JAL VENKATESH INVESTMENTS P. LTD, MUMBAI V. DCIIT CIR 2(2), MUMBAI

ITA 3557/MUM/2010

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 8222 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 2 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-08-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 01-08-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 06-05-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: K G KUTTY
• Assessee Lawyers: DR K SHIVRAM; AJAY R SINGH
• Keywords: Business income; Bad and doubtful debts
• Section: 143(3); 37(1); 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH I MUMBAI BEFORE SHRI VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER ITA NO.3557/MUM/2010 ASSESSMENT YEAR-2006-07 M/S. JAL VENKATESH INVESTMENTS PVT. LTD., 305-A, JANMABHUMI CHAMBERS, 29, W.H. MARG, BALLARD ESTATE, MUMBAI-400 038 PAN-AAACJ 2554P VS. THE DCIT, CIRCLE-2(2), MUMBAI (APPELLANT) (RESPONDENT) APPELLANT BY: DR. K. SHIVRAM & SHRI AJAY R. SINGH RESPONDENT BY: SHRI K.G. KUTTY DATE OF HEARING :01.08.2012 DATE OF PRONOUNCEMENT: 03.08.2012 O R D E R PER N.K. BILLAIYA (AM): THE ASSESSEE IS IN APPEAL AGAINST THE ORDER OF LD. CIT(A)-5, MUMBAI DT. 3.3.2010 PERTAINING TO ASSESSMENT YEAR 2006-07 . 2. THE ASSESSEE HAS RAISED ONLY ONE GROUND IN FORM NO. 36 AND HAS RAISED AND ADDITIONAL GROUND AS AN ALTERNATE PLEA. THE SUM AND SUBSTANCE OF THE GRIEVANCE OF THE ASSESSEE IS THAT THE LOWER AUT HORITIES HAVE ERRED IN NOT ALLOWING ITS CLAIM OF BAD DEBT AMOUNTING TO RS. 12 ,37,154/-. ALTERNATIVELY, THE CLAIM SHOULD HAVE BEEN ALLOWED AS A BUSINESS LO SS U/S. 28 OF THE ACT. 3. BRIEFLY STATED THE FACTS OF THE CASE ARE THAT TH E ASSESSEE IS ENGAGED IN THE BUSINESS OF INVESTMENTS IN SHARES & SECURITIES AND PROVIDING LOANS FINANCIAL ASSISTANCE, PROVIDING FINANCIAL CONSULTAN CY & SYNDICATION OF LOAN FROM FINANCIAL INSTITUTION & BANKS AND PROMOTING INSURAN CE AND FINANCIAL PRODUCTS ITA NO. 3557/M/10 2 OF ESTABLISHED ORGANIZATION. THE RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATION WAS FILED ON 16.10.2006 DECLARING TOT AL INCOME AT RS. 23,17,480/-. THE RETURN WAS SELECTED FOR SCRUTINY ASSESSMENT AND ACCORDINGLY STATUTORY NOTICES WERE ISSUED AND SERVE D UPON THE ASSESSEE. 4. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER FOUND THAT THE ASSESSEE HAS WRITTEN OFF BAD DEBTS A MOUNTING TO RS. 12,37,154/-. THE AO OBSERVED THAT ASSESSEE HAS WRI TTEN OFF 90% OF THE DEBENTURE OF KAILASH STRUCTURAL LTD. THE AO SOUGHT EXPLANATION FROM THE ASSESSEE IN RESPECT OF THIS CLAIM OF BAD DEBT. IN R ESPONSE TO WHICH, THE ASSESSEE FILED A DETAILED REPLY EXPLAINING THE CIRC UMSTANCES WHICH PERSUADED THE ASSESSEE TO WRITE OFF 90% OF THE DEBENTURES OF KAILASH STRUCTURAL LTD. THE AO DID NOT ACCEPT THE EXPLANATION OF THE ASSESS EE. THE AO WAS OF THE OPINION THAT THE ASSESSEE HAS ALWAYS SHOWN THE SHAR ES AND SECURITIES AS INVESTMENT IN BALANCE SHEET AND NOT AS STOCK IN TRA DE. THEREFORE ANY LOSS IN INVESTMENT IS A CAPITAL LOSS AND THE SAME CANNOT BE ALLOWED U/S. 36(1)(VII) AS BAD DEBTS R.W.S. 36(2) OF THE ACT. THE AO ALSO REJ ECTED THE ALTERNATE CLAIM OF THE ASSESSEE TO CONSIDER THE WRITE OFF AS TRADING L OSS U/S. 28 OF THE I.T. ACT. ACCORDING TO THE AO, A TRADING LOSS IS ALLOWABLE A S DEDUCTION WHILE COMPUTING BUSINESS INCOME ONLY IN THE YEAR IN WHICH IT IS INC URRED. IN THIS CASE, THE ASSESSEE HAS STATED THAT KAILASH STRUCTURAL LTD. IS BANKRUPT AND UNDER LIQUIDATION. ACCORDING TO THE AO, THE PROCESS OF L IQUIDATION IS NOT OVER AND THE PAYMENT TO THE ASSESSEE IS NOT YET DETERMINED. THEREFORE, THE CLAIM OF LOSS CANNOT BE ALLOWED. THEREAFTER, THE AO COMPLET ED THE ASSESSMENT PROCEEDINGS BY ADDING A SUM OF RS. 12,37,154/- TO T HE RETURNED INCOME. 5. THE ASSESSEE TOOK THE MATTER BEFORE THE LD. CIT( A) AND REITERATED ITS SUBMISSIONS THAT IF THE WRITE OFF IS NOT ALLOWED AS BAD DEBT, IT SHOULD BE ALLOWED AS BUSINESS LOSS. HOWEVER, THE SUBMISSIONS OF THE ASSESSEE DID NOT FIND FAVOUR WITH THE LD. CIT(A). ACCORDING TO THE LD. CIT(A), SUCH A LOSS IS NOTHING BUT A CAPITAL LOSS, IT CANNOT BE ALLOWED A S DEDUCTION U/S. 36(1)(VII) AND SECTION 28 OF THE ACT. THE LD. CIT(A) FURTHER R ELIED UPON CERTAIN DECISIONS WHICH ARE EXHIBITED ON THE BODY OF THE APPELLATE OR DER. ITA NO. 3557/M/10 3 6. AGGRIEVED BY THE FINDINGS OF LD. CIT(A), ASSESSE E IS IN APPEAL BEFORE US. THE LD. COUNSEL FOR THE ASSSESSEE ARGUED THAT THE WRITE OFF WAS IMMINENT BECAUSE THE COMPANY KAILASH STRUCTURAL LTD. BECAME BANKRUPT ON 6.2.2003 WHICH WAS SUBSEQUENTLY DECLARED A SICK COMPANY AND WAS REGISTERED WITH BIFR VIDE ORDER DT. 13.2.2006. AS THE COMPANY HAS B ECOME A SICK COMPANY, THE ASSESSEE WAS LEFT WITH NO OPTION BUT TO WRITE O FF 90% OF THE DEBENTURE AS BAD DEBT. THE COUNSEL FURTHER SUBMITTED THAT 10% O F THE AMOUNT HAS BEEN RETAINED SO THAT AS AND WHEN THE LIQUIDATOR OF THE COMPANY PAYS SOMETHING TOWARDS THE DEBTS, THE ASSESSEE MAY GET SOME AMOUN T. THE LD. COUNSEL FURTHER ARGUED THAT THE BUSINESS OF THE ASSESSEE IS DEALING IN SHARES AND SECURITIES THEREFORE DEBENTURES OF KAILASH STRUCTUR AL LTD. ARE TO BE TREATED AS TRADING ASSETS AND THE WRITE OFF SHOULD BE ALLOWED AS TRADING LOSS WHICH IS THE ALTERNATE PLEA OF THE ASSESSEE FOR THE APPEAL UNDER CONSIDERATION. THE LD. COUNSEL FURTHER POINTED OUT THAT INTEREST ON DEBENT URES IN EARLIER YEAR I.E. A.Y. 1999-2000 WERE OFFERED AS BUSINESS INCOME AND WERE ASSESSED AS SUCH U/S. 143(3) OF THE ACT. THE LD. COUNSEL CONCLUDED THAT IF THE WRITE OFF IS NOT ALLOWED AS BAD DEBT, IT SHOULD BE ALLOWED AS BUSINE SS LOSS U/S. 28/SEC. 37(1) OF THE ACT. 7. THE LD. DEPARTMENTAL REPRESENTATIVE STRONGLY SUP PORTED THE FINDINGS OF LOWER AUTHORITIES AND SUBMITTED THAT THE ASSESSE E IS SHOWING INVESTMENT IN DEBENTURES AND SHARES IN ITS BALANCE SHEET AND THER EFORE THE PLEA OF THE ASSESSEE THAT WRITE OFF OF DEBENTURES SHOULD BE CON SIDERED AS TRADING LOSS SHOULD NOT BE ACCEPTED. 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF LOWER AUTHORITIES AND THE PAPER BOOK SUBMITTED BY THE ASS ESSEE. THE ASSESSEE HAS INVESTED IN 200 NON CONVERTIBLE DEBENTURE OF KAILAS H STRUCTURAL LTD. ON 25.2.1997. THEREAFTER, THE ASSESSEE HAS SHOWN INTE REST FROM DEBENTURES IN A.Y. 1998-99 FOR RS. 1,75,895/- AND IN A.Y. 1999-20 00 FOR RS. 2,48,400/-. WE FIND THAT THESE INTERESTS WERE SHOWN UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION. ON A PERUSAL OF THE ASSES SMENT ORDER A.Y. 2003-04, ITA NO. 3557/M/10 4 WE FIND THAT THE ASSESSEE HAS BEEN SHOWING INTEREST ON DEBENTURES AS BUSINESS INCOME WHICH HAS BEEN ACCEPTED BY THE DEPA RTMENT U/S. 143(3) OF THE ACT. WE HAVE ALSO CONSIDERED THE MEMORANDUM OF ASSOCIATION OF THE ASSESSEE COMPANY. UNDER THE HEAD THE OBJECTS FOR WHICH THE COMPANY IS ESTABLISHED CLAUSE (1) TO ACQUIRE HOLD AND DISPOS E OF OR OTHERWISE DEAL IN INVEST IN FIXED DEPOSITS, SHARES, STOCK, DEBENTURES , DEBENTURE STOCKS, BONDS AND SECURITIES OF EVERY KIND AND TO DEAL IN REAL ES TATE OR PROPERTIES AND INVESTMENTS. CONSIDERING ALL THESE FACTS, WE FIND FORCE IN THE CONTENTION OF THE COUNSEL THAT THE DEBENTURE IS PART OF ITS BUSIN ESS AND ANY LOSS ARISING FROM THE DIMINUTION IN THE VALUE SHOULD BE TREATED AS A BUSINESS LOSS. 9. THE CASE LAWS DISCUSSED BY THE LD. CIT(A) IN HIS ORDER ARE ON DIFFERENT FACTS. FOR EXAMPLE IN THE CASE OF C.A. NATRAJAN VS CIT 92 ITR 347 (MAD), THE ASSESSEE WAS A C.A. WHO PURCHASED PREFERENTIAL SHAR ES THEREFORE ANY LOSS WAS TO BE TREATED AS CAPITAL LOSS WHEREAS IN THE C ASE OF THE ASSESSEE, THE INVESTMENT IN DEBENTURES WAS MADE IN THE ORDINARY COURSE OF THE BUSINESS OF THE ASSESSEE. IN THE CASE OF SALAM MAGNESTIC PVT. LTD. (2009) 180 TAXMAN 545 (BOM), THE ASSESSEE WAS ENGAGED IN MINING BUSIN ESS AND IT HAD LENT CERTAIN SUM TO A SUBSIDIARY COMPANY AS LOAN, THE WR ITE OFF WAS NOT ALLOWED AS BUSINESS LOSS. SIMILARLY OTHER CASE LAWS ARE ON DIF FERENT FACTS . IN OUR HUMBLE OPINION, THE CLAIM OF RS. 12,37,154/- DESERVES TO B E ALLOWED AS A BUSINESS LOSS ON FACTS OF THE CASE . WE ACCORDINGLY REVERSE THE FINDINGS OF LD. CIT(A) AND DIRECT THE AO TO ALLOW THE WRITE OFF OF RS. 12, 37,154/- AS A BUSINESS LOSS. THEREBY WE ALLOW THE ADDITIONAL GROUND OF APPEAL. THE ADDITIONAL GROUND OF APPEAL IS ALLOWED AND ON THAT NOTE THE MAIN GROUND OF APPEAL IS DISMISSED. 10. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED ON THIS 3 RD DAY OF AUGUST, 2012 SD/- SD/- (VIJAY PAL RAO) (N.K. BILLAIYA ) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED 3 RD AUGUST, 2012 RJ ITA NO. 3557/M/10 5 C OPY TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT-CONCERNED 4. THE CIT(A)-CONCERNED 5. THE DR I BENCH TRUE COPY BY ORDER ASSTT. REGISTRAR, I.T.A.T, MUMBAI