DCIT, CIR-6, KOLKATA, Kolkata V. Universal Industrial Fund Ltd., Kolkata

ITA 297/KOL/2014

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 9197 (ITAT-KOLKATA)
• Duration Of Justice: 3 year(s) 1 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-03-2017
• Appeal Filed By: Department
• Bench Allotted: B
• Next Hearing Date: 01-11-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 18-02-2014
• Court: TRIBUNAL
• Keywords: Bad and doubtful debts
• Section: 14A; 139

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, B BENCH, KO LKATA BEFORE SRI ABY T.VARKEY, JM AND SHRI WASEEM AHMED, AM I.T. A. NO. 297/KOL/2014 ASSESSMENT YEARS: 2010-11 FOR THE APPELLANT ANAND B AIWAR ,CIT - DR FOR THE RESPONDENT SHRI D S DAMLE, FCA & SRI A. DUDHEWALA, ACA DATE OF HEARING 07.02 .2017 DATE OF PRONOUNCEMENT 24 .03. 2017 ORDER PER ABY T. VARKEY, JM THIS IS AN APPEAL PREFERRED BY THE REVENUE AGAINST THE ORDER OF THE LD. CIT(A)-VI, KOLKATA, DT.23.11.2013 FOR ASSESSMENT YEAR 2010-11. 2. THE FIRST GROUND OF THE REVENUE IS AGAINST THE D ELETION OF RS.3,41,87,613/- WHICH WAS CLAIMED BY THE ASSESSEE AS DEBT WRITTEN OFF. 3. BRIEF FACTS OF THE CASE IS THAT THE ASSESSEE CO MPANY, WHICH IS A NON-BANKING FINANCIAL COMPANY (NBFC), IN ITS COMPUTATION OF RET URN OF INCOME CLAIMED DEDUCTION OF DEBT WRITTEN OFF RS.3,41,87,163/-. ON BEING ASKED B Y THE AO IT WAS EXPLAINED THAT SINCE THE ASSESSEE IS A NBFC COMPANY ENGAGED IN THE BUSIN ESS OF GRANTING LOANS AND ADVANCES AND THAT THE ASSESSEE HAD GRANTED LOAN TO A PARTY NAMED M/S DHANANI INTERNATIONAL LTD., ALMOST 10 YEARS BACK AND INTERE ST WAS CHARGED ON THE SAID LOAN AMOUNT. SUBSEQUENTLY, IT WAS FOUND THAT THE SAID PA RTY WAS NOT REGULAR IN PAYING INTEREST AND LATER ON, THE DEBT BECAME BAD DEBT AND , THEREFORE, IT WAS CATEGORIZED AS DCIT, CIRCLE - 6, KOLKATA. [PAN :AAACU4032H] -VS- UNIVERSAL INDUSTRIAL FUND LTD. (APPELLANT) (RESPONDENT) 2 ITA NO.297/KOL/2014 UNIVERSAL INDUSTRIAL F UND LTD., AY 2010-11 2 NON-PERFORMING ASSET. IT WAS BROUGHT TO THE KNOWLED GE OF THE AO THAT SINCE THE LOAN GIVEN TO M/S. DHANANI INTERNATIONAL LTD. BECAME BAD CONSEQUENTLY THE DEBT AND THE INTEREST THEREON WAS WRITTEN OFF IN THE BOOKS IN TH E INSTANT ASSESSMENT YEAR. THE AO REJECTED THE CLAIM OF WRITING OFF OF DEBT ON THE GR OUND THAT IT WAS NOT SUNDRY DEBTOR AND INTEREST WAS NOT BEING ACCOUNTED FOR PAST SEVERAL Y EARS. AGGRIEVED BY THE AFORESAID ORDER OF THE AO, THE ASSESSEE PREFERRED AN APPEAL B EFORE THE LD. CIT(A), WHO WAS PLEASED TO ALLOW THE APPEAL OF THE ASSESSEE AND DEL ETED THE ADDITION. AGGRIEVED BY THE DECISION OF THE LD. CIT(A), THE REVENUE IS IN APPEA L BEFORE US. 4. WE HAVE HEARD RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE TAKE NOT THAT THE ASSESSEE IS A NBFC DULY AUTHOR IZED BY RESERVE BANK OF INDIA. AS A NBFC IT IS ENGAGED IN THE BUSINESS OF GRANTING LOAN S AND INVESTMENTS IN SHARES AND SECURITIES. THE ASSESSEE HAS GIVEN LOAN TO M/S. DHA NANI INTERNATIONAL LTD. IN THE COURSE OF ITS BUSINESS. THE ASSESSEE IN THE INSTANT YEAR HAS WRITTEN OFF BAD DEBT OF RS.3,41,87,163/- IN ITS BOOKS OF ACCOUNT, WHICH WAS REJECTED BY THE AO ON THE GROUND THAT IT WAS NOT A SUNDRY DEBTOR AND THAT INTEREST W AS NOT BEING ACCOUNTED FOR PAST SEVERAL YEARS. ON APPEAL, THE LD. CIT(A) WAS PLEAS ED TO ALLOW THE CLAIM OF THE ASSESSEE VIDE PARA 3.2 OF HIS ORDER BY HOLDING AS UNDER: 3.2. I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE. THE APPELLANT IS THE NBFC DULY AUTHORIZED BY RBI. AS A NBFC, IT IS ENGAGED I N THE BUSINESS OF, INTER ALIA, LENDING OF MONEY. THE LOAN GIVEN TO M/S. DHANANI I NTERNATIONAL LIMITED WAS ADVANCED IN COURSE OF ITS PRINCIPAL BUSINESS GIVING LOANS. THE ASSESSING OFFICER HAS REJECTED THE CLAIM OF WRITE OFF ON THE GROUND THAT IT WAS NOT SUNDRY DEBTOR AND INTEREST WAS NOT BEING ACCOUNTED FOR PAST SEVERAL Y EARS. ALLOWANCE FOR WRITE OFF OF A BAD DEBT IS GOVERNED BY PROVISION OF SECTION 36(1 ) (VII) READ WITH SECTION 36(2). CLAUSE (I) OF SUB-SECTION (2) OF SECTION 36 STATES THAT NO SUCH DEDUCTION SHALL BE ALLOWED, UNLESS SUCH DEBT OR PART THEREOF HAS BEEN TAKEN INTO ACCOUNT IN COMPUTING THE INCOME OF THE ASSESSEE OF THE PREVIOUS YEAR IN WHICH THE AMOUNT OF SUCH DEBT 3 ITA NO.297/KOL/2014 UNIVERSAL INDUSTRIAL F UND LTD., AY 2010-11 3 OR PART THEREOF IS WRITTEN OFF OR OF AN EARLIER PRE VIOUS YEAR, OR REPRESENTS MONEY LENT IN THE ORDINARY COURSE OF THE BUSINESS OF BANKING O R MONEY LENDING WHICH IS CARRIED ON BY THE ASSESSEE. SO FAR AS INTEREST COMPONENT OF THE AMOUNT WRITTEN OF IS CONCERNED, THE SAME WAS DULY TAKEN INTO ACCOUNT IN COMPUTING INCOME FOR THOSE YEARS TO WHICH IT PERTAINS. THOUGH THE APPELLANT HA S, IN THE PAST SEVERAL YEARS, NOT ACCOUNTED FOR INTEREST INCOME, THE INTEREST WRITTEN OFF PERTAINS TO THE YEARS IN WHICH SUCH INTEREST HAD BEEN RECOGNIZED AND TAKEN INTO AC COUNTS INCOME. SO FAR AS THE PRINCIPAL AMOUNT IS CONCERNED, IT IS TRUE THAT THE AMOUNT WAS NEVER CONSIDERED IN COMPUTING INCOME OF ANY ASSESSMENT YEAR. HOWEVER, T HE SAME REPRESENTS MONEY LENT IN THE ORDINARY COURSE OF BUSINESS OF LENDING MONEY IN FORM OF LOAN WHICH THE PRINCIPAL BUSINESS OF THE APPELLANT. THE SEVERAL DE CISIONS CITED BY THE APPELLANT, INCLUDING THAT OF TULIP STAR HOTELS LIMITED (SUPRA) ; ALSO SUPPORT THE APPELLANT'S CLAIM FOR DEDUCTION. THE JURISDICTIONAL BENCH OF TR IBUNAL HAS ALSO TAKEN SIMILAR VIEW IN THE CASE OF ASST. CIT VS PHILIPS CARBON BLACK LT D (ITA NO. 1447/KO1/2006) AND THE REVENUE'S APPEAL AGAINST THE TRIBUNAL'S ORDER I N THAT CASE HAS BEEN DISMISSED BY HON'BLE CALCUTTA HIGH COURT. CONSIDERING THE AFORES AID FACTS AND RESPECTFULLY FOLLOWING THE RATIO SET BY VARIOUS JUDICIAL AUTHORI TIES, INCLUDING JURISDICTIONAL HIGH COURT AND TRIBUNAL, THE ADDITION OF RS.3,41 ,87,613 1- IS DELETED. 5. WE NOTE THAT THE DEDUCTION OF BAD DEBT WRITTEN OFF IN THE BOOKS OF ACCOUNT IS ALLOWABLE AS PER THE PROVISION OF SECTION 36(1)(VII ) OF THE ACT. HOWEVER, THE SAID PROVISION IS SUBJECT TO THE PROVISION OF SUB-SECTIO N (2) OF SECTION 36 OF THE ACT. ON A PLAIN READING OF THE PROVISION OF SECTION 36(1)(VII ) ALONG WITH SECTION 36(2)(I) OF THE ACT IT IS CLEAR THAT THERE ARE TWO CATEGORIES OF BAD DEBTS IN RESPECT OF WHICH DEDUCTION IS ALLOWABLE VIZ., (I) DEBT WHICH HAS BEEN ASSESSED AS INCOME IN THE PREVIOUS YEAR OR ANY PRECEDING PREVIOUS YEAR WHICH HAS NOW BECOME IRRECO VERABLE AND WRITTEN OFF IN THE BOOKS OF ACCOUNT AND (II) MONEY LENT IN THE ORDINAR Y COURSE OF BUSINESS OF BANKING OR MONEY LENDING WHICH IS CARRIED ON BY THE ASSESSEE A ND WHICH HAS BECOME IRRECOVERABLE AND HAS BEEN WRITTEN OFF IN THE BOOKS OF ACCOUNT. WE FURTHER NOTE THAT THE ASSESSEE A NBFC HAS LENT AND ADVANCED MONEY AMOUNTING TO RS.2, 07,58,000/- IN THE ORDINARY COURSE OF ITS BUSINESS. THE ASSESSEE HAS CREDITED INTEREST IN THE ASSESSEES BOOKS IN THE FYS 1999-2000 AND 2000-01 AMOUNTING TO RS.71,99,443 /- AND RS.62,98,553/- RECEIVED 4 ITA NO.297/KOL/2014 UNIVERSAL INDUSTRIAL F UND LTD., AY 2010-11 4 OUT OF WHICH THE ASSESSEE WAS ABLE TO REALIZE ONLY RS.68,383/-. IN THE LIGHT OF THE SAID FACT, THE UNREALIZED INTEREST INCOME WHICH HAS BEEN BOOKED AS INCOME IN FYS 1999-2000 AND 2000-01 AMOUNTING TO RS.1,34,59,613/- ATTRACTS THE FIRST LIMB OF SUB-CLAUSE (I) OF CLAUSE (2) OF SECTION 36 OF THE ACT. THE PRINCIPAL AMOUNT OF RS.2,07,58,000/- WRITTEN OFF IN THE BOOKS WERE COVERED BY THE SECOND LIMB OF SUB -CLAUSE (I) OF CLAUSE (2) OF SEC. 36 OF THE ACT, BEING THE AMOUNT OF MONEY LENT IN THE O RDINARY COURSE OF BUSINESS. THEREFORE, IN THE PRESENT CASE, WE NOTE THAT THE DE BT WAS TAKEN INTO ACCOUNT IN THE INCOME OF THE ASSESSEE FOR THE AYS 2000-01 AND 2001 -02 WHEN THE INTEREST INCOME ACCRUING THEREON WAS TAXED IN THE HANDS OF THE ASSE SSEE. THE NATURE OF THE INCOME INDICATED THE TRANSACTIONS FROM WHICH IT EMERGED. THE TRANSACTION WAS THE DEBT AND THE DEBT WAS TAKEN INTO ACCOUNT IN COMPUTING THE INCOME OF THE ASSESSEE OF THE RELEVANT PREVIOUS YEAR. THE PRINCIPAL AMOUNT WHICH HAS BEEN WRITTEN OFF ATTRACTS CLAUSE (I) OF SUB-SECTION (2) OF SECTION 36 OF THE ACT AND, THERE FORE, THE CONDITIONS SPECIFIED IN SECTION 36(1)(VII) OF THE ACT AND REQUIREMENT OF CLAUSE (I) OF SUB-SECTION (2) OF SEC. 36 OF THE ACT HAVE BEEN FULFILLED AND, THEREFORE, THE LD. CIT(A) HAS RIGHTLY DELETED THE ADDITION AND ALLOWED THE CLAIM OF THE ASSESSEE. WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD. CIT(A) AND, THEREFORE, WE DISMISS THIS GROUND OF AP PEAL PREFERRED BY THE REVENUE. 6. GROUND NO. 2 READS AS UNDER: 2. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CAS E, THE CIT(A) ERRED IN HOLDING THAT IF NET OF INTEREST RECEIVED AND INTEREST PAID IS POSITIVE FIGURE, NO PART OF INTEREST CAN BE DISALLOWED UNDER RULE 8D(2)(II) AS ATTRIBUTABLE TO EARNING TAX FREE DIVIDEND, IGNORING THAT FACT THAT THE PROVISIONS OF RULE 8D(2)(II) IS RESTRICTED TO THE EXPENSE ON ACCOUNT OF INTEREST ATTRIBUTABLE TO THE INVESTMENT FROM WHICH TAX FREE INCOME WAS EARNED. 5 ITA NO.297/KOL/2014 UNIVERSAL INDUSTRIAL F UND LTD., AY 2010-11 5 7. THE MAIN GRIEVANCE OF THE REVENUE IS THAT THE LD . CIT(A) IGNORED THE FACT THAT THE PROVISIONS OF RULE 8D(2)(II) IS RESTRICTED TO THE E XPENSES ON ACCOUNT OF INTEREST ATTRIBUTABLE TO THE INVESTMENTS FROM WHICH TAX FREE INCOME WAS EARNED. THE BRIEF FACTS OF THE CASE AS NOTED BY THE LD. CIT(A) READS AS UND ER: THE APPELLANT IS ENGAGED IN THE BUSINESS OF LOAN F INANCING. DURING THE YEAR THE APPELLANT HAD PAID INTEREST OF RS.6,68,38,624/- ON THE LOANS OBTAINED AND RECEIVED INTEREST OF RS.7,26,62,380/- ON LOANS ADVANCED IN T HE COURSE OF BUSINESS. NET RESULT WAS POSITIVE INTEREST INCOME OF RS.58,23,756/-. APART FROM THE INTEREST INCOME, THE APPELLANT HAD ALSO EARNED DIVIDEND OF RS.5,20,74,730/-. IN T HE RETURN OF INCOME FILED U/S. 139 THE APPELLANT SUO MOTO INVOKED RULE 8D AND DISALLOWED A SUM OF RS.68,98,734/- UNDER SECTION 14A OF THE INCOME-TAX ACT, 1961. THE COMPU TATION OF THE SAID DISALLOWANCE IS AS FOLLOWS: RULE PARTICULARS AMOUNT 8D(2)(I) EXPENDITURE INCURRED DIRECTLY IN RELATION TO EARNING DIVIDEND INCOME NIL 8D(2)(II) INTEREST IN RELATION TO DIVIDEND INCOME INTEREST X AVERAGE VALUE OF INVESTMENTS AVERAGE VALUE OF TOTAL ASSETS (SINCE NET INTEREST IS POSITIVE INCOME, DISALLOWANCE IS WORKED OUT AT NIL) 8D(2)(III) ADMINISTRATIVE EXPENDITURE 68,98,734 0.5 % OF THE AVERAGE VALUE OF INVESTMENTS TOTAL DISALLOWANCE UNDER SECTION 14A 68,98,734 THE AO HOWEVER IN HIS IMPUGNED ORDER OBJECTED TO TH E COMPUTATION OF THE APPELLANT AND DISALLOWED A FURTHER SUM OF RS.3,91,97,029/- UNDER SECTION 14A OF THE I. T. ACT, 1961. AGGRIEVED, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE LD. CIT(A) WHO WAS PLEASED TO ALLOW THE CLAIM OF THE ASSESSEE AND DELETED THE DIS ALLOWANCE OF RS.3,91,97,029/-. AGGRIEVED BY THE SAID DECISION OF LD. CIT(A), THE R EVENUE IS NOW IN APPEAL BEFORE US. 6 ITA NO.297/KOL/2014 UNIVERSAL INDUSTRIAL F UND LTD., AY 2010-11 6 8. WE HAVE HEARD RIVAL SUBMISSIONS AND GONE THROUGH FACTS AND CIRCUMSTANCES OF THE CASE. WE NOTE THAT DURING THE YEAR THE ASSESSE E HAS PAID INTEREST OF RS.6,68,38,624/- ON THE LOANS OBTAINED AND RECEIVED INTEREST OF RS.7,26,62,380/- ON LOANS ADVANCED IN THE COURSE OF BUSINESS. IN THE P &L ACCOUNT NET INTEREST IS REFLECTED SHOWING A POSITIVE INTEREST INCOME OF RS.58,23,756 /-. IN THE YEAR UNDER CONSIDERATION APART FROM THE INTEREST INCOME THE ASSESSEE HAS EAR NED DIVIDEND OF RS.5,20,74,730/-. THE ASSESSEE HAS DISALLOWED IN ITS RETURN OF INCOME A SUM OF RS.68,98,734/- WHICH WAS 0.5% OF THE AVERAGE VALUE OF INVESTMENT AS PER RULE 8D(2)(III). THE AO, HOWEVER, COMPUTED THE DISALLOWANCE AS PER RULE 8D(2)(II) AND DISALLOWED A FURTHER SUM OF RS.3,91,97,029/-. ON APPEAL, THE LD. CIT(A) TAKING INTO ACCOUNT THE FACT THAT THE ASSESSEES INTEREST INCOME IS HIGHER THAN INTEREST EXPENDITURE AND SINCE THE NET INTEREST EXPENDITURE IS NEGATIVE THE ASSESSEE HAS NOT INCURR ED ANY NET EXPENDITURE ON INTEREST AND THEREAFTER, THE LD. CIT(A) RELIED ON THE DECISI ON OF THE KOLKATA TRIBUNAL IN THE CASE OF DCIT VS. TRADE APARTMENT LTD. IN ITA NO. 1277/KO L/2011, WHEREIN THE TRIBUNAL HAS HELD AS UNDER: ONCE THERE IS NO NET INTEREST EXPENDITURE UPON SE TTING OFF INTEREST CREDITED TO PROFIT & LOSS ACCOUNT, NO PART OF INTEREST DEBITED CAN BE DISALLOWED AS ATTRIBUTABLE TO EARNING TAX FREE DIVIDEND. 9. FOLLOWING THE SAID ORDER, THE LD. CIT(A) HAS GIV EN RELIEF TO THE ASSESSEE. WE NOTE FROM THE P&L ACCOUNT OF THE ASSESSEE THAT THE NET I NTEREST REFLECTED IS AN INTEREST INCOME OF RS.58,23,756/-. RULE 8D(2)(II) CANNOT BE APPLIED WHEN THERE IS NO NET INTEREST EXPENDITURE UPON SETTING UP OF INTEREST CREDITED TO THE P&L ACCOUNT AND, THEREFORE, NO PART OF INTEREST DEBITED CAN BE DISALLOWED AS ATTRI BUTABLE TO EARNING TAX FREE DIVIDEND. 7 ITA NO.297/KOL/2014 UNIVERSAL INDUSTRIAL F UND LTD., AY 2010-11 7 THE LD. DR COULD NOT CONTROVERT THIS FACT AND, THER EFORE, THE AO ERRED IN COMPUTING DISALLOWANCE UNDER RULE 8D(2)(II) AND, THEREFORE, T HE LD. CIT(A) HAS CORRECTLY ALLOWED RELIEF TO THE ASSESSEE AND WE DO NOT FIND ANY INFIR MITY IN THE ORDER PASSED BY THE LD. CIT(A) ON THIS ISSUE AND, THEREFORE, WE UPHOLD THE IMPUGNED ORDER OF LD. CIT(A) AND DISMISS THIS GROUND OF APPEAL OF REVENUE. 10. IN THE RESULT, THE APPEAL OF THE REVENUE IS DI SMISSED. ORDER PRONOUNCED IN THE COURT ON 24.03.2017 SD/- SD/- [WASSEM AHMED] [A.T.VARKEY] ACCOUNTANT MEMBER JUDICIAL MEMBER DATED :24TH MARCH, 2017 {JD, SR. PS} COPY OF THE ORDER FORWARDED TO: 1. ASSESSEE UNIVERSAL INDUSTRIAL FUND LTD., 31, N. S . ROAD, KOL-1 2.REVENUE- DCIT, CIRCLE-6, KOLKATA. 3.CIT(A)- KOLKATA. 4.CIT , KOLKATA. 5. CIT(DR), KOLKATA BENCHES, KOLKATA. TRUE COPY BY ORDER ASSTT. REGISTRAR, ITAT, KOLKATA