Deputy Commissioner of Income-tax, V. Kinetic Communication Ltd., Pune

ITA 294/PUN/2014

• Counselvise Citation: [2015] 134 COUNSELVISE.COM (IT) 1101 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 7 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-09-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2010-2011
• Appeal Filed On: 14-02-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DHEERAJ KUMAR JAIN
• Keywords: Business income; Bad and doubtful debts

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, PUN E , ! '# , $% BEFORE SHRI VIKAS AWASTHY, JM AND SHRI PRADIP KUMAR KEDIA, AM & / ITA NO. 294/PN/2014 ' ( )( / ASSESSMENT YEAR : 2010-11 DY. COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 9, PUNE ....... / APPELLANT *' / V/S. KINETIC COMMUNICATIONS LIMITED, G-92, D-II BLOCK, MIDC, CHINCHWAD, PUNE 411019 PAN : AAACK7632B / RESPONDENT ASSESSEE BY : SHRI C.H. NANIWADEKAR REVENUE BY : SHRI DHEERAJ KUMAR JAIN / DATE OF HEARING : 30-09-2015 / DATE OF PRONOUNCEMENT : 30-09-2015 + / ORDER PER VIKAS AWASTHY, JM : THE APPEAL HAS BEEN FILED BY THE REVENUE AGAINST THE OR DER OF COMMISSIONER OF INCOME TAX (APPEALS)-V, PUNE DATED 22-11- 2013 FOR THE ASSESSMENT YEAR 2010-11. THE SOLITARY GROUND RAIS ED BY THE DEPARTMENT IN APPEAL AGAINST THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS) IS ACCEPTING THE CLAIM OF WRITING OFF OF BAD DEBTS. 2 ITA NO. 294/PN/2014, A.Y. 2010-11 2. THE BRIEF FACTS OF THE CASE ARE : THE ASSESSEE IS A CO MPANY REGISTERED UNDER THE PROVISIONS OF COMPANIES ACT, 1956. T HE ASSESSEE COMPANY IS ENGAGED IN MANUFACTURING AND TRADING OF ELECTRO NIC EQUIPMENTS LIKE COLOUR MONITOR, UPS. CD ROM, DVD, MODEM, MOTH ER BOARD AND AUTO ELECTRONIC COMPONENTS. THE ASSESSEE IS ALSO PROVIDING ENGINEERING AND DESIGN SERVICES AND IT SERVICES. THE ASS ESSEE FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2010-11 ON 1 4-10-2010 DECLARING TOTAL INCOME AS NIL. THE ASSESSEE HAD SET OFF ITS BUSINESS INCOME OF RS.63,03,346/- AGAINST BROUGHT FORWARD BUSINES S LOSSES OF ASSESSMENT YEAR 2009-10. THE CASE OF THE ASSESSEE WA S SELECTED FOR SCRUTINY. ACCORDINGLY, NOTICE U/S. 143(2) WAS ISSUED TO TH E ASSESSEE ON 25-08-2011. DURING SCRUTINY ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER INTER ALIA DISALLOWED WRITING OFF OF BAD DEBTS OF M/S. KINET IC MOTOR CO. LTD. AMOUNTING TO RS.1,27,58,427/-. AGGRIEVED BY THE ASSESSMENT ORDER DATED 31-12-2012, T HE ASSESSEE PREFERRED AN APPEAL BEFORE THE COMMISSIONER OF I NCOME TAX (APPEALS). THE COMMISSIONER OF INCOME TAX (APPEALS) VIDE IMPUG NED ORDER ACCEPTED THE APPEAL OF THE ASSESSEE IN TOTO. THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL AGAINST THE FINDINGS OF THE COM MISSIONER OF INCOME TAX (APPEALS) IN ALLOWING WRITING OFF OF BAD DEBTS. 3. SHRI DHEERAJ KUMAR JAIN REPRESENTING THE DEPARTMENT SUBMITTED THAT THE COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED I N ACCEPTING THE CLAIM OF THE ASSESSEE BY ALLOWING WRITING OFF OF BAD DEBTS . THE BAD DEBTS WRITTEN OFF ARE IN RESPECT OF KINETIC MOTOR CO. LTD. WHICH IS A GROUP CONCERN. THE ASSESSEE HAS NOT BEEN ABLE TO SHO W THAT THE DEBTS ARE ACTUALLY BAD AND IRRECOVERABLE. THE DEBTS HAVE BEE N WRITTEN OFF AS BAD DEBTS ONLY TO SUPPRESS THE INCOME. IT IS THE STR ATEGY OF THE GROUP 3 ITA NO. 294/PN/2014, A.Y. 2010-11 TO REDUCE THE INCOME OF THE PROFIT MAKING GROUP COMPANIES AND THEREBY REDUCING THE INCIDENCE OF TAX. IN SUPPORT OF HIS SUBMISSION S, THE LD. DR PLACED RELIANCE ON THE DECISION OF BANGALORE BENCH OF TH E TRIBUNAL IN THE CASE OF EMBASSY CLASSIC P. LTD. VS. ACIT REPORTED A S 7 ITR (T) 287 (BANGALORE) AND THE DECISION OF HON'BLE MADRAS HIGH COU RT IN THE CASE OF SOUTH INDIA SURGICAL CO. LTD. VS. ACIT REPORTED AS 287 ITR 62 (MADRAS). 4. SHRI C.H. NANIWADEKAR APPEARING ON BEHALF OF THE ASSESS EE STRONGLY SUPPORTED THE FINDINGS OF COMMISSIONER OF INCOME TAX (APPEALS). THE LD. AR SUBMITTED THAT FOR CLAIMING WRITING OFF OF B AD DEBTS, THE ASSESSEE HAS TO ONLY WRITE OFF THE BAD DEBTS IN ITS BOOKS OF ACCOUNT. IT IS FOR THE ASSESSEE, NOT THE DEPARTMENT TO SEE WHETHER THE DEBTS HAVE BECOME BAD AND IRRECOVERABLE. IN SUPPORT O F HIS SUBMISSIONS, THE LD. AR PLACED RELIANCE ON THE JUDGMENT OF T HE HON'BLE SUPREME COURT OF INDIA IN THE CASE OF TRF LIMITED VS. CIT REPORTED AS 323 ITR 397 (SC). THE LD. AR FURTHER SUBMITTED THAT KINETIC MOTOR CO. LTD. IS ONE OF THE GROUP CONCERNS AND IS A LOSS MAKING CO MPANY. THE ASSESSEE COULD NOT RECOVER DEBTS FROM THE SAID COMPANY , AS THE COMPANY WAS IN FINANCIAL CRISIS AND EVEN IN FUTURE THERE WAS NO CHANCE TO RECOVER ANY AMOUNT WHATSOEVER FROM THE SAID COMPAN Y. THE LD. AR PLACED ON RECORD THE LIST OF CREDITORS OF KINETIC MOTOR CO. LTD. WITH WHICH THE SAID COMPANY HAD MADE ONE TIME SETTLEMENT. 5. WE HAVE HEARD THE SUBMISSIONS MADE BY THE REPRESEN TATIVES OF BOTH THE SIDES AND HAVE PERUSED THE ORDERS OF THE AUT HORITIES BELOW. THE ONLY ISSUE RAISED IN THE APPEAL BY THE DEPARTMENT IS , WHETHER THE COMMISSIONER OF INCOME TAX (APPEALS) WAS JUSTIFIED IN ACCEPTIN G THE 4 ITA NO. 294/PN/2014, A.Y. 2010-11 CLAIM OF ASSESSEE IN WRITING OFF OF BAD DEBTS IN RESPECT OF KIN ETIC MOTOR CO. LTD.? THE MAIN CONTENTION OF THE DEPARTMENT IS THAT THE ASSESSEE HAS WRITTEN OFF THE DEBTS OF KINETIC MOTOR CO. LTD. A GROUP CONCERN, TO REDUCE THE PROFITS OF THE ASSESSEE COMPANY AND THEREBY REDUCING THE TAX LIABILITY. 6. A PERUSAL OF IMPUGNED ORDER SHOWS THAT THE COMMISSION ER OF INCOME TAX (APPEALS) AFTER CONSIDERING THE FINANCIAL STATUS OF THE DEBT OR COMPANY HAS ACCEPTED THE CLAIM OF THE ASSESSEE. THE RE LEVANT EXTRACT OF THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) R EADS AS UNDER: 6. I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CA SE AS WELL AS REPLY OF THE APPELLANT, IN THIS CASE, IT IS SEEN THAT KMCL W HICH IS AN ASSOCIATE CONCERN OF THE APPELLANT COMPANY, WAS ENGAGED IN MA NUFACTURE OF TWO WHEELERS. DURING THE YEAR 2008-09, KMCL ENTERED INT O AGREEMENT WITH MAHINDRA 2 WHEELERS PVT. LTD. (MTWL) FOR SALE OF PL ANT & MACHINERY AND LAND PERTAINING TO 2 WHEELER BUSINESS. LIABILITY TO VENDORS FOR SUPPLIES MADE BY VENDORS TO KMCL TILL THAT DATE WAS TO BE DI SCHARGED BY KMCL. AT THE TIME OF SALE THE APPELLANT WAS HAVING BALANC E OF APPROX. 237 LACS TO BE RECOVERED FROM KMCL. OUT OF THAT AMOUNT OF RS .110 LACS WAS RECOVERED AND BALANCE AMOUNT OF RS.127 LACS WAS WRI TTEN OFF AS BAD DEBTS. THE ASSESSING OFFICER TREATED THIS ARRANGEME NT AS RESTRUCTURING OF FINANCE NECESSITATED BY FINANCIAL CONSTRAINTS OF TH E GROUP AS A WHOLE AND NOT ON ACCOUNT OF IRRECOVERABILITY OF THE BAD DEBTS IN RESPECT OF KMCL. TO UNDERSTAND THE ISSUE, THE LEARNED COUNSEL OF THE AP PELLANT WAS ASKED TO GIVE THE DETAILS OF SETTLEMENT AND PAYMENT BY KMCL TO OTHER VENDORS COMPARED TO THE TOTAL DEBTS, THE APPELLANT SUBMITTE D THAT PERCENTAGE OF AMOUNT PAID IN RESPECT OF TOTAL DUES WAS 57.19% COM PARED TO 46.32% OF THE APPELLANT. HOWEVER, IT WAS FURTHER SUBMITTED TH AT, THE ABOVE % OF 57.19% INCLUDES SECURE DEBTS OF BANKS WHICH WAS REQ UIRED TO BE GIVEN PRIORITY AND IF THE DEBTS OF BANKS ARE EXCLUDED THE N THE PAYMENT MADE BY KMCL TO OTHER VENDORS IS ONLY 41.8%, COMPARED TO 46.32% OF THE APPELLANT AND AS PER THE LIST SUBMITTED BY THE APPE LLANT IT IS SEEN THAT KMCL HAD NEGOTIATED SETTLEMENT WITH ALMOST ALL THE VENDORS TO WHOM ONLY 41.88% WAS PAID OUT OF THE TOTAL DEBTS. THIS T HE PAYMENT OF 46,32% TO THE APPELLANT CANNOT BE SAID TO BE DISADVANTAGES TO THE APPELLANT 5 ITA NO. 294/PN/2014, A.Y. 2010-11 COMPANY AND CONSIDERING THE TOTALITY OF THE FACTS I T CANNOT BE SAID THAT THE APPELLANT COMPANY, BEING ASSOCIATE CONCERN WAS PUT AT DISADVANTAGE COMPARED TO OTHER VENDORS BY KMCL IN R ESPECT OF ONE TIME SETTLEMENT. ACCORDINGLY, IT IS HELD THAT THE ASSESS ING OFFICER WAS NOT JUSTIFIED IN HOLDING THAT WRITING OFF BAD DEBTS WAS NECESSITATED ON ACCOUNT OF GROUP CONSIDERATIONS AND NOT ON ACCOUNT OF IRRECOVERABILITY OF DEBTS PERTAINING TO THE APPELLANT COMPANY. ACCORDIN GLY, THE ASSESSING OFFICER IS DIRECTED TO DELETE THE ADDITION OF RS.1, 27,58,427/-. THUS, THE GROUND IS ALLOWED. 7. THE REVENUE IN ITS APPEAL HAS NOT CHALLENGED THE FINDING OF FACT GIVEN BY THE COMMISSIONER OF INCOME TAX (APPEALS) WITH RES PECT TO PRECARIOUS FINANCIAL POSITION OF THE DEBTOR COMPANY AND THA T IT HAD ENTERED INTO ONE TIME SETTLEMENT WITH ITS VARIOUS CREDITO RS INCLUDING BANKS. THE LD. AR HAS BROUGHT OUR ATTENTION TO THE WRIT TEN SUBMISSIONS FILED BEFORE THE COMMISSIONER OF INCOME TAX (APP EALS) WHERE IN THE SUMMARIZED POSITION OF THE DEBTS SETTLED BY THE KINETIC MOTOR CO. LTD. WAS FURNISHED. THE SAME IS REPRODUCED HERE-IN-UND ER: TOTAL LEVEL OTHER THAN BANK 1. TOTAL AMOUNT PAYABLE BEFORE THE TIME SETTLEMENT RS.100,59,42,834 RS.59,95,10,7 75/- 2. TOTAL PAID BY KMCL AS ONE TIME SETTLEMENT RS.57,53,48,899 RS.25,10,96,892 3. PERCENTAGE OF AMOUNT PAID TO TOTAL DUES 57.19% 41.88% 4. PERCENTAGE OF AMOUNT PAID TO KCL TO TOTAL DUES 46.32% 46.32% 8. A PERUSAL OF THE FACTS CLEARLY SHOWS THAT KINETIC MOTOR CO. LTD. WAS IN FINANCIAL DISTRESS AND IT COULD PAY ONLY PART OF ITS D EBTS. SINCE, THE ASSESSEE IN ITS BOOKS OF ACCOUNT HAD WRITTEN OFF BAD DEBTS, THE ASSESSEE WAS NOT REQUIRED TO ESTABLISH THAT DEBTS WER E IN FACT IRRECOVERABLE. THE HON'BLE SUPREME COURT OF INDIA IN THE CASE OF TRF 6 ITA NO. 294/PN/2014, A.Y. 2010-11 LIMITED VS. CIT (SUPRA) HAS HELD THAT AFTER THE AMENDMENT OF SECTION 36(1)(VII) OF THE ACT W.E.F. 1 ST APRIL,1989 IT IS NOT NECESSARY FOR THE ASSESSEE TO ESTABLISH THAT THE DEBT, IN FACT, HAS BECOME IRRECOVERABLE. IT IS ENOUGH IF THE BAD DEBT IS WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE. 9. THE LD. DR PLACED RELIANCE ON THE DECISION OF BANGALORE B ENCH OF THE TRIBUNAL IN THE CASE OF EMBASSY CLASSIC P. LTD. VS. AC IT (SUPRA) WHEREIN THE CO-ORDINATE BENCH OF THE TRIBUNAL AFTER CONSI DERING THE JUDGMENT OF HON'BLE SUPREME COURT OF INDIA IN THE CASE O F TRF LIMITED VS. CIT (SUPRA) HAS DISTINGUISH THE SAME. IN THE SAID CASE THE ASSESSEE HAD WRITTEN OFF BAD DEBTS IN THE BOOKS OF ACCOUNT. HOWEV ER, THE AMOUNT WAS RECOVERED BY THE ASSESSEE BEFORE FILING OF THE RETURN ITSELF. THUS, AT THE TIME OF FILING OF RETURN OF INCOME, NO DEBT WAS DUE. THE TRIBUNAL OBSERVED THAT THE ASSESSEE CANNOT CONVERT AN Y LIVE AMOUNT INTO A BAD DEBT ONLY ON THE BASIS OF THE TECHNICAL RULE O F WRITING OFF. IT WAS NOT A CASE OF BAD DEBT BUT A CASE OF DELAYED PAYME NT. IT WAS IN BACKDROP OF THESE FACTS THE TRIBUNAL HELD, THAT THE JUDGM ENT OF HON'BLE SUPREME COURT OF INDIA IN THE CASE OF TRF LIMITED VS. CI T (SUPRA) WILL NOT APPLY. WE FIND THAT THE FACTS IN THE PRESENT CASE A RE ENTIRELY AT VARIANCE. THEREFORE, THE DECISION OF BANGALORE BENCH OF TH E TRIBUNAL IN THE CASE OF EMBASSY CLASSIC P. LTD. VS. ACIT (SUPRA) WILL HAV E NO APPLICATION IN THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE. 10. THE LD. DR HAS ALSO PLACED RELIANCE ON THE DECISION OF H ON'BLE MADRAS HIGH COURT IN THE CASE OF SOUTH INDIA SURGICAL CO. LTD. VS. ACIT (SUPRA). IN THE SAID CASE THE ASSESSEE HAD WRITTEN OF THE DEBTS DUE FROM THE GOVERNMENT AS BAD DEBTS. THE HON'BLE HIGH COURT HELD 7 ITA NO. 294/PN/2014, A.Y. 2010-11 THAT IT WOULD BE PREPOSTEROUS TO CONSIDER THAT THE GOV ERNMENT WAS NOT IN A POSITION TO DISCHARGE ITS ACKNOWLEDGED DEBT. IT MIGHT BE DUE TO CERTAIN FUND-FLOW PROBLEM AND PRIORITY BETWEEN DIFFERENT NEED S AND THERE IS POSTPONEMENT IN DISCHARGING CERTAIN LIABILITY BY TH E GOVERNMENT. THERE WAS NO NEGATION OF CLAIM NOR HAS ANY GOVERNMENT HOSPITAL WRITTEN THAT THEY WOULD NOT PAY ANY OF THESE AM OUNTS. IN THE LIGHT OF THESE FACTS THE HON'BLE HIGH COURT DISALLOWED THE C LAIM OF ASSESSEE IN WRITING OFF OF BAD DEBTS. IN THE PRESENT CASE THE DEBTOR COMPANY HAD ENTERED INTO ONE TIME SETTLEMENT NOT ONLY WITH THE ASSESSEE COMPANY BUT WITH VARIOUS OTHER CREDITORS, INCLUD ING BANKS. MOREOVER, IT IS NOT A CASE WHERE THE AMOUNT IS DUE FROM GOVERNMENT OR ANY INSTRUMENTALITY OF THE GOVERNMENT. THEREFORE, THE RAT IO LAID DOWN BY THE HON'BLE MADRAS HIGH COURT IN THE CASE OF SOUTH INDIA SURGICAL CO. LTD. VS. ACIT (SUPRA) WOULD NOT APPLY IN THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE. 11. ONE OF THE ARGUMENTS RAISED BY THE LD. DR WAS THAT THE ASSESSEE AND THE DEBTOR COMPANY ARE THE PART OF SAME GROUP, W RITING OFF OF BAD DEBTS IS A COLOURABLE DEVICE TO SET OFF THE PROFITS OF ONE GROUP COMPANY FROM THE LOSS OF OTHER GROUP COMPANIES. WE ARE NOT CONV INCED WITH THE PROPOSITION PUT FORTH BY THE LD. DR. BOTH THE COMPANIES I.E. THE ASSESSEE AS WELL AS KINETIC MOTOR CO. LTD. ARE SEPARATE LE GAL ENTITIES AND THE ASSESSEE HAVE BEEN ABLE TO SHOW THAT KINETIC M OTOR CO. LTD. IS A LOSS MAKING COMPANY. THUS, WE REJECT THIS CONTENTION OF THE LD. DR BEING DEVOID OF MERIT. WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS) IN ALLOWING THE CLAIM OF ASSESSEE. 8 ITA NO. 294/PN/2014, A.Y. 2010-11 12. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISMISSED BEING DEVOID OF MERIT. ORDER PRONOUNCED ON WEDNESDAY, THE 30 TH DAY OF SEPTEMBER, 2015. SD/- SD/- (PRADIP KUMAR KEDIA) (VIKAS AWASTHY) / ACCOUNTANT MEMBER / JUDICIAL MEMBER / PUNE; !' / DATED : 30 TH SEPTEMBER, 2015 RK +,!-./)- / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT. 2. / THE RESPONDENT. 3. # # $ () / THE CIT(A)-V, PUNE 4. # # $ / THE CIT-V, PUNE 5. '() *+ , # *+ , , -./ , / DR, ITAT, A BENCH, PUNE. 6. )01 23 / GUARD FILE. // ' // TRUE COPY// #4 / BY ORDER, 5 */ / PRIVATE SECRETARY, # *+ , / ITAT, PUNE