The DCIT, Circle-1(1), Baroda V. Camphor & Allied Products Ltd., Baroda

ITA 3291/AHD/2009

• Counselvise Citation: 329120514 RSA 2009
• Duration Of Justice: 1 year(s) 9 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-09-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 13-09-2011
• Assessment Year: 2002-2003
• Appeal Filed On: 11-12-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: C N SHAH
• Keywords: Business income; Depreciation; Reasonable cause; Bad and doubtful debts; Scheme of amalgamation; Unabsorbed depreciation

Judgement Text

- 1 - IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH C AHMEDABAD BEFORE S/SHRI D.K. TYAGI, JM AND A.K. GARODIA, A.M . DY CIT, CIR.1(1), BARODA. M/S CAMPHOR & ALLIED PRODUCTS LTD., 3, INDUSTRIAL AREA NANDESARI, BARODA. APPELLANT VS. RESPONDENT APPELLANT BY :- SHRI VINOD TANWANI, SR.DR RESPONDENT BY:- SHRI C. N. SHAH, AR DATE OF HEARING 13/9/2011. DATE OF PRONOUNCEMENT -16/9/2011 O R D E R PER D.K. TYAGI, JUDICIAL MEMBER . THIS IS AN APPEAL FILED BY THE REVENUE AGAINST THE ORDER OF LD. CIT(A) DATED 22.9.2009. THE REVENUE HAS RAISED THE FOLLOWING GROUND IN THIS APPEAL:- (1) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. CIT(A) ERRED IN CANCELING THE PENALTY OF RS.32, 00,000/- IMPOSED U/S 271(1)(C) OF THE ACT. 2. THE FACTS OF THE CASE ARE THAT THE ASSESSEE COMP ANY HAD A SUBSIDIARY COMPANY CALLED MULBERRY INVESTMENT AND T RADING CO. LTD. (MITCL). MITCL WAS REGISTERED AS A NON-BANKING FINA NCE COMPANY (NBFC) AND CARRIED ON THE BUSINESS OF INVESTMENT AN D FINANCE. DURING ITA NO.3291/AHD/2009 ASST. YEAR 2002-03 ITA NO.3291/AHD/2009 ASST. YEAR 2002-03 2 THE YEAR UNDER CONSIDERATION MITCL AMALGAMATED INTO THE ASSESSEE COMPANY UNDER A SCHEME OF AMALGAMATION APPROVED BY THE GUJARAT HIGH COURT VIDE ORDER DATED 10.7.2002 AND BY MUMBAI HIGH COURT VIDE ORDER DT.25.7.2002. IN THE COURSE OF ITS BUSINESS MITCL H AD, IN THE EARLIER YEARS, ADVANCED LOANS TO VARIOUS PARTIES ON INTERES T. HOWEVER, THESE LOANS BECAME STICKY AND DIFFICULT TO RECOVER. DETAILS THE REOF ARE AS UNDER :- UNSECURED LOANS RS.40,79,185/- BILLS RECEIVABLE RS.38,05,951/- INTEREST RECEIVABLE RS. 5,20,548/- INVESTMENT RS.3,08,000/- ----------------- RS.87,13,684/- THE TOTAL OF SUCH STICKY AND IRRECOVERABLE DEBTS AM OUNTED TO RS.90,12,000/-. IN THE RETURN OF INCOME FILED BY TH E ASSESSEE COMPANY AFTER THE AMALGAMATION, IT OFFERED FOR TAXATION RS. 3,08,000/- OUT OF THE ABOVE AND CLAIMED WRITE-OFF OF BAD DEBTS OF THE BAL ANCE OF RS.87,03,275/- THE AO DISALLOWED THE SAME ON THE GROUND THAT THE E NTIRE SCHEME OF AMALGAMATION WAS A COLOURABLE DEVICE FOR REDUCING T HE TAX LIABILITY OF THE ASSESSEE COMPANY. THIS VIEW WAS UPHELD BY THE LD. C IT(A) VIDE ORDER DTD.14.11.2006 AND THE DISALLOWANCE WAS CONFIRMED. SUBSEQUENTLY, IN PENALTY PROCEEDINGS, IT WAS HELD BY THE AO THAT INA CCURATE PARTICULARS HAD BEEN FURNISHED IN RESPECT OF INCOME AMOUNTING TO RS .87,03,275/-. ACCORDINGLY, PENALTY OF RS.32 LACS WAS IMPOSED, I.E . 100% OF THE TAX SOUGHT TO BE EVADED. 3. IN APPEAL BEFORE LD. CIT(A) THE ASSESSEE HAD CLA IMED THE WRITE-OFF OF DEBTS BELONGING TO THE AMALGAMATING COMPANY, IN THE HANDS OF THE AMALGAMATED COMPANY, FOLLOWING THE DECISION OF THE SUPREME COURT IN THE CASE OF CIT VS. VEERBHADRA RAO 154 ITR 152. ATT ENTION WAS INVITED TO THE NOTE NO.2 BELOW THE COMPUTATION OF TAXABLE I NCOME FILED WITH THE ITA NO.3291/AHD/2009 ASST. YEAR 2002-03 3 RETURN, WHEREIN IT WAS CLEARLY MENTIONED THAT THE W RITE-OFF OF BAD DEBTS WAS CLAIMED BASED ON THE DECISION OF THE SUPREME CO URT IN VEERBHADRA RAO. THUS THERE WAS NO CONCEALMENT OF ANY PARTICULA RS OF INCOME. REFERRING TO THE UNDERLYING ASSUMPTION OF TAX AVOID ANCE/EVASION IN THE MIND OF THE AO IT WAS SUBMITTED THAT WHERE THE HIGH COURTS OF TWO STATES HAD APPROVED THE SCHEME OF AMALGAMATION, THERE WAS NO REASONABLE CAUSE FOR THE AO TO TAKE THE VIEW THAT THE AMALGAMA TION WAS A COLOURABLE DEVICE FOR REDUCING ITS TAX LIABILITY. IT WAS FURTH ER POINTED OUT THAT THE WRITE-OFF WAS ALSO DULY DISCLOSED IN NOTE NO.8(B) T O THE AUDITED ACCOUNTS FORMING PART OF THE ANNUAL REPORT OF THE COMPANY FO R THE YEAR UNDER CONSIDERATION. THIS WAS ALSO FILED ALONG WITH THE R ETURN OF INCOME AND WAS AVAILABLE TO THE AO. IN FACT, HAD IT NOT BEEN F OR THE DISCLOSURE MADE BY THE ASSESSEE, THIS FACT MAY NOT HAVE COME TO THE NOTICE OF THE AO AT ALL. THUS THE BONA FIDES OF THE ASSESSEE COULD NOT BE DOUBTED. IT WAS ARGUED THAT A CLAIM BASED ON LEGAL INTERPRETATION O F PROVISIONS OF LAW COULD NOT BE CONSIDERED TO BE FURNISHING OF INACCUR ATE PARTICULARS OF INCOME. THE LD. CIT(A) AFTER CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE, SUBMISSIONS OF THE ASSESSEE AND TAKING IN TO CONSIDERATION VARIOUS DECISIONS INCLUDING THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. VEERBHADRA RAO (SUPRA) DELETED THE PENALTY. AGGRIEVED BY THIS ORDER OF THE LD. CIT(A) THE REVEN UE IS IN APPEAL BEFORE US. 4. THE LD. DR SUPPORTING THE ORDER OF AO VEHEMENTLY ARGUED THAT A SUBSIDIARY COMPANY CALLED MULBERRY INVESTMENT AND T RADING CO. LTD. AMALGAMATED WITH THE ASSESSEE COMPANY UNDER A SCHEM E OF AMALGAMATION APPROVED BY THE GUJARAT HIGH COURT. IN THE COURSE OF BUSINESS MITCL HAD IN EARLIER YEARS ADVANCED LOANS TO VARIOUS PARTIES ON ITA NO.3291/AHD/2009 ASST. YEAR 2002-03 4 INTEREST. HOWEVER, THESE LOANS BECAME STICKY AND DI FFICULT TO RECOVER. SUCH STICKY AND IRRECOVERABLE DEBTS AMOUNTED TO RS. 90,12,000/-. IN THE RETURN OF INCOME FILED BY THE ASSESSEE COMPANY AFTE R AMALGAMATION IT OFFERED FOR TAXATION RS.3,08,000/- OUT OF THE ABOVE AND CLAIMED WRITE-OFF OF BAD DEBTS OF THE BALANCE OF RS.87,03,275/-. THE AO HAD DISALLOWED THE SAME ON THE GROUND THAT THE ENTIRE SCHEME OF AMALGA MATION WAS A COLOURABLE DEVICE FOR REDUCING THE TAX LIABILITY OF THE ASSESSEE COMPANY. THIS VIEW OF THE AO WAS UPHELD BY LD. CIT(A) VIDE O RDER DT.14.11.2006 AND DISALLOWANCE WAS CONFIRMED. SUBSEQUENTLY, IN PE NALTY PROCEEDINGS IT WAS HELD BY THE AO THAT INACCURATE PARTICULARS HAD BEEN FURNISHED IN RESPECT OF INCOME AMOUNTING TO RS.87,03,275/-. ACCO RDINGLY PENALTY OF RS.32 LACS WAS IMPOSED. THE LD. CIT(A) WAS NOT JUST IFIED IN DELETING THE PENALTY. HENCE THE ORDER OF LD. CIT(A) BE SET ASIDE AND THAT OF THE AO BE RESTORED. 5. ON THE OTHER HAND, AT THE OUTSET THE LD. AR FOR THE ASSESSEE SUBMITTED THAT IN QUANTUM APPEAL IN THE CASE OF ASS ESSEE IN ITA NO. 481/AHD/2007 ASST. YEAR 2002-03 THE HONBLE TRIBUNA L HAS DELETED THE QUANTUM ADDITION.(COPY OF ORDER PLACED ON RECORD). HENCE IT WAS SUBMITTED THAT WHERE THE QUANTUM ADDITION IN RESPEC T OF WHICH PENALTY IS PROPOSED TO BE LEVIED, IS DELETED, NO PENALTY IS LE VIABLE. ACCORDINGLY IT WAS PRAYED THAT THE PENALTY MAY KINDLY BE DELETED. 6. WE HAVE HEARD THE RIVAL PARTIES AND PERUSED THE MATERIAL ON RECORD. WE FIND THAT IN THE CASE OF ASSESSEE IN ITA NO.481/ AHD/2007 ASST. YEAR 2002-03 THE TRIBUNAL HAS DELETED THE IMPUGNED ADDIT ION OF RS.87,03,275/- WITH THE FOLLOWING OBSERVATION:- 18. WE HAVE GIVEN OUR CAREFUL CONSIDERATION TO THE RIVAL SUBMISSIONS MADE BEFORE US AND HAVE PERUSED THE ORDERS OF AUTHO RITIES BELOW. IN OUR OPINION, THE CRUCIAL QUESTION OF CONSIDERATION IS T HAT IF MULBERRY ITA NO.3291/AHD/2009 ASST. YEAR 2002-03 5 INVESTMENT & TRADING CO. LTD. HAS MERGED WITH THE A SSESSEE-COMPANY, WHETHER THE SAID COMPANY WOULD HAVE BEEN ENTITLED T O CLAIM THE AFORESAID ITEMS AS ALLOWABLE DEDUCTION WHILE COMPUT ING THE TAXABLE PROFITS. SECTION 36(1)(VII) GRANTS AN ALLOWANCE IN RESPECT OF BAD DEBTS OF A BUSINESS, PROFESSION OR VOCATION AND IN RESPECT OF IRRECOVERABLE LOANS IN THE CASE OF BANKING OR MONEY LENDING BUSINESS. ADMI TTEDLY, THE ASSESSEE BEING IN BANKING OR MONEY LENDING BUSINESS IS ENTIT LED TO ALLOWANCE IN RESPECT OF IRRECOVERABLE LOANS ADVANCED IN THE ORDI NARY COURSE OF BUSINESS, REGARDLESS OF THE METHOD OF ACCOUNTING EM PLOYED. THE REASON IS THAT MONEY IS THE STOCK-IN-TRADE OR THE CIRCULATING CAPITAL OF A BANKER OR MONEYLENDER. THE LOSS OF STOCK-IN-TRADE IS ALWAYS A TRADING LOSS IRRESPECTIVE OF THE METHOD OF ACCOUNTING EMPLOYED. AFTER THE AMALGAMATION, THE NATURE OF THE DEBT REMAINING THE SAME. IT WOULD BE OPEN FOR THE ASSESSEE TO WRITE OFF THE SAME TO THE PROFIT AND LOSS ACCOUNT AND CLAIM IT AS ALLOWABLE DEDUCTION UNDER SECTION 3 6(1)(VII) WHILE COMPUTING THE TAXABLE PROFITS FOR THE RELEVANT ASSE SSMENT YEAR. IN OUR HUMBLE OPINION, THE TREATMENT GIVEN TO THE LOANS AN D ADVANCES BY THE SUBSIDIARY COMPANY PRIOR TO AMALGAMATION WOULD BE A RELEVANT CONSIDERATION AND SINCE THE INTEREST INCOME ITSELF HAS BEEN TAXED AS BUSINESS INCOME IN THE EARLIER YEARS, THE ASSESSEE WOULD BE ENTITLED TO CLAIM THE SAID AMOUNT. 19. THE HON'BLE SUPREME COURT IN THE CASE OF CIT V S.- VEERABHADRA RAO, K. KOTESWARA RAO & CO. (155 ITR 152) HELD THAT IF A BUSINESS, ALONG WITH ITS ASSETS AND LIABILITIES, IS TRANSFERR ED BY ONE OWNER TO ANOTHER, A DEBT SO TRANSFERRED WOULD BE ENTITLED TO THE SAME TREATMENT IN THE HANDS OF THE SUCCESSOR. THE RECOVERY OF THE DEB T IS A RIGHT TRANSFERRED ALONG WITH THE NUMEROUS OTHER RIGHTS COMPRISING THE SUBJECT OF THE TRANSFER. IF THE LAW PERMITS THE TRANSFER TO TREAT THE WHOLE OR PART OF THE DEBT AS IRRECOVERABLE AND TO CLAIM A DEDUCTION ON T HAT ACCOUNT, THE SAME RIGHT SHOULD BE RECOGNIZED IN THE TRANSFEREE. IT IS MERELY AN INCIDENT FLOWING FROM THE TRANSFER OF THE BUSINESS, TOGETHER WITH ITS ASSETS AND LIABILITIES, FROM THE PREVIOUS OWNER TO THE TRANSFE REE. IT IS IMPLIED IN THE TRANSFER OF A BUSINESS BE REGARDED AS BELONGING TO THE NEW OWNER. 20. IN THE CASE BEFORE US, THE ASSESSEE BECOMES THE OWNER OF THE ASSETS AND LIABILITIES OF THE SUBSIDIARY COMPANY, I.E. MUL BERRY INVESTMENTS & TRADING CO. LTD. AND ACCORDINGLY THE RATIO OF THE J UDGMENT OF THE HON'BLE SUPREME COURT REFERRED TO ABOVE WOULD BE APPLICABLE AND THE ASSESSEE IS ENTITLED TO WRITE OFF THE PRINCIPAL AMOUNT AND ARRE ARS OF INTEREST AS IRRECOVERABLE WHILE COMPUTING THE TAXABLE PROFITS O F THE SAID MULBERRY INVESTMENTS & TRADING CO. LTD. ITA NO.3291/AHD/2009 ASST. YEAR 2002-03 6 21. KEEPING IN VIEW THE TOTALITY OF THE FACTS AND C IRCUMSTANCES OF THE CASE, IN OUR OPINION, BOTH THE DEPARTMENTAL AUTHORITIES B ELOW CLEARLY ERRED IN RELYING ON THE JUDGMENT OF THE HON'BLE SUPREME COUR T IN THE CASE OF MCDOWELL & CO. (SUPRA). THE ASSESSEE HAS FULFILLED ALL THE CONDITIONS LAID DOWN IN SECTION 36(1)(VII), THE BAD DEBTS WERE WRITTEN OFF IN THE BOOKS OF ACCOUNTS, THE ASSESSEE IS NOT TRYING TO SET OFF CARRY FORWARD LOSS OR UNABSORBED DEPRECIATION AND, THEREFORE, SECTION 72A HAS NO APPLICATION. IN VIEW OF THIS, WE DIRECT THE A.O. TO ALLOW THE BA D DEBTS AMOUNTING TO RS.87,03,275/- WRITTEN OFF IN THE BOOKS OF ACCOUNTS . RESULTANTLY, THIS GROUND OF APPEAL IS ALLOWED. THEREFORE, IN OUR CONSIDERED VIEW THE PENALTY IS NO T LEVIABLE. THE LD. CIT(A) HAS RIGHTLY DELETED THE PENALTY. THE PROPOSI TION THAT NO PENALTY UNDER SECTION 271(1)(C) CAN BE LEVIED IF QUANTUM IN RESPECT OF WHICH LEVY OF PENALTY IS PROPOSED, IS DELETED, HAS BEEN HELD B Y SEVERAL AUTHORITIES SUCH AS ADDL. CIT VS. BADRI PRASAD KASHI PRASAD (19 93) 200 ITR 206 (ALL), PRABHAT OIL TRADERS VS. ITO (1996) 218 ITR ( AT) 39 ITAT (AHD), CITY DRY FISH CO. VS. CIT (1999) 238 ITR 63 (A.P.), CIT VS. MD. BUX SAUKAT ALI (2004) 265 ITR 326 (RAJ) AND CIT VS. SHI SHPAL (2002) 255 ITR 187 (RAJ). IN VIEW OF THE ABOVE, WE UPHOLD THE ORDER OF LD. CIT(A), AND DISMISS THE APPEAL FILED BY THE REVENUE. 7. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER WAS PRONOUNCED IN OPEN COURT ON 16/9/2011. SD/- SD/- (A. K. GARODIA) (D.K. TYAGI) ACCOUNTANT MEMBER JUDICIAL MEMBER AHMEDABAD, DATED : 16/9/2011. MAHATA/- ITA NO.3291/AHD/2009 ASST. YEAR 2002-03 7 COPY OF THE ORDER FORWARDED TO :- 1. THE ASSESSEE. 2. THE REVENUE. 3. THE CIT(APPEALS)- 4. THE CIT CONCERNS. 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER, DEPUTY / ASSTT.REGISTRAR ITAT, AHMEDABAD 1.DATE OF DICTATION 13/9/11. 2.DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE TH E DICTATING MEMBER 14/9/11. /OTHER MEMBER. 3.DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. P.S./P.S. 4.DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT.. 5.DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR .P.S./P.S 6.DATE ON WHICH THE FILE GOES TO THE BENCH CLERK .. 7.DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 8.THE DATE ON WHICH THE FILE GOES TO THE ASSTT. REG ISTRAR FOR SIGNATURE ON THE ORDER 9.DATE OF DESPATCH OF THE ORDER..