The ITO, Ward-1(4)., Visakhapatnam V. M/s Srinivasa Ferro Alloys Ltd, Visakhapatnam

ITA 262/VIZ/2007

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 7115 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 2 year(s) 8 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-02-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Assessment Year: 2004-2005
• Appeal Filed On: 29-05-2007
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SUBRATA SARKAR
• Keywords: Bad and doubtful debts; Capital expenditure

Judgement Text

PAGE 1 OF 6 IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH, VISAKHAPATNAM BEFORE: SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI BR BASKARAN, ACCOUNTANT MEMBER ITA NO. 262/VIZAG/2007 ASSESSMENT YEAR: 2004-05 ACIT, CIRCLE-4 (1), VISAKHAPATNAM VS. SRINIVASA FERRO ALLOYS LTD., VISAKHAPATNAM (APPELLANT) (RESPONDENT) PAN NO.AADCS 1439 B ITA NO. 283/VIZAG/2007 ASSESSMENT YEAR: 2004-05 SRINIVASA FERRO ALLOYS LTD., VISAKHAPATNAM VS. ACIT, CIRCLE-4 (1), VISAKHAPATNAM (RESPONDENT) (APPELLANT) PAN NO.AADCS 1439 B APPELLANT BY: SHRI SUBRATA SARKAR, (CIT)DR, RESPONDENT BY: SHRI G.V.N. HARI, C.A ORDER PER SHRI B R BASKARAN, ACCOUNTANT MEMBER : THESE CROSS APPEALS ARE DIRECTED AGAINST THE ORDER DATED 27-03-2007 PASSED BY THE LD CIT (A)-II VISAKHAPATNAM AND THEY R ELATE TO THE ASSESSMENT YEAR 2004-05. 2. THE ISSUE CONTESTED IN THE APPEAL OF THE DEPARTM ENT IS WHETHER LD CIT (A) IS JUSTIFIED IN DELETING THE DISALLOWANCE OF BA D DEBT CLAIM OF RS.1,63,81,975/- RELATING TO A DEBTOR NAMED M/S METALLIC ALLOYS. 3. THE FOLLOWING TWO ISSUES ARE CONTESTED IN THE AP PEAL FILED BY THE ASSESSEE: A) WHETHER THE LD CIT (A) IS JUSTIFIED IN CONFIRMING T HE DISALLOWANCE OF BAD PAGE 2 OF 6 DEBT CLAIM OF RS.1,26,79,998/- B) WHETHER THE LD CIT (A) IS JUSTIFIED IN NOT A CCEPTING THE PLEA OF THE ASSESSEE THAT THE CREDIT BALANCES WRITTEN OFF SHOUL D NOT BE TREATED AS INCOME. 4. THE FACTS OF THE CASE ARE STATED IN BRIEF. THE A SSESSEE COMPANY IS ENGAGED IN MANUFACTURE OF FERRO ALLOYS, POLYESTER A ND COTTON GRAY FABRIC. DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE MA DE A CLAIM FOR DEDUCTION OF BAD DEBT TO THE TUNE OF RS.2,78,85,988/-. THE BREAK UP DETAILS OF SAID AMOUNT AND THEIR RESPECTIVE EXPLANATIONS ARE EXTRACTED BEL OW FROM THE ORDER OF THE LD CIT (A): DEBIT CREDIT GROUP A RS. 3,28,67,080 GROUP-B RS. 1,26,79,998 GROUP-C RS. 26,61,090 GROUP-D RS.1,50,00,000 RS.4,55,47,078 RS.1,76,61,090 NET AMOUNT WRITTEN OFF AS BAD DEBTS RS.2,78,85,988 /- IN THIS CONTEXT, IT WAS SUBMITTED AS UNDER: GROUP-A: THIS CONSISTS OF DEBTORS TO WHOM GOODS ARE SOLD AND MONEY IS DUE BUT NOT RECEIVED DUE TO VARIOUS REASON S. THE COMPANY IS OF THE OPINION THAT THE CHANCES OF RECEIVING THE AMOUNT ARE NEGLIGIBLE. IF AND WHEN THE AMOUNTS ARE RECEIVED, TH EY WOULD BE OFFERED AS INCOME IN THE YEAR OF RECEIPT. THE TOTAL AMOUNT UNDER THIS HEAD IS RS.3,28,67,080/- GROUP-B: THIS GROUP CONSISTS OF DEBIT BALANCE OF DE BTORS FOR WHICH EVIDENCE OF SALE IS NOT AVAILABLE. THIS LIST CONSIS TS OF ADVANCE GIVEN TO CREDITORS WHICH FOR SOME REASON REMAIN IN THE BO OKS UNCOLLECTED AND ARE IN THE NATURE OF UNRECOVERABLE ADVANCES. TH E AMOUNT IN THIS GROUP IS RS.1,26,79,998/-. GROUP-C: THESE ARE CREDIT BALANCES IN DEBTORS ACCOU NTS. THESE ARE AMOUNTS RECEIVED AGAINST WHICH THE COMPANY COULD NO T SUPPLY ANY MATERIAL. SINCE THEY ARE IN THE BOOKS AND THE PARTI ES HAVE NOT MADE ANY CLAIM, DECIDED TO WRITE OFF THESE ITEMS. THE TO TAL AMOUNT IS RS.26,61,090/- PAGE 3 OF 6 GROUP-D: AN AMOUNT OF RS.1,50,00,000/- WAS GIVEN AS LOAN TO US BY M/S CASION FINANCE & INVESTMENT. THIS AMOUNT WAS NOT CLAIMED FROM OUR COMPANY AS THEN IT WAS REFERRED TO BIFR. 4.1 SINCE AMOUNTS INCLUDED IN THE GROUP-B CONSI STED OF ADVANCES GIVEN, THE AO TREATED THEM AS CAPITAL EXPENDITURE AND ACCORDIN GLY DISALLOWED THE SAME. THE AO ALSO DISALLOWED A SUM OF RS.1,63,81,975/- TH AT STOOD IN THE NAME OF M/S METALLIC ALLOYS INCLUDED IN GROUP-A FOR THE FOLLOWI NG REASONS: A) THE ASSESSEE CONTINUES TO HAVE FINANCIAL BUSINESS T RANSACTIONS WITH M/S METALLIC ALLOYS. B) THE ASSESSEE HAS NOT TAKEN ANY LEGAL RECOURSE FOR R ECOVERY OF THE SAID AMOUNT C) THE ASSESSEE DID NOT SUBSTANTIATE THE REASONS FOR W RITING OFF THE SAID AMOUNT AS BAD IN THE APPEAL PREFERRED BY THE ASSESSEE, THE LD CIT (A) CONFIRMED THE ADDITION OF RS.1.26 CRORES PERTAINING TO GROUP-B AND DELETED TH E ADDITION OF RS.1.63 CRORES INCLUDED IN GROUP-A. THE LD CIT (A) ALSO NEGATED TH E CLAIM OF THE ASSESSEE FOR NOT TREATING THE CREDIT BALANCES WRITTEN OFF AS INC OME ON THE REASON THAT THE CESSATION OF LIABILITY IS TAXABLE U/S 41(1) OF THE ACT. AGGRIEVED BY THE ORDER OF THE LD CIT(A) BOTH THE PARTIES ARE IN APPEAL BEFORE US. 5. WE HAVE HEARD THE PARTIES AND CAREFULLY PERUSED THE RECORD. WE DEAL WITH THE APPEAL OF THE REVENUE FIRST. THERE IS NO D ISPUTE WITH REGARD TO THE FACT THAT THE IMPUGNED AMOUNT OF RS.1.63 CRORES REPRESEN TED TRADE DEBT AND THE SAME WAS TAKEN AS INCOME OF THE ASSESSEE EARLIER. T HERE IS ALSO NO DISPUTE WITH REGARD TO THE FACT THAT THE ASSESSEE HAS WRITTEN OF F THE SAID AMOUNT IN ITS BOOKS OF ACCOUNTS AS IRRECOVERABLE. NOW IT IS WELL SETTLE D THAT AFTER AMENDMENT OF SEC. 36(1)(VII), IN ORDER TO CLAIM A DEBT, WHICH WAS TAK EN AS INCOME, AS BAD; IT IS ENOUGH IF IT IS WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE. THE SAME VIEW HAS BEEN EXPRESSED BY CBDT IN ITS CIRCULA R NO.551 DATED 23.01.1990. THE LD CIT(A), IN ADDITION TO THE CIRCULAR OF CBDT REFERRED ABOVE, HAS ALSO RELIED UPON THE FOLLOWING DECISION OF HONBLE GUJARAT HIGH COURT. PAGE 4 OF 6 I) DCIT VS. PATIDAR GINNING & PROCESSING CO. (157 I TR 177) II) CIT VS. GIRISH BHAGAWAT PRASAD (256 ITR 772) SIMILAR VIEW HAS BEEN EXPRESSED BY HONBLE BOMBAY H IGH COURT IN THE CASE OF DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION) VS. OMAN INTERNATIONAL BANK SAOG (2009) (313 ITR 128). SINCE THE DECISION OF T HE LD CIT (A) IS IN TUNE WITH THE JUDICIAL PRONOUNCEMENTS, WE FIND NO REASON TO I NTERFERE WITH HIS DECISION AND ACCORDINGLY UPHOLD HIS ORDER ON THIS ISSUE. 6. NOW WE PROCEED TO ADJUDICATE THE ISSUES RAISED I N THE APPEAL OF THE ASSESSEE. THE FIRST ISSUE RELATES TO BAD DEBT CLAIM OF RS. 1.26 CRORES. IT IS NOT IN DISPUTE THAT THE AMOUNT INCLUDED THEREIN CONSISTED OF ADVANCE PAYMENT MADE TO VARIOUS PERSONS AND FURTHER THERE WAS NO EVIDENCE T HAT THE ASSESSEE TO SHOW THAT THE ASSESSEE EFFECTED ANY SALES TO THE SAID PE RSONS, MEANING THEREBY THE SAID AMOUNTS HAVE NOT BEEN TAKEN AS INCOME OF THE A SSESSEE IN ANY OF THE PERIODS. ACCORDING TO THE SEC. 36(2)(I) A DEDUCTIO N TOWARDS BAD DEBT IN RESPECT OF ANY DEBT OR PART THERE OF SHALL BE ALLOWED U/S 3 6(1)(VII), ONLY IF SUCH DEBT OR PART THEREOF HAS BEEN TAKEN INTO ACCOUNT IN COMPUTI NG THE INCOME OF THE ASSESSEE FOR ANY OF THE PERIOD. SINCE THE CLAIM MA DE BY THE ASSESSEE DID NOT SATISFY THE CONDITION LAID DOWN BY THE ACT, IN OUR OPINION, LD CIT (A) IS RIGHT IN CONFIRMING THE DISALLOWANCE OF THE SAME. THE ASSESS EE PLACED RELIANCE ON THE DECISION OF THE HONBLE MADRAS HIGH COURT IN THE CA SE OF CIT VS. DHANALAKSHMI CORPORATION (1962) 46 ITR 1031 (MAD.). HOWEVER, THE ISSUE CONSIDERED IN THAT DECISION PERTAINS TO THE ASSESSMENT YEAR 1950-51. HENCE, IN OUR OPINION, AFTER AMENDMENT IN SECTION 36(1)(VII) R.W.S SEC. 36(2)(I) , WHICH MODIFIED THE PROVISIONS RELATING TO THE BAD DEBT CLAIM, THE SAID CASE LAW MAY NOT BE APPLICABLE. IN THE ALTERNATIVE THE LD AR CONTENTED THAT THE CREDIT BALANCE WRITTEN OFF BY THE ASSESSEE INCLUDED A SUM OF RS.1.50 CRORE S PERTAINING TO M/S CASION FINANCE & INVESTMENT, WHICH IS A LOAN TRANSACTION T O WHICH THE PROVISIONS OF SEC. 41(1) SHALL NOT APPLY AND HENCE THE SAME CANNOT BE TAKEN AS INCOME. IN THAT CONNECTION LD AR PLACED RELIANCE DATED 30.05.2008 P ASSED BY THIS BENCH IN THECASE OF M/S COASTAL CORPORATION LTD., IN ITA NO. 407/VIZAG/2006. PAGE 5 OF 6 6.1 IN THE CASE OF M/S COASTAL CORPORATION, THI S BENCH CONSIDERED THE ISSUE WHETHER THE WAIVER OF LOAN IS LIABLE FOR TAXATION U /S 41(1) OF THE ACT. THE OPERATIVE PORTION OF THE SAID DECISION DATED 30-5-2 008 IS EXTRACTED HEREUNDER: 22. WE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORDS. SECTION 41(1) OF THE ACT READS AS UNDER. 41(1) . WHERE AN ALLOWANCE OR DEDUCTION HAS BEEN MADE IN THE ASSESSMENT FOR ANY YEAR IN RESPECT OF L OSS, EXPENDITURE OR TRADING LIABILITY INCURRED BY THE AS SESSEE (HEREINAFTER REFERRED TO AS THE FIRST-MENTIONED PER SON) AND SUBSEQUENTLY DURING ANY PREVIOUS YEAR,-- (A) THE FIRST-MENTIONED PERSON HAS OBTAINED, WHETH ER IN CASH OR IN ANY OTHER MANNER WHATSOEVER, ANY AMOU NT IN RESPECT OF SUCH LOSS OR EXPENDITURE OR SOME BENEFIT IN RESPECT OF SUCH TRADING LIABILITY BY WAY OF REMISSION OR CE SSATION THEREOF, THE AMOUNT OBTAINED BY SUCH PERSON OR THE VALUE OF BENEFIT ACCRUING TO HIM SHALL BE DEEMED TO BE PROFI TS AND GAINS OF BUSINESS OR PROFESSION AND ACCORDINGLY CHA RGEABLE TO INCOME-TAX AS THE INCOME OF THAT PREVIOUS YEAR, WHE THER THE BUSINESS OR PROFESSION IN RESPECT