JINDAL SOUTH WEST HOLDINGS LTD, MUMBAI V. DCIT 5(2), MUMBAI

ITA 3191/MUM/2010

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 9384 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 6 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-11-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 17-09-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 23-04-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PRADEEP KUMAR SINGH
• Keywords: Earning of tax free income; Bad and doubtful debts
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH I BENCH BEFORE SHRI I.P.BANSAL, JUDICIAL MEMBER AND SHRI RAJENDRA, ACCOUNTANT MEMBER ITA NO. 3191/MUM/2010 (ASSESSMENT YEAR: 2006-07) M/S. JINDAL SOUTH WEST HOLDINGS LTD., JINDAL MANSION, 5A, DR. G. DESHMUKH MARG, MUMBAI-26 PAN NO. AABCJ 1531 F VS. DEPUTY COMMISSIONER OF INCOME TAX, 5(2), ROOM NO. 571, AAYAKAR BHAVAN, MUMBAI-20. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI HIRO RAI REVENUE BY : SHRI PRADEEP KUMAR SINGH DATE OF HEARING : 15.11.2012 DATE OF PRONOUNCEMENT : 21.11.2012 ORDER PER RAJENDRA, A.M. : THE ASSESSEE HAS PREFERRED AN APPEAL AGAINST THE O RDER DATED 26-2-2010 OF THE CIT(A)-9, ON THE FOLLOWING GROUNDS :- 1.THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) [CIT(A)] ERRED IN LAW AND FACTS OF THE CASE WHILE CONFIRMING THE DISALLOWANCE OF RS.76,84, 919/- U/S 14A OF THE ACT. THE LEARNED CIT(A) WAS NOT JUSTIFIED IN REJECTING THE ASSESSEE S CONTENTION THAT THE SAID EXPENSES WERE INCURRED DURING THE NORMAL COURSE OF ITS BUSINESS T O COMPLY WITH VARIOUS STATUTORY REQUIREMENTS AND FOR RUNNING THE OPERATIONS OF THE COMPANY. THEREFORE, THE DISALLOWANCE OF RS.76,84,919/-UNDER SECTION 14A BE DELETED. 2.THE LEARNED CIT(A) ERRED IN LAW IN CONFIRMING DIS ALLOWANCE OF BAD DEBTS WRITTEN OFF I.E. INTEREST INCOME ON NON-PERFORMING ASSETS AMOUNTING TO RS.47,57,700/- OUT OF RS. 55,05,644/- 2 . THE FACTS IN BRIEF FOR ADJUDICATION OF THE GROUND NO.1, ARE THAT THE ASSESSEE COMPANY, A NON-BANKING FINANCIAL INSTITUTION, HAD FILED ITS RETURN OF INCOME ON 14-11-2006 DECLARING TOTAL INCOME AT RS.54,46,970/-. THE CASE WAS SELECT ED FOR SCRUTINY IN CASS SYSTEM AND ASSESSMENT WAS FINALISED ON 19-12-2008 U/S.143(3) O F THE INCOME TAX ACT, 1961(ACT) DETERMINING THE TOTAL INCOME OF THE ASSESSEE AT RS. 1,86,37,530/-. 3. DURING THE ASSESSMENT PROCEEDINGS, THE AO FOUND TH AT THE ASSESSEE HAD CLAIMED EXEMPTION OF RS.8.26 CRORES AND OF RS. 2 CRORES UN DER THE HEAD DIVIDEND INCOME AND 2 ITA NO.3191/10 LONG TERM CAPITAL GAINS RESPECTIVELY. APPLYING TH E PROVISIONS OF RULE 8D OF THE IT RULES, 1962, R.W.S.14A OF THE ACT, AO MADE AN ADDI TION OF RS.76.84 LAKHS TO THE TOTAL INCOME OF THE ASSESSEE, AS HE WAS OF THE OPINION TH AT ASSESSEE HAD INCURRED CERTAIN EXPENSES FOR EARNING EXEMPT INCOME. 3.1. BEING AGGRIEVED WITH THE ACTION OF THE AO ,ASSESSEE PREFERRED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY(FAA). AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, FAA HELD THAT THE AO WAS RIGHT IN INVOKING THE PROVISIO NS OF SECTION 14A OF THE ACT AND RULE 8D(2)(III). DISALLOWANCE MADE BY THE AO, @ 5% OF A VERAGE INVESTMENT, WAS UPHELD BY HIM. 4. BEFORE US, THE AUTHORISED REPRESENTATIVE (AR) SUBMI TTED THAT THE RULE 8D WAS NOT APPLICABLE FOR THE ASSESSMENT YEAR 2006-07, THAT AS PER THE ORDER OF THE HONBLE BOMBAY HIGH COURT SAID SECTION WAS APPLICABLE FROM ASSESSM ENT YEAR 2008-09 ONLY. HE RELIED UPON THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CA SE OF GODREJ BOYCE & MFG. CO (328 ITR 81). DEPARTMENTAL REPRESENTATIVE (DR) RELIED U PON THE ORDER OF THE FAA. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON FILE. THE HONBLE HIGH COURT OF BOMBAY HAS HELD THAT PROVISIO NS OF RULE 8D ARE APPLICABLE FROM THE ASSESSMENT YEAR 2008-09. RESPECTFULLY FOLLOWING TH E ORDER OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ BOYCE & MFG. CO(SUPRA), WE REVERSE THE ORDER OF THE FAA. IN THE INTEREST OF JUSTICE, MATTER IS BEING RESTORED B ACK TO THE FILE OF THE AO TO DECIDE THE ISSUE OF DISALLOWANCE, IF ANY, IN FRESH PROCEEDINGS. HE IS D IRECTED TO AFFORD A REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. GROUND NO.1 IS PARTLY ALLOWED IN FAVOUR OF THE ASSE SSEE. 6. THE NEXT GROUND OF APPEAL IS ABOUT DISALLOWANCE OF BAD DEBTS OF AMOUNTING TO RS.44.57 LAKHS OUT OF RS.55.05 LAKHS. WHILE FRAMIN G THE ASSESSMENT THE AO FOUND THAT THE ASSESSEE HAD DEBITED EXPENSES ON ACCOUNT OF REVERSA L OF INCOME ON NON-PERFORMING THE ASSETS (NPA) OF RS.55.05 LAKHS IN THE PROFIT AND LOSS ACCO UNT. HE DIRECTED THE ASSESSEE TO JUSTIFY THE SAID CLAIM. AFTER CONSIDERING THE SUBMISSIONS MADE BY THE ASSESSEE, HE HELD THAT THE APPELLANT-COMPANY HAD NOT WRITTEN OFF PRINCIPAL AMO UNT OUTSTANDING OF SUCH OCDS IN THE BOOKS OF ACCOUNTS, THAT THE ASSESSEE HAD MADE A PRO VISION OF DOUBTFUL DEBTS, THAT THE ASSESSEE HAD WRITTEN OFF ONLY THE INTEREST OF THE DEBT. HE F URTHER HELD THAT AS PER THE PROVISION OF SECTION 36(1)(VII) OF THE ACT, BAD DEBTS COULD BE A LLOWED ONLY WHEN THE DEBTS HAD BEEN WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE. RELYING UPON THE ORDER DELIVERED BY THE HONBLE MADRAS HIGH COURT IN THE CASE OF MIC ROMAX SYSTEMS PVT. LTD. (277ITR409), HE HELD THAT THE ASSESSEE HAD NOT WRITTEN OFF THE D EBTS IN HIS BOOKS OF ACCOUNTS. FINALLY, HE DISALLOWED THE ENTIRE AMOUNT OF REVERSED INTEREST ( RS.55.05 LAKHS) AND ADDED IT TO THE TOTAL INCOME OF THE ASSESSEE. 7 . ASSESSEE PREFERRED AN APPEAL BEFORE THE FAA. AFT ER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AND THE ARGUMENTS OF THE AO, HE HELD T HAT THE ASSESSEE HAD NOT STATED CERTAIN FACTS CORRECTLY IN THE ASSESSMENT PROCEEDINGS, THAT OCDS WERE PURCHASED BY JINDAL VIJAYNAGAR STEEL LIMITED IN THE YEAR 1994, THAT OCD S WERE TO BE CONVERTED INTO SHARES OR TO BE REDEEMED AFTER THE EXPIRY OF 7 YEARS FROM THE DA TE OF ALLOTMENT, THAT THESE OCDS WERE ALLOTTED TO THE APPELLANT ON THE MERGER OF M/S JIND AL VIJAYNAGAR STEEL LIMITED IN FINANCIAL YEAR 2004-05, THAT THESE OCDS WERE MATURED IN THE Y EAR 2001, THAT THESE ASSETS WERE 3 ITA NO.3191/10 CLASSIFIED AS MATURE DEBENTURES BY THE JINDAL VIJAY NAGAR STEEL LIMITED, THAT THE CLAIM OF THE ASSESSEE ABOUT ACQUIRING THE OCDS IN THE YEAR 2003- 04, 2004-05 & 2005-06 WAS NOT CORRECT. HE HELD THAT THE CLAIM OF THE ASSESSEE ABOUT REVERS AL OF INTEREST INCOME OF NON-PERFORMING ASSETS COULD NOT BE ACCEPTED, THAT THE GUIDELINES I SSUED BY THE RBI TO NFBC WERE ONLY DISCLOSURE GUIDELINES, THAT THE SAID GUIDELINES DID NOT OVERRIDE THE PROVISIONS OF THE ACT. RELYING UPON THE ORDER OF THE HONBLE SUPREME COURT DELIVERED IN THE CASE OF M/S SOUTHERN TECHNOLOGIES LIMITED, IN ITA 1337/2003, HE HELD THA T THE ASSESSEE WAS NOT ENTITLED TO DEDUCTION ON ACCOUNT OF PROVISIONS OF NPA, EVEN THO UGH THE PROVISIONS WAS MADE AS PER THE RBI GUIDELINES. HE FURTHER HELD THAT THERE WAS NO P ROVISIONS UNDER THE ACT TO ALLOW DEDUCTION ON ACCOUNT OF REVERSAL OF INCOME SHOWN IN THE EARLI ER YEARS UNLESS THERE WAS CRYSTALLIZATION OF LIABILITY TO RETURN INCOME. HE HELD THAT AS FAR AS INTEREST AMOUNTING TO RS.7.47 LAKHS WAS CONCERNED, IT WAS ALLOWABLE EXPENDITURE FOR THE YEA R UNDER CONSIDERATION. HE REDUCED THE DISALLOWANCE BY RS.7.47 LAKHS. ASSESSEE-COMPANY HA S FILED THE APPEAL AGAINST THE DISALLOWANCE MADE BY THE FAA, WHEREAS AO HAS CHALLE NGED THE RELIEF GIVEN BY HIM I.E. RS.7.47 LAKHS. 8. BEFORE US, AR SUBMITTED THAT INCOME FROM THE OCDS W ERE SHOWN IN EARLIER YEARS, THAT DEPARTMENT HAD ACCEPTED THE ENTRIES ABOUT THE INTEREST INCOME WHILE PASSING THE ASSESSMENT ORDERS FOR THOSE YEARS, THAT AS PER THE GUIDELINES OF THE RBI, INTEREST AMOUNTING TO RS.55.05 LAKHS WAS REVERSED IN THE YEAR UNDER CONSI DERATION, THAT AS PER THE PROVISIONS OF SECTION 36 (1) (VII) DEBT OR PART OF IT WRITTEN OFF IN THE BOOKS OF ACCOUNT WAS ALLOWABLE. HE RELIED UPON THE CASES OF INDUSTRIAL FINANCIAL CORPO RATION OF INDIA LIMITED (201 TAXMAN 75) AND TED CO. INVESTMENT AND FINANCIAL SERVICES (P) L TD. (330ITR440) DELIVERED BY HONBLE DELHI HIGH COURT. HE ALSO REFERRED TO THE PAGE NOS . 31 TO 38 AND 39 TO 41 OF THE PAPER BOOK. DR SUBMITTED THAT REVERSAL OF INTEREST WAS NOT ALLO WABLE AS PER THE PROVISIONS OF THE ACT. HE RELIED UPON THE ORDER OF THE FAA. IN HIS REJOINDER AR SUBMITTED THAT THE COMPANY WAS DECLARED NBFC ONLY IN SEPTEMBER, 2005, THAT INTERES T ON NPA WAS WRITTEN OFF IN THE BOOKS OF ACCOUNTS, THAT CONDITIONS FOR WRITING OFF THE IN TEREST WERE FULFILLED, THAT ALL THE NECESSARY FACTS OF THE CASE WERE SUBMITTED BEFORE AO DURING T HE ASSESSMENT PROCEEDINGS. 9 . WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED T HE MATERIAL BEFORE US. THE UNDISPUTED FACTS OF THE CASE EMERGING FROM THE FILE CAN BE SUMMARISED AS UNDER :- I). PURSUANT TO A SCHEME OF ARRANGEMENT AND AMALGAMATIO N BETWEEN JINDAL IRON & STEEL LTD (JISL) AND JINDAL VIJAYANAGAR STEEL LTD (JVSL) INVE STMENT PORTFOLIO CONSISTING OF INVESTMENTS AND LOANS & ADVANCES HAD BEEN TRANSFERR ED TO THE COMPANY AND THE STEEL BUSINESS WAS MERGED IN JINDAL VIJAYANAGAR STEEL LTD WITH EFFECT FROM 1STAPRIL, 2003. II). TRANSFERRED INVESTMENTS INCLUDED 16% OPTIONALLY CON VERTIBLE DEBENTURES (OCD) AMOUNTING TO RS,2,50,00,000/- THE SAID OCDS HAD MAT URED IN 2001 AND WERE CLASSIFIED AS MATURED DEBENTURES UNDER THE HEAD LOANS AND ADVAN CES. III) . INTEREST ON THE AFORESAID OCDS FOR FY 2003-04 AND F OR FY 2004-05AMOUNTING TO RS.23, 85,000/- AND RS.23,72,700/- RESPECTIVELY W AS DULY PROVIDED FOR BY THE APPELLANT- COMPANY AND THE SAME WAS OFFERED FOR TAXATION IN RE LEVANT AYS. IV). ON 30-06-2005, AN AMOUNT OF RS.7,47,944/-, ACCRUED AS INTEREST ON THE SAID OCDS FOR THE PERIOD FROM 01-04-2005 TO 30-06-2005, WAS PROVIDED IN THE BOOKS OF ACCOUNTS-THEREBY 4 ITA NO.3191/10 TAKING THE TOTAL INTEREST ACCRUED TO RS.55,05,644/- . V). ASSESSEE COMPANY WAS DECLARED A NON-BANKING FINANCI AL INSTITUTE IN THE YEAR UNDER CONSIDERATION ; VI). DURING AY 2005-06,THE APPELLANT HAD WRITTEN OFF THE AFORESAID INTEREST DUES, AGGREGATING TO RS.55,05,644/-,AND DEBITED THE SAME TO THE PROFI T AND LOSS ACCOUNT. VII). AO DISALLOWED THE SAID AMOUNT AS HE WAS OF THE OPIN ION THAT THE ASSESSEE HAS NOT WRITTEN OFF THE ENTIRE DEBT OUTSTANDING AND ONLY PART OF TH E DEBT WAS WRITTEN OFF. IF THE ABOVE MENTIONED FACTS ARE CONSIDERED ALONG W ITH THE PROVISIONS OF SECTION 36(1)(VII) OF THE ACT, THEN IN OUR OPINION, DISALLOWANCE MADE BY THE AO AND CONFIRMED BY THE FAA CANNOT BE UPHELD. 9.1. THERE IS NO DOUBT THAT ABOVE-REFERRED AMOUNT HAS AC TUALLY BEEN WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE APPELLANT COMP ANY FOR THE RELEVANT ASSESSMENT YEAR AND AMOUNTS WERE OFFERED AS INTEREST INCOME FOR TAX DUR ING F.Y. 2003-04 TO 2005-06 ON ACCRUAL BASIS. IN THESE CIRCUMSTANCES, IN OUR OPINION, THE APPELLANT HAS FULFILLED ALL THE REQUIREMENTS OF CLAUSE (VII) OF SUB-SECTION (1) OF SECTION 36 OF THE ACT. IN A RECENT JUDGMENT OF T.R.F. LIMITED (323 ITR 397), THE HONBLE SUPREME COURT HA S HELD THAT FOR BAD DEBTS TO BE CLAIMED U/S 36(1)(VII), IT IS NOT NECESSARY FOR THE ASSESSE E SHOULD ESTABLISH THAT THE DEBT, IN FACT, HAS BECOME IRRECOVERABLE. IT IS ENOUGH IF THE BAD DEBT WERE WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE (323ITR397). WE FIND THAT ASSESSEE HAS WRITTEN OF THE ACCRUED INTEREST AMOUNTS IN HIS BOOK OF ACCOUNTS AND HIS AC TION WAS IN ACCORDANCE WITH THE GUIDELINES ISSUED BY THE RBI WITH REGARD TO NPAS. HENCE, REVER SING THE ORDER OF THE FAA, WE DECIDE GROUND NO.2 IN FAVOUR OF THE ASSESSEE. GROUND NO.2 IS DECIDED IN FAVOUR OF THE ASSESSEE-CO MPANY. RESULTANTLY, APPEAL FILED BY THE ASSESSEE STANDS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 21 ST NOVEMBER, 2012 SD/- (I.P.BANSAL) JUDICIAL MEMBER SD/- (RAJENDRA) ACCOUNTANT MEMBER MUMBAI, DATED 21 ST NOVEMBER, 2012 PKM 5 ITA NO.3191/10 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. COMMISSIONER OF INCOME TAX (APPEALS), , MU MBAI 4. COMMISSIONER OF INCOME TAX, , MUMBAI 5. DEPARTMENTAL REPRESENTATIVE, BENCH I MUMBAI //TRUE COPY// BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI