Sri T Ramachandra Prabhu, Guntur V. The ACIT, Circle-2(1), Guntur

ITA 482/VIZ/2006

• Counselvise Citation: [2009] 115 COUNSELVISE.COM (IT) 1659 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 2 year(s) 11 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-11-2009
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 1998-1999
• Appeal Filed On: 27-11-2006
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: B JAYA KUMAR
• Keywords: Opportunity of being heard; Bad and doubtful debts; Assessment record; Notional interest; Set aside
• Section: 148

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH: VISAKHAPATNAM BEFORE: SRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SRI B.R. BASKARAN, ACCOUNTANT MEMBER I.T.A. NO.482 & 483/VIZAG/2006 AND I.T.A.NO.509/VIZAG/2007 ASSESSMENT YEARS : 1998-99, AND 2003-04 TO 2004-05 T. RAMACHANDRA PRABHU, GUNTUR VS. ACIT, CIRCLE-2(1), GUNTUR (APPELLANT) (RESPONDENT) PAN NO.ABCPT 4938 R APPELLANT BY : SHRI G.V.N. HARI, CA RESPONDENT BY : SHRI B. JAYA KUMAR, DR O R D E R PER B..R. BASKARAN, ACCOUNTANT MEMBER : 1. THESE THREE APPEALS FILED AT THE INSTANCE OF THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF LD CIT(A), GUNTUR AND THEY RELATE TO T HE ASSESSMENT YEAR 1998-99, 2003-04 AND 2004-05. CERTAIN ISSUES AGITATED IN TH ESE THREE APPEALS ARE IDENTICAL IN NATURE. HENCE, FOR THE SAKE OF CONVEN IENCE, WE DISPOSE OF ALL THESE THREE APPEALS BY THIS COMMON ORDER. 2. THE IDENTICAL ISSUES IN THESE THREE APPEALS ARE STATED BELOW:- A) DISALLOWANCE OF INTEREST CLAIMED IN THE FINANCE DIV ISION OF CHANDRA TRANSPORTS FOR THE REASON THAT THE INVESTME NT MADE FROM THE LOAN BORROWED DID NOT YIELD INCOME. B) ADDITION OF NOTIONAL INTEREST OF RS.10,86,717/- ON THE SUNDRY DEBTORS BALANCES IN THE BUSINESS CONCERN VIZ., COAS TAL PACKAGINGS. 2 3. THE ASSESSEE IS THE PROPRIETOR OF VARIOUS CO NCERNS VIZ., M/S COASTAL PACKAGINGS, M/S CHANDRA TRANSPORT, WHITE GOLD GINNI NG MILLS AND ALSO THE MANAGING DIRECTOR IN M/S CHAITANYA PACKAGINGS PVT. LTD AND M/S TULASI SEEDS (P) LTD. M/S CHANDRA TRANSPORT HAS GOT TWO DIVISIONS V IZ., FINANCE DIVISION AND TRUCK DIVISION. THE RETURN OF INCOME PERTAINING TO THE A SSESSMENT YEARS 2003-04 AND 2004-05 WERE TAKEN UP FOR SCRUTINY IN THE NORMAL CO URSE, WHILE THE ASSESSMENT PERTAINING TO THE ASSESSMENT YEAR 1998-99 IS A REO PENED ASSESSMENT U/S 148 OF THE ACT. 3.1 IN ALL THESE THREE YEARS, THE AO NOTICED TH AT THE ASSESSEE HAS CLAIMED INTEREST PAYMENTS IN THE FINANCE DIVISION OF CHANDR A TRANSPORT. HOWEVER THE ASSESSEE HAD DERIVED INCOME FROM DIVIDEND ONLY IN T HAT DIVISION, WHICH IS OTHERWISE EXEMPT U/S 10(33) OF THE ACT. ACCORDING TO AO, THE ASSESSEE HAS UTILIZED THE FUNDS OBTAINED THROUGH UNSECURED LOANS FOR THE PURPOSE OF MAKING INVESTMENT IN THE SHARES OF SISTER COMPANIES, PERSO NAL DRAWINGS AND TO GIVE LOANS TO SISTER CONCERNS. THE AO TOOK THE VIEW THA T THE ASSESSEE IS NEITHER CARRYING ON ANY BUSINESS ACTIVITY IN MONEY LENDING NOR USED THE FUNS BORROWED IN THIS DIVISION FOR SPECIFIC BUSINESS PURPOSES. ACCO RDING TO THE AO, THE ASSESSEE HAS NOT BORROWED FUNDS OUT OF BUSINESS COMPULSION A ND FURTHER SINCE THE LOAN FUNDS HAVE BEEN DIVERTED TO THE SISTER CONCERNS, TH E ASSESSEE SHOULD HAVE COLLECTED INTEREST FROM THE SISTER CONCERNS AT LEAS T TO THE EXTENT OF ITS INTEREST LIABILITY. ACCORDINGLY, THE AO WORKED OUT PROPORTI ONATE INTEREST THAT SHOULD BE DISALLOWED IN EACH OF THE THREE YEARS AND ADDED THE SAME TO THE TOTAL INCOME DECLARED BY THE ASSESSEE. IN THE BOOKS OF COASTAL PACKAGINGS, THE AO NOTICED THAT THE ASSESSEE IS PAYING INTEREST ON ALL THE CRE DITS INCLUDING CREDITS FOR GOODS, EXPENSES, LOANS ETC; BUT HE DID NOT CHARGE ANY INTE REST FROM THE SUNDRY DEBTORS. THE AO NOTICED THAT THE SALES INVOICE CONTAINS A CL AUSE TO CHARGE INTEREST @ 18% IN CASE OF LATE PAYMENT. THE AO ALSO NOTICED FROM THE ASSESSMENT RECORD OF EARLIER YEAR THAT THE ASSESSEE HAD FILED LEGAL CLAI MS ON SOME PARTIES AND SUCH CLAIM INCLUDED INTEREST CLAIM ALSO. ACCORDINGLY TH E AO TOOK THE VIEW THAT THE 3 ASSESSEE COULD COLLECT INTEREST @ 24% P.A. ON THE O UTSTANDING BALANCES DUE FROM SUNDRY DEBTORS. SINCE THE NUMBER OF DEBTORS WERE M ORE, THE AO WORKED OUT AVERAGE SUNDRY DEBTORS BALANCE AND WORKED OUT INTER EST AT 12% FOR ASSESSMENT YEAR 2004-05 AND AT 18% FOR OTHER TWO YEARS AND ADD ED THE SAME TO THE TOTAL INCOME, BY STATING THAT THE AMOUNT EQUIVALENT TO TH E INTEREST SO CALCULATED IS DISALLOWED FROM THE INTEREST CLAIM. BOTH THE ADDI TIONS WERE CONFIRMED BY LD CIT(A). HENCE THE ASSESSEE IS IN APPEAL BEFORE US. 4. WE HAVE HEARD THE PARTIES AND ALSO PERUSED T HE RECORD. SO FAR AS THE FIRST ISSUE IS CONCERNED, IT WAS BROUGHT TO OUR NOTICE TH AT A SIMILAR ISSUE WAS CONSIDERED BY THIS BENCH IN THE ASSESSEES OWN CAS E RELATING TO ASSESSMENT YEAR 2000-01 IN ITA NO.50/V/2004 AND THIS BENCH, VIDE IT S ORDER DATED 18-5-2009 SET ASIDE THE ISSUE TO THE FILE OF THE ASSESSING OFFICE R. WE HAVE PERUSED THE ORDER OF THIS BENCH CITED ABOVE. IN THAT YEAR, WHILE THE AO STATED THAT THE ASSESSEE HAS USED THE LOANS FOR MAKING INVESTMENT IN THE SHARES OF THE SISTER CONCERNS AND ALSO FOR GIVING LOAN TO THE SISTER CONCERNS, THE AS SESSEE HAD CLAIMED THAT HE HAS USED THE SAID LOANS TO REPAY THE EARLIER LOANS. TH E LD AR ALSO CLAIMED THAT THERE WERE INTERLACING OF FUNDS BETWEEN VARIOUS BUSINESS CONCERNS BELONGING TO THE ASSESSEE AND HENCE IF A GLOBAL VIEW OF THE UTILIZAT ION OF LOANS IS TAKEN, THERE IS NO REQUIREMENT OF ANY DISALLOWANCE. ACCORDING TO LD A R, IF THE BALANCE SHEET OF THE FINANCE DIVISION IS ALONE CONSIDERED IN ISOLATION, IT WOULD GIVE MISLEADING RESULTS CAUSING IRREPARABLE DAMAGE TO THE ASSESSEE. IN VIE W OF THE RIVAL CLAIMS WITH REGARD TO THE ACTUAL USAGE OF FUNDS AND ALSO INTERL ACING OF FUNDS, THE BENCH WAS OF THE VIEW THAT THE RIVAL CLAIMS NEEDED VERIFICATI ON AND ACCORDINGLY, SET ASIDE THE ISSUE TO THE FILE OF THE AO WITH CERTAIN DIRECTIONS . WE NOTICE THAT THE ISSUE AGITATED BEFORE US IS SIMILAR IN NATURE AND HENCE W E THINK IT PROPER TO SET ASIDE THE ABOVE SAID ISSUE RELATING TO THIS YEAR ALSO TO THE FILE OF THE ASSESSING OFFICER, IN ORDER TO ENABLE HIM TO TAKE UNIFORM VIEW IN ALL THE YEARS. WE ORDER ACCORDINGLY. NEEDLESS TO MENTION, THE ASSESSEE SHO ULD BE GIVEN NECESSARY OPPORTUNITY OF BEING HEARD TO EXPLAIN HIS CASE. 4 5. THE NEXT ISSUE RELATES TO THE DISALLOWANCE O F INTEREST PAYMENT BY CALCULATING NOTIONAL INTEREST ON THE SUNDRY DEBTORS BALANCE. THE FACTS RELATING TO THIS ISSUE HAVE BEEN NARRATED EARLIER. THOUGH THE TERMS AND CONDITIONS PRINTED ON THE SALES INVOICES CONTAINED AN INTEREST CLAUSE, THE SUBMISSION OF THE ASSESSEE IS THAT HE HAS NOT COLLECTED ANY INTEREST FROM THE DEBTORS NOR DOES IT GIVE RIGHT TO COLLECT SUCH INTEREST IN THE ABSENCE OF ACCEPTANCE OF THE SAID TERM. THE AO HAS ALSO NOTICED FROM THE EARLIER RECORD OF THE ASSESSE E THAT HE HAD PREFERRED LEGAL CLAIM ON CERTAIN DEFAULTING DEBTORS DEMANDING OUTST ANDING AMOUNT ALONG WITH INTEREST OF 24%. FROM A CAREFUL PERUSAL OF THE ASS ESSMENT ORDER, WE NOTICE THAT THE ASSESSEE, IN THAT YEAR, HAD CLAIMED BAD DEBTS A ND IN SUPPORT OF THE SAID BAD DEBT CLAIM, HE PRODUCED THE COPIES OF LEGAL CLAIM. THE VERY FACT THAT THE ASSESSEE HAS WRITTEN OFF THE DEBT AS BAD CLEARLY SU GGESTS THAT THE ASSESSEE DID NOT RECEIVE ANY INTEREST AS CLAIMED BY HIM. THE ASS ESSEE HAS EXPLAINED THAT HIS SUPPLIERS ARE LESS IN NUMBER, WHILE THE SUNDRY DEBT ORS ARE NUMEROUS, WHICH FACT IS NOT DISPUTED BY THE AO. HENCE, ACCORDING TO THE ASSESSEE, HE IS UNDER COMPULSION TO OBLIGE TO THE INTEREST CLAIM OF HIS C REDITORS, WHILE AT THE SAME TIME, IN VIEW OF THE COMPETITION, HE IS NOT IN A POSITION TO COLLECT INTEREST FROM THE SUNDRY DEBTORS FOR BELATED PAYMENT. THIS EXPLANATI ON OF THE ASSESSEE HAS NOT BEEN DISPROVED BY THE AO WITH ANY INDEPENDENT MATER IAL. BESIDES THE ABOVE, THE AO HAS NOT BROUGHT OUT ANY MATERIAL ON RECORD T O SHOW THAT THE ASSESSEE HAD BEEN COLLECTING INTEREST IN THE NORMAL COURSE A ND DID NOT RECORD IT IN ITS BOOKS OF ACCOUNT. IN THE CASE LAW RELIED UPON BY T HE ASSESSEE VIZ., HIGHWAYS CONSTRUCTION PVT. LTD. VS. CIT (199 ITR 702), THE H ONBLE GAUHATI HIGH COURT, IN THE SIMILAR CIRCUMSTANCES HAS HELD AS UNDER: THERE IS NO FINDING OF THE FACT TO THE EFFECT THA T ACTUALLY LOAN HAD BEEN GRANTED TO MANAGING DIRECTOR OR ANY OTHER PERSON ON INTEREST, OR THAT INTEREST HAD ACTUALLY BEEN COLLECTED AND THE COLLECTION OF T HE INTEREST WAS NOT REFLECTED ON THE ACCOUNTS. THE FINDING OF THE ITO IS THAT THE A SSESSEE OUGHT TO HAVE COLLECTED INTEREST. IN OTHER WORDS, IN THE VIEW OF THE ITO I S THAT THE ASSESSEE OUGHT TO HAVE COLLECTED INTEREST. IN OTHER WORDS, IN THE VI EW OF THE ITO WHICH HAS BEEN 5 ACCEPTED BY THE TRIBUNAL, THE ASSESSEE AS A GOOD BU SINESS CONCERN SHOULD NOT HAVE GRANTED INTEREST FREE LOAN, OR SHOULD HAVE INS ISTED ON PAYMENT OF INTEREST. IF THE ASSESSEE HAD NOT BARGAINED FOR INTEREST, OR HAD NOT COLLECTED INTEREST, ONE FAILS TO SEE HOW THE IT AUTHORITIES CAN FIX A NOTIO NAL INTEREST AS DUE, OR COLLECTED BY THE ASSESSEE. ATTENTION HAS NOT BEEN INVITED T O ANY PROVISIONS OF THE IT ACT EMPOWERING THE IT AUTHORITIES TO INCLUDE IN THE INC OME INTEREST WHICH WAS NOT DUE OR NOT COLLECTED. IN THE INSTANT CASE, THOUGH THE TERMS AND CONDITION S PRINTED ON THE SALES INVOICE SHOW THE RATE OF INTEREST AT 18%, YET THE AO HAS CH OSEN TO CALCULATE INTEREST AT 12% FOR THE ASSESSMENT YEAR 2004-05. SIMILARLY, TH OUGH THE AO HAS OPINED THAT THE ASSESSEE IS IN A POSITION TO COLLECT INTEREST A T 24% P.A. ON THE BASIS OF THE LEGAL CLAIM FILED ON CERTAIN DEBTORS, YET HE CHOSE TO CALCULATE INTEREST AT 18% P.A.. ALL THESE ACTIONS OF THE AO SUPPORTS THE CLA IM OF THE ASSESSEE THAT THE TERMS AND CONDITIONS HAVE BEEN PRINTED ON THE SALES INVOICE IN A ROUTINE MANNER ONLY TO DETER THE DEBTOR TO MAKE THE PAYMENT IN TIM E AND THERE IS NO RECORD TO SHOW THAT THE DEBTORS HAVE ACCEPTED THE CONDITION R ELATING TO THE DEBTORS. THE AO HAS ALSO OBSERVED THAT THE SAID NOTIONAL INTERES T IS CALCULATED TO DISALLOW A PART OF INTEREST PAID TO THE CREDITORS. IN FACT TH ERE WAS NO DISPUTE WITH REGARD TO THE ASSESSEES LIABILITY TO PAY INTEREST TO HIS CRE DITORS AND IN THE ABSENCE OF ANY DOUBT ABOUT THE EXISTENCE OF INTEREST LIABILITY; TH ERE IS NO NECESSITY TO MAKE ANY DISALLOWANCE OF SUCH INTEREST. SIMILARLY, IN THE A BSENCE OF ANY MATERIAL TO SHOW THAT THE ASSESSEE HAS BARGAINED FOR INTEREST OR ACT UALLY COLLECTED INTEREST, THE AO IS NOT ENTITLED TO CALCULATE THE NOTIONAL INTEREST AND ADD THE SAME TO THE TOTAL INCOME. IN VIEW OF THE ABOVE, WE DIRECT THE AO TO DELETE THE NOTIONAL INTEREST IN ALL THESE THREE YEARS. 6. THE ONLY REMAINING ISSUE IN THE APPEAL FILED FOR ASSESSMENT YEAR 2003-04 RELATES TO THE DISALLOWANCE OF BAD DEBTS FOR THE RE ASON THAT THE ASSESSEE DID NOT PROVE THAT THE DEBT HAS REALLY BECOME BAD. THE LAW IS NOW WELL SETTLED NOW FOR CLAIMING A DEBT AS A BAD DEBT U/S 36(1)(VII)., I.E. , IT IS ENOUGH IF THE DEBT IS 6 WRITTEN OFF IN THE ACCOUNTS OF THE ASSESSEE. IN TH E YEAR UNDER CONSIDERATION, THE AO IS OTHERWISE SATISFIED WITH THE CONDITIONS PRESC RIBED FOR THE CLAIM OF BAD DEBT. THERE IS NO DISPUTE WITH REGARD TO THE FACT THAT TH E ASSESSEE HAS WRITTEN OFF THE DEBT IN HIS ACCOUNTS. HENCE THE CLAIM OF BAD DEBT MADE BY THE ASSESSEE IS IN ACCORDANCE WITH THE LAW AND SETTLED PRINCIPLES. AC CORDINGLY, WE DIRECT THE AO TO DELETE THE SAID DISALLOWANCE. 7. IN THE RESULT, ALL THE THREE APPEALS FILED B Y THE ASSESSEE ARE ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED ACCORDINGLY ON 11 TH NOVEMBER, 2009 SD/- SD/- (SUNIL KUMAR YADAV) (B.R. BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER PVV/SPS VISAKHAPATNAM DATE : 11 TH NOVEMBER, 2009 A COPY OF THIS ORDER IS FORWARDED TO : 01 SHRI T. RAMACHANDRA PRABHU, C/O. M/S. V. RAO & G OPI, CHARTERED ACCOUNTANTS, 26-1-77, 1 ST FLOOR, NAGARAMPALEM, GUNTUR-4 02 THE ACIT, CIRCLE(2)1, GUNTUR 03 THE CIT (A), GUNTUR, 04 THE CIT, GUNTUR 05 THE DR, ITAT, VISAKHAPAATNAM 06 GUARD FILE. BY ORDER SENIOR PRIVATE SECRETARY ITAT, VISAKHAPATNAM BENCH