DWARKA CEMENT WORKS LTD, MUMBAI V. ITO 5(1)(3), MUMBAI

ITA 3451/MUM/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 49192 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 1 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-06-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Assessment Year: 2006-2007
• Appeal Filed On: 30-04-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: KUBAL
• Keywords: Additional evidence; Bad and doubtful debts; Corroborative evidences
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, D BENCH, MUMBAI. BEFORE SHRI PRAMOD KUMAR, ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO, JUDICIAL MEMBER I.T.A NO.3451/ MUM/2010 ASSESSMENT YEAR: 2006-07 DWARKA CEMENT WORKS LTD., .. APPELLANT 307, 3 RD FLOOR, A.C.MARKET, TARDEO, MUMBAI-034. PA NO.AAACD 2955 L VS INCOME TAX OFFICER 5(1)(3) ,. RESPONDEN T AAYAKAR BHAVAN, M.K. ROAD, MUMBAI. APPEARANCES: VIJAY MEHTA, FOR THE APPELLANT M.R.KUBAL, FOR THE RESPONDENT O R D E R PER PRAMOD KUMAR: 1. BY WAY OF THIS APPEAL, THE ASSESSEE HAS CALLED INTO QUESTION CORRECTNESS OF CIT(A)S ORDER DATED 25 TH MARCH, 2010, IN THE MATTER OF ASSESSMENT UNDER SEC TION 143(3) OF THE INCOME TAX ACT, 1961, FOR THE ASSESS MENT YEAR 2006-07. 2. IN THE FIRST GROUND OF APPEAL, THE ASSESSEE RAIS ED THE GRIEVANCE AGAINST DISALLOWANCE OF RS. 1,15,000 BEING THE RENT PAID BY THE COMPANY TO SHRI JITEN P MODI, SUSTAINED IN APPEAL BY THE CIT(A). I .T.A NO.3451/ MUM/2010:ASSESSMENT YEAR: 2006-07 2 3. BRIEFLY STATED THE RELEVANT MATERIAL FACTS ARE L IKE THIS. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAS CLAIMED DEDUCTION OF EXPENSES AN AMOUNT OF RS. 1,15,000 PAI D TO SHRI JITEN P. MODI. THIS PAYMENT WAS SAID TO HAVE BEEN MADE AS THE ASSESSEE WAS CARRYING ON BUSINESS AT 101, ARUN CHAMBER, TARDEO, MUMBAI AND IT CONSTITUTE D RENT FOR THE SAME. THIS PREMISES, HOWEVER, BELONGED TO ONE SHRI SUKETU J MO DI. THE ASSESSING OFFICE HAVING NOTED THAT THE PREMISES BELONG TO SHRI SUKETU J MOD I, DISALLOWED THE PAYMENT OF RENT FOR WANT OF SUPPORTING EVIDENCE BY WAY OF AN A GREEMENT BETWEEN SHRI SUKETU J MODI AND SHRI JITEN P MODI, HUF SO AS TO JUSTIFY PA YMENT OF RENT TO J.P.MODI, HUF. THE ASSESSING OFFICER WAS OF THE VIEW THAT THE PAYM ENT HAS BEEN MADE TO AN ENTITY OTHER THAN THE OWNER OF THE PREMISES. AGGRIEVED BY THIS DISALLOWANCE OF RS.1,15,000, THE ASSESSEE CARRIED THE MATTER IN APP EAL BUT WITHOUT ANY SUCCESS. 4. THE ASSESSEE IS NOT SATISFIED AND IS IN APPEAL B EFORE US. 5. IN THE COURSE OF HEARING BEFORE US, THE ASSESSEE HAS FILED CERTAIN ADDITIONAL EVIDENCE AND HAS MOVED A PETITION DATED 10.6.2011 P RAYING THAT THE ADDITIONAL EVIDENCE BE ADMITTED SO AS TO ENABLE THE ASSESSEE TO DEMONSTRATE THAT THERE WAS AN ARRANGEMENT BETWEEN SHRI SUKETU J MODI AND SHRI JIT EN P MODI, HUF AND ALSO THAT THE PREMISE WAS IN FACT USED BY THE ASSESSEE. WE H AVE ALSO TAKEN THROUGH THESE DOCUMENTS TO DEMONSTRATE THE RELEVANCE OF DETERMINI NG THE ADMISSIBILITY OF ASSESSEES CLAIM ON MERITS. LEARNED DEPARTMENTAL R EPRESENTATIVE DID OBJECT TO THE ADMISSION OF ADDITIONAL EVIDENCE AT THIS STAGE, THO UGH, IN ALL FAIRNESS, DID NOT OBJECT TO THE SAME BEING EXAMINED BY THE ASSESSING OFFICER ON MERITS. 6. HAVING HEARD THE RIVAL CONTENTIONS ON ADMISSION OF ADDITIONAL EVIDENCE AND HAVING PERUSED THE MATERIAL ON RECORD, WE DEEM IT F IT AND PROPER TO REMIT THE MATTER BACK TO THE FILE OF THE ASSESSING OFFICER FOR EXAMI NING THE MATTER AFRESH IN THE LIGHT OF, INTER ALIA , ADDITIONAL EVIDENCE FILED BY THE ASSESSEE BEFORE US NOW. WHILE DECIDING I .T.A NO.3451/ MUM/2010:ASSESSMENT YEAR: 2006-07 3 THE ADDITIONAL EVIDENCE, THE AO WILL GIVE AN OPPOR TUNITY OF HEARING TO THE ASSESSEE AND DECIDE THE ISSUE IN ACCORDANCE WITH LAW AND BY WAY OF A SPEAKING ORDER. 7. GROUND NO.1 IS THUS ALLOWED FOR STATISTICAL PURP OSES IN THE TERMS INDICATED ABOVE. 8. GROUND NOS.2 TO 5 ARE DISMISSED AS NOT PRESSED. 9. IN GROUND NO.6, THE ASSESSEE IS AGGRIEVED THE CI T(A)S CONFIRMING THE ADDITION OF ` . 8,65,460 ON ACCOUNT OF ACCRUAL OF INTEREST ON LOA NS GIVEN TO M/S. C.J. SHAH & CO. AND M/S. R.M.DESAI & CO. IN THE EARLIER YEARS. 10. SO FAR AS THIS ADDITION IS CONCERNED, THE RELEV ANT MATERIAL FACTS ARE LIKE THIS. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AS SESSING OFFICER NOTED THAT THE ASSESSEE HAS NOT DISCLOSED INTEREST INCOME FROM M/ S. C.J. SHAH & CO. AND M/S. R.M.DESAI & CO EVEN THOUGH THE ASSESSEE WAS TO RECE IVE @ 15% INTEREST ON THE LENDINGS TO THESE CONCERNS. IT WAS SUBMITTED BY THE ASSESSEE THAT THE LOANS IN RESPECT OF BOTH THE PARTIES HAVE BECOME DOUBTFUL AN D NEITHER THE PRINCIPAL NOR THE INTEREST IS LIKELY TO BE RECOVERED. HOWEVER, THE AS SESSING OFFICER REJECTED THE SUBMISSIONS OF THE ASSESSEE AND NOTED THAT THE ASSE SSEE HAD BUSINESS TRANSACTIONS WITH M/S. C.J. SHAH &CO. IN THE YEAR 2005 AND THAT SINCE THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING, INTEREST SHOULD NO T BE ACCRUED ON ACCRUAL BASIS. THE ASSESSING OFFICER WAS OF THE VIEW THAT MERELY B ECAUSE THE ASSESSEE HAD NOT RECEIVED INTEREST DURING THE RELEVANT PREVIOUS YEAR , IT DOES NOT MEAN THAT THE INCOME HAS NOT ACCRUED TO THE ASSESSEE. WITH THESE OBSERVATIONS, THE AO PROCEEDED TO BRING TO TAX INTEREST INCOME COMPUTED @ 15% OF P RINCIPAL AMOUNTING TO ` . 8,65,460 IN THE HANDS OF THE ASSESSEE. AGGRIEVED, THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT(A) BUT WITHOUT ANY SUCCESS. 11. THE CIT(A) WAS OF THE VIEW THAT SINCE THE ASSES SEE HAS SHOWN TRANSACTION WITH M/S. C.J. SHAH & CO. UPTO 12.11.2005 AND THAT SINCE THERE IS NO EVIDENCE TO I .T.A NO.3451/ MUM/2010:ASSESSMENT YEAR: 2006-07 4 DEMONSTRATE THAT FINANCIAL CONDITION OF M/S. R.M.DE SAI & CO. HAS BECOME BAD AND SINCE THE ASSESSEE IS MAINTAINING BOOKS OF ACCOUNT ON MERCANTILE BASIS, THE AO WAS JUSTIFIED IN HOLDING THAT INTEREST INCOME HAS ACTUA LLY ACCRUED TO THE ASSESSEE. THE ACTION OF THE ASSESSING OFFICER WAS THUS CONFIRMED. THE ASSESSEE IS NOT SATISFIED AND IS IN APPEAL BEFORE US. 12. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED T HE MATERIAL ON RECORD AND DULY CONSIDERED FACTUAL MATRIX OF THE CASE AS ALSO THE APPLICABLE LEGAL POSITION. 13. WE HAVE NOTED THAT SO FAR AS THE AOS OBSERVATI ON REGARDING THE REGULAR TRANSACTIONS WITH M/S. C.J.SHAH & CO. ARE CONCERNED , THE ONLY TRANSACTION REFLECTED IN THE LEDGER ACCOUNT, A COPY OF WHICH WAS PLACED BEFO RE US, AT PAGE 33 OF COMPILATION OF PAPERS, SHOWS RECOVERY OF PART OF THE PRINCIPAL FROM M/S. C.J.SHAH & CO AND, THEREFORE, IT CANNOT BE TERMED AS A REGULAR COMMERC IAL TRANSACTION. WE FURTHER FIND THAT THIS ISSUE IS CONCLUDED IN FAVOUR OF THE ASSES SEE BY AN ORDER DATED 2.3.2009, IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2003-04 , WHEREIN, THE COORDINATE BENCH HAS, INTER ALIA, OBSERVED AS FOLLOWS: 6. GROUND 4 IS ON THE ISSUE WHETHER THE FIRST APPE LLATE AUTHORITY WAS RIGHT IN DELETING AN ADDITION OF RS.11,65,300 MADE BY THE ASSESSING OFFICER ON THE GROUND THAT INTEREST ACCRUED ON A LOAN DUE FROM M/S. CJ SHAH & CO. THE UNDISPUTED FACT IS THAT THE ASSESSEE HAD IN EARLIER YEARS BORROWED INTEREST IN THE CSE OF M/S. CJ SHAH & CO. AND THAT IT HAD ALSO WRITTEN OFF THIS INTEREST AS BAD DEBTS SUBSEQUENTLY, AS THE REALIZATION OF THE S AME WAS IN DOUBT. THE LOAN BAD BECOME STICKY AND THE RECOVERY OF THE SAME IS D OUBTFUL. ON THESE FACTS, AS THE ASSESSEE SUO MOTU HAD TO REVERSE THE INTEREST R ECOGNIZED AS INCOME IN THE EARLIER YEARS, IT CHOSE NOT TO RECOGNIZE ANY IN COME DURING THE YEAR. ON THESE FACTS WE ARE OF THE CONSIDERED OPINION THAT T HE ISSUE IS SQUARELY COVERED BY THE DECISION OF THE MUMBAI BENCH A OF THE TRIBUNAL IN THE CASE OF LINKSON LEASING LIMITED VS. ITP ITA NO.358/MUM/2 006 FOR THE ASSESSMENT YEAR 2001-02 ORDER DATED 24-10-2008, WHE REIN AT PARAGRAPH 5 ON PAGE 3, A SIMILAR ISSUE HAS BEEN CONSIDERED. THE LEGAL POSITION HAS BEEN SPELT OUT THEREIN AS UNDER : 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. ADMITTEDLY THE ASSESSEE IS A LI MITED COMPANY AND IS OBLIGED TO FOLLOW MERCANTILE SYSTEM OF ACCOUNTING. I N THIS SYSTEM OF ACCOUNTING INCOME AND EXPENSES ARE ACCOUNTED FOR ON ACCRUAL BASIS. INSOFAR AS THE INCOME ASPECT IS CONCERNED IT IS REC OGNIZED WHEN THE RIGHT I .T.A NO.3451/ MUM/2010:ASSESSMENT YEAR: 2006-07 5 TO RECEIVE SUCH INCOME IS ACQUIRED. IF HOWEVER THE VERY RIGHT TO EARN THE INCOME IS ACQUIRED, THAT CANNOT BE INCLUDED IN THE T OTAL INCOME ON ACCRUAL BASIS. IF THE VERY DEBT IS DOUBTFUL OF RECOVE RY, NO INTEREST INCOME CAN BE SAID TO HAVE ARISEN EVEN IN THE MERCANTILE SY STEM OF ACCOUNTING. THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. GOYAL M. G. GASES P. LTD. [(2008) 3003 ITR 159 (DEL.)] HAS HELD THAT WHE N THE PRINCIPAL AMOUNT ITSELF IS NOT RECOVERABLE THERE CAN BE NO REA L ACCRUAL OF INCOME BY WAY OF INTEREST. SIMILAR VIEW WAS TAKEN BY THE H ON'BLE ALLAHABAD HIGH COURT IN THE CASE OF CIT VS. GIRIRAJ UDYOG PVT . LTD. [(2005) 273 ITR 495 (ALL.)]. THE HON'BLE ALLAHABAD HIGH COURT IN THE CASE OF CIT VS. ABBAR VAZIR (P) LTD. [(2005) 274 ITR 448 (ALL.)] JUST IFIED THE ACTION OF THE TRIBUNAL IN DELETING THE ADDITION WHICH WAS MADE BY THE ASSESSING OFFICER ON THE GROUND THAT THE FINANCIAL CONDITION OF DEBTORS HAD DETERIORATED TO SUCH AN EXTENT THAT EVEN THE RECOVE RY OF THE PRINCIPAL AMOUNT WAS A DOUBT AND THE RECOVERY OF INTEREST WAS NOT POSSIBLE. IN VIEW OF THE FOREGOING DISCUSSION IT IS OBVIOUS THAT IF THE PRINCIPAL AMOUNT OF LOAN IS NOT CAPABLE OF RECOVERY THEN THERE CANNOT BE ANY QUESTION OF CHARGING INTEREST OF SUCH LOAN ON ACCRU AL BASIS IN THE MERCANTILE SYSTEM OF ACCOUNTING. APPLYING THE ABOVE PROPOSITION TO THE FACTS ON HAND , WE UPHOLD FINDINGS OF THE FIRST APPELLATE AUTHORITY AND DISMISS THIS GROU ND OF REVENUE. 14. WE HAVE NOTED THE LEARNED COUNSELSS SUBMISSION THAT THERE WAS NO FURTHER RECOVERY FROM BOTH THE PARTIES AND, THEREFORE, WHEN THE PRINCIPAL ITSELF HAS BECOME DOUBTFUL OF RECOVERY, INTEREST INCOME CANNOT BE BRO UGHT TO TAX. MERELY BECAUSE THE ASSESSEE IS TECHNICALLY RIGHT TO RECEIVE THE INTERE ST BUT THERE IS REAL POSSIBILITY OF REALIZING THE SAME, THEREFORE, INCOME CANNOT BE SAI D TO ACCRUE IN THE HANDS OF THE ASSESSEE. WE HAVE TAKEN NOTE OF LEARNED COUNSELS S UBMISSION THAT FOLLOWING THE REAL INCOME THEORY EVEN WHEN ACCOUNTS ARE MAINTAINED IN THE MERCANTILE SYSTEM, WHETHER THE INCOME IS REALLY ACCRUED TO THE ASSESSE E AS HELD BY HONBLE SUPREME COURTS JUDGMENT IN THE CASE OF GODHRA ELECTRICITY CO. LTD. V. COMMISSIONER OF INCOME-TAX(225 ITR 746)(SC). IN VIEW OF THE ABOVE DISCUSSION AND RESPECTFULLY FOLLOWING THE STAND OF THE COORDINATE BENCH IN ASSE SSEES OWN CASE, WE UPHOLD THE GRIEVANCE OF THE ASSESSEE AND DIRECT THE AO TO DELE TE THE IMPUGNED DISALLOWANCE OF RS. 8,65,640. 15. GROUND NO.6 IS THUS ALLOWED. I .T.A NO.3451/ MUM/2010:ASSESSMENT YEAR: 2006-07 6 16. THE ASSESSEE HAS ALSO FILED ADDITIONAL GROUND V IDE LETTER DATED 9.6.2011 AND HAS NOT PRESSED THE SAME. THE ADDITIONAL GROUND IS ACCORDINGLY DISMISSED. 17. IN THE RESULT, APPEAL IS PARTLY ALLOWED IN THE TERMS INDICATED ABOVE. PRONOUNCED IN THE OPEN COURT ON 17 TH JUNE, 2011 SD/- (VIJAY PAL RAO) JUDICIAL MEMBER SD/- (PRAMOD KUMAR) ACCOUNTANT MEMBER MUMBAI, DATED 17 TH JUNE, 2011 PARIDA COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. COMMISSIONER OF INCOME TAX (APPEALS),9 MUMBAI 4. COMMISSIONER OF INCOME TAX, 5 , MUMBAI 5. DEPARTMENTAL REPRESENTATIVE, BENCH D, MUMBAI //TRUE COPY// BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI