MERCHANT MEDIA LTD, MUMBAI V. ITO WD 5(2)(3), MUMBAI

ITA 4925/MUM/2009

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 1562 (ITAT-MUMBAI)
• Duration Of Justice: 9 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-06-2010
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: H
• Assessment Year: 2005-2006
• Appeal Filed On: 27-08-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: KESHAVE SAXENA
• Keywords: Bad and doubtful debts; Corroborative evidences

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL H BENCH, MUMBAI BEFORE SHRI R.K. PANDA, AM & SMT. ASHA VIJAYARAGHAV AN, JM I.T.A. NO. 4925/MUM/2009 (ASSESSMENT YEAR 2005-06) M/S. MERCHANT MEDIA LTD. 1002, SAMUDRA SETU, SAHER AGIAR LANE, 51-D, BHULABHAI DESAI ROAD, MUMBAI-400 028 PAN: AAACM2832R VS. I.T.O.-5(2)(3) AAYAKAR BHAVAN MUMBAI APPELLANT RESPONDENT APPELLANT BY: MR. JAYESH DADIA RESPONDENT BY: MR. KESHAVE SAXENA O R D E R DATE OF HEARING: 01.06.2010 DATE OF ORDER: 04.06.2010 PER R.K. PANDA, AM: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGA INST THE ORDER DATED 20 TH JULY, 2009 OF THE CIT(A)-V, MUMBAI RELATING TO ASS ESSMENT YEAR 2005-06. 4. IN GROUNDS OF APPEAL NO. 1, THE ASSESSEE HAS CHALLE NGED THE ORDER OF THE CIT(A) IN CONFIRMING THE DISALLOWANCE OF BAD DEBTS MADE BY THE ASSESSING OFFICER AMOUNTING TO RS.18,46,740 (ACCORD ING TO THE ASSESSMENT AND APPELLATE ORDERS RS.18,46,750). 5. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESSEE COMPANY IS IN THE PUBLICATION BUSINESS AND HAS CLAIMED DEDUCTION OF R S.18,46,750 ON ACCOUNT OF BAD DEBT WRITTEN OFF DURING THE IMPUGNED ASSESSMENT YEAR. ON BEING QUESTIONED BY THE ASSESSING OFFICER DURING TH E COURSE OF ASSESSMENT PROCEEDINGS REGARDING ALLOWABILITY OF TH E CLAIM IT WAS EXPLAINED THAT THE ASSESSEE HAS NOT TAKEN ANY STEPS FOR THE RECOVERY OF THE DEBTS. IT WAS SUBMITTED THAT PAST EXPERIENCE SHOWS THAT WHEREVER MANAGEMENT OF THE COMPANY HAS TAKEN STEPS FOR RECOV ERY OF BAD DEBTS LIKE FILING POLICE COMPLAINT, ISSUING OF NOTICE U/S . 138 OF THE NEGOTIABLE I.T.A. NO. 4925/MUM/2009 M/S. MERCHANT MEDIA LTD. ================== 2 INSTRUMENT ACT, IT HAS NOT YIELDED ANY RESULT AND T HE COMPANY WAS UNABLE TO RECOVER THE AMOUNTS DUE FROM THE CLIENTS. SUCH CASES WERE ALSO VERY COSTLY AND TIME CONSUMING. IT WAS SUBMITTED THAT I N VIEW OF THE ABOVE FACTS THE COMPANY DECIDED TO WRITE OFF THE DEBT WIT HOUT TAKING ANY ACTION AGAINST THE CLIENT WHICH WAS IN THE INTEREST OF BUS INESS OF THE ASSESSEE. IT WAS FURTHER SUBMITTED THAT AS PER THE AMENDED PROVI SIONS OF SECTION 36(1)(VII) OF THE INCOME-TAX ACT, 1961 (THE ACT) IT IS NO MORE NECESSARY FOR THE ASSESSEE TO ESTABLISH THAT THE DEBTS HAVE B ECOME BAD. 6. HOWEVER, THE ASSESSING OFFICER REJECTED THE CONTENT ION OF THE ASSESSEE. HE NOTED FROM THE DETAILS OF DEBTS WRITT EN OFF THAT THE ASSESSEE HAS WRITTEN OFF MANY AMOUNTS WHICH WERE DUE FROM WE LL KNOWN COMPANIES AND THERE WERE NO REASON TO WRITE OFF THE SE AMOUNTS. FURTHER THE REPLY FILED BY THE ASSESSEE IS VERY EVASIVE. THE ASSESSEE COULD NOT SUBSTANTIATE ITS CLAIM OF ALLOWABILITY OF DEDUCTION THROUGH PROPER SUPPORTING EVIDENCES. NOT BEING SATISFIED WITH THE EXPLANATION GIVEN BY THE ASSESSEE AND RELYING ON THE DECISION OF THE HON BLE MADRAS HIGH COURT IN THE CASE OF SOUTHERN INDIA SURGICAL COMPANY LTD. VS. ACIT REPORTED IN 287 ITR 62, THE ASSESSING OFFICER DISALLOWED THE CL AIM OF THE ASSESSEE. 7. IN APPEAL, THE LEARNED CIT(A) UPHELD THE ACTION OF THE ASSESSING OFFICER. WHILE DOING SO HE NOTED THAT THE ASSESSEE IN THE INSTANT CASE HAS NOT GIVEN ANY BASIS AS TO WHY IT TREATED THE AMOUNT S DUE FROM WELL KNOWN AND REPUTED COMPANIES AS IRRECOVERABLE. SINCE IT W AS ONLY STATED THAT STEPS FOR RECOVERY WERE NOT TAKEN AS STEPS TAKEN IN THE PAST HAVE NOT YIELDED ANY RESULT AND ALSO PROVED COSTLY, THEREFOR E, IT CANNOT BE EXAMINED WHETHER THE DECISION OF THE ASSESSEE TO TR EAT THESE DEBTS AS IRRECOVERABLE IS A COMMERCIAL OR BUSINESS DECISION AND WHETHER SUCH DECISION IS BONAFIDE. HE ACCORDINGLY UPHELD THE DI SALLOWANCE MADE BY THE ASSESSING OFFICER. AGGRIEVED WITH SUCH ORDER OF TH E CIT(A), THE ASSESSEE IS IN APPEAL BEFORE US. I.T.A. NO. 4925/MUM/2009 M/S. MERCHANT MEDIA LTD. ================== 3 8. AFTER HEARING BOTH THE SIDES, WE FIND THE ASSESSEE DURING THE COURSE OF ASSESSMENT PROCEEDINGS HAS SUBMITTED BEFO RE THE ASSESSING OFFICER THE FOLLOWING: (PAGE 3/PARA 2 OF THE ASSESS MENT ORDER) IT IS FURTHER SUBMITTED THAT MOST OF THE AMOUNTS W RITTEN OFF AS BAD DEBTS RELATE TO VERY WELL KNOWN PUBLIC LIMIT ED COMPANIES AND ALSO REPUTED BANKS. THESE COMPANIES/ BANKS AFTER RECEIPT OF OUR BILLS NEGOTIATED WITH US FOR S ETTLING THE BILLS AS ACCORDING TO THEM THE BILLS WERE ON VERY H IGHER SIDE. TAKING INTO CONSIDERATION THE RELATIONSHIP WITH THE SE COMPANIES/BANKS, TOUGH COMPETITION IN THE MARKET AN D TO MAINTAIN GOOD RELATIONSHIP, WE HAVE AGREED TO SETTL E THE BILLS OF A LESSER AMOUNT. HENCE, MOST OF THE AMOUNTS ARE SHORT RECOVERY AND/OR SUNDRY BALANCES WRITTEN OFF. FURTHER, THE GROSS BILL RAISED BY US IS OFFERED AS INCOME IN THE YEAR WHEN THE BILLS WERE RAISED AND INCLUDED IN THE GROSS REVENUE. .. 9. WE FIND THE HONBLE SUPREME COURT IN THE CASE OF TR F LTD. VS. CIT VIDE CIVIL APPEAL NO. 5293 OF 2003 ORDER DATED 9 TH FEBRUARY, 2010 (A COPY OF WHICH WAS FILED DURING THE COURSE OF HEARING BEF ORE US) HAS HELD THAT AFTER 1 ST APRIL, 1989 IT IS NOT NECESSARY FOR THE ASSESSEE T O 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. SINCE IN THE INSTANT CASE THE ASSESSEE UNDISPUTEDLY HAS WRITTEN OFF BAD DEBTS AMOUNTING TO RS.18,46,750 AND SINCE THE ABOVE AMOUN TS WERE OFFERED IN THE YEAR WHEN THE BILLS WERE RAISED AND INCLUDED IN THE GROSS REVENUE, A FACT STATED BEFORE THE ASSESSING OFFICER AND NOT CO NTROVERTED BY THE REVENUE, THEREFORE, FOLLOWING THE DECISION OF THE H ONBLE SUPREME COURT CITED ABOVE, THE CLAIM OF BAD DEBT HAS TO BE ALLOWE D. ACCORDINGLY, WE SET ASIDE THE ORDER OF THE CIT(A) AND DIRECT THE ASSESS ING OFFICER TO ALLOW THE CLAIM OF THE ASSESSEE. GROUNDS OF APPEAL NO. 1 BY THE ASSESSEE IS ACCORDINGLY ALLOWED. 10. IN GROUNDS OF APPEAL NO. 2 THE ASSESSEE HAS CHALLEN GED THE ORDER OF THE CIT(A) IN CONFIRMING THE ACTION OF THE ASSESSIN G OFFICER IN DISALLOWING THE ADVANCES WRITTEN OFF AMOUNTING TO RS.13,40,276 CLAIMED BY THE ASSESSEE AS BUSINESS LOSS U/S. 28 OF THE ACT. GROU NDS OF APPEAL NO. 3 IS AN I.T.A. NO. 4925/MUM/2009 M/S. MERCHANT MEDIA LTD. ================== 4 ALTERNATIVE GROUND TO GROUNDS OF APPEAL NO. 2 IN WH ICH THE ASSESSEE HAS CHALLENGED THE ORDER OF THE CIT(A) IN NOT ALLOWING THE AMOUNT OF ADVANCES WRITTEN OFF AMOUNTING TO RS.13,40,276 AS CAPITAL LO SS. 11. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESSEE CLAIMED AN AMOUNT OF RS.13,40,276 AS ADVANCES TO STAFF WRITTEN OFF. ON BEING QUESTIONED BY THE ASSESSING OFFICER IT WAS EXPLAINED THAT THE ASS ESSEE IS A VERY SMALL PUBLICATION COMPANY AND REQUIRES SKILLED EMPLOYEES LIKE EDITOR, SUB EDITOR, MARKETING PERSONNEL, PRODUCTION MANAGER, DT P OPERATORS, ETC. THE COMPANY FACES LOT OF COMPETITION FROM BIG PRINT MEDIA COMPANIES WHO OFFER HANDSOME SALARIES, PERKS AND BENEFITS TO THEIR EMPLOYEES. THE COMPANY GIVES VARIOUS TYPES OF ADVANCES TO THE MARK ETING EMPLOYEES TO MEET THEIR OUTSTATION COSTS LIKE TRAVELLING, CONVEY ANCE, FOOD EXPENSES, HOTEL STAY, ETC. OVER THE PERIOD OF TIME SOME OF T HE EMPLOYEES HAVE LEFT THE ORGANISATION AND HAVE NOT SUBMITTED THEIR EXPEN DITURE STATEMENT. IN VIEW OF THE REVENUE EXPENSES INCURRED BY THE COMPAN Y STAFF AND TO RETAIN THE LOW COST STAFF IN THE COMPETITIVE ENVIRONMENT, THE ADVANCES TO THE STAFF WHICH WERE REVENUE IN NATURE WERE WRITTEN OFF AS NOT RECOVERABLE AMOUNTS. THE ASSESSEE ALSO ENCLOSED A LIST OF SUC H ADVANCES TO THE STAFF WRITTEN OFF DURING THE YEAR AND IT WAS SUBMITTED TH AT NONE OF THE ABOVE MENTIONED STAFF IS IN SERVICE DURING THE RELEVANT A SSESSMENT YEAR. SINCE THE STAFF HAVE LEFT, THE AMOUNTS GIVEN TO THEM AS A DVANCES ARE WRITTEN OFF. 12. HOWEVER, THE ASSESSING OFFICER DID NOT ACCEPT THE C ONTENTION OF THE ASSESSEE. HE NOTED THAT AS AGAINST STAFF SALARY OF RS.38,84,746 THE ASSESSEE HAS WRITTEN OFF AN AMOUNT OF RS.13,40,286. THE ADVANCES WRITTEN OFF RELATING TO VARIOUS EMPLOYEES ARE IN TH E RANGE OF RS.3,03,500, RS.1,62,000, RS.1,56,358, ETC. HE NOTED THAT A BUS INESSMAN WILL NOT WRITE OFF SUCH LARGE AMOUNT WITHOUT MAKING ANY EFFORTS FO R RECOVERY. THE ASSESSING OFFICER FURTHER NOTED THAT THE AMOUNT ADV ANCED IS IN THE NATURE OF CAPITAL ADVANCES WHICH WERE NEVER TAXED AS INCOM E IN THE PAST THEREFORE, THE EXPENDITURE INCURRED IS A CAPITAL EX PENDITURE. I.T.A. NO. 4925/MUM/2009 M/S. MERCHANT MEDIA LTD. ================== 5 13. IN APPEAL, IT WAS ARGUED THAT THE ASSESSEE COMPANY HAS WRITTEN OFF THE AMOUNT GIVEN AS LOAN TO EMPLOYEES. AS THESE EM PLOYEES HAVE LEFT THE SERVICE OF THE ASSESSEE THE AMOUNT WAS WRITTEN OFF AND SINCE THE LOSS WAS INCURRED BY IT DURING THE COURSE OF BUSINESS THE AS SESSEE IS ENTITLED TO DEDUCTION OF THE SAME AS BUSINESS LOSS. 13.1 HOWEVER, THE CIT(A) REJECTED THE CONTENTION OF THE ASSESSEE. HE NOTED THAT THE ASSESSEE HAS WRITTEN OFF THE AMOUNT DUE FROM SOME OF THE PERSONS WHO ARE STILL WORKING WITH THE ASSESSEE COM PANY. ACCORDING TO HIM SO LONG AS THESE PERSONS WERE WORKING WITH THE ASSESSEE, IT IS NOT DIFFICULT FOR THE ASSESSEE TO RECOVER THE LOANS FRO M THESE PERSONS FROM THE MONTHLY SALARIES PAID TO THE EMPLOYEES. THEREFORE, THE REASON GIVEN BY THE ASSESSEE IS NOT BONAFIDE AND FACTUALLY FOUND TO BE INCORRECT. NONE OF THE PERSONS CONFIRMED THAT ON SETTLEMENT AT THE TIM E OF RETIREMENT ANY AMOUNT WAS PAYABLE TO THE ASSESSEE. SINCE THE DECI SION OF THE ASSESSEE IS NOT A BONAFIDE DECISION BUT RATHER A MALAFIDE ONE, THEREFORE, THE AMOUNTS WRITTEN OFF CANNOT BE ALLOWED AS A DEDUCTION. FURT HER HE OBSERVED THAT THE ASSESSEE HAS NOT FILED ANY SCHEME TO SUBSTANTIA TE THAT THE LOANS WERE ADVANCED BY THE ASSESSEE DURING THE COURSE OF ITS B USINESS. THEREFORE, THE SAME ALSO CANNOT BE TREATED AS BUSINESS LOSS. HE A CCORDINGLY REJECTED THE CLAIM OF THE ASSESSEE. AGGRIEVED WITH SUCH ORDER O F THE CIT(A), THE ASSESSEE IS IN APPEAL BEFORE US. 14. AFTER HEARING BOTH THE SIDES AND CONSIDERING THE TO TALITY OF THE FACTS OF THE CASE, WE AGREE WITH THE FINDINGS OF TH E CIT(A) THAT THE AMOUNT SO WRITTEN OFF CANNOT BE ALLOWED AS A REVENUE EXPEN DITURE. HOWEVER, WE FIND MERIT IN THE ALTERNATE GROUND OF THE ASSESSEE THAT THE AMOUNT OF ADVANCES WRITTEN OFF AMOUNTING TO RS.13,40,276 BE H ELD AS A CAPITAL LOSS. WE FIND THE ASSESSING OFFICER HIMSELF AT PAGE 5 OF THE ASSESSMENT ORDER HAS HELD THAT THE EXPENDITURE IS NOT A REVENUE EXPE NDITURE BUT ARE CAPITAL ADVANCES AND SHOULD BE TREATED AS CAPITAL IN NATURE . SINCE THE ASSESSEE HAS WRITTEN OFF SUCH AMOUNT THE SAME, IN OUR OPINIO N, SHOULD BE TREATED AS CAPITAL LOSS. WE, THEREFORE, HOLD THAT THE AMOUNT OF RS.13,40,276 SHOULD BE TREATED AS CAPITAL LOSS. GROUNDS OF APPEAL NO. 3 BY THE ASSESSEE IS I.T.A. NO. 4925/MUM/2009 M/S. MERCHANT MEDIA LTD. ================== 6 ACCORDINGLY ALLOWED AND GROUNDS OF APPEAL NO. 2 BY THE ASSESSEE IS DISMISSED. 15. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED ON 4 TH JUNE, 2010. SD/- (ASHA VIJAYARAGHAVAN) JUDICIAL MEMBER SD/- (R.K. PANDA) ACCOUNTANT MEMBER MUMBAI, DATED 4 TH JUNE, 2010 COPY TO: (1) THE APPELLANT, (2) THE RESPONDENT, (3) THE CIT(A)-V, MUMBAI, (4) THE CIT, MC-V, MUMBAI, (5) THE DR, H BENCH, ITAT, MUMBAI. //TRUE COPY// BY ORDER ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI TPRAO