OF WHICH THE ALLO WANCE OR DEDUCTION HAS BEEN MADE IS IN EXISTENCE IN THAT YEA R OR NOT; SECTION 41(1) CONSISTS OF TWO MAIN INGREDIENTS VIZ. , (A) LOSS OR EXPENDITURE AND (B) TRADING LIABILITY. AS PER T HE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF POLYFLEX (INDIA) (P) LTD. (SUPRA), THE TWO COMPONENTS OF SECTION 41(1) OF THE ACT HAVE TO BE READ SEPARATELY, NAMELY (I) HAS OBTAINED, WHETHER IN CAS H OR IN ANY OTHER MANNER WHATSOEVER, ANY AMOUNT IN RESPECT OF SUCH LO SS OR EXPENDITURE; (II) SOME BENEFIT IN RESPECT OF SUCH TRADING LIABIL ITY BY WAY OF REMISSION OR CESSATION THEREOF. ACCORDINGLY THE HONBLE APEX COURT HELD THAT THE WORDS REMISSION OR CESSATION THEREOF SHALL APPLY ONLY TO TRADING LIABILITY AND IT SHALL NOT APPLY TO ANY LOSS OR EXP ENDITURE. 23. THE NEXT ISSUE THAT ARISES IS WHETHER WAIVER OF PRINCIPAL AMOUNT OF LOAN WOULD AMOUNT TO TRADING LIABILITY? ON THIS IS SUE ALSO, THE HONBLE DELHI HIGH COURT IN PHOOL CHAND JIWAN RAM (SUPRA) HAS HELD THAT ONLY TRADING DEBTS, WHICH ARE ALLOWED AS DEDUCTION IN EA RLIER YEARS, CAN BE TREATED AS TRADING LIABILITY. IT IS NOT IN DISPUTE THE PRINCIPAL PORTION OF LOAN AMOUNT, WHICH HAS BEEN WAIVED, HAS NOT BEEN CL AIMED AS DEDUCTION IN ANY OF THE YEARS. HENCE WAIVER OF PRINCIPAL POR TION OF LOAN CANNOT BE TERMED AS WAIVER OF TRADING LIABILITY AND HENCE THE SECOND CLAUSE OF SECTION 41(1), RELATING TO TRADING LIABILITY, SHALL NOT APPLY TO THE PRESENT CASE UNDER CONSIDERATION. PAGE 6 OF 6 HENCE THE WRITING OFF OF THE PRINCIPAL COMPONENT OF THE LOAN CANNOT BE TAXED U/S 41(1) OF THE ACT. HOWEVER IN THE INSTANT CASE, THE ASSESSEE ITSELF HAS OFFERED THE SUM OF RS.26,61,090/- AND RS.1.50 CRORES AS ITS INC OME. OUT OF THE SAID TWO AMOUNTS, RS.26,61,090/- PERTAIN TO THE TRADE DEBTOR S AND THE RS.1.50 CRORE PERTAIN TO LOAN BORROWAL. SINCE THE ASSESSEE ITSEL F HAS OFFERED THE SAID TWO AMOUNTS AS ITS INCOME, WE DO NOT LIKE TO INTERFERE WITH THE SAME. HOWEVER, AS AN ALTERNATIVE PLEA, LD AR PLEADED THAT ANY AMOUNT CONFIRMED BY THE TRIBUNAL MAY KINDLY BE GIVEN SET OFF AGAINST THE LOAN AMOUNT OF RS.1.50 CRORES WHICH WAS WRITTEN OFF AND OFFERED AS INCOME. WE, IN THE INTE REST OF SUBSTANTIAL JUSTICE, FIND MERIT IN THE ALTERNATIVE PLEA OF THE ASSESSEE. ACC ORDINGLY, WE DIRECT THE AO TO SET OFF THE AMOUNT OF RS.1,26,79,996/-, WHICH WAS C ONFIRMED BY US, AGAINST THE LOAN AMOUNT OF RS.1.50 CRORES WRITTEN OFF BY THE AS SESSEE. 7. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISMISSED AND THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON 01/02/2010. SD/- SD/- (SUNIL KUMAR YADAV) (B R BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER PVV/SPS VISAKHAPATNAM, 1 ST FEBRUARY, 2010. COPY TO 1 THE ACIT, CIRCLE-4(1) VISAKHAPATNAM 2 M/S SRINIVASA FERRO ALLOYS LTD., MIG-225, TPT COLO NY, SEETHAMMADHARA, VISAKHAPATNAM 530 013 3 THE CIT (A)-II VISAKHAPATNAM 4 THE CIT, VISAKHAPATNAM 5 THE DR, ITAT, VISAKHAPATNAM. 6 GUARD FILE. BY ORDER SENIOR PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM