Elgi Ultra Industries Ltd., Coimbatore V. ACIT, Coimbatore

ITA 463/CHNY/2011

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 4910 (ITAT-CHENNAI)
• Duration Of Justice: 3 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-06-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2004-2005
• Appeal Filed On: 08-03-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DR I VIJAYKUMAR
• Assessee Lawyers: T BANUSEKAR
• Keywords: Principle of natural justice; Bad and doubtful debts; Scheme of amalgamation

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BENCH C CHENNAI BEFORE DR. O.K. NARAYANAN, VICE-PRESIDENT AND SHRI HARI OM MARATHA, JUDICIAL MEMBER I.T.A.NO. 463/MDS/2011 ASSESSMENT YEAR : 2004-05 ELGI ULTRA INDUSTRIES LTD., 1239, INDIA HOUSE, TRICHY ROAD, COIMBATORE 641 018. PAN AADCE 4566 G VS. THE ASST. COMMISSIONER OF INCOME-TAX, COMPANY CIRCLE-I(1), COIMBATORE. (APPELLANT) (RESPONDENT) APPELLANT BY : S HRI T. BANUSEKAR, FCA RESPONDENT BY : DR. I. VIJAYKUMAR, CIT O R D E R PER DR. O.K. NARAYANAN, VICE-PRESIDENT THIS APPEAL FILED BY THE ASSESSEE RELATES TO THE AS SESSMENT YEAR 2004-05. THE APPEAL IS DIRECTED AGAINST THE O RDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS)-I, AT COIMBATO RE DATED 24.12.2010 AND ARISES OUT OF THE ASSESSMENT COMPLET ED UNDER SEC.143(3) OF THE I.T. ACT, 1961. ITA 463/2011 :- 2 -: 2. THE ASSESSEE IS A PUBLIC LIMITED COMPANY ENGAGED IN THE BUSINESS OF ASSEMBLING AND MARKETING OF WET GRINDER S. 3. IN THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR 2002- 03, THE ASSESSEE-COMPANY HAD TAKEN OVER DEBTS AMOUN TING TO ` 25,68,81,743/- FROM ITS SISTER CONCERN, M/S. ELGI F INANCE LTD. THE DEBTS WERE TAKEN OVER BY THE ASSESSEE AT A DISC OUNTED VALUE OF ` 22,10,00,000/-. THE DIFFERENCE OF ` 3.58 CRORES WAS OFFERED AS INCOME BY THE ASSESSEE-COMPANY FOR THE THREE ASSESS MENT YEARS COMMENCING FROM ASSESSMENT YEAR 2002-03. OUT OF TH E ABOVE DEBTS TAKEN OVER BY THE ASSESSEE-COMPANY, IT HAS WR ITTEN OFF AN AMOUNT OF ` 1,07,84,618/- AS BAD DEBTS IN ITS BOOKS OF ACCOUNT IN THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR U NDER APPEAL. THIS CLAIM WAS MADE AS A DEDUCTION UNDER SEC.36(I)( VII) OF THE I.T. ACT, 1961. 4. THE ABOVE DEDUCTION WAS DENIED BY THE ASSESSING AUTHORITY ON THE FOLLOWING GROUNDS : (I) THE DEBTS WERE TAKEN OVER BY THE ASSESSEE- COMPANY NOT UNDER ANY SCHEME OF AMALGAMATION, BUT ONLY ON THE BASIS OF A MUTUAL AGREEMENT. EVEN AFTE R ITA 463/2011 :- 3 -: THE TAKEN OVER OF THE DEBTS, THE TWO COMPANIES VIZ. , THE ASSESSEE AND M/S. ELGI FINANCE LTD. CONTINUED T O RETAIN THEIR INDEPENDENT ENTITIES. (II) THE INTEREST ACCRUED ON THE AMOUNTS LENT BY M /S. ELGI FINANCE LTD. AND TAKEN OVER BY THE ASSESSEE HA S NEVER BEEN OFFERED FOR TAXATION IN ASSESSEES HANDS . AFTER TAKING OVER THE DEBTS, THE ASSESSEE HAS BEEN SYSTEMATICALLY WRITTEN OFF OF A PART OF AGGREGATE D EBTS IN EVERY ASSESSMENT YEAR. THE AMOUNT OF ` 1,07,84,618/- REPRESENTED THE AMOUNT WHICH HAD BEEN WRITTEN OFF IN THE RELEVANT PREVIOUS YEAR. (III) THE TAKE OVER OF AND WRITING OFF OF THE DEBT S ARE NOT PART OF ASSESSEES REGULAR BUSINESS AND ALL THE SE EXERCISES WERE THE RESULTS OF A PRE-MEDITATED ACT. 5. IN FIRST APPEAL, THE COMMISSIONER OF INCOME-TAX (APPEALS) UPHELD THE ORDER OF THE ASSESSING AUTHORITY AND CON FIRMED THAT THE ASSESSEE CANNOT BE GIVEN DEDUCTION OF ` 1,07,84,618/- AS BAD DEBTS. ITA 463/2011 :- 4 -: 6. IT IS IN THIS CONTEXT THAT THE ASSESSEE HAS COME IN SECOND APPEAL BEFORE THE TRIBUNAL. 7. THE GROUNDS RAISED BY THE ASSESSEE READ AS BELOW : 1. FOR THAT THE ORDER OF THE COMMISSIONER OF INCO ME- TAX (APPEALS) IS CONTRARY TO LAW, FACTS AND CIRCUMSTANCES OF THE CASE AND AT ANY RATE IS OPPOSE D TO THE PRINCIPLES OF EQUITY, NATURAL JUSTICE AND FA IR PLAY. 2. FOR THAT THE COMMISSIONER OF INCOME-TAX (APPEAL S) ERRED IN NOT ALLOWING THE EXPENDITURE OF ` 1,07,84,680/- AS DEDUCTION U/S 37(1). 3. FOR THAT THE COMMISSIONER OF INCOME-TAX (APPEAL S) FAILED TO APPRECIATE THAT THE APPELLANT WAS ALSO IN THE BUSINESS OF MONEY LENDING AS PER CLAUSE 21 OF THE OBJECTS INCIDENTAL AND ANCILLARY TO THE ATTAINMENT OF THE MAIN OBJECTS IN THE MEMORANDUM OF ASSOCIATION. 4. FOR THAT THE COMMISSIONER OF INCOME-TAX (APPEAL S) FAILED TO APPRECIATE THAT THE APPELLANT HAD INCURRE D THE EXPENDITURE WHICH IS FOR THE PURPOSE OF THE BUSINES S AND TO PROTECT THE GOODWILL OF THE GROUP AND THE NA ME OF THE COMPANY.. ITA 463/2011 :- 5 -: 8. WE HEARD SHRI T. BANUSEKAR, THE LEARNED CHARTERE D ACCOUNTANT APPEARING FOR THE ASSESSEE AND DR. I. VI JAYKUMAR, THE LEARNED THE COMMISSIONER OF INCOME-TAX APPEARING FO R THE REVENUE. 9. WE FIND THAT THE OBJECT CLAUSE PERMITS THE ASSES SEE- COMPANY TO INDULGE IN FINANCING AND DISCOUNTING BUS INESS. THE TAKING OVER OF THE DEBTS OF ITS SISTER CONCERN AT A DISCOUNTED RATE, THEREFORE, CANNOT BE HELD AS AN EXTRA CONSTITUTIONA L TRANSACTION. THIS POSITION IS MADE CLEAR BY THE ASSESSEE BY CLAS SIFYING THE DEBTS TAKEN OVER BY IT AS ACTIONABLE CLAIMS COMIN G UNDER A DIFFERENT DIVISION OF THE ASSESSEE-COMPANY. 10. THE DEBTS RELATING TO ITS SISTER CONCERN, M/S. ELGI FINANCE LTD. HAD BEEN TAKEN OVER BY THE ASSESSEE-COMPANY AT A DISCOUNTED VALUE. THE GROSS VALUE OF THE DEBTS WAS ` 25,68,81,743/-. THE DEBTS WERE TAKEN OVER FOR A SU M OF ` 22,10,00,000/-. THE DIFFERENCE OF ` 3.58 CRORES HAS BEEN OFFERED AS INCOME FOR THE THREE ASSESSMENT YEARS COMMENCING FROM 2002-03. THE INCOME SO OFFERED BY THE ASSESSEE-COM PANY HAS ITA 463/2011 :- 6 -: BEEN ASSESSED BY THE ASSESSING AUTHORITY. BY OFFE RING THE DIFFERENTIAL AMOUNT OF DISCOUNT AS INCOME FOR TAXAT ION AND THE SAME AMOUNT BEING ASSESSED, THE ASSESSEE HAS ALMOST PROVED THE BONA FIDES AND LEGALITY OF TAKING OVER OF THE D EBTS OF ITS SISTER CONCERN. THIS POSITION RUNS CONTRARY TO THE FINDIN GS OF THE LOWER AUTHORITIES. 11. BY TAKING OVER OF THE DEBTS OF THE SISTER CONCE RN, THE ASSESSEE-COMPANY HAS ALSO SOUGHT TO ENSURE THAT THE COMMON BRAND NAME OF ASSESSEES GROUP ELGI IS NOT BROUGH T TO DEFAME. IN THAT WAY, THE ASSESSEE-COMPANY IS TRYING TO PROT ECT ITS BUSINESS PROSPECTUS. SUCH EXPENSE IS ALSO TREATED AS EXPENSES INCURRED FOR THE PURPOSE OF CARRYING ON THE BUSINES S. 12. AS AGAINST THE DEBTS OF ` 22,10,00,000/- TAKEN OVER BY THE ASSESSEE-COMPANY, THE ASSESSEE HAS CLAIMED ONLY A SUM OF ` 1,07,84,618/- FOR THE IMPUGNED ASSESSMENT YEAR UND ER APPEAL. IT SHOWS THAT THE ASSESSEE WAS NOT TRYING TO WRITE OFF ENTIRE AMOUNT AS A PART OF SOME MANIPULATIVE DESIGN. 13. THE ASSESSING OFFICER HAS STATED THAT THE ASSES SEE HAS NOT CREDITED ANY INTEREST RECEIVABLE FROM THE TAKEN OVER DEBTS BY ITA 463/2011 :- 7 -: AND OFFERED FOR TAXATION. THE DEBTS HAVE ALMOST BE COME DOUBTFUL AND THAT IS WHY THE DEBTS WERE TAKEN OVER BY THE AS SESSEE- COMPANY FROM ITS SISTER CONCERN AT A DISCOUNTED RAT E. WHEN THE DEBT BECOMES DOUBTFUL AND NON-PERFORMING IN NATURE, THERE IS NO POINT IN RECOGNIZING INTEREST INCOME FROM SUCH DEBT . ONCE SUCH INTEREST INCOME IS NOT RECOGNIZED OUT OF COMPULSION OF THE CIRCUMSTANCES, THERE IS NO QUESTION OF THE ASSESSEE OFFERING ANY SUCH INTEREST INCOME FOR TAXATION. THEREFORE, THE SAID REASON POINTED OUT BY THE ASSESSING AUTHORITY IS NOT SUSTA INABLE IN LAW. 14. THIS ISSUE WAS EARLIER CONSIDERED BY THE TRIBUN AL. ORIGINALLY, THE ASSESSEE HAS CLAIMED DEDUCTION AS B AD DEBTS UNDER SEC.36(1)(VII). IN THE FIRST ROUND OF APPEAL , THE COMMISSIONER OF INCOME-TAX (APPEALS) DISMISSED THE CLAIM. THE MATTER WAS TAKEN UP BEFORE THE TRIBUNAL. THE TRIBU NAL HELD THAT THE DEDUCTION MIGHT NOT BE AVAILABLE UNDER SEC.36(1 )(VII) BUT MIGHT BE AVAILABLE UNDER SEC.37(1), IF THE BONA FID ES OF THE CLAIM IS ESTABLISHED BY THE ASSESSEE. THE MATTER WAS REM ITTED BACK TO THE ASSESSING AUTHORITY TO EXAMINE THE GENUINENESS OF THE CLAIM MADE BY THE ASSESSEE. IN THE SECOND ROUND, THE ASS ESSING AUTHORITY DENIED DEDUCTION UNDER SEC.37(1) ALSO. T HE ITA 463/2011 :- 8 -: COMMISSIONER OF INCOME-TAX (APPEALS) HAS CONFIRMED THAT. BUT IT IS TO BE SEEN THAT THE TRIBUNAL IN ITS EARLIER ORDE R HAS CLEARLY STATED THAT IF THE BAD DEBT IS PROVED, THE CLAIM IS ADMISS IBLE UNDER SEC.37(1). THEREFORE, THE CONTENTION OF THE REVENU E THAT THE CLAIM CANNOT BE ALLOWED AS A DEDUCTION AS IT IS NOT HING TO DO WITH THE BUSINESS OF THE ASSESSEE IS NOT SUSTAINABLE IN LAW. THAT IS CONTRARY TO THE FINDING OF THE EARLIER ORDER OF THE TRIBUNAL. 15. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, HAV ING THE TRANSACTIONS LAWFULLY MADE AND ENTERED IN THE BOOKS OF ACCOUNT IN PROPER MANNER AND THE DISCOUNT OFFERED FOR TAXATION WHICH HAS BEEN ACTED UPON BY THE DEPARTMENT, IT IS NOT PROPER ON THE PART OF THE ASSESSING AUTHORITY TO SAY THAT THE PART OF DEB TS WRITTEN OFF BY THE ASSESSEE COULD NOT BE ALLOWED AS A DEDUCTION UN DER SEC.37(1). THE FACTS OF THE CASE SPEAK OUT THAT TH E DEBTS WERE TAKEN OVER BY THE ASSESSEE-COMPANY AS PART OF ITS B USINESS DESIGN. 16. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, WE SET ASIDE THE ORDERS OF THE LOWER AUTHORITIES AND DIRECT THE ASSESSING OFFICER TO ALLOW DEDUCTION OF ` 1,07,84,618/- AND RE-DO THE ASSESSMENT. ITA 463/2011 :- 9 -: 17. IN RESULT, THIS APPEAL FILED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED ON WEDNESDAY, THE 15 TH DAY OF JUNE, 2011 AT CHENNAI. SD/- SD/- (HARI OM MARATHA) (DR.O.K.NARAYANAN) JUDICIAL MEMBER VICE-PRESIDENT CHENNAI, DATED THE 15 TH JUNE, 2011 MPO* COPY TO : APPELLANT/RESPONDENT/CIT/CIT(A)/DR