DCIT CIR 3(1), MUMBAI V. EDELWEISS CAPITAL LTD, MUMBAI

ITA 3971/MUM/2009

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 8486 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 7 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-02-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: J
• Next Hearing Date: 19-01-2011
• Assessment Year: 2004-2005
• Appeal Filed On: 24-06-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P N DEVDASAN
• Assessee Lawyers: MANOJ PUR OHIT
• Keywords: Capital asset; Bad and doubtful debts; Revenue expenditure; Capital expenditure
• Section: 143(3); 191; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES, J, MUMBAI BEFORE SHRI R V EASWAR, PRESIDENT AND SHRI B RAMAKOTAIAH, ACCOUNTANT MEMBER I T A NO: 3971/MUM/2009 (ASSESSMENT YEAR: 2005-06) DEPUTY COMMISSIONER OF INCOME TAX APPELLANT CIRCLE 3(1), MUMBAI VS M/S EDELWEISS CAPITAL LTD., MUMBAI RESPONDENT (PAN: AAACE1461E) APPELLANT BY: SHRI P N DEVDASAN RESPONDENT BY: SHRI RAJAN R VORA AND SHRI MANOJ PUR OHIT O R D E R R V EASWAR, PRESIDENT: THIS IS AN APPEAL BY THE REVENUE AND IT RELATES TO THE ASSESSMENT YEAR 2005-06. THE ASSESSEE IS A COMPANY ENGAGED IN INVESTMENT BANKING AND DEALING AND INVESTING IN SEC URITIES. THE APPEAL ARISES OUT OF THE ASSESSMENT MADE ON 20 TH DECEMBER 2007 UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961. 2. THE FIRST GROUND IS THAT THE CIT(A) ERRED IN DEL ETING THE ADDITION OF ` 27,97,170/- MADE ON ACCOUNT OF BAD DEBTS. THE BRIE F FACTS IN THIS CONNECTION MAY BE NOTED. IN THE PROF IT AND LOSS ACCOUNT FOR THE YEAR, THE ASSESSEE WROTE OFF THE BA D DEBTS. IN THE COURSE OF THE ASSESSMENT PROCEEDINGS THE ASSESSEE W AS ASKED TO JUSTIFY THE CLAIM. THE ASSESSEE REPLIED THAT SINCE THE NET WORTH OF THE DEBTORS WAS ERODED BECAUSE OF HUGE LOSSES, THER E WAS LITTLE CHANCE OF RECOVERY AND, THEREFORE, THE ASSESSEE DEC IDED TO WRITE OFF THE DEBTS. THIS EXPLANATION WAS NOT ACCEPTABLE TO THE ASSESSING OFFICER. ACCORDING TO HIM, THE ASSESSEE FELL SHORT OF ESTABLISHING THE ITA NO: 3971/MUM/2009 2 DEBTS TO HAVE BECOME BAD. HE WAS OF THE VIEW THAT EXCEPT THE UNILATERAL ACT OF THE ASSESSEE TO WRITE OFF THE DEB TS IN ITS BOOKS OF ACCOUNT, NO CASE HAD BEEN MADE OUT TO REGARD THE DE BTS AS IRRECOVERABLE. HE THEREFORE DISALLOWED THE SAME. 3. THE ASSESSEE QUESTIONED THE DECISION OF THE ASSE SSING OFFICER BEFORE THE CIT(A). IN THE COURSE OF THE AR GUMENTS BEFORE HIM THE ASSESSEE SUBMITTED, INTER ALIA, THAT THE WR ITE OFF OF THE AMOUNT SHOULD BE ALLOWED AS LOSS ARISING OUT OF AND INCIDENTAL TO THE TRADE UNDER SECTION 28 / 29 OF THE INCOME TAX A CT, 1961. THIS SUBMISSION IS SEEN NOTED IN PARA 6(II) OF THE ORDER OF THE CIT(A). THE ASSESSEE ALSO CITED THE FOLLOWING JUDGMENTS IN SUPPORT OF ITS PLEA THAT THE WRITE OFF SHOULD BE ALLOWED AS BUSINE SS LOSS: - (1) CIT VS. S C KOTHARI (1971) 82 ITR 794 (SC) (2) CIT VS. ANJANI KUMAR CO. LTD. (2003) 259 ITR 11 4 (RAJ) (3) MINDA (HUF) LTD. VS. JCIT (2006) 101 ITD 191 (DE L) THESE AUTHORITIES ARE SEEN NOTED AT PAGE 6 OF THE I MPUGNED ORDER. THE CIT(A) THEREAFTER DISCUSSED EACH AND EVERY DEBT AGGREGATING TO ` 27,97,170/- AND HELD THAT IN VIEW OF THE JUDGMENT O F THE HONBLE BOMBAY HIGH COURT IN THE CASE OF DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION) VS. OMAN INTERNATIONAL BAN K (2009) 313 ITR 128 (BOM), THE BAD DEBTS WRITTEN OFF IN THE CAS E OF ICLEO.COM LIMITED ( ` 22,21,800/-) AND IN RESPECT OF INDIAPORT.COM ( ` 5,00,000/-) SHOULD BE ALLOWED AS A DEDUCTION. THE AGGREGATE AM OUNT ALLOWED COMES TO ` 27,21,800/-. THE OTHER BAD DEBTS AGGREGATING TO ` 75,370/- WERE HOWEVER NOT ALLOWED AS THE ASSESSEE F AILED TO GIVE ANY REASON FOR WRITING OFF THESE DEBTS. 4. THE REVENUE HAS COME IN APPEAL QUESTIONING THE D ECISION OF THE CIT(A). THERE IS A MISTAKE IN THE GROUND. THE AMOUNT OF BAD ITA NO: 3971/MUM/2009 3 DEBTS ACTUALLY ALLOWED BY THE CIT(A) WAS ONLY ` 27,21,800/- AS NOTED ABOVE. THE GROUND SHOULD ACCORDINGLY READ TH AT THE CIT(A) ERRED IN DELETING THE ADDITION OF ` 27,21,800/-. IN RESPECT OF THE BALANCE OF ` 75,370/-, CONSISTING OF THREE DEBTS, THE CIT(A) HAS ACTUALLY CONFIRMED THE DISALLOWANCE. THERE IS NO A PPEAL BY THE ASSESSEE. 5. THE REVENUE IS IN APPEAL. ITS CONTENTION THAT T HESE ARE NOT BAD DEBTS BUT ARE ADVANCES MADE TO THE TWO COMPANIE S FOR THE DEVELOPMENT OF WEBSITE AND, THEREFORE, THEY CANNOT BE ALLOWED AS A BAD DEBT UNDER SECTION 36(1)(VII) OF THE ACT, IS WE LL FOUNDED. THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT CITED SUP RA RELATES TO A CLAIM OF BAD DEBT UNDER THE ABOVE SECTION. THE ADV ANCES HAVE NOT BEEN TAKEN INTO ACCOUNT IN COMPUTING THE ASSESSEES PROFITS IN ANY OF THE EARLIER YEARS OR IN THE RELEVANT ACCOUNTING YEAR. THE PRIMARY CONDITION LAID DOWN IN SECTION 36(2)(I) NOT HAVING BEEN SATISFIED, THE CIT(A) IS NOT CORRECT IN ALLOWING THE AMOUNT AS BAD DEBT ON THE GROUND THAT THE ASSESSEE HAS WRITTEN OFF THE AMOUNT IN THE PROFIT AND LOSS ACCOUNT. 6. THE ARGUMENT OF THE LEARNED REPRESENTATIVE FOR T HE ASSESSEE, HOWEVER, IS THAT THE AMOUNT WAS ALLOWABLE AS BUSINESS LOSS UNDER SECTION 28 OF THE ACT AND, THEREFORE, TH E ULTIMATE DECISION OF THE CIT(A) SHOULD BE SUSTAINED ON THE B ASIS OF RULE 27 OF THE ITAT RULES, 1963. THOUGH THE ASSESSEE IS EN TITLED TO RELY ON THIS RULE, THERE IS NO DECISION OF THE CIT(A) WITH RESPECT TO THE ASSESSEES ALTERNATIVE SUBMISSION BEFORE HIM THAT T HE WRITE OFF SHOULD BE ALLOWED AS BUSINESS LOSS, THOUGH SUCH AN ALTERNATIVE PLEA ITA NO: 3971/MUM/2009 4 APPEARS TO HAVE BEEN TAKEN BEFORE HIM VIDE PARA 6(I I) OF HIS ORDER. THE QUESTION IS WHETHER IN THE ABSENCE OF ANY DECIS ION ON THIS ALTERNATIVE PLEA BY THE CIT(A), THE BENEFIT OF RULE 27 CAN BE EXTENDED TO THE ASSESSEE. THE LEARNED REPRESENTATI VE FOR THE ASSESSEE CITED BEFORE US THE JUDGMENT OF THE DELHI HIGH COURT IN THE CASE OF CIT VS. EDWARD KEVENTER (SUCCESSORS) P. LTD. (1980) 123 ITR 200 (DEL), IN WHICH IT WAS HELD THAT IN SUC H A SITUATION RULE 27 WOULD APPLY. RELIANCE IS ALSO PLACED ON THE JUD GMENT OF THE HONBLE BOMBAY HIGH COURT IN CIT VS. GILBERT & BARK ER MANUFACTURING CO., USA (1978) 111 ITR 529 (BOM). I N THESE JUDGMENTS IT HAS BEEN HELD THAT THE SUBJECT-MATTER OF AN APPEAL SHOULD BE UNDERSTOOD NOT IN A NARROW AND UNREALISTI C MANNER BUT SHOULD BE SO COMPREHENDED AS TO ENCOMPASS THE ENTIR E CONTROVERSY BETWEEN THE PARTIES WHICH IS TO BE ADJU DICATED UPON BY THE TRIBUNAL. THE HONBLE JUSTICE S RANGANATHAN, S PEAKING FOR THE DELHI HIGH COURT OBSERVED THAT : BUT IN A CASE WHERE THERE ARE INTER-CONNECTED GROUNDS OF APPEAL AND THEY HAVE IMPACT ON THE SAME SUBJECT-MATTER, THE SCOPE OF THE APPEAL SHOULD BE BROADLY CONSIDERED IN THE CORRECT PERSPECTIVE. WHI LE THE APPELLANT SHOULD NOT BE MADE TO SUFFER AND BE DEPRIVED OF THE BENEFIT GIVEN TO HIM BY THE LOWER AUTHORITY WHERE THE OTHER SIDE HAS NOT APPEALED, EQUALLY THE PROCEDURAL RULES SHOULD NOT BE INTERPRE TED OR APPLIED SO AS TO CONFER ON AN APPELLANT A RELIEF TO WHICH HE CANNOT BE ENTITLED IF THE POINTS DECIDED I N HIS FAVOUR ON THE SAME MATTER BY THE LOWER COURT ARE AL SO CONSIDERED AS REQUESTED BY THE RESPONDENT. IN THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT IT WAS HELD THAT THE TRIBUNAL HAS THE DISCRETION TO ALLOW ANY PARTY TO AN APPEAL, WHETHER APPELLANT OR RESPONDENT, TO RAISE A NEW POI NT OR NEW CONTENTION PROVIDED TWO CONDITIONS ARE SATISFIED, N AMELY, (I) NO NEW ITA NO: 3971/MUM/2009 5 FACTS ARE REQUIRED TO BE BROUGHT ON RECORD FOR DISP OSING OF SUCH NEW POINT; AND (II) AN OPPORTUNITY IS GIVEN TO THE OTHE R SIDE TO MEET THE POINT. IN HUKUMCHAND MILLS LTD. VS. CIT (1967) 63 ITR 232 (SC) THE SUPREME COURT HELD THAT RULE 27 OF THE ITAT RULES I S NOT EXHAUSTIVE OF THE POWERS OF THE TRIBUNAL AND IS MER ELY PROCEDURAL IN CHARACTER AND DOES NOT IN ANY WAY CIRCUMSCRIBE OR C ONTROL THE POWERS OF THE TRIBUNAL WHICH ARE COUCHED IN WIDEST POSSIBLE TERMS UNDER SECTION 254(1) OF THE ACT. IT WAS HELD THAT THE WORD THEREON APPEARING IN THE SUB-SECTION LIMITS THE JURISDICTIO N OF THE TRIBUNAL TO THE SUBJECT-MATTER OF THE APPEAL. THE WORDS PASS SUCH ORDERS THEREON AS IT THINKS FIT INCLUDE ALL THE POWERS (E XCEPT POSSIBLY THE POWER OF ENHANCEMENT) WHICH ARE CONFERRED ON THE FI RST APPELLATE AUTHORITY UNDER SECTION 250. THE SUBJECT-MATTER OF THE APPEAL, AS NOTED BY HONBLE JUSTICE RANGANATHAN IN THE JUDGMEN T OF THE DELHI HIGH COURT CITED SUPRA IS DIFFERENT FROM THE GROUND S OF APPEAL TAKEN BEFORE THE TRIBUNAL. IN THE PRESENT CASE THE SUBJE CT-MATTER OF THE APPEAL IS THE ALLOWANCE OF THE CLAIM FOR DEDUCTION OF THE AMOUNT OF ` 22,21,800/-. IT IS THEREFORE OPEN TO THE ASSESSEE, AS RESPONDENT, TO SUPPORT THE ULTIMATE DECISION OF THE CIT(A) THOU GH ON A DIFFERENT GROUND, NAMELY, THAT IT SHOULD BE ALLOWED PROPERLY AS BUSINESS LOSS. RULE 27 THUS CANNOT COME IN THE WAY OF THE ASSESSEE PUTTING FORTH ITS CLAIM, IN THE DEPARTMENTS APPEAL, THAT THE AMO UNT SHOULD BE DEDUCTED AS BUSINESS LOSS. IN THE LIGHT OF THESE J UDGMENTS, THE ASSESSEE MUST BE PERMITTED TO DEFEND THE ORDER OF T HE CIT(A) ALSO ON THE GROUND THAT THE AMOUNTS WRITTEN OFF REPRESEN TED BUSINESS LOSS UNDER SECTION 28 / 29 OF THE ACT. ITA NO: 3971/MUM/2009 6 7. TURNING TO THE QUESTION OF BUSINESS LOSS, WE HAV E CAREFULLY CONSIDERED THE FACTS AND RIVAL CONTENTIONS. THE SU BMISSION OF THE DEPARTMENT BEFORE US IS THAT THE AMOUNTS PAID FOR D EVELOPMENT OF WEBSITES CANNOT BE ALLOWED AS BUSINESS LOSS BECAUSE IF THE WEBSITES HAD BEEN SUCCESSFULLY PUT UP, THE EXPENDIT URE WOULD HAVE BEEN CLEARLY CAPITAL EXPENDITURE. IT IS SUBMITTED THAT THE FACT THAT THE WEBSITES DID NOT MATERIALIZE AND THE IDEA WAS A BANDONED BY THE ASSESSEE CANNOT CONVERT WHAT WOULD HAVE BEEN CAPITA L EXPENDITURE INTO BUSINESS LOSS. THE FACTS BROUGHT OUT AT PAGE 7 OF THE IMPUGNED ORDER SHOW THAT AN AMOUNT OF ` 50,00,000/- WAS PAID DURING THE PERIOD FROM OCTOBER 2000 TO JULY 2001 TO M/S ICLEO. COM LIMITED FOR THE DEVELOPMENT OF THE WEBSITE. SUBSEQUENTLY ALSO SEVERAL AMOUNTS WERE ADVANCED AND FROM THE LEDGER ACCOUNT T HE TOTAL ADVANCE CAME TO ` 22,21,800/-. THE DEVELOPMENT OF WEBSITE DID NOT MATERIALIZE AND ULTIMATELY THE ASSESSEE ABANDON ED THE IDEA. THE AMOUNT WAS WRITTEN OFF IN THE ACCOUNTS IN JANUA RY 2005 AS BAD DEBT, KEEPING IN VIEW THE FINANCIAL POSITION OF THE ABOVE COMPANY. A RESOLUTION OF THE BOARD OF DIRECTORS WAS PASSED T O WRITE OFF THE DEBT. THE PROFIT AND LOSS ACCOUNT, BALANCE SHEET A ND THE BOARD RESOLUTION WERE BEFORE THE CIT(A). SIMILARLY, IN T HE CASE OF INDIAPORT.COM, THE ASSESSEE HAD ADVANCED ` 5,00,000/- IN THE YEAR 2000 FOR THE DEVELOPMENT OF WEBSITE. ULTIMATELY TH E IDEA WAS ABANDONED BUT THE ASSESSEES EFFORTS TO RECOVER THE MONEY BY SENDING SEVERAL REMINDERS DID NOT YIELD ANY RESULT. IN THIS CASE ALSO THE BOARD CONSIDERED THE MATTER AND TAKING INTO ACC OUNT THE FINANCIAL POSITION OF THE ABOVE COMPANY, RESOLVED T O WRITE OFF THE ITA NO: 3971/MUM/2009 7 ADVANCE. THE ORDERS OF THE INCOME TAX AUTHORITIES THUS SHOW THAT ALL THE FACTS WHICH WERE NECESSARY FOR THE ADJUDICA TION OF THE ASSESSEES CLAIM THAT THE AMOUNT SHOULD BE ALLOWED AS BUSINESS LOSS WERE BEFORE THEM. IT WAS ON THOSE VERY FACTS THAT THE ASSESSEE HAD UNSUCCESSFULLY CLAIMED FOR ALLOWANCE OF THE AMO UNT AS BAD DEBT. ON THOSE VERY FACTS IT HAD PUT FORTH THE ALT ERNATIVE CLAIM BEFORE THE CIT(A). SINCE THE CIT(A) HAD ALLOWED TH E CLAIM AS BAD DEBT, HE HAD NO OCCASION TO ADJUDICATE UPON THE ALT ERNATIVE CLAIM OF BUSINESS LOSS. THAT HOWEVER CANNOT PRECLUDE THE AS SESSEE RESPONDENT FROM CONTENDING BEFORE US, HAVING REGARD TO THE JUDGMENTS CITED ABOVE, THAT EVEN IF THE CIT(A) IS W RONG IN ALLOWING THE CLAIM AS BAD DEBT, HIS ULTIMATE DECISION SHOULD BE UPHELD ON THE GROUND THAT THE AMOUNT REPRESENTED BUSINESS LOSS. AS ALREADY NOTED, WE HAVE PERMITTED THE ASSESSEE RESPONDENT TO PUT FORTH THIS PLEA BEFORE US SINCE NO FURTHER FACTS ARE REQU IRED TO BE FOUND AND THE DEPARTMENT WAS ALSO GIVEN THE OPPORTUNITY O F ARGUING THE QUESTION OF BUSINESS LOSS. 8. ON MERITS, THE JUDGMENT OF THE RAJASTHAN HIGH CO URT IN THE CASE OF CIT VS. ANJANI KUMAR CO. LTD. (SUPRA) SUPPO RTS THE ASSESSEES PLEA. IN THIS CASE THE ASSESSEE INTENDE D TO ACQUIRE AGRICULTURAL LAND TO SET UP A BOILER FACTORY AND MA DE ADVANCES TO THE AGRICULTURISTS FOR PURCHASE OF THE LAND. THE PROJE CT DID NOT MATERIALIZE. THE AGRICULTURISTS HOWEVER REFUSED TO REFUND THE ADVANCES. THE ASSESSEE FILED THE SUIT BUT LOST IT. THE AMOUNTS WERE WRITTEN OFF IN ITS BOOKS OF ACCOUNT AND WERE C LAIMED AS REVENUE LOSS. THE RAJASTHAN HIGH COURT HELD THAT I N THESE ITA NO: 3971/MUM/2009 8 CIRCUMSTANCES NO CAPITAL ASSET HAS BEEN ACQUIRED AN D, THEREFORE, IRRECOVERABLE ADVANCES WERE TO BE ALLOWED AS BUSINE SS LOSS. THIS JUDGMENT OF THE HIGH COURT HAS BEEN APPLIED BY THE MUMBAI BENCH OF THE TRIBUNAL IN ITS ORDER DATED 28 TH JANUARY 2010, IN ITA NO: 6847/MUM/2008, IN THE CASE OF M/S PIK PEN PRIVATE L IMITED VS. ITO. THERE ADVANCES WERE MADE FOR THE PURCHASE OF MACHIN ERY, WHICH WAS NOT SUPPLIED. THE ASSESSEE WROTE OFF THE ADVAN CES AND CLAIMED DEDUCTION AS REVENUE EXPENDITURE, WHICH CLA IM WAS ALLOWED BY THE TRIBUNAL. IN THE PRESENT CASE, WE A RE OF THE OPINION THAT EVEN IF THE WEBSITES HAD MATERIALIZED, THE EXP ENDITURE COULD NOT HAVE BEEN VIEWED AS CAPITAL EXPENDITURE BECAUSE THE WEBSITE IS PUT UP FOR THE PURPOSES OF DAY-TO-DAY RUNNING OF THE BUSINESS AND EVEN IF ONE WERE TO VIEW THAT SOME ENDURING BENEFIT IS OBTAINED BY THE ASSESSEE, THE BENEFIT CANNOT BE SAID TO ACCRUE TO THE ASSESSEE IN THE CAPITAL FIELD. A WEBSITE IS SOMETHING WHERE FULL INFORMATION ABOUT THE ASSESSEES BUSINESS IS GIVEN AND IT HELPS THE ASSESSEES CUSTOMERS IN DEALING WITH IT. A WEBSITE CONSTANTLY NEEDS UPDATING, OTHERWISE IT MAY BECOME OBSOLETE. IT HELPS IN THE SMOOTH AND EFFICIENT RUNNING OF THE DAY-TO-DAY BUSINESS. THE EXPENDITURE WOULD HAVE BEEN ALLOWABLE AS REVENUE EXPENDITURE; AS A CO ROLLARY, WHEN THE WEBSITE DID NOT MATERIALIZE, THE AMOUNTS ADVANC ED TO THE COMPANIES WHO WERE ENGAGED TO DEVELOP THE WEBSITES, WHEN THEY BECAME IRRECOVERABLE, CAN BE WRITTEN OFF AND CLAIME D AS LOSS INCIDENTAL TO THE BUSINESS. THE LOSS IS THUS ALLOW ABLE AS BUSINESS LOSS IN TERMS OF SECTION 28 OF THE ACT. WE ACCORDI NGLY UPHOLD THE ASSESSEES ALTERNATIVE PLEA. IN THE RESULT, THE UL TIMATE DECISION OF ITA NO: 3971/MUM/2009 9 THE CIT(A) IS UPHELD, THOUGH NOT AS A VALID CLAIM O F BAD DEBT BUT ON GROUNDS OF BUSINESS LOSS. THE APPEAL OF THE DEPART MENT IS ACCORDINGLY DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 15 TH FEBRUARY 2011. SD/- SD/- (B RAMAKOTAIAH) (R V EASWAR) ACCOUNTANT MEMBER PRESIDENT MUMBAI, DATED 15 TH FEBRUARY 2011 SALDANHA COPY TO: 1. M/S EDELWEISS CAPITAL LTD. 413, 4 TH FLOOR, DALAMAL TOWER FREE PRESS JOURNAL ROAD, NARIMAN POINT MUMBAI 400 021 2. DCIT, CIRCLE 3(1), MUMBAI 3. CIT-3, MUMBAI 4. CIT(A)-XXVIII, MUMBAI 5. DR J BENCH TRUE COPY BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI