M/s Value Point Systems Private Limited, Bangalore V. Deputy Commissioner of Income Tax, Bangalore

ITA 376/BANG/2017

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 7113 (ITAT-BANGALORE)
• Duration Of Justice: 9 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-12-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2011-2012
• Appeal Filed On: 20-02-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: B T SHETTY
• Keywords: Business expenditure; Earning of tax free income; Bad and doubtful debts
• Section: 14A; 37(1); 28

Judgement Text

ITA.376/BANG/2017 PAGE - 1 IN THE INCOME TAX APPELLATE TRIBUNAL BENGALURU BENCH 'C', BENGALURU BEFORE SHRI. A. K. GARODIA, ACCOUNTANT MEMBER AND SHRI. LALIT KUMAR, JUDICIAL MEMBER I.T.A NO.376/BANG/2017 (ASSESSMENT YEAR : 2011-12) M/S. VALUE POINT SYSTEMS P. LTD, NO.66, 4 TH CROSS (OPP. ORACLE LEXINGTON), KAVERI LAYOUT, TAVAREKERE MAIN ROAD, BENGALURU 560 029 .. APPELLANT PAN : AAACV4796R V. DEPUTY COMMISSIONER OF INCOME-TAX, NEW CIRCLE 7(1)(2), BENGALURU .. RESPONDENT ASSESSEE BY : SHRI. B. T. SHETTY, CA REVENUE BY : SHRI. M. K. BIJU, JCIT HEARD ON : 16.10.2017 PRONOUNCED ON : 15.12.2017 O R D E R PER LALIT KUMAR, JUDICIAL MEMBER : THE PRESENT APPEAL IS FILED BY THE ASSESSEE AGAINS T THE ORDER OF THE CIT (APPEALS) 7, BENGALURU, DATED 23.11.2016, FOR THE ASSESSMENT YEAR 2011-12, ON THE FOLLOWING GROUNDS : ITA.376/BANG/2017 PAGE - 2 02. THE BRIEF FACTS ARE THAT THE ASSESSEE IS AN IT SOLUTION PROVIDER WITH ITS CORE BUSINESS IS TO ENABLE CLIENTS TO SET UP AND RUN BUSINESSES ITA.376/BANG/2017 PAGE - 3 AND CRITICAL APPLICATIONS THROUGH PROVISION OF IT I NFRASTRUCTURE AND MAINTENANCE SERVICES. THE ASSESSEE WAS FOLLOWING T HE MERCANTILE SYSTEM OF ACCOUNTING AND THE ACCOUNTS ARE DULY AUDI TED. DURING THE IMPUGNED ASSESSMENT YEAR, THE ASSESSEE FILED THE OR IGINAL RETURN OF INCOME ON 30.09.2011 DECLARING TOTAL INCOME OF RS.5 ,40,70,200/-. THEREAFTER IT WAS REVISED TO RS.6,55,43,750/-. BAS ED ON THE AUDIT REPORT, THE ASSESSEE DECLARED THE NET PROFIT FIGURE OF RS.1,77,73,076/-. IN THE SAID COMPUTATION THE ASSESSEE HAS OFFERED VA RIOUS ADDITIONS BY EFFECTING SEVERAL DISALLOWANCES OF EXPENDITURE AND PAYMENTS, AMOUNTING IN ALL TO RS.5,13,12,585/-, DEBITED IN IT S BOOKS. HOWEVER, THE AO MADE THE REGULAR ASSESSMENT U/S.143(3) AND R ECOMPUTED THE TOTAL INCOME OF THE ASSESSEE AT RS.7,57,49,844/-. FEELING AGGRIEVED BY THE ADDITION, THE ASSESSEE APPROACHED THE CIT (A) F OR RELIEF. 03. THE CIT (A) PARTLY GRANTED RELIEF TO THE ASSESS EE. HENCE THE ASSESSEE IS NOW IN APPEAL BEFORE US WITH THE GROUND S MENTIONED HEREIN ABOVE. 04. GROUND NO.2 PERTAINS TO DISALLOWANCE MADE BY TH E AO AND CONFIRMED BY THE CIT (A) UNDER RULE 8D(2)(III) R.W. S.14A. IN THIS REGARD, THE LD. AR HAS SUBMITTED THAT THE ADDITION MADE BY BOTH THE LOWER AUTHORITIES IS WITHOUT ANY BASIS AS THE ASSES SEE HAS NOT EARNED ANY DIVIDEND INCOME DURING THE YEAR UNDER CONSIDERA TION AND THEREFORE NO EXPENDITURE CAN BE DISALLOWED BY THE A O BY INVOKING RULE 8D(2)(III) R.W.S.14A. THE LD. AR RELIES UPON THE JUDGMENT ITA.376/BANG/2017 PAGE - 4 PASSED BY THE HONBLE DELHI HIGH COURT IN THE MATTE R OF CHEMINVEST LTD. V. ITO [378 ITR 33]. 05. ON THE OTHER HAND, THE LD. AR RELIES UPON THE O RDER PASSED BY THE LOWER AUTHORITIES. 06. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RECORD. THE AO IN PARA 5 RECORDS THAT THE TOTAL INVESTMENT AS ON 31.03.2011 WAS RS.1,37,70,000/-. HOWEVER NO DIVIDEND INCOME WAS DECLARED DURING THE PREVIOUS YEAR BY THIS COMPANY, HENCE THE ASSESSEE DID NOT CLAIM ANY DIVIDEND FOR THE PREVIOUS YEAR. THUS, IT IS CLEAR THAT THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION HAS NO T RECEIVED ANY DIVIDEND INCOME FROM INVESTMENT MADE IN EQUITY SHAR ES OF COMPANIES. NOW THE ISSUE OF DISALLOWANCE UNDER RULE 8D(2)(III) R.W.S. 14A IS NO MORE RES INTEGRA SO FAR AS NON RECEIPT OF DIVIDEND INCOME. THE HONBLE DELHI HIGH COURT IN THE MATTER OF PCIT-04 V . IL & FS ENERGY DEVELOPMENT CO., [(2017) 84 TAXMANN.COM 186] IN PARAS 11 TO 23 HAS HELD AS UNDER: 11. AT THE OUTSET, IT REQUIRES TO BE NOTICED THAT WE A RE CONCERNED WITH THE AY 2011-12 AND, THEREFORE, THE QUESTION OF THE APPLICABILITY OF RULE 8D, WHICH WAS INSERTED WITH EFFECT FROM 24TH M ARCH 2008, IS NOT IN DOUBT. 12. SECTION 14A OF THE ACT, WHICH WAS INSERTED WITH RE TROSPECTIVE EFFECT FROM 1ST APRIL 1962, PROVIDES FOR DISALLOWAN CE OF THE EXPENDITURE INCURRED IN RELATION TO INCOME EXEMPTED FROM TAX. FROM 11TH MAY 2001, A PROVISO WAS INSERTED IN SECTION 14 A TO CLARIFY THAT IT COULD NOT BE USED TO REOPEN OR RECTIFY A COMPLETED ASSESSMENT. SUB- SECTIONS (2) AND (3) OF SECTION 14A WERE INSERTED W ITH EFFECT FROM 1ST APRIL, 2007 TO PROVIDE FOR METHODOLOGY FOR COMPUTIN G OF DISALLOWANCE UNDER SECTION 14A. HOWEVER, THE ACTUAL METHODOLOGY WAS PROVIDED IN ITA.376/BANG/2017 PAGE - 5 TERMS OF RULE 8D ONLY FROM 24TH MARCH 2008. THERE W AS A FURTHER AMENDMENT TO RULE 8D WITH EFFECT FROM 2ND JUNE 2016 LIMITING THE DISALLOWANCE THE AGGREGATE OF THE AMOUNT OF EXPENDI TURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTA L INCOME AND AN AMOUNT EQUAL TO ONE PER CENT OF THE ANNUAL AVERAGE OF THE MONTHLY AVERAGE OF THE OPENING AND CLOSING BALANCES OF THE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT FORM PART OF THE TOTAL INCOME. IT IS ALSO PROVIDED THAT THE AMOUNT SHALL NOT EXCEE D THE TOTAL EXPENDITURE CLAIMED BY THE ASSESSEE. 13. IN THE ABOVE BACKGROUND, THE KEY QUESTION IN THE P RESENT CASE IS WHETHER THE DISALLOWANCE OF THE EXPENDITURE WILL BE MADE EVEN WHERE THE INVESTMENT HAS NOT RESULTED IN ANY EXEMPT INCOM E DURING THE AY IN QUESTION BUT WHERE POTENTIAL EXISTS FOR EXEMPT INCO ME BEING EARNED IN LATER AYS. 14. IN THE EXPLANATORY MEMORANDUM TO THE FINANCE ACT 2 001, BY WHICH SECTION 14A WAS INSERTED WITH EFFECT FROM 1ST APRIL 1962, IT WAS CLARIFIED THAT 'EXPENSES INCURRED CAN BE ALLOWED ON LY TO THE EXTENT THEY ARE RELATABLE TO THE EARNED INCOME OF TAXABLE INCOME'. THE OBJECT BEHIND SECTION 14A WAS TO PROVIDE THAT 'NO DEDUCTIO N SHALL BE MADE IN RESPECT OF ANY EXPENDITURE INCURRED BY THE ASSES SEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE INCOME TAX ACT'. 15. WHAT IS TAXABLE UNDER SECTION 5 OF THE ACT IS THE 'TOTAL INCOME' WHICH IS NEITHER NOTIONAL NOR SPECULATIVE. IT HAS T O BE 'REAL INCOME'. THE SUBSEQUENT AMENDMENT TO SECTION 14A DOES NOT PA RTICULARLY CLARIFY WHETHER THE DISALLOWANCE OF THE EXPENDITURE WOULD APPLY EVEN WHERE NO EXEMPT INCOME IS EARNED IN THE AY IN QUEST ION FROM INVESTMENTS MADE, NOT IN THAT AY, BUT EARLIER AYS. 16. RULE 8D (1) OF THE RULES IS HELPFUL, TO SOME EXTEN T, IN UNDERSTANDING THE ABOVE ISSUE. IT READS AS UNDER: '8D. (1) WHERE THE ASSESSING OFFICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE OF A PREVIOUS YEAR, IS NOT SATISFIED WITH (A) THE CORRECTNESS OF THE CLAIM OF EXPENDITURE MADE BY THE ASSESSEE; OR ITA.376/BANG/2017 PAGE - 6 (B) THE CLAIM MADE BY THE ASSESSEE THAT NO EXPENDITURE HAS BEEN INCURRED, IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT FOR SUCH PREVIOUS YEAR, HE SHALL DETERMINE THE AMOUNT OF EXPENDITURE IN REL ATION TO SUCH INCOME IN ACCORDANCE WITH THE PROVISIONS OF SUB-RUL E (2).' 17. THE WORDS 'IN RELATION TO INCOME WHICH DOES NOT FO RM PART OF THE TOTAL INCOME UNDER THE ACT FOR SUCH PREVIOUS YE AR' IN THE ABOVE RULE 8 D (1) INDICATES A CORRELATION BETWEEN THE EX EMPT INCOME EARNED IN THE AY AND THE EXPENDITURE INCURRED TO EA RN IT. IN OTHER WORDS, THE EXPENDITURE AS CLAIMED BY THE ASSESSEE H AS TO BE IN RELATION TO THE INCOME EARNED IN 'SUCH PREVIOUS YEA R'. THIS IMPLIES THAT IF THERE IS NO EXEMPT INCOME EARNED IN THE AY IN QUESTION, THE QUESTION OF DISALLOWANCE OF THE EXPENDITURE INCURRE D TO EARN EXEMPT INCOME IN TERMS OF SECTION 14A READ WITH RULE 8D WO ULD NOT ARISE. 18. THE CBDT CIRCULAR UPON WHICH EXTENSIVE RELIANCE IS PLACED BY MR. HOSSAIN DOES NOT REFER TO RULE 8D (1) OF THE RU LES AT ALL BUT ONLY REFERS TO THE WORD 'INCLUDIBLE' OCCURRING IN T HE TITLE TO RULE 8D AS WELL AS THE TITLE TO SECTION 14A. THE CIRCULAR C ONCLUDES THAT IT IS NOT NECESSARY THAT EXEMPT INCOME SHOULD NECESSARILY BE INCLUDED IN A PARTICULAR YEAR'S INCOME FOR THE DISALLOWANCE TO BE TRIGGERED. 19. IN THE CONSIDERED VIEW OF THE COURT, THIS WILL BE A TRUNCATED READING OF SECTION 14 A AND RULE 8D PARTICULARLY WH EN RULE 8D (1) USES THE EXPRESSION 'SUCH PREVIOUS YEAR'. FURTHER, IT DOES NOT ACCOUNT FOR THE CONCEPT OF 'REAL INCOME'. IT DOES N OT NOTE THAT UNDER SECTION 5 OF THE ACT, THE QUESTION OF TAXATION OF ' NOTIONAL INCOME' DOES NOT ARISE. AS EXPLAINED IN CIT V. WALFORT SHAR E & STOCK BROKERS (P.) LTD. [2010] 326 ITR 1/192 TAXMAN 211 (SC) , THE MANDATE OF SECTION 14A OF THE ACT IS TO CURB THE PR ACTICE OF CLAIMING DEDUCTION OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME BEING TAXABLE INCOME AND AT THE SAME TIME AV AIL OF THE TAX INCENTIVES BY WAY OF EXEMPTION OF EXEMPT INCOME WIT HOUT MAKING ANY APPORTIONMENT OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME. CONSEQUENTLY, THE COURT IS NOT PERSUADED TH AT IN VIEW OF THE CIRCULAR OF THE CBDT DATED 11TH MAY 2014, THE D ECISION OF THIS COURT IN CHEMINVEST LTD. (SUPRA) REQUIRES RECONSIDE RATION. ITA.376/BANG/2017 PAGE - 7 20. IN REDINGTON (INDIA) LTD. V. ADDL. CIT [2017] 392 ITR 633/77 TAXMANN.COM 257 (MAD.) , A SIMILAR CONTENTION OF THE REVENUE WAS NEGATED. THE COURT THERE DECLINED TO AP PLY THE CBDT CIRCULAR BY EXPLAINING THAT SECTION 14A IS 'CLEARLY RELATABLE TO THE EARNING OF THE ACTUAL INCOME AND NOT NOTIONAL INCOM E OR ANTICIPATED INCOME.' IT WAS FURTHER EXPLAINED THAT, 'THE COMPUTATION OF TOTAL INCOME IN TERMS OF RULE 8 D IS BY WAY OF A DETERMINATION INVOLVING DIRECT AS WELL AS INDIRECT ATTRIBUTION. THUS, ACCEPTING THE SUBMISSION OF THE REVENUE WOULD RESUL T IN THE IMPOSITION OF AN ARTIFICIAL METHOD OF COMPUTATION O N NOTIONAL AND ASSUMED INCOME. WE BELIEVE THUS WOULD BE CARRYING T HE ARTIFICE TOO FAR.' 21. THE DECISIONS IN CIT V. LAKHANI MARKETING INC. [2014] 49 TAXMANN.COM 257/226 TAXMAN 45 (MAG.) , CIT V. WINSOME TEXTILE INDUSTRIES LTD. [2009] 319 ITR 204 , CIT V. SHIVAM MOTORS (P.) LTD. [2015] 230 TAXMAN 63/55 TAXMANN.COM 262 (ALL.) HAVE ALL TAKEN A SIMILAR VIEW. THE DECISION IN TAI KISHA ENGINEERING INDIA (P.) LTD. (SUPRA) DOES NOT SPECIF ICALLY DEAL WITH THIS ISSUE. 22. IT WAS SUGGESTED BY MR. HOSSAIN THAT, IN THE CONTE XT OF SECTION 57(III), THE SUPREME COURT IN CIT V. RAJENDRA PRASA D MOODY [1978] 115 ITR 519 EXPLAINED THAT DEDUCTION IS ALLOWABLE EVEN WHERE INCOME WAS NOT ACTUALLY EARNED IN THE AY IN QUESTION. THIS ASPECT OF THE MATTER WAS DEALT WITH BY THIS CO URT IN CHEMINVEST LTD. (SUPRA) WHERE IT REVERSED THE DECISION OF THE SPECIAL BENCH OF THE ITAT BY OBSERVING AS UNDER: '20. SINCE THE SPECIAL BENCH HAS RELIED UPON THE DE CISION OF THE SUPREME COURT IN RAJENDRA PRASAD MOODY (SUPRA), IT IS CONSIDERED NECESSARY TO DISCUSS THE TRUE PURPORT OF THE SAID D ECISION. IT IS NOTICED TO BEGIN WITH THAT THE ISSUE BEFORE THE SUP REME COURT IN THE SAID CASE WAS WHETHER THE EXPENDITURE UNDER SECTION 57 (III) OF THE ACT COULD BE ALLOWED AS A DEDUCTION AGAINST DIVIDEN D INCOME ASSESSABLE UNDER THE HEAD 'INCOME FROM OTHER SOURCE S'. UNDER SECTION 57 (III) OF THE ACT DEDUCTION IS ALLOWED IN RESPECT OF ANY EXPENDITURE LAID OUT OR EXPENDED WHOLLY OR EXCLUSIV ELY FOR THE PURPOSE OF MAKING OR EARNING SUCH INCOME. THE SUPRE ME COURT EXPLAINED THAT THE EXPRESSION 'INCURRED FOR MAKING OR EARNING SUCH INCOME', DID NOT MEAN THAT ANY INCOME SHOULD IN FAC T HAVE BEEN ITA.376/BANG/2017 PAGE - 8 EARNED AS A CONDITION PRECEDENT FOR CLAIMING THE EX PENDITURE. THE COURT EXPLAINED: 'WHAT S. 57(III) REQUIRES IS THAT THE EXPENDITURE M UST BE LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF MAKING OR EARNING INCOME. IT IS THE PURPOSE OF THE EXPENDITUR E THAT IS RELEVANT IN DETERMINING THE APPLICABILITY OF S. 57(III) AND THAT PURPOSE MUST BE MAKING OR EARNING OF INCOME. S. 57(III) DOES NOT REQUIRE THAT THIS PURPOSE MUST BE FULFILLED IN ORDER TO QUALIFY THE E XPENDITURE FOR DEDUCTION. IT DOES NOT SAY THAT THE EXPENDITURE SHA LL BE DEDUCTIBLE ONLY IF ANY INCOME IS MADE OR EARNED. THERE IS IN F ACT NOTHING IN THE LANGUAGE OF S. 57(III) TO SUGGEST THAT THE PURPOSE FOR WHICH THE EXPENDITURE IS MADE SHOULD FRUCTIFY INTO ANY BENEFI T BY WAY OF RETURN IN THE SHAPE OF INCOME. THE PLAIN NATURAL CO NSTRUCTION OF THE LANGUAGE OF S. 57(III) IRRESISTIBLY LEADS TO THE CO NCLUSION THAT TO BRING A CASE WITHIN THE SECTION, IT IS NOT NECESSAR Y THAT ANY INCOME SHOULD IN FACT HAVE BEEN EARNED AS A RESULT OF THE EXPENDITURE.' 21. THERE IS MERIT IN THE CONTENTION OF MR. VOHRA T HAT THE DECISION OF THE SUPREME COURT IN RAJENDRA PRASAD MOODY (SUPR A) WAS RENDERED IN THE CONTEXT OF ALLOWABILITY OF DEDUCTIO N UNDER SECTION 57(III) OF THE ACT, WHERE THE EXPRESSION USED IS 'F OR THE PURPOSE OF MAKING OR EARNING SUCH INCOME.' SECTION 14A OF THE ACT ON THE OTHER HAND CONTAINS THE EXPRESSION 'IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME.' THE DECISI ON IN RAJENDRA PRASAD MOODY (SUPRA) CANNOT BE USED IN THE REVERSE TO CONTEND THAT EVEN IF NO INCOME HAS BEEN RECEIVED, THE EXPENDITUR E INCURRED CAN BE DISALLOWED UNDER SECTION 14A OF THE ACT.' 23. THE DECISIONS OF THE ITAT IN RATAN HOUSING DEVELOP MENT LTD. (SUPRA) AND RELAXO FOOTWEARS LTD. (SUPRA), TO THE EXTENT THAT THEY ARE INCONSISTENT WITH WHAT HAS BEEN HELD HEREI NBEFORE DO NOT MERIT ACCEPTANCE. FURTHER, THE MERE FACT THAT IN TH E AUDIT REPORT FOR THE AY IN QUESTION, THE AUDITORS MAY HAVE SUGGESTED THAT THERE SHOULD BE A DISALLOWANCE CANNOT BE DETERMINATIVE OF THE LEGAL POSITION. THAT WOULD NOT PRECLUDE THE ASSESSEE FROM TAKING A STAND THAT NO DISALLOWANCE UNDER SECTION 14 A OF THE ACT WAS CALLED FOR IN THE AY IN QUESTION BECAUSE NO EXEMPT INCOME WAS EAR NED. ITA.376/BANG/2017 PAGE - 9 RESPECTFULLY FOLLOWING THE ORDER OF THE HONBLE DE LHI HIGH COURT, WE ALLOW THE GROUND NO.2, RELATING TO DISALL OWANCE UNDER RULE 8D(2)(III). 07. GROUND NOS.3 AND 6 ARE PERTAINING TO THE AMOUNT S WRITTEN OFF AS UNDER : I) EMD OF RS.84,412/- ; AND II) BUSINESS LOSS U/S.28 R.W.S.37(1), AMOUNTING TO RS.20,02,741/-. 08. IN THIS REGARD, THE LD. AR HAS SUBMITTED THAT T HE AMOUNTS WERE WRITTEN OFF IN THE BOOKS OF ACCOUNT AS THE BALANCE WAS APPEARING AS OUTSTANDING IN THE BOOKS OF ACCOUNT. IT WAS FURTHE R SUBMITTED THAT THE AO SHOULD HAVE CONSIDERED THE FACTS THAT THE ASSESS EE OUT OF THE BUSINESS EXPEDIENCY DEPOSITED MARGIN MONEY IN THE B ANKS AND A SUM OF RS.20,02,741/- HAD NOT BEEN RECONCILED AND THERE FORE THIS MARGIN MONEY PAYMENT TO THAT EXTENT WHICH IT REMAINED UNS ETTLED/ UN RECONCILED FOR A LONG PERIOD IN THE BOOKS OF THE A SSESSEE WAS WRITTEN OFF BY THE ASSESSEE. 09. THE LD. DR SUBMITTED BEFORE US THAT THE AUTHORI TIES BELOW HAVE CONSIDERED THE ABOVE SAID FACTS AND THEREAFTER ONLY HAD DISALLOWED THE WRITE-OFF. 10. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE CIT (A) IN PARA 8.3 HAS RECORDED AS UNDER : 8.3 THE CONTENTION OF THE APPELLANT THAT IT HAS INC URRED A BUSINESS LOSS HAS TO BE SEEN IN THE PRETEXT OF THE QUESTION ITA.376/BANG/2017 PAGE - 10 THAT WHAT IS THE OBJECT OF EXPENDITURE. IF THE DE POSITS NOT RECEIVED ARE MADE IN USUAL ACTIVITY OF THE APPELLAN T AND TO EASE OUT THE BUSINESS THEN IT IS AN EXPENDITURE WHI CH IS ALLOWABLE U/S 37(1) OF IT ACT. HOWEVER THERE IS NO QUESTION OF MAINTAINING THAT AN DEPOSIT WHICH WAS AVAILABLE FOR MEETING ANY CAPITAL LIABILITY AND DUE DELAY ON INCO NVENIENCE, THE SAME WAS TREATED AS WRITTEN OFF, CAN BE ALLOWED AS A BUSINESS LOSS. THE APPELLANT COMPANY IS AN IT SOLUT IONS PROVIDER WITH ITS CORE BUSINESS ALIGNED TO ENABLE 4 CLIENTS TO SET UP AND RUN BUSINESSES AND CRITICAL APPLICATIONS THR OUGH PROVISIONING OF IT INFRASTRUCTURE AND MAINTENANCE S ERVICES AND AS REPORTED IT PROVIDES THE AFORESAID SERVICES THRO UGH STRATEGIC ALLIANCES WITH PARTNERS SUCH AS HEWLETT P ACKARD, MICROSOFT, SUN MICROSYSTEMS AND CISCO ETC. IT IS NE VER BEEN THE BUSINESS OF EXTENDING MARGIN MONEY FOR BANK GUARANT EE. THE APPELLANT HAS APPREHENDED THAT THIS MARGIN MONEY GI VEN ON HANK GUARANTEE HAS BEEN ADJUSTED WITH BANK CHARGES BY THE BANK BUT NO SUCH EVIDENCE HAS BEEN FURNISHED. FURTH ER IN CASE THE AMOUNT HAS BEEN ALREADY ADJUSTED THEN THERE IS NO SCOPE FOR WRITING IT OFF ONCE AGAIN. AT THE TIME OF HEARING, WE ENQUIRED FROM THE ASSESS EE TO FURNISH THE PROOF OF EARNEST MONEY DEPOSITED WITH VARIOUS AUTHO RITIES AS WELL AS THE BANK GUARANTEE FURNISHED FOR THE AMOUNT OF RS.2 0,02,741/-, WHICH WAS NOT RECONCILABLE AND UNSETTLED. HOWEVER, DESPI TE THE QUERY BY THE BENCH THE ASSESSEE HAS FAILED TO PRODUCE ANY EVIDEN CE SHOWING THAT EMD( EARNEST MONEY DEPOSIT) WAS DEPOSITED BY THE AS SESSEE TO THE EXTENT OF RS.84,412/-, AS WELL AS THE BANK GUARANTE E DEPOSIT BY THE ASSESSEE OF AN AMOUNT OF RS.20,02,741/-. AS THE AS SESSEE FAILED TO DISCHARGE THE PRIMARY ONUS OF PROVING THE INVESTMEN T OR DEPOSIT MADE BY IT, THEREFORE THE FACT OF THESE TWO AMOUNTS BEIN G WRITTEN OFF OR BECOMING BAD, IS NOT SUSTAINABLE IN THE EYES OF LAW . ACCORDINGLY GROUND NOS.3 AND 6 OF THE ASSESSEE ARE DISMISSED. ITA.376/BANG/2017 PAGE - 11 11. GROUND 4 OF THE ASSESSEE PERTAINS TO DISALLOWAN CE OF RS.11,59,600/- CLAIMED ON SECURITY DEPOSITS WRITTEN OFF IN THE NORMAL COURSE OF BUSINESS AS BUSINESS LOSS UNDER THE PROVI SIONS OF SECTION 28 R.W.S.37(1) OF THE ACT. IN THIS REGARD THE LD. AR HAS DRAWN OUR ATTENTION TO ANEXURE-2 OF THE PAPER BOOK WHERE AN A MOUNT OF RS.11,59,600/- WAS SHOWN AS RECEIVABLE FROM VARIOUS AUTHORITIES INCLUDING BSNL, FOOD CORPORATION, GOVERNMENT DEPART MENTS ETC., AND THE SAID AMOUNT HAS BEEN SHOWN AS RECEIVABLE IN THE ASSESSEES BOOKS OF ACCOUNT. 12. ON THE OTHER HAND THE LD. DR RELIES UPON THE OR DERS PASSED BY THE AUTHORITIES BELOW. 13. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. IT IS THE CASE OF THE ASSESSEE THAT THE ASSESSEE HAS CLAIMED THE WRITE-OFF OF VARIOUS ADVANCES AND DEPOSITS U/S. 28 R.W.S.37(1) OF THE ACT. IN VIEW THEREOF, THE JUDGMENT RELIED UPON BY T HE ASSESSEE IN THE MATTER OF TRF LTD (SUPRA), IS NOT APPLICABLE AS IN THE SAID JUDGMENT, THE HONBLE SUPREME COURT WAS CONCERNED WITH THE IN TERPRETATION OF THE PROVISIONS OF SECTION 36(1)(VII) AND IN THAT CO NTEXT IT WAS HELD BY THE HONBLE SUPREME COURT THAT IF THE BAD DEBTS WER E WRITTEN OFF IN THE BOOKS OF ACCOUNT THEN, IT IS NOT NECESSARY FOR THE ASSESSEE TO PROVE THE DEBTS BECAME ACTUAL BAD . IN THE PRESENT CASE , NO EVIDENCE WAS FILED BEFORE THE LOWER AUTHORITIES OR BEFORE US TO SHOW THAT THE LOAN ADVANCES, SECURITY DEPOSITS ETC., HAVE BECOME IRREC OVERABLE RESULTING IN BUSINESS LOSS TO THE ASSESSEE IN THE PRESENT YEA R. AS THE ONUS HAS ITA.376/BANG/2017 PAGE - 12 NOT BEEN DISCHARGED BY THE ASSESSEE SHOWING THAT TH E LOAN ADVANCES, SECURITY DEPOSITS BECAME IRRECOVERABLE DURING THE Y EAR, THEREFORE, THIS GROUND OF THE ASSESSEE FAILS AND ACCORDINGLY WE DIS MISS GROUND.4 OF THE ASSESSEE. 14. GROUND NO.7 OF THE ASSESSEE IS IN RESPECT OF DI SALLOWANCE OF RS.37,45,165/- TOWARDS THE EMPLOYEES ADVANCES WHIC H WAS WRITTEN OFF IN THE NORMAL COURSE OF BUSINESS. IN THIS REGA RD, FACTS OF THE ISSUE AS NARRATED BY THE CIT (A) AND THE FINDING GIVEN IN PARAS 10 TO 10.4, ARE AS UNDER : 10 THE AO HAS MADE AN ADDITION OF RS.37,45,165 UNDE R THE HEAD EXPENDITURE INCURRED AND SPENT ON THE PAYMENT OF ADVANCES TO THE APPELLANT'S EMPLOYEES. IN PARA 6 OF THE ORDER GIVES THE LIST OF ITEMS WRITTEN OFF UNDER THIS HEAD AND THE REASONS FOR DISALLOWANCE. THE DISALLOWANCE MADE BY AO HAS 2 DISTINCT DIVISION ONE IS IN REGARD TO THE WRITE O FF OF THE AMOUNT OF RS.15,82,181 IN THE NAME OF SRI GURURAJ ANJANEYALU WHO WAS WORKING AS SENIOR VP SALES AND H AS LEFT THE SERVICES ON 31.03.2009. BUT LATER ON HE JOINED AS ONE OF THE DIRECTORS IN A SISTER CONCERN OF THE APPELLANT COMPANY BY NAME M/S VALUE POINT KNOWLEDGE WORKS PVT. LTD., AND THAT THE APPELLANT HAS MADE INVESTMENTS IN THE SAID COMPANY AND THE TWO DIRECTORS OF THE APPELLANT COMPANY (VIZ., SRI. SAMPATH KUMAR AND SRI. R.S. SHANHAG) ARE ALSO SHARE HOLDERS IN THE SAID COMPANY ALONG WITH SRI, GURURAJ ANJANEYALU. 10.1 WITH REGARD TO THE OUTSTANDING AMOUNT RS. 15,8 2,181 IN THE CASE OF SRI.GURURURAJ ANJANEYALU, IS MADE UP OF THREE ITEMS VIZ., A) SALARY ADVANCE OUTSTANDING RS.6,39,0 93, B) CURRENT ACCOUNT BALANCE OUTSTANDING RS.4,89,093 AND C) LOAN AMOUNT OUTSTANDING RS.4,53,995. CONSIDERING THE FAC T THAT MR GURURAJ WAS AN EMPLOYEE WITH THE APPELLANT COMPANY BEFORE 2007-08 AND THAT HE LEFT THE COMPANY FOR SETTING UP SET UP HIS OWN COMPANY NAMED KNOWLEDGE WORKS PVT. LTD. IN WHIC H DIRECTORS OF THE APPELLANT COMPANY HAVE INVESTED IN SHARES ITA.376/BANG/2017 PAGE - 13 AND THE NAME WAS CHANGED TO VALUE POINT KNOWLEDGE W ORKS PVT LTD GOES TO ONLY INDICATE THAT NO TIMELY EFFECT IVE EFFORTS (WHICH WAS AVAILABLE TO THE APPELLANT COMPANY) WERE TAKEN TO RECOVER THE DUES FROM THIS OLD EMPLOYEE. THE FACT T HAT HE FELL SICK AND WENT INTO COMA AND AFTER VERY LONG HOSPITALISAT ION HE PASSED AWAY AND THEREFORE THE ADVANCE OUTSTANDING I N HIS CASE WAS NOT RECOVERABLE IS HARDLY SUFFICIENT REASO N TO WRITE OFF THE OUTSTANDING AMOUNT AS BUSINESS LOSS OF THE APPE LLANT COMPANY. IN THIS VIEW OF THE MATTER THE ADDITION MADE TO THE EXTENT OF RS. 15,82,181 IS UPHELD HOLDING THAT IT WAS PREMATURE T O WRITE OFF THE SAID DUES WITHOUT RECONCILIATION AND FOR WANT O F REASONABLE EFFORTS FOR RECOVERING THE SAID DUES 10.2 IN THIS BACKGROUND IT HAS BEEN HELD THAT THE CLAIM THAT ADVANCES GIVEN TO SAID SRI GURURAJ COULD NOT HE REC OVERED IS HELD AS NOT SUBSTANTIATED AND THE CLAIM OF RS. 15,8 2,181 HAS BEEN HELD THAT IT CANNOT HE ALLOWED AS EXPENDITURE OF THE APPELLANT EITHER U/S 36(1)(VII) OR U/S 37(1). 10.3 THE APPELLANT HAS ALSO DISALLOWED THE WRITE O FF OF THE REMAINING AMOUNT OF RS.21,62,984 TREATING THAT IT I S NOT THE BUSINESS OF THE APPELLANT TO LOAN AND ADVANCE AND T HEREFORE IF SOME LOANS ARE GIVEN TO EMPLOYEES, AND THE SAME COU LD HE RECOVERED THOUGH THE SALARIES AND WITHOUT ANY VALID EXPLANATION WHY THE SAME COULD NOT BE RECOVERED AND WHAT EFFORTS WERE MADE TO RECOVER THE SAME THE ASSESSING OFFICER HIS HELD THAT THE APPELLANT CANNOT UNILATERALLY WRI TE OFF THE LOANS AND CLAIM THE SAME AS BUSINESS EXPENDITURE. 10.4 IN THE MATTER RELATING TO EASES OF OTHER EMPL OYEES, THE AMOUNTS INVOLVED AS ADVANCES TO THE EMPLOYEES IS CL EARLY ON THE HIGHER SIDE. THESE AMOUNTS HAVE BEEN EXPLAINED AS PAYMENTS MADE TO THEM TOWARDS INCENTIVES AND LATER ON AS IT WAS FOUND THAT THEY WERE NOT ENTITLED / ELIGIBLE TO ANY INCENTIVES THE AMOUNTS PAID TO THEM REMAINED AS OUTSTANDING AMOUNT S TO HE RECOVERED IN THEIR CASES, AS THE OUTSTANDING AMOUNT S REMAINED TO BE RECOVERED AND AS IT COULD NOT BE REC OVERED BEFORE THE SAID EMPLOYEES LEFT THE APPELLANT COMPAN Y THEY HAD TO ITA.376/BANG/2017 PAGE - 14 BE WRITTEN OFF AS THEY WERE LYING FOR A LONG PERIOD OF TIME IN THEIR BOOKS THE EXPLANATION OFFERED IN THIS REGARD FOR NO N RECOVERY OR NON ADJUSTMENT OF THESE OUTSTANDING INCENTIVE AMOUN TS IS CONSIDERED AS NOT ACCEPTABLE AND IT IS NOT SUFFICIE NT CAUSE FOR EFFECTING SUCH WRITE OFF WHERE LARGE AMOUNTS ARE IN VOLVED. HENCE, THE DISALLOWANCE OF IN THEIR CASES UPHELD BY HOLDING THAT IT WAS PREMATURE TO WRITE OFF THE SAID DUES WI THOUT RECONCILIATION AND FOR WANT OF REASONABLE EFFORTS F OR RECOVERING THE SAID DUES. ACCORDINGLY, THESE GROUNDS OF APPEAL ARE DISMISSED. THE DISALLOWANCE OF RS.37,45,165/- WAS DIVIDED BY T HE CIT (A) INTO TWO PARTS ONE IS TOWARDS THE PAYMENT OF ADVANCES MA DE TO ONE GURARAJ ANJANEYALU FOR AN AMOUNT OF RS.15,82,181/- TOWARDS SALARY ADVANCES OUTSTANDING, CURRENT ACCOUNT BALANCE OUTSTANDING AN D LOAN AMOUNT OUTSTANDING AND THE OTHER AMOUNT WAS RS.21,62,985/- , AS ADVANCES GIVEN TO OTHER EMPLOYEES. 15. FIRST WE SHALL DEAL WITH THE AMOUNT OF RS.15,82 ,181/- WHICH IS THE PAYMENT MADE TO GURURAJ ANJANEYALU. IN THIS RE GARD, THE LD. AR HAS SUBMITTED THAT THE AMOUNT OF RS.15,82,181/- WAS IRRECOVERABLE AS GURURAJ ANJANEYALU HAD DIED AND BEFORE HE PASSED AW AY, HE WAS INTO THE STATE OF COMA( REMAINED HOSPITALIZED FOR LONG) AND THEREFORE THE AMOUNT OF RS.15,82,181/- THOUGH WAS OUTSTANDING BEC AME IRRECOVERABLE. 16. ON THE OTHER HAND THE LD. DR HAD SUBMITTED THAT THE ADVANCES WERE MADE AND THE SAID PERSON HAPPENS TO BE THE DIR ECTOR OF THE COMPANY IN WHICH THE ASSESSEE COMPANY HAS INVESTED, THEREFORE THE ITA.376/BANG/2017 PAGE - 15 SAME CANNOT BE SAID TO BE IRRECOVERABLE. 17. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RECORD. IT IS AN UNDISPUTED FACT THAT GURURAJ ANJANEYALU WAS W ORKING AS SR.VP (SALES) ALONG WITH TWO OF ITS DIRECTORS WHO ARE SHA REHOLDERS IN THE COMPANY. IT IS ALSO NOT DISPUTED THAT GURURAJ ANJA NEYALU FELL SICK AND WENT INTO COMA AND SUBSEQUENTLY HAD PASSED AWAY. I N OUR VIEW ONCE THE PERSON TO WHOM THE ADVANCES / LOANS ETC., WERE GIVEN HAD PASSED AWAY THEN, SAID AMOUNT BECOMES IRRECOVERABLE AND TH E ASSESSEE WAS RIGHT IN WRITING OFF THE SAID AMOUNT IN ITS BOOKS O F ACCOUNT. HOWEVER IT IS FOR THE ASSESSEE TO PROVE THAT THE ADVANCE BE CAME IRRECOVERABLE IN THE YEAR UNDER CONSIDERATION. IN THE PRESENT CASE, NO EVIDENCE WAS FILED BEFORE T HE LOWER AUTHORITIES OR BEFORE US TO SHOW THAT THE LOAN ADVANCES HAVE BE COME IRRECOVERABLE RESULTING IN BUSINESS LOSS TO THE ASSESSEE IN THE P RESENT YEAR. AS THE ONUS HAS NOT BEEN DISCHARGED BY THE ASSESSEE SHOWIN G THAT ADVANCES, BECAME IRRECOVERABLE DURING THE YEAR, THEREFORE, TH IS GROUND OF THE ASSESSEE FAILS. 18. THE NEXT LIMB OF ADDITION WAS RS.21,62,984/- WH ICH WAS GIVEN AS ADVANCES TO VARIOUS EMPLOYEES AND THOSE EMPLOYEE S HAD LEFT THE EMPLOYMENT OF THE ASSESSEE. THE DETAILS OF THE LOA NS AND ADVANCES GIVEN TO THE EMPLOYEES WERE MENTIONED IN ANNEXURE-D OF THE PAPER BOOK. THE LD. AR HAD MADE SIMILAR ARGUMENTS AS MAD E IN RESPECT TO ITA.376/BANG/2017 PAGE - 16 GROUND.4 BY RELYING UPON THE JUDGMENT OF THE HONBL E SUPREME COURT IN TRF LTD (SUPRA) AND A BOARD CIRCULAR IN THIS REG ARD. 19.. THE LD. DR HAS RELIED UPN PARA.10.4 OF THE CIT (A) ORDER (SUPRA) AND SUBMITTED THAT THE EXPLANATION GIVEN BY THE ASSESSEE IS PLAUSIBLE AND THEREFORE THIS EXPLANATION CANNOT BE ACCEPTED. 20. WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE TH ROUGH THE RECORDS. IT IS THE CASE OF THE ASSESSEE THAT THE A SSESSEE HAS CLAIMED THE WRITE-OFF OF VARIOUS ADVANCES AND DEPOSITS U/S.28 R .W.S.37(1) OF THE ACT. IN VIEW THEREOF, THE JUDGMENT RELIED UPON BY T HE ASSESSEE IN THE MATTER OF TRF LTD (SUPRA), IS NOT APPLICABLE AS IN THE SAID JUDGMENT, THE HONBLE SUPREME COURT WAS CONCERNED WITH THE IN TERPRETATION OF THE PROVISIONS OF SECTION 36(1)(VII) AND IN THAT CO NTEXT IT WAS HELD BY THE HONBLE SUPREME COURT THAT IF THE BAD DEBTS WER E WRITTEN OFF IN THE BOOKS OF ACCOUNT THEN, IT IS NOT NECESSARY FOR THE ASSESSEE TO PROVE THE DEBTS BECAME ACTUAL BAD . IN THE PRESENT CASE , NO EVIDENCE WAS FILED BEFORE THE LOWER AUTHORITIES OR BEFORE US TO SHOW THAT THE LOAN ADVANCES, SECURITY DEPOSITS ETC., HAVE BECOME IRREC OVERABLE RESULTING IN BUSINESS LOSS TO THE ASSESSEE IN THE PRESENT YEA R. AS THE ONUS HAS NOT BEEN DISCHARGED BY THE ASSESSEE SHOWING THAT TH E LOAN ADVANCES, SECURITY DEPOSITS BECAME IRRECOVERABLE DURING THE Y EAR, THEREFORE, THIS GROUND OF THE ASSESSEE FAILS AND ACCORDINGLY WE DIS MISS GROUND.7 OF THE ASSESSEE. IN THE RESULT GROUND.7 OF THE ASSESSE E IS DISMISSED. ITA.376/BANG/2017 PAGE - 17 21. GROUND.5 RAISED BY THE ASSESSEE IS IN RESPECT O F DISALLOWANCE OF RS.4,406/- CLAIMED ON ACCOUNT OF TELEPHONE DEPOSIT WRITTEN OFF IN THE NORMAL COURSE OF BUSINESS. IN THIS REGARD, THE LD. AR MADE SIMILAR ARGUMENTS AS MADE IN RESPECT GROUND.4 ABOVE. THE L D. DR RELIED ON THE ORDERS OF THE LOWER AUTHORITIES 22. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL. SINCE THE AMOUNT OF RS.4,406/- WAS TOWARDS TELEPHON E DEPOSIT WHICH WAS WRITTEN OFF, IN OUR VIEW, GROUND OF THE ASSESSE E IS REQUIRED TO BE ALLOWED AS THE SAME WAS DULY REFLECTED IN THE BOOKS OF ACCOUNT OF THE ASSESSEE. FOLLOWING THE REASONING GIVEN BY US IN G ROUND.4, WE REJECT THIS GROUND 5 AS WELL. 23. APROPOS GROUND NOS.8 AND 9 THE LD. AR HAS SUBMI TTED THAT THESE GROUNDS ARE REQUIRED TO BE ALLOWED ON THE SAME ANAL OGY GIVEN IN RESPECT OF GROUNDNO.4 (SUPRA). 24. THE LD. DR RELIES UPON THE ORDER OF THE LOWER A UTHORITIES. 25. WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE TH ROUGH THE RECORDS. IN OUR VIEW, IN PARA 11 THE CIT (A) HAS C LEARLY MENTIONED THAT THE ASSESSEE HAS NEITHER MADE ANY SPECIFIC GRO UND NOR FURNISHED ANY EVIDENCE FOR IMPAIRMENT OF THE IMMOVABLE PROPER TY RIGHTS. FOR THIS THE ASSESSEE HAS FAILED TO FURNISH ANY DETAILS IN SUPPORT OF ITS CLAIM IN GROUND NOS.8 AND 9. THEREFORE, NO INTERFERENCE IS CALLED FOR. THESE GROUNDS OF THE ASSESSEE ARE ACCORDINGLY DISMISSED. ITA.376/BANG/2017 PAGE - 18 27. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 15 TH DAY OF DECEMBER, 2017. SD/- SD- (A. K. GARODIA) (LALIT KUMAR) ACCOUNTANT MEMBER JUDICIAL M EMBER BENGALURU DATED : 15.12.2017 MCN* COPY TO: 1. THE ASSESSEE 2. THE ASSESSING OFFICER 3. THE COMMISSIONER OF INCOME-TAX 4. COMMISSIONER OF INCOME-TAX(A) 5. DR 6. GF, ITAT, BANGALORE BY ORDER SENIOR PRIVATE SECRETARY