THE ACIT, Circle -1(1), V. M/S GARDEN SILK MILLS LTD.,

ITA 3493/AHD/2003

• Counselvise Citation: [2009] 115 COUNSELVISE.COM (IT) 0442 (ITAT-AHMEDABAD)
• Duration Of Justice: 6 year(s) 2 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-11-2009
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 28-08-2009
• Assessment Year: 2000-2001
• Appeal Filed On: 12-09-2003
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: J P SHAH SMT CHHAVI ANUPAM
• Keywords: Depreciation; Business expenditure; Bad and doubtful debts; Scheme of amalgamation; Capital receipt; Set aside
• Section: 27; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH D BEFORE SHRI MAHAVIR SINGH, JUDICIAL MEMBER AND SHRI D.C.AGRAWAL, ACCOUNTANT MEMBER DATE OF HEARING : 28/08/09 DRAFTED ON: 20/10/ 09 APPEAL(S) BY SL. NO(S). ITA NO(S) ASSESSMENT YEAR(S) APPELLANT RESPONDENT 1. 3493/AHD/2003 2000-01 THE ACIT CIRCLE-1(1) SURAT M/S.GARDEN SILK MILLS LTD. GARDEN MILLS COMPLEX SAHARA GATE, SURAT PAN - 2. 3257/AHD/2004 2002-03 M/S.GARDEN SILK MILLS LTD., SURAT THE ACIT, CIRCLE-1(1) SURAT 3. 3353/AHD/2004 2002-03 THE ACIT CIRCLE-1(1), SURAT M/S.GARDEN SILK MILLS LTD., SURAT ASSESSEE BY : SHRI J.P.SHAH REVENUE BY: SMT.CHHAVI ANUPAM, CIT- DR O R D E R PER D.C.AGRAWAL , ACCOUNTANT MEMBER :- THE ITA NOS.3257/AHD/2004 & 3353/AHD/2004 ARE THE C ROSS APPEALS BY THE ASSESSEE AND THE REVENUE RESPECTIVEL Y AGAINST THE ORDER OF THE LEARNED CIT(APPEALS)-I, SURAT DATED 09/09/2004 FOR ASSESSMENT YEAR 2002-03 AND APPEAL NO. ITA 3493/AHD/2003 IS BY THE REVENUE AGAINST THE ORDER OF THE LEARNED CIT(APPEALS) DATED 23/06/2 003 FOR ASSESSMENT YEAR 2000-01. THE FOLLOWING GROUNDS HAVE BEEN RAIS ED BY THE RESPECTIVE PARTIES IN THEIR APPEALS:- ITA NOS.3493/A/03(BY REVENUE), ITA NOS.3257 & 3353/AHD/2004(CROSS) THE ACIT VS. M/S.GARDEN SILK MILLS LTD.A.YS - 2000 -01 & 2002-03 - 2 - (A) REVENUES APPEAL, ITA NO.3493/AHD/2003 FOR A.Y. 2000-01 THE REVENUE IS IN APPEAL AGAINST THE ORDER OF THE LEARNED CIT(APPEALS)-I, SURAT DATED 23/06/2003 PASSED FOR A SSESSMENT YEAR 2000- 01, WHEREIN FOLLOWING EFFECTIVE GROUND HAS BEEN RAI SED: (1) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED COMMISSIONER OF INCOME-TAX(APPEALS)-I, SURAT HAS ERRED IN DELETING THE DISALLOWANCE OF RS.4,40,58,13 0/- MADE BY THE ASSESSING OFFICER ON ACCOUNT ESCROW DEPOSIT WRITTEN OFF. (B) ASSESSEES APPEAL, ITA NO.3257/AHD/2004 FOR A.Y . 2002-03 THE APPELLANT OBJECTS TO THE ORDER UNDER SECTION 14 3(3) OF THE INCOME-TAX ACT, 1961 ('THE ACT') DATED 30 JUNE 2004 PASSED BY THE ASST. COMMISSIONER OF INCOME-TAX, CIRCLE 1(1), SURA T ('ACIT'), FOR THE AFORESAID ASSESSMENT YEAR ON THE FOLLOWING AMON GST THE OTHER GROUNDS: 1. THE LEARNED ACIT ERRED IN NOT ALLOWING A DEDUCT ION OF RS.3,37,809 AND RS. 4,49,608 BEING BAD DEBTS WRITTE N OFF OF KOTAK MAHINDRA PRIMUS LTD. AND KOTAK MAHINDRA FINANCE LTD . AGGREGATING TO RS.7,47,417. HE ERRED IN NOT APPRECIATING THE DETAILS/ EXPLANATI ONS FILED BY THE COMPANY VIDE ITS LETTERS DATED 9 JANUARY 2004 AND 2 4 MAY 2004 IN ITS PROPER PERSPECTIVE. HE FURTHER ERRED IN MAKING THE FOLLOWING OBSERVATIO N WHICH ARE EITHER NOT RELEVANT TO THE ISSUE OR IS FACTUALLY IN CORRECT: IT IS SEEN THAT NO EFFORTS HAVE BEEN MADE TO RE COVER SAID DEBTS FROM THE DEBTORS. THE ASSESSEE COMPANY AGAIN MADE TRADE TRANSACTI ONS WITH THE SAID PARTIES AND WRITTEN OFF RS.3,37,809 AND RS.4,0 9,608 DUE FROM ITA NOS.3493/A/03(BY REVENUE), ITA NOS.3257 & 3353/AHD/2004(CROSS) THE ACIT VS. M/S.GARDEN SILK MILLS LTD.A.YS - 2000 -01 & 2002-03 - 3 - KOTAK MAHINDRA PRIMUS LTD. AND KOTAK MAHINDRA FINAN CE LTD. RESPECTIVELY. AGAIN THE ASSESSEE CANNOT MAKE TRANSACTIONS WIT H THE SAME PARTY IN THE FOLLOWING ASSESSMENT YEARS AND CLAIM THAT TH E AMOUNT DUE FROM THE SAID PARTY HAD BECOME BAD FOR THE PURPOSE OF RECOVERY. THE APPELLANT IN CONNECTION WITH ITS CLAIM FOR DEDU CTION OF AFORESAID BAD DEBTS RELIES ON THE CIT(A)'S ORDER FO R THE ASSESSMENT YEAR 2000-01. WITHOUT PREJUDICE THE LEARNED ACIT ERRED IN NOT ALL OWING THE WRITE OFF OF DEPOSIT AS LOSS UNDER SECTION 29 OF THE ACT. HE OUGHT TO HAVE APPRECIATED THAT THE WRITE OFF WAS CLEARLY CONNECTE D WITH THE AUTO FINANCE BUSINESS OF THE COMPANY AND THEREFORE OUGHT TO BE ALLOWED AS DEDUCTION. 2. THE LEARNED ACIT ERRED IN NOT CONSIDERING THE S ALES TAX INCENTIVE OF RS.2,05,37,224 GIVEN BY THE GOVERNMENT OF GUJARAT FOR SETTING UP INDUSTRIES IN NOTIFIED AREAS IN THE FORM OF EXEMPTION FROM LIABILITY TO PAYMENT OF SALES TAX AS A CAPITAL RECE IPT NOT CHARGEABLE TO TAX. HE ERRED IN NOT APPRECIATING THE EXPLANATIONS FILED BY THE COMPANY VIDE ITS LETTER DATED 24 MAY 2004 IN ITS PROPER PER SPECTIVE. HE FURTHER ERRED IN MAKING THE FOLLOWING OBSERVATIO NS, WHICH ARE CONTRARY TO THE FACTS OF THE APPELLANT'S CASE: I DO NOT AGREE WITH THE ARGUMENTS OF THE ASSESSEE COMPANY THAT THE SALES TAX INCENTIVES HAVE BEEN GIVEN BY THE GOV T. OF GUJARAT TO THE COMPANY FOR SETTING UP INDUSTRIES IN A NOTIFIED AREA, BUT IT HAS BEEN GIVEN FOR THE PURPOSE OF DEVELOPMENT AND TO EN COURAGE EMPLOYMENT TO LOCAL PERSONS AND TO RUN THE BUSINESS OF THE COMPANY AND TO STRENGTHEN THE FINANCIAL POSITION FO R EFFICIENT AND PROFITABLE RUNNING OF THE INDUSTRY. THERE IS NO DIRECT NEXUS BETWEEN THE INCENTIVES AND THE FIXED CAPITAL INVESTMENT. THE COMPUTATION OF SALES TAX INCENTIVES ALSO DE PENDS UPON THE TURNOVER OF THE BUSINESS. ITA NOS.3493/A/03(BY REVENUE), ITA NOS.3257 & 3353/AHD/2004(CROSS) THE ACIT VS. M/S.GARDEN SILK MILLS LTD.A.YS - 2000 -01 & 2002-03 - 4 - THE SUBSIDY GRANTED TO THE ASSESSEE COMPANY IN THIS CASE DEPENDS UPON PRODUCTION AND ANY SUBSIDY RELATING TO PRODUCTION COULD NOT BE ANYTHING BUT REVENUE RECEIPT. THE ASSESSEE COMPANY HAS CLAIMED THAT SALES TAX INCENTIVES OF RS.2,05,37,224 IS A CAPITAL RECEIPT, HOWEVER, IT HA S NOT DEDUCTED THE SAME AMOUNT FROM THE VALUE OF THE ACTUAL COST OF TH E ASSETS FOR THE PURPOSE OF COMPUTATION OF DEPRECIATION. THE APPELLANT IN THIS CONNECTION RELIES ON THE DECI SION ON THE SPECIAL BENCH DECISION OF THE MUMBAI TRIBUNAL IN TH E CASE OF RELIANCE INDUSTRIES LTD. (82 TTJ 765). 3. THE LEARNED ASSESSING OFFICER ERRED IN INITIATI NG PENALTY PROCEEDINGS UNDER SECTION 27 L(L)(C) OF ACT. 4. EACH ONE OF THE ABOVE GROUNDS OF APPEAL IS WITH OUT PREJUDICE TO THE OTHER. 5. THE APPELLANT RESERVES THE RIGHT TO ADD, ALTER OR AMEND TO THE ABOVE GROUNDS OF APPEAL. (C) REVENUES APPEAL, ITA NO.3353/AHD/2004 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD. CIT(A), SURAT HAS ERRED IN DELETING THE ADDITIO NS IN RESPECT OF BAD DEBTS AMOUNTING TO RS.7,47,417/-. 2. ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A)HAS ERRED IN NOT APPRECIATING THE FACT THAT T HE ASSESSEE HAD NOT PRODUCED ANY EVIDENCE THAT THE DEBT HAD BECOME BAD. THE LD. CIT(A) HAS ALSO ERRED IN, SOLELY, RELYING UPON THE CONTENTION OF THE ASSESSEE, WHICH WERE RAISED DURING THE ASSESSMENT P ROCEEDINGS AND WHICH WERE CONSIDERED AND REJECTED BY THE ASSESSING OFFICER. 2. FIRST, WE TAKE UP THE REVENUES APPEAL, ITA NO.3 493/AHD/2003. ITA NOS.3493/A/03(BY REVENUE), ITA NOS.3257 & 3353/AHD/2004(CROSS) THE ACIT VS. M/S.GARDEN SILK MILLS LTD.A.YS - 2000 -01 & 2002-03 - 5 - 3. THE SOLE ISSUE INVOLVED IN THIS REVENUES APPEAL IS THAT THE LD.CIT(A) HAS ALLOWED THE CLAIM OF THE ASSESSEE FOR WRITING OFF A SUM OF RS.4.40 CRORES OUT OF ESCROW DEPOSIT ACCOUNT. 4. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSE SSEE IS A TEXTILE MANUFACTURING COMPANY. IT HAD FILED A RETURN OF IN COME FOR THE YEAR UNDER CONSIDERATION ON 30/11/2000 AT NIL INCOME U/S.115JA OF THE I.T. ACT, 1961. THE RETURN WAS PROCESSED ON THE SAME INCOME BUT SUBSEQUENTLY ASSESSMENT ORDER U/S.143(3) OF THE I.T. ACT, 1961 W AS PASSED WHEREIN MAJOR ADDITION MADE BY THE ASSESSING OFFICER RELATE D TO DISALLOWANCE OF WRITING OFF OF BY THE ASSESSEE OUT OF ESCROW DEPOS IT ACCOUNT A SUM OF RS.4,40,58,130/-. ONE OF THE SISTER CONCERNS OF TH E ASSESSEE-COMPANY, I.E. M/S.GARDEN FINANCE LTD WAS NON-BANKING FINANCE COM PANY ENGAGED IN THE BUSINESS OF GIVING LOANS, AUTO FINANCING, DEALI NG IN SHARES, DIVIDEND, ETC. THIS COMPANY AMALGAMATED WITH THE ASSESSEE-CO MPANY ON 01/04/1997. THE SCHEME OF AMALGAMATION WAS APPROVE D BY HON'BLE GUJARAT HIGH COURT VIDE ITS ORDER DATED 20/04/1999 IN COMPANYS PETITION NO.38 OF 1999 CONNECTED WITH COMPANYS PE TITION NO.170 OF 1998. THEREAFTER, THE ASSESSEE-COMPANY CARRIED O N THIS BUSINESS FOR SOMETIME BUT DECIDED TO TRANSFER ITS ENTIRE AUTO F INANCE RECEIVABLE PORT FOLIO TO M/S.KOTAK MAHINDRA PRIMUS LTD. (IN SHORT KMPL) AND M/S.KOTAK MAHINDRA FINANCE LTD (IN SHORT KMFL). ACCORDINGLY , THE ASSESSEE- COMPANY ENTERED INTO A SALE-DEED AGREEMENT WITH KMP L AND KMFL ON 02/05/1998 AND 02/07/1998 FOR THE TRANSFER OF THE A UTO FINANCE RECEIVABLES AND THE UNDERLINED SECURITIES TOGETHER WITH THE RIG HTS AND OBLIGATIONS UNDER THE HIRE PURCHASE AGREEMENTS FOR THE TOTAL CONSIDER ATION OF RS.42.55 CRORES. THE TRANSFER OF THE AUTO FINANCE PORT FOLIO WAS DON E IN TWO STAGES AND TOTAL RECEIVABLES WERE TRANSFERRED ACCORDINGLY AS UNDER: - ITA NOS.3493/A/03(BY REVENUE), ITA NOS.3257 & 3353/AHD/2004(CROSS) THE ACIT VS. M/S.GARDEN SILK MILLS LTD.A.YS - 2000 -01 & 2002-03 - 6 - AMOUNT (RS.) 1 ST PHASE ( FOR AUTO FINANCE PORTFOLIO OF HIRERS OUTSIDE SURAT) ( ON 2 ND MAY, 1998 ) 1 KOTAK MAHINDRA PRIMUS LTD. (KMPL) 31,40,80,926 2 KOTAK MAHINDRA FINANCE (KMFL) 3,32,42,015 TOTAL 34,73,22,941 2 ND PHASE (FOR AUTO FINANCE PORTFOLIO OF HIRERS WITHIN SURAT) ( ON 2 ND JULY, 1998 ) 1 KOTAK MAHINDRA PRIMUS LTD. (KMPL) 6,90,26,742 2 KOTAK MAHINDRA FINANCE (KMFL) 91,95,956 TOTAL 7,82,22,698 GRAND TOTAL 42,55,45,639 4.1. IT WAS CLAIMED BY THE ASSESSEE BEFORE THE ASSE SSING OFFICER THAT THE ASSESSEE IS REQUIRED TO KEEP A DEPOSIT WITH KMPL A ND KMFL IN AN ESCROW ACCOUNT AND, ACCORDINGLY, ASSESSEE ENTERED INTO TWO SEPARATE ESCROW AGREEMENTS WITH KMPL AND KMFL ON 02/05/1998 AND 02/07/1998 RESPECTIVELY AND DEPOSITED FOLLOWING AMOUNTS:- DATE OF DEPOSIT KMPL KMFL REMARKS 4-5-1998 RS. 2,91,32,908 RS. 32,75,833 BASE ESCROW AMOUNT 4-5-1998 RS. 69,91,898 RS. 7,86,200 ADDITIONAL ESCROW AMOUNT 30-6-1998 RS. 48,03,967 RS. 6,71,629 BASE ESCROW ACCOUNT TOTAL RS.4,09,28,773 RS.47,33,662 RS.4,56,62,435 4.2.IT WAS ALSO CLAIMED THAT AGREEMENT PROVIDED TH AT ASSESSEE-COMPANY WILL BEAR THE COST UPTO AN AMOUNT NOT EXCEEDING 10% OF THE OUTSTANDING ITA NOS.3493/A/03(BY REVENUE), ITA NOS.3257 & 3353/AHD/2004(CROSS) THE ACIT VS. M/S.GARDEN SILK MILLS LTD.A.YS - 2000 -01 & 2002-03 - 7 - RECEIVABLES IN RESPECT TO THE HIRE PURCHASE AGREEME NT AND THIS LIMIT MAY BE ENHANCED AS PER MUTUAL AGREEMENT BETWEEN THE PARTIE S. SUBSEQUENT TO ASSIGNING AUTO FINANCE AND PURCHASE RECEIVABLE PORT FOLIO, KMPL AND KMFL INCURRED LOSSES IN THE AUTO FINANCE TRANSACTIO NS ON ACCOUNT OF CONSIDERABLE DEFAULTS BY THE CUSTOMERS IN MAKING PA YMENTS OF THE HIRE PURCHASE INSTALLMENTS OF FINANCE AGAINST THE VEHICL ES AND, THEREFORE, KMPL AND KMFL INVOKED THE FORECLOSER CLAUSES. IN THE CA SES OF DEFAULTS, THEY COMPUTED THE FORECLOSER AMOUNTS AND PENAL CHARGES A ND ADJUSTED THE SAME AGAINST ESCROW DEPOSIT ACCOUNT WHICH IN TOTAL AMOU NTED TO RS.4,40,58,130/-. THIS AMOUNT WAS REDUCED FROM TH E ESCROW DEPOSIT ACCOUNT AND, ACCORDINGLY, THE ASSESSEE SUFFERED A L OSS. THE DETAILS OF AMOUNT OF RS.4.40 CRORES ADJUSTED FROM THE ESCROW A CCOUNT AND, ACCORDINGLY, WRITTEN OFF BY THE ASSESSEE AS BAD DEB TS WERE AS UNDER: 4.3. THE ASSESSING OFFICER, HOWEVER, DID NOT AGREE AND DISALLOWED THE CLAIM IN A DETAILED ORDER FOR THE REASONS WHICH A RE SUMMARIZED AS UNDER:- PARTICULARS RS. RS. 1 COMMISSION OF KMPL 83,088 2 COMMISSION OF KMFL 14,235 3 FORECLOSURE LOSS OF KMPL 1,19,47,528 FORECLOSURE LOSS OF VARIOUS BRANCHES 2,97,813 1,22,45,341 4 ESCROW WRITE OFF KMPL 2,86,52,018 FOR VARIOUS BRANCHES 2,72,491 2,89,24,509 5 LOSS ON FORECLOSURE OF KMFL 28,20,375 TOTAL 4,40,87,548 ITA NOS.3493/A/03(BY REVENUE), ITA NOS.3257 & 3353/AHD/2004(CROSS) THE ACIT VS. M/S.GARDEN SILK MILLS LTD.A.YS - 2000 -01 & 2002-03 - 8 - 1. IN THE ORIGINAL AGREEMENT DATED 2 ND MAY 1998 ENTERED INTO BY THE APPELLANT WITH KMPL AND KMFL, THERE WAS NO MENT ION ABOUT THE ESCROW ACCOUNT. HE HAS FURTHER OBSERVED T HAT THE OPENING OF ESCROW ACCOUNT IS AN AFTER THOUGHT WITH THE SOLE PURPOSE OF INFLATING THE EXPENSES. 2. ON PAGE NO.9-PARA 2.4, IT HAS BEEN CLEARLY STATED T HAT THE FIRST PARTY, IE.E THE ASSESSEE DOES NOT WARRANTY OR GUARA NTEE THE PAYMENT OF RECEIVABLE OR THE PERFORMANCE OF THE OBL IGATION UNDER THE HIRE PURCHASE AGREEMENT BY THE HIRER. IF THAT BE SO, THEN THERE IS HARDLY ANY JUSTIFICATION AS TO WH Y THE AMOUNT HAS BEEN DEPOSITED BY WAY OF ESCROW AGREEMEN T 3. THE ASSESSEE HAS NOT PROVIDED SPECIFIC DETAILS AS TO HOW THIS AMOUNT HAD BECOME IRRECOVERABLE AND THE NAMES OF HI RERS WHO WERE IN DEFAULT. NO DETAILS OF STEPS TAKEN FOR RECOVERY HAVE BEEN INDICATED. 4. HE OBSERVED THAT THE AMOUNT CAN UNDER NO CIRCUMSTA NCES BE CONSTRUED OR EXPEDIENT IN THE INTEREST OF BUSINESS OR AS LAID OUT FOR THE PURPOSE OF BUSINESS OF THE APPELLANT. H E HAS OBSERVED THAT THERE IS NO CONNECTION BETWEEN THE EX PENDITURE AND THE OBJECT FOR WHICH IT HAS BEEN INCURRED. HE H AS FURTHER OBSERVED THAT THERE IS NO RELATIONSHIP OF DEBTOR AN D CREDITOR TO PRESUPPOSE THE EXISTENCE OF A DEBT AND FURTHER T HE AMOUNT DEBITED AND CLAIMED AS DEBT IS NOT INCIDENTAL TO TH E BUSINESS OF THE APPELLANT. 5. HE POINTED OUT THAT AS PER THE ORIGINAL AGREEMENT, THE ENTIRE BUSINESS WAS HANDED OVER TO THE KMPL AND KMFL AND A T THAT POINT OF TIME, THERE WAS NO INDICATION REGARDI NG ESCROW AGREEMENT. HE OBSERVED THAT MERE SETTING APART OF F UNDS IS NOT EXPENDITURE. THE LEARNED ASSESSING OFFICER HAS ALSO OBSERVED THAT THE AMOUNT DEBITED TO PROFIT AND LOSS ACCOUNT AND CLAIMED, AS DEBT IS NOT INCIDENTAL TO THE BUSIN ESS OF THE APPELLANT. 6. THE ASSESSING OFFICER HAS OBSERVED THAT WHERE AN AGREEMENT IS DRAWN UP AND THE ENTIRE BUSINESS IS HANDED OVER TO ANOTHER PARTY, THE ORIGINAL HOLDER O F THE ITA NOS.3493/A/03(BY REVENUE), ITA NOS.3257 & 3353/AHD/2004(CROSS) THE ACIT VS. M/S.GARDEN SILK MILLS LTD.A.YS - 2000 -01 & 2002-03 - 9 - BUSINESS I.E. THE ASSESSEE, IN THIS CASE WOULD BE R ID OF ALL LIABILITIES. 7. THE LEARNED ASSESSING OFFICER HAS OBSERVED THAT THE MERE FACT OF AN AMOUNT HAVING BEEN WRITTEN OFF IS NOT SUFFIC IENT TO PROVE THAT THE ASSESSEE BELIEVED THE AMOUNT HAS BEC OME BAD SINCE IT WOULD ALLOW A FREE HAND FOR TAX EVASION AN D MANIPULATION OF INCOME OF A PARTICULAR YEAR. HE HAS FURTHER OBSERVED THAT UNDER THE AMENDED CLAUSE, THE REQUIRE MENT OF ESTABLISHING THAT DEBT HAS BECOME BAD IN THE RELEVA NT ACCOUNTING YEAR IS DISPENSED WITH, BUT THE SUBJECT MATTER OF THE CLAUSE IS STILL ANY BAD DEBTS AND NOT ANY DE BTS 4.4. IN APPEAL, THE LEARNED CIT(APPEALS) CONSIDERED THE ARGUMENTS OF THE ASSESSEE AND HIS RELIANCE ON FOLLOWING JUDGEMEN TS:- (A) KAMAT HOTELS INDIA LTD. V/S. ITQ 78 ITD 144 (B) -CIT V/S. MOTORS & GENERAL STORES P. LTD. 66 ITR 692 (C) CIT V/S. B. M. KHARWAR 72 ITR 603. (D)RAMCHANDRA SHIVNARAYAN V/S. CIT ( 111 ITR 263) (SC) (E)G,G. DANDEKAR MACHINE WORKS V/S. CIT. (202 ITR 161 ) ( B'BAYH.C.) ' 4.5. HE HELD THAT ASSESSING OFFICER HAS MADE THE AD DITION UNDER MISCONCEPTION OF FACTS. IN THIS REGARDS, WE REPRO DUCE HIS FINDING AND OBSERVATION AS UNDER:- 2.6. IN A GENERAL WAY IT IS EXPLAINED THAT THE FIN ANCE BUSINESS WAS PARTED IN THE YEAR 1990 WHICH WAS A BOOM PERIOD FOR CAR FINANCE BUSINESS. A LARGE NUMBER OF CONCERNS WENT I NTO SUCH BUSINESS AT THAT TIME. LATER ON THE BUSINESS .VENT INTO A DOWNTURN AS RECOVERY PRESENTED PROBLEMS. THE MARGINS ALSO WE NT DOWN GRADUALLY. THEREFORE THE APPELLANT STARTED FAC ING PROBLEMS IN ITA NOS.3493/A/03(BY REVENUE), ITA NOS.3257 & 3353/AHD/2004(CROSS) THE ACIT VS. M/S.GARDEN SILK MILLS LTD.A.YS - 2000 -01 & 2002-03 - 10 - RUNNING THE BUSINESS. IT IS POINTED OUT THAT RECOVERIES IN AUTOMOBILE FINANCE BUSINESS ARE OFTEN A PROBLEM AND THERE IS A NEED FOR SOME KIND OF MUSCLE POWER WHICH THE APPELL ANT DID NOT HAVE OR WAS INTERESTED IN ARRANGING FOR. ON ACCOUNT OF SUCH FACTORS IT WAS DECIDED TO DISPOSE OF THE BUSINESS. AS A BUY ER WILL ALSO NOT PURCHASE SUCH BUSINESS ON THE PRESUMPTION OF 100% R ECOVERY, AN ESCROW AGREEMENT WAS ENTERED INTO FOR THE PURPOSE O F TAKING CARE OF UNCERTAINTIES IN RECOVERY AND LIMITING THE APPEL LANT'S LIABILITY. AS HAS BEEN EXPLAINED EARLIER, THE ESCROW ARRANGEMENT WAS AN INTEGRAL PART OF THE AGREEMENT. IT IS FURTHER POINT ED JUT THAT M/S. KOTAK MAHENDRA IS A REPUTED CONCERN OF LONG STANDIN G. IT IS EMPHASISED THAT THE TRANSACTION IN QUESTION IS NOT SUCH THAT DOUBTS CAN REASONABLY BE RAISED ON ITS GENUINENESS. IT IS STATED THAT THE ASSESSING OFFICER SEEMS TO HAVE PROCEEDED ON A PRES UMPTION OF NON-GENUINENESS OF THE ARRANGEMENT AND THIS MINDSET , COUPLED WITH MISPERCEPTION OF RELEVANT FACTS, LED HIM ASTRA Y INTO A WRONG CONCLUSION. 2.7. IN THE BACKGROUND OF THE FACTS AND CIRCUMSTANC ES AS SET OUT ABOVE, THERE SEEMS TO BE NO JUSTIFIABLE GROUND TO D OUBT THE GENUINENESS OF THE BUSINESS ARRANGEMENT ENTERED INT O WITH M/S, KOTAK MAHINDRA. THE ASSESSING OFFICER HAS ARRIVED A T HIS CONCLUSIONS ON ACCOUNT OF SOME CONFUSION ABOUT FACT S AS HAS BEEN POINTED OUT EARLIER. THE ADDITION IS NOT JUSTIFIED UNDER THE FACTS AND HENCE IT IS DELETED. ITA NOS.3493/A/03(BY REVENUE), ITA NOS.3257 & 3353/AHD/2004(CROSS) THE ACIT VS. M/S.GARDEN SILK MILLS LTD.A.YS - 2000 -01 & 2002-03 - 11 - 5. BEFORE US, THE LEARNED DEPARTMENTAL REPRESENTATI VE VEHEMENTLY RELIED ON THE ORDER OF THE ASSESSING OFFICER, BUT I N ADDITION HE SUBMITTED THAT FIRSTLY THE ASSESSEE HAS GIVEN A DIFFERENT NAR RATION TO THE CLAIM IN THE BOOKS OF ACCOUNT. THE MONEY HAS BEEN DEBITED UNDER THE HEAD PAYMENTS TO AND PROVISIONS FOR EMPLOYEES WHICH CLEARLY IND ICATED THAT THE ASSESSEE INTENDED TO CAMOUFLAGE THE REAL STATE OF AFFAIRS. IT IS SUPPORTED BY THE FACT THAT THE ASSESSEE ORIGINALLY DID NOT WARRANTY OR GU ARANTEE THE PAYMENT OF RECEIVABLE AS PER PARAGRAPH NO.2.4 OF THE ESCROW AG REEMENT. THEN SUBSEQUENT WRITING OFF A PART OF IT IS ONLY A DEVIC E TO HOODWINK THE DEPARTMENT. ARRANGEMENT HAS BEEN MADE BY THE ASSES SEE IN SUCH A WAY THAT ONE PARTY IS ON THE GIVING SIDE AND OTHER PART Y IS NOT AT LOSS. FURTHER, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED T HAT ASSESSEE HAS NOT PROVIDED SPECIFIC DETAILS AS TO HOW THIS AMOUNT HAD BECOME IRRECOVERABLE. THE NAMES AND ADDRESSES OF THE HIRERS WHO WERE IN D EFAULT AND THE DETAILS OF THE STEPS TAKEN FOR RECOVERY, ETC. HAS NOT BEEN PROVIDED. BUT LD.DR FAIRLY CONFIRMED THAT THE ASSESSEE HAS SUBMITTED C ONFIRMATORY LETTERS FORM M/S.KMPL AND KMFL STATING THAT THE AMOUNT HAS BECOM E IRRECOVERABLE. AS AN ADDITIONAL ARGUMENT, THE LD.DR SUBMITTED THAT ONCE THE ASSESSEE HAS HANDED OVER THE ENTIRE LEASING/FINANCE BUSINESS TO M/S.KMPL AND KMFL, THEN IT CANNOT BE CONSTRUED THAT EXPENDITURE SO CLA IMED BY THE ASSESSEE WAS LAID OUT FOR THE PURPOSES OF ASSESSEES BUSINESS. THUS, ONCE ENTIRE BUSINESS IS HANDED OVER TO KOTAK MAHENDRA GROUP, THEN ASSESS EE GETS RID OF ALL THE LIABILITIES AND, THEREFORE, THERE IS NEXUS BETWEE N EXPENDITURE AND THE BUSINESS. THE CLAIM OF THE ASSESSEE OF BUSINESS LO SS ALSO CANNOT BE ALLOWED AS THE SAID BUSINESS IS NOT RUN BY THE ASS ESSEE-COMPANY DURING THE ACCOUNTING PERIOD, RELEVANT TO ASSESSMENT YEAR UNDE R CONSIDERATION. 6. AGAINST THIS, LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE SUBMITTED THAT IT IS INCORRECT ON THE PART OF THE A SSESSING OFFICER TO HOLD ITA NOS.3493/A/03(BY REVENUE), ITA NOS.3257 & 3353/AHD/2004(CROSS) THE ACIT VS. M/S.GARDEN SILK MILLS LTD.A.YS - 2000 -01 & 2002-03 - 12 - THAT ORIGINAL AGREEMENT DATED 02/05/1998 & 02/07/19 98 DID NOT PROVIDE FOR ESCROW ARRANGEMENT. HE INVITED OUR ATTENTION TO P ARAGRAPH NO.2.1 OF ARTICLE-II OF ESCROW AGREEMENT DATED 02/05/1998, WH EREIN IT IS MENTIONED THAT SUM OF RS.2,91,32,908/- AND RS.69,91,898/- SHA LL BE DEPOSITED IN BASE ESCROW ACCOUNT AND IN ADDITIONAL ESCRWO ACCOUNT AND THEY WOULD BE DEALT WITH AS PER PARA 2.3. OF THE SAID AGREEMENT. IT PR OVIDED THAT ESCROW ACCOUNT IS TO COVER ANY LOSS OR DAMAGE THAT M/S.KM PL AND M/S.KMFL MAY INCUR ON ACCOUNT OF NON-REALISATION OF THE HIRE PURCHASE RECEIVABLES. THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESS EE SUBMITTED THAT THE FIRST AGREEMENT DATED 02/05/1998 WAS IN RESPECT OF FINANCE PORTFOLIOS OF CUSTOMERS OUTSIDE SURAT AND SECOND AGREEMENT DATED 02/07/1998 WAS WITH RESPECT TO CUSTOMERS PERTAINING TO SURAT. THE MAIN ESCROW AGREEMENTS WERE ENTERED SIMULTANEOUSLY ON THESE TWO DATES WITH RESPECT TO CUSTOMERS PERTAINING OUTSIDE SURAT AND CUSTOMERS PERTAINING T O SURAT. HE INVITED OUT ATTENTION TO CLAUSES 5.6 AND NO.8.1 OF DEED OF ASSIGNMENT WHICH PROVIDED FOR INDEMNIFYING THE ASSIGNEE, I.E. M/S. K MPL AND M/S.KMFL AGAINST ALL LEGAL AND RELATED COST OF EXPENSES. IT ALSO PROVIDED THAT ASSIGNER, I.E. ASSESSEE WILL HAVE TO INCUR AGGREGAT E COST NOT TO EXCEED OF 10% OF THE OUTSTANDING RECEIVABLES. 7. IN RESPECT OF ARGUMENT OF THE ASSESSING OFFICER THAT THERE IS NO WARRANTY OR GUARANTEE PROVIDED BY THE ASSESSEE, THE LD.AR SUBMITTED THAT ASSESSING OFFICER HAS ONLY PICKED UP AND RELIED UPO N CLAUSE(B) OF PARAGRAPH NO.2.4 AT PAGE NO.9 OF THE ESCROW AGREEME NT. PARAGRAPH NO.2.4 ON WHICH LD. ASSESSING OFFICER HAS RELIED PROVIDED THAT ASSESSEE DOES NOT GUARANTEE THE PAYMENT OF RECEIVABLES OR TH E PERFORMANCE OR THE OBLIGATIONS UNDER THE PURCHASE AGREEMENT BY THE HIR ER BUT THIS RELATES TO FINANCE PORTFOLIO AND NON-PERFORMANCE OF OBLIGATIO N BY THE HIRER AS STIPULATED IN THE AGREEMENT. THE ASSESSEE HAS NOT GUARANTEED THE RECOVERY ITA NOS.3493/A/03(BY REVENUE), ITA NOS.3257 & 3353/AHD/2004(CROSS) THE ACIT VS. M/S.GARDEN SILK MILLS LTD.A.YS - 2000 -01 & 2002-03 - 13 - OF ENTIRE AUTO FINANCE PORTFOLIO ASSIGNED TO M/S.KM PL AND KMFL. REIMBURSEMENT OF ANY LOSS OR COST INCURRED BY M/S.K MPL AND KMFL IS OUTSIDE THE PURVIEW OF THIS CLAUSE WHICH IS SEPARAT ELY PROVIDED IN CLAUSE 8.1. AND CLAUSE 5.6. CLAUSE 5.6 AND CLAUSE 8.1 OF THE DEED OF ASSIGNMENT PROVIDE THAT ASSESSEE-COMPANY BEARS THE COST UPTO 10% OF THE OUTSTANDING RECEIVABLES. WITH REGARD TO THE ARGUMENT OF THE A SSESSING OFFICER THAT DETAILS OF STEPS TAKEN FOR RECOVERY AND DETAILS OF HIRERS IN DEFAULT ARE NOT PROVIDED, THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE SUBMITTED THAT SUCH DETAILS ARE PROVIDED TO THE ASSESSING OFF ICER AS UNDER:- 1. COPY OF ESCROW AGREEMENTS ENTERED WITH KMPL AND KMF L MARKED AS ANNEXURES A TO D .(PAGES 78 TO 132 OF ASSESSEES PAPER BOOK) 2. PARTYWISE DETAILS OF HIRE STOCK RECEIVABLE TRANSFER RED TO KMPL IN TWO PHASES (AS PER ANNEXURE E AND G SUBMITTED TO CIT(A) ) 3. PARTYWISE DETAILS OF HIRE STOCK RECEIVABLE TRANSFER RED TO KMFL IN TWO PHASES( AS PER ANNEXURE F AND H SUBMITTED TO CIT(A) ) 4. DETAILS OF DEPOSITS MADE BY APPELLANT TO THE ESCROW ACCOUNT. 5. DETAILS OF AMOUNT WRITTEN OFF TO PROFIT AND LOSS AC COUNT FROM ESCROW ACCOUNT. 6. FORECLOSURE LOSS KMPL( ANNEXURE I SUBMITTED TO CIT(A) ) 7. ESCROW WRITE OFF KMPL( ANNEXURE J SUBMITTED TO CIT(A) ) 8. FORECLOSURE LOSS KMFL.( ANNEXURE K SUBMITTED TO CIT(A) ) 6. CERTIFICATE FROM KMPL AND KMFL FOR FORECLOSURE LOSS AND ESCROW WRITE-OFF. (PAGES 133 TO 135 OF ASSESSEES PAPER BOOK) 8. IN RESPECT OF ARGUMENT OF ASSESSING OFFICER THAT THERE IS NO NEXUS BETWEEN EXPENDITURE AND BUSINESS AND THERE IS NO RE LATIONS BETWEEN DEBTOR AND CREDITOR, THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE SUBMITTED THAT IT IS ONLY AS PER DEED OF ASSIGNMENT AND CONNECTED ESCROW AGREEMENT THAT ASSESSEE HAS WRITTEN OFF A SUM OF RS .4.40 CRORES AS BAD DEBT. THE ASSESSEE HAD AGREED TO REIMBURSE A PART O F THE LOSS THAT ITA NOS.3493/A/03(BY REVENUE), ITA NOS.3257 & 3353/AHD/2004(CROSS) THE ACIT VS. M/S.GARDEN SILK MILLS LTD.A.YS - 2000 -01 & 2002-03 - 14 - M/S.KMPL/KMFL MAY INCUR DURING RECOVERY OF THE HIRE PURCHASE INSTALLMENTS ON THE PORTFOLIO ASSIGNED TO THEM BY T HE ASSESSEE. THEREFORE, THIS LOSSES DIRECTLY RELATED TO THE BUSINESS OF HIR E PURCHASE TRANSACTIONS CARRIED ON BY THE ASSESSEE. 9. REGARDING OF THE ARGUMENT OF THE ASSESSING OFFIC ER THAT WHILE MAKING DEED OF ASSIGNMENT, THERE IS NO REFERENCE TO ESCROW AGREEMENT, THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSES SEE SUBMITTED THAT CLAUSE 5.6 AND CLAUSE 8.1. OF THE DEED OF ASSIGNMEN T PROVIDED SUCH EVENTUALITY AND BOTH THE DEED OF ASSIGNMENT AND ESC ROW AGREEMENT WERE ENTERED ON THE SAME DAY. THEREFORE, IT IS INCORR ECT ON THE PART OF THE ASSESSING OFFICER TO SAY THAT ESCROW AGREEMENT WAS AN AFTER-THOUGHT. 10. REGARDING ARGUMENT OF ASSESSING OFFICER THAT ON CE ENTIRE BUSINESS IS HANDED OVER TO ANOTHER PARTY, THE ASSESSEE WOUL D GET RID OF ALL THE LIABILITIES, THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE SUBMITTED THAT SUCH ASSERTION MADE BY THE ASSESSIN G OFFICER ARE GENERAL IN NATURE AND WITHOUT APPRECIATING THE FACTS OF THE CA SE. THE TERMS OF THE DEED OF ASSIGNMENT MENTIONED FOR CREATION OF ESCR OW AGREEMENT. IT IS THE BUSINESS DECISION ENTERED BY TWO BUSINESS-MEN O N MUTUALLY AGREED TERMS AND CONDITIONS WITH REGARD TO RISK BEARING AN D LOSS SHARING. THERE IS NO CONTRARY MATERIAL SUBMITTED BY THE ASSESSING OFFICER IN SUPPORT OF HIS ARGUMENTS. THE LOSS SUFFERED BY THE ASSESSEE IS IN PURSUANCE TO AGREEMENT ENTERED BY THE ASSESSEE WITH M/S.KMPL AND M/S.KMFL. IN THIS REGARD, LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE R EFERRED TO JUDGMENTS CITED BY HIM BEFORE THE LEARNED CIT(APPEALS). 11. REGARDING ARGUMENT OF THE ASSESSING OFFICER TH AT MERELY WRITING OFF OF AN AMOUNT IS NOT SUFFICIENT TO PROVE THAT DE BT HAS BECOME BAD, ITA NOS.3493/A/03(BY REVENUE), ITA NOS.3257 & 3353/AHD/2004(CROSS) THE ACIT VS. M/S.GARDEN SILK MILLS LTD.A.YS - 2000 -01 & 2002-03 - 15 - LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE S UBMITTED THAT IN VIEW OF THE AMENDED PROVISIONS OF SECTION 36(1)(VII) R.W .S. 36(2) OF THE I.T. ACT, 1961, SUCH CONDITION DO NOT HOLD GOOD. HE RELIED ON THE DECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. AU TO MOTORS LTD. (2007) 292 ITR 345 (DELHI) AND OF CIT VS. MORGAN SECURITI ES AND CREDITS (P) LTD. (2007) 162 TAXMAN 124 (DELHI)/(2007) 292 ITR 339(DELHI). FOR CLAIMING A DEBT AS BAD, IT IS SUFFICIENT THAT IT S HOULD BE WRITTEN OFF IN THE BOOKS OF ACCOUNT AND IT IS NOT NECESSARY THAT ASSES SEE SHOULD ESTABLISH THAT DEBT HAS BECOME BAD. THE LEARNED AUTHORISED REPRES ENTATIVE OF THE ASSESSEE SUBMITTED THAT IN THE ALTERNATIVE THE WRI TING OFF THE DEBT SHOULD BE ALLOWED AS A TRADING LOSS U/S.29 OF THE I.T. ACT, 1 961 AS ITS IS INTIMATELY AND DIRECTLY CONNECTED WITH THE BUSINESS OPERATIONS OF A DIVISION OF THE COMPANY, I.E. AUTO FINANCE BUSINESS. HE RELIED ON THE DECISION OF HON'BLE KERALA HIGH COURT IN THE CASE OF CIT VS. GILLANDE RS ARBUTHNOT OF CO.LTD. (1992) 138 ITR 763 (KERALA) AND ALSO OF HON'BLE SU PREME COURT IN THE CASE OF RAMCHANDER SHIVNARAIN VS. CIT (1978) 111 I TR 263(SC). FOR CLAIMING LOSS UNDER SECTION 28 AND 29 OF THE I.T. A CT, 1961 HE RELIED ON THE DECISION OF HON'BLE BOMBAY HIGH COURT IN THE CASE O F DANDEKAR (G.G.) MACHINE WORKS LTD. VS. CIT (1993) 202 ITR 161 (BOM .). 12. THE LEARNED AUTHORISED REPRESENTATIVE OF THE AS SESSEE FINALLY SUBMITTED THAT SUM OF RS.42.55 CRORES RECEIVED BY I T ON TRANSFER OF ITS AUTO FINANCE PORTFOLIO WAS CREDITED IN THE PROFIT & LOSS ACCOUNT AND, ACCORDINGLY, CONDITION U/S.36(2) ARE SATISFIED. H E ALSO SUBMITTED THAT ASSESSEE-COMPANY HAD NOT TOTALLY FORGOTTEN THE BUSI NESS OF FINANCE AND DEALING IN SHARES, DIVIDEND, HIRE PURCHASE, ETC. I T HAD ONLY TRANSFERRED THE AUTO FINANCE BUSINESS OF M/S.KMPL AND M/S.KMFL. IN OTHER WORDS, ASSESSEE HAS NOT TOTALLY GONE OUT OF THE BUSINESS O F FINANCING. ITA NOS.3493/A/03(BY REVENUE), ITA NOS.3257 & 3353/AHD/2004(CROSS) THE ACIT VS. M/S.GARDEN SILK MILLS LTD.A.YS - 2000 -01 & 2002-03 - 16 - 13. THE LEARNED AUTHORISED REPRESENTATIVE OF THE AS SESSEE ALSO SUBMITTED THAT ASSESSEE-COMPANY IS CARRYING ON THE BUSINESS AND THE LOSS OF RS.4.40 CRORES WAS A PART OF AGREEMENT WHILE TRANSF ERRING AUTO FINANCE TO M/S.KMPL AND M/S.KMFL. 14. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIALS AVAILABLE ON RE CORD. IN OUR CONSIDERED VIEW, THE ASSESSEE HAS MADE THE CLAIM FIRSTLY AS BA D DEBT U/S.36(1)(VIII) R.W.S. 36(2) OF THE I.T. ACT, 1961 AND OTHER IN THE ALTERNATIVE AS A TRADING LOSS. THE UNDISPUTED FACTS HAVE BEEN THAT M/S.GAR DEN FIANNCE LTD. WAS CARRYING ON THE BUSINESS OF AUTO FINANCING, HIRE PU RCHASES, GIVING LOANS, DEALING IN SHARES, ETC. BEING PART OF NON-BANKING F INANCE BUSINESS. IT WAS AMALGAMATED WITH ASSESSEE-COMPANY. THIS BUSINESS WAS CARRIED ON FOR SOMETIME BY THE ASSESSEE-COMPANY, BUT WAS LATER TRA NSFERRED TO M/S.KMPL AND M/S.KMFL TO THE EXTENT OF AUTO FINANCE PORTFOLIO ONLY. THE ASSESSEE-COMPANY HAD ENTERED INTO AN AGREEMENT WITH M/S.KMPL AND M/S.KMFL. THERE WERE TWO AGREEMENTS; ONE IS DATED 02/05/1998 AND ANOTHER ONE IS DATED 02/07/1998. ON 02/05/1998, T HE AGREEMENT RELATED TO RECOVERIES OUTSIDE SURAT DISTRICT. ON THIS DATE, THE MAIN AGREEMENT AS WELL AS ESCROW AGREEMENT WERE ENTERED INTO. IN RESPECT OF RECOVERIES PERTAINING TO HIRERS OUTSIDE SURAT DISTRICT, SIMILARLY WORDED TWO AGREEMENTS DATED 02/07/1998; ONE DEED OF ASSIGNMENT AND OTHER ESCR OW AGREEMENT WERE ENTERED INTO IN (RESPECT OF RECOVERIES FORM HIRERS PERTAINING TO SURAT DISTRICT). WE HAVE EXAMINED THE MATERIAL AVAILABLE ON RECORD AND WE NOTICE THAT ASSESSING OFFICER WAS NOT CORRECT IN PR ESUMING THAT ESCROW AGREEMENT WAS AN AFTER-THOUGHT AND WAS NOT A RESULT OF DEED OF ASSIGNMENT. IN THIS REGARD, WE REFER TO CLAUSE 5.6 AND CLAUSE 8.1 OF THE DEED OF ASSIGNMENT, AS UNDER:- ITA NOS.3493/A/03(BY REVENUE), ITA NOS.3257 & 3353/AHD/2004(CROSS) THE ACIT VS. M/S.GARDEN SILK MILLS LTD.A.YS - 2000 -01 & 2002-03 - 17 - CLAUSE 5.6 THE ASSIGNOR SHALL CO-OPERATE FULLY WITH THE ASSIGN EE IN COLLECTION OF ALL RECEIVABLES AND THE ENFORCEMENT OF PAYMENT THEREOF, WHETHER BY LEGAL PROCEEDINGS OR OTHERWISE, INCLUDING PROVISION OF EV IDENCE AND WITNESSES, AND EXECUTION OF ANY FURTHER DOCUMENTS REQUIRED TO PERF ECT TITLE OF THE ASSIGNEE TO THE RECEIVABLES, OR TO THE UNDERLYING SECURITY AND TO I NDEMNIFY THE ASSIGNEE AGAINST ALL LEGAL AND OTHER RELATED COSTS AND EXPENSES INCU RRED IN CONNECTION WITH THE ENFORCEMENT OF THE RECEIVABLES AND THE UNDERLYING S ECURITY. PROVIDED THAT FOR THE PURPOSES OF FULFILMENT OF ITS OBLIGATIONS UNDER THIS CLAUSE, AND UNDER CLAUSE 8.1 (IV) WITH REFERENCE TO ANY HIRE PURCHASE AGREEM ENTS, THE ASSIGNOR SHALL NOT BE REQUIRED TO INCUR IN THE AGGREGATE COST IN EXCES S OF 10% OF THE OUTSTANDING RECEIVABLE AS ON THE COMMENCEMENT DATE RELATIVE TO THE CONCERNED HIRE PURCHASE AGREEMENT OR SUCH OTHER AMOUNT AS MAY BE A GREED IN WRITING BY THE PARTIES . THE ABOVE CLAUSE PROVIDES THAT THE APPELLANT COMPAN Y SHALL BEAR THE COST UPTO AN AMOUNT NOT EXCEEDING 10% OF THE OUTSTANDING RECEIVA BLE IN RESPECT TO THE HIRE PURCHASE AGREEMENTS AND THIS LIMIT MAY BE ENHANCED AS PER MUTUAL AGREEMENT BETWEEN THE PARTIES. CLAUSE 8.1 THE ASSIGNOR HEREBY UNCONDITIONALLY AND IRREVOCABLY INDEMNIFIES THE ASSIGNEE FROM AND AGAINST: (I) (II) .. (III) .. (IV) ALL COST AND EXPENSES (INCLUDING LEGAL COSTS A ND FEES) INCURRED BY THE ASSIGNEE IN ENFORCING OR ATTEMPTING TO ENFORCE PAYM ENT OF ANY OF THE RECEIVABLES OR THE UNDERLYING SECURITIES. PROVIDED THAT FOR THE PURPOSES OF FULFILMENT OF ITS OBLIGATIONS UNDER THIS CLAUSE AND UNDER CLAUSE 5.6, THE ASSIGNOR SHALL NOT, WITH REFERENCE TO ANY HIRE PURCHASE AGREEMENT BE REQUIRE D TO INCUR IN THE AGGREGATE COST IN EXCESS OF: (A) 10% OF THE OUTSTANDING RECEIVABLE (AS ON COMMEN CEMENT DATE) RELATIVE TO THE CONCERNED HIRE PURCHASE AGREEMENT O R, (B) SUCH OTHER AMOUNT AS MAY BE AGREED BY THE PARTI ES IN WRITING. 15. A PLAIN READING OF THESE TWO CLAUSES CLEARLY IN DICATES THAT THE TWO PARTIES HAD AGREED TO DEVICE A MECHANISM ENABLING THE ASSESSEE-COMPANY ITA NOS.3493/A/03(BY REVENUE), ITA NOS.3257 & 3353/AHD/2004(CROSS) THE ACIT VS. M/S.GARDEN SILK MILLS LTD.A.YS - 2000 -01 & 2002-03 - 18 - TO WEAR COST AND EXPENSES INCURRED BY M/S.KMPL AND M/S.KMFL IN ENFORCING RECOVERIES OF ANY RECEIVABLE AND FOR IND EMNIFYING THE ASSIGNEES, I.E. M/S.KMPL AND M/S.KMFL. ASSESSEE HA S TO BEAR LOSS ATLEAST TO THE EXTENT OF 10% OF THE OUTSTANDING REC EIVABLES. THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS MAINLY RELIED ON C LAUSE NO.2.4 OF ESCROW AGREEMENT WHICH PROVIDED THAT ASSESSEE DOES NOT WARRANTY OR GUARANTEE THE PAYMENT OF RECEIVABLES OR THE PERFORM ANCE OF THE HIRERS AND, ACCORDINGLY, A.O. WAS OF THE VIEW THAT PROVIDING D EPOSIT IN ESCROW ACCOUNT AND CONSEQUENT WRITE OFF CERTAIN MONEY OUT OF THAT ACCOUNT WAS NOT LEGALLY ALLOWABLE. IN OUR CONSIDERED VIEW, IT IS INCORRECT TO READ THE AGREEMENT IN PART. BOTH THE AGREEMENT SHOULD BE R EAD AS A WHOLE AND PROPER INFERENCE SHOULD BE DERIVED AT. CLAUSE 2.4 ALONE DOES NOT ABSOLVE THE ASSESSEE FROM BEARING THE COST OR EXPENSES OR E VEN SOME OF THE RECOVERIES ON ACCOUNT OF WHICH M/S.KMPL AND M/S.KM FL HAVE SUFFERED THE LOSS. FOR THE SAKE OF CONVENIENCE, CLAUSE NO .2.4 OF THE ESCROW AGREEMENT IS REPRODUCED AS UNDER:- (A) IT IS EXPRESSLY AGREED THAT THE PARTY OF THE F IRST PART DOES NOT WARRANTY OR GUARANTEE THE PAYMENT OF THE RECEIVABLE S OR THE PERFORMANCE OF THE OBLIGATIONS UNDER THE HIRE PURCH ASE AGREEMENT BY THE HIRER. (B) IT IS ALSO AGREED THAT THE PROVISIONS OF CLAUSE 2.3 (A) ABOVE SHALL NOT IN ANY MANNER DILUTE OR PREJUDICE THE PARTY OF THE SEC OND PARTS RIGHT OVER THE BASE ESCROW AMOUNT, THE ADDITIONAL ESCROW AMOUNT OR THE TOTAL ESCROW AMOUNT. 16. A READING OF THIS PARAGRAPH WILL ONLY REVEAL TH AT IT IS ONLY THE COMPLETE RECOVERY OF RECEIVABLES OR THE PERFORMANCE OR THE OBLIGATIONS BY THE HIRER IS NOT GUARANTEED. IN OTHER WORDS, TOTA L FAILURE OF THE M/S. ITA NOS.3493/A/03(BY REVENUE), ITA NOS.3257 & 3353/AHD/2004(CROSS) THE ACIT VS. M/S.GARDEN SILK MILLS LTD.A.YS - 2000 -01 & 2002-03 - 19 - KMPL AND M/S.KMFL TO RECOVER THE MONEY FROM THE HIR ERS TO WHOM AUTO FINANCE WAS GIVEN IS NOT GUARANTEED BY THE ASSESSEE , BUT IT HAS ALSO AGREED TO BEAR LOSS UPTO 10% ON ACCOUNT OF THIS AND NOT MO RE UNLESS FURTHER AGREED. THE COMBINED READING OF CLAUSE NOS.2.4, 5. 6 & 8.1 CLEARLY REVEALED THAT OBLIGATION OF ASSESSEE IS TO BEAR THE LOSS UPTO 10% AND NOT IF FULL AMOUNT IS LOST BY M/S.KMPL AND M/S.KMFL IN T HE PROCESS OF RECOVERY OF LOANS FROM HIRERS. IN THIS REGARD, WE MAY REFER TO CLAUSE NOS.2.3 ALSO OF ESCROW AGREEMENT FOR UNDERSTANDING AS TO HOW THE PARTIES HAVE AGREED TO ASSIGN THE LIABILITIES TO EACH OTHER IN THE EVENT OF NON- PERFORMANCE BY THE HIRERS. 2.3. THE OBJECT AND PURPOSE OF THE TOTAL ESCROW AM OUNT BEING KEPT WITH THE PARTY O THE SECOND PART IS TO COVER, SUBJECT TO OTHER PROVISIONS OF THIS ESCROW AGREEMENT, ANY LOSS OR DA MAGE THAT THE PARTY OF THE SECOND PART MAY SUFFER ON ACCOUNT OF N ON-RELAISATION OF THE RECEIVABLES WHEN DUE AND ANY COSTS ASSOCIATE D WITH THE REALIZATION OF THE RECEIVABLES WHEN DUE. THE MANNE R AND LIMIT UPTO WHICH SUCH LOSS OR DAMAGE IS TO BE COVERED AND THE MANNER AND LIMIT UPTO WHICH THE PARTY OF THE SECOND PART IS EN TITLED TO MAKE A DRAWING OUT OF THE TOTAL ESCROW AMOUNT TO MEET SUCH DAMAGE OR LOSS IS SET OUT HEREAFTER. 16.1. IN OTHER WORDS, CLAUSE NOS.2.3 & 2.4., 5.6 & 8.1 ARE TO BE READ TOGETHER. THE LIABILITY OF THE ASSESSEE IS UPTO 10 % OF THE AMOUNT RECEIVABLES. OVER AND ABOVE, THE ASSESSEE DOES NOT GUARANTEE THE NON- PERFORMANCE OF THE HIRERS. WE DO NOT AGREE WITH TH E LD.DR THAT THE ASSESSEE DID NOT PROVIDE DETAILS OF DEFAULTING HIRE RS. THE CERTIFICATES FORM M/S.KMPL & KMFL ARE ON RECORD WHICH INDICATE THE N ECESSARY DETAILS. IN ANY CASE, NO MALA FIDE INTENTION IN PROVIDING CE RTIFICATES BY M/S.KMPL AND M/S.KMFL IS ALLEGED. THERE IS NO MATERIAL TO H OLD SO. ONCE IT IS CERTIFIED BY THE ASSIGNEES THAT TO THIS EXTENT, IT HAS SUFFERED LOSS AND ASSESSEE HAS ACCEPTED THE SAME, THEN IT IS FOR THE REVENUE TO PROVE MALA ITA NOS.3493/A/03(BY REVENUE), ITA NOS.3257 & 3353/AHD/2004(CROSS) THE ACIT VS. M/S.GARDEN SILK MILLS LTD.A.YS - 2000 -01 & 2002-03 - 20 - FIDE. NOTWITHSTANDING, THERE IS NO MATERIAL TO HAV E EVEN A PRIMA-FACIE BELIEF THAT CLAIM MADE BY M/S.KMPL AND M/S.KMFL ARE NOT BONA FIDE OR THAT ASSESSEE HAS AGREED TO BEAR THE LOSS IN ORDER TO REDUCE ITS OWN TAXABLE INCOME. 17. NOW THE QUESTION IS WHETHER THERE IS ANY BAD DE BT WHICH IS WRITTEN OFF BY THE ASSESSEE AND IT SHOULD BE ALLOWED U/S.36 (1)(VII) OF THE I.T. ACT, 1961 R.W.S. 36(2) OF THE I.T. ACT, 1961. IN OUR C ONSIDERED VIEW WHEN THE ASSESSEE HAS TRANSFERRED ALL THE RECEIVABLES TO M/S .KMPL AND M/S.KMFL, THERE IS NO RECEIVABLES LEFT IN THE BOOKS OF THE AS SESSEE CLAIMED. ACCORDINGLY, NO DEBT AND, THEREFORE, QUESTION OF HO LDING IT AS BAD AND WRITING IT OFF IN THE BOOKS DOES NOT ARISE. THE A SSESSEE HAS GIVEN ONLY A DEPOSIT OF AN AMOUNT AS AGREED WITH M/S.KMPL & M/S .KMFL ON WHICH IT HAS EARNED INTEREST WHICH HAS BEEN DECLARED BY THE ASSESSEE AS ITS INCOME. SUM OF RS.4.56 CRORES WAS A GUARANTEE AMOUNT DEPOSI TED IN ESCROW ACCOUNTS AND NOT AS A LOAN GIVEN TO M/S.KMPL & M/S .KMFL. FOR THE PURPOSES OF CLAIMING A SUM AS BAD DEBT FOLLOWING CONDITIONS ARE REQUIRED TO BE SATISFIED :- 1. BAD DEBT IS ALLOWABLE AS DEDUCTION PROVIDED; A) IT IS TAKEN INTO ACCOUNT IN COMPUTING THE INCOME OF THE ASSESSEE OF THE PREVIOUS YEAR OR OF EARLIER YEAR. B) IT IS ACTUALLY WRITTEN OFF IN BOOKS OF ACCOUNTS OR C) IT REPRESENTS MONEY LENT IN THE ORDINARY COURSE OF BUSINESS OF MONEY LENDING CARRIED ON BY THE ASSESSEE. 2. FOR ALLOWING BAD DEBT THERE SHOULD BE A DEBT- A) IT MEANS THERE SHOULD BE A RELATIONSHIP OF DEBTOR A ND CREDITOR. B) IT SHOULD BE AN ADMITTED DEBT AT THE TIME WHEN IT I S WRITTEN OFF. C) DEBT MEANS WHICH IS OWED OR DUE; D) ANYTHING WHICH ONE PERSON IS UNDER OBLIGATION TO PA Y. E) LIABILITY TO PAY OR RENDER SOMETHING. ITA NOS.3493/A/03(BY REVENUE), ITA NOS.3257 & 3353/AHD/2004(CROSS) THE ACIT VS. M/S.GARDEN SILK MILLS LTD.A.YS - 2000 -01 & 2002-03 - 21 - F) IT IS A PERSONAL OBLIGATION TO PAY AN ASCERTAINABLE SUM. G) WHETHER PAYABLE IN PRESENTEE OR IN FUTURO. H) IT MEANS DEBT MUST BE OWED AT THE TIME WHEN IT IS W RITTEN OFF I.E DEBTOR MUST ADMIT THAT HE OWES DEBT TO THE ASSESSEE. 17.1. IN THIS REGARD, WE MAY REFER TO THE JUDGMENT OF HON'BLE SUPREME COURT IN THE CASE OF A.V. THOMAS & CO. LTD. VS. CIT (1963) 48 ITR 67 (SC), WHEREIN IT HAS BEEN HELD THAT A DEBT IS SOMET HING MORE THAN ADVANCE WHICH IS RELATED TO AND RESULTS FROM BUSINESS OF TH E ASSESSEE. A DEBT IS SOMETHING WHICH IF RECOVERED WOULD HAVE SWELLED THE PROFIT. IT IS NOT THE MONEY HANDED OVER TO SOMEONE. A DEBT MUST HAVE AR ISEN AS AN OUTSTANDING OF AN ASSESSEES BUSINESS. A DEBT TO B E ALLOWABLE AS BAD SHOULD BE THE DUES FROM CUSTOMERS FOR GOODS SUPPLIE D OR FOR SERVICES RENDERED IN RESPECT OF WHICH RECEIVABLES ARE TAKEN INTO ACCOUNT WHILE COMPUTING PROFITS OF THE ASSESSEE. IT IS ONLY IN M ONEY LENDING BUSINESS THAT LOSSES ARE DEBT AND NOT IN ORDINARY COURSE OF BUSINESS. WHERE LOSSES ARE ADVANCES GIVEN TO THE SISTER-CONCERNS OR TO OTH ER BUSINESS CONSTITUENCIES AND ARE NOT RECOVERED, THEY MAY BE O NLY A CAPITAL LOSS UNLESS THEY ARE TRADING LOSS. SECTION 36(2) OF THE I.T. ACT, 1961 MAKES ITS ABUNDANTLY CLEAR THAT MERELY WRITING OF ANY AMOUNT AS BAD DEBT IN THE BOOKS OF ACCOUNT AS IRRECOVERABLE DOES NOT RESULT I N CLAIMING THE SAID SUM WHILE COMPUTING TAXABLE INCOME IN ACCORDANCE WITH THE PROVISIONS OF THE ACT. FULFILLMENT OF CONDITIONS OF SUB-SECTION (2) OF SECTION 36 IS TO BE SHOWN EVEN IN A CASE WHERE A SUM IS WRITTEN OFF IN THE BOOKS OF ACCOUNT AS AN IRRECOVERABLE DEBT. IN THE PRESENT CASE, EXCEPT MAKING A CLAIM THE ASSESSEE HAS NOT ESTABLISHED THAT SUM OF RS.42.55 C RORES RECEIVED FROM M/S.KMPL & M/S.KMFL WAS DECLARED AS A CREDIT IN THE TRADING ACCOUNT/ PROFIT & LOSS ACCOUNT IN ANY YEAR EVENTHOUGH SUCH A CLAIM WAS MADE BY THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESS EE IN THE ARGUMENTS.. ACCORDINGLY, CONDITIONS LAID DOWN IN SECTION 36(2) OF THE I.T. ACT, 1961 ITA NOS.3493/A/03(BY REVENUE), ITA NOS.3257 & 3353/AHD/2004(CROSS) THE ACIT VS. M/S.GARDEN SILK MILLS LTD.A.YS - 2000 -01 & 2002-03 - 22 - HAVING BEEN NOT SATISFIED THE WRITING OFF OF SUM OF RS.4.40 CRORES ON THE BASIS OF CERTIFICATE ISSUED BY M/S.KMPL AND M/S.KM FL CANNOT BE ALLOWED AS A BAD DEBT. HOWEVER, THE CLAIM OF THE A SSESSEE IS CLEARLY ALLOWABLE AS A TRADING LOSS. THE REASONS ARE THAT: (I) THE ASSESSEE-COMPANY IS IN THE BUSINESS OF AUTO FINANCE, GENERAL FINANCE, DIVIDEND, SHARES, ETC. WHICH ARE P ART OF NON- BANKING FINANCE BUSINESS. (II) ONLY A PART OF THIS BUSINESS WHICH RELATED TO AUTO FINANCE IS TRANSFERRED TO M/S.KMPL & M/S.KMFL. (III) OTHER PART OF THE BUSINESS REMAINED WITH THE ASSESSEE. (IV) THE LIABILITY OF THE ASSESSEE TO BEAR A PART O F THE LOSS ON ACCOUNT OF LEGAL EXPENSES, COST OR IRRECOVERIES A ROSE A RESULT OF CONTRACTUAL AGREEMENT BETWEEN ASSESSEE AND M/S.K MPL AND M/S. KMFL. 17.2. THE DEPOSIT IN THE ESCROW ACCOUNT WAS A PART OF BUSINESS TRANSACTION BETWEEN ASSESSEE AND M/S.KMPL AND M/S.K MFL AND ALSO TO BEAR LOSS UPTO 10% OF THE RECEIVABLES WAS PART OF BUSINESS DEAL. IF A CERTAIN AMOUNT IS DEDUCTED BY M/S.KMPL & M/S.KMFL O N ACCOUNT OF LOSS SUFFERED BY IT, CERTIFIED BY IT AND ACCEPTED BY THE ASSESSEE, THEN THE LOSS IS A RESULT OF BUSINESS DEAL AND, ACCORDINGLY, IS ALLOWA BLE AS A BUSINESS LOSS. IN THIS REGARD, WE MAY REFER TO THE DECISION OF HON'BL E BOMBAY HIGH COURT IN THE CASE OF CIT VS. DEMPO AND CO.(P) LTD. (1994) 2 06 ITR 291, WHERE A PRINCIPLE IS LAID DOWN BY THE HON'BLE COURT THAT TH E CAUSE WHICH OCCASIONS ITA NOS.3493/A/03(BY REVENUE), ITA NOS.3257 & 3353/AHD/2004(CROSS) THE ACIT VS. M/S.GARDEN SILK MILLS LTD.A.YS - 2000 -01 & 2002-03 - 23 - THE LOSS IS IMMATERIAL WHAT IS MATERIAL IS WHETHE R THE LOSS IS OCCURRED IN THE COURSE OF CARRYING ON THE BUSINESS OR IS INCIDE NTAL TO IT. 17.3 IN THE CASE OF KAMAT HOTELS (I) VS. ITO 78 IT D 241 ITAT (MUMBAI) HELD THAT IF THE DOMINANT INTENTION OF THE PARTIES TO AN AGREEMENT IS TO ENTER INTO A TRANSACTION UNDER AGREED TERMS AND CONDITION S SUITED TO THEIR BUSINESS NEEDS, IT IS NOT THEREAFTER OPEN TO THE IN COME-TAX AUTHORITIES TO REWRITE THE AGREEMENTS AND INFER A DIFFERENT INTENT ION. 17.4. IN THE CASE OF CIT V. MOTORS & GENERAL STORE S (P.) LTD. (66 ITR 692) WHEREIN THE SUPREME COURT IT WAS HELD THAT IN THE A BSENCE OF ANY SUGGESTION OF BAD FAITH OR FRAUD THE TRUE PRINCIPLE IS THAT THE TAXING STATUTE HAS TO BE APPLIED IN ACCORDANCE WITH THE LEGAL RIGH TS OF THE PARTIES TO THE TRANSACTION. WHEN THE TRANSACTION IS EMBODIED IN A DOCUMENT, THE LIABILITY TO TAX DEPENDS UPON THE MEANING AND CONTENT OF THE LANGUAGE USED IN ACCORDANCE WITH THE ORDINARY RULES OF CONSTRUCTION. 17.5. IN THE CASE OF CIT VS. V.M. KHARWAR 72 ITR 603, THE HON'BLE SUPREME COURT REITERATED THAT WHEREIN THE SUPREME C OURT AGAIN REITERATED THAT THE LEGAL EFFECT OF A TRANSACTION CANNOT BE DI SPLACED BY PROBING INTO THE 'SUBSTANCE OF THE TRANSACTION'. IT WAS FURTHER HELD THAT THE TAXING AUTHORITIES ARE BOUND TO DETERMINE THE TRUE LEGAL R ELATION RESULTING FROM A TRANSACTION, WHERE THE LEGAL RELATION IS RECORDED I N A FORMAL DOCUMENT, IT OTHERWISE HAS TO BE GATHERED FROM EVIDENCE AND THE CONDUCT OF THE PARTIES TO THE TRANSACTION. 17.6. THE HON'BLE KERALA HIGH COURT IN THE CASE OF COMMON WEALTH TRUST (INDIA) LTD. VS. CIT (2000) 242 ITR 593 (KER.) HELD THAT IF THERE IS A DIRECT AND PROXIMATE NEXUS BETWEEN THE BUSINESS OPE RATION AND THE LOSS OR ITA NOS.3493/A/03(BY REVENUE), ITA NOS.3257 & 3353/AHD/2004(CROSS) THE ACIT VS. M/S.GARDEN SILK MILLS LTD.A.YS - 2000 -01 & 2002-03 - 24 - IT IS INCIDENTAL TO IT, THEN THE LOSS IS DEDUCTIBLE AS WITHOUT THE BUSINESS OPERATION AND DOING ALL THAT IS INCIDENTAL TO IT, N O PROFIT CAN BE EARNED. 17.7. IN THE CASE OF CIT VS. GILLANDERS ARBUTHNOT AND CO.LTD. 138 ITR 763, THE CALCUTTA HIGH COURT HELD AS UNDER:- SINCE WE HAVE HELD THAT THE ASSESSEE WAS ENGAGED I N THE BUSINESS OF A HOLDING COMPANY OF FINANCING SUBSIDIARIES, THE OTHE R ARGUMENTS OF THE DEPARTMENTAL REPRESENTATIVE THAT THE ASSESSEES CLA IM CANNOT BE ALLOWED AGAINST THE DIVIDEND INCOME, IF AT ALL LOSS ES ITS SIGNIFICANCE. EVEN IF THE AMOUNT CANNOT BE TREATED AS A BAD DEBT IN THE SENSE THAT IT WAS NOT AN ADVANCE IN THE COURSE OF MONEY LENDING B USINESS, IT CAN CERTAINLY BE ALLOWED AS A TRADING LOSS INCURRED BY THE ASSESSEE IN THE COURSE OF ITS BUSINESS. 17.8. IN THE CASE OF RAMCHANDER SHIVNARAIN VS. CIT (1978) 111 ITR 263 (SC), THE HON'BLE SUPREME COURT, IN THIS REGARD OB SERVED AS UNDER:- IT IS TO BE REMEMBERED THAT THE DIRECT AND PROXIMAT E CONNECTION AND NEXUS MUST BE BETWEEN THE BUSINESS OPERATION AND TH E LOSS. IT GOES WITHOUT SAYING THAT A BUSINESS MAN HAS TO KEEP MONE Y EITHER WHEN HE GETS IT AS SALE PROCEEDS OF THE STOCK-IN-TRADE OR F OR DISBURSEMENT TO MEET THE BUSINESS EXPENSES OR FOR PURCHASING STOCK- IN-TRADE AND IF HE LOSES SUCH MONEY IN THE ORDINARY COURSE OF BUSINESS , THE LOSS IS A DEDUCTIBLE TRADING LOSS. IT IS IMMATERIAL WHETHER THE MONEY IS A PART OF THE STOCK-IN-TRADE, SUCH AS, OF A BANKING COMPANY O R A MONEY-LENDER, OR IS DIRECTLY CONNECTED WITH THE OTHER BUSINESS OP ERATIONS. THE RISK IS INHERENT IN THE CARRYING ON OF THE BUSINESS AND IS EITHER DIRECTLY CONNECTE4D WITH IT OR INCIDENTAL TO IT. 17.9. THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF G.G. DANDEKAR MACHINE WORKS VS. CIT (202 ITR 161) ARE ALSO RELEVANT IN THE PRESENT CASE, WHICH READS AS UNDER:- ITA NOS.3493/A/03(BY REVENUE), ITA NOS.3257 & 3353/AHD/2004(CROSS) THE ACIT VS. M/S.GARDEN SILK MILLS LTD.A.YS - 2000 -01 & 2002-03 - 25 - IT IS WELL SETTLED THAT THE LIST OF ALLOWANCES ENU MERATED IN SECTIONS 30 TO 43C IS NOT EXHAUSTIVE OF ALL ALLOWANCES WHICH CO ULD BE MADE IN ASCERTAINING THE PROFITS OF THE BUSINESS TAXABLE UN DER SECTION 28 OF THE I.T. ACT AND AN ITEM OF LOSS OR EXPENDITURE INCIDEN TAL TO BUSINESS MAY BE DEDUCTED IN COMPUTING THE PROFITS AND GAINS OF T HE BUSINESS OR PROFESSION EVEN IF IT DOES NOT FALL UNDER ANY OF TH IS SECTIONS. IT IS LIKEWISE WELL SETTLED THAT THE PROFITS AND GAINS WH ICH ARE LIABLE TO BE TAXED UNDER SECTION 28 ARE WHAT ARE UNDERSTOOD TO B E SUCH ACCORDING TO ORDINARY COMMERCIAL PRINCIPLES. THE ONLY DISPUT E THAT ARISES FROM TIME TO TIME IS IN REGARD TO THE APPLICABILITY OF T HE PRINCIPLES LAID DOWN THEREIN TO THE FACTS OF EACH CASE. THE REAL CONTRO VERSY THAT FALLS FOR DETERMINATION IN SUCH CASES IS WHETHER THE LOSS IS INCIDENTAL TO THE OPERATIONS OF THE BUSINESS AND THIS QUESTION EVIDENTIALLY HAS TO BE DECIDED AND THE FACTS OF EACH CASE HAVING REGARD TO THE NATURE OF BUSINESS AND THE OPERATIONS CARRIED ON BY THE ASSES SEE. 18. ACCORDINGLY, WE HOLD AS UNDER:- (I) THE SUM OF RS.4,56,62,435/- WAS DEPOSITED BY THE ASSESSEE WITH M/S.KMPL & MN/S.KMFL IN THE COURSE OF ITS BUSI NESS AND IN ACCORDANCE WITH THE AGREEMENTS DULY AND VALI DLY ENTERED BY THE ASSESSEE WITH THEM. IT WAS, IN FACT , GUARANTEE AMOUNT AGAINST LOSS TO BE SUFFERED BY M/S.KMPL AND KMFL IN THE COURSE OF RECOVERY IN AUTO FINANCE BUSINESS, PURCHASED BY THEM FROM THE ASSESSEE. THUS, THE GUARANTEE MON EY WAS ADVANCED IN THE COURSE OF BUSINESS. THE RECOVERY O F RS.4,40,87,548/- AS PER CERTIFICATE ISSUED BY M/S.K MPL AND M/S.KMFL WAS IN THE COURSE OF BUSINESS AND A CONSEQ UENCE OF AGREEMENTS WITH THE ASSESSEE. (II) THE RESULTING LOSS OF RS.4,40,87,548/- TO THE ASSESSEE WAS IN THE COURSE OF BUSINESS AND, THEREFORE, IT IS A TRAD ING LOSS. THIS LOSS IS CLEARLY INCIDENTAL TO THE AUTO FINANCE BUSINESS ITA NOS.3493/A/03(BY REVENUE), ITA NOS.3257 & 3353/AHD/2004(CROSS) THE ACIT VS. M/S.GARDEN SILK MILLS LTD.A.YS - 2000 -01 & 2002-03 - 26 - TRANSFERRED TO M/S.M/S.KMPL & M/S.KMFL WITH PART OF THE LOSS TO BE BORNE BY THE ASSESSEE-COMPANY TO THE EXT ENT MENTIONED IN THE AGREEMENTS. ACCORDING, A SUM OF RS.4,40,87,548/- IS ALLOWABLE AS A BUSINESS LOSS. 19. AS A RESULT, THE APPEAL BY THE REVENUE, I.E. IT A NO.3493/AHD/2003 FOR ASSESSMENT YEAR 2000-01 IS DIS MISSED. ITA NO.3257/AHD/2004 BY ASSESSEE FOR ASSESSMENT Y EAR 2002-03 & ITA NO.3353/AHD/2004 BY REVENUE FOR ASSESSMENT YEA R 2002-03 20. THESE ARE THE CROSS APPEALS; ONE BY THE ASSESSE E AND THE OTHER BY THE REVENUE AGAINST THE ORDER OF THE LEARNED CIT(APPEAL S)-I, SURAT DATED 09/09/2004. FOLLOWING GROUNDS HAVE BEEN RAISED BY THE RESPECTIVE PARTIES IN THEIR APPEALS:- (A) ASSESSEES APPEAL THE APPELLANT OBJECTS TO THE ORDER DATED 9 TH SEPTEMBER, 2004 PASSED BY THE COMMISSIONER TAX (APPEALS)-1, SURAT FOR THE AFORESAID ASSESSMENT YEAR ON THE FOLLOWING AMONGST OTHER GROU NDS:- 1. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS ) ERRED NOT DIRECTING THE ASSESSING OFFICER TO EXCLUDE THE SALE S TAX EXEMPTION OF RS.2,05,37,224/- GIVEN BY THE GOVERNMENT OF GUJARAT FOR SETTING UP INDUSTRIES IN NOTIFIED AREAS AS IT WAS A CAPITAL RE CEIPT, NOT CHARGEABLE TO TAX. 2. THE APPELLANT RESERVES THE RIGHT TO ADD, ALTER OR AMEND TO THE ABOVE GROUNDS OF APPEAL (B) REVENUES APPEAL 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD. CIT(A), SURAT HAS ERRED IN DELETING THE ADDITIO NS IN RESPECT OF BAD DEBTS AMOUNTING TO RS.7,47,417/-. ITA NOS.3493/A/03(BY REVENUE), ITA NOS.3257 & 3353/AHD/2004(CROSS) THE ACIT VS. M/S.GARDEN SILK MILLS LTD.A.YS - 2000 -01 & 2002-03 - 27 - 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD. LEARNED CIT(A) HAS ERRED IN NOT APPRECIATING TH E FACT THAT THE ASSESSEE HAD NOT PRODUCED ANY EVIDENCE THAT THE DEB T HAD BECOME BAD. THE LD. CIT(A) HAS ALSO ERRED IN, SOLELY, REL YING UPON THE CONTENTION OF THE ASSESSEE, WHICH WERE RAISED DURIN G THE ASSESSMENT PROCEEDINGS AND WHICH WERE CONSIDERED AND REJECTED BY THE ASSESSING OFFICER. 3. IT IS, THEREFORE, PRAYED THAT THE ORDER OF THE LD. CIT(A), SURAT BE SET ASIDE AND THAT OF THE A.O. BE RESTORED. 21. FIRST, WE TAKE UP THE ASSESSEES APPEAL IN ITA NO.3257/AHD/2004 FOR ASSESSMENT YEAR 2002-03. 22. THE BRIEF FACTS OF THE CASE ARE THAT ASSESSEE I S A MANUFACTURING COMPANY PRIMARILY INVOLVED IN THE MANUFACTURE OF P OLYSTER CHIPS, YARN AND GREY CLOTH. 23. THE ONLY ISSUE INVOLVED IN ASSESSEES APPEAL IS THAT SALES TAX INCENTIVE AMOUNTING TO RS.2,05,37,224/- GIVEN BY TH E GOVERNMENT OF INDIA FOR SETTING UP INDUSTRIES IN NOTIFIED AREA IS TREAT ED AS REVENUE RECEIPT. 24. IN FINANCIAL YEAR 1994-95, THE ASSESSEE-COMPAN Y STARTED A FACGTORY UNIT AT JOLVA, TAL.PALSANA IN SURAT DISTRICT. JOLV A IS A NOTIFIED ARE FOR THE PURPOSES OF SALES TAX EXEMPTION WHICH IS AVAILABLE TO THE EXTENT OF 75% OF THE FIXED CAPITAL INVESTMENT FOR A PERIOD OF EIGHT YEARS FROM THE DATE OF COMMENCEMENT OF COMMERCIAL PRODUCTION. IN ACCORDAN CE WITH THE SCHEME, SALES TAX AMOUNTING TO RS.2,05,37,224/- COL LECTED BY THE APPELLANT DURING THE PERIOD WAS NOT PAYABLE TO THE STATE GOVE RNMENT. IN EARLIER YEARS, THE ASSESSEE-COMPANY HAS TREATED SUCH RECEIP TS AS REVENUE RECEIPT AND WORKED OUT INCOME TAX LIABILITY ACCORDINGLY. I N THE PRESENT ASSESSMENT ITA NOS.3493/A/03(BY REVENUE), ITA NOS.3257 & 3353/AHD/2004(CROSS) THE ACIT VS. M/S.GARDEN SILK MILLS LTD.A.YS - 2000 -01 & 2002-03 - 28 - YEAR ALSO, THE ASSESSEE HAS TREATED SALES TAX REVEN UE RECEIPTS, BUT DURING THE COURSE OF ASSESSMENT BEFORE THE ASSESSING OFFICER, THE ASSESSEE REFERRED TO THE DECISION OF ITAT BOMBAY J SPECIAL BENCH IN TH E CASE OF RELIANCE INDUSTRIES LTD., WHEREIN IT HAS BEEN HELD THAT THE AMOUNT WAS NOT TAXABLE BEING THE CAPITAL NATURE. THE ASSESSING OFFICER DI D NOT ACCEPT THE ABOVE CONTENTION IN VIEW OF THE DECISION OF HON'BLE SUPRE ME COURT IN THE CASE OF SAHNEY STEEL & PRESS WORKS LTD. 228 ITR 253 (SC). ACCORDING TO THE ASSESSING OFFICER, DECISION IN RELIANCE INDUSTIRES CASE PERTAINED TO THE ASSESSMENT YEAR 1996-97 BEFORE THE INTRODUCTION OF EXPLANATION-10 TO SECITODN 43(1) OF THE I.T. ACT, 1961 WHICH WAS EFFE CTIVE FROM 01/04/1999. THE LD. ASSESSING OFFICER DID NOT ACCEPT THE CONT ENTIONS OF THE ASSESSEE RELYING ON THE DECISION OF HON'BLE SUPRME COURT IN THE CASE OF CHOWRINGEE SALES BUREAU AND SINCLAIR MURRAY & CO.LTD. VS. CIT (1974) CIR (SC) 283: (1974) 97 ITR 615 (SC). THE LEARNED CIT(APPEALS) C ONFIRMED THE ORDER OF THE ASSESSING OFFICER BY OBSERVING AS UNDER:- 2.2 THE DECISION CITED BY THE APPELLANT IS ALSO DISTINGUISHABLE ON FACTS WHEREAS THE DECISION IN TH E CASE OF SAHNEY STEEL & PRESS WORKS LTD IS DIRECTLY ON THE P OINT. THE DECISION NOTES THAT THE INCENTIVE IS AVAILABLE ONLY AFTER THE START OF PRODUCTION AND AS SUCH THE AMOUNT REPRESEN TS 'SUPPLEMENTARY TRADING RECEIPTS' . THE OBSERVATIONS OF THE COURT AS CONTAINED AT PAGE 262 OF THE ITR ARE REPRO DUCED BELOW: THAT PRECISELY IS THE QUESTION RAISED IN THIS CASE. BY NO STRETCH OF IMAGINATION CAN THE SUBSIDIES WHETHER BY WAY OF REFUND OF SALES TAX OR RELIEF OF ELECTRICITY CHARGES OR WATER CHARGES BE TREATED AS AN AID TO TH E SETTING UP OF THE INDUSTRY OF THE ASSESSEE. AS WE H AVE SEEN EARLIER, THE PAYMENTS WERE TO BE MADE ONLY IF AND WHEN THE ASSESSEE COMMENCED ITS PRODUCTION. THE SAID PAYMENTS WERE MADE FOR A PERIOD OF FIVE YEARS ITA NOS.3493/A/03(BY REVENUE), ITA NOS.3257 & 3353/AHD/2004(CROSS) THE ACIT VS. M/S.GARDEN SILK MILLS LTD.A.YS - 2000 -01 & 2002-03 - 29 - CALCULATED FROM THE DATE OF COMMENCEMENT OF PRODUCTION IN THE ASSESSEE'S FACTORY. THE SUBS IDIES ARE OPERATIONAL SUBSIDIES AND NOT CAPITAL SUBSIDIES . THE FACTS OF THE PRESENT CASE ARE IDENTICAL WITH TH OSE OF THE DECISION IN ALL MATERIAL RESPECTS. THEREFORE I HOLD THAT SALES TAX AMOUNT IN QUESTION IS A REVENUE RECEIPT LIABLE TO TAX AND NOT A CAPITAL RECEIPT AT ALL. 25. BEFORE US, LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE SUBMITTED THAT ITAT AHMEDABAD BENCH IN THE CASE OF NIRMA LTD. REPORTED IN 301 (AT) ITR 96 (AHD.) FOR ASSESSMENT YEAR 1992- 93 DECIDED ON 13/03/2005 RELIED ON THE DECISION OF RELIANCE INDUS TRIES LTD. 88 ITD 273 AND RESTORED THE MATTER BACK TO THE ASSESSING OFFIC ER TO DECIDE AFTER VERIFYING THE RELEVANT FACTS. 26. THE LEARNED DEPARTMENTAL REPRESENTATIVE RELIED ON THE ORDER OF THE LEARNED CIT(APPEALS). 27. AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE REM AND THE MATTER BACK TO THE FILE OF ASSESSING OFFICER TO EXAMINE THE SCH EME OF THE GOVERNMENT OF GUJARAT AS TO HOW EXEMPTION HAS BEEN GIVEN TO TH E ASSESSEE. THE DECISION WOULD DEPEND UPON THE SCHEME FRAMED BY THE GOVERNMENT AND CASE LAWS ON THE SUBJECT. THE ASSESSING OFFICER W ILL GRANT AN OPPORTUNITY TO THE ASSESSEE BEFORE DECIDING THE ISSUE. THIS G ROUND IS, THEREFORE, ALLOWED FOR STATISTICAL PURPOSES. 28. IN THE RESULT, THE APPEAL OF THE ASSESSEE, I. E. ITA NO.3257/AHD/2004 IS TREATED AS ALLOWED BUT FOR STAT ISTICAL PURPOSES. ITA NOS.3493/A/03(BY REVENUE), ITA NOS.3257 & 3353/AHD/2004(CROSS) THE ACIT VS. M/S.GARDEN SILK MILLS LTD.A.YS - 2000 -01 & 2002-03 - 30 - REVENUES APPEAL 29. THE ISSUE INVOLVED IN THE REVENUES APPEAL IS A BOUT LOSS CLAIMED BY THE ASSESSEE ON ACCOUNT OF ITS TRANSACTIONS WITH M/ S.KMPL AMOUNTING TO RS.3,37,809/- AND WITH M/S.KMFL AMOUNTING TO RS.4,0 9,608/-. 30. THE LEARNED CIT(APPEALS) HAD ALLOWED THE APPEAL OF THE ASSESSEE BY ACCEPTING THE SUBMISSIONS MADE BY IT. 31. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIALS AVAILABLE ON RE CORD. SIMILAR ISSUE HAD ARISEN IN THE ASSESSMENT YEAR 2000-01 (BY WAY OF IT A NO.3493/AHD/2003), WHEREIN WE HAVE HELD THAT AMOUNT WRITTEN OFF BY THE ASSESSEE ON ACCOUNT OF CLAIM MADE BY M/S.KMPL AND M /S.KMFL IS ALLOWABLE AS BUSINESS LOSS. THEREFORE, FOLLOWING OUR ORDER OF EVEN DATE, WE CONFIRM THE ORDER OF THE LEARNED CIT(APPEALS) BU T ON DIFFERENT GROUNDS. 32. AS A RESULT, THE APPEALS OF THE REVENUE, I.E. ITA NO.3353/AHD/2004 FOR ASSESSMENT YEAR 2002-03 AND IT A NO.3493/AHD/2003 FOR ASSESSMENT YEAR 2000-01 ARE DI SMISSED, WHEREAS ASSESSEES APPEAL, I.E. ITA NO.3257/AHD/2004 IS TRE ATED AS ALLOWED BUT FOR STATISTICAL PURPOSES. ORDER SIGNED, DATED AND PRONOUNCED IN THE COURT ON 13/11/ 2009. SD/- SD/- ( MAHAVIR SINGH ) ( D.C.AGRAWAL ) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD; DATED 13 /11 /2009 T.C. NAIR ITA NOS.3493/A/03(BY REVENUE), ITA NOS.3257 & 3353/AHD/2004(CROSS) THE ACIT VS. M/S.GARDEN SILK MILLS LTD.A.YS - 2000 -01 & 2002-03 - 31 - COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE LD. CIT(APPEALS)-I, SURAT 5. THE DR, AHMEDABAD BENCH 6. THE GUARD FILE. BY ORDER, //TRUE COPY// (DY./ASSTT.REGISTRAR), ITAT, AHMEDABAD