The ACIT,Mehsana Circle, Mehsana V. Shri Rajesh J.Desai, Mehsana

ITA 275/AHD/2013

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 9190 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 1 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-03-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 02-03-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 31-01-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: LALA PHILIPS
• Assessee Lawyers: S N DIVETIA
• Keywords: Bad and doubtful debts
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD C BENCH BEFORE: S H RI PRAMOD KUMAR , ACCOUNTANT MEMBER AND SHR I S. S. GODARA , JUDICIAL MEMBER THE ACIT, MEHSANA CIRCLE, MEHSANA (APPELLANT) VS RAJESH J. DESAI, 5, ASHOKNAGAR SOCIETY, RADHANPUR ROAD, MEHSANA - 384002 PAN: AAWPD3248B (RESPONDENT) REVENUE BY : S H RI LALA PHILIPS , SR. D . R. ASSESSEE BY: S H RI S.N. DIVETIA , A.R. DATE OF HEARING : 02 - 03 - 2 016 DATE OF PRONOUNCEMENT : 11 - 03 - 2 016 / ORDER P ER : S. S. GODARA , JUDICIAL MEMBER : - THIS REVENUE S AP PEAL FOR A.Y. 2009 - 10 , AR I SES FROM ORDER OF THE CIT(A) - I, AHMEDABAD DATED 22 - 11 - 2012 IN APPEAL NO. CIT(A) - I/CC.1(2)/222/2011 - 12 , IN PROCEEDINGS UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961; IN SHORT THE ACT . I T A NO . 275 / A HD/20 13 A SSESSMENT YEAR 200 9 - 10 I.T.A NO. 275 /AHD /2013 A.Y. 2009 - 10 PAGE NO ACIT VS. RAJESH J. DESAI 2 2. THE REVENUE S FIRST SUBSTANTIVE GROUND ASSAILS LOWER APPELLATE ORDER DELETING ADDITION OF RS. 31,90,550/ - MADE BY THE ASSESSING OFFICER ON ACCOUNT OF INTEREST INCOME NOT OFFERED TO TAX. IT APPEARS THAT ASSESSEE HAD NOT RECOVERED INTEREST ON ADVANCES MADE TO ONE M/S AN BUILDERS AMOUNTING TO RS . 2,65,87,917/ - IN HIS PROPRIETARY CONCERN M/S. RAJEEV ENTERPRISES . HE PLEADED THAT THESE ADVANCES HAD BECOME STICKY AND STAGNANT. AND THAT ALTHOUGH HE WAS DEBITING THE INTEREST DURING THE YEAR, NO INTEREST WAS DEBITED TO AVOID HUGE AMOUNT OF WRITE OFF IN THE COMING YEAR. THE ASSESSING OFFICER IN ASSESSMENT ORDER DATED 29 - 12 - 2011 REJECTED THIS EXPLANATION INTER A LIA BY OBSERVING THAT ASSESSEE FOLLOWED MERCANTILE SYSTEM OF ACCOUNTING ON ACCRUAL BASIS AND IT OUGHT TO HAVE DECLARED ITS INTEREST INCOME TILL THE TIME THE ADVANCES IN QUESTION ARE NOT WRITTEN OFF AS BAD DEBTS. THIS RESULTED IN THE IMPUGNED DISALLOWANCE/ADDITIONS OF THE INTEREST AMOUNT OF RS. 31,90,550/ - . 3 . THE CIT(A) ACCEPTS ASSESSEE S ARGUMENTS BY HOLDING AS UNDER: - 4. I HAVE GONE THRO UGH THE ASSESSMENT ORDER AND SUBMISSIONS OF THE A.R. OF THE APPELLANT CAREFULLY. IT IS SEEN THAT THE ASSESSING OFFICER HAS NOT DISPUTED ANY OF THE ARGUMENTS OF THE APPELLANT. HE HAS MERELY RELIED ON THE FACTS THAT SINCE AN APPELLANT IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING AND HAS BEEN DEBITING INTEREST INCOME RECEIVABLE FROM A.N. BUILDERS ON ACCRUAL BASIS OVER THE YEARS, HENCE, THE APPELLANT HAS TO SHOW THE INCOME DURING THE CURRENT YEAR ALSO. 4.1 THE ABOVE CONTENTION OF THE ASSESSING OFFICER IS NOT CORRECT. NO INCOME HAS RESULTED WHEN THE LOAN ITSELF BECOMES DOUBTFUL. IN I.T.A NO. 275 /AHD /2013 A.Y. 2009 - 10 PAGE NO ACIT VS. RAJESH J. DESAI 3 SUCH A SITUATION WHEN THE LOAN ITSELF IS DOUBTFUL, THE INTEREST CANNOT BE SAID TO BE ACCRUED. THE HON'BLE MADRAS HIGH COURT IN THE CASE OF CIT VS. MOTOR CREDIT COMPANY PVT.LTD. REPOR TED IN 127 ITR 572 (MADRAS) HAS HELD THAT NO INTEREST CAN BE SAID TO HAVE ACCRUED ON THE LOANS WHICH THEMSELVES HAVE BECOME DOUBTFUL. IN THE CASE OF CIT VS. FIROZEPUR FINANCE PVT. LTD. REPORTED IN 124 ITR 619 (PUNJAB), THE HON'BLE PUNJAB HIGH COURT HELD TH AT EVEN IF THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING MAKES THE ENTRY FOR HYPOTHETICAL INTEREST INCOME THE SAME CANNOT BA ; INCLUDED IN THE TOTAL INCOME WHERE SUCH INCOME HAS NEITHER BEEN ACCRUED NOR RECEIVED. THE SLP WAS FILED AGAINST THIS D ECISIONS OF THE HON'BLE PUNJAB AND HARYANA HIGH COURT, HAS BEEN DISMISSED BY THE HON'BLE SUPREME COURT. THE SAME IS REPORTED IN 144 ITR (SC)50(SC) 4.2 IN VIEW OF THE FACT THAT WHEN THE LOAN GIVEN BY THE APPELLANT TO A.N. BUILDERS ITSELF HAD BECOME DOUBTF UL THE INTEREST THEREON COULD NOT BE SAID TO HAVE ACCRUED TO THE APPELLANT. IN VIEW OF THE ABOVE, THE ASSESSING OFFICER WAS NOT JUSTIFIED IN MAKING ADDITION OF RS.31,90,550/ - . THE SAME IS HENCE, DELETED. 4 . WE HAVE HEARD BOTH THE PARTIES. WE FIND THAT THE CIT(A) HA S FOLLOWED REAL INCOME PRINCIPAL AS PER VARIOUS DECISIONS HOLDING THAT NO INTEREST ACCRUES WHEN THE PRINCIPAL AMOUNT OF LOAN ITSELF BECOMES DOUBTFUL. THE REVENUE NEITHER POINTS OUT ANY ILLEGALITY THEREIN NOR DOES IT TAKE US TO ANY EVIDENCE RE BUTTING FACTUAL FINDING THAT THE ASSESSEE S LOAN IN QUESTION HAS NOT BECOME DOUBTFUL. WE ACCEPT ASSESSEE S ARGUMENTS SUPPORTING LOWER APPELLATE FINDINGS UNDER CHALLENGE. THIS FIRST SUBSTANTIVE GROUND FAILS. 5 . THE REVENUE S SECOND SUBSTANTIVE GROUND S EEKS TO REVIVE BAD DEBT DISALLOWANCE OF RS. 26,74,708/ - . THE ASSESSEE HAD WRITTEN OFF BAD DEBTS OF RS. 29,96,552/ - . HE WOULD FILE LEDGER ACCOUNT OF DEBTORS M/S. GUJARAT PSYLIUM CORPORATION AND VANGUARD MARKETING TO THE I.T.A NO. 275 /AHD /2013 A.Y. 2009 - 10 PAGE NO ACIT VS. RAJESH J. DESAI 4 TUNE OF RS. 25,24,444/ - AND RS. 4,4 8,108/ - AS DEPOSITS AND ADVANCES. THERE IS NO DISPUTE THAT ITS LEDGER ACCOUNTS OF THE AFORESAID PARTIES HAD WRITTEN OFF BOTH PRINCIPAL AND INTEREST COMPONENTS THEREUPON. THE ASSESSING OFFICER DISALLOWED THIS CLAIM ON THE GROUND THAT THE ASSESSEE HAD EXTE NDED HIS OWN MONEY AS ADVANCE S. THEREFORE, THIS WRITE OFF O F THE PRINCIPAL AMOUNT IS NOT ALLOWABLE. HE COMPUTED INTEREST COMPONENT ONLY AS ALLOWABLE THEREBY DISALLOWING THE IMPUGNED SUM OF RS. 26,74,708/ - . 6 . THE CIT(A) HAS DECIDED THE RELEVANT ISSUE IN ASSESSEE S FAVOUR AS UNDER: - 6. I HAVE GONE THROUGH THE ASSESSMENT ORDER AND SUBMISSIONS OF THE A.R. OF THE APPELLANT CAREFULLY. THE ASSESSING OFFICER HAS NOT DOUBTED THE FACT THAT THE ENTIRE AMOUNT OF RS.25,24,444/ - IN THE CASE OF GUJARAT PSYL IUM CORPO RATION AND RS.4,48,108/ - IN THE CASE OF VANGUARD MARKETING HAD BEEN WRITTEN OFF. THE ASSESSING OFFICER HAS ONLY OBSERVED THAT THE INTER EST RECEIVABLE OF RS.48,129/ - IN THE CASE OF VAN GUARD MARKETING AND RS.2,73,715/ - IN THE CASE OF GUJARAT PSYLIUM CORPORATI ON ARE ALLOWED TO BE WRITTEN OFF AS BAD DEBT. HE HAS OBSERVED THAT THE PRINCIPAL AMOUNT CANNOT BE ALLOWED TO BE WRITTEN OFF AS BAD DEBT. THE ASSESSING OFFICER HAS NOT APPRECIATED THE FACT THAT THE APPELLANT IS IN THE BUSINESS OF GIVING LOANS AND ADVANCES. IN FACT, IT IS SEEN THAT THE APPELLANT HAS EA RNED INTEREST OF RS.1,09,43,092/ - FROM FINANCIAL SERVICES. FURTHER, ANY ADVANCES GIVEN FOR THE PURPOSES OF BUSINESS IF THEY BECOME BAD AND IS NOT RECOVERABLE THE SAME ARE ALLOWABLE AS A BUSINESS LOSS. IN THIS CA SE, THE ASSESSING OFFICER HAS NOT POINTED OUT ANY EVIDENCE TO ESTABLISH THAT THESE ADVANCES WERE NOT GIVEN IN THE NORMAL COURSE OF BUSINESS. ONCE IT IS FOUND THAT THE ADVANCE GIVEN ARE FOR BUSINESS PURPOSE THEN THEIR WRITE OFF IS ALLOWABLE AS BUSINESS LOSS . 6.1 IN VIEW OF THE ABOVE, THE ASSESSING OFFICER WAS NOT JUSTIFIED IN DISA LLOWING THE SUM OF RS.26,74,708/ - ON ACCOUNT OF THE FACT THAT IT I.T.A NO. 275 /AHD /2013 A.Y. 2009 - 10 PAGE NO ACIT VS. RAJESH J. DESAI 5 WAS A PRINCIPAL AMOUNT WHICH HAD BEEN WRITTEN OFF. THE ADDITION OF RS.26,74,708/ - MADE BY THE ASSESSING OFFICER I S, HENCE DELETED. 7 . HEARD BOTH SIDES. THERE IS NO DISPUTE THAT THE ASSESSEE IS ALREA DY IN MONEY LENDING BUSINESS AS HIS CLAIM THROUGHOUT. THERE CAN HARDLY BE ANY DISPUTE THAT SECTION 36(VII)(2) PROVIDE FOR THIS DEDUCTION SUBJECT TO THE CONDITION THA T THE CONCERNED ASSESSEE TAKES INTO ACCOUNT THE SAME IN COMPUTING OF HIS INCOME OF THE PREVIOUS YEAR IN WHICH THE SAME IS WRI TTEN OFF OR ANY EARLIER PREVISION OR THAT REPRESENTING THE MONEY LENT IN THE ORDINARY COURSE OF BUSINESS OF BANKING OR MONEY LENDIN G BEING CARRIED ON BY THE ASSESSEE. THERE IS NO SUCH CONDITION IN CASE OF MONEY LENDING/FINANCE BUSINESS AS PROPAGATED BY THE ASSESSING OFFICER THAT ONLY INTEREST INCOME NOT RECOVERABLE AND WRITTEN O FF IS TO BE ALLOWED AS BAD DEBT DEDUCTIONS. WE FIND NO R EASON TO INTERFERE WITH THE CIT(A) S FINDINGS UNDER CHALLENGE. THIS GROUND IS DECIDED IN ASSESSEE S FAVOUR. 8 . THIS LEAVES US WITH REVENUE S THIRD AND FINAL SUBSTANTIVE SEEKING TO RESTORE INTEREST DISALLOWANCE OF RS. 1,29,43,122/ - MADE ON ACCOUNT OF INTE REST EXPENDITURE NOT INCURRED FOR THE PURPOSE OF THE BUSINESS. THE ASSESSEE CLAIMED THIS SUM AS LOSS INCURRED FROM FINANCIAL SERVICES. HE FURTHER STATED TO HAVE INCURRED INTEREST EXPENDITURE OF RS. 2,44,36,874/ - COMPRISING OF BANK INTEREST , INTE REST PAYA BLE AND INTEREST EXPENDITURE . THE ASSESSEE SOUGHT TO EXPLAIN HIS BORROWING TO HAVE BEEN UTILIZED FOR BUSINESS PURPOSES ONLY. THE ASSESSING OFFICER WENT THROUGH HIS BALANCE SHEET, INTEREST FREE FUNDS I.T.A NO. 275 /AHD /2013 A.Y. 2009 - 10 PAGE NO ACIT VS. RAJESH J. DESAI 6 ALONG WITH INVESTMENTS AND DEPOSITS TO HOLD THAT HE HAD UTILIZED INTEREST BEARING FUNDS FOR THE IMPUGNED INVESTMENTS THEREBY DIVERTING INTEREST BEARING FUNDS. 9 . THE ASSESSEE HAS SUCCEEDED IN THE LOWER APPELLATE PROCEEDINGS AS UNDER: - 8. I HAVE GONE THROUGH THE ASSESSMENT ORDER AND SUBMISSION OF THE A.R. OF THE APPELLANT CAREFULLY. IT IS SEEN THAT THE ASSESSING OFFICER HAS NOT MADE DETAILED EXAMINATION OF THE FACTS IN THE CASE OF THE ASSESSEE BEFORE THE DISALLOWING THE CLAIM OF INTEREST U/S.36(1)(III) OF THE I.T. ACT. THE ASSESSING OFFICER HAS OBSERVED TH E FIGURES OF THE BALANCE SHEET TO SAY THAT THE INTEREST FREE FUNDS AVAILABLE WITH THE APPELLANT WERE RS.5.29 CRORES WHEREAS THE INVESTMENT MADE WHICH DID NOT YIELD ANY INTEREST WERE TO THE EXTENT OF RS. 19.02 CRORES. HENCE, HE HELD THAT THE APPELLANT HAD U TILISED INTEREST BEARING FUNDS IN MAKING INVESTMENT WHICH DID NOT YIELD ANY INTEREST. 8.1 THE ABOVE CONTENTION OF THE ASSESSING OFFICER IS NOT RIGHT. THOUGH THE FINDING THAT THE INTEREST FREE FUNDS AVAILABLE WITH THE APPELLANT WERE TO THE EXTENT OF RS.5 .29 CRORES IS CORRECT, HOWEVER, THE ASSESSING OFFICER COULD NOT HAVE BEEN DISALLOWED ANY AMOUNT OF INTEREST IN RESPECT OF LOANS AND ADVANCES GIVEN TO THE EXTENT OF RS. 10.42 CRORES BECAUSE THE APPELLANT WAS CHARGING INTEREST ON THESE ADVANCES. FURTHER, THE DEPOSITS GIVEN WERE FOR THE PURPOSE OF SECURING LANDS ETC. WHICH WERE FOR THE BUSINESS PURPOSE OF THE APPELLANT. IN VIEW OF THE ABOVE, THE ASSESSING OFFICER COULD NOT HAVE BEEN DISALLOWED ANY INTEREST ON ACCOUNT OF BORROWED MONIES BEING INVESTED IN DEPOSI TS AND LOANS AND ADVANCES. 8.2 AS FAR AS THE INVESTMENTS ARE CONCERNED IT IS SEEN THAT MAJOR PART OF THE INVESTMENTS ARE IN SHARES IN FACT THE ASSESSEE HAS MADE INVESTMENTS OF RS.7.07 CRORES IN PURCHASE OF SHARES OF RJD INTEGRATED TEXTILE PARK LTD. INVES TMENTS IN SHARES CANNOT YIELD ANY INCOME WHICH IS CHARGEABLE TO TAX. HENCE, INTEREST EXPENDITURE ATTRIBUTABLE BORROWED FUNDS UTILIZED FOR THE PURPOSE OF MAKING I.T.A NO. 275 /AHD /2013 A.Y. 2009 - 10 PAGE NO ACIT VS. RAJESH J. DESAI 7 INVESTMENTS IN SHARES CANNOT BE ALLOWED AS DEDUCTION U/S.36(1)(IIII) OF THE I.T. ACT. 8.3 THE APPELLANT WAS ASKED TO FURNISH THE DETAILS OF INVESTMENTS MADE IN SHARES. VIDE HIS REPLY FILED ON 20.11.2012, THE APPELLANT HAS FILED DETAILS OF INVESTMENT IN RJD INTEGRATED TEXTILE PARK LTD. WHICH SHOWS THAT THE OPENING BALANCE OF INVESTMENT WAS RS.2,42,5 00/ - THE SUM OF RS. 1 CRORE WAS INVESTED ON 23.02.2009, A SUM OF RS.5 LACS WAS INVESTED ON 25.02.200 AND RS.6 CRORE WAS INVESTED ON 27.02.2009. IN VIEW OF THE FACTS THAT THE OPENING BALANCE OF INVESTMENT OF APPELLANT WAS ONLY RS. 1,92,88,891/ - AND THE APPE LLANT HAD INTEREST FREE FUNDS AVAILABLE OF RS.5, 29, 93,800/ - HENCE, ONLY TO THE EXTENT OF RS.3,30,0 1,822/ - (TOTAL INVESTMENTS OF RS.8,59,95,622 ( - ) TOTAL INTEREST FREE FUNDS OF RS.5, 29, 93, 800) OF BORROWED FUNDS WAS UTILIZED IN MAKING INVESTMENT WHICH DID NOT YIELD ANY TAXABLE INCOME. FROM THE DATES ON WHICH THIS INVESTMENT IS MADE IT IS CLEAR THAT INTEREST BEARING FUNDS WERE UTILISED IN MAKING THESE INVESTMENTS TO THE EXTENT OF RS.3,30,01,822/ - FROM 27.02.2009 TO 31.03.2009. THUS, THE INTEREST PAID BY T HE APPELLANT ON THE MONEY BORROWED @ 12% PER ANNUM, HENCE THE INTEREST DISALLOWABLE IN THIS CASE, WORKS OUT TO RS.3,47,197 (RS.3,30,01,822 X 32 + 365 X 12 - 100). THE ADDITION OF RS. 1,29,43,122/ - IS HENCE REDUCED TO RS. 3,47,1 97/ - . 10 . WE HAVE HEARD R IVAL CON T E N TIONS. RELEVANT CASE RECORDS STAND PERUSED. IT EMERGES FROM THE LOWER APPELLATE FINDINGS THAT THE ASSESSEE HAD ALREADY AVAILABLE AT HIS DISPOSAL INTEREST FREE FUNDS TO THE TUNE OF RS. 5,29,93,800/ - . THE CIT(A) FINDS THAT THE ASSESSEE HAD ONLY UTILIZED INTEREST BEARING FUNDS IN THE INVESTMENTS IN QUESTION AMOUNTING TO RS. 3,30,01,822/ - FROM 27 - 02 - 2009 TO 31 - 03 - 2009. HE THEREAFTER REDUCES THE IMPUGNED INTEREST DISALLOWANCES FOR THIS TIME PERIOD AS RS.3,47,197/ - . THIS CRUCIAL FINDING HAS GONE UN - REBUTT ED IN THE COURSE OF HEARING BEFORE US. WE REJECT REVENUE S ARGUMENT ON THIS SCORE. IT FAILS IN THIS THIRD SUBSTANTIVE GROUND AS WELL. I.T.A NO. 275 /AHD /2013 A.Y. 2009 - 10 PAGE NO ACIT VS. RAJESH J. DESAI 8 11 . THIS REVENUE S APPEAL IS DISMISSED. ORDER PR ONOUNCED IN THE OPEN C OURT ON 11 - 03 - 201 6 SD/ - SD/ - ( PRAMOD KUMAR ) ( S. S. GODARA ) ACCOUNTANT MEMBER JUDICIAL MEMBER AHMEDABAD : DATED 11 /03 /2016 AK / COPY OF ORDER FORWARDED TO: - 1. ASSESSEE 2. REVENUE 3. CONCERNED CIT 4. CIT (A) 5. DR, IT AT, AHMEDABAD 6. GUARD FILE. BY ORDER/ , / ,