PALLONJI LEASING P. LTD, MUMBAI V. ACIT (OSD) CIR 2(2), MUMBAI

ITA 5035/MUM/2010

• Counselvise Citation: 503519914 RSA 2010
• Duration Of Justice: 3 year(s) 3 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-09-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 17-12-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 17-06-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: J D MISTRI P B CHHAPGAR; A M PATEL IZRFKHZ DH LS
• Keywords: Capital asset; Business income; Depreciation; Earning of tax free income; Revenue expenditure
• Section: 14A

Judgement Text

PALLONJI LEASING PRIVATE LIMITED - 1 - VK;DJ VIHYH; VF/KDJ.K LH U;K;IHB EQACBZ ESAA IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, MUM BAI JH ,P- ,Y- DKJOK] V/;{K ,OA JH JKTSUNZ FLAG YS[KK L NL; DS LE{K BEFORE HONBLE PRESIDENT SHRI H.L. KARWA AND SHRI R AJENDRA SINGH ACCOUNTANT MEMBER VK;DJ VIHY LA[;K /ITA NO.5035/MUM/2010 FU/KKZJ.K O'KZ @ ASSESSMENT YEAR: - 2006-07 VK;DJ VIHY LA[;K /ITA NO.5036/MUM/2010 FU/KKZJ.K O'KZ @ ASSESSMENT YEAR: - 2007-08 PALLONJI LEASING PRIVATE LIMITED C/O TAJ PRINTING WORKS, 46/A, CAWASJI PATEL STREET FORT, MUMBAI 400 001. CUKE@ VS. THE ASSISTANT COMMISSIONER OF INCOME TAX,(OSD) CIRCLE-2(2)- MUMBAI, AAYKAR BHAVAN, MARSHI KARVE MARG, MUMBAI- 400 020. VIHYKFKHZ @ APPELLANT IZR;FKHZ @ RESPONDENT VIHYKFKHZ DH VKSJ LS @ APPELLANT BY SHRI J.D. MISTRI, P.B. CHHAPGAR AND MS. A.M. PATEL IZR;FKHZ DH VKSJ LS @ RESPONDENT BY SHRI DEEPAK SUTARIYA VKNS'K@ VKNS'K@ VKNS'K@ VKNS'K@ ORDER PER RAJENDRA SINGH THESE APPEALS BY THE ASSESSEE ARE DIRECTED AGAINST THE ORDERS DATED 9.4.2010 AND 4.5.2010 OF CIT(A) FOR THE ASSES SMENT YEARS 2006-07 AND 2007-08. SINCE THE DISPUTES RAISED IN T HESE APPEALS ARE IDENTICAL, THESE ARE BEING DISPOSED OFF BY A SINGLE CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. THE IDENTICAL DISPUTES RAISED RELATE TO LQUOKBZ DH RKJH[K @ DATE OF HEARING 27-08-2013 ?KKS'K.KK DH RKJH[K @ DATE OF PRONOUNCEMENT 30-08-2013 PALLONJI LEASING PRIVATE LIMITED - 2 - ALLOWABILITY OF LOSS INCURRED ON ACCOUNT OF SALE OF REPOSSESSED ASSETS AND DISALLOWANCE OF EXPENSES U/S 14A OF THE INCOME TAX ACT. 2. WE FIRST TAKE UP THE DISPUTE RELATING TO ALLOWABILI TY OF LOSS INCURRED BY THE ASSESSEE ON SALE OF REPOSSESSED ASS ETS. THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF LEASING AND F INANCING MOTOR CARS ETC, PURCHASED BY THE CUSTOMERS. THE OWNERSHIP OF THE MOTOR CARS ETC REMAINS IN THE NAME OF CUSTOMERS WHO HYPOT HECATE THE ASSETS TO THE ASSESSEE COMPANY AGAINST THE LOANS TA KEN. CUSTOMERS HAVE TO PAY EQUATED MONTHLY INSTALLMENTS TOWARDS TH E AMOUNTS DUE FROM THEM TO THE ASSESSEE AND ON NON REALIZATION OF THE EQUATED INSTALLMENTS, THE ASSESSEE COMPANY REPOSSESSES THE ASSETS WHICH ARE THEN RE-SOLD TO THIRD PARTIES. THE ASSESSEE DOES NO T CLAIM DEPRECIATION ON THE ASSETS FINANCED BY IT. THE PROF IT/LOSS ARISING ON SALE OF REPOSSESSED ASSETS ARE DEBITED/CREDITED TO THE PROFIT & LOSS ACCOUNT. THE ASSESSEE IN THE ASSESSMENT YEARS UNDER CONSIDERATION INCURRED LOSS ON SALE OF REPOSSESSED ASSETS AND ACC ORDINGLY CLAIMED DEDUCTION OF A SUM OF RS. 4,81,277/- IN ASSESSMENT YEAR 2006-07 AND RS. 5,55,248/- IN ASSESSMENT YEAR 2007-08. THE ASSESSEE EXPLAINED THAT THE AMOUNTS COLLECTED FROM NEW CUSTO MERS ON SALE OF REPOSSESSED ASSETS WERE LESS THAN THE AMOUNTS OF LO AN OUTSTANDING FROM DEFAULTING CUSTOMERS BECAUSE THE MARKET VALUE OF THE REPOSSESSED ASSETS WAS MUCH LESS WHICH WAS THE REAS ON FOR THE LOSSES. THE AO DID NOT ACCEPT THE EXPLANATION GIVE N BY THE ASSESSEE AND OBSERVED THAT THE LOANS WHICH RELATED TO THE SA LE OF CAPITAL ASSETS WAS CAPITAL IