ITO 2(2)(1), MUMBAI V. INFINITY INDIA ADVISORS P.LTD, MUMBAI

ITA 4115/MUM/2013

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 8184 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 4 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-10-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I
• Next Hearing Date: 16-10-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 22-05-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ASGHAR ZAIN V P
• Keywords: Bad and doubtful debts
• Section: 143(3)

Judgement Text

, INCOME TAX APPELLATE TRIBUNAL MUMBAI - I BENCH MUMBAI . . , / ! ! ! ! , '# '# '# '# BEFORE S/SH. H.L.KARWA,PRESIDENT & RAJENDRA,ACCOUNTANT MEMBER /. ITA NO. 4115/MUM/2013, $ $ $ $ % % % % / ASSESSMENT YEAR 2008-09 ITO 2(2)(1) AAYAKAR BHAVAN, R.NO. 549, 5TH FLOOR, M.K.ROAD, MUMBAI-400020 VS. INFINITY INDIA ADVISORS PVT. LTD. 605/608, 'A' WING, CRYSTAL PLAXA, NEW LINK ROAD, OP. CITI MALL, ANDHERI (W),MUMBAI-400053 PAN: AAACE8141K ( &' / APPELLANT) ( ()&' / RESPONDENT) &' * / APPELLANT BY : SHRI ASGH AR ZAIN V.P. ()&' + * / RESPONDENT BY : NONE $ $ $ $ + ++ + ,- ,- ,- ,- / DATE OF HEARING : 16-10-2014 ./% + ,- / DATE OF PRONOUNCEMENT : 16 - 10- 2014 $ $ $ $ , 1961 + ++ + 254 )1( ,0, ,0, ,0, ,0, '1 '1 '1 '1 ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) PER RAJENDRA,AM: CHALLENGING THE ORDER DATED 14.02.2013 OF THE CIT(A )-5,MUMBAI, ASSESSING OFFICER (AO) HAS RAISED FOLLOWING GROUNDS OF APPEAL: 1.THE ORDER OF THE CIT(A) IS OPPOSED TO LAW AND FA CTS OF THE CASE. 2.ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) HAS ERRED IN ALLOWING THE CLAIM OF BAD DEBTS THEREBY OVERLOOKING THE FACT THAT THE ASSESSEE HAS NOT BEEN ABLE TO ESTABLISH THAT THE AMOUNT WAS NOT RECOVERABLE AN D THE DEBT HAD ACTUALLY BECOME BAD. 3.ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) HAS ERRED IN ALLOWING THE CLAIM OF BAD DEBTS OVERLOOKING THE FAC T THAT THE ASSESSEE WAS ENTITLED TO RECOVER THE AMOUNT SPENT THROUGH THE PROCEEDS OF THE FILM EXHIB ITION AND THEREFORE THE CLAIM OF WRITE OFF IS PREMATURE. 4.ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) HAS ERRED IN ALLOWING THE CLAIM OF BAD DEBTS OVERLOOKING THE FAC T THAT THE GUARANTEE GIVEN BY THE ASSESSEE IS BACKED BY REINSURANCE BY AN INSURANCE COMPANY. 5.FOR THESE AND OTHER GROUNDS THAT HEARING, THE DEC ISION OF THE CIT(A) ASSESSING OFFICER BE RESTORED. 2 .ASSESSEE-COMPANY,ENGAGED IN THE BUSINESS OF FINANC IAL CONSULTANCY,FILED ITS RETURN OF INCOME ON 27.11.2010 DECLARING INCOME OF RS. 28,05,735/- T HE AO FINALISED THE ASSESSMENT U/S 143(3) R.W.S.147 OF THE ACT ON 28.12.2011 DETERMINING THE INCOME OF THE ASSESSEE AT RS. 65.70 LAKHS. DURING THE ASSESSMENT PROCEEDINGS, AO FOUND THAT TH E ASSESSEE HAD WRITTEN OFF CERTAIN AMOUNT DURING THE YEAR UNDER APPEAL,THAT IT HAD RECEIVED R EIMBURSEMENT OF EXPENDITURE IN RESPECT OF PRODUCTION OF FILM FROM THE PRODUCER.AO HELD THAT T HE ASSESSEE HAD NOT CARRIED OUT ANY BUSINESS ACTIVITY,THAT ON BEHALF OF PRODUCER ASSESSEE HAD CA RRIED OUT THE PRODUCTION ACTIVITY AND HAD RECEIVED THE REIMBURSEMENT EXPENDITURE,THAT THERE W AS NO QUESTION OF CLAIMING BAD DEBT AS ASSESSEE HAD TO RECEIVE THE AMOUNT FOR THE EXPENDIT URE INCURRED BY ASSESSEE ON BEHALF OF PRODUCER.REFERRING TO SECTION 36(1)(VII) R.W.S. 36( 2) OF THE ACT, THE AO HELD THAT THE ASSESSEE 2 ITA NO. 4115/MUM/2013 INFINITY INDIA ADVISORS PVT. LTD. HAD TO SATISFY THE BASIC TWO CONDITIONS FOR WRITING OFF OF BAD DEBTS. HE DIRECTED THE ASSESSEE TO EXPLAIN AS TO WHY THE B AD DEBTS WRITTEN OFF, AMOUNTING TO RS. 55,42,819/- SHOULD NOT BE ADDED TO ITS TOTAL INCOME . THE ASSESSEE FILED HIS DETAILED REPLY IN THIS REGARD. AFTER CONSIDERING THE SAME,THE AO HELD THAT THE COMMON UNDERSTANDING OF THE BAD DEBTS WAS THE DEBT WHICH WAS WORTHLESS OR THE DEBT WHICH WAS NOT WORTHY OF BEING RECOVERED, THAT THE ALLOWABILITY OF CLAIM ON ACCOUNT OF BAD DEBTS PRESU PPOSED THE EXISTENCE OF BAD DEBT BEING BAD IN NATURE, THAT THE ASSESSEE HAD FAILED TO PROVE THAT THE SAID DEBT HAD BECOME BAD IN THE YEAR UNDER CONSIDERATION, THAT IT WAS NOT SUFFICIENT TO CLAIM THE DEBT TO BE BAD MERELY ON THE BASIS OF WRITING IT OFF IN THE BOOKS OF ACCOUNTS,THAT THE AO HAD TO BE CONVINCED THAT THE DEBIT HAD BECOME BAD. THE AO REFERRED TO THE CIRCULAR NO. 551 DATED 23.01 .1990 ISSUED BY THE CBDT. REFERRING TO THE AMENDED PROVISIONS OF SECTION 36, HE HELD THAT THE INTERPRETATION THAT AFTER THE AMENDMENT BAD DEBT WAS ALLOWABLE,AS AND WHEN THE ASSESSEE WROTE I T OFF IN THE BOOKS OF ACCOUNTS,WAS NOT ACCEPTABLE.FINALLY,HE MADE A DISALLOWANCE OF RS. 55 ,42,819/- AND ADDED IT BACK TO THE TOTAL INCOME OF THE ASSESSEE. 3. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE FILE D AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY (FAA).BEFORE HIM, IT WAS ARGUED THAT THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF FILM COMPLETION GUARANTEE ,THAT THE ASSESSEE WOULD PROVIDE GUARANTEE FOR COMPLETION OF FILMS, THAT THE PRODUCERS WERE ABLE TO RAISE THE FINANCE R EQUIRED BY THEM FROM FINANCERS FOR PRODUCING THE FILMS,THAT IN THE CASE OF THE FILM WAS NOT COMP LETED BY THE STIPULATED TIME OR THERE WAS A COST OVERRUN THE ASSESSEE AS A GUARANTOR WAS RESPONSIBLE TO COMPLETE THE FILM, THAT THE GUARANTEE PROVIDED BY IT WAS CONSIDERED RELIABLE IN THE BUSIN ESS FRATERNITY, THAT THE GUARANTEE GIVNE BY IT WAS REINSURED BY AN INSURANCE COMPANY, THAT THE ASS ESSEE WAS RESPONSIBLE ON THE FAILURE OF THE PRODUCER TO COMPLETE THE FILM,THAT WHEN THE FILM WA S COMPLETED THE ASSESSEE WAS ENTITLED TO RECOUP THE INVESTMENT MADE IN THE BUSINESS FOR COMP LETING THE FILM FROM THE PROCEEDS TO THE FILM AND TO RECOVER THE EXPENDITURE INCURRED WITH I NTEREST, THAT THE ASSESSEE HAD ENTERED INTO AN AGREEMENT FOR FILM COMPLETION BOND ON 27.07.2006 WI TH M/S SOHAIL MAKLAI ENTERTAINMENT PVT. LTD.(SMEPL) AND M/S SEVEN ENTERTAINMENT PVT. LTD. ( SEL) FOR PRODUCTION OF FILMS THAT THE TOTAL COST OF PRODUCTION WAS BUDGETED AT RS. 12.51 CRORES, THAT THE FILM DELIVERY DATE WAS FIXED ON 31.03.2007, THAT THE ASSESSEE WAS ENTITLED TO TH E FILM COMPLETION GUARANTEE FEES OF RS. 61.73 CRORES, THAT FOR FINANCING THE FILM PRODUCERS APPRO ACHED THE IDBI BANK FOR FINANCING THE FILM, THAT THE IDBI BANK AGREED TO FINANCE RS. 6.25 CRORE S FOR THE FILM ON CONDITION PROVIDING THE GUARANTEE, THAT THE ASSESSEE AGREED TO PROVIDE A CO MPLETION GUARANTEE TO IDBI, THAT IT AGREE INTO A COMPLETION GUARANTEE AGREEMENT WITH IDBI ON 25.11.2 006, THAT AGAINST TOTAL RECEIVABLE AMOUNTING TO RS. 1084.46 LAKHS THE ASSESSEE COULD R ECOVER ONLY AN AMOUNT OF RS. 1025.03 LAKHS FROM THE FILM PRODUCER, THAT THE FILM PRODUCER DID NOT PAY THE BALANCE AMOUNT DESPITE FOLLOW UP AND BASED ON HIS INABILITY TO COMPLETE THE FILM. AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE, T HE FAA HELD THAT THE ASSESSEE HAD SHOWN FILM COMPLETION BOND/GUARANTEE FEES AMOUNTING TO RS. 42. 30 LAKHS BESIDES LOAN PROCESSING FEES/ INCOME FROM MUTUAL FUNDS/INTEREST INCOME,THAT THE P RODUCER FAILED TO OWNER HIS COMMITMENT AND DEFAULT IN REPAYMENT OF BANK LOANS, THAT THE INVOKI NG OF GUARANTEE GIVEN BY THE BANK INTEREST OF RECOVERING THE LOAN FROM THE PRODUCER WAS THE INDIC ATION THAT THE AMOUNT DUE FROM THE PRODUCER WAS NOT RECOVERABLE, THAT THE ASSESSEE WRITTEN OF T HE DEBTS DUE AS BAD DEBTS AMOUNTING TO RS. 55.43 LAKHS. FAA REFERRED TO THE SPECIAL BENCH OF T HE TRIBUNAL DELIVERED IN THE CASE OF SHREYAS S MORKHAI(ITA NO. 3374/MUM/2014). HE FINALLY HELD T HAT THE ASSESSEE HAD SHOWN THE FILM COMPLETION BOND/GUARANTEE/INTEREST INCOME/INVESTMEN T IN INVOKING GUARANTEE, THAT THE AMOUNT OF RS.55.43 LAKHS, THEREFORE, WAS NOT RECOVERED FROM T HE PRODUCER, THAT THE EXPENDITURE WAS ALLOWABLE AS BED DEBTS U/S 36(1)(VII) R.W.S. 36(2) OF THE ACT. 4. BEFORE US, DEPARTMENTAL REPRESENTATIVE (DR)SUPPORTE D THE ORDER OF THE AO.NOBODY APPEARED 3 ITA NO. 4115/MUM/2013 INFINITY INDIA ADVISORS PVT. LTD. ON BEHALF OF THE ASSESSEE,AS STATED EARLIER. WE HAV E PERUSED THE MATERIAL AVAILABLE ON RECORD.THE UNDISPUTED FACTS ARE THAT THE ASSESSEE HAD GIVEN GU ARANTEE TO THE IDBI BANK,THAT IT COULD NOT RECOVER RS.55.43 LAKHS FROM THE PRODUCER,THAT IT HA D WRITTEN OFF THE AMOUNT IN DISPUTE IN THE BOOKS OF ACCOUNTS,THAT THE AO WAS OF THE OPINION TH AT MERE WRITING OFF OF DEBT IN THE P & L ACCOUNT WAS NOT SUFFICIENT FOR CLAIMING DEDUCTION,T HAT THE FAA HAD ALLOWED THE APPEAL OF THE ASSESSEE. WE FIND THAT THE ISSUE OF WRITING OFF OF BAD DEBTS WAS SUBJECT MATTER OF LOT OF LITIGATION.IN OUR OPINION,THE DECISION OF THE HONBLE SUPREME COURT D ELIVERED IN THE CASE OF THE T.R.F.LTD. (323ITR397)HAS FINALLY SETTLED THE ISSUE.THE HONBL E COURT HAD EXAMINED THE IMPORT OF THE AMENDMENT IN SECTION 36(1)(VII) OF THE ACT, WITH EF FECT FROM APRIL 1,1989, AND HELD AS UNDER : 'AFTER THE AMENDMENT OF SECTION 36(1)(VII) OF THE INCOME-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 IRR ECOVERABLE : IT IS ENOUGH IF THE BAD DEBT IS WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE.' WE FIND THAT IN THE MATTER OF MAKPAR EXPORTS PVT. L TD.THE HONBLE MP HIGH COURT (352ITR 401)HAS ALSO DEALT WITH ISSUE OF BAD DEBTS.IN THAT MATTER THE AO HELD THAT NO REASONS WERE GIVEN BY THE ASSESSEE FOR WRITING OFF THE BAD DEBT IN THE BOOKS OF ACCOUNT.IN THE APPELLATE PROCEEDINGS, THE FAA HELD THAT UNDER SECTION 36(1)(VII) IT WAS NOT NECESSARY FOR THE ASSESSEE TO GIVE REASONS AND WRITING OFF THE AMOUNT ITSELF WAS SUFFICIENT.TH E TRIBUNAL UPHELD THE ORDER OF THE FAA. HONBLE HIGH COURT,FOLLOWING THE JUDGMENT OF T.F.R. LIMITED(SUPRA),DISMISSED THE APPEAL FILED BY DEPARTMENT.SIMILARLY IN THE CASE OF MADHAV MARBL ES AND GRANITES, HONBLE RAJASTHAN HIGH COURT(362ITR647)HAS DELIBERATED UPON THE ISSUE OF B AD DEBTS AND HAS DECIDED IT,FOLLOWING THE JUDGMENT OF T.R.F.LIMITED (323 ITR 397),AS UNDER: THE REQUIREMENT ON THE PART OF THE ASSESSEE TO EST ABLISH THAT DEBTS IN QUESTION HAD REALLY TURNED BAD IS NO LONGER THERE AFTER APRIL 1, 1989, AND IT IS LEFT TO THE BUSINESS PRUDENCE OF THE ASSESSEE TO CLAIM SUCH DEDUCTION BY MERELY WRITING OFF SUCH ADV ANCES OR DEBTS AS BAD DEBTS IN THE BOOKS OF ACCOUNT AND DEBITING THEM TO THE PROFIT AND LOSS AC COUNT OF THE ASSESSEE. OTHERWISE, ANY ADVANCE WOULD HAVE BEEN SHOWN ON THE ASSETS SIDE OF THE BAL ANCE-SHEET UNDER THE HEADING OF 'DEBTORS' OR 'LOANS AND ADVANCES' UNDER THE HEADING 'CURRENT ASS ETS'. SO LONG AS THE OUTSTANDING DEBT IS SHOWN ON THE ASSETS SIDE OF THE BALANCE-SHEET, THER E IS NO QUESTION OF CLAIMING IT AS DEDUCTION FROM PROFITS AND GAINS OF THE BUSINESS COMPUTED UND ER SECTION 28. IT IS ONLY WHEN SUCH A DEBT OR ADVANCE TURNS BAD OR IS IRRECOVERABLE IN THE OPINIO N OF THE ASSESSEE, IN TERMS OF THE AMENDMENT IN LAW AFTER APRIL 1, 1989, THAT A SIMPLE BOOK KEEP ING ENTRY TO WRITE IT OFF IS ENOUGH TO ENTITLE THE ASSESSEE TO CLAIM SUCH A DEDUCTION THAT IT WAS NO T IN DISPUTE FROM THE SIDE OF THE REVENUE THAT SUCH A WRITE OFF ENTRY WAS MADE BY THE ASSESSE E IN ITS BOOKS OF ACCOUNT. IF EVEN AFTER SUCH WRITING OFF, THE ASSESSEE RECOVERS ANY PART OF SUCH BAD DEBTS, IT WILL NATURALLY BE CREDITED AGAIN IN HIS BOOKS AND WILL BE TAXED IN THE YEAR OF ITS R ECEIPT ON RECOVERY. THEREFORE, GOING INTO THE REQUIREMENT OF THE ASSESSEE NOT ESTABLISHING THE NE XUS OF THE ADVANCES WITH HIS BUSINESS AND COMPUTATION OF PROFIT IN THE RELEVANT YEAR IS OF NO CONSEQUENCE AND THE POSITION OF LAW AS OBTAINING PRIOR TO APRIL 1, 1989, HAS SIMPLY CHANGE D AFTER APRIL 1, 1989. FROM THE ABOVE,IT IS CLEAR THAT W.E.F.01.04.1989 TH E ASSESSEE HAS TO WRITE THE BAD DEBTS OFF IN THE P & L ACCOUNT ONLY AND IT HAS NOT TO JUSTIFY THE WR ITING OFF OF THE BAD DEBTS.IN THE MATTER UNDER CONSIDERATION THE ONLY OBJECTION OF THE AO WAS THAT THE ASSESSEE HAS NOT GIVEN ANY JUSTIFICATION FOR WRITING OFF OF BAD DEBTS.IN OUR OPINION,THE STA ND TAKEN BY THE AO WAS NOT AS PER LAW.AS THEE ASSESSEE COULD NOT RECOVER THE AMOUNT SO IT HAD WRI TTEN OFF IT IN THE BOOKS OF ACCOUNTS.SO,IN OUR OPINION THE ORDER OF THE FAA DOES NOT SUFFER FROM A NY LEGAL OR FACTUAL INFIRMITY.RESPECTFULLY, FOLLOWING THE ABOVE MENTIONED DECISIONS,WE UPHOLD T HE ORDER OF THE FAA. AS A RESULT APPEAL FILED BY THE AO STANDS DISMISSED. 2,3 2,3 2,3 2,3 $4, $4, $4, $4, VF/KDKJH VF/KDKJH VF/KDKJH VF/KDKJH 5 5 5 5 '6 '6 '6 '6 + ++ + 0 0 0 0 V VV V #7, #7, #7, #7, + ++ + , , , , 89 8989 89 . 4 ITA NO. 4115/MUM/2013 INFINITY INDIA ADVISORS PVT. LTD. ORDER PRONOUNCED IN THE OPEN COURT ON 16TH OCTOBER,2014. '1 + ./% : ;'$ 16 VDVWCJ VDVWCJ VDVWCJ VDVWCJ , 2014 / + 0 < SD/- SD/- ( . . / H.L.KARWA ) ( ! / RAJENDRA ) / PRESIDENT '# '# '# '# /ACCOUNTANT MEMBER / MUMBAI, ;'$ /DATE: 16 . 10.2014 SK '1 '1 '1 '1 + ++ + (,> (,> (,> (,> ?>%, ?>%, ?>%, ?>%, / COPY OF THE ORDER FORWARDED TO : 1. ASSESSEE / &' 2. RESPONDENT / ()&' 3. THE CONCERNED CIT (A) / @ A , 4. THE CONCERNED CIT / @ A 5. DR I BENCH, ITAT, MUMBAI / >B0 (,$ , . . . 6. GUARD FILE/ 0 2 )>, )>, )>, )>, (, (,(, (, //TRUE COPY// '1$ / BY ORDER, C / 8 DY./ASST. REGISTRAR , /ITAT, MUMBAI