HIREN N DHARAMSHI, MUMBAI V. DCIT (OSD-II) CEN RG-7, MUMBAI

ITA 3032/MUM/2014

• Counselvise Citation: 303219914 RSA 2014
• Duration Of Justice: 4 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-09-2014
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: SMC
• Assessment Year: 1998-1999
• Appeal Filed On: 02-05-2014
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: NEIL PHILIP
• Assessee Lawyers: SHANKAR K JALGAR
• Keywords: Bad and doubtful debts; Block assessment
• Section: 132

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL 'SMC' BENCH, MUMBAI BEFORE SHRI D. MANMOHAN, VICE PRESIDENT ITA NO. 3032/MUM/2014 (ASSESSMENT YEAR: 1998-99) SHRI HIREN N. DHARAMSHI VS. DCIT (OSD-II), CENTRAL RANGE-7 A-22, MADHUR MILAN DR. R.P. ROAD, MULUND (W) MUMBAI 400080 AAYAKAR BHAVAN, M.K. ROAD MUMBAI 400020 PAN - AHAPD3409R APPELLANT RESPONDENT APPELLANT BY: SHRI SHANKAR K. JALGAR RESPONDENT BY: SHRI NEIL PHILIP DATE OF HEARING: 09.09.2014 DATE OF PRONOUNCEMENT: 09.09.2014 O R D E R PER D. MANMOHAN, V.P. THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER PASSED BY THE CIT(A)-40, MUMBAI AND IT PERTAINS TO AY 1998-99. 2. ASSESSEE CLAIMED DEDUCTION OF A SUM OF ` 2,43,550/- AS BAD DEBT REFERABLE TO THE AMOUNT RECEIVABLE FROM ONE OF THE PARTIES ON WHOSE BEHALF SHARES WERE PURCHASED. ASSESSEE IS ADMITTEDLY A SUB -BROKER OF SHARES CARRYING ON THE PROPRIETARY CONCERN IN THE NAME OF M/S. DHARAMSHI CAPITAL SERVICES. FOR THE YEAR UNDER CONSIDERATION ASSESSEE DECLARED TOTAL INCOME OF ` 852/- WHICH WAS ORIGINALLY PROCESSED UNDER SECTION 143(1) OF THE ACT. ACTION UNDER SECTION 132 OF THE ACT WAS INITIATED I N THE CASE OF M/S. KRISHNA FILAMENTS LTD. (KFL) GROUP COMPANIES, THEIR DIRECTO RS AND OTHER FAMILY MEMBERS ON 29.07.1998. THE SEIZED PAPERS INDICATED THE INVOLVEMENT OF THE ASSESSEE IN SEVERAL TRANSACTIONS DONE ON BEHALF OF M/S. KFL GROUP OUTSIDE THE BOOKS OF ACCOUNT. BASED ON THE EVIDENCE FOUND, FURTHER INVESTIGATIONS WERE MADE AND STATEMENTS OF SHRI HIREN DHARAMSHI WE RE RECORDED DURING THE BLOCK ASSESSMENT PROCEEDINGS. ITA NO. 3032/MUM/2014 SHRI HIREN N. DHARAMSHI 2 3. IT IS NOTICED FROM THE PROFIT & LOSS ACCOUNT THAT T HE ASSESSEE CLAIMED BAD DEBT OF ` 2,43,550/-. DURING THE COURSE OF PROCEEDINGS FOR TH E REGULAR ASSESSMENT ASSESSEE WAS REQUIRED TO EXPLAIN IN DETA IL THE NATURE OF BAD DEBT. ON THE DATE OF HEARING, I.E. ON 22.03.2001 AS SESSEE STATED THAT SHRI DILIP JOSHI, ONE OF HIS CLIENTS, PLACED ORDER FOR P URCHASE AND SALE OF SHARES THROUGH THE BOLT TERMINAL OPERATED BY THE ASSESSEE. SOME DEBIT BALANCE AROSE ON ACCOUNT OF THE TRANSACTIONS EXECUTED ON BE HALF THE SHRI DILIP JOSHI. THERE WAS DISPUTE BETWEEN THEM REGARDING PURCHASE A ND SALE OF SHARES OF ITC LTD. AND SHRI JOSHI WAS NOT PREPARED TO ACCEPT THE SHARES RESULTING THEREBY THE OUTSTANDING BALANCE WAS NOT PAID BY THE DEBTOR. THEREFORE THE OUTSTANDING BALANCE OF ` 2,43,550/- WAS TREATED AS BAD DEBT. 4. THE AO OBSERVED THAT IT IS NOT ON ACCOUNT OF A DISP UTE IN A SINGLE TRANSACTION THAT THE BAD DEBT AROSE. THE TRANSACTIO NS RESULTING IN LOSS WERE MANY AND IT CANNOT BE BELIEVED THAT IN ALL THESE TR ANSACTIONS THERE WERE DISPUTES. HE NOTICED THAT THERE WAS NO EXCHANGE OF CHEQUES THROUGHOUT THE YEAR BETWEEN THE PARTIES CONCERNED. CREDITS AND DEB ITS APPEARING WERE ON ACCOUNT OF J.V. ENTRIES ON THE SO CALLED TRANSACTIO NS. IN VIEW OF THE ABOVE ABNORMALITIES AND THE FACT THAT THERE WERE DISPUTES IN SEVERAL SETTLEMENTS AND STILL THE ASSESSEE CONTINUED TO HAVE SHRI JOSHI AS HIS CLIENT, HE CONCLUDED THAT THE CLAIM MADE IN THIS REGARD IS NOT GENUINE. ASSESSEE WAS THEREFORE REQUIRED TO PRODUCE SHRI JOSHI IN PERSON FOR EXAMINATION ON OATH. ON THE APPOINTED DATE THE ASSESSEE FURNISHED A LETT ER INFORMING THAT THE SAID DEBTOR, SHRI JOSHI, IS NOT COOPERATING. UNDER THESE CIRCUMSTANCES THE AO CONCLUDED THAT IT CANNOT BE TREATED AS A BAD DEB T. HE ALSO OBSERVED THAT THIS ACCOUNT IS FULL OF UNUSUAL ENTRIES. THE CREDIT S AND DEBITS ARE ON ACCOUNT OF AMOUNTS RECEIVABLE AND PAYABLE AND NOT ON ACCOUN T OF EXCHANGE OF CHEQUES. FURTHER, THE TRANSACTIONS RELATING TO SHRI JOSHI FELL IN THE SAME YEAR FOR WHICH HE IS SEEKING TO WRITE OFF THE AMOUN T. NEITHER THE IDENTITY NOR THE GENUINENESS OF TRANSACTIONS HAVE BEEN ESTABLISH ED. NO EVIDENCE TO PROVE THAT SUCH DEBT REALLY EXISTED AND IT HAS BECOME BAD , HAS BEEN FURNISHED. THEREFORE HE DISALLOWED THE CLAIM OF BAD DEBTS. ITA NO. 3032/MUM/2014 SHRI HIREN N. DHARAMSHI 3 5. AGGRIEVED, ASSESSEE CONTENDED BEFORE THE CIT(A) THA T THE AMOUNT WAS OUTSTANDING IN THE ACCOUNT OF THE DEBTOR FOR A LONG TIME AND THE SAME HAS BECOME IRRECOVERABLE AND BAD. ACCORDINGLY THE ASSES SEE CLAIMED IT AS BAD DEBT WHICH IS PERMISSIBLE IN LAW. DURING THE COURSE OF HEARING RELIANCE WAS PLACED UPON THE DECISION OF THE APEX COURT IN THE C ASE OF TRF LTD. VS. CIT 323 ITR 397 TO SUBMIT THAT ONCE THE ASSESSEE TREATS A DEBT AS BAD DEBT AND MAKES AN ENTRY TO THAT EFFECT THE AO IS NOT ENTITLE D TO EXAMINE AS TO WHETHER IT HAS REALLY BECOME BAD OR NOT AND SUCH DEBT HAS T O BE ALLOWED AS DEDUCTION. IT WAS CONTENDED THAT THE DEBIT BALANCE HAS ARISEN ON ACCOUNT OF TRADING TRANSACTIONS ENTERED IN THE ORDINARY COURSE OF BUSINESS AND THESE TRANSACTIONS WERE DULY CONSIDERED IN COMPUTING THE TOTAL INCOME OF THE ASSESSEE. 6. THE LEARNED CIT(A) REJECTED THE CONTENTIONS OF THE ASSESSEE. IN THIS REGARD HE OBSERVED THAT THE TRANSACTIONS WHICH HAVE BEEN WRITTEN OFF BELONG TO THIS YEAR ITSELF AND THEY ARE IN THE NATURE OF J OURNAL ENTRIES WITHOUT ANY ENTRY WITH REGARD TO RECEIPT OF MONEY OR PAYMENT OF MONEY THROUGH CHEQUES IN THIS REGARD. HE FURTHER OBSERVED THAT WHEN A PER SON HAD DISPUTE ABOUT EARLIER TRANSACTION IT IS NOT KNOWN AS TO WHY THE A SSESSEE CONTINUED TO BE DEALING WITH SUCH PERSON IN SUBSEQUENT PERIOD. HE R ECORDED THE FACT THAT THE ASSESSEE HAS NOT FURNISHED ANY RECORD BEFORE HIM OF BEFORE THE A O TO INDICATE THAT THESE AMOUNTS HAVE BEEN WRITTEN OF F IN THE BOOKS OF THE ASSESSEE . NO EFFORTS, WHATSOEVER, APPEARS TO HAVE BEEN MADE BY THE ASSESSEE IN THE FORM OF FILING A SUIT OR LEGAL NOTI CE TO REALISE THIS AMOUNT FROM SHRI JOSHI AND IN FACT SHRI JOSHI WAS NOT PROD UCED. THE LEARNED CIT(A) THEREFORE OBSERVED THAT THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF TRF LTD. 323 ITR 337 IS DISTINGUISHABLE. I N THE INSTANT CASE EVEN THE IDENTITY OF THE THIRD PARTY AND GENUINENESS OF THE TRANSACTIONS IS IN DOUBT. THE TRANSACTIONS RELATE TO THE YEAR UNDER CO NSIDERATION ITSELF AND IT IS UNLIKELY THAT THE ASSESSEE REACHED ON A CONCLUSION AFTER DUE DILIGENCE THAT THE AMOUNT HAS BECOME IRRECOVERABLE AND BAD. HE THE REFORE AFFIRMED THE ACTION OF THE AO. ITA NO. 3032/MUM/2014 SHRI HIREN N. DHARAMSHI 4 7. FURTHER AGGRIEVED, ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT HE HAS EARNED BROKERAGE INCOME WHICH WAS OFFERED TO TAX AND HENCE UNDER SEC TION 36(2) OF THE ACT ANY DEBT OR PART THEREOF HAVING OFFERED TO TAX THE BALANCE CAN BE CLAIMED AS BAD DEBT. HE ALSO RELIED UPON THE DECISION OF THE H ON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. SHREYAS S. MORAKHIA 34 2 ITR 385 TO SUBMIT THAT EVEN THE AMOUNT PAYABLE BY THE PURCHASER OF SHARES CAN BE TREATED AS PART OF DEBT AND ASSESSEE COULD NOT BE EXPECTED TO PRODU CE THE PARTY SINCE HE WAS DEFIANT TO PAY THE AMOUNT. IT WAS ALSO SUBMITTE D THAT THE PURCHASES ARE BASED ON THE REQUEST OF THE PARTY BUT HE REFUSED TO HONOUR HIS COMMITMENTS WITHIN THE STIPULATED PERIOD, WHICH WAS FOUR DAYS A T THAT POINT OF TIME. HE ALSO ADVERTED THE ATTENTION OF THE BENCH TO PAGE 4 TO 12 OF THE PAPER BOOK TO SUBMIT THAT THE ASSESSEE MADE A BAONAFIDE EFFORT RE COVER THE DEBT BUT DID NOT PURSUE FURTHER BECAUSE HE DID NOT WANT TO WASTE HIS GOOD MONEY AFTER BAD. HOWEVER, IN THE LIGHT OF THE DECISION OF THE H ON'BLE SUPREME COURT IN THE CASE OF TRF LTD. AND ALSO THE DECISION OF THE H ON'BLE BOMBAY HIGH COURT EVEN THE DEBT RECOVERABLE FROM THE PARTY CAN BE CLA IMED AS DEDUCTION WHEN THE BROKERAGE AMOUNT IS OFFERED TO TAX AS INCOME. 8. ON THE OTHER HAND, THE LEARNED D.R. SUBMITTED THAT THE ASSESSEE HAS NOT FURNISHED ANY EVIDENCE TO PROVE THE GENUINENESS OF THE TRANSACTIONS AND TO SHOW THAT THE CLAIM OF BAD DEBT WAS RECORDED IN THE BOOKS OF ACCOUNT. HE STRONGLY RELIED UPON THE OBSERVATIONS MADE BY THE C IT(A) TO SUBMIT THAT THE CLAIM IS NOT TENABLE. 9. I HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS A ND PERUSED THE RECORD. THE AO AS WELL AS THE CIT(A) MADE THE FOLLO WING OBSERVATIONS: - A) IT IS NOTICED THAT IT IS NOT ON ACCOUNT OF DISPUTE IN A SINGLE TRANSACTION THAT THE BAD DEBT AROSE. THE TRANSACTIONS RESULTING IN LOSS WERE MANY AND IT CANNOT BE BELIEVED THAT IN ALL THESE TRANSAC TIONS THERE WERE DISPUTES. B) THERE WAS NO EXCHANGE OF CHEQUES THROUGHOUT THE YEA R BETWEEN THE PARTIES. NEITHER CASH PAYMENT NOR CHEQUE PAYMENT RE PORTED AND THE ITA NO. 3032/MUM/2014 SHRI HIREN N. DHARAMSHI 5 ALLEGED TRANSACTIONS APPEAR TO HAVE BEEN MADE ON TH E STRENGTH OF JOURNAL ENTRIES. C) DESPITE DISPUTES IN SEVERAL SETTLEMENTS, ASSESSEE C ONTINUED TO HAVE THE SO CALLED JOSHI AS HIS CLIENT, WHICH PRIMA FACI E APPEARS THAT THE CLAIM IS NOT GENUINE AND THE PERSON IS NOT EXISTING . D) ASSESSEE WAS CALLED UPON TO PRODUCE SHRI JOSHI IN P ERSON, FOR EXAMINATION ON OATH, WHICH THE ASSESSEE FAILED ON T HE GROUND THAT SHRI JOSHI IS NOT COOPERATING. E) NO RECORD HAS BEEN FURNISHED EITHER BEFORE THE AO O R BEFORE THE CIT(A) TO INDICATE THAT THESE AMOUNTS HAVE BEEN WRITTEN OF F IN THE BOOKS OF ACCOUNT OF THE ASSESSEE. F) THE DECISION OF THE HON'BLE SUPREME COURT IN THE CA SE OF TRF LTD. IS DISTINGUISHABLE SINCE ALL THE TRANSACTIONS RELATE T O THE YEAR UNDER CONSIDERATION AND GENUINENESS OF THE TRANSACTIONS I TSELF IS IN DOUBT. MOREOVER, NO RECORD OF DETAILS HAVE BEEN PRODUCED T O SHOW THAT THIS AMOUNT HAD ACTUALLY BEEN WRITTEN OFF IN THE BOOKS O F ACCOUNT OF THE ASSESSEE. 10. IN PAGE 13 OF THE PAPER BOOK ASSESSEE POINT OUT THA T SHRI DILIP JOSHI IS ONE OF HIS CLIENTS WHO USED TO PLACE ORDERS FOR PURCHASE OF VARIOUS SHARES THROUGH BOLT TERMINAL. THE SAID PARTY HAD PLACED OR DERS FOR SALE OF SHARES OF ITC LTD. AT THE RATE OF ` 504.70 PER SHARE. THE ADDRESS OF THE PURCHASER IS SHOWN AS ITC CLASSIC LTD., APEEJAY HOUSE, SAHID BHA GAT SINGH ROAD, FORT, MUMBAI. IT ALSO DESERVES TO BE NOTICED THAT THE VER Y CLAIM OF ORDER PLACED BY THE PARTY IS IN DISPUTE AND THE ASSESSEE COULD NOT FURNISH ANY EVIDENCE TO PROVE THE SAME. IN THE LETTER DATED 19 TH MARCH, 2001 (PAPER 13 OF THE PAPER BOOK) ASSESSEE SUBMITTED THAT SHRI DILIP JOSHI DENI ED TO HAVE PLACED ORDER FOR SALE OF ITC SHARES AND INSTEAD HE HAD PLACED OR DER FOR PURCHASE OF SAID SHARES. THUS, THERE HAS BEEN A DISPUTE BETWEEN SHRI JOSHI AND THE ASSESSEE REGARDING TRANSACTION OF 1000 SHARES OF ITC LTD. EF FECTED ON 20.11.1997. AT THAT POINT OF TIME THE PRICE OF ITC SHARES WAS MOVI NG UPWARDS. IT SEEMS THAT THE PARTY CLAIMED TO HAVE DISCLAIMED THE AFORESAID SALE TRANSACTION BUT THE ITA NO. 3032/MUM/2014 SHRI HIREN N. DHARAMSHI 6 ASSESSEE WAS COMPELLED TO BUY EQUAL QUANTITY OF SHA RES OF ITC LTD. FOR AN AGGREGATE CONSIDERATION OF ` 6,35,045/- IN DECEMBER, 1007. AS A RESULT OF UPWARD SWING IN THE PRICE OF ITC SHARES THE TRANSAC TIONS RESULTED IN A LOSS OF ` 1,29,345/- 11. AFTER THE PARTY REJECTED THE CLAIM MADE BY THE ASSE SSEE IT CANNOT BE SAID THAT THE ASSESSEE COULD HAVE CLAIMED BROKERAGE AND OFFERED THE BROKERAGE TO TAX. IN FACT NO SUCH CLAIM WAS MADE BE FORE THE AO OR THE CIT(A) AND FOR THE FIRST TIME MADE SUCH CLAIM BEFORE THE T RIBUNAL BUT NO EVIDENCE THEREON WAS FURNISHED. IT ALSO DESERVES TO BE NOTIC ED THAT AS AGAINST THE AMOUNT OF ` 2,43,550/- THE ACTUAL LOSS ON ACCOUNT OF PURCHASE O F ITC SHARES, AS STATED IN PAGE 14 OF THE PAPER BOOK IS ONLY ` 1,29,345/-. 12. THERE WAS ONE MORE DISPUTE CLAIMED TO HAVE BEEN OCC URRED BETWEEN SHRI JOSHI AND THE ASSESSEE REGARDING TRANSACTION R ELATING TO 200 SHARES OF ITC LTD. HERE ALSO THERE WAS A NET LOSS OF ` 26,640/- AND BECAUSE OF THE DISPUTE IT CANNOT BE SAID THAT THE PARTY WOULD HAVE PAID THE BROKERAGE AMOUNT TO THE ASSESSEE AND IN TURN ASSESSEE WOULD N OT HAVE OFFERED TO TAX THE BROKERAGE INCOME. THE BALANCE AMOUNT OF BAD DEB T AMOUNTING TO ` 87,565/- PERTAINS TO MR. JOSHI IN RESPECT OF VARIOU S TRANSACTIONS EFFECTED BY HIM WHICH AGAIN SHOWS THAT DESPITE DISPUTES ON N UMBER OF OCCASIONS THE ASSESSEE WENT ON ACCEPTING WHATEVER SHRI JOSHI CLAI MED TO HAVE SAID AND ALLOWED HIM THE BENEFIT OF PURCHASE OR SALE WITHOUT MAINTAINING ANY RESERVE FUND IN THE BOOKS OF THE ASSESSEE. AS RIGHTLY OBSER VED BY THE CIT(A) AND THE AO, WHEN THERE IS DISPUTE IN MORE THAN ONE TRANSACT ION AND THERE IS NO CASH OR CHEQUE PAYMENTS FOR THE WHOLE YEAR THE VERY GENU INENESS OF THE TRANSACTION WOULD BE IN DOUBT IN WHICH EVENT THERE CANNOT BE ANY QUESTION OF CLAIMING DEDUCTION TOWARDS BAD DEBT. IN THIS REG ARD, NOT MATERIAL, WHATSOEVER, WAS FURNISHED BY THE ASSESSEE TO SHOW T HAT THE PARTY IS IN EXISTENCE AND THE TRANSACTIONS HAVE IN FACT TAKEN P LACE. THE FACT THAT THE ASSESSEE HAS NOT EVEN TAKEN ANY LEGAL ACTION DESPIT E REPEATED DISPUTES AND PERMITTED THE SO CALLED SHRI JOSHI TO HAVE HIS FINA L WORD ALSO INDICATES THAT THE CLAIM OF TRANSACTIONS HAVING TAKEN PLACE IS IN ITSELF DOUBTFUL. UNDER ITA NO. 3032/MUM/2014 SHRI HIREN N. DHARAMSHI 7 THESE CIRCUMSTANCES I AM OF THE FIRM VIEW THAT THE LEARNED CIT(A) WAS JUSTIFIED IN DENYING THE CLAIM OF DEDUCTION AND THE REFORE THE APPEAL FILED BY THE ASSESSEE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 9 TH SEPTEMBER, 2014. SD/- (D. MANMOHAN) VICE PRESIDENT MUMBAI, DATED: 9 TH SEPTEMBER, 2014 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) 40, MUMBAI 4. THE CIT CENTRAL-II, MUMBAI CITY 5. THE DR, SMC BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI N.P.