Asst. Commissioner of Income tax, Circle-1(1), Panaji V. M/s EDC Ltd., Panaji

ITA 42/PAN/2013

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 5224 (ITAT-PANAJI)
• Duration Of Justice: 7 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-09-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Assessment Year: 2009-2010
• Appeal Filed On: 27-02-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AMRIT RAJ SINGH
• Keywords: Earning of tax free income; Bad and doubtful debts; Revenue expenditure
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PANAJI BENCH, PANAJI BEFORE SHRI P. K. BANSAL, HONBLE ACCOUNTANT MEMBER AND SHRI D.T. GARASIA, HONBLE JUDICIAL MEMBER ITA NO. 42/PNJ/2013 (ASSESSMENT YEAR-2009-10) THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-1(1), PANJI- GOA. (APPELLANT) VS. M/S EDC LTD., EDC HOUSE, DR. ATMARAM BORKAR ROAD, PANAJI-GOA. PAN: AAACE4614K (RESPONDENT) APPELLANT BY : AMRIT RAJ SINGH, DR RESPONDENT BY : M.M.GOLVALA, ADV. DATE OF HEARING : 03/09/2013 DATE OF ORDER : 27/09/2013 O R D E R PER: D.T.GARASIA (JM) THIS APPEAL BY THE DEPARTMENT AGAINST THE ORDER OF CIT(A)-1(1), DATED 22.11.2012, FOR ASSESSMENT YEAR 2009-10. THE FOLLOWING GROUNDS ARE RAISED BY THE DEPARTMENT WHICH READ AS UNDER. (I) THE ORDER NO.IN ITA NO. 353/PNJ?11-12/AY 1009-10, DATED: 20.11.2012 IN THE ABOVE CASE IS OPPOSED TO LAW AND FACTS OF THE CASE. (II) THE LEARNED CIT(A) HAS ERRED IN APPRECIATING THE ISSUE OF 14A DISALLOWANCE MADE BY THE ASSESSING OFFICER AS ASSESSEE HAS NOT PRODUCED ANY EVIDENCE DURING SCRUTINY ASSESSMENT TO PROVE THAT NO INTEREST HAS BEEN PAID ON THE MONEY UTILISED FOR PURCHASE OF INVESTMENTS. (III) THE LEARNED CIT(A) HAS FAILED TO APPRECIATE THE DISALLOWANCE OF INTEREST ON LOANS GIVEN TO EMPLOYEES. THE ASSESSEE COMPANY IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING AND ACCOUNTING OF INTEREST ON RECEIPT BASIS IS NOT PERMISSIBLE. THE INTEREST SHOWN BY THE ASSESSEE OF RS.13,90,962/- DURING THE 2 ITA 42/ PAN/2013 ACIT VS. M/S. EDC LTD., YEAR RELATES TO THE EARLIER YEARS LOAN AMOUNTS WHICH WERE NOT OFFERED FOR TAX IN THE EARLIER YEARS. (IV) THE LEARNED CIT(A) HAS FAILED TO APPRECIATE THE ADDITION MADE BY THE ASSESSING OFFICER WITH RESPECT TO BAD DEBTS WRITTEN OFF OF RS. 1,24,86,456/-. THE ASSESSEE IS ACTUALLY NOT WRITING OFF THE BAD DEBTS IN THE LEDGER ACCOUNTS OF THE LOAN PARTIES, INSTEAD ONLY JOURNAL ENTRIES HAVE BEEN PASSED IN THE PROVISIONS FOR BAD AND DOUBTFUL DEBTS ACCOUNT FOR CLAIMING THE EXPENDITURE ON ACCOUNT OF BAD DEBTS WRITTEN OFF. AS PER THE PROVISIONS OF INCOME TAX ACT 1961, THE ASSESSEE SHOULD ACTUALLY WRITE OFF THE BAD DEBTS IN THE BOOKS FOR AVAILING THE EXPENDITURE ON THIS HEAD. THE METHOD ADOPTED BY THE ASSESSEE IS CONTRARY TO THE SPIRIT OF THE PROVISIONS OF SECTION 36(1)(VII). IT IS SUBMITTED THAT THE AMOUNT OF BAD DEBTS OF RS. 1,24,86,456/- HAS NOT REALLY BECOME BAD DEBTS AS THE SECURITIES TAKEN FOR THE RECOVERY OF THE LOAN AMOUNTS WERE YET TO BE ENFORCED. (V) THE LEARNED CIT(A) HAS FAILED TO APPRECIATE THE ADDITION MADE BY THE ASSESSING OFFICER WITH RESPECT TO CMRY SUBSIDY CLAIMED AS BAD DEBT. THE SUBSIDY AMOUNT WHICH IS PAID BY THE ASSESSEE TO THE BENEFICIARIES AMOUNTING TO RS. 18,90,801/- IS WRITTEN OFF IN THE BOOKS OF THE ASSESSEE ON THE GROUND THAT THERE IS A DELAY IN RECEIPT OF THE SUBSIDY AND UNCERTAINTY REGARDING RECEIPTS FROM THE ABOVE GOVERNMENT. THESE AMOUNTS ARE PAID AS PER THE GOVERNMENT DIRECTIONS WHICH ARE TO BE REIMBURSED TO THE ASSESSEE BY THE GOVERNMENT. THIS AMOUNT IS NOT OFFERED FOR TAX IN THE EARLIER YEARS AND AS PER PROVISIONS OF SECTION 36(1)(III), BAD DEBTS CAN BE WRITTEN OFF ONLY IN RESPECT OF AMOUNTS WHICH WERE OFFERED FOR TAX IN THE EARLIER YEAR. 2. GROUND NO. 1 IS GENERAL. 3. GROUND NO. 2 : THE SHORT FACTS OF THE CASE ARE THAT THE ASSESSEE COMPANY IS FINANCIAL CORPORATION OF GOVERNMENT OF GOA, ENGAGED IN BUSINESS OF FINANCING INDUSTRIES. THE ASSESSEE HAS FIELD E-RETURN OF INCOME PROCESSED UNDER SECTION 143(3) OF THE ACT. THE ASSESSEE HAS ON THE DIVIDEND INCOME OF RS. 44,21,500/- AND CLAIMED AS EXEMPT INCOME. THE ASSESSEE WAS REQUESTED TO FILE THE COMPUTATION OF DISALLOWANCE UNDER SECTION 14A. THE ASSESSEE STATED THAT AS THE CORPORATION HAD NEITHER INCURRED IN ADMINISTRATIVE EXPENSES NOR PAID INTEREST FOR EARNING THE DIVIDEND INCOME AND IT HAS WORKED OUT DISALLOWANCE OF RS.1,08,722/- UNDER RULE 8D. THE ASSESSEE HAS NOT PRODUCED ANY EVIDENCE TO PROVE THAT NO INTEREST IS PAID ON THE MONEY UTILISED FOR PURCHASE OF INVESTMENTS. 3 ITA 42/ PAN/2013 ACIT VS. M/S. EDC LTD., THEREFORE, AS PER THE PROVISIONS OF RULE 8D, DISALLOWANCE WAS WORKED OUT BY AO AS UNDER: (I) AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME :NIL (II) IN A CASE WHERE THE ASSESSEE HAS INCURRED EXPENDITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT, AN AMOUNT COMPUTED IN ACCORDANCE WITH THE FOLLOWING FORMULA, NAMELY (A X B)/C= A. AMOUNT OF EXPENDITURE BY WAY OF INTEREST OTHER THAN THE AMOUNT OF INTEREST INCLUDED IN CLAUSES (I) INCURRED DURING THE PREVIOUS YEAR- RS. 4,30,69,789/- B. THE AVERAGE OF VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FROM PART OF THE TOTAL INCOME APPEARING IN THE BALANCE SHEET OF THE ASSESSEE ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR. OF 33,06,56,832 + 33,06,56,832= 330656832 C. THE AVERAGE OF TOTAL ASSETS AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR; 2486482454+2034760535=4521242989 AVERAGE OF THE ABOVE = 2260621494 ACCORDINGLY:- (AXB)/C= 43069789 X 330656832 = 6613136 2260621494 (III) AN AMOUNT EQUAL TO ONE-HALF PER CENT OF THE AVERAGE OF THE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR. 330656832 X .005= RS. 16,53,284/- ACCORDINGLY, A SUM OF RS. 82,66,420/- (6613136+1653284) IS DISALLOWED U/S. 14A READ WITH RULE 8D AS EXPENDITURE INCURRED FOR EARNING THE EXEMPTED INCOME AND SAME IS ADDED TO THE TOTAL INCOME. 4. THE MATTER CARRIED TO CIT(A) AND CIT(A) HAS DELETED THE ADDITION BY OBSERVING AS UNDER:- I HAVE GONE THROUGH THE FACTS OF THE CASE, CONTENTS OF THE ASSESSMENT ORDER UNDER WRITTEN SUBMISSION OF THE ASSESSEE AS THERE WAS NO FRESH INVESTMENTS DURING THIS YEAR AND NO DEDUCTION SHALL BE ALLOWED IN THE RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. HENCE THE ADDITION MADE BY THE JCIT IS DISMISSED AND THE APPEAL OF ASSESSEE IS ALLOWED. 4 ITA 42/ PAN/2013 ACIT VS. M/S. EDC LTD., 4.1. LEARNED DR SUBMITTED THAT THE ASSESSEE WAS REQUESTED TO FILE THE COMPUTATION FOR DISALLOWANCE UNDER SECTION 14A. THE ASSESSEE HAS STATED THAT CORPORATION HAD NEITHER INCURRED ANY ADMINISTRATIVE EXPENSES NOR PAID INTEREST OF EARNING THE DIVIDEND INCOME AND WORKED OUT THE DISALLOWANCE OF RS. 1,08,722/- UNDER RULE 8D. THE ASSESSEE DID NOT PRODUCE ANY EVIDENT TO PROVE THAT NO INTEREST IS PAID ON THE MONEY UTILISED FOR PURCHASE OF INVESTMENTS. THEREFORE, AS PER 8D RULE FORMULA. THE ASSESSING OFFICER HAS DISALLOWED A SUM OF RS. 82,66,420/- UNDER SECTION 14A R.W. RULE 8D, EXPENDITURE INCURRED FOR EARNING THE EXEMPT INCOME. 4.2 THE LEARNED AR SUBMITTED THE AUDIT ANNUAL ACCOUNTS AND TAX AUDIT REPORT AND ALSO THE STATEMENT OF INCOME SHOWING THE DIVIDEND INCOME DURING THE YEAR. THE CORPORATION AS ON THE DIVIDEND INCOME OF RS. 44,21,500/- WHICH IS EXEMPT FROM THE TAX. THE AR SUBMITTED THAT THE CORPORATION HAD NEITHER INCURRED ANY ADMINISTRATIVE EXPENSES NOR PAID INTEREST OF LOAN FOR EARNING THE DIVIDEND INCOME, WHICH IS EXEMPT FROM TAX. AS FAR AS PAYMENT OF INTEREST IS CONCERNED CORPORATION HAS NOT TAKEN ANY LOAN FOR MAKING THE INVESTMENTS IN SHARES. THEREFORE, THE QUESTION OF PAYING THE INTEREST DOES NOT ARISE AS PER THE AUDIT ACCOUNT. THE ASSESSEE HAS CAPITAL PLUS INTERNAL ACCRUAL AMOUNTING TO RS. 205 CRORES WHICH IS MUCH MORE THAN THE INVESTMENT OF RS. 33 CRORES MADE IN SHARES OF DIFFERENT COMPANIES. AS PER THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILITIES & POWER LTD. 313 ITR 340 NO INTEREST COULD BE DISALLOWED U/S. 14A OF THE INCOME TAX ACT, IF THE INTEREST FREE FUND HAVE BEEN UTILISED FOR MAKING THE INVESTMENT IN SHARES. THE ASSESSEE HAS FILED THE DISALLOWANCE U/S 14A, CALCULATED THE TAX AUDIT AND SHOWN IN FORM NO. 3CD FORMING PART OF THE TAX OF THE AUDIT REPORT. THE RULE 8D SPEAKS THE INVESTMENTS, FROM WHICH DOES NOT PART OR SHALL NOT FORM PART OF TOTAL INCOME. THE CORPORATION HAS CONSIDERED ONLY THE INVESTMENTS OF RS. 2,17,44,445/- ON WHICH THE DIVIDEND 5 ITA 42/ PAN/2013 ACIT VS. M/S. EDC LTD., WAS RECEIVED BY THE COMPANY FOR THE PURPOSE OF ARRIVING AT THE DISALLOWED AMOUNT. THE LEARNED AR SUBMITTED THAT IN AY- 2003-04 AND 2006-07 THE ASSESSMENT WAS MADE UNDER SECTION 143(3) AND IN BOTH THE YEAR NO DISALLOWANCE UNDER SECTION 14A WAS MADE FOR THE PAST IN THIS YEAR. THE LEARNED AR SUBMITTED THAT THE ASSESSING OFFICER HAS NOT GIVEN ANY FINDING THAT THE ASSESSEE IS WORKING FOR DISALLOWANCE UNDER SECTION 14A IS ERRONEOUS & ILLEGAL, AND NO FINDING IS GIVEN THEREFORE, NO DISALLOWANCE UNDER SECTION 14A CAN BE MADE AS PER THE DECISION OF JURISDICTIONAL HIGH COURT IN THE CASE OF GODREJ AND BOYCE MFG. CO. LTD. 328 ITR 81. 4.3 LEARNED DR SUBMITTED THAT WEATHER THE ASSESSEE HAS MADE INVESTMENT FROM INTEREST FREE FUNDS AVAILABLE TO ASSESSEE SUFFICIENT TO MEET ITS INVESTMENTS AND AT THE SAME TIME ASSESSEE HAS RAISED A LOAN IT CAN BE PRESUMED THAT THE INVESTMENT WERE MADE FROM INTEREST FREE FUNDS AVAILABLE. THE AR HAS RELIED UPON THE DECISION OF THE BOMBAY HIGH COURT IN CASE OF CIT VS. RELIANCE UTILITIES & POWER LTD. REPORTED IN 313 ITR 340 AND CIT VS. SUZLON ENERGY LTD. 354 ITR 630 (GUJ). 4.4. WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH THE PARTIES LOOKING TO THE FACTS AND CIRCUMSTANCES OF THE CASE, WE FIND THAT THE ASSESSEE COMPANY AS CREDITED AN AMOUNT OF RS. 44,21,500/- TO ITS PROFIT AND LOSS ACCOUNT FOR THE YEAR TOWARDS THE DIVIDEND INCOME. THE ASSESSING OFFICER HAS DISALLOWED RS. 66,13,136/- FOR INTEREST AND OTHER EXPENSES OF RS. 16,53,284/- UNDER RULE 8D OF THE ACT. THE ASSESSEE COMPANY HAS FILED THE AUDITED ACCOUNTS AND CLEARLY SHOWN THAT THE ASSESSEE COMPANY HAS NOT MADE NEW INVESTMENT DURING THIS YEAR. THE ASSESSEE HAS GIVEN LOANS TO INDUSTRIAL AND BUSINESS UNITS AND THE LOANS WERE REPAID DURING THE YEAR EXCEEDS THE LOAN TAKEN IN THE YEAR. THE ORIGINAL INVESTMENT IN SHARES OF RS. 33 CRORES WERE MADE OUT OF SHARE CAPITAL AND GENERAL RESERVE OF RS. 206 CRORES OF THE ASSESSEES COMPANY. WE FIND THAT FROM THIS FACTS 6 ITA 42/ PAN/2013 ACIT VS. M/S. EDC LTD., IT IS CLEAR THAT ASSESSEE HAS NOT UTILISED ANY BORROWED FUND FOR INVESTMENT IN THE SHARES. WE FIND THAT THE ASSESSING OFFICER HAS NOT DETERMINED THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME UNDER THIS ACT IN ACCORDANCE WITH THE METHOD AS PRESCRIBED IN THE LAW. IF THE ASSESSING OFFICER IS NOT SATISFIED WITH THE ACCOUNTS OF THE ASSESSEE THEN THE ASSESSING OFFICER SHOULD ARRIVE AT OBJECTIVE SATISFACTION REGARDING TO THE ACCOUNTS OF THE ASSESSEE. IN THE DECISION OF BOMBAY JURISDICTIONAL HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX 328 ITR 81 (BOMBAY) PAGE 81, THE HIGH COURT HAS DECIDED REGARDING SUBJECT TO SATISFACTION OF THE ASSESSING OFFICER BY OBSERVING IN A SHORT ORDER READ AS UNDER. THE SATISFACTION ENVISAGED BY SUB-SECTION (2) OF SECTION 14A IS AN OBJECTIVE SATISFACTION THAT HAS TO BE ARRIVED AT BY THE ASSESSING OFFICER HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. THE SAFEGUARD INTRODUCED BY SUB-SECTION (2) OF SECTION 14A FOR A FAIR AND REASONABLE EXERCISE OF POWER BY THE ASSESSING OFFICER, CONDITIONED AS IT IS BY THE REQUIREMENT OF AN OBJECTIVE SATISFACTION, MUST, THEREFORE, BE SCRUPULOUSLY OBSERVED. AN OBJECTIVE SATISFACTION, MUST, THEREFORE, BE SCRUPULOUSLY OBSERVED. AN OBJECTIVE SATISFACTION CONTEMPLATES A NOTICE TO THE ASSESSEE, AN OPPORTUNITY TO THE ASSESSEE TO PLACE ON RECORD ALL THE RELEVANT FACTS INCLUDING HIS ACCOUNTS AND RECORDING OF REASONS BY THE ASSESSING OFFICER IN THE EVENT THAT HE COMES TO THE CONCLUSION THAT HE IS NOT SATISFIED WITH THE CLAIM OF THE ASSESSEE; (X) THE EFFECT OF SECTION 115-O IS THAT IN ADDITION TO THE INCOME-TAX CHARGEABLE ON THE TOTAL INCOME OF A DOMESTIC COMPANY, ADDITIONAL INCOME-TAX IS CHARGED ON PROFITS DECLARED, DISTRIBUTED OR PAID. THIS TAX WHICH IS REFERRED T AS A TAX ON DISTRIBUTED PROFITS IS WHAT IT MEANS, NAMELY, A TAX ON THE PROFITS OF THE COMPANY. THIS IS NOT TAX ON DIVIDEND INCOME. UNDER SECTION 115-O, THE CHANGE IS ON A COMPONENT OF THE PROFITS OF THE COMPANY; THAT COMPONENT REPRESENTING PROFITS DECLARED, DISTRIBUTED OR PAID. THE TAX UNDER SECTION 115-O IS NOT A TAX WHICH IS PAID BY THE COMPANY ON BEHALF OF THE SHAREHOLDER, NOR DOES THE COMPANY ACT AS AN AGENT OF THE SHAREHOLDER IN PAYING THE TAX. THIS LEGAL POSITION IS FORTIFIED BY THE CIRCUMSTANCE THAT THE SHAREHOLDER IS NOT ENTITLED TO ANY DEDUCTION IN RESPECT OF THE AMOUNT WHICH HAS BEEN CHARGED TO TAX UNDER SUB-SECTION (1) OR THE TAX THEREON; 4.5 WE RESPECTFULLY FOLLOWING THE DECISION OF JURISDICTIONAL HIGH COURT, WE ARE OF THE VIEW THAT IN THE INSTANT CASE, THE ASSESSING OFFICER HAS NOT COME TO OBJECTIVE SATISFACTION, CONCLUSION GIVEN BY THE ASSESSING OFFICER IS NOT TRUE, 7 ITA 42/ PAN/2013 ACIT VS. M/S. EDC LTD., THEREFORE WE ARE OF THE VIEW THAT CIT(A) IS JUSTIFIED IN DELETING THE DISALLOWANCE. DURING THE YEAR UNDER CONSIDERATION, WE FIND FROM THE ORDER OF CIT(A), HE HAS SPECIFICALLY HELD THAT ASSESSEE COMPANY HAS NOT MADE INVESTMENT DURING THE PERIOD FROM 01/04/2008 TO 31/03/2009, THEREFORE, THERE IS NO QUESTION OF APPLICABILITY OF SECTION 14A R.W. RULE 8D. DURING THE COURSE OF HEARING LEARNED DR DID NOT POINT OUT FROM THE ACCOUNTS OF THE ASSESSEE THAT ASSESSEE HAS MADE ANY INVESTMENT DURING THE YEAR UNDER CONSIDERATION. WE ARE OF THE VIEW THAT CIT(A) IS JUSTIFIED IN DELETING THE DISALLOWANCE UNDER SECTION 14A OF THE ACT. WE ALSO FOUND FROM THE SUBMISSION OF THE AR THAT IN ASSESSMENT YEAR 2003-04 AND 2006-07, THE ASSESSMENT WAS MADE UNDER SECTION 143 OF THE ACT AND NO DISALLOWANCE WAS MADE UNDER SECTION 14A . THEREFORE, WHEN THE ASSESSEE HAS MADE THE INVESTMENT IN SHARES PRIOR TO ASSESSMENT YEAR 2003-04 AND MADE NO DISALLOWANCE IN THE PRIOR ASSESSMENT YEARS, NO DISALLOWANCE CAN BE MADE IN THE YEAR UNDER CONSIDERATION. THEREFORE, THE CIT(A) IS JUSTIFIED IN FACTS AND OUR INTERFERENCE IS NOT REQUIRED. IN THE RESULT, WE DISMISS THIS GROUND OF APPEAL. 5. GROUND NO. 3 : - THE ASSESSEE COMPANY IS ACCOUNTING THE INTEREST ON LOANS GIVEN TO EMPLOYEES ON RECEIPT BASIS. THE ASSESSEE COMPANY IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING AND HENCE ACCOUNTING OF INTEREST ON CASH BASIS IS NOT PERMISSIBLE. THE TOTAL INTEREST ON LOANS OUTSTANDING DURING THE YEAR RELATES TO EARLIER YEARS LOANS AMOUNT RS. 14,73,000/- WHICH WERE NOT OFFERED TO TAX IN THE RELEVANT YEARS. THEREFORE, IT WAS ADDED TO THE TOTAL INCOME OF THE ASSESSEE. 5.1. THE MATTER CARRIED TO CIT(A) AND CIT(A) HAS DEALT BY OBSERVING AS UNDER: I HAVE GONE THROUGH THE FACTS OF THE CASE CONTENTS OF THE ASSESSMENT ORDER AND WRITTEN SUBMISSIONS OF THE ASSESSEE. THE EDC LTD. FOLLOWING THE SYSTEM OF COLLECTING INTEREST AFTER COMPLETED REPAYMENT OF LOAN AMOUNT, ONLY AND SUCH ACCOUNTING SYSTEM FOLLOWED BY THE EDC LTD, SINCE INCEPTION OF THE COMPANY AND ALL THE TIME DEPARTMENT HAS ACCEPTED THE SAME. THE HONOURABLE SUPREME COURT IN THE CASE OF BILAHARI INVESTMENTS(P) LTD. VS. CIT 299 ITR 1, IT HELD THAT THE METHOD OF ACCOUNTING METHOD ADOPTED BY THE ASSESSEE ACCEPTED BY THE DEPARTMENT OVER SEVERAL YEARS SUBSEQUENT 8 ITA 42/ PAN/2013 ACIT VS. M/S. EDC LTD., DECISION OF DEPARTMENT TO CHANGE METHOD DEPARTMENT HAS TO RECORD A FINDING THAT ASSESSEES METHOD DISTORTS PROFITS- INCOME TAX ACT, 1961. IN VIEW OF THE FACTS DISCUSSED ABOVE THE ADDITION MADE BY THE ASSESSING OFFICER DISMISSED AND THE ASSESSEES GROUND OF APPEAL IS ALLOWED. 5.2. LEARNED DR SUBMITTED THAT THE ASSESSEE COMPANY IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING AND ASSESSEE HAS GIVEN LOANS ADVANCE TO EMPLOYEE WHILE ASSESSEE COMPANY IS CHARGING INTEREST ON LOANS ON RECEIPTS BASIS WHICH IS NOT PERMISSIBLE. THEREFORE, ASSESSEE IS TO FOLLOW GIVEN MERCANTILE SYSTEM ONLY. THEREFORE, ASSESSING OFFICER HAS DISALLOWED THE INTEREST AMOUNT TO THE INCOME OF THE ASSESSEE. 5.3. LEARNED AR SUBMITTED THAT THE ASSESSEE COMPANY HAS GIVEN HOUSING LOANS TO ITS EMPLOYEES ON THE LINES OF GOVERNMENT SCHEME AND AS PER THE SCHEME THEY ARE REQUIRED TO PAY INTEREST ONLY AFTER FULL REPAYMENT OF PRINCIPAL AMOUNT OF LOANS. CONSIDERING THE GOVERNMENT RULES, THE ASSESSEE COMPANY HAS RECOVERED INTEREST AFTER FULL REPAYMENT OF PRINCIPAL AMOUNT OF THE HOUSING LOAN. THE ASSESSEE COMPANY WAS CHARGING THE INTEREST ON HOUSING LOANS AS PER THE ABOVE PROCEDURE WHICH WAS ACCEPTED BY THE DEPARTMENT IN EARLIER YEAR ALSO. THE LEARNED AR HAS DRAWN OUR ATTENTION TO PAGE 35 TO 36 OF THE PAPER BOOK, WHICH ARE THE RULES OF EDC EMPLOYEE HOUSE BUILDING ADVANCE RULES AND AS PER THIS RULES, THE INTEREST WILL BE PAID BY THE MONTHLY INSTALMENT EQUAL TO THE INSTALMENT TOWARDS PRINCIPAL AMOUNT COMMENCING FROM THE MONTH FOLLOWING THE MONTH IN WHICH THE LAST INSTALMENT OF THE PRINCIPAL AMOUNT IS PAID AND AS PER THESE RULES, THE ASSESSEE COMPANY HAS CONSISTENTLY FOLLOWED DURING THE YEAR AND PAST YEARS THE PRACTICE OF ACCOUNTING INTEREST ON HOUSING LOANS ON CASH BASIS. THE LEARNED AR HAS RELIED UPON THE DECISION OF CIT VS. BILAHARI INVESTMENTS PVT. LTD., 299 ITR 1 AND SUBMITTED THAT AS PER THE DECISION THE METHOD ADOPTED BY THE ASSESSEE WAS ACCEPTED BY THE DEPARTMENT OVER SEVERAL YEARS. SUBSEQUENT DECISION OF THE DEPARTMENT CHANGE THE MATTER DEPARTMENT HAS TO RECORD FINDING THAT THE ASSESSEE METHOD DISTORT THE PROFITS. 9 ITA 42/ PAN/2013 ACIT VS. M/S. EDC LTD., 5.4. WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH THE PARTIES. LOOKING TO THE FACTS AND CIRCUMSTANCES OF THE CASE, WE FIND THAT THE ASSESSEE COMPANY GRANTS HOUSING LOANS TO ITS EMPLOYEE ON THE LINES OF GOVERNMENT SCHEME. AS PER THE SCHEME, EMPLOYEES ARE REQUIRED TO PAY INTEREST ONLY AFTER PAYMENT OF FULL PRINCIPAL AMOUNT OF LOAN. CONSIDERING THIS ASPECT OF RECOVERY, THE ASSESSEE COMPANY HAS CONSISTENTLY FOLLOWED DURING THE YEAR AND PAST YEARS THE PRACTICE OF ACCOUNTING INTEREST ON ABOVE HOUSING LOANS ON CASH BASIS. WE FIND THAT THE ASSESSEE COMPANY IS FOLLOWING THIS METHOD OF ACCOUNTING IN THE PAST AND THAT HAS BEEN ACCEPTED BY THE DEPARTMENT. THEREFORE, IN THE YEAR UNDER CONSIDERATION IF THE DEPARTMENT WANTS TO CHANGE THE METHOD OF ACCOUNTING, THEN THE DEPARTMENT MUST HAVE TO RECORD ITS FINDING THAT ASSESSEES METHOD OF ACCOUNT DISTORTS THE PROFITS. THE SUPREME COURT IN THE CASE OF COMMISSIONER OF INCOME TAX VS. BILHARI INVESTMENTS PVT. LTD. 299 ITR 1 ( SUPRA ), WHEREIN THE SUPREME COURT HAS HELD AS UNDER: 20. AS STATED ABOVE, WE ARE CONCERNED WITH ASSESSMENT YEARS 1991-1992 TO 1997-1998. IN THE PAST, THE DEPARTMENT HAD ACCEPTED THE COMPLETED CONTRACT METHOD AND BECAUSE OF SUCH ACCEPTANCE, THE ASSESSEES, IN THESE CASES, HAVE FOLLOWED THE SAME METHOD OF ACCOUNTING, PARTICULARLY IN THE CONTEXT OF CHIT DISCOUNT. EVERY ASSESSEE IS ENTITLED TO ARRANGE ITS AFFAIRS AND FOLLOW THE METHOD OF ACCOUNTING, WHICH THE DEPARTMENT HAS EARLIER ACCEPTED. IT IS ONLY IN THOSE CASES WHERE THE DEPARTMENT RECORDS A FINDING THAT THE METHOD ADOPTED BY THE ASSESSEE RESULTS IN DISTORTION OF PROFITS, THE DEPARTMENT CAN INSIST ON SUBSTITUTION OF THE EXISTING METHOD. FURTHER, IN THE PRESENT CASES, WE FIND FROM THE VARIOUS STATEMENTS PRODUCED BEFORE US, THAT THE ENTIRE EXERCISE, ARISING OUT OF CHANGE OF METHOD FROM COMPLETED CONTRACT METHOD TO DEFERRED REVENUE EXPENDITURE, IS REVENUE NEUTRAL. THEREFORE, WE DO NOT WISH TO INTERFERE WITH THE IMPUGNED JUDGMENT OF THE HIGH COURT. 21. BEFORE CONCLUDING, WE MAY POINT OUT THAT UNDER SECTION 211(2) OF THE COMPANIES ACT, ACCOUNTING STANDARDS ('AS') ENACTED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS HAVE NOW BEEN ADOPTED [SEE: JUDGMENT OF THIS COURT IN J.K. INDUSTRIES CASE (SUPRA)]. SHRITRIPATHI, LEARNED COUNSEL FOR THE DEPARTMENT, HAS PLACED RELIANCE ON AS 22 AS THE BASIS OF HIS ARGUMENT THAT THE COMPLETED CONTRACT METHOD SHOULD BE SUBSTITUTED BY DEFERRED REVENUE EXPENDITURE (SPREADING THE SAID EXPENDITURE ON PROPORTIONATE BASIS OVER A PERIOD OF TIME). HE ALSO RELIED UPON THE CONCEPT OF TIMING DIFFERENCE INTRODUCED BY AS 22. IT MAY BE STATED THAT ALL THESE DEVELOPMENTS ARE OF RECENT ORIGIN. 10 ITA 42/ PAN/2013 ACIT VS. M/S. EDC LTD., IT IS OPEN TO THE DEPARTMENT TO CONSIDER THESE NEW ACCOUNTING STANDARDS AND CONCEPTS IN FUTURE CASES OF CHIT TRANSACTIONS. WE EXPRESS NO OPINION IN THAT REGARD. SUFFICE IT TO STATE THAT, THESE NEW CONCEPTS AND ACCOUNTING STANDARDS HAVE NOT BEEN INVOKED BY THE DEPARTMENT IN THE PRESENT BATCH OF CIVIL APPEALS. RESPECTFULLY FOLLOWING THE DECISION OF HONBLE SUPREME COURT, WE DISMISS THE DEPARTMENT APPEAL. 6. GROUND NO. 4 - THE ASSESSEE COMPANY CLAIMED BAD DEBTS WRITTEN OFF OF RS. 1,24,86,456/- IN PROFIT AND LOSS ACCOUNTS. IN THE NOTICE TO ACCOUNTS ATTACHED TO RETURN OF THE INCOME IT IS MENTIONED THAT SALE PROCEEDS OF SECURITIES IN RESPECT OF BAD DEBTS WRITTEN OFF WILL BE ACCOUNTED UNDER THE HEAD OTHER INCOME AS AND WHEN THE AMOUNTS ARE REALISED IN FUTURE. THE BAD DEBTS WRITTEN OFF ARE REPORTED EVEN BEFORE THE SALE OF SECURITIES/ MORTGAGE PROPERTY OR OBTAINING THE LOANS. THE ASSESSEE IS ACTUALLY NOT WRITING OF BAD DEBTS IN HIS LEDGER ACCOUNT OF THE PARTIES AND INSTEAD ONLY JOURNAL ENTRIES ARE PASSED IN THE PROVISIONS FOR BAD DEBT AND DOUBTFUL DEBTS ACCOUNT FOR CLAIMING THE EXPENDITURE ON ACCOUNT OF BAD DEBT WRITTEN OFF. AS PER THE PROVISIONS, THE ASSESSEE SHOULD WRITE OFF THE BAD DEBTS IN BOOKS FOR AVAILING THE EXPENDITURE ON THIS HEAD. THE ASSESSEE HAS SHOWED RS. 3 CRORES DEBTS RELATING TO THE DEBTS FOR WHICH SECURITIES OBTAINED AGAINST THE LOANS WERE SOLD AS ON 31 ST MARCH, 2009. THEREFORE, THAT BAD DEBT WRITTEN OFF INCOME BECOMES FINAL. IN RESPECT OF REMAINING AMOUNT OF BAD DEBTS OF RS. 1,24,86,456/-, SAME HAS NOT BECOME BAD AS THE SECURITIES TAKEN FOR RECOVERY OF THE LOANS AMOUNT ARE NOT ENFORCED. THEREFORE, CLAIM OF BAD DEBTS TO THE EXTENT OF RS.1,24,86,456/- WAS DISALLOWED AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE. 6.1. THE MATTER CARRIED TO CIT(A) AND CIT(A) HAS DELETED THIS AMOUNT BY OBSERVING AS UNDER:- I HAVE GONE THROUGH THE FACTS OF THE CASE, CONTENTS OF THE ASSESSMENT ORDER AND WRITTEN SUBMISSION OF THE ASSESSEE THE HONOURABLE BOMBAY HIGH COURT IN THE CASE OF COMMISSIONER VS. OMPRAKAS B. SALECHA 325 ITR 24. IT WAS HELD THAT BAD DEBT 11 ITA 42/ PAN/2013 ACIT VS. M/S. EDC LTD., CLASSIFICATION OF DEBTS AS BAD-CHANGE OF LAW-ASSESSEE WRITING OF DEBTS AS BAD DEBT IN BOOKS WAS IN COMPLIANCE WITH REQUIREMENT OF SEC. 36(1)(VII). THE TRIBUNAL JUDGEMENT WAS UPHELD. THIS GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED. 6.2. WE HAVE HEARD THE RIVAL CONTENTION OF BOTH THE PARTIES LOOKING TO THE FACTS AND CIRCUMSTANCES OF THE CASE, WE FIND THAT THE ASSESSEE HAS WRITTEN OFF BAD DEBT DURING THE YEAR SINCE THE CORPORATION REALISED DURING THE YEAR THAT IT WOULD NOT BE POSSIBLE TO RECOVER THIS DEBT DUE FROM PARTIES FINDINGS BY IT. THE BAD DEBTS AMONGST ARE WORK OUT AFTER DEDUCTING FROM THE LOANS AMOUNT THE VALUE OF SECURITIES AGAINST WHICH THE SAID LOANS WERE GRANTED. 6.3. WE FIND THAT THE ASSESSEE COMPANY HAS RETURN OF BAD DEBTS OF RS. 1,24,86,456/- IN ITS ACCOUNT OF THE YEAR. THE COMPANY REALISED DURING THE YEAR THAT IT WOULD BE NOT POSSIBLE TO RECOVER DEBTS DUE FROM THE PARTIES FINDING BY IT. THE ASSESSEE COMPANY HAS WORK OUT THE AMOUNT AFTER DEDUCTING FROM THE LOAN AMOUNT REALISABLE VALUE OF SECURITIES AGAINST WHICH THE SAID LOANS WERE GRANTED. THE ASSESSEE HAS TO WRITTEN OFF BAD DEBTS OF RS. 1.24,86,456/- REPRESENTS THE DIFFERENCE BETWEEN AMOUNT DUE FROM CONCERNED DATE AND ESTIMATED MARKET VALUE OF THE SECURITIES AGAINST WHICH THE LOANS WERE GRANTED THEM. THE MARKET VALUE ARE DETERMINED BY TECHNICAL STAFF OF THE ASSESSEE COMPANY AFTER CONSIDERING THE AMOUNT WITH THE CORPORATION WOULD FETCH IF THE SECURITIES ARE SOLD IN OPEN MARKET DURING THE YEAR. THE ASSESSEE COMPANY HAS RETURNED OF THE LOANS UNDER THE CATEGORY OF NON-PERFORMING ASSETS SINCE BORROWER HAS NEITHER PAID INSTALMENTS OF LOANS NOR INTEREST ON IT. WE FIND THAT THE CIT(A) HAS CONSIDERING THE DECISION OF BOMBAY JURISDICTIONAL HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME TAX VS. OMPRAKAS B. SALECHA 325 ITR 24. WE FIND THAT DURING THE COURSE OF HEARING LEARNED AR CITED THE DECISION OF VIJAYA BANK V. CIT(323 ITR 166) (SC) WHEREIN THE SUPREME COURT HAS DEALT THIS ISSUE IN HIS JUDGEMENT. AS PER THE DECISION OF SUPREME COURT, WHEREIN THE SUPREME COURT HAS DECIDED THE ISSUE BY OBSERVING AS UNDER:- 12 ITA 42/ PAN/2013 ACIT VS. M/S. EDC LTD., HELD, ON THE FACTS, THAT THE ASSESSEE WAS ENTITLED TO THE DEDUCTION CLAIMED BECAUSE: (I) THE HEAD OFFICE ACCOUNTS OF THE ASSESSEE CLEARLY INDICATED THAT ON REPAYMENT IN SUBSEQUENT YEARS THE AMOUNTS WERE DULY OFFERED FOR TAX; (II) THAT UNDER ACCOUNTANCY PRACTICE THE ACCOUNTS OF THE RURAL BRANCHES HAD TO TALLY WITH THE ACCOUNTS OF THE HEAD OFFICE, ANY IF THE AMOUNT REPAID IN SUBSEQUENT YEARS IS NOT CREDITED TO THE PROFIT AND LOSS ACCOUNT OF THE HEAD OFFICE IF THE REPAID AMOUNT IN SUBSEQUENT YEARS IS NOT CREDITED TO THE PROFIT AND LOSS ACCOUNT OF THE HEAD OFFICE, WHICH WAS WHAT MATTERED ULTIMATELY, THEN THERE WOULD BE A MISMATCH BETWEEN THE RURAL BRANCH ACCOUNTS AND THE HEAD OFFICE ACCOUNTS; (III) IN ANY EVENT UNDER SECTION 41(4), WHERE DEDUCTION HAD BEEN ALLOWED IN RESPECT OF A BAD DEBT OR A PART THEREOF UNDER SECTION 36(1) (VII) THEN IF THE AMOUNT SUBSEQUENTLY RECOVERED ON ANY SUCH DEBT IS GREATER THAN THE DIFFERENCE BETWEEN THE DEBT AND THE AMOUNT SO ALLOWED, THE EXCESS IS DEEMED TO BE PROFITS AND GAINS OF BUSINESS, AND ACCORDINGLY CHARGEABLE TO TAX AS THE INCOME OF THE PREVIOUS YEAR IN WHICH IT IS RECOVERED; AND THE INCOME-TAX OFFICER IS SUFFICIENTLY EMPOWERED TO TAX SUCH SUBSEQUENT REPAYMENTS UNDER SECTION 41(4). 6.4. THE CIT(A) HAS RELIED UPON THE DECISION OF ITAT, KOLKATA BENCH IN THE CIT VS. INSPECTING ASSISTANT COMMISSIONER IN ITA NO. 745 OF 1983 WHEREIN THE TRIBUNAL HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE THEREFORE, WE ARE OF THE VIEW THAT CIT(A) IS JUSTIFIED IN ALLOWING THE CLAIM OF THE ASSESSEE. 7. GROUND -4: THE SHORT FACTS OF THE CASE THAT ASSESSEE HAS WRITTEN OFF THE AMOUNT OF RS . 18,90,801/- IN HIS BOOKS OF ACCOUNT ON THE GROUND THAT AS PER THE CMRY SCHEME. THE GOVERNMENT OF GOA APPROVED SUBSIDY TO THE BENEFICIARIES WHICH WAS PAID BY THE ASSESSEE AS PER THE DIRECTION GOVERNMENT OF GOA. THE SUBSIDY AMOUNT WHICH WAS PAYING TO THE BENEFICIARIES AMOUNT TO RS. 18,90,801/-IS WRITTEN OFF IN THE BOOKS OF ACCOUNTS ON THE GROUND THAT THERE IS A DELAY IN RECEIPT OF SUBSIDY UNCERTAINTY REGARDING RECEIPTS FROM THE GOVERNMENT. THESE AMOUNTS ARE PAID AS PER THE GOVERNMENT DIRECTIONS WHICH ARE TO BE REIMBURSED TO THE ASSESSEE BY THE GOVERNMENT OF GOA. THIS AMOUNT WAS NOT OFFERED FOR TAX IN THE EARLIER YEARS. THE ASSESSEE HAS CLAIMED THIS AMOUNT AS BAD DEBTS UNDER SECTION 36(1)(III) BUT THIS EXPENDITURE WAS NOT WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. THEREFORE, ASSESSING OFFICER HAS DISALLOWED THE BAD DEBTS OF RS. 18,90,801/-. 13 ITA 42/ PAN/2013 ACIT VS. M/S. EDC LTD., 7.1. THE MATTER CARRIED TO CIT(A) AND CIT(A) HAS DELETED BY OBSERVING AS UNDER: I HAVE GONE THROUGH THE FACTS OF THE CASE, CONTENTS OF THE ASSESSMENT ORDER AND WRITTEN SUBMISSION OF THE ASSESSEE. THE HONOURABLE OF THE SUPREME COURT IN THE CASE OF T.R.F. LTD. VS. CIT 323 ITR 397 IT WAS HELD THAT BAD DEBT- LAW AFTER APRIL 1, 1989- ASSESSEE ONLY TO ESTABLISH THAT DEBT IN THE FACT HAD BECOME IRRECOVERABLE- INCOME TAX ACT, 1961, S. 36(1) (VIII). AFTER THE AMENDMENT OF SEC. 36(1)(VIII) OF THE INCOME TAX ACT, 1961, WITH THE EFFECT OF APRIL 1, 1989, IN ORDER TO OBTAIN THE DEDUCTION IN RELATION TO BAD DEBTS, IT IS NOT NECESSARY FOR THE ASSESSEE TO ESTABLISH THAT THE DEBT, IN FACT, HAS BECOME IRRECOVERABLE: IT IS ENOUGH IF THE BAD DEBT IS WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE. IN VIEW OF MY ABOVE OBSERVATIONS I DIRECT THE JCIT TO DELETE THE ADDITION OF RS. 18,90,801/- MADE BY HIM TO THE RETURNED INCOME OF THE APPELLANT COMPANY IN HIS ASSESSMENT ORDER TOWARDS THE DISALLOWANCE OF CMRY SUBSIDY BAD DEBTS. 7.2. WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH THE PARTIES, WE FIND THAT THE ASSESSEE COMPANY HAS PAID SUBSIDY TO VARIOUS INDUSTRIAL / BUSINESS UNITS AS PER THE DIRECTION OF THE GOVERNMENT OF GOA. THIS AMOUNTS WERE SUBSEQUENTLY HAS TO BE RECOVERED FROM THE GOVERNMENT BY THE COMPANY. THE ASSESSEE COMPANY HAS MADE VARIOUS OFFERS TO BE RECOVERED THE SUBSIDY AMOUNTS FROM THE GOVERNMENT. THE GOVERNMENT DIRECTED THAT COMPANY SHOULD BARE THESE EXPENSES. THE DOCUMENTARY EVIDENCE WAS FILED BY THE ASSESSEE TO SHOW THAT THERE WAS REFUSAL FROM THE GOVERNMENT TO PAY SUBSIDY AMOUNT TO THE ASSESSEE COMPANY. THE ASSESSEE COMPANY, THEREFORE, WRITE OF THIS AMOUNT SINCE THIS AMOUNT WAS NOT OFFERED TO TAX IN EARLIER YEARS. WE FIND THAT THE ASSESSEE COMPANY IS FINANCIAL CORPORATION ENGAGED IN BUSINESS OF PROVIDING FINANCE TO THE ENTERPRISES RUNNING THE INDUSTRIES OR CARRYING ON A BUSINESS ACTIVITY WHEN THIS AMOUNT IS NOT RECOVERABLE THE ASSESSEE HAS WRITTEN OFF THIS AMOUNT AS PER THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF T.R.F. LTD. VS. CIT 323 ITR 397. WE ARE RESPECTFULLY FOLLOWING THE SAME, WE ARE OF THE VIEW THAT CIT (A) IS JUSTIFIED IN DELETING THE AMOUNT AND OUR INTERFERENCE IS NOT REQUIRED. 14 ITA 42/ PAN/2013 ACIT VS. M/S. EDC LTD., 8. IN THE RESULT, THE APPEAL FILED BY THE DEPARTMENT IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 27.09.2013. SD/- SD/- ( P.K. BANSAL) (D.T. GARASIA) ACCOUNTANT MEMBER JUDICIAL MEMBER PLACE : PANAJI / GOA DATED : 27.09.2013 P.S.- *PK* COPY TO : (1) APPELLANT (2) RESPONDENT (3) CIT CONCERNED (4) CIT(A) (5) D.R (6) GUARD FILE TRUE COPY, BY ORDER PRIVATE SECRETARY, ITAT, PANAJI, GOA