MAYANK CHEMIPLAST P. LTD, MUMBAI V. DCIT RG 8(2), MUMBAI

ITA 4072/MUM/2011

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 72020 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 7 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-12-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 22-10-2013
• Assessment Year: 2007-2008
• Appeal Filed On: 18-05-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S S RANA
• Assessee Lawyers: K SHIVARAM
• Keywords: Capital asset; Business income; Question of law; Bad and doubtful debts
• Section: 143(3); 6

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH B, MUMBAI BEFORE SHRI SANJAY ARORA, ACCOUNTANT MEMBER AND DR. S.T.M. PAVALAN, JUDICIAL MEMBER ITA NO. 4072/MUM/2011 ASSESSMENT YEAR: 2007-08 MAYANK CHEMIPLAST PVT. LTD UNIT NO.3, JYOTI WIRE HOUSE, 23 A, SHAH INDUSTRIAL ESTATE, VEERA DESAI ROAD, ANDHERI (W) MUMBAI- 400 053 VS. DY. COMMISSIONER OF INCOME TAX, RG. 8(2) AAYAKAR BHAVAN MUMBAI. (APPELLANT) (RESPONDENT) PERMANENT ACCOUNT NO. :- AAACM 7702 N APPELLANT BY : SHRI K. SHIVARAM RESPONDENT BY : SHRI S.S. RANA DATE OF HEARING : 22.10.2013 DATE OF PRONOUNCEMENT : 31.12.2013 O R D E R PER DR. S.T.M. PAVALAN, JM: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAIN ST THE ORDER OF THE LD.CIT(A) -17, MUMBAI DATED 23.01.2010 FOR THE ASSE SSMENT YEAR 2007-08. 2. GROUND NO. 1 RELATES TO THE DECISION OF THE LD.C IT(A) IN CONFIRMING THE DISALLOWANCE MADE BY THE AO AGAINST THE CLAIM OF TH E ASSESSEE ON ACCOUNT OF BAD DEBTS OF RS.20,30,801/-( SIC ). 2.1 THE RELEVANT FACTS ARE THAT THE ASSESSEE, A COM PANY ENGAGED IN THE BUSINESS OF COMMISSION AGENT, WHILE DECLARING A TOTAL INCOME OF RS.36,70,640/-, IN ITS P&L ACC HAD DEBITED AN AMOUNT OF RS.20,51,601/- ON ACCOUNT OF BAD DEBTS. THE SAID BAD DEBTS CONSISTED OF THE FOLLOWING PARTIES. A) GANESH PIPES PVT LTD. RS.20,00,000/- B) P.M. ZAVERI & CO. RS. 47,800/- C) POLYMERCK LEATHER LITE RS. 3,801/- RS.20,51,601/- ITA NO. 4072/MUM/2011 MAYANK CHEMIPLAST PVT. LTD ASSESSMENT YEAR: 2007-08 2 HOWEVER, IN THE ASSESSMENT FRAMED U/S 143(3) OF THE INCOME TAX ACT, THE AO DISALLOWED THE CLAIM OF THE ASSESSEE AMOUNTING TO R S.20,00,000/- AND RS. 3,801/- IN RESPECT OF THE PARTIES GANESH PIPES PVT LTD AND POLYMERCK LEATHER LITE, RESPECTIVELY AND THEREBY ADDED AN AMOUNT OF RS.20,03,801/- TO TH E TOTAL INCOME OF THE ASSESSEE. DURING THE ASSESSMENT PROCEEDINGS, THE AO FOUND THA T THE TRANSACTIONS/SALES WITH THE PARTIES HAVE BEEN DIRECTLY EFFECTED BY M/S FINO LEX INDUSTRIES LTD AND THE ASSESSEE, BEING AN AGENT ENTITLED ONLY FOR COMMISSI ON. ACCORDING TO THE AO, NO SALE HAS BEEN EFFECTED TO THESE PARTIES IN THE EARLIER Y EARS AND THE ASSESSEE HAD NOT PROVED THAT THE DEBT HAS BECOME BAD AS THE ASSESSEE HAD DEALT WITH THE SAME PARTY IN SUBSEQUENT YEAR. THEREFORE, THE CLAIM OF BAD DEB T IS NOT ALLOWABLE. ON APPEAL, THE LD.CIT(A) CONFIRMED THE SAID DISALLOWANCE AS THE DE BT HAD NOT BEEN OFFERED AS INCOME IN THE RELEVANT YEAR AND ALSO THE ASSESSEE O FFERING THE COMMISSION AS INCOME DID NOT SATISFY THE REQUIREMENT OF SECTION 3 6 (1)(VII) OF THE ACT. AGGRIEVED BY THE IMPUGNED DECISION, THE ASSESSEE HAS RAISED THIS GROUND IN APPEAL BEFORE US. 2.2 BEFORE US, THE LD.COUNSEL FOR THE ASSESSEE HAS STATED THAT IT IS NOT IN DISPUTE THAT THE ASSESSEE PROCURES ORDERS FROM CUSTOMERS AN D FORWARD IT TO M/S FINOLEX INDUSTRIES LTD (FIL) AND FIL SUPPLIES MATERIALS DIR ECTLY TO THE CUSTOMERS. AS PER THE AGREEMENT, THE ASSESSEE HAS TO MAKE THE PAYMENTS TO FIL WITHIN 15 DAYS ON DISPATCH OF MATERIALS AND THE CUSTOMERS ARE GIVEN A CREDIT PERIOD OF 0-90 DAYS TO MAKE THE PAYMENT TO THE ASSESSEE. IN THE BOOKS OF A CCOUNT AND P&L ACCOUNT, THE ASSESSEE CREDITS ONLY THE COMMISSION INCOME ON ACCO UNT OF DISTRIBUTORSHIP AND DOES NOT SEPARATELY ACCOUNT FOR SALES AND PURCHASES. SIN CE THE COMMISSION DUE ON ACCOUNT OF DISTRIBUTORSHIP WHICH IS PART OF THE DEB T THAT HAS BEEN OFFERED AS INCOME OF THE ASSESSEE IN THE PREVIOUS YEAR, THE ASSESSEE HAS FULFILLED THE CONDITIONS FOR CLAIMING THE BAD DEBT WRITTEN OF AS PER THE PROVISI ONS OF INCOME TAX ACT. FURTHER, THE LD.COUNSEL HAS RELIED ON THE DECISION OF THE JU RISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. SHREYAS S. MORAKHIA (2012) 342 ITR 285 (BOM) IN SUPPORT OF THE CLAIM THAT WHEN THE BROKERAGE DUE FROM THE CUSTOMERS CAN BE ALLOWED FOR BAD DEBT WRITTEN OFF, NOTHING PREVENTS FROM ALLOWING OF THE COMMISSION DUE FROM THE PARTIES AS BAD DEBT WRITTEN OFF. ALTERNATIVELY, THE LD.COUN SEL FOR THE ASSESSEE HAS CLAIMED THAT THE ALLEGED BAD DEBT HAS TO BE ALLOWED AS A BU SINESS LOSS AND THEREBY RELIED ON ITA NO. 4072/MUM/2011 MAYANK CHEMIPLAST PVT. LTD ASSESSMENT YEAR: 2007-08 3 THE DECISIONS IN THE CASES OF HARSHAD J. CHOKSI VS. CIT (2012) 349 ITR 250 (BOM) AND CIT VS WACKHARDT INTERNATIONAL LTD. (2009) 314 ITR 11 (BOM). ON THE OTHER HAND, THE LD.DR HAS RELIED ON THE ORDERS OF THE AO AND LD.CIT(A). 2.3 WE HAVE HEARD BOTH THE SIDES AND PERUSED THE MA TERIAL ON RECORD ON THIS GROUND. IT IS PERTINENT TO MENTION THAT THE PERUSAL OF BOOKS OF ACCOUNT AND P&L ACCOUNT REVEALS THAT THE ASSESSEE HAS CREDITED ONLY THE COMMISSION INCOME ON ACCOUNT OF DISTRIBUTORSHIP AND DOES NOT SEPARATELY ACCOUNT FOR SALES AND PURCHASES. NOW THE LEGAL ISSUE BEFORE US IS WHETHER OR NOT THE COMMISSION DUE FROM THE PARTIES QUALIFIES FOR BAD DEBT WRITTEN OFF UNDER THE PROVIS IONS OF THE INCOME TAX ACT. IT IS RELEVANT TO MENTION THAT IN THE CASE OF CIT VS. SHREYAS S. MORAKHIA (SUPRA), THE ASSESSEE HAS ACTED AS A SUB BROKER AND PURCHASED SH ARES ON BEHALF OF HIS CLIENTS AND THE ASSESSEE HAS CREDITED ONLY BROKERAGE. WHEN THE ASSESSEE HAS CLAIMED THE BROKERAGE AMOUNT IRRECOVERABLE FROM THE CLIENTS AS BAD DEBT WRITTEN OFF, THE HONBLE HIGH COURT OF BOMBAY HAS HELD THAT THE BROKERAGE FROM THE TRANSACTION OF THE PURCHASE OF SHARES WHICH HAS BEEN TAXED IN THE HAND S OF THE ASSESSEE AS BUSINESS INCOME, THE DEBT OR PART THEREOF FULFILS THE REQUIR EMENTS OF S. 36(1)(VII) R.W.S. 36(2). CONSIDERING THE FACTS OF THE CASE AND THE RATIO, WE ARE NOT INCLINED TO ACCEPT THE REASONING OF THE LD.CIT(A) THAT THE SAID CASE IS DI STINGUISHABLE FROM THE PRESENT CASE ONLY ON THE GROUND THAT THE PRESENT ASSESSEE I S NOT ENGAGED IN THE BUSINESS OF SHARE BROKER AND THEREBY DECIDING THAT THE RATIO IS NOT APPLICABLE TO THE FACTS OF THE ASSESSEE. CONSIDERING THE NATURE OF THE BUSINESS OF THE PRESENT ASSESSEE EARNING COMMISSION INCOME, THE RATIO IN THE CASE OF CIT VS. SHREYAS S. MORAKHIA, IN OUR VIEW, IS SQUARELY APPLICABLE TO THE CASE OF THE ASSESSEE AND THE COMMISSION DUE FROM THE PARTIES QUALIFIES FOR BAD DEBT WRITTEN OFF UNDER THE PROVISIONS OF THE INCOME TAX ACT. THEREFORE, THE AUTHORITIES BELOW ARE NOT J USTIFIED IN DISALLOWING/CONFIRMING THE DISALLOWANCE OF BAD DEBT WRITTEN OFF AGAINST TH E CLAIM OF THE ASSESSEE ON THIS GROUND AND THE DISALLOWANCE/ADDITION MADE ON THIS C OUNT IS DELETED. RESULTANTLY, GROUND NO. 1 IS ALLOWED. 3. GROUND NO. 2 IS NOT PRESSED BY THE ASSESSEE AND HENCE THE SAME REQUIRES NO ADJUDICATION. ITA NO. 4072/MUM/2011 MAYANK CHEMIPLAST PVT. LTD ASSESSMENT YEAR: 2007-08 4 4. GROUND NO 3 DEPENDS ON THE ADJUDICATION OF THE I SSUES RAISED IN GROUNDS NO 4 AND THE ADDITIONAL GROUNDS. IN GROUND NO.4, THE ASS ESSEE HAS AGITATED THE ACTION OF THE LD.CIT(A) PARTLY CONFIRMING THE ADDITION TO THE EXTENT OF RS.2,49,411/- OF RS.6,66,400/- MADE BY THE AO UNDER THE HEAD INCOME FROM HOUSE PROPERTY ON THE BASIS OF ESTIMATION OF NOTIONAL INCOME OF THE PROPE RTIES WHICH HAD NOT BEEN LET OUT. SUBSEQUENTLY, DURING THE COURSE OF THE PROCEEDINGS, VIDE LETTER DATED 18.06.2012, THE ASSESSEE HAS RAISED SOME ADDITIONAL GROUNDS WHI CH READ AS UNDER: 1. THE LD.CIT(A) FAILED TO APPRECIATE THAT AS THE P ROPERTIES WERE HELD TO BE READY TO BE LET OUT, S. 23(1)(C) IS APPLICABLE AND HENCE THE RENT RECEIVED SHOULD BE TAKEN AS NIL FOR COMPUTING INCOME FROM HO USE PROPERTY. 2. THE LD. AO AND CIT(A) ERRED IN NOT REDUCING MUNI CIPAL TAX PAID FROM GROSS RENT AS PER S. 23 OF THE I.T. ACT 1961 WHILE COMPUT ING INCOME FROM HOUSE PROPERTY. SINCE THE SAID ADDITIONAL GROUNDS INVOLVE QUESTION OF LAW WHICH EMERGES FROM THE FACTS ON RECORDS IN THE ASSESSMENT PROCEEDINGS, WE ADMIT THE SAME AND PROCEED TO ADJUDICATE THE ISSUE INVOLVED IN ALL THE SAID GROUN DS. 4.1 BRIEFLY STATED, THE ASSESSEE WAS OWNER OF 7 FLA TS AND ONE GALA WHICH ACCORDING TO THE ASSESSEE WERE PURCHASED FOR MAKING PROFIT BY SELLING THEM. OUT OF 7 FLATS, 2 JOINT FLATS AT OSHIWARA WERE GIVEN ON RE NT OF RS.25,000/- AND THE INCOME THEREON WAS OFFERED AS INCOME FROM HOUSE PROPERTY. ON SALES OF FLATS, ASSESSEE OFFERED THE INCOME THEREON AS INCOME FROM BUSINESS AND PROFESSION. IN THE ASSESSMENT FRAMED, THE AO COMPUTED NOTIONAL RENTAL INCOME OF RS.6,66,400/- IN RESPECT OF ITS PROPERTIES BEING 8.50% OF THE MARKET VALUE AS ON 01.04.2006 AND THEREBY MADE THE ADDITION UNDER THE HEAD INCOME FR OM HOUSE PROPERTY BY TREATING THE PROPERTIES AS CAPITAL ASSETS AGAINST THE ASSE SSEE CLAIMING THE SAME AS BUSINESS ASSETS HELD AS STOCK IN TRADE. ACCORDING TO THE AO , DUE TO THE FACT THAT THE ASSESSEE HAS SHOWN THE FLATS UNDER THE HEAD OTHER FIXED ASS ETS, THE CONTENTION OF THE ASSESSEE THAT THE FLATS WERE PART OF BUSINESS ASSE TS OR STOCK IN TRADE WAS NOT ACCEPTABLE. ON APPEAL, THE LD.CIT(A) WHILE OBSERVIN G THAT INCOME FROM HOUSE PROPERTY WOULD BE APPLICABLE IN THE CASE OF THE AS SESSEE, HELD THAT 8.5% SHOULD BE TAKEN OF AMOUNT INVESTED AND NOT MARKET VALUE AS PE R DECISION OF TRIBUNAL IN THE CASE OF ITO VS. CHEM MECH (P) LTD. (2002) 83 ITD 427 (MUM) (TRIB). AGGRIEVED BY ITA NO. 4072/MUM/2011 MAYANK CHEMIPLAST PVT. LTD ASSESSMENT YEAR: 2007-08 5 THE IMPUGNED DECISION, THE ASSESSEE HAS RAISED THES E GROUNDS IN THE APPEAL BEFORE US. 4.2 HAVING HEARD BOTH THE SIDES AND PERUSED THE MAT ERIAL ON RECORD, IT IS PERTINENT TO MENTION THAT THE PERUSAL OF THE ASSESS MENT ORDERS MADE U/S 143(3) R.W.S. 254 FOR AYS 1996-97 AND 1997-98 REVEALS THAT THE AO HAS ACCEPTED THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF PURCHASING A ND SELLING OF FLATS, GALAS, OFFICES, GO-DOWNS. ALSO, THE PERUSAL OF THE AUDITED BALANCE SHEETS AVAILABLE ON RECORD INDICATES THAT THE ASSESSEE IN EARLIER YEARS AND IN SUBSEQUENT YEARS HAS DISCLOSED THE PROFIT EARNED ON SALE OF PROPERTIES AS BUSINES S INCOME AND THE SAME HAS BEEN ASSESSED AS BUSINESS INCOME. THESE FACTS SUGGEST THAT THE ASSESSEE, BESIDES COMMISSION BUSINESS, IS ALSO ENGAGED IN BUSINESS OF BUYING AND SELLING OF PROPERTIES AND THE ASSESSEE IS HOLDING THE FLATS AS BUSINESS A SSETS WHICH ARE NOT DISPUTED. IN VIEW OF THAT MATTER, WE ARE INCLINED TO ACCEPT THE CONTENTION OF THE ASSESSEE THAT THE FLATS HAVE BEEN HELD AS STOCK IN TRADE. THE R EASONING OF THE AUTHORITIES BELOW IN NOT ACCEPTING THE CONTENTION OF THE ASSESSEE THAT T HE FLATS WERE PART OF BUSINESS ASSETS HELD AS STOCK IN TRADE DUE TO THE REASON THAT THE ASSESSEE HAS SHOWN THE FLATS UNDER THE HEAD OTHER FIXED ASSETS IS NOT JU STIFIED AS THE TREATMENT IN THE BOOKS OF ACCOUNTS, IN OUR VIEW CANNOT BE THE SOLE BASIS F OR ARRIVING AT A CONCLUSION AS HELD BY THE HONBLE APEX COURT IN THE CASE OF TUTICORIN ALKALI CHEMICALS & FERTILIZERS LTD. CIT (1997) 227 ITR 172 (SC). IT IS RELEVANT TO STATE T HAT THE DECISION OF THE HIGH COURT OF GUJARAT IN THE CASE OF CIT VS. NEHA BUILDERS PVT. LTD. (2008) 296 ITR 661 SUPPORTS THE PROPOSITION THAT IF PROPERTY IS USED A S STOCK-IN-TRADE, THEN SAID PROPERTY WOULD BECOME OR PARTAKE CHARACTER OF STOCK AND ANY INCOME DERIVED FROM STOCK WOULD BE INCOME FROM BUSINESS AND NOT INCOME FRO M PROPERTY. HAVING NOTED THE LEGAL POSITION THAT THE PROVISIONS OF SEC 23 AND 24 OF THE INCOME TAX ACT ARE NOT APPLICABLE TO THE BUSINESS ASSETS HELD AS STOCK IN TRADE, WE ARE OF THE CONSIDERED VIEW THAT THE AUTHORITIES BELOW ARE NOT JUSTIFIED I N ADDING THE NOTIONAL RENT COMPUTED IN RESPECT OF THE PROPERTIES UNDER THE HEA D INCOME FROM HOUSE PROPERTY AND THE SAME STANDS DELETED. RESULTANTLY, GROUND NO 4 IS ACCORDINGLY ALLOWED AND GROUND NO 3 & ADDITIONAL GROUND NO 1 ARE DISMISSED AS THE SAME HAVE BECOME INFRUCTUOUS. ITA NO. 4072/MUM/2011 MAYANK CHEMIPLAST PVT. LTD ASSESSMENT YEAR: 2007-08 6 5. APROPOS ADDITIONAL GROUND NO 2 AS REGARDS THE IS SUE OF NOT REDUCING MUNICIPAL TAX PAID FROM GROSS RENT AS PER SECTION 23 OF THE A CT WHILE COMPUTING INCOME FROM HOUSE PROPERTY , THE AO IS DIRECTED TO ALLOW THE MUNICIPAL TAX ACTUAL LY PAID BY THE ASSESSEE IN RESPECT OF THE PROPERTIES AGAINST WHICH THE ASSESSEE HAS ALREADY OFFERED THE INCOME UNDER THE HEAD INCOME FROM HOUSE PROPER TY EXCLUDING THE MUNICIPAL TAX PAID IN RESPECT OF THE PROPERTIES WHICH HAVE BEEN H ELD AS STOCK IN TRADE. WE DIRECT AND ORDER ACCORDINGLY. ACCORDINGLY, ADDITIONAL GROU ND NO 2 IS PARTLY ALLOWED. 6. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS TREATED AS PARTLY ALLOWED . ORDER PRONOUNCED IN THE OPEN COURT ON THIS 31 ST DAY OF DECEMBER, 2013. SD/- SD/- (SANJAY ARORA) (DR. S.T.M. PAVALAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED: 31.12.2013. *SRIVASTAVA COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR B BENCH //TRUE COPY// BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.