ASIT MEHTA FINANCIAL SERVICES ( FORMERLY KNOWN AS m/S. NUCELUS SECURITIES LTD & EARLIER KNOWN AS NUCLEUS NETSOFT & GIS (I) LTD), MUMBAI V. DCIT 8(2), MUMBAI

ITA 3659/MUM/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 48958 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-05-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2005-2006
• Appeal Filed On: 07-05-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SHRAVAN KUMAR
• Keywords: Business expenditure; Earning of tax free income; Bad and doubtful debts; Rule 8D
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH A, MUMBAI BEFORE SHRI R.S. SYAL, A.M. AND SHRI V. DURGA RAO, J.M. ITA NO. 3659 & 3660/MUM/2010 ASSESSMENT YEAR: 2005-06 & 2007-08 M/S ASIT C. MEHTA FINANCIAL SERVICES, APPELLANT (FORMERLY KNOWN AS M/S NUCLEUS SECURITIES LTD. & EARLIER KNOWN AS NUCLEUS NETSOFT & GIS (I) LTD. NUCLEUS HOUSE, SAKI VIHAR ROAD, POWAI, ANDHERI (E), MUMBAI 400 072. (PAN AABCN6882D) VS. DY. COMMISSIONER OF INCOME-TAX, RESPONDENT CIRCLE 8(2), MUMBAI 400 020. APPELLANT BY : MR. SATISH MODY RESPONDENT BY : MR. SHRAVAN KUMAR . ORDER PER V. DURGA RAO, J.M.: BOTH THESE APPEALS FILED BY ONE ASSESSEE ARE DIR ECTED AGAINST THE ORDERS OF CIT(A), MUMBAI, FOR THE ASSESSMENT YE ARS 2005-06 AND 2007-08. SINCE IDENTICAL ISSUES ARE INVOLVED IN THE SE APPEALS, THEY WERE HEARD TOGETHER AND, THEREFORE, WE FIND IT CONV ENIENT TO DISPOSE OF THESE APPEALS BY WAY OF COMMON ORDER. 2. GROUND NO. 1 IN AY 2005-06 AND THE ONLY GROUND I N AY 2007-08 ARE COMMON. TO DISPOSE OF THESE APPEALS, WE REFER T O THE FACTS OF THE CASE IN AY 2005-06. THE GROUND NO. 1 IN AY 2005-06 READS AS UNDER:- THE LEARNED ASSESSING OFFICER HAS ERRED IN ADDING AN AMOUNT OF RS. 5,32,126/- U/S 14A OF THE ACT. THE LEARNED ASS ESSING OFFICER HAS ERRED IN NOT TAKING INTO ACCOUNT THE FACT THAT THE ASSESSEE HAS PAID INTEREST ON BANK LOAN OF RS. 3,01,847/-, I NTEREST ON BANK DPN LOAN OF RS. 2,15,871/- AND INTEREST ON CAR LOAN OF RS. 14,400/-. THE ASSESSING OFFICER HAS NOT APPRECIATED THE FACT THAT ITA NOS. 3659 & 3660/M/2010 M/S ASIT MEHTA FINANCIAL SERVICES. 2 THESE INTEREST PAYMENTS WERE MADE TO THE BANK ON TH E LOANS TAKEN AND UTILIZED SPECIFICALLY FOR THE BUSINESS PU RPOSE OF THE ASSESSEE AND THAT SUCH INTEREST PAYMENTS HAS NO CO- RELATION WITH THE EXEMPT INCOME EARNED BY YOUR PETITIONER. THE CI T(A) ERRED IN CONFIRMING THE SAID ADDITION MADE BY THE ASSESSING OFFICER. 3. THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HA D INVESTED IN SHARES OF RS. 3,11,12,239/- AND A SUM OF RS. 5,32,1 26/- HAD BEEN CLAIMED AS INTEREST IN P&L A/C. THE ASSESSEE HAD EX PLAINED THAT BORROWED FUNDS WERE NOT UTILIZED FOR INVESTING IN S HARES, WHICH WAS NOT ACCEPTED BY THE ASSESSING OFFICER AND OBSERVED THAT LOANS AMOUNTED TO RS. 94,45,398/- AT THE BEGINNING OF THE YEAR AND RS. 52,095/- AT THE END OF THE YEAR. THE ASSESSING OFFI CER HELD THAT THE ASSESSEE HAD DIVERTED THE BORROWED FUNDS FOR NON-BU SINESS PURPOSES AND, THEREFORE, HE DISALLOWED THE INTEREST CLAIMED BY THE ASSESSEE. AGGRIEVED, THE ASSESSEE CARRIED THE MATTER IN APPEA L BEFORE THE CIT(A). 4. BEFORE THE CIT(A), THE ASSESSEE SUBMITTED THAT I NTEREST CLAIMED RELATED TO INTEREST ON BANK LOAN RS. 3,01,947/-, IN TEREST ON BANK DPN LOAN RS. 2,15,871/- AND INTEREST ON CAR LOAN OF RS. 14,400/-, THEREFORE, THESE LOANS HAD BEEN UTILIZED FOR THE PU RPOSE THEY WERE TAKEN. IT WAS CONTENDED THAT THE ASSESSING OFFICER WAS WRONGLY DISALLOWED THE ENTIRE INTEREST WITHOUT CO-RELATING THE BORROWINGS WITH THE INVESTMENTS. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, THE CIT(A) FOLLOWING THE SPECIAL BENCH DECISION OF ITAT, MUMBAI IN THE CASE OF ITO VS. DAGA CAPITAL MANAGEMENT PVT. LTD., 26 SOT 603 DIRECTED THE ASSESSING OFFICER TO COMPUTE DISALLOWA NCE IN ACCORDANCE WITH RULE 8D. STILL AGGRIEVED, THE ASSESSEE IS IN A PPEAL BEFORE THE ITAT. 5. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF THE PARTIES AND PERUSED THE RECORD AS WELL AS GONE THROUGH THE ORDE RS OF THE AUTHORITIES BELOW. THIS ISSUE IS COVERED BY THE JUD GMENT OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF GODREJ & B OYCE MFG. CO. LTD., [2010] 328 ITR 81 (BOM.) WHEREIN THE HONBLE COURT HELD AS UNDER:- ITA NOS. 3659 & 3660/M/2010 M/S ASIT MEHTA FINANCIAL SERVICES. 3 THAT THE PROVISIONS OF RULE 8D OF THE RULES WHICH H AVE BEEN NOTIFIED WITH EFFECT FROM MARCH 24, 2008, WOULD APP LY WITH EFFECT FROM ASSESSMENT YEAR 2008-09. EVEN PRIOR TO ASSESSM ENT YEAR 2008-09, WHEN RULE 8D WAS NOT APPLICABLE, THE AO HA D TO ENFORCE THE PROVISIONS OF SUB-SECTION (1) OF SECTION 14A. F OR THAT PURPOSE, THE AO IS DUTY BOUND TO DETERMINE THE EXPENDITURE W HICH HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THE AO MUST ADOPT A REASONABLE BASIS OR METHOD CONSISTENT WITH ALL THE RELEVANT FA CTS AND CIRCUMSTANCES AFTER FURNISHING A REASONABLE OPPORTU NITY TO THE ASSESSEE TO PLACE ALL GERMANE MATERIAL ON THE RECOR D. THE PROCEEDINGS FOR ASSESSMENT YEAR 2002-03 WOULD STAND REMANDED TO THE AO. THE AO SHOULD DETERMINE AS TO WHETHER TH E ASSESSEE HAD INCURRED ANY EXPENDITURE (DIRECT OR INDIRECT) I N RELATION TO DIVIDEND INCOME/INCOME FROM MUTUAL FUNDS WHICH DOES NOT FORM PART OF THE TOTAL INCOME AS CONTEMPLATED UNDER SECT ION 14A. THE AO CAN ADOPT A REASONABLE BASIS FOR EFFECTING THE A PPORTIONMENT. WHILE MAKING THAT DETERMINATION, THE AO SHOULD PROV IDE A REASONABLE OPPORTUNITY TO THE ASSESSEE OF PRODUCING ITS ACCOUNTS AND RELEVANT OR GERMANE MATERIAL HAVING A BEARING O N THE FACTS AND CIRCUMSTANCES OF THE CASE. 6. IN VIEW OF THE RATIO LAID DOWN BY THE HONBLE JU RISDICTIONAL HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. ( SUPRA), WE REMIT THE MATTER BACK TO THE FILE OF THE AO WITH A DIRECTION DECIDE THE ISSUE AFRESH IN THE LIGHT OF THE SAID JUDGMENT OF THE HON BLE JURISDICTIONAL HIGH COURT AFTER PROVIDING REASONABLE OPPORTUNITY O F BEING HEARD TO THE ASSESSEE. 7. GROUND NO. 2 IN AY 2005-06 IS DIRECTED AGAINST THE DISALLOWANCE OF BAD DEBTS OF RS. 2,66,109/-. 8. THE ASSESSEE HAD CLAIMED BAD DEBTS OF RS. 2,66,1 09/- ON THE GROUND THAT WRONG PAYMENTS WERE MADE, WHICH WERE NO T RECOVERABLE, THE ASSESSEE WRITTEN OFF THE SAME IN THE BOOKS OF A CCOUNTS AS BAD DEBTS. THE ASSESSING OFFICER OBSERVED THAT AS PER SECTION 36(2)(I) ANY DEDUCTION FOR A BAD DEBT OR PART THEREOF IS ALLOWAB LE ONLY WHEN SUCH DEBT OR PART THEREOF HAD BEEN TAKEN INTO ACCOUNT IN COMPUTING THE INCOME OF THE ASSESSEE OF THE PREVIOUS YEAR IN WHIC H THE AMOUNT OF SUCH DEBT OR PART THEREOF IS WRITTEN OFF OR OF AN E ARLIER YEAR PREVIOUS ITA NOS. 3659 & 3660/M/2010 M/S ASIT MEHTA FINANCIAL SERVICES. 4 YEAR, OR REPRESENTS MONEY LENT IN THE ORDINARY COUR SE OF THE BUSINESS OF BANKING OR MONEY-LENDING WHICH IS CARRIED ON BY THE ASSESSEE. IT WAS OBSERVED THAT THE ASSESSEE IS NOT A BANKING COM PANY OR ENGAGED IN THE BUSINESS OF MONEY LENDING. FURTHER, FROM THE NARRATION OF THE JOURNAL ENTRY IT IS CLEAR THAT THE DEBT CLAIMED UND ER THE HEAD BAD DEBTS WAS IN FACT NOT A TRADE DEBT AT ALL TO BE COV ERED BY THE PROVISIONS OF SECTION 36(2)(I) OF THE ACT. THEREFOR E, THE ENTIRE AMOUNT OF BAD DISALLOWED BY THE ASSESSING OFFICER. ON APPE AL, THE CIT(A) SUSTAINED THE DISALLOWANCE MADE BY THE ASSESSING OF FICER. STILL AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE THE ITA T. 9. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT THE ASSESSEE WAS DEALING IN FOREIGN EXCHANGE M ONEY BUSINESS. IT HAS GOT STANDING BUSINESS ARRANGEMENT WITH WESTERN UNION MONEY TRANSFER OF USA. IT IS SUBMITTED THAT THE ASSESSEE HAS DEALT IN FOREIGN EXCHANGE MONEY TRANSFER BUSINESS WORTH MILLIONS OF DOLLARS THROUGH WESTERN UNION MONEY TRANSFER AGENCY SINCE LAST FEW YEARS. IT IS SUBMITTED THAT THERE WAS NO SINGLE EXAMPLE OF WRONG PAYMENT TO BENEFICIARY OR PROBLEM INVOLVING IDENTITY OF BENEFI CIARY. HOWEVER, IN ONE CASE THE BENEFICIARY WAS PAID AN AMOUNT OF RS. 2,66,109/- EVEN THOUGH IT APPEARS THAT THE DETAILS OF IDENTIFICATIO N GIVEN BY HIM DID NOT MATCH WITH THE IDENTIFICATION DETAILS TRANSMITT ED TO ASSESSEE BY WESTERN UNION. IT IS SUBMITTED THAT SINCE WESTERN U NION REFUSED TO REIMBURSE THE SAID AMOUNT, THE ASSESSEE HAD WRITTEN OFF THE SAID AMOUNT AS BUSINESS EXPENSES AS THE ENTIRE COMMISSIO N EARED ON THE FOREIGN EXCHANGE BUSINESS IS ALWAYS OFFERED AS BUSI NESS INCOME THEREFORE, IT IS AN AMOUNT OF BAD DEBT ALSO CLOSELY ASSOCIATED WITH THE BUSINESS OPERATION OF THE COMPANY. THE LEARNED COUN SEL, THEREFORE, PLEADED THAT THE DISALLOWANCE MAY BE DELETED. 10. THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER HAND, HAS STRONGLY RELIED ON THE ORDERS OF THE AUTHORITIE S BELOW. ITA NOS. 3659 & 3660/M/2010 M/S ASIT MEHTA FINANCIAL SERVICES. 5 11. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF TH E PARTIES AND PERUSED THE RECORD AS WELL AS GONE THROUGH THE ORDE RS OF THE AUTHORITIES BELOW. WE FIND THAT THE ASSESSEE IS DEA LING IN FOREIGN EXCHANGE MONEY THROUGH WESTERN UNION. IN ONE CASE A N AMOUNT OF RS. 2,66,109/- WAS PAID WRONGLY, WHICH IS NOT RECOV ERABLE, HENCE, THE ASSESSEE HAD CLAIMED THE SAID AMOUNT AS BAD DEBT. T HE ASSESSING OFFICER DISALLOWED THE SAME AS IT IS NOT TRADE DEBT TO BE COVERED U/S 36(2)(I) OF THE ACT. IN THIS CONNECTION, WE REFER T O THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF TRF LTD. V. CI T, [2010] 323 ITR SC WHEREIN THE APEX COURT HELD AS UNDER:- AFTER THE AMENDMENT OF SECTION 36(1)(VII) OF THE IN COME-TAX ACT, 1961, WITH EFFECT FROM APRIL 1, 1989, IN ORDER TO OBTAIN A DEDUCTION IN RELATION TO BAD DEBTS, IT IS NOT NECESSARY FOR THE ASSESSEE TO ESTABLISH THAT THE DEBT, IN FACT, HAS BECOME IRRECOVERABLE, I T IS ENOUGH IF THE BAD DEBT IS WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNT S OF THE ASSESSEE. THE SUPREME COURT ACCORDINGLY REMANDED THE MATTER T O THE AO TO EXAMINE, SOLELY TO THE EXTENT OF WRITE OFF, WHETHER THE DEBT OR PART THEREOF WAS WRITTEN OFF IN THE ACCOUNTS OF THE ASSE SSEE. 12. THE APEX COURT HELD THAT IT IS NOT NECESSARY FO R THE ASSESSEE TO ESTABLISH THAT THE DEBT, IN FACT, HAS BECOME IRREC OVERABLE, IT IS ENOUGH IF THE BAD DEBT IS WRITTEN OFF AS IRRECOVERA BLE IN THE ACCOUNTS OF THE ASSESSEE. IN THE CASE UNDER CONSIDERATION, T HE BUSINESS OF THE ASSESSEE ITSELF DEALING IN FOREIGN EXCHANGE BUSINES S AND IN ONE TRANSACTION, THE AMOUNT HAS BEEN PAID WRONGLY TO A NON-BENEFICIARY, WHICH IS NOT RECOVERABLE AND THEREFORE, THE ASSESSE E CLAIMED THE SAME AS BAD DEBT. SINCE THE LOSS OCCURRED IN THE COURSE OF BUSINESS, THE BAD DEBT CLAIM OF THE ASSESSEE OUGHT TO HAVE BEEN A CCEPTED BY THE REVENUE AUTHORITIES. FOLLOWING THE RATIO LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF TRF LTD. (SUPRA) WE SE T ASIDE THE ORDER OF CIT(A) AND ALLOW THE BAD DEBTS CLAIM OF THE ASSE SSEE OF RS. 2,66,109/-. THUS, THIS GROUND OF APPEAL OF THE ASSE SSEE IS ALLOWED. ITA NOS. 3659 & 3660/M/2010 M/S ASIT MEHTA FINANCIAL SERVICES. 6 13. IN THE RESULT, APPEAL FOR AY 2005-06 IS PARTLY ALLOWED FOR STATISTICAL PURPOSES AND THE APPEAL FOR AY 2007-08 IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON THIS DAY OF 27 TH MAY, 2011. SD/- SD/- (R.S. SYAL) (V. DU RGA RAO) ACCOUNTANT MEMBER JUDI CIAL MEMBER MUMBAI, DATED: 27 TH MAY, 2011 KV COPY TO:- 1) THE APPELLANT. 2) THE RESPONDENT. 3) THE CIT (A) CONCERNED. 4) THE CIT CONCERNED. 5) THE DEPARTMENTAL REPRESENTATIVE, A BENCH, I.T .A.T., MUMBAI. BY ORDER //TRUE COPY// ASST. REGISTRAR, I.T.A.T., MUMBAI. S.NO. DESCRIPTION DATE INTLS 1. DRAFT DICTATED ON 12/05/11 SR.P.S./P.S 2. DRAFT PLACED BEFORE AUTHOR 13/05/11 SR.P.S/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5 APPROVED DRAFT COMES TO THE SR.P.S./PS SR.P.S./P.S 6. KEPT FOR PRONOUNCEMENT ON SR. P.S./P.S. 7. FILE SENT TO THE BENCH CLERK SR.P.S./P.S 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER