OLENEK INVESTMENTS PVT. LTD., MUMBAI V. I.T.O. WD.7(1)(2), MUMBAI

ITA 2572/MUM/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 59728 (ITAT-MUMBAI)
• Duration Of Justice: 9 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-01-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2001-2002
• Appeal Filed On: 01-04-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: N K MEHTA
• Assessee Lawyers: NEETIN M SHAH
• Keywords: Bad and doubtful debts
• Section: 56

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH: MUMBAI BEFORE SHRI R.S. SYAL, ACCOUNTANT MEMBER AND SHRI R.S. PADVEKAR, JUDICIAL MEMBER ITA NO.2572/MUM /2011 (ASSESSMENT YEAR: 2001-02) OLENEK INVESTMENTS PVT. LTD., 212/216, 1ST FLOOR, DCOR HOUSE, SHERIFF DEVJI STREET, MUMBAI -400 003 .... APPELLANT VS INCOME-TAX OFFICER WARD-7(1)(2), AAYAKAR BHAVAN, MUMBAI .. RESPONDENT PAN: AAACO 0774 G APPELLANT BY: SHRI NEETIN M. SHAH RESPONDENT BY: SHRI N.K. MEHTA DATE OF HEARING: 25.01.2012 DATE OF PRONOUNCEMENT: 31.01.2012 O R D E R PER R.S. PADVEKAR, JM IN THIS APPEAL THE ASSESSEE HAS CHALLENGED THE IMPU GNED ORDER OF THE LD. CIT (A)-13, MUMBAI DATED 13.11.2010 FOR THE A.Y. 2001-02 CONFIRMING THE PENALTY LEVIED BY THE A.O. U/S.271(1 )(C) OF THE ACT. THE ASSESSEE HAS TAKEN MULTIPLE GROUNDS BUT THE ISSUE F OR OUR CONSIDERATION IS WHETHER THE CIT (A) WAS JUSTIFIED IN CONFIRMING THE PENALTY LEVIED BY THE A.O. U/S.271(1)(C) OF THE ACT . 2. THE FACTS PERTAINING TO THE ISSUE ARE AS UNDER. THE ASSESSEE FILED THE RETURN OF INCOME FOR THE A.Y. 2001-02 DEC LARING TOTAL INCOME AT NIL ON 18.10.2001. THE RETURN WAS INITIALLY A CCEPTED AND THERE WAS NO REGULAR ASSESSMENT U/S.143(3). BUT SUBSEQUEN TLY THE A.O. ISSUED NOTICE U/S.148 AND ASSESSMENT WAS COMPLETED BY DETERMINING THE TOTAL INCOME AT ` 3,37,543/-. THE MAJOR ADDITION WAS IN RESPECT OF ITA 2572/MUM/2011 OLENEK INVESTMENTS PVT. LTD. 2 THE DISALLOWANCE OF INTEREST OF BADLA PROFIT. IT WAS NOTICED BY THE A.O. THAT THE ASSESSEE COMPANY WAS NOT IN THE BUSINESS O F MONEY LENDING. THE ASSESSEE HAS CLAIMED THE WRITE OFF OF THE BAD D EBTS TO THE EXTENT OF ` 14,09,525.39 WHICH WAS CLAIMED TO HAVE BEEN PERTAI NING TO THE A.Y. 2001-02. AS NOTED BY THE A.O. THE SAID BAD DE BT WAS IN RESPECT OF ADVANCES MADE TO HRS INSIGHT FINANCE INTERMEDIARIES PVT. LTD. THE ASSESSEE STATED BEFORE THE A.O. THAT IT IS IN THE B USINESS OF FINANCING UNDER POPULAR SCHEME OF BOMBAY STOCK EXCHANGE OF S HARE BADLA FINANCING SINCE 1995-96. IN THE COURSE OF THE SAI D BUSINESS, VARIOUS PAYMENTS REGARDING INSIGHT FINANCE INTERMEDIARIES P VT. LTD. (HRS). IT WAS ALSO STATED THAT THE ASSESSEE HAD RECEIVED REGU LAR BADLA TRANSACTION BILLS FROM THE SAID COMPANY AND THE SAM E WERE ACCOUNTED AS INCOME ALMOST ON THE WEEKLY BASIS. IT WAS STATE D THAT TOTAL AMOUNT INVESTED ALONG WITH REINVESTED INCOME OF THE PREVIO US YEAR AND THE EARLIER YEARS WERE DEMANDED / TAKEN OUT FROM THE SA ID HRS IN THE LAST WEEK OF MARCH, 2001 BUT THE SAID COMPANY EXPRESSED ITS INABILITY TO PAY ANY AMOUNT. ACCORDINGLY, THE ENTIRE AMOUNT WAS WRITTEN OFF. THE ASSESSEE TRIED TO JUSTIFY THE CLAIM. THE A.O. REJE CTED THE CLAIM OF THE ASSESSEE BY GIVING THE FOLLOWING REASONS: 6. THE ABOVE CONTENTIONS OF THE ASSESSEE COMPANY ARE NOT ACCEPTABLE. IN VIEW OF THE FOLLOWING FACTS: I) HRS INSIGHT FINANCIAL SERVICES IS JUST AN INTERMEDIARY. THE MONEY WHICH HAS BEEN DEPLOYED IN THE MARKET HAS EARNED INTEREST FROM THE PERSONS IN THE SHARE MARKET AND NOT FROM HRS INSIGHT FINANCIAL SERVICES. IN A NORMAL MONEY LENDING ACTIVITY IF MONEY IS ADVANCED BY A TO B THEN INTEREST WOULD BE PAYABLE BY B TO A. BUT THE FACTS ARE DISTINGUISHABLE. IN THE SENSE THAT THE A SSESSEE COMPANY HAS GIVEN MONEY TO HRS, WHICH HAS FURTHER DEPLOYED THE FUNDS IN THE MARKET AND THE BADLA INTE REST ARISING THEREON IS PAYABLE TO THE ASSESSEE COMPANY FROM ITA 2572/MUM/2011 OLENEK INVESTMENTS PVT. LTD. 3 THE FUNDS DEPLOYED IN THE MARKET AND NOT FROM THE H RS TO WHOM THE MONEY WAS ADVANCED. WHEN MONEY IS ADVANCED FOR SPECIFIC PURPOSE AND AS SOON AS THE SPECIFIC PU RPOSE IS SERVED THE MONIES SO ADVANCED ALONG WITH INCREMENTA L INCOME EARNED OR LOSS SUFFERED SHOULD NORMALLY BE RETURNED TO THE LENDER. IT IS AMPLY CLEAR FROM THE ABOVE THAT IN THIS CASE THERE S NO BORROWER LENDER RELATIONSHI P. HRS INSIGHT FINANCIAL SERVICES INTERMEDIARY IS NOT A BO RROWER IT IS JUST AN INTERMEDIATERY BETWEEN THE ASSESSEE COMP ANY AND THE PERSONS WHO NEEDS THE FUNDS TO INVEST IN TH E SHARE MARKET. IN VIEW OF THE ABOVE SAID POSITION, IT IS D IFFICULT TO UNDERSTAND AS TO HOW THE FUNDS SO ADVANCED TO THE H RS CAN BE WRITTEN OFF AS BAD DEBTS WHEN THE SAME HAS N OT BEEN ACTUALLY UTILIZED BY HRS FOR ITS BUSINESS PURP OSE BUT UTILISED BY OTHER PERSONS WHO WANTED TO INVEST IN S HARES IN THE MARKET. II) IN VIEW OF THE ABOVE, IT IS REITERATED THAT TH E ASSESSEE COMPANY IS NOT IN THE BUSINESS OF MONEY LENDING BEC AUSE MONEY LENDING REPRESENTS TRANSACTIONS WHICH INVOLVE S TWO ENTITIES. THE OPINIONS OF THE EXPERT ADVISORY COMMI TTEE OF THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA ENC LOSED BY THE ASSESSEE COMPANY IS NOT BINDING ON THE DEPARTME NT. III) WITHOUT PREJUDICE TO THE ABOVE, IT IS STATED HEREIN THAT ON PERUSAL OF THE EARLIER RECORDS IT IS SEEN T HAT THE ASSESSEE COMPANY WAS IN THE BUSINESS OF TRADING IN SHARES. DURING THE YEAR THERE HAS BEEN NO TRADING ACTIVITY AND THE ASSESSEE COMPANY HAS RECEIVED INCOME FROM O THER SOURCES SUCH AS DIVIDEND AND INTEREST ON 10% RELIEF BOND WHICH IS EXEMPT U/S.10. HE ALSO HAS RECEIVED BADLA INTEREST OF RS.3,40,725/-. NOW THE NATURE OF SUCH B ADLA ACTIVITY IS SUCH THAT THE MONEY GIVEN TO THE SHARE BROKER IS ITA 2572/MUM/2011 OLENEK INVESTMENTS PVT. LTD. 4 DEPLOYED BY HIM IN THE SHARE MARKET AND AFTER PASSI NG OR THE BADLA INTEREST TO THE PERSON WHO HAS ADVANCED T HE MONEY THE BROKER EARNS BROKERAGE AT A FIXED PERCENT AGE OUT OF THE SAME. SUCH ACTIVITY IS AKIN TO KEEPING A SURPLUS FUND IN THE BANK AND EARNING INTEREST THEREON AND I N CASE OF DEFAULT OF THE BANK IT WOULD AMOUNT IN LIQUIDATI ON OF ONES CAPITAL AND NOT LIQUIDATION OF DEBT. SUCH INT EREST EARNED FROM THE BANK IS BEING TAXED AS INCOME FROM OTHER SOURCES. ON THE BASIS OF THIS ANALOGY, THE BADLA I NTEREST IN THE ASSESSEE COMPANYS CASE SHOULD BE TAXED AS INC OME FROM OTHER SOURCES. RELIANCE IS PLACED ON THE FOLL OWING DECISION: A) WHEN THE QUESTION IS WHETHER A RECEIPT OF MONEY IS TAXABLE OR NOT OR WHETHER CERTAIN DEDUCTIONS FRO M THAT RECEIPT ARE PERMISSIBLE IN LAW OR NOT, THE QUESTION HAS TO BE DECIDED ACCORDING TO THE PRINCIP LES OF LAW AND NOT IN ACCORDANCE WITH ACCOUNTANCY PRACTICE. ACCOUNTING PRACTICE CANNOT OVERRIDE SECTI ON 56 OR ANY OTHER PROVISION OF (HO ACT- TUTICORIN ALK ALI CHEMICALS & FERTILIZERS LTD. V. CIT[1997] 93 TAXMAN 502,227 ITR 172(SC) 7. VIDE PARA (B) OF THE ASSESSEES REPRESENTATIVE S LETTER DATED 20.08.2005 IT IS STATED AS UNDER: IF THE FOREGOING STAND IS NOT ACCEPTED, IT SHOULD BE CONSIDERED THAT INCOME COMPRISED IN THE OUTSTANDING BALANCE IS DEDUCTIBLE U/S.36(2) SINCE THAT PART OF THE BALANCE HAS ALREADY BEEN OFFERED FOR TAX, IN PAST. IN A RUNNING ACCOUNT LIKE THE ONE IN OUR CLIENTS CASE A QUESTION ARISES AS TO WHAT IS INCOME COMPONENT INCLUDED IN THE OUTSTANDING BALANCE. IT IS SUBMITT ED THAT OUT OF RS.14,09,525/-, RS.9,99,947/- IS INCOME COMPONENT AND OUT OF SAID RS.9,99,947/-. RS. ITA 2572/MUM/2011 OLENEK INVESTMENTS PVT. LTD. 5 1,61,664/- CONSTITUTES BADLA INCOME EARNED DURING THE YEAR. FROM THE ABOVE CONTENTION OF THE ASSESSEE COMPANY IT IS VERY CLEAR THAT THE ASSESSEE COMPANY IS NOT V ERY SURE ABOUT HIS STANCE AS REGARDS THE TREATMENT OF VYAJ B ADLA ACTIVITY. AS REGARDS THE ASSESSEES CLAIM TO ALLOW THE INCOME COMPONENT AMOUNTING TO RS.9,99,947/- OUT OF THE TOTAL BAD DEBTS CLAIMED IT IS SEEN ON PERUSAL OF TH E CASE RECORDS THAT HRS INSIGHT FINANCIAL INTERMEDIARIES A CCEPT MONEY ON BEHALF OF THE ASSESSEE COMPANY IN THE SHAR E BADLA BUSINESS. THE SHARE BROKER EFFECTS PURCHASES AND SALES OF SHARES ON BEHALF OF THE ASSESSEE COMPANY A ND ON THE SETTLEMENT DATES HE IS EXPECTED TO REPATRIATE T HE ENTIRE BALANCE MONIES ADVANCED AND INCOME LOSS/EARNED. HOWEVER, THE ASSESSEE COMPANY HAS CHOSEN NOT TO WITHDRAW THE PRINCIPAL AMOUNT GIVEN TO HRS. IT IS SEEN FROM THE COPY OF LEDGER ACCOUNT SUBMITTED BY THE AS SESSEE COMPANY FOR THE PERIOD FROM 01.04.2000 TO 31 .03.20 01 THAT HE DEPLOYS THE OUTSTANDING BALANCE AMOUNT (WHI CH CONSISTS OF BOTH THE MONEY ADVANCED AND INCOME EARN ED ON IT) IN THE SHARE MARKET. 3. IN SUM AND SUBSTANCE, THE BADLA INTEREST WAS ASS ESSED UNDER THE HEAD INCOME FROM OTHER SOURCES AND HENCE THE A.O. DISALLOWED THE CLAIM OF THE ENTIRE BAD DEBTS TO THE EXTENT OF ` 14,09,525/-. IT IS PERTINENT TO NOTE HERE THAT THE QUANTUM WAS CONFIRM ED BY THE CIT (A). THE A.O. INITIATED THE PENALTY PROCEEDINGS U/S.271( 1)(C) OF THE ACT AND LEVIED THE PENALTY OF ` 5,57,466/- BY GIVING THE FINDING THAT THE ASSESSEE HAS DELIBERATELY FILED INACCURATE PARTICUL ARS OF ITS INCOME IN ORDER TO CONCEAL THE INCOME TO THE EXTENT OF ` 14,09,525/-. THE ASSESSEE CHALLENGED THE PENALTY ORDER BEFORE THE LD . CIT (A) BUT WITHOUT SUCCESS AS THE PENALTY WAS CONFIRMED. NOW, THE ASSESSEE IS IN APPEAL BEFORE US. ITA 2572/MUM/2011 OLENEK INVESTMENTS PVT. LTD. 6 4. WE HAVE HEARD THE LD. D.R. AND PERUSED THE RECOR DS. THE DISALLOWANCE OF THE CLAIM OF THE BAD DEBT TO THE EX TENT OF ` 14,09,528/- WAS VISITED WITH THE PENALTY U/S.271(1 )(C) OF THE ACT. THE ASSESSEE CLAIMED THAT IT WAS IN THE BUSINESS OF FIN ANCING UNDER THE BOMBAY STOCK EXCHANGE SCHEME OF SHARE BADLA SINCE 1995 AND IN THE COURSE OF THE SAID BUSINESS THE ASSESSEE HAD MA DE FINANCE TO HRS INSIGHT FINANCE INTERMEDIARIES PVT. LTD. (IN SHORT HRS). THE ASSESSEE ALSO DECLARED BADLA INTEREST. THE SAME WAS ASSESSE D UNDER THE HEAD INCOME FROM OTHER SOURCES. THERE IS NO DISPUTE A BOUT THE FACT THAT THE FINANCING MADE TO HRS WAS HAVING NEXUS WITH BAD LA TRANSACTIONS ENGAGED INTO BY THE ASSESSEE AS PER THE BOMBAY STOC K EXCHANGE SCHEME. THE RESERVATION OF THE A.O. FOR NOT ALLOWI NG THE BAD DEBS IS THAT AS BADLA INTEREST IS ASSESSED UNDER THE HEAD INCOME FROM OTHER SOURCES THEN THE BAD DEBTS CANNOT BE ALLOWED AS TH ERE IS NO INCOME ASSESSABLE UNDER THE HEAD BUSINESS. ON THE BASIS OF DISALLOWANCE OF THE CLAIM OF THE BAD DEBTS THE A.O. TREATED THE SAM E AMOUNT AS CONCEALMENT OF INCOME OR FILING INACCURATE PARTICUL ARS OF INCOME. WE FIND FROM THE ORDERS OF THE AUTHORITIES BELOW THAT IT IS A LEGAL INTERPRETATION ADOPTED FOR ALLOWING OR NOT ALLOWING CLAIM OF THE ASSESSEE. ONCE THE LEGAL INTERPRETATION IS TO PUT INTO PROCESS BUT OTHERWISE ALL PARTICULARS ARE ON RECORD IT CANNOT B E SAID THAT THE ASSESSEE HAS FILED ANY INACCURATE PARTICULARS OR CO NCEALED PARTICULARS OF INCOME. IN THE CASE OF DILIP SHROFF - 291 ITR 5 19 THE HONBLE SUPREME COURT HAS EXPLAINED THE EXPRESSION CONCEAL MENT AND INACCURATE PARTICULARS. MERELY BECAUSE THE CLAIM IS REJECTED BY THE A.O., WHICH IS NOT OTHERWISE MALA FIDE NO PENALTY CAN BE LEVIED. IN THE PRESENT CASE, IN OUR OPINION, THE ASSESSEES CLAIM OF BAD DEBT CANNOT BE TREATED AS A MALA FIDE CLAIM. THOUGH THE ASSESSEE AND THE A.O. BOTH ARE HAVING THE DIFFERENT VIEWS ON SAID CLAIM. IN OUR OPINION, THIS IS NOT FIT CASE FOR LEVYING THE PENALTY U/S.271(1)( C). WE, ACCORDINGLY, DELETE THE PENALTY LEVIED BY THE A.O. AND THE GROUN DS TAKEN BY THE ASSESSEE IN HIS APPEAL ARE ALLOWED. ITA 2572/MUM/2011 OLENEK INVESTMENTS PVT. LTD. 7 5. IN THE RESULT, ASSESSEES APPEAL IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS DAY OF 3 1ST JANUARY 2012. SD/- ( R.S. SYAL ) ACCOUNTANT MEMBER SD/- ( R.S. PADVEKAR ) JUDICIAL MEMBER MUMBAI, DATE: 31ST JANUARY 2012 COPY TO:- 1) THE APPELLANT. 2) THE RESPONDENT. 3) THE CIT (A)13, MUMBAI. 4) THE CIT-7, MUMBAI. 5) THE D.R. C BENCH, MUMBAI. BY ORDER / / TRUE COPY / / ASSTT. REGISTRAR I.T.A.T., MUMBAI *CHAVAN