREFORE,- DISMISSE D.' 3.5. FROM.'THE ABOVE DECISION, .IT IS CLEAR THAT IF THE AMOUNT HAS BEEN ADVANCED BY AN ASSESSEE FOR ACQUISITION OF A CAPITA L ASSET THEN THE WRITE OFF OF THAT AMOUNT IS NOT AN 'ALLOWABLE EXPENDITURE UND ER SECTION 36 OR 28 OR 29 OF THE INCOME' TAX ACT SINCE THE LOSS IS A CAPITAL LOSS. WHEREAS, THE JUDGMENTS CITED BY THE AR OF THE APPELLANT, CLEARLY SAYS THAT IF THE ADVANCES HAS BEEN GIVEN FOR THE PURPOSE OF ITS BUSINESS AND NOT FOR ACQUIRING ANY CAPITAL ASSET,, THEN THE WRITE OFF OF SUCH ADVANCES ARE ALLOWABLE UNDER SECTION 28 OR 29 OF THE INCOME TAX ACT. IN VIEW OF THIS BRO AD PRINCIPLE, IT IS CLEAR THAT IF THE LOANS AND ADVANCES HAVE BEEN GIVEN BY T HE APPELLANT INCURRED FOR SETTING UP OF A PLANT WHICH DID NOT MATERIALISE, IN VIEW OF THE HONOURABLE JURISDICTIONAL HIGH COURT DECISION AND T HE DECISION OF HONOURABLE SUPREME COURT AS MENTIONED ABOVE, THE EX PENDITURE OF RS. 3,25,200/- IS TREATED AS CAPITAL EXPENDITURE AND NO T ALLOWABLE DEDUCTION EITHER UNDER SECTION 28, 29 OR 36 OF THE INCOME TAX ACT. 3.7. AS REGARDS THE WRITE OFF OF RS. 11,39,020/- FR OM R.P. CONSTRUCTION THE DETAILED ACCOUNT OF THE PARTY HAS BEEN REPRODUCED A S ABOVE. A JOB WORK ORDER WAS PLACED WITH THIS PARTY WITH MATERIAL AND AGAINST THE ORDER THE COMPANY HAD GIVEN ADVANCES TO THE PARTY AND ALSO SU PPLIED THE MATERIAL. THE PARTY COULD NOT COMPETE THE WORK IN TIME WHICH WAS GOT COMPLETED FROM ANOTHER PARTY AND THE CHARGES WERE DEBITED TO THE P ARTY ACCOUNT THAT IS R.P. CONSTRUCTION. HOWEVER PARTY IS SQUANDERED FROM- THE SITE BY LEAVING BEHIND THE LABOURS AND COULD NOT BE AGAIN CONTACTED. SINCE THE PERMANENT ADDRESS OF THE-PARTY WAS CHANGED THE COMPANY COULD NOT FILE TH E SUIT FOR RECOVERY OF- MATERIAL AND TO SEARCH FROM ALL OVER THE COUNTRY IT WAS QUITE IMPOSSIBLE. HENCE THE AMOUNT HAS BEEN WRITTEN OFF AND DEBITED T O THE PROFIT AND LOSS ACCOUNT. SIMILARLY IN RESPECT OF THE WRITE OFF OF T HE AMOUNT OF RS.23,13,118/- ITA NO. 2077/AHD/2011 ASST. YEAR 2008-09 9 FROM SANGAM CONSTRUCTIONS IT WAS STATED THAT THE JO B WORK WAS PLACED TO THIS PARTY WITH MATERIAL AND AGAINST THIS ORDER THE APPE LLANT COMPANY HAD GIVEN ADVANCE TO THIS PARTY AND ALSO SUPPLIED THE MATERIA L. THE PARTY COULD NOT COMPETE THE WORK IN TIME WHICH 'WAS GOT COMPLETED F ROM ANOTHER- PARTY AND THE CHARGES WERE DEBITED TO THE PARTY ACCOUNT. HOWE VER THIS PARTY ALSO ABSCONDED FROM THE SITE BY LEAVING BEHIND THE LABOU RS AND COULD NOT BE CONTACTED AGAIN BY THE APPELLANT. THEREFORE THE BAL ANCE AMOUNT WAS WRITTEN OFF AND DEBITED TO THE PROFIT AND LOSS ACCOUNT OF T HE APPELLANT. IN BOTH THE CASES SINCE THE AMOUNTS WERE WRITTEN OFF BY THE APP ELLANT FROM THE PARTIES TO WHOM THE APPELLANT HAS GIVEN JOB WORK AND THESE PAR TIES EITHER COULD NOT COMPLETE THE JOB WORK OR DID NOT ISSUE THE BILL OF THE COMPLETED JOB WORK BY THEM OR BOTH. IN MY OPINION, THE ADVANCES HAS BEEN GIVEN BY THE APPELLANT FOR THE PURPOSE OF ITS BUSINESS AND THEREFORE THE W RITE OFF OF SUCH AMOUNTS IS AN ALLOWABLE EXPENDITURE UNDER SECTION 28/29 OF THE INCOME TAX ACT AS HELD BY VARIOUS HIGH COURTS AS MENTIONED ABOVE. 3.8. AS REGARDS THE WRITE OFF OF OTHER AMOUNTS BELO W RS. 1 LAKH, THE SAME ARE BEING ALLOWED AS DEDUCTION BECAUSE THE ADVANCES WER E NOT MADE FOR ACQUIRING A CAPITAL ASSET AND ALL SUCH ADVANCES/EXP ENSES HAVE BEEN INCURRED BY THE APPELLANT FOR THE PURPOSE OF ITS BUSINESS. F URTHER IT IS ALSO SEEN THAT MANY CREDIT .ENTRIES ARE ALSO SHOWN BY THE [APPELLA NT HAS ITS INCOME IN THE SAME ACCOUNT. 4. IN SHORT, OUT OF THE ADDITION OF RS. 45,74,134/- MADE BY THE AO, THE ADDITION OF RS.3,25,200/- ONLY IS SUSTAINED. IN OTH ER WORDS, THE APPEAL OF THE APPELLANT IS PARTLY ALLOWED. 4. AGGRIEVED, REVENUE IS NOW IN APPEAL BEFORE THE T RIBUNAL. 5. LD. DR SUPPORTED THE ORDER OF ASSESSING OFFICER. 6. ON THE OTHER HAND, LD. AR SUBMITTED THAT THE ASS ESSEE COMPANY WHICH IS IN THE BUSINESS OF MANUFACTURING T RANSMISSION TOWERS, INFRASTRUCTURE AND REAL ESTATE HAS DECLARED TOTAL INCOME AT RS.144.81 CRORES. NO MISTAKE HAS BEEN POINTED OUT I N THE AUDITED ITA NO. 2077/AHD/2011 ASST. YEAR 2008-09 10 FINANCIAL STATEMENTS AND BOOKS OF ACCOUNT AND THE O NLY ADDITION MADE BY LD. ASSESSING OFFICER IS THE DISALLOWANCE O F BALANCES WRITTEN OFF OF RS.45,74,134/-. LD. AR FURTHER SUBMITTED THA T ALL THE NECESSARY DETAILS WERE PLACED BEFORE THE ASSESSING OFFICER IN SUPPORT OF THE CLAIM THAT ADVANCES GIVEN WERE TO THE PARTIES WITH WHOM REGULAR BUSINESS TRANSACTIONS WERE BEING CARRIED OUT AND TH EY WERE MOSTLY CONTRACTORS AND AFTER MAKING NECESSARY EFFORTS ALSO THESE DEBIT BALANCES WERE IMPOSSIBLE TO BE RECOVERED AND THE SA ME WERE WRITTEN OFF. AS FAR AS THE WRITE OFF OF BALANCES RELATING T O DEPB OF RS.7,45,138/- AND EXPORT BENEFIT (DEPB) OF RS.1,49, 833/- THAT THESE TWO AMOUNTS WERE SHOWN AS INCOME IN THE EARLIER YEA RS AND WHEN IT CAME TO THE NOTICE OF ASSESSEE THESE CLAIMS ARE NOT RECOVERABLE, THE SAME HAVE BEEN CLAIMED AS EXPENDITURE AND THE SAME ARE PURELY OF BUSINESS IN NATURE. LD. AR PLACED RELIANCE ON THE J UDGMENT OF HON. JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. AB DUL RAZAK & CO. 136 ITR 825 (GUJ). 7. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. THE SOLITARY GRIEVANCE OF THE REVENUE IS AGAINST THE ACTION OF LD. CIT(A) IN DELETING THE ADDITION OF RS.42,48, 934/- OUT OF RS.45,74,134/-, HOLDING IT AS A BUSINESS LOSS INSTE AD OF CAPITAL LOSS. WE OBSERVE THAT ASSESSEE HAS CLAIMED RS.45,74,134,/ - AS BALANCES WRITTEN OFF FOR EXPENSES WHICH COMPRISES OF DEBIT B ALANCES OF RS, 52,06,169/- AND CREDIT BALANCE OF RS.6,32,035/- NET EFFECT OF THE SAME COMES TO RS.45,74,134/-. IN THE LIST OF DEBIT BALAN CE WRITTEN OFF MOST OF THE BALANCES WERE BELOW RS.1 LACS IN RESPECT OF VARIOUS PARTIES TOTALS TO RS.3,61,448/- WHICH HAVE BEEN CONFIRMED B Y LD. CIT(A) AS ITA NO. 2077/AHD/2011 ASST. YEAR 2008-09 11 BUSINESS EXPENDITURE. WE ALSO FIND THAT REVENUE HAS BEEN UNABLE TO CONTROVERT THE CLAIM OF ASSESSEE FOR WRITING OFF O F THE BALANCES OF THESE PARTIES. ACCORDINGLY, WE CONFIRM THE ACTION O F LD. CIT(A) RELATING TO THIS DELETION OF DISALLOWANCE OF RS.3,61,448/-. RELATING TO PETTY ADVANCES. 8. FURTHER WE OBSERVE THAT MAIN DEBIT BALANCES WHIC H ARE THE SUBJECT MATTER OF DISPUTE BEFORE US RELATES TO FOLL OWING :- 1. EXPORT BENEFIT (DEPB) 149833 + 745138 2. ESBEE ELECTRICALS 172402 3. PARIKAJ SINGH 325200 4. R.P.CONSTRUCTION 1139020 5. SANGAM CONSTRUCTIONS 2313118 9. WE OBSERVE THAT EXCEPT THE DEBIT BALANCES WRITTE N OFF RELATING TO EXPORT BENEFIT (DEPB) OF RS.8,94,971/-, THE REMAINI NG AMOUNTS RELATE TO ADVANCES GIVEN TO CONTRACTORS FOR MATERIAL AND L ABOUR. FURTHER WE ALSO OBSERVE THAT LD. ASSESSING OFFICER HAS MADE TH E IMPUGNED DISALLOWANCE BY TREATING THE ADVANCES GIVEN AS CAPI TAL LOSS. LD. AR HAS REFERRED AND RELIED ON THE JUDGMENT OF HON. JUR ISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. ABDUL RAZAK & CO. 136 ITR 825 (GUJ) WHEREIN THE HON. HIGH COURT HAS OBSERVED AS UNDER : - 7. IN VIEW OF THESE WELL ACCEPTED LEGAL PRINCIPLES, IN OUR OPINION, BY NECESSARY IMPLICATION, EITHER SHORT-TERM OR LONG-TERM FINANCING IS AN INTE GRAL PART OF THE COMMISSION AGENCY BUSINESS. AS A COMMISSION AGENT, ONE EITHER BUYS TH E GOODS OR SELLS THE GOODS FOR ONE'S PRINCIPAL. WHEN HE ACTS AS A COMMISSION AGENT FOR S ALES OF GOODS, HE PURCHASES THE GOODS ITA NO. 2077/AHD/2011 ASST. YEAR 2008-09 12 FOR SUPPLY TO HIS PRINCIPAL FROM HIS FUNDS AND THEN HE IS REIMBURSED BY HIS PRINCIPAL ON SUPPLY OF SUCH GOODS. A COMMISSION AGENT, THEREFORE , HAS GOT TO ADVANCE AMOUNTS FROM TIME TO TIME ACCORDING TO THE NATURE OF HIS BUSINES S. IT MAY BE A SHORT-TERM ADVANCE IF HE IS A COMMISSION AGENT FOR PURCHASE OF GOODS OR IT M AY BE A LONG-TERM ADVANCE IF IT IS FOR SALE OF GOODS. WE HAVE, THEREFORE, NOT BEEN ABLE TO APPRECIATE AS TO HOW THE TRIBUNAL APPROACHED THE PROBLEM AS IF THE FINANCIAL LENDING WHICH IS INVOLVED IN THE BUSINESS OF COMMISSION AGENCY IS A SEPERATE AND EXCLUSIVE BUSIN ESS AND NOT AN INTEGRAL PART OF THE COMMISSION AGENCY BUSINESS. IT IS AN ADMITTED POSIT ION HERE BEFORE US THAT THE ASSESSEE- FIRM WAS DOING THE BUSINESS AS COMMISSION AGENTS AN D DEALERS IN GROCERY ARTICLES. IT IS ALSO AN ADMITTED POSITION THAT M/S. MOHMAD PEER MOH MAD OF NASIK ENGAGED THE ASSESSEE-FIRM AS COMMISSION AGENTS FOR PURPOSES OF PURCHASE OF GOODS. THE ONE SET OF ACCOUNT IN THE TRADING BOOKS OF THE ASSESSEE-FIRM C OMPRISES OF THIS COMMISSION AGENCY BUSINESS FOR PURCHASE OF THE GOODS CARRIED ON BY TH E ASSESSEE-FIRM KNOWN AS 'SARAFI ACCOUNT'. IT IS, HOWEVER, IN OUT OPINION, THE INTER FERENCE OF THE TRIBUNAL FROM THESE TWO SETS OF ACCOUNTS OF M/S. MOHMAD PEER MOHMAD OF NASI K THAT THESE WERE TWO DIFFERENT BUSINESSES, WHICH IS NOT JUSTIFIED. IT IS NO DOUBT TRUE THAT IN THE PRESENT CASE BEFORE US THE BAD DEBT WHICH HAS BEEN CLAIMED BY THE ASSESSEE-FIR M WAS IN RESPECT OF ADVANCE MADE TO THE PRINCIPAL, M/S. GOKALDAS VIRJIBHAI OF SANGLI WI TH WHOM THE SAID PRINCIPAL HAD INDEPENDENT DEALINGS. IT IS ALSO AN ADMITTED POSITI ON THAT THE TRADING ACCOUNT OF M/S. MOHMAD PEER MOHMAD OF NASIK IN THE BOOKS OF THE ASS ESSEE-FIRM WAS SETTLED AND THERE WAS NO OUTSTANDING WHICH HAD BEEN CARRIED TO THE SA RAFI ACCOUNT OF THE SAID PARTY. THESE FACTS, HOWEVER, IN OUR OPINION, ARE NOT SUFFICIENT TO NECESSARILY REACH THE CONCLUSION AS HAS BEEN DONE BY THE TRIBUNAL THAT THE LENDING WAS NOT A PART OF THE GENERAL COMMISSION AGENCY BUSINESS. THE GENERAL LIEN GRANTED, INTER AL IA, TO THE FACTORS WHO ARE THE COMMISSION AGENTS FOR SALE OF GOODS UNDER S. 171 AN D OF AGENTS UNDER S. 221 OF THE INDIAN CONTRACT ACT EXTENDS TO THE GENERAL BALANCE OF ACCO UNT OF THEIR PRINCIPAL WHICH WOULD, THEREFORE, NECESSARILY INCLUDE THE ADVANCES MADE AP ART FROM STRICTLY IN THE COURSE OF THE BUSINESS AS FACTORS OR COMMISSION AGENTS FOR PURCHA SE AND SUPPLY OF GOODS. IT IS A MATTER OF SURPRISE HOW THE TRIBUNAL LOST SIGHT OF THE FIND ING MADE BY THE ITO THAT IN THE COURSE OF THE BUSINESS OF COMMISSION AGENCY, THE ASSESSEE- FIRM HAD ADVANCED MONEY TO THE CONSTITUENTS WHO WHERE REQUIRED TO PAY INTEREST ON SUCH ADVANCES. IT IS NO DOUBT TRUE THAT THE ITO HAS FOUND THAT THESE ADVANCES WERE MADE TO THE CONSTITUENTS AGAINST THE GOODS RECEIVED FROM THEM FOR SALE ON COMMISSION BASIS, BU T THAT OBSERVATION OF THE ITO, IN OUR OPINION, DOES NOT DETRACT FROM THE NATURE OF THE BU SINESS OF COMMISSION AGENTS, WHETHER FOR SALE OR PURCHASE OF THE GOODS, WHICH, IN OUR OP INION, NECESSARILY REQUIRES THE ADVANCES TO BE MADE. WE SHOULD NOT BE, HOWEVER, UNDERSTOOD T O SUBSCRIBE TO THE VIEW THAT IF IN A GIVEN CASE A TRADER DOING COMMISSION AGENCY BUSINES S MAKES ADVANCES OR LENDS MONEY TO AN UNKNOWN OUTSIDER OR TO A COMPLETE STRANGER, IT W OULD BE A PART OF HIS COMMISSION AGENCY BUSINESS. IN THE PRESENT CASE, HOWEVER, THE ITO HAS NOT ONLY FOUND THAT THE ASSESSEE-FIRM WAS MAKING SUCH ADVANCES IN THE COURS E OF COMMISSION AGENCY BUSINESS BUT THE ITO, RAJKOT, HAS ALSO RECORDED THE STATEMEN T OF ONE OF THE PARTNERS OF THE ASSESSEE-FIRM WHERE SHRI AHMED IBRAHIM SAHIGRA STAT ED, INTER ALIA, THAT THE FIRM WAS CARRYING ON MONEY-LENDING BUSINESS AT BOMBAY AND NO LICENCE WAS NECESSARY FOR SUCH BUSINESS AND THE TRANSACTIONS WERE RECORDED IN THE COMMON TRADING BOOKS OF ACCOUNT OF THE FIRM. IN ANSWER TO QUESTION NO. 10 HE STATED TH AT M/S. MOHMAD PEER MOHMAD OF NASIK APPROACHED THEM FOR LOAN AND REQUESTED THEM T O SEND MONEY ON THEIR BEHALF TO M/S. GOKALDAS VIRJIBHAI OF SANGLI FROM WHOM M/S. MO HMAD PEER MOHMAD OF NASIK HAD PURCHASED THE GOODS WERE NOT PREPARED TO WAIT FOR T HEIR DUES AND AS THE LATTER ENJOYED BETTER CREDIT FACILITY WITH THE ASSESSEE-FIRM THEY APPROACHED THEM FOR PAYING OFF THE DUES TO THE SANGLI PARTY. IN ANSWER TO QUESTION NO. 17 A S TO WHEN THEY POST ENTRIES FOR INTEREST IN THE BOOKS, THE DEPONENT STATED THAT IN THE ACCOU NTS OF THEIR CONSTITUENTS THEY MAKE ITA NO. 2077/AHD/2011 ASST. YEAR 2008-09 13 ENTRIES AT THE END OF THE ACCOUNTING PERIOD WHILE I N THE CASE OF OTHER ADVANCES, THE ENTRIES ARE MADE WHEN THE INTERESTS AMOUNTS ARE RECEIVED. A DMITTEDLY, M/S. MOHMAD PEER MOHMAD OF NASIK WAS THE CONSTITUENT OF THE ASSESSEE -FIRM. THE ITO, NASIK, HAS ALSO RECORDED THE STATEMENT OF ONE OF THE PARTNER OF THI S DEBTOR-FIRM, WHERE THE DEPONENT- PARTNER HAS STATED THAT THEIR FIRM OF M/S. MOHMAD P EER MOHMAD OF NASIK HAD TRADING RELATIONS WITH THE ASSESSEE-FIRM FOR MORE THAN 30 Y EARS, AND THEY ENJOYED GREATER CREDIT FACILITY WITH THEM WHICH WAS NOT AVAILABLE FROM M/S . GOKALDAS VIRJIBHAI OF SANGLI. THE TRIBUNAL HAS OVERLOOKED THESE STATEMENTS OF THE ASS ESSEE AND THE DEBTOR-FIRM WHERE IT HAS BEEN CLEARLY STATED THAT THESE ADVANCES WERE ASKED FOR AND MADE IN FACT HAVING REGARD TO THE COMMERCIAL RELATIONS WERE ADMITTEDLY OF PRINCIP AL AND COMMISSION AGENTS. IN OUR OPINION, THEREFORE, THE TRIBUNAL WAS NOT JUSTIFIED ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE TO HOLD THAT THE ADVANCE TO M/S. MOHMAD PE ER MOHMAD OF NASIK WAS NOT IN THE ORDINARY COURSE OF BUSINESS OF THE ASSESSEE-FIRM AN D MERELY INCIDENTAL TO IT. AS HELD BY THIS COURT IN CIT V. EQUITORIAL PVT. LTD. [1974] TA XATION 37(S)-82, THE DEBT OWED BY M/S. MOHMAD PEER MOHMAD OF NASIK WAS ONE WHICH SPRANG DI RECTLY FROM THE BUSINESS OF THE ASSESSEE AND WAS ALLOWABLE AS A BAD DEBT, AND, CONS EQUENTLY, THEREFORE, A TRADING LOSS UNDER SECTION 28(1). IT IS NO DOUBT TRUE THAT EVERY LOSS IS NOT SO DEDUCTIBLE UNLESS IT IS INCURRED IN CARRYING OUT THE OPERATION OF THE BUSIN ESS, [VIDE CIT V. NAINITAL BANK LTD. [1965] 55 ITR 707 (SC)]. IN THAT VIEW OF THE MATTER , THEREFORE, FOR THE REASONS STATED IN THIS ORDER, WE ARE OF THE OPINION THAT THE SAID LOS S BEING A BAD DEBT IS ALLOWABLE AS TRADING LOSS UNDER S. 28 OF THE I.T. ACT, 1961, AND, THEREF ORE, FOR THE REASONS STATED HEREINABOVE, THE ANSWER TO THE QUESTION REFERRED TO US IS IN THE AFFIRMATIVE, THAT IS, IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. 8 THE QUESTION REFERRED TO US AT THE BEHEST OF THE ASSESSEE, THEREFORE, NEED NOT TO BE ANSWERED AS CONCEDED BY THE LEARNED ADVOCATE FOR TH E ASSESSEE. 9. THE RESULT IS THAT THE QUESTION REFERRED TO US A T THE INSTANCE OF THE REVENUE IS ANSWERED IN THE AFFIRMATIVE, THAT IS, AGAINST THE REVENUE AND I N FAVOUR OF THE ASSESSEE, WHILE THE QUESTION REFERRED TO US AT THE BEHEST OF THE ASSESS EE DOES NOT SURVIVE AND, THEREFORE, DOES NOT REQUIRE TO BE ANSWERED. THE COMMISSIONER SHALL PAY THE COSTS OF THIS REFERENCE TO THE ASSESSEE 10. NOW WE PROCEED AHEAD BY EXAMINING THE IMPUGNED BALANCE IN THE LIGHT OF THE JUDGMENT OF HON. JURISDICITIONAL H IGH COURT IN THE ABOVE REFERRED CASE. 11. AS FAR AS WRITE OFF OF EXPORT BENEFIT (DEPB) OF RS. 8,94,971/- WE OBSERVE THAT LD. CIT(A) HAS GIVEN SPECIFIC FINDING THAT HE HAS VERIFIED THE BOOKS OF ACCOUNT OF ASSESSEE AND HAS FOUND THAT THE EXPORT BENEFIT (DEPB) HAS BEEN SHOWN BY THE ASSESSEE AS AN INCOME IN THE ITA NO. 2077/AHD/2011 ASST. YEAR 2008-09 14 EARLIER YEARS/THIS YEAR. WE FURTHER OBSERVE THAT TH E REASON GIVEN BY ASSESSEE FOR WRITE OFF OF THIS EXPENDITURE WAS THAT THE AMOUNT OF EXPORT BENEFIT WAS CALCULATED AT ITS LEVEL AND INCO ME OF RS.8,94,971/- WAS BOOKED AND THE SAME WAS SHOWN RECEIVABLE FROM T HE GOVERNMENT DEPARTMENT BUT THEREAFTER ON ACCOUNT OF RECALCULATION IT WAS FOUND THAT THIS IMPUGNED AMOUNT OF RS.8,94,971/ - HAS BEEN BOOKED EXCESSIVELY AS INCOME AND WHICH IS NOT RECEI VABLE AND THE SAME WAS TRANSFERRED TO BALANCE WRITTEN OFF ACCOUNT . ON GOING THROUGH THESE FACTS, WE ARE OF THE VIEW THAT ASSESS EE HAS RIGHTLY CLAIMED RS.8,94,971/- AS BUSINESS EXPENDITURE. 12. NOW MOVING AHEAD TO EXAMINE THE BALANCE WRITE O FF OF RS.172402/- OF ESBEE ELECTRICALS, RS. 1139020/- OF R.P. CONSTRUCTION AND RS.2313118/- OF SANGAM CONSTRUCTION, ON PERUSAL OF RECORDS RELATING TO LEDGER ACCOUNT OF THESE THREE PARTIES, WE FIND THAT THERE HAVE BEEN REGULAR BUSINESS TRANSACTIONS IN THE FORM OF PAYMENT THROUGH BANK AND BY CASH TOWARDS SUPPLY OF MATERIAL AND LABOUR, FREE SUPPLY OF GOODS TO THE CONTRACTORS FOR JOB WORK PUR POSES, INCOME-TAX HAS BEEN DEDUCTED AT SOURCE ON REGULAR JOB WORKS B ILLS. WE OBSERVE THAT THERE HAVE BEEN CONTINUOUS BUSINESS TRANSACTIO NS WITH A BONA FIDE BELIEF OF CONSISTENCY OF BUSINESS RELATION WIT H THESE THREE PARTIES. HOWEVER, AT ONE POINT OF TIME WHEN THESE THREE PAR TIES WERE NOT TRACEABLE EVEN AFTER NECESSARY EFFORTS LAST RESORT LEFT WITH THE ASSESSEE WAS TO TRANSFER THESE IRRECOVERABLE AMOUNT S AS BUSINESS LOSS. WE, THEREFORE, ARE OF THE VIEW THAT THESE ADV ANCES OF RS.36,24,540/- (RS.172402 + RS.1139020/- + RS.23131 18/-) BEING ITA NO. 2077/AHD/2011 ASST. YEAR 2008-09 15 IRRECOVERABLE BUSINESS ADVANCES HAVE BEEN RIGHTLY C LAIMED AS BUSINESS EXPENDITURE BY THE ASSESSEE. WE FIND NO RE ASON TO INTERFERE WITH THE ORDER OF LD. CIT(A). WE UPHOLD THE SAME. A CCORDINGLY, THE APPEAL OF REVENUE IS DISMISSED. 13. OTHER GROUND IS OF GENERAL IN NATURE, WHICH NEE DS NO ADJUDICATION. 14. IN THE RESULT, APPEAL OF REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 1 ST AUGUST, 2016 SD/- SD/- (R. P. TOLANI) JUDICIAL MEMBER (MANISH BORAD) ACCOUNTANT MEMBER DATED 1/8/2016 MAHATA/- COPY OF THE ORDER FORWARDED TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE CIT(A) CONCERNED 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE BY ORDER ASST. REGISTRAR, ITAT, AHMEDABAD ITA NO. 2077/AHD/2011 ASST. YEAR 2008-09 16 1. DATE OF DICTATION: 01/08/2016 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE T HE DICTATING MEMBER: 01/08/2016 OTHER MEMBER: 3. DATE ON WHICH APPROVED DRAFT COMES TO THE SR. P. S./P.S.: 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE TH E DICTATING MEMBER FOR PRONOUNCEMENT: __________ 5. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE S R. P.S./P.S.: 6. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK: 1/8/2016 7. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK: 8. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER: 9. DATE OF DESPATCH OF THE ORDER: