DCIT, Mangalore V. M/s Hotel Navarathna Complex, Mangalore

ITA 415/BANG/2009

• Counselvise Citation: [2009] 114 COUNSELVISE.COM (IT) 9523 (ITAT-BANGALORE)
• Duration Of Justice: 3 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-08-2009
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2004-2005
• Appeal Filed On: 04-05-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: V S SREELEKHA
• Assessee Lawyers: V CHANDRASEKHAR
• Keywords: Business income; Bad and doubtful debts; Liquidation
• Section: 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE B BENCH, BANGALORE BEFORE SHRI SHAILENDRA KUMAR YADAV, JM AND SHRI A. MOHAN ALANKAMONY, AM ITA NO.415(BANG.)/2009 (ASSESSMENT YEAR : 2004-05) THE DEPUTY COMMISSIONER OF INCOME-TAX , CIRCLE-2(1), MANGALORE APPELLANT VS M/S HOTEL NAVRATHNA COMPLEX, K.S.RAO ROAD, MANGALORE. RESPONDENT REVENUE BY SMT. V.S. SREELEKHA ASSESSEE BY : SHRI V. CHANDRASEKHAR O R D E R PERSHAILENDRA KUMAR YADAV,JM: THIS APPEAL HAS BEEN FILED BY THE REVENUE AGAINST THE O RDER OF THE CIT(A), MANGALORE DATED 24-02-2009ON TWO ISSUES. 2. THE FIRST ISSUE IS WITH REGARDS TO CLAIM OF BAD DEBTS WR ITTEN OFF IN RESPECT OF AMOUNT INVESTED WITH M/S YASHASWI LEASING LT D. THE ASSESSEE IS A FIRM CARRYING ON HOTEL AND JEWELLERY BUSINESS. THUS , THE ASSESSEE HAS TWO BUSINESS ACTIVITY FIRST BEING HOTEL SECTION AND THE OT HER IS JEWELLERY SECTION. THE FIRM HAS DEPOSITED AN AMOUNT OF RS.25,93,500/- WITH M/S YASHASWI LEASING & FINANCE CO. LTD.. (HEREIN AFTER CALLED AS YLFCL, BANGALORE). THE BACKGROUND OF THE INVESTMENT IS STATED TO BE FUNDS GENERATED FROM NEW CUSTOMER SCHEME. DURING THE FINANC IAL YEAR 1996-97, THE FIRM INTRODUCED A NEW CUSTOMER SCHEME AND OUT OF TH AT CERTAIN COLLECTIONS WERE MADE, WHICH WERE TO BE UTILIZED FOR THE SCH EME. THE COMPANY DEPLOYED THE FUNDS WITH M/S YLFCL, BANGALORE. TH E ASSESSEE INVESTED A SUM OF RS.78.73 LAKHS DURING THE PERIOD 1996- 97 TO 2001-02 ITA NO.415(B)/09 2 AND EARNED INTEREST OF RS.17.26 LAKHS DURING THE CORRESPO NDING PERIOD WHICH HAVE BEEN OFFERED FOR TAXATION IN THE RESPECTIVE AS SESSMENT YEARS. SUBSEQUENTLY, FUNDS COLLECTED OUT OF THIS CUSTOMERS SCHE MES WERE CREDITED IN A SEPARATE ACCOUNT OPENED WITH UCO BANK AND OUT OF WHICH FUND TO THE TUNE OF RS.25,93,500/- WAS INVESTED WITH M/S YLFCL, BANG ALORE, A NON- BANKING FINANCIAL CORPORATION. HOWEVER, THE LICENCE OF THE CO MPANY HAS BEEN REVOKED BY THE RBI IN MARCH, 2003 AND IT COULD NOT CARRY ON ITS ACTIVITIES RESULTING INTO HUGE LOSS. SUBSEQUENTLY, COMPANY WENT INTO LIQUIDATION AND HAD TO WOUND UP AS PER THE ORDER OF THE HIGH COURT OF KARNATAKA DATED 22-02-2006. AS A CONSEQUENCE, THE C OMPANY DEFAULTED IN REPAYMENT OF DEPOSITS AND THE ASSESSEE FIRM COULD NOT RECOVER THE FOLLOWING AMOUNTS: HOTEL SECTION JEWELLERY SECTION I) PRINCIPAL AMOUNT RS.3,03,500 /- 22,90,000/- II) INTEREST RECEIVABLE RS. 6,942/- 40,449/- 3. THE ASSESSEE HAD MADE A CLAIM OF WRITE OFF OF THE ABOV E AMOUNTS U/S 36 AND LATER REQUESTED TO CONSIDER THE CLAIM U/S 37 OF THE IT ACT. SINCE INTEREST AMOUNT HAS BEEN OFFERED FOR TAXATION, THE AO HA S ALLOWED WRITE OFF OF INTEREST FOR BOTH THE SECTIONS. HOWEVER, IN RESPECT O F PRINCIPLE AMOUNT, ASSESSING OFFICER HAS CONTENDED THAT THESE AMOUNTS HAVE NOT BEEN ENTERED IN THE COMPUTATION OF ASSESSEES INCOME AND HENCE THE C LAIM DOES NOT FALL WITHIN THE PROVISIONS OF SECTION 36(1)(IV) RWS. 36(2) (I). AS REGARDS CLAIM U/S 36, THE ASSESSING OFFICER HAS HELD THAT THE AMOUNTS WERE NOT EXPENDITURE LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPO SES OF BUSINESS AND THE CLAIM DOES NOT FULFILL THE CONDITIONS U/S 37(1). ACC ORDINGLY, THE AO REJECTED THE ASSESSEES CLAIM. THE ASSESSING OFFICER ALSO OBSERVED THAT THE ITA NO.415(B)/09 3 ASSESSEES CLAIM IS PREMATURE BESIDES BEING CAPITAL IN NATU RE, SO NOT ENTITLED FOR DEDUCTION U/S 36 OR 37. 4. THE MATTER WAS CARRIED BEFORE THE FIRST APPELLATE AUTHO RITY, WHEREIN THE SAME HAS BEEN ALLOWED AND THE CIT(A) HEAVILY RELIED O N THE DECISION OF ITAT, DELHI BENCH-E IN THE CASE OF M/S GOETZE (INDIA) LTD., VS DCIT 119 TTJ (2008) DELHI 351. THE SAME HAS BEEN OPPOSED BEFORE US, BY THE REVENUE BY STATING THAT THE CIT(A) WAS NOT JUSTIFIED IN A LLOWING THE BAD DEBTS WRITTEN OFF WITH RESPECT TO THE AMOUNTS INVESTED WITH M/S YLFCL, BANGALORE, BECAUSE THE INVESTMENT DOES NOT QUALIFY AS A BAD DEBT U/S 36(1)(VII) RWS 36(2) OR A BUSINESS LOSS U/S 37(1). ON THE OTHE R HAND, LEARNED DR SUPPORTED THE ORDERS OF THE CIT(A) ON THE ISSUE. 5. WE FIND IT UNDISPUTED THAT THE ASSESSEE HAS INVESTED IN M/S YLFCL, BANGALORE WHICH WAS COLLECTED FROM LARGE NUMBER OF DEPOSITORS UNDER THE GOLD SCHEME. UNDER THE SAID SCHEMES, THE AMO UNT COLLECTED WERE SETTLED ON MATURITY OF THE SCHEMES BY WAY OF SALE OF JEWELLERY TO THE CUSTOMERS. THE WHOLE SCHEME WAS WITH A VIEW TO PROMOT E ITS BUSINESS IN JEWELLERY. SINCE PART OF THE FUND WAS INVESTED IN M/S YL FCL, BANGALORE TO AUGMENT INCOME AND TO REPAY TO THE CUSTOMERS, THE INVE STMENT HAS TO BE SEEN IN THE CONTEXT OF OVERALL BUSINESS CONSIDERATION. TH E HONBLE SUPREME COURT IN THE CASE OF M/S PATNAIK & CO.LTD., VS CIT 16 1 ITR 365, WHEREIN THE ASSESSEE ENGAGED AS A DEALER IN AUTOMOBILES AND SP ARE PARTS, HAD PURCHASED GOVERNMENT BONDS TO OBTAIN PREFERENTIAL TRE ATMENT FROM GOVERNMENT. THE DECISION OF INVESTMENT WAS PROPELLED TO FURTHER THE SALES AND BOOST BUSINESS. THE HONBLE SUPREME COURT HELD TH AT INVESTMENT DID NOT BRING IN AN ASSET OF CAPITAL NATURE AND IN THE CIRCUMS TANCES, LOSS SUFFERED ON SALE OF GOVERNMENT BONDS BY THE ASSESSEE IS ALLOWABLE A BUSINESS LOSS. SIMILARLY, THE BOMBAY HIGH COURT IN THE CAS E OF CIT VS ITA NO.415(B)/09 4 GANNON DUNKERELEY & CO., 119 ITR 595(BOM.) FOUND THAT TH E ASSESSEE, A BUILDING CONTRACTOR, IS REQUIRED TO MAKE DEPOSITS FOR OBTAIN ING GOVERNMENT CONTRACTS AND IT CHOOSE TO DEPOSIT IN GOVERNMENT SECUR ITIES. THE COURT HELD THAT LOSS SUFFERED ON SALE OF GOVERNMENT SECURITIES ARE N OT IN THE NATURE OF ORDINARY INVESTMENT AND THE LOSS IS ALLOWABLE AS A DEDUCTIO N IN COMPUTING THE BUSINESS PROFIT. SIMILARLY, THE ITAT, DELHI BENCH-E IN C ASE OF M/S GOETZE (INDIA)LTD., VS DCIT 119 TTJ (2008) DELHI 351 HAS C ONSIDERED A SIMILAR ISSUE. IN ASSESSEES CASE ALSO, IT S SEEN THAT PA RT OF THE FUNDS COLLECTED UNDER PROMOTIONAL BUSINESS WAS INVESTED WITH M/ S YLFCL, BANGALORE, THEREOF HAS BEEN OFFERED FOR TAXATION FROM THE ASSESSMENT YEAR 1997-98 TO 2001-02. FOLLOWING THE ABOVE SAID DECISION, T HE CIT(A) OBSERVED THAT PRINCIPLE AMOUNT IRRECOVERABLE DUE TO THE BANKRUPTCY AND WINDING UP OF M/S YLFCL, BANGALORE AND THE SAME SHOULD BE TREATED AS LOSS IN CONNECTION WITH THE OVERALL BUSINESS AND, THEREFOR E, THE CLAIM WAS ALLOWED AS BAD DEBTS OR BUSINESS LOSS. WE ARE NOT INCLINE D TO INTERFERE WITH THE REASONED FINDING OF CIT(A) IN THE LEGAL BACKGROUND DISCUSSED. T HE SAME IS UPHELD. 6. THE NEXT ISSUE IS WITH REGARD TO ALLOWABILITY OF CLAIM OF S UNDRY BALANCES WRITTEN OFF IN RESPECT OF OUTSTANDING LODGING RENT. THE ASSESSEE HAD CLAIMED WRIT OFF OF RENTS RECEIVABLE FROM THE FOLLOWING C OMMERCIAL TAX OFFICERS: 1. H.K.NAIK, MYSORE SALES TAX OFFICER RS.13,536/- 2. C.T.O.BANGALORE -DO- RS. 9,887/- 3. RAMASWAMY -DO- RS.19,632/- 4. B.S.PATIL -DO- RS. 9,383/- 5. RAMESH, BANGALORE -DO- RS18,375/- ITA NO.415(B)/09 5 7. IT HAS BEEN CLAIMED THAT ORAL AGREEMENT WAS ENTERED WITH SRI SUDHEER PAI, FOR RUNNING OPERATIONAL SERVICES TO THE ROOM GUESTS, ROOM SERVICE, HOUSE KEEPING AND ALSO RESPONSIBLE FOR COLLECTING D UES AND FOR FOLLOW UP THE OPERATIONS. HOWEVER, THE AFORESAID CTOS W ITHOUT MAKING PAYMENT VACATED THE ROOMS AND INSPITE OF BEST EFFORTS MAD E BY THE ASSESSEE COULD NOT COLLECT THE AMOUNT. THE EXPLANATION WAS NOT FOU ND TO BE SATISFACTORY BY THE ASSESSING OFFICER, ACCORDINGLY HE DISALLOW ED THE CLAIM OF RS.70,813/-. IN APPEAL, THE SAME WAS ALLOWED. 8. AFTER GOING THROUGH THE RIVAL SUBMISSIONS AND MATERIAL ON RECORD, WE RE NOT INCLINED TO INTERFERE WITH THE FINDING OF CIT(A) ON THIS ISSUE, WHO AFTER OVERALL APPRAISAL OF THE FACTS FOUND THAT INCOME OF THE LODGE HAS NOT BEEN CONSISTENTLY OFFERED TO BUSINESS INCOME AND ANY A MOUNT WHICH COULD NOT BE RECOVERED COULD BE CLAIMED AS BAD DEBT. ACCORDIN GLY, THE CLAIM OF BAD DEBT IN RESPECT OF RENT FROM CTOS WAS RIGHTLY ALLOWE D BY CIT(A). THE SAME IS ALLOWED AS NON-RECOVERABLE. THE SAME IS UPHELD. 9. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 28 TH AUGUST, 2009. ( A. MOHAN ALANKAMONY) (SHAILENDRA KUMAR YADAV) ACCOUNTANT MEMBER JUDICIAL MEMBER PLACE: BANGALORE DATED: 28-08-2009 AM * COPY TO : 1. THE ASSESSEE 2. THE REVENUE 3. CIT(A) 4. CIT 5. DR 6. GF(BLORE) 7. GF(DELHI AR, ITAT, BANGALORE