THE DCIT CC-47, MUMBAI V. M/S. MAHINDRA GESCO DEVELOPERS LTD, MUMBAI

ITA 4129/MUM/2007

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 49304 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 1 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-06-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 15-10-2009
• Assessment Year: 2003-2004
• Appeal Filed On: 30-05-2007
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SATBIR SINGH
• Assessee Lawyers: D P BAPAT
• Keywords: Business income; Depreciation; Business expenditure; Retrospective amendment; Bad and doubtful debts; Revenue expenditure; Capital expenditure
• Section: 37(1); 54; 28; 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES, B, MUMBAI BEFORE SHRI R V EASWAR, PRESIDENT AND SHRI T R SOOD, ACCOUNTANT MEMBER I T A NOS: 4291/MUM/2007 AND 5658/MUM/2007 (ASSESSMENT YEAR: 2003-04) MAHINDRA GESCO DEVELOPERS LTD., MUMBAI APPELLANT (PAN: AAACG8904C) VS ASSISTANT COMMISSIONER OF INCOME TAX RESPONDENT CENTRAL CIRCLE 47, MUMBAI I T A NO: 4129/MUM/2007 (ASSESSMENT YEAR: 2003-04) DEPUTY COMMISSIONER OF INCOME TAX APPELLANT CENTRAL CIRCLE 47, MUMBAI VS MAHINDRA GESCO DEVELOPERS LTD., MUMBAI RESPONDENT ASSESSEE BY: MR D P BAPAT REVENUE BY: MR SATBIR SINGH O R D E R R V EASWAR, PRESIDENT: THESE ARE THREE APPEALS ALL RELATING TO THE ASSESS MENT YEAR 2003-04. ITA NO: 4291/MUM/2007 IS AN APPEAL BY THE ASSESSEE ARISING OUT OF THE ASSESSMENT PROCEEDINGS AND ITA N O: 4129/MUM/2007 IS A CROSS APPEAL BY THE DEPARTMENT. ITA NO: 5658/MUM/2007 IS AN APPEAL BY THE ASSESSEE ARISING OUT OF RECTIFICATION PROCEEDINGS INITIATED UNDER SECTION 1 54 OF THE INCOME TAX ACT, 1961. SINCE ALL THE APPEALS WERE HEARD TO GETHER THEY ARE DISPOSED OF BY A SINGLE ORDER FOR THE SAKE OF CONVE NIENCE. 2 ITA NO: 4291/MUM/2007 ITA NO: 5658/MUM/2007 ITA NO: 4129/MUM/2007 2. WE MAY FIRST TAKE UP THE ASSESSEES APPEAL IN IT A NO: 4291/MUM/2007. THE ASSESSEE HAS FILED A CHART EXPL AINING THE GROUNDS AND HAS ALSO FILED PAPER BOOKS WHICH HAVE B EEN TAKEN INTO CONSIDERATION IN DISPOSING OF THE APPEAL. 3. THE FIRST GROUND IS THAT THE CIT(A) ERRED IN HOL DING THAT HIRE CHARGES OF OPERATING COMMERCIAL COMPLEXES AND BUSIN ESS CENTRES WAS ASSESSABLE AS INCOME FROM HOUSE PROPERTY AND NO T AS INCOME FROM BUSINESS AS CLAIMED BY THE ASSESSEE. THE BRIE F FACTS IN CONNECTION WITH THIS ISSUE MAY BE NOTED. THE ASSES SEE DERIVED INCOME FROM LEASING OF COMMERCIAL PREMISES AS BUSIN ESS CENTRE AND ALSO INCOME FROM OPERATION OF COMMERCIAL COMPLE XES. THE BUSINESS CENTRE REVENUES REPRESENT RECEIPTS DERIVED OUT OF COMMERCIAL BUILDINGS OWNED BY THE ASSESSEE, NAMELY, GE CENTRE AT DELHI. THE ASSESSEE PROVIDES SPECIALIZED FACILI TIES / SERVICES TO THE CUSTOMERS INCLUDING PLUSH FURNISHED EXECUTIVE S UITS, STATE OF THE ART COMPUTERS, TELEPHONES, INTEGRATED SERVICES, VID EO CONFERENCING, WELL TRAINED SECRETARIAL STAFF, ETC. THE COMMERCIA L COMPLEXES OWNED BY THE ASSESSEE ARE ALSO IN GE CENTRE DELHI A ND GE PLAZA PUNE. THESE COMPLEXES ARE ULTRA MODERN STATE OF TH E ART COMMERCIAL BUILDINGS PROVIDING HIGH-TECH AMENITIES AND SERVICES SUCH AS CENTRAL AIR-CONDITIONING, 100% POWER BACKU P, PARKING FACILITIES, WATER FILTRATION PLANT WITH CHLORINATIO N, SECURITY SYSTEM BY PROVIDING CCTV CAMERAS, ETC. IN THE RELEVANT ACCOU NTING YEAR ENDED ON 31.03.2003, THE INCOME FROM BUSINESS CENTR ES WAS ` 1,96,99,176/- AND THE INCOME FROM OPERATION OF COMM ERCIAL 3 ITA NO: 4291/MUM/2007 ITA NO: 5658/MUM/2007 ITA NO: 4129/MUM/2007 COMPLEXES WAS ` 18,74,96,089/- AS PER THE PROFIT AND LOSS ACCOUNT. THE ASSESSING OFFICER TOOK THE VIEW THAT SINCE THE ASSESSEE WAS THE OWNER OF THE COMMERCIAL COMPLEXES FROM WHICH THE AFORESAID INCOME WAS DERIVED, THE INCOME SHOULD BE PROPERLY ASSESSED UNDER SECTION 22 OF THE ACT, UNDER THE HEA D INCOME FROM HOUSE PROPERTY AND NOT AS BUSINESS INCOME AS CLAIM ED BY THE ASSESSEE. THE ASSESSEE FILED DETAILED SUBMISSIONS WHICH ARE REPRODUCED IN PARAGRAPH 4 OF THE ASSESSMENT ORDER A ND IN THESE SUBMISSIONS STRONGLY OBJECTED TO THE ASSESSMENT OF THE INCOME AS PROPERTY INCOME. THE ASSESSING OFFICER OVERRULED T HE ASSESSEES OBJECTIONS PREDOMINANTLY RELYING ON THE FACT THAT T HE ASSESSEE OWNED THE PROPERTIES AND BROUGHT THE INCOME TO ASSE SSMENT UNDER THE HEAD INCOME FROM HOUSE PROPERTY. THIS RESULT ED IN SEVERAL ITEMS OF EXPENSES CLAIMED BY THE ASSESSEE AGAINST T HE INCOME BEING RESTRICTED AND THIS IS THE CENTRAL DISPUTE BE TWEEN THE PARTIES. THE DISALLOWANCE WAS UPHELD BY THE CIT(A), WHO FOLL OWED HIS OWN ORDERS FOR THE ASSESSMENT YEARS 2001-02 AND 2002-03 . 4. AT THE TIME OF THE HEARING BEFORE US, THE LEARNE D REPRESENTATIVE FOR THE ASSESSEE STATED THAT THE ORD ERS OF THE CIT(A) ON THIS POINT FOR THE ASSESSMENT YEARS 2001-02 AND 2002-03 HAVE BEEN REVERSED BY THE TRIBUNAL IN ITA NOS: 3404/MUM/ 2006 AND 3711/MUM/2007 AND THAT THE TRIBUNAL HAS HELD, ACCEP TING THE ASSESSEES CONTENTION, THAT THE INCOME IN QUESTION SHOULD BE ASSESSED AS BUSINESS INCOME AS CLAIMED BY THE ASSES SEE. COPIES OF THESE ORDERS HAVE BEEN FILED IN THE PAPER BOOK. IT IS ALSO 4 ITA NO: 4291/MUM/2007 ITA NO: 5658/MUM/2007 ITA NO: 4129/MUM/2007 SUBMITTED THAT THIS GROUND OF THE ASSESSEE IS CONNE CTED WITH GROUND NOS: (I) TO (III) TAKEN BY THE DEPARTMENT IN ITS APPEAL. IT WAS THEREFORE SUBMITTED THAT THE ORDERS OF THE TRIBUNAL FOR THE EARLIER YEARS SHOULD BE FOLLOWED SINCE THE FACTS AND THE CO NTROVERSY ARE THE SAME FOR THE YEAR UNDER APPEAL. 5. WE HAVE CONSIDERED THE FACTS AND WE HAVE ALSO RE SPECTFULLY PERUSED THE EARLIER ORDERS OF THE TRIBUNAL ON THE I SSUE. IN ITA NO: 3404/MUM/2006 (ASSESSMENT YEAR 2001-02), ORDER DATE D 06.04.2009, THIS ISSUE WAS DECIDED BY THE TRIBUNAL AFTER EXAMINING IN DETAIL THE SERVICES AND AMENITIES RENDERED BY TH E ASSESSEE ALONG WITH THE HIRING OUT OF THE SPACE IN THE COMMERCIAL COMPLEXES AND BUSINESS CENTRES AND ULTIMATELY IT WAS HELD THAT TH E TERMS OF THE HIRING AGREEMENTS SHOW THAT THE COMMERCIAL COMPLEXE S AND BUSINESS CENTRES REQUIRED CONTINUOUS MANAGEMENT, MO NITORING AND ATTENTION FOR PROVISION OF COMPLEX SERVICES AND THU S THE FACTS LED TO THE FINDING THAT THE PROPERTIES IN QUESTION WERE BUSINESS ASSET S OF THE ASSESSEE AND THESE ASSETS WERE EXPLOITED BY THE ASSESSEE FOR THE PURPOSE OF BUSINESS BY RENDERING COMPLEX COMMER CIAL AND BUSINESS SERVICES AS PROPERTY MANAGERS IN A SYSTEMA TIC AND ORGANIZED MANNER AND THEREFORE, THE CASE OF THE ASS ESSEE MERITS ACCEPTANCE . THERE IS NO DISPUTE BEFORE US THAT THE FACTS AN D THE CONTROVERSY FOR THE YEAR UNDER APPEAL ARE IDENTICAL . THEREFORE, RESPECTFULLY FOLLOWING THE AFORESAID ORDER OF THE T RIBUNAL, WHICH WAS FOLLOWED BY THE TRIBUNAL IN ITS ORDER DATED 21.07.2 009 IN ITA NO: 3711/MUM/2007 FOR THE ASSESSMENT YEAR 2002-03 (COPY FILED IN THE 5 ITA NO: 4291/MUM/2007 ITA NO: 5658/MUM/2007 ITA NO: 4129/MUM/2007 PAPER BOOK), WE DIRECT THE ASSESSING OFFICER TO ASS ESS THE INCOME FROM THE COMMERCIAL COMPLEXES AND THE BUSINESS CENT RES AS PROFITS AND GAINS OF THE BUSINESS AS CLAIMED BY THE ASSESSE E. CONSEQUENTLY, THE ASSESSEE WILL BE ALLOWED EXPENSES AS WELL AS DEPRECIATION AS CLAIMED BY IT AND A SIMILAR DIRECTI ON HAS BEEN GIVEN BY THE TRIBUNAL IN ITS ORDER FOR THE ASSESSMENT YEA R 2002-03 IN PARAGRAPH 2.3 OF THE ORDER. THE GROUND OF THE ASSE SSEE IS ACCORDINGLY ALLOWED. THIS DIRECTION TAKES CARE OF THE DEPARTMENTS GROUND NOS: (I) TO (III). 6. THE SECOND GROUND IS THAT THE CIT(A) ERRED IN CO NFIRMING THE DISALLOWANCE OF THE WRITE OFF OF ` 1,07,12,354/- AS CAPITAL EXPENDITURE. IT IS CLAIMED IN THE GROUND THAT THE CIT(A) FAILED TO APPRECIATE THE FACT THAT THE SUM COMPRISED OF MONEY ADVANCED TO AND EXPENDITURE INCURRED FOR THE JOINT VENTURE COMP ANY FOR THE PURPOSE OF INFRASTRUCTURE BUSINESS AND HENCE CONSTI TUTED BUSINESS EXPENDITURE. IT HAS ALSO BEEN CLAIMED IN THE ALTER NATIVE THAT THE DEDUCTION SHOULD IN ANY CASE BE ALLOWED AS BUSINESS LOSS. 7. THE BRIEF FACTS IN THIS CONNECTION MAY BE NOTICE D. THE ASSESSEE ADVANCED MONIES TO THE TUNE OF ` 1,07,12,354/- TOWARDS BUILDING A SOFTWARE TECHNOLOGY PARK (STP) AT MOHALI NEAR CHANDIGARH. ACCORDING TO THE ASSESSEE, THE CREATIO N OF THE STP WAS A BUSINESS VENTURE WITH THE PUNJAB STATE ELECTR ONICS DEVELOPMENT CORPORATION LIMITED. UNFORTUNATELY THI S PROJECT DID NOT TAKE OFF AND WAS ABANDONED DUE TO COMMERCIAL CONSID ERATIONS. SINCE THE MONEY ADVANCED TOWARDS DEVELOPMENT EXPENS ES WERE 6 ITA NO: 4291/MUM/2007 ITA NO: 5658/MUM/2007 ITA NO: 4129/MUM/2007 NOT REIMBURSED BY THE CORPORATION, THE ASSESSEE WRO TE OFF THE SAME IN ITS BOOKS OF ACCOUNT AND CLAIMED IT AS BUSI NESS EXPENDITURE DEDUCTIBLE IN COMPUTING THE BUSINESS IN COME. IN THE COURSE OF THE ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER CALLED UPON THE ASSESSEE TO JUSTIFY THE CLAIM, IN RESPONSE TO WHICH THE ASSESSEE WROTE A LETTER TO THE ASSESSING OFFICER EX PLAINING THE FACTS AND THIS LETTER IS REPRODUCED IN PARAGRAPH 7.2 OF T HE ASSESSMENT ORDER. IN SHORT, IT WAS EXPLAINED THAT THE ORIGINA L PROPOSAL FOR ENTERING INTO A JOINT VENTURE WITH THE GOVERNMENT O F PUNJAB DID NOT PROCEED FORWARD AND HAD TO BE TERMINATED ON ACCOUNT OF RAPID CHANGES IN THE INFORMATION TECHNOLOGY AND THE TECHN OLOGY ENABLED SERVICES. IT WAS POINTED OUT THAT THE INIT IAL INVESTMENT WAS MADE IN TERMS OF THE SHAREHOLDERS AGREEMENT DATED 2 5.10.2000 AND THE TERMINATION AGREEMENT WAS SIGNED ON 24.09.2 002, WHICH DATE FELL WITHIN THE RELEVANT ACCOUNTING YEAR. IT WAS ALSO EXPLAINED THAT THE MONIES ADVANCED BY THE ASSESSEE WERE USED FOR INCURRING VARIOUS ITEMS OF EXPENDITURE IN RELATION TO THE BUS INESS OF JOINT VENTURE COMPANY. THE BREAK-UP OF THE EXPENDITURE A ND THE CORRESPONDENCE AND DOCUMENTATION IN CONNECTION WITH THE SAME WERE FILED BEFORE THE ASSESSING OFFICER. IT WAS CO NTENDED THAT THE BUSINESS OF INFRASTRUCTURE PROJECTS WAS IN KEEPING WITH THE MAIN OBJECTS OF THE COMPANY AS PER THE MEMORANDUM AND AR TICLES OF ASSOCIATION AND THE INCOME FROM SUCH PROJECTS FORME D PART OF OPERATIONAL INCOME AND INCLUDED IN THE BUSINESS SEG MENT OF THE COMPANY. THE ASSESSEE ALSO DREW THE ATTENTION OF T HE ASSESSING 7 ITA NO: 4291/MUM/2007 ITA NO: 5658/MUM/2007 ITA NO: 4129/MUM/2007 OFFICER TO OTHER INFRASTRUCTURE PROJECTS UNDERTAKEN BY IT AND SUBMITTED THAT SINCE IT WAS IN THE BUSINESS OF UNDE RTAKING INFRASTRUCTURE PROJECTS, THE LOSS ARISING ON ACCOUN T OF NON-RECOVERY OF THE AMOUNT OF ` 1,07,12,354/- SHOULD BE ALLOWED AS A REVENUE LOSS UNDER SECTION 28 OF THE ACT. 8. THE ASSESSEES CLAIM WAS NOT ACCEPTED BY THE ASS ESSING OFFICER. HE NOTED THAT THE ASSESSEE HAD DEBITED TH E AMOUNT AS PROJECT EXPENSES WRITTEN OFF ON TERMINATION OF JOI NT VENTURE AS PER SCHEDULE 22 TO THE PROFIT AND LOSS ACCOUNT. HE FUR THER NOTED THAT AS PER THE AUDIT REPORT IN FORM NO.3CD, THE EXPENDI TURE WAS IN THE NATURE OF CAPITAL EXPENDITURE DEBITED TO THE PROFIT AND LOSS ACCOUNT. THE ASSESSING OFFICER THEREAFTER REFERRED TO THE JU DGMENT OF THE CALCUTTA HIGH COURT IN THE CASE OF KANORIA CHEMICAL S AND INDUSTRIES LIMITED VS. CIT (1995) 78 TAXMAN 455 (CA L), IN WHICH IT WAS HELD THAT EXPENDITURE INCURRED IN CONNECTION WI TH THE STARTING OF A NEW PROJECT WHICH HAS BEEN ABANDONED IS A CAPITAL EXPENDITURE. IN THIS VIEW, HE DISALLOWED THE ASSESSEES CLAIM FO R DEDUCTION OF ` 1,07,12,354/-. 9. ON APPEAL, THE CIT(A) REFERRED TO SEVERAL JUDGME NTS INCLUDING THE JUDGMENT OF THE HONBLE BOMBAY HIGH C OURT IN THE CASE OF FANCY CORPORATION LIMITED VS. CIT (1986) 16 2 ITR 827 (BOM) AND HELD THAT MERE FAILURE OF THE PROJECT OR SCHEME DOES NOT RESULT IN A CHANGE IN THE NATURE OF THE EXPENDITURE . ACCORDING TO HIM, IF THE INHERENT NATURE OF THE EXPENDITURE IS C APITAL AND IF SUCH EXPENDITURE WOULD HAVE BEEN CAPITALIZED IN THE EVEN T OF THE 8 ITA NO: 4291/MUM/2007 ITA NO: 5658/MUM/2007 ITA NO: 4129/MUM/2007 SUCCESSFUL COMPLETION OF THE PROJECT, THE SAID EXPE NDITURE CANNOT BE CLAIMED AS BUSINESS LOSS MERELY BECAUSE THE PROJECT DID NOT FRUCTIFY OR PROVED TO BE A FAILURE. IN THIS VIEW OF THE MAT TER HE UPHELD THE DISALLOWANCE. THE ASSESSEE IS IN FURTHER APPEAL BE FORE THE TRIBUNAL. OUR ATTENTION WAS DRAWN TO THE SHAREHOLD ERS AGREEMENT AT PAGE 5 OF THE PAPER BOOK. PARTICULAR ATTENTION WAS DRAWN TO CLAUSE (2) WHICH IS TITLED PROJECT OWNERSHIP AND I MPLEMENTATION. IN SUB-PARA (C), UNDER THE HEAD BUSINESS OBJECTIVE S, IT WAS STATED IN THE AGREEMENT AS FOLLOWS: - (C) BUSINESS OBJECTIVES : THE MAIN BUSINESS OF THE PROJECT COMPANY SHALL BE TO SET UP AN INTEGRATED TECHNOLOGY PARK. THE PROJECT COMPANY SHALL DEVELOP THE PARK AS A WORLD CLASS FACILITY STRIVING TO BECOME THE PREFERRED DESTINATION FOR GLOBAL IT COMPANIES AS WELL AS OTHER KNOWLEDGE BASED, NON POLLUTING COMPANIES DESIROUS OF SETTING UP OPERATIONS IN INDIA. APART FROM CATERING TO THE PARTICULAR REQUIREMENTS OF THE SOFTWARE AND KNOWLEDGE BASED INDUSTRIES, THE PARK WOULD ALSO OFFER FACILITIES OF AN EXPORT PROCESSING ZONE FOR COMPANIES SPECIALIZING IN SOFTWARE AND HARDWARE EXPORTS AND FOR OTHER UNITS OPERATING FROM THE PARK. RELYING ON THIS CLAUSE IT WAS ARGUED BEFORE US THAT THE EXPENDITURE SHOULD BE ALLOWED AS REVENUE EXPENDITURE OR BUSINES S LOSS. OUR ATTENTION WAS ALSO DRAWN TO CLAUSE (5) OF THE AGREE MENT. SUB-PARA (D) STATES THAT UNLESS OTHERWISE MUTUALLY AGREED TO THE CONTRARY IN WRITING, THE PUNJAB CORPORATION AND THE ASSESSEE SH ALL BE ALLOTTED SHARES IN THE NEW COMPANY IN THE RATIO OF 11 : 89 A ND THAT THE ASSESSEE SHALL DEPOSIT THE MONEY INTO THE NEW COMPA NYS BANK 9 ITA NO: 4291/MUM/2007 ITA NO: 5658/MUM/2007 ITA NO: 4129/MUM/2007 ACCOUNT AS ITS SHARE OF THE EQUITY IN PROPORTION TO THE EQUITY CAPITAL OF THE CORPORATION IN ACCORDANCE WITH THE SCHEDULE DRAWN UP. IT WAS CONTENDED ON BEHALF OF THE ASSESSEE THAT THE AS SESSING OFFICER HAS NOT DISPUTED THE FACTS AND THAT THE DISALLOWANC E IS BASED ONLY ON LEGAL GROUNDS. AT OUR QUERY FOR PLACING FURTHER FACTS IN CONNECTION WITH THE ASSESSEES GROUND, THE LEARNED REPRESENTATIVE FOR THE ASSESSEE STATED THAT HE HAS NO FURTHER FACT S AVAILABLE WITH HIM, BUT REQUESTED THAT THE MATTER MAY BE SENT BACK TO THE ASSESSING OFFICER FOR FRESH DECISION IN THE LIGHT O F THE FACTS WHICH MAY BE FOUND ON FURTHER ENQUIRY. 10. ON THE OTHER HAND, THE LEARNED CIT DR STRONGLY RELIED ON THE FINDINGS OF THE CIT(A) IN PARAGRAPH 5 OF HIS ORDER. IN THIS PARAGRAPH THE CIT(A) HAS OBSERVED THAT THE ADVANCE OF ` 1,07,12,354/- HAS BEEN CONVERTED INTO SHARE APPLICATION MONEY BY THE ASSESSEE AND THIS AMOUNT HAS BEEN WRITTEN OFF AS IMPAIRMENT IN VALUE OF THE ASSET IN THE PROFIT AND LOSS ACCOUNT AND HAS BEEN DISALLOWED BY THE ASSESSING OFFICER. IT WAS THUS POINTED OUT THA T THE ASSESSEE DID NOT SUFFER ANY LOSS CONTRARY TO WHAT HAS BEEN PUT F ORTH BEFORE THE DEPARTMENTAL AUTHORITIES AS WELL AS BEFORE THE TRIB UNAL, BUT WHATEVER MONIES HAVE BEEN SPENT BY THE ASSESSEE IN CONNECTION WITH THE STP, HAVE BEEN CONVERTED INTO SHARE APPLIC ATION MONEY WHICH CAN IN NO WAY BE ALLOWED AS REVENUE EXPENDITU RE OR BUSINESS LOSS. 11. WE HAVE CAREFULLY CONSIDERED THE FACTS AND THE RIVAL SUBMISSIONS. THE SHAREHOLDERS AGREEMENT WAS ENTERE D INTO ON 10 ITA NO: 4291/MUM/2007 ITA NO: 5658/MUM/2007 ITA NO: 4129/MUM/2007 31.10.2000 BETWEEN PUNJAB STATE ELECTRONICS DEVELOP MENT CORPORATION LIMITED AND MAHINDRA REALTY & INFRASTRU CTURE DEVELOPERS LIMITED, A PUBLIC LIMITED COMPANY. THIS PUBLIC LIMITED COMPANY AMALGAMATED WITH THE ASSESSEE COMPANY AND T HUS THE ASSESSEE COMPANY STEPPED INTO THE SHOES OF THIS COM PANY. THE PUNJAB STATE ELECTRONICS DEVELOPMENT CORPORATION LI MITED AND MAHINDRA REALTY & INFRASTRUCTURE DEVELOPERS LIMITED HAD SIGNED A MEMORANDUM OF UNDERSTANDING (MOU) ON 26.05.1999 SHO WING THE INTENT OF BOTH THE PARTIES TO COMMISSION A FEASIBIL ITY STUDY AND PREPARE A DETAILED FEASIBILITY REPORT TO EXAMINE TH E COMMERCIAL AND TECHNICAL VIABILITY OF THE PROJECT OF SETTING UP AN INTEGRATED STP IN MOHALI AND ITS STRUCTURING TO ENSURE COMMERCIAL SUC CESS AND TO EXPLORE THE TYPE AND QUALITY OF FACILITIES TO MAKE THE PROJECT ATTRACTIVE TO POTENTIAL CUSTOMERS. THE PREAMBLE FU RTHER RECORDS THAT THE FEASIBILITY STUDY SHOWED THAT THE PROJECT WAS C OMMERCIALLY AND TECHNICALLY VIABLE AND THEREFORE THE PARTIES DECIDE D TO PROCEED WITH THE PHASED DEVELOPMENT OF THE PROJECT. THE PREAMBL E FURTHER SAYS THAT THE PUNJAB STATE ELECTRONICS DEVELOPMENT CORPO RATION LIMITED AND MAHINDRA REALTY & INFRASTRUCTURE DEVELOPERS LIM ITED ARE DESIROUS OF RECORDING THE TERMS AND CONDITIONS GOVE RNING THEIR RESPECTIVE INVESTMENTS IN THE JOINT VENTURE COMPANY TO BE FORMED TO IMPLEMENT THE PROJECT. THE SHAREHOLDERS AGREEMENT THEREAFTER PROCEEDED TO REDUCE THE TERMS AND CONDITIONS INTO W RITING. THEREAFTER, ON AMALGAMATION, THE ASSESSEE COMPANY S TEPPED INTO THE SHOES OF MAHINDRA REALTY & INFRASTRUCTURE DEVEL OPERS LIMITED. 11 ITA NO: 4291/MUM/2007 ITA NO: 5658/MUM/2007 ITA NO: 4129/MUM/2007 THE ASSESSEE COMPANY INVESTED A TOTAL OF ` 1,12,12,414/- IN THE JOINT VENTURE COMPANY WHICH WAS KNOWN AS MAHINDRA K NOWLEDGE PARK (MOHALI) LIMITED [MKPML, FOR SHORT]. OUT OF T HIS AMOUNT, A SUM OF ` 5,00,060/- WAS CONVERTED INTO SHARE CAPITAL IN THE MKPML BY ISSUE OF 50,000 6% EQUITY SHARES OF ` 10/- EACH. THIS AMOUNT WAS ALSO WRITTEN OFF AND CLAIMED IN THE PROFIT AND LOSS ACCOUNT AS PROVISION FOR DIMINUTION IN THE VALUE OF INVESTMENT . THE BALANCE OF ` 1,07,12,354/- WAS CONVERTED INTO SHARE APPLICATION MONIES BY MKPML. THE ASSESSEE WROTE OFF THIS AMOUNT ALSO, AS STATED EARLIER, AS IMPAIRMENT IN THE VALUE OF THE ASSET IN THE PROFIT AND LOSS ACCOUNT. THE ASSESSING OFFICER DISALLOWED BOT H THE AMOUNTS AND THE CIT(A) ALSO CONFIRMED THE DISALLOWANCE OF B OTH THE AMOUNTS. IN GROUND NO: 2 BEFORE US, THE ASSESSEE H AS QUESTIONED THE DISALLOWANCE OF ` 1,07,12,354/- AND IN GROUND NO: 3 HAS QUESTIONED THE DISALLOWANCE OF ` 5,00,060/-. HOWEVER, AT THE TIME OF THE HEARING BEFORE US, GROUND NO: 3 WAS NOT PRES SED. HOWEVER, GROUND NO: 2 WAS ARGUED AND WE HAVE ALREADY REFERRE D TO THE SUBMISSIONS OF BOTH THE SIDES. ON A CAREFUL CONSID ERATION OF THE RIVAL CONTENTIONS, WE ARE UNABLE TO FIND FAULT WITH THE ACTION OF THE DEPARTMENTAL AUTHORITIES. THERE IS NO LOSS TO THE ASSESSEE BECAUSE THE AMOUNT OF ` 1,07,12,354/- HAS BEEN CONVERTED INTO SHARE APPLICATION MONIES BY MKPML. IN THE PROFIT AND LOS S ACCOUNT ALSO THE ASSESSEE HAS BEEN EQUIVOCAL IN CLAIMING THE AMO UNT AS IMPAIRMENT IN THE VALUE OF THE ASSET. IT WOULD T HUS APPEAR THAT THE ASSESSEE ITSELF HAS TREATED THE AMOUNT AS REPRESENT ING AN ASSET 12 ITA NO: 4291/MUM/2007 ITA NO: 5658/MUM/2007 ITA NO: 4129/MUM/2007 AND THIS IS ALSO NOT WRONG IN OUR OPINION, BECAUSE THE AMOUNT HAS BEEN CONVERTED INTO SHARE APPLICATION MONIES BY MKP ML, IN RECOGNITION OF THE ASSESSEE HAVING SPENT THE AMOUNT FOR THE PURPOSES OF THE JOINT VENTURE COMPANY. IT IS THERE FORE PREMATURE TO SAY THAT THE AMOUNT SPENT WAS LOST TO THE ASSESSEE SO THAT IT CAN BE ALLOWED AS BUSINESS LOSS UNDER SECTION 28 OF THE AC T. FOR THE SAME REASON THERE IS ALSO NO EXPENDITURE IN THE SENSE OF THE AMOUNT HAVING BEEN SPENT BY THE ASSESSEE ONCE AND FOR ALL. THE AMOUNT HAS BEEN TREATED BY MKPML AS SHARE APPLICATION MONE Y AND IF THE SHARES ARE NOT ALLOTTED TO THE ASSESSEE, THE APPLIC ATION MONEY HAS TO BE RETURNED WITH INTEREST STIPULATED BY THE RELE VANT PROVISION IN THE COMPANIES ACT. EITHER WAY THERE IS NO EXPENDIT URE OR LOSS WHICH CAN BE ALLOWED TO THE ASSESSEE IN COMPUTING I TS BUSINESS INCOME. WE ACCORDINGLY CONFIRM THE DISALLOWANCE OF ` 1,07,12,354/- AND DISMISS THE GROUND. 12. GROUND NO: 3, WHICH IS AGAINST THE DISALLOWANCE OF THE PROVISION FOR DIMINUTION IN THE VALUE OF INVESTMENT OF ` 5,00,060/- IS DISMISSED AS NOT PRESSED. 13. WE NOW TURN TO GROUND NO: 4, WHICH IS THAT THE CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE OF REVERSAL OF INCOM E OF ` 15,50,15,000/- BEING INTEREST THAT WAS ACCOUNTED AS INCOME, THOUGH IN REALITY IT NEVER ACCRUED TO THE ASSESSEE. 14. THE BRIEF FACTS IN THIS CONNECTION MAY NOW BE N OTICED. THE ASSESSEE CLAIMED THE AFORESAID AMOUNT AS PROVISION FOR IMPAIRMENT IN THE VALUE OF ASSETS AND DEBITED THE PROFIT AND L OSS ACCOUNT WITH 13 ITA NO: 4291/MUM/2007 ITA NO: 5658/MUM/2007 ITA NO: 4129/MUM/2007 THE PROVISION. WHEN ASKED TO EXPLAIN, THE ASSESSEE REPLIED THAT ANOTHER COMPANY BY NAME MAHINDRA & MAHINDRA LIMITED , HEREINAFTER REFERRED TO AS M & M, MADE A NON-INTERE ST BEARING SECURITY DEPOSIT OF ` 29.27 CRORES WITH A COMPANY BY NAME THE NEW GREAT EASTERN SPINNING & WEAVING COMPANY LIMITED, H EREINAFTER REFERRED TO AS NGE. SUBSEQUENTLY THE DEPOSIT, ALON G WITH ALL RIGHTS AND OBLIGATIONS, VESTED IN THE ASSESSEE COMPANY. T HE ASSESSEE COMPANY DECIDED TO COMPOUND THE INTEREST LEVIED IN A PARTICULAR YEAR DUE TO WHICH THE INTEREST CLAIMED STOOD AT ` 37.26 CRORES FOR THE PERIOD RELEVANT TO THE ASSESSMENT YEARS 1997-98 TO 2003-04. THE INTEREST HOWEVER WAS NOT RECEIVED BY THE ASSESS EE COMPANY. THEREAFTER THE INTEREST RECEIVABLE WAS REVISED DOWN WARDS TO ` 21.76 CRORES, THE DIFFERENCE BEING ` 15,50,15,000/-. IT WAS POINTED OUT BY THE ASSESSEE THAT THE INTEREST INCOME TO THI S EXTENT DID NOT ACCRUE TO THE ASSESSEE AT ALL AND THEREFORE IT WAS NOT CHARGEABLE AS INCOME OF THE BUSINESS UNDER SECTION 28 OF THE ACT. 15. THE ASSESSING OFFICER NOTED FROM THE DOCUMENTS FILED BY THE ASSESSEE THAT THE SECURITY DEPOSIT DID NOT BEAR ANY INTEREST. HE THEREFORE HELD THAT THE DOWNSCALING OF THE INTEREST BY THE ASSESSEE BY TREATING THE SO CALLED EXCESS INTEREST OF ` 15,50,15,000/- AS IF IT WAS NEVER RECOVERABLE BY THE ASSESSEE WAS NOT A TEN ABLE CLAIM IN VIEW OF THE CORRESPONDENCE EXCHANGED BETWEEN THE AS SESSEE AND NGE, AS ALSO THE TERMS OF THE COMPOSITE SERVICES AG REEMENT. THE ASSESSING OFFICER ALSO NOTED THAT EVEN ACCORDING TO THE ASSESSEE THE DIFFERENTIAL AMOUNT DID NOT REPRESENT ACCRUED I NTEREST AND WAS 14 ITA NO: 4291/MUM/2007 ITA NO: 5658/MUM/2007 ITA NO: 4129/MUM/2007 THEREFORE NOT CHARGEABLE AS INCOME. HE CONCLUDED T HAT SINCE EVEN AS PER THE ASSESSEE THE AMOUNT NEVER ACCRUED TO IT AS INCOME, THE PROVISION FOR IMPAIRMENT IN THE VALUE OF THE ASSET MADE BY THE ASSESSEE WAS TO BE DISALLOWED AND ACCORDINGLY ADDED BACK THE SAME TO THE BUSINESS INCOME FOR THE YEAR. 16. THE ASSESSEE APPEALED TO THE CIT(A) AND SUBMITT ED THAT THE CHARGING OF INTEREST ON THE SECURITY DEPOSIT ON COM POUNDING BASIS WAS AN UNILATERAL ACT ON THE PART OF THE ASSESSEE, THAT NGE DISPUTED THE ASSESSEES CLAIM FOR THE FIRST TIME IN THE FINANCIAL YEAR 2003-04, THAT THEREFORE THE ASSESSEE SCALED DOWN TH E INTEREST TO THE RATES APPLICABLE UNDER THE PLR RATES, THAT EVEN UNDER THE COMPOSITE SERVICES AGREEMENT ENTERED INTO BETWEEN T HE COMPANIES THERE WAS NO RIGHT TO CHARGE INTEREST ON COMPOUNDIN G BASIS, THAT IN ADDITION NGE HAD ALSO BEEN DECLARED AS A SICK COMPA NY UNDER THE BIFR, AND THEREFORE IN THESE CIRCUMSTANCES IT BECAM E NECESSARY FOR THE ASSESSEE TO REWORK OR SCALE DOWN THE INTERE ST CLAIMED AND ACCORDINGLY MAKE A PROVISION IN ITS ACCOUNTS. IT W AS THUS SUBMITTED THAT THE PROVISION MADE WAS IN ACCORDANCE WITH THE FACTS AND SINCE THE INTEREST TO THE EXTENT OF THE PROVISION DID NOT ACCRUE TO THE ASSESSEE, THE SAME CANNOT BE CONSIDERED AS ITS INCO ME. 17. THE CIT(A) EXAMINED THE FACTS AND THE CONTENTIO NS. HE NOTED THAT ADVANCES HAD BEEN GIVEN FOR THE CONSTRUC TION OF PROJECTS TO NGE AND THE INTEREST ON THE ADVANCES WERE CREDIT ED TO THE PROFIT AND LOSS ACCOUNT AND TAXES WERE ALSO PAID. THE YEA R-WISE POSITION REGARDING ACCRUAL OF INTEREST ON THE ADVAN CES AND THE 15 ITA NO: 4291/MUM/2007 ITA NO: 5658/MUM/2007 ITA NO: 4129/MUM/2007 REVISED INTEREST INCOME ON THE BASIS OF THE SBI PLR RATES WAS SET OUT BY THE CIT(A) IN THE FORM OF THE FOLLOWING CHAR T: - YEAR-WISE ACCRUAL OF INTEREST ON NGE OTHER ADVANCES SR. NO. ASSESSMENT YEAR ACCRUAL OF INTEREST (RS.) REVISED INTEREST AT SBI PLR (RS.) 1. 1997-1998 1.15 CRORES 0.24 CRORES 2. 1998-1999 1.13 CRORES 2.34 CRORES 3. 1999-2000 1.13 CRORES 2.45 CRORES 4. 2000-2001 1.13 CRORES 2.74 CRORES 5. 2001-2002* 16.4 CRORES 2.89 CRORES 6. 2002-2003 7.2 CRORES 3.24 CRORES 7. 2003-2004 9.0 CRORES 4.18 CRORES TOTAL 37.2 CRORES 21.76 CRORES HE THUS FOUND THAT FROM THE ASSESSMENT YEARS 1997-9 8 TO 2003-04 INTEREST WAS BEING OFFERED TO TAX ON ACCRUAL BASIS, WITH SIMPLE INTEREST BEING CHARGED FOR SOMETIME, WHICH WAS COMP OUNDED FROM THE ASSESSMENT YEAR 2001-02. HE POSED TO HIMSELF T HE QUESTION AS TO WHETHER THE INTEREST INCOME WHICH HAD ALREADY BE EN OFFERED TO TAX ON ACCRUAL BASIS CAN SUBSEQUENTLY BE CLAIMED AS DEDUCTION ON THE GROUND THAT NO REAL INCOME HAD ACTUALLY ACCRUED . HE REFERRED TO THE FOLLOWING JUDGMENTS OF THE SUPREME COURT TO FIN D AN ANSWER TO THE QUESTION: - (1) CIT VS. SHIV PRAKASH JANAK RAJ & CO. PVT. LTD. (1996) 222 ITR 583 (SC) (2) MORVI INDUSTRIES LIMITED VS. CIT (1971) 82 ITR 835 (SC) FROM THE AFORESAID DECISIONS, THE CIT(A) CONCLUDED THAT FOR THE PURPOSE OF RELINQUISHING ANY INCOME WHICH HAS ALREA DY ACCRUED, THERE OUGHT TO BE A BOARD RESOLUTION AND THAT IT SH OULD HAVE BEEN PASSED BEFORE THE INCOME BECAME DUE AND THAT ONCE T HE INCOME 16 ITA NO: 4291/MUM/2007 ITA NO: 5658/MUM/2007 ITA NO: 4129/MUM/2007 HAD ACCRUED, THE SAME COULD NOT BE GIVEN UP UNILATE RALLY. THE CIT(A) ALSO HELD THAT BY MAKING AN ACCOUNTING ENTRY , INCOME ALREADY ACCRUED CANNOT BE NULLIFIED. 18. THE ASSESSEE RELIED ON THE JUDGMENTS OF THE SUP REME COURT IN CIT VS. BIRLA GWALIOR (P) LTD. (1973) 89 ITR 266 (SC) AND GODHRA ELECTRICITY CO. LTD. VS. CIT (1997) 225 ITR 746 (SC ) BEFORE THE CIT(A). THESE JUDGMENTS WERE DISTINGUISHED ON FACT S BY THE CIT(A). AN ORDER OF THE MUMBAI BENCH OF THE TRIBUNA L IN THE CASE OF DCIT VS. RELIANCE PETROLEUM LTD. (2006) 5 SOT 165 ( MUM) WAS ALSO RELIED UPON BY THE ASSESSEE BEFORE THE CIT(A) BUT THIS DECISION WAS ALSO DISTINGUISHED BY HIM ON FACTS AND WAS HELD INAPPLICABLE. 19. ULTIMATELY THE CIT(A) HELD THAT THE AMOUNT OF ` 15.50 CRORES CANNOT BE ALLOWED AS A DEDUCTION. 20. IN PARAGRAPH 7.15 OF HIS ORDER THE CIT(A) DEALT WITH THE QUESTION AS TO WHETHER THE PROVISION CAN BE CLAIMED AS A BAD DEBT. HE NEGATIVED THE PROPOSITION AND HELD AS UNDER: - 7.15 MOREOVER, ` 15.50 CRORES HAS BEEN CLAIMED AS A DEBIT IN THE PROFIT & LOSS ACCOUNT AS PROVISION FOR IMPAIRMENT ON THE VALUE OF ASSETS. ONCE THE INCOME IS OFFERED FOR TAXATION AND IS NOT ACTUALLY RECEIVED, THE AMOUNT PARTAKES THE CHARACTER OF A DEBT. THAT BEING SO, ANY PROVISION IN RESPECT OF SUCH A DEBIT IS A PROVISION FOR BAD DEBTS WHICH IS NOT AN ALLOWABLE EXPENDITURE IN VIEW OF THE RETROSPECTIVE INTRODUCTION OF EXPLANATION TO SECTION 36(1)(VII) READ WITH SECTION 36(2). THE DISALLOWANCE MADE BY THE AO OF ` 15.50 CRORES IS, THEREFORE, CONFIRMED FOR THE REASONS DISCUSSED ABOVE. 17 ITA NO: 4291/MUM/2007 ITA NO: 5658/MUM/2007 ITA NO: 4129/MUM/2007 21. THE ASSESSEE IS IN FURTHER APPEAL BEFORE THE TR IBUNAL. IT WAS ARGUED ON ITS BEHALF THAT THE AMOUNT OF INTEREST TH AT HAS BEEN SCALED DOWN OR WAIVED AND DEBITED TO THE PROFIT AND LOSS ACCOUNT AS PROVISION FOR IMPAIRMENT OF THE ASSET CANNOT BE ASSESSED AS THE INCOME. IT IS SUBMITTED THAT EVEN ORIGINALLY THERE WAS NO STIPULATION FOR INTEREST BUT SOMEHOW INTEREST WAS CHARGED AND W AS ALSO ASSESSED TO TAX. SUBSEQUENTLY COMPOUND INTEREST WA S ALSO CHARGED. IT WAS THEN REALIZED THAT COMPOUND INTERE ST COULD NOT BE CHARGED AND THEREFORE IT WAS SCALED DOWN TO SIMPLE INTEREST AND THE DIFFERENTIAL AMOUNT WAS DEBITED TO THE PROFIT AND L OSS ACCOUNT AS A PROVISION. IT IS POINTED OUT THAT IN THESE CIRCUMS TANCES THE PROVISION SHOULD BE ALLOWED AS A DEDUCTION AS CLAIMED. OUR A TTENTION WAS DRAWN TO THE RELEVANT PAGES IN THE PAPER BOOK. 22. THE ABOVE CONTENTIONS WERE OPPOSED BY THE LEARN ED CIT DR, WHO STRONGLY RELIED ON THE FINDINGS OF THE CIT( A) IN PARAGRAPHS 7.4 TO 7.14 OF THE ORDER. 23. ON A CAREFUL CONSIDERATION OF THE RIVAL CONTENT IONS, WE ARE OF THE VIEW THAT THE ASSESSEES CONTENTION CANNOT BE A CCEPTED. THE AGREEMENT FOR COMPOSITE SERVICES WAS ENTERED INTO O N 14.07.1995 BETWEEN NGE AND MAHINDRA & MAHINDRA LIMITED (M & M, FOR SHORT). ACCORDING TO CLAUSE 10 OF THIS AGREEMENT, M & M WAS TO ADVANCE ` 20.00 CRORES TO NGE AS INTEREST FREE DEPOSIT. M & M WAS ALSO TO ADVANCE WORKING CAPITAL WHICH SHALL BEAR INTEREST A T THE RATES CHARGEABLE BY THE SBI ON ITS ADVANCES. ACCORDING T O CLAUSE 11(A), M & M SHALL HAVE THE RIGHT TO RECEIVE, AT THE END O F THE CONSTRUCTION 18 ITA NO: 4291/MUM/2007 ITA NO: 5658/MUM/2007 ITA NO: 4129/MUM/2007 AND AFTER COMPLETION OF THE SALE OF THE CONSTRUCTED AREA BY NGE, REMUNERATION AT A PARTICULAR RATE SET OUT IN THE SA ID CLAUSE. THERE WAS PROVISION FOR MINIMUM REMUNERATION ALSO IN THE EVENT OF LOSSES SUFFERED BY NGE. ON 29.03.1996, M & M ASSIGNED THE ENTIRE AGREEMENT FOR COMPOSITE SERVICES IN FAVOUR OF THE A SSESSEE. AT PAGE 129 OF THE PAPER BOOK, THE ASSESSEE HAS PLACED A COPY OF THE LETTER DATED 04.10.2000 WRITTEN BY NGE TO THE ASSES SEE, WHICH WAS AT THAT TIME KNOWN AS MAHINDRA REALTY AND INFRASTRU CTURE DEVELOPERS LIMITED. THE LETTER REFERS TO THE DISCU SSIONS HELD BETWEEN THE TWO COMPANIES AND THE PROCESS OF RESOLU TION OF ALL PENDING ISSUES. SIGNIFICANTLY THE LETTER ALSO SAYS AS UNDER: - .. WE CONFIRM HAVING AGREED THAT IN RESPECT OF THE AMOUNTS ADVANCED AND TO BE ADVANCED BY YOU TO US IN EXCESS OF WHAT WAS PAYABLE BY YOU UNDER THE COMPOSITE SERVICES AGREEMENT (CSA) DATED 14 TH JULY, 1995, YOU HAVE THE FOLLOWING OPTIONS THAT MAY BE EXERCISED BY YOU AT YOUR SOLE DISCRETION AS YOU MAY FEEL APPROPRIATE WHICH WHEN EXERCISED SHALL BE BINDING ON US. 1. DEMAND AT ANY TIME THE AMOUNTS FROM US TOGETHER WITH INTEREST AT 18% P.A., FROM THE RESPECTIVE DISBURSEMENT DATES. 2. TREAT THESE AMOUNTS TOGETHER WITH INTEREST AT 18% FROM THE RESPECTIVE DATES OF DISBURSEMENTS AS AMOUNTS PAID TO US AND RECEIVED BY US TOWARDS THE MONIES PAYABLE TO US UNDER THE CSA AND WE HEREBY AUTHORIZE YOU TO FIRST WITHDRAW FROM THE PROJECT RECEIVABLE ALL SUCH AMOUNTS BEFORE ANY PAYMENTS FROM THE PROJECT ARE REQUIRED TO BE MADE TO US. 3. .. 19 ITA NO: 4291/MUM/2007 ITA NO: 5658/MUM/2007 ITA NO: 4129/MUM/2007 AT PAGE 112 OF THE PAPER BOOK, THERE IS A LETTER WR ITTEN BY NGE TO THE ASSESSEE ON 05.06.2003. IN PARAGRAPHS 10, 11 A ND 16 OF THIS LETTER, THERE IS REFERENCE TO THE ASSESSEES CLAIM FOR INTEREST AT 18% AS A FALSE, FRIVOLOUS AND BASELESS CLAIM AND CONTRARY TO THE TERMS AND CONDITIONS OF CSA . IN PARAGRAPH 16 THERE IS ALSO A STATEMENT THAT THE FURTHER CLAIM OF INTEREST THEREUPON AT 18% P.A. IS EQUALLY INCORRECT AND UNTENABLE . 24. RELYING ON THE AFORESAID DOCUMENTS IT IS CONTEN DED ON BEHALF OF THE ASSESSEE THAT THERE WAS A SERIOUS DISPUTE BE TWEEN THE ASSESSEE AND NGE AS REGARDS CHARGING OF INTEREST AN D THEREFORE THE ASSESSEE THOUGHT THAT INTEREST TO THE EXTENT OF ` 15,50,15,000/- (BEING THE DIFFERENCE BETWEEN INTEREST CHARGED ON C OMPOUNDING BASIS AND INTEREST CHARGED ON SIMPLE INTEREST BASIS ) DID NOT ACCRUE TO IT AS INCOME AND THEREFORE A PROVISION WAS MADE IN THE ACCOUNTS FOR THE YEAR UNDER APPEAL TO REVERSE THE INTEREST A CCRUAL. WE ARE UNABLE TO ACCEPT THE CONTENTION. YEAR AFTER YEAR T HE ASSESSEE HAS BEEN CHARGING INTEREST AND HAS ALSO BEEN SHOWING TH E SAME IN ITS TAX RETURNS. BY LETTER DATED 04.10.2000, NGE HAD A LSO CONFIRMED THAT INTEREST AT 18% WAS PAYABLE FROM THE RESPECTIV E DISBURSEMENT DATES. MERELY BECAUSE IN THE LETTER DATED 05.06.20 03 NGE DISPUTED THE CLAIM FOR INTEREST, THE ASSESSEE CANNO T URGE THAT THE INTEREST DID NOT ACCRUE. THE ENTRY MADE BY THE ASS ESSEE DESCRIBES IT AS PROVISION FOR IMPAIRMENT IN THE VALUE OF ASSETS . THERE IS NO EVIDENCE TO SHOW THAT THE ENTRIES WERE REVERSED IN THE ACCOUNT OF 20 ITA NO: 4291/MUM/2007 ITA NO: 5658/MUM/2007 ITA NO: 4129/MUM/2007 NGE. FURTHER, AS RIGHTLY POINTED OUT BY THE CIT(A) , THERE IS NO EVIDENCE TO SHOW THAT THE ASSESSEE PASSED A RESOLUT ION IN THE BOARD AND THAT TOO BEFORE THE CLOSE OF THE RELEVANT ACCOUNTING YEAR, JUSTIFYING THE CREATION OF THE PROVISION. AT PAGE 134 135 OF THE PAPER BOOK, THE ASSESSEE HAS PLACED A COPY OF ITS L ETTER TO THE ASSESSING OFFICER WRITTEN ON 21.02.2005. THEREIN I T HAS BEEN ADMITTED BY THE ASSESSEE THAT CONSIDERING THE HUGE PROJECT DELAYS AND OTHER BUSINESS REASONS THE COMPANY UNILATERALLY DECIDED TO COMPOUND THE INTEREST LEVY IN A PARTICULAR YEAR DUE TO WHICH THE INTEREST CLAIM STOOD AT RS.37.26 CRORES EVEN THOUGH THE PRINCIPAL AMOUNT STOOD AT RS.15.75 CRORES . THE ASSESSEE HAS FURTHER STATED THAT IN THE PREVIOUS YEAR IT WAS FORCED TO REVIEW THESE INTEREST CHARGES FOR VARIOUS REASONS INCLUDING NON-COOPERATI ON OF THE PARTY IN TAKING THE PROJECT FORWARD, NON-PAYMENT AND DENI AL OF THE LIABILITY TO PAY AS COMMUNICATED BY NGE IN ITS LETTER DATED 0 5.06.2003. THE COMPANY, AS A PRUDENT MEASURE, FINALLY DECIDED TO P EG THE INTEREST RATES CHARGED ON THE PRINCIPAL AMOUNT OF RS.15.75 C RORES TO THE STATE BANK OF INDIA PRIME LENDING RATE IN KEEPING W ITH THE ORIGINAL AGREEMENT BETWEEN M & M AND NGE PLUS A REASONABLE S PREAD . THESE STATEMENTS IN THE LETTER SHOW THAT THE ASSESS EES ACTION WAS UNILATERAL AND THAT THE SCALING DOWN OF THE INTERES T WAS ONLY A PRUDENT MEASURE. THOUGH IN THE SAID LETTER THE ASS ESSEE HAS REFERRED TO THE JUDGMENT OF THE SUPREME COURT IN TH E CASE OF E D SASSOON & COMPANY LIMITED VS. CIT (1954) 26 ITR 27 (SC), IN WHICH IT WAS HELD THAT NO INCOME CAN BE CHARGED TO TAX UNLESS A 21 ITA NO: 4291/MUM/2007 ITA NO: 5658/MUM/2007 ITA NO: 4129/MUM/2007 DEBT IS CREATED IN FAVOUR OF THE ASSESSEE, THAT JUD GMENT IS NOT APPLICABLE TO THE ASSESSEES CASE SINCE A DEBT FOR THE INTEREST INCOME WAS CREATED IN FAVOUR OF THE ASSESSEE BOTH U NDER THE AGREEMENT AS WELL AS BY THE LATER CONFIRMATION BY N GE. ONCE INCOME BY WAY OF INTEREST HAD ACCRUED, IT CANNOT BE WISHED AWAY BY MAKING SUCH ENTRIES AS THE ASSESSEE HAS MADE IN ITS BOOKS OF ACCOUNT. WE THEREFORE FIND OURSELVES UNABLE TO ACC EPT THE ASSESSEES CONTENTION THAT NO INTEREST HAD ACCRUED TO IT AT ALL TO THE EXTENT OF ` 15,50,15,000/-. 25. THE OTHER ARGUMENT OF THE LEARNED REPRESENTATIV E FOR THE ASSESSEE BEFORE US WAS THAT THE PROVISION SHOULD BE ALLOWED AS A BAD DEBT. HE STRONGLY RELIED ON THE JUDGMENT OF TH E SUPREME COURT IN THE CASE OF VIJAYA BANK VS. CIT (2010) 323 ITR 1 66 (SC) TO CONTEND THAT THERE WAS A PROPER WRITE OFF OF THE DE BT IN THE ASSESSEES BOOKS OF ACCOUNT IN THE MANNER REQUIRED BY THE JUDGMENT. HE PROCEEDED TO DEMONSTRATE THE SAME WIT H REFERENCE TO THE ACCOUNTING ENTRIES MADE BY THE ASSESSEE IN I TS BOOKS OF ACCOUNT. HIS ATTEMPT WAS TO SHOW THAT THE EXACT RE QUIREMENTS FOR A PROPER WRITE OFF OF THE DEBT AS LAID DOWN IN THE AF ORESAID JUDGMENT OF THE SUPREME COURT HAVE BEEN FULLY SATISFIED IN T HE ASSESSEES CASE. TWO ALTERNATIVE CONTENTIONS WERE ALSO CANVAS SED BEFORE US AND THEY WERE (A) THAT THE AMOUNT IS ALLOWABLE AS A DEDUCTION UNDER SECTION 37(1) ON THE BASIS OF THE JUDGMENT OF THE DELHI HIGH COURT IN CIT VS. KHAITAN CHEMICALS & FERTILIZERS LT D. [JUDGMENT DELIVERED ON 08.02.2010 IN ITA NO: 164/2007 (COPY F ILED)] AND (B) 22 ITA NO: 4291/MUM/2007 ITA NO: 5658/MUM/2007 ITA NO: 4129/MUM/2007 THE AMOUNT IS ALLOWABLE AS DEDUCTION UNDER SECTION 28 OF THE ACT ON THE GENERAL PRINCIPLE THAT ONLY COMMERCIAL PROFITS ARE TO BE TAXED, ON THE STRENGTH OF THE JUDGMENT OF THE MADRAS HIGH COU RT IN BANK OF MADURA LTD. VS. CIT (2003) 261 ITR 749 (MAD). IT W AS ALSO ARGUED THAT THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF SHIV PRAKASH JANAK RAJ & CO. PVT. LTD. (SUPRA) IS NOT A CASE OF BAD DEBT AND HENCE NOT APPLICABLE TO THE PRESENT CASE. 26. THE CONTENTION OF THE LEARNED CIT DR BEFORE US WAS THAT THE ASSESSEE AND NGE ARE CONNECTED COMPANIES AND THE QU ESTION HAS TO BE VIEWED IN THIS CONTEXT. IT WAS POINTED OUT T HAT ALL THE ENTITIES INVOLVED IN THE CLAIM ARE PART OF THE SAME GROUP AN D THIS CRUCIAL FACT SHOULD BE KEPT IN MIND IN DECIDING THE ISSUE. STRO NG RELIANCE WAS PLACED ON THE FINDINGS AND CONCLUSION RECORDED BY T HE CIT(A). WITH REGARD TO THE CLAIM THAT THE AMOUNT SHOULD BE ALLOW ED AS A BAD DEBT, THE LEARNED CIT DR RELIED ON PARAGRAPH 7.15 O F THE ORDER OF THE CIT(A) AND SUBMITTED THAT THERE WAS NO WRITE OF F OF THE DEBT AND THERE WAS ONLY A PROVISION CREATED, WHICH IS NOT SU FFICIENT FOR ALLOWING THE CLAIM. 27. IN HIS BRIEF REPLY, THE LEARNED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE DEPARTMENT IS MAKING OUT A NEW CASE FOR THE FIRST TIME BEFORE THE TRIBUNAL BY SAYING THAT ALL T HE COMPANIES INVOLVED IN THE TRANSACTION ARE CONNECTED. HE SUBM ITTED THAT THE COMPANIES ARE INDEPENDENT ENTITIES AND NOT RELATED TO EACH OTHER. HE SUBMITTED THAT UNDER SECTION 36(1)(VII), EVEN A PART OF A DEBT CAN BE WRITTEN OFF AND IN THE PRESENT CASE THE ASSESSEE HAS WRITTEN OFF A 23 ITA NO: 4291/MUM/2007 ITA NO: 5658/MUM/2007 ITA NO: 4129/MUM/2007 PART OF THE INTEREST WHICH WAS UNREALIZED. HE POIN TED OUT THAT THE CONDITION LAID DOWN BY SECTION 36(2)(I) THAT THE DE BT OUGHT TO HAVE BEEN TAKEN INTO ACCOUNT IN COMPUTING THE INCOME OF THE ASSESSEE IN THE EARLIER YEARS OR IN THE RELEVANT ASSESSMENT YEA R HAS ALSO BEEN SATISFIED IN THE PRESENT CASE. IN SUPPORT OF THE P OINTS MADE BY HIM IN THE COURSE OF THE REPLY, HE RELIED ON THE JUDGME NTS OF THE SUPREME COURT IN THE CASE OF STATE BANK OF TRAVANCO RE VS. CIT (1986) 158 ITR 102 (SC) AND TRF LIMITED VS. CIT (20 10) 323 ITR 397 (SC). THE LEARNED REPRESENTATIVE FOR THE ASSES SEE ALSO STATED THAT TILL NOW NOTHING HAS BEEN RECEIVED BY THE ASSE SSEE TOWARDS INTEREST. 28. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTI ONS. WE HAVE ALREADY HELD THAT THE INTEREST HAD ACTUALLY ACCRUED ON THE COMPOUNDED RATES FOR THE DIFFERENT ASSESSMENT YEARS STARTING FROM THE ASSESSMENT YEAR 1997-98 AS SET OUT IN THE TABLE GIVEN BY THE CIT(A) IN PARAGRAPH 7.4 OF HIS ORDER AND WHICH WE H AVE REPRODUCED EARLIER. THE CONTENTION OF THE ASSESSEE IN SUBSTAN CE IS THAT OUT OF THE INTEREST OF ` 37.20 CRORES ASSESSED IN THE VARIOUS ASSESSMENT YEARS (AS PER THE TABLE), IT WAS ENTITLED TO CHARGE ONLY ` 21.76 CRORES AND THEREFORE THE BALANCE OF ` 15,50,15,000/- CANNOT BE RECOVERED BY IT AND THAT IT HAS ACTUALLY BECOME A BAD DEBT. THUS, WE ARE REALLY CONCERNED WITH THE QUESTION WHETHER THE PROV ISIONS OF SECTION 36(1)(VII) READ WITH SECTION 36(2)(I) ARE SATISFIED IN THE PRESENT CASE. 29. SO FAR AS THE CONDITION LAID DOWN BY SECTION 36 (2)(I) IS CONCERNED, THERE IS NO DISPUTE THAT THE ENTIRE INTE REST OF ` 37.20 24 ITA NO: 4291/MUM/2007 ITA NO: 5658/MUM/2007 ITA NO: 4129/MUM/2007 CRORES WAS ASSESSED IN THE VARIOUS ASSESSMENT YEARS (AS PER THE TABLE). THE OTHER QUESTION TO BE EXAMINED IS WHETH ER THERE WAS A PROPER WRITE OFF OF THE DEBT IN THE ASSESSEES BOOK S OF ACCOUNT. ACCORDING TO THE EXPLANATION BELOW SECTION 36(1)(VI I), INTRODUCED BY THE FINANCE ACT, 2001, WITH RETROSPECTIVE EFFECT FR OM 01.04.1989, ANY BAD DEBT OR PART THEREOF WRITTEN OFF AS IRRECOV ERABLE IN THE ACCOUNTS OF THE ASSESSEE SHALL NOT INCLUDE ANY PROV ISION FOR BAD AND DOUBTFUL DEBTS MADE IN THE ACCOUNTS OF THE ASSE SSEE. THIS EXPLANATION CAME UP FOR CONSIDERATION BEFORE THE SU PREME COURT IN SOUTHERN TECHNOLOGIES LIMITED VS. JCIT (2010) 320 I TR 577 (SC). IT WAS HELD IN THIS JUDGMENT THAT AFTER THE INTRODU CTION OF THE EXPLANATION A MERE PROVISION FOR BAD DEBT WOULD NOT BE ENTITLED TO DEDUCTION. IT WAS OBSERVED THAT IF AN ASSESSEE DEB ITS AN AMOUNT OF DOUBTFUL DEBT TO THE PROFIT AND LOSS ACCOUNT AND CR EDITS THE ASSET ACCOUNT, IT WOULD CONSTITUTE A WRITE OFF OF THE ACT UAL DEBT. HOWEVER, IF AN ASSESSEE DEBITS A PROVISION FOR DOUBTFUL DEBT TO THE PROFIT AND LOSS ACCOUNT AND MAKES A CORRESPONDING CREDIT TO TH E CURRENT LIABILITIES AND PROVISIONS IN THE LIABILITIES SIDE OF THE BALANCE SHEET, THEN IT WOULD AMOUNT ONLY TO A PROVISION AND THE AS SESSEE WILL NOT BE ENTITLED TO THE DEDUCTION FOR BAD DEBT. 30. THE AFORESAID JUDGMENT OF THE SUPREME COURT WAS NOTICED BY THE SUPREME COURT IN THE LATER JUDGMENT IN THE C ASE OF VIJAYA BANK (SUPRA). IN THE CASE OF VIJAYA BANK (SUPRA), BESIDES DEBITING THE PROFIT AND LOSS ACCOUNT AND CREATING A PROVISIO N FOR BAD AND DOUBTFUL DEBT, THE BANK CORRESPONDINGLY AND SIMULTA NEOUSLY 25 ITA NO: 4291/MUM/2007 ITA NO: 5658/MUM/2007 ITA NO: 4129/MUM/2007 OBLITERATED THE PROVISION FROM ITS ACCOUNTS BY REDU CING THE CORRESPONDING AMOUNT FROM LOANS AND ADVANCES / DEBT ORS ON THE ASSETS SIDE OF THE BALANCE SHEET AND, CONSEQUENTLY, AT THE END OF THE YEAR, THE FIGURE IN THE LOANS AND ADVANCES / DE BTORS ON THE ASSETS SIDE OF THE BALANCE SHEET WAS SHOWN NET OF T HE PROVISION FOR THE IMPUGNED BAD DEBT. THIS MANNER OF WRITING OFF THE DEBT IN THE ACCOUNTS WAS HELD TO SATISFY THE REQUIREMENTS OF TH E EXPLANATION. 31. IN THE CASE OF VIJAYA BANK (SUPRA), THE SUPREME COURT ALSO POSED ANOTHER QUESTION AS TO WHETHER IT IS IMPERATI VE FOR THE ASSESSEE BANK TO CLOSE THE INDIVIDUAL ACCOUNT OF EACH DEBTOR IN ITS BOOKS OR A MERE REDUCTION IN THE LOANS AND ADV ANCES ACCOUNT OR DEBTORS TO THE EXTENT OF THE PROVISION FOR BAD A ND DOUBTFUL DEBT IS SUFFICIENT. WHILE ANSWERING THIS QUESTION, THE SUP REME COURT REITERATED THAT SECTION 36(1)(VII) APPLIES BOTH TO BANKING AND NON- BANKING BUSINESSES. IT WAS OBSERVED THAT AS PER TH E ACCOUNTING ENTRIES MADE BY THE BANK, NOT ONLY THE PROFIT AND L OSS ACCOUNT WAS BEING DEBITED TO THE EXTENT OF THE BAD DEBT, BUT TH E BANK WAS ALSO SIMULTANEOUSLY REDUCING THE AMOUNT OF LOANS AND ADV ANCES OR THE DEBTORS ACCOUNT AT THE YEAR END. THE LOANS AND ADV ANCES OR THE DEBTORS AT THE END OF THE YEAR WERE SHOWN IN THE BA LANCE SHEET NET OF THE PROVISION FOR THE DEBT. THE OBJECTION OF TH E DEPARTMENT IN THE CASE OF VIJAYA BANK WAS THAT THE MERE REDUCTION OF THE LOANS AND ADVANCES OR THE DEBTORS AT THE YEAR-END WOULD NOT S UFFICE AND, IN THE INTEREST OF TRANSPARENCY, IT WOULD BE DESIRABLE FOR THE BANK TO CLOSE EACH AND EVERY INDIVIDUAL ACCOUNT OF LOANS AN D ADVANCES OR 26 ITA NO: 4291/MUM/2007 ITA NO: 5658/MUM/2007 ITA NO: 4129/MUM/2007 DEBTORS AS A PRE-CONDITION FOR CLAIMING THE DEDUCTI ON. THE SUPREME COURT NOTICED THAT THE BASIS FOR THIS APPRE HENSION IS THAT THE ASSESSING OFFICER THOUGHT THAT THE BANK WAS CLA IMING DEDUCTION TWICE. STATING THAT THE CASE CANNOT BE DECIDED ON THE BASIS OF APPREHENSION AND DESIRABILITY, THE SUPREME COURT HE LD THAT IT WAS ALWAYS OPEN TO THE ASSESSING OFFICER TO CALL FOR TH E INDIVIDUAL DEBTORS ACCOUNT IF HE HAD REASONABLE GROUNDS TO BE LIEVE THAT THE ASSESSEE CLAIMED DOUBLE DEDUCTION. THE SUPREME COU RT ALSO HELD THAT THE SQUARING OFF EACH INDIVIDUAL ACCOUNT OF TH E DEBTORS WAS NOT REQUIRED BECAUSE IN ANY EVENT SECTION 41(4) WOULD T AKE CARE OF A SITUATION WHERE THE ASSESSEE IN THE SUBSEQUENT YEAR S IS ABLE TO RECOVER THE WHOLE OR PART OF THE DEBT. UNDER THIS SECTION THE RECOVERY WOULD BE ASSESSED AS INCOME FROM BUSINESS. 32. WE NOW PROPOSE TO EXAMINE THE ASSESSEES CLAIM THAT IT HAS WRITTEN OFF THE DEBT IN THE SAME MANNER IN WHICH VI JAYA BANK IN THE CASE CITED SUPRA WROTE OFF THE DEBT. IN THE PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31.03.2003 (PAGE 156 OF THE PAPE R BOOK), THE ASSESSEE HAS DEBITED ADMINISTRATION AND OTHER EXPEN SES OF ` 23,01,48,298/-. SCHEDULE 20 GIVES THE BREAK-UP O F THESE EXPENSES (PAGE 165). THE AMOUNT INCLUDES ` 15,50,15,000/- AS PROVISION FOR IMPAIRMENT IN ASSET VALUE (REFER NOT E 7F). NOTE 7(F) (PAGE 168) SAYS : - THE PROVISION OF RS.15,50,15,000/- TOWARDS IMPAIRMENT IN THE VALUE OF ASSETS IS IN RESPECT OF CERTAIN PROJECT RECEIVABLES FORMING PART OF OTHER CURRENT ASSETS . IN THE BALANCE SHEET AS ON 31.03.2003, OTHER CURRENT ASSETS IS S HOWN IN THE 27 ITA NO: 4291/MUM/2007 ITA NO: 5658/MUM/2007 ITA NO: 4129/MUM/2007 ASSETS SIDE AT ` 56,30,77,747/-. SCHEDULE 10 TO THE BALANCE SHEET GIVES THE BREAK-UP OF THE AMOUNT (PAGE 161). THIS IS AS UNDER: - RUPEES SCHEDULE 10 : OTHER CURRENT ASSETS INTEREST ACCRUED ON PROJECT ADVANCES (REFER NOTE 7B) 706,574,118 LESS: PROVISION FOR IMPAIRMENT IN ASSET VALUE (15 5,015,000) ---------------- 551,559,118 INTEREST ACCRUED ON DEPOSITS 11,518,629 --------------------- 563,077,747 =========== IT MAY BE SEEN FROM THE ABOVE THAT THE PROVISION FO R IMPAIRMENT IN THE ASSET VALUE HAS BEEN REDUCED NOT FROM THE LOANS AND ADVANCES ACCOUNT OR SUNDRY DEBTORS ACCOUNT APPEARING IN THE BALANCE SHEET. IT HAS BEEN REDUCED FROM OTHER CURRENT ASSETS AND ONLY FROM THE INTEREST ACCRUED ON PROJECT ADVANCES AMOUNTING TO ` 70,65,74,118/-. THE SUNDRY DEBTORS ACCOUNT IS SHOW N IN THE BALANCE SHEET (PAGE 155) AT ` 15,93,18,787/- AND THE LOANS AND ADVANCES ARE SHOWN THEREIN AT ` 169,95,54,952/-. THESE TWO ACCOUNTS ARE SEPARATELY SHOWN IN SCHEDULES 8 AND 11. THUS THE FACTUAL POSITION AS SHOWN IN THE ASSESSEES ACCOUNT S IS THAT, CONTRARY TO WHAT IS CONTENDED BEFORE US ON BEHALF O F THE ASSESSEE, THE PROVISION FOR THE BAD DEBT HAS NOT BEEN REDUCED FROM THE 28 ITA NO: 4291/MUM/2007 ITA NO: 5658/MUM/2007 ITA NO: 4129/MUM/2007 SUNDRY DEBTORS OR LOANS AND ADVANCES APPEARING IN T HE ASSETS SIDE OF THE BALANCE SHEET. IT HAS ONLY BEEN REDUCED FRO M OTHER CURRENT ASSETS WHICH IS CONSTITUTED ONLY BY THE INTEREST A CCRUED ON PROJECT ADVANCES. THIS INTEREST HAS BEEN EXPLAINED IN NOTE 7B) [PAGE 168 OF THE PAPER BOOK]. THE NOTE SAYS : PROJECT ADVANCES AND INTEREST ACCRUED THEREON REPRESENT THE AMOUNTS RECOVERABLE O N ACCOUNT OF PROJECTS UNDERTAKEN BY THE COMPANY AS PER THE CONTR ACTED TERMS. THE ADVANCES AS WELL AS THE INTEREST THEREON ARE CO NSIDERED GOOD AND FULLY RECOVERABLE BASED ON THE ESTIMATES AND PR OJECTIONS OF THE REVENUES EXPECTED FROM THE RESPECTIVE PROJECTS . A PERUSAL OF SCHEDULE 11 TO THE BALANCE SHEET WHICH EXPLAINS T HE FIGURE OF LOANS AND ADVANCES SHOWS THAT THE PROJECT ADVANCES, I.E. THE PRINCIPAL AMOUNTS ON WHICH INTEREST HAD ACCRUED TO THE ASSESSEE, ARE SEPARATELY SHOWN THERE-UNDER IN THE FOLLOWING M ANNER: - RUPEES SCHEDULE 11 : LOANS AND ADVANCES PROJECT ADVANCES (REFER NOTE 7B & 7C) CONSIDERED GOOD 930,449,245 CONSIDERED DOUBTFUL 12,124,652 ------------------ 942,573,897 LESS: PROVISION FOR DOUBTFUL ADVANCES (12,124,652) ------------------ 930,449,245 29 ITA NO: 4291/MUM/2007 ITA NO: 5658/MUM/2007 ITA NO: 4129/MUM/2007 THE ASSESSEE OUGHT TO HAVE REDUCED THE PROVISION FO R IMPAIRMENT IN THE ASSET VALUE NOT FROM THE INTEREST ACCRUED ON PROJECT ADVANCES BUT FROM THE PROJECT ADVANCES ITSELF, WHICH IS SHOW N UNDER LOANS AND ADVANCES. THE MANNER OF EXHIBITING THE ACCOUNT S SHOWS THAT IT WAS ONLY THE PROJECT ADVANCES, I.E. THE PRINCIPAL A MOUNTS, WHICH WERE SHOWN AS LOANS AND ADVANCES AND THE INTEREST A CCRUED THEREON WAS SHOWN SEPARATELY AS OTHER CURRENT ASSET S AND NOT PART OF THE LOANS AND ADVANCES. 33. THUS, IT IS SEEN THAT THE WRITE OFF OF THE DEBT IS NOT IN THE MANNER LAID DOWN IN THE JUDGMENT OF THE SUPREME COU RT IN THE CASE OF VIJAYA BANK (SUPRA). WHEREAS THE JUDGMENT REQUI RES THAT THE PROVISION FOR THE DEBT SHOULD SIMULTANEOUSLY BE RED UCED FROM THE LOANS AND ADVANCES OR DEBTORS ACCOUNT, THE ASSESSEE HEREIN HAS REDUCED THE PROVISION NOT FROM THE LOANS AND ADVANC ES OR THE SUNDRY DEBTORS ACCOUNT, BUT FROM OTHER CURRENT ASSE TS, WHICH IN THE PRESENT CASE CONSISTS MERELY OF INTEREST ACCRUED ON PROJECT ADVANCES. THUS THE WRITE OFF DOES NOT SATISFY THE REQUIREMENTS OF LAW. IN THIS VIEW OF THE MATTER, WE ARE UNABLE TO ALLOW THE CLAIM AS BAD DEBT. THE GROUND IS THUS DISMISSED. 34. THE ALTERNATIVE CLAIM THAT SECTION 37(1) IS APP LICABLE, IS WITHOUT ANY MERIT BECAUSE UNDER THIS SECTION WHAT I S ALLOWED IS EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS. NO EXPENDITURE HAS BEEN INCURRED BY THE ASSESSEE AND THE AMOUNT OF ` 15,50,15,000/- IS DESCRIBED IN THE ACCOUNTS AS PROVISION FOR IMPAIRMENT IN THE VALUE OF ASSETS. WHEN THIS WAS 30 ITA NO: 4291/MUM/2007 ITA NO: 5658/MUM/2007 ITA NO: 4129/MUM/2007 POINTED OUT TO THE LEARNED REPRESENTATIVE FOR THE A SSESSEE, HE CITED THE JUDGMENT OF THE DELHI HIGH COURT IN THE CASE OF CIT VS. KHAITAN CHEMICALS & FERTILIZERS LTD., DELIVERED ON 08.02.20 10 IN ITA NO: 164/2007. A COPY OF THE SAID JUDGMENT WAS ALSO FIL ED. IN THIS DECISION CERTAIN SUBSIDY WAS CLAIMED BY THE ASSESSE E IN THE EARLIER YEARS AND THE CALCULATIONS WERE PROVISIONALLY MADE. WHEN THE FINAL RATES OF SUBSIDY WERE COMMUNICATED, THE AMOUNT WAS FOUND TO BE LESS AND THE DIFFERENCE WAS SOUGHT TO BE ADJUSTED A S SUBSIDY NOT RECEIVED. THE DIFFERENCE WAS CLAIMED AS A BAD DEBT BUT WAS NOT ALLOWED. THE ALTERNATIVE PLEA WAS THAT IT SHOULD B E ALLOWED UNDER SECTION 37(1) OF THE ACT. THE HIGH COURT WOULD APP EAR TO HAVE PROCEEDED ON THE BASIS THAT THE AMOUNT CAN BE CONSI DERED AS EXPENDITURE UNDER SECTION 37(1) OF THE ACT AND THAT THE TRIBUNAL HAD THE POWER TO DEAL WITH THE ALTERNATIVE CLAIM OF THE ASSESSEE. THE QUESTION WHETHER THE DIFFERENCE BETWEEN THE SUBSIDY CLAIMED AND THE SUBSIDY ACTUALLY RECEIVED WOULD AMOUNT TO EXPEN DITURE WAS NOT SPECIFICALLY BEFORE THE HIGH COURT AND THEREFORE TH ERE WAS NO OCCASION FOR THE HIGH COURT TO EXAMINE THAT CONTENT ION. IN OTHER WORDS, THAT QUESTION PASSED ON SUB SILENTIO . 35. THE OTHER ALTERNATIVE CLAIM IS THAT SECTION 28 OF THE ACT IS APPLICABLE AND THE PROVISION SHOULD BE ALLOWED ON G ENERAL PRINCIPLES AND ON THE PRINCIPLE THAT ONLY COMMERCIA L PROFITS ARE TO BE TAXED. THE JUDGMENT OF THE MADRAS HIGH COURT IN BA NK OF MADURA LTD. VS. CIT (2003) 261 ITR 749 (MAD) WAS CITED IN SUPPORT OF THE CLAIM. THAT WAS A CASE WHICH AROSE UNDER SECTION 6 OF THE INTEREST 31 ITA NO: 4291/MUM/2007 ITA NO: 5658/MUM/2007 ITA NO: 4129/MUM/2007 TAX ACT, 1974. THERE WAS NO DISPUTE THAT THE BANK CHARGED A HIGHER RATE OF INTEREST, THAN IT WAS ENTITLED TO, O N A CUSTOMER AND WHEN THE MISTAKE WAS REALIZED IN A LATER YEAR, IT C REDITED THE EXCESS AMOUNT REALIZED IN THE EARLIER YEARS TO THE ACCOUNT OF THE CUSTOMER LONG AFTER THE CLOSE OF THE ASSESSMENT YEARS IN QUE STION. IT WAS HELD THAT THE ASSESSEE WAS ENTITLED TO CLAIM THE EX CESS AMOUNT AS A DEDUCTION IN THE ASSESSMENT YEAR 1986-87 THOUGH T HE INTEREST WAS CHARGED AND ASSESSED IN THE ASSESSMENT YEARS 19 81-82 TO 1986-87. THIS DECISION IS CLEARLY DISTINGUISHABLE BECAUSE THERE WAS NO DISPUTE THAT WHAT THE BANK CHARGED WAS CLEARLY I N EXCESS OF WHAT IT WAS ENTITLED TO. FURTHER, THE BANK ON REAL IZING THE MISTAKE THAT IT HAD OVERCHARGED THE CUSTOMER, CREDITED THE EXCESS INTEREST TO THE ACCOUNT OF THE CUSTOMER. IN THE PRESENT CAS E, HOWEVER, THE ASSESSEE HAS NOT CREDITED THE INTEREST WHICH IT CON SIDERS TO BE WRONGLY CHARGED, TO THE ACCOUNT OF NGE. THE AMOUNT WAS MERELY CREDITED TO A PROVISION ACCOUNT AND DEBITED TO THE PROFIT AND LOSS ACCOUNT. SECTION 28 HAS NO APPLICATION ON THESE FA CTS. 36. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. 37. ITA NO: 4129/MUM/2007 IS AN APPEAL BY THE DEPAR TMENT. IT IS ACTUALLY A CROSS APPEAL. GROUND NOS: (I) TO (II I) HAVE ALREADY BEEN DEALT WITH WHILE DEALING WITH GROUND NO: 1 OF THE A SSESSEES APPEAL SINCE THEY ARE CONNECTED. THESE GROUNDS ARE DISMIS SED. 38. GROUND NO: (IV) IS THAT THE CIT(A) ERRED IN ALL OWING THE PROVISION FOR LOSSES ON COMPLETION OF PROJECT OF ` 65,66,013/-. THE ASSESSEE DEBITED THE AFORESAID AMOUNT BASED ON PROJ ECTIONS AND 32 ITA NO: 4291/MUM/2007 ITA NO: 5658/MUM/2007 ITA NO: 4129/MUM/2007 ESTIMATES OF EXPECTED REVENUES AND COSTS TO COMPLET E THE PROJECT. THE DETAILS OF THE PROVISION WERE GIVEN IN SCHEDULE 20 TO THE PROFIT AND LOSS ACCOUNT. IN THESE PROJECTS THE REVENUES W ERE EXPECTED TO BE LOWER THAN THE ESTIMATED COSTS FOR COMPLETION. ACCORDING TO THE ASSESSING OFFICER THE PROVISION REPRESENTED A CONTI NGENT LIABILITY AND IT HAS BEEN REPORTED SO IN CLAUSE 17(K) OF THE AUDIT REPORT IN FORM NO.3CD. THE ASSESSING OFFICER THEREFORE DISAL LOWED THE CLAIM. 39. ON APPEAL, THE CIT(A) NOTED THAT THE ASSESSEE E XECUTED A BUILDING PROJECT BY NAME MAHINDRA PARK AT GHATKOP AR AND THAT IT WAS FOLLOWING THE PERCENTAGE COMPLETION METHOD OF A CCOUNTING FOR PROFITS, WHICH WAS ONE OF THE RECOGNIZED METHODS AS PER ACCOUNTING STANDARD 7 ISSUED BY THE INSTITUTE OF CH ARTERED ACCOUNTANTS OF INDIA. UNDER THIS METHOD, THE PROFI T FROM THE PROJECT IS ESTIMATED AND BOOKED OVER THE PERIOD OF CONTRACT AS A PERCENTAGE OF THE ACTUAL COST TO TOTAL COST OF THE PROJECT AT EVERY CUT- OFF DATE. THE CIT(A) THUS HELD THAT IN THE CASE OF PERCENTAGE OF COMPLETION METHOD, ANTICIPATORY PROFITS ARE BOOKED DURING THE PROGRESS OF THE PROJECT. AS A COROLLARY TO THIS, I F AT ANY STAGE IT IS FOUND THAT THE CONTRACT IS GOING TO END IN A LOSS, SUCH LOSS IS ALSO BOOKED AS PER THE REQUIREMENTS OF AS 7. THE CIT(A) , ON EXAMINATION OF THE FACTS, FOUND THAT THE ASSESSEE H AS BEEN FOLLOWING THE PERCENTAGE OF COMPLETION METHOD OF AC COUNTING RIGHT FROM THE INCEPTION AND HAS BEEN OFFERING PROFITS ON THIS METHOD AND THIS IS THE FIRST YEAR IN WHICH A LOSS HAS BEEN CLA IMED. HE FURTHER 33 ITA NO: 4291/MUM/2007 ITA NO: 5658/MUM/2007 ITA NO: 4129/MUM/2007 FOUND THAT THE METHOD WAS BONA FIDE AND SCIENTIFIC AS IT WAS ONE OF THE RECOGNIZED METHODS AS PER AS 7 ISSUED BY THE IN STITUTE OF THE CHARTERED ACCOUNTANTS OF INDIA. HE HELD THAT IF TH E LOGIC OF THE ASSESSING OFFICER IS TO BE UPHELD THAT THE LOSS IS A CONTINGENT LIABILITY, THEN BY THE SAME LOGIC THE PROFIT UNDER THE PERCENTAGE OF COMPLETION METHOD CANNOT ALSO BE TREATED AS TRUE PR OFIT BUT ONLY A CONTINGENT PROFIT. ACCORDING TO THE CIT(A), THE QU ESTION IS NOT WHETHER A CONTINGENT LIABILITY IS ALLOWABLE UNDER T HE INCOME TAX ACT, BUT THE REAL QUESTION IS WHETHER THE METHOD OF ACCO UNTING WHICH IS RECOGNIZED AND HAS BEEN CONSISTENTLY ADOPTED BY THE ASSESSEE AND ACCEPTED BY THE DEPARTMENT FOR A PERIOD OF TIME, CA N BE GIVEN A GO BY. HE HELD THAT THE METHOD FOLLOWED BY THE ASSESS EE CANNOT BE DISTURBED AND THUS DIRECTED THE ASSESSING OFFICER T O ALLOW THE LOSS OF ` 65,66,013/-. 40. THE REVENUE IS IN APPEAL. THE LEARNED CIT DR R ELIED ON THE ASSESSMENT ORDER AND DID NOT ADVANCE ANY FURTHER AR GUMENTS. ON THE OTHER HAND, THE LEARNED REPRESENTATIVE FOR THE ASSESSEE DREW OUR ATTENTION TO THE ORDER OF THE MUMBAI BENCH OF T HE TRIBUNAL IN THE CASE OF DCIT VS. OTIS ELEVATOR CO (I) LTD. (2006) 9 9 ITD 73 (MUM), WHICH WAS RELIED ON BY THE CIT(A) AND SUBMITTED THA T THE ISSUE HAS TO BE DECIDED IN FAVOUR OF THE ASSESSEE SINCE THE F ACTS ARE IDENTICAL. AFTER EXAMINING THE MATTER, WE ARE OF THE VIEW THAT THE REASONING AND CONCLUSION OF THE CIT(A) ARE SOUND AND CANNOT B E DISTURBED. AS RIGHTLY POINTED OUT BY HIM, THE PERCENTAGE OF CO MPLETION METHOD FOR ACCOUNTING THE PROFITS OF THE PROJECT IS A RECO GNIZED METHOD AND 34 ITA NO: 4291/MUM/2007 ITA NO: 5658/MUM/2007 ITA NO: 4129/MUM/2007 THE SAME HAS BEEN CONSISTENTLY FOLLOWED BY THE ASSE SSEE AND ALSO ACCEPTED BY THE DEPARTMENT HITHERTO. IN THIS METHO D, THE PROFITS FROM THE PROJECT ARE ESTIMATED AND SPREAD OVER THE CONSTRUCTION PERIOD ON AN ESTIMATE BASIS. DISTURBING THE METHOD IN ONE PARTICULAR WITHOUT ANY VALID REASON WILL DISTORT TH E RESULT. WE THEREFORE UPHOLD THE DECISION OF THE CIT(A) AND DIS MISS THE GROUND TAKEN BY THE REVENUE. THUS THE APPEAL OF THE REVEN UE IS DISMISSED. 41. ITA NO: 5658/MUM/2007 IS AN APPEAL BY THE ASSES SEE ARISING OUT OF PROCEEDINGS UNDER SECTION 154 OF THE ACT. IT WAS STATED BY THE ASSESSEE THAT THIS APPEAL HAS BECOME INFRUCTUOUS. WE ACCORDINGLY DISMISS THE APPEAL AS INFRUCTUOUS. 42. TO SUM UP, ITA NO: 4291/MUM/2007 IS PARTLY ALLO WED, ITA NO: 4129/MUM/2007 IS DISMISSED AND ITA NO: 5658/MUM /2007 IS ALSO DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 30 TH JUNE 2011. SD/- SD/- (T R SOOD) (R V EASWAR) ACCOUNTANT MEMBER PRESIDE NT MUMBAI, DATED 30 TH JUNE 2011 SALDANHA COPY TO: 1. MAHINDRA GESCO DEVELOPERS LTD. 5 TH FLOOR, MAHINDRA TOWERS ROAD NO.13, WORLI, MUMBAI 400 018 2. ACIT, CENTRAL CIRCLE 47, MUMBAI 3.CIT-CENTRAL IV, MUMBAI 4. CIT(A)-CENTRAL III, MUMBAI 5.DR B BENCH TRUE COPY BY ORDER ASSTT. 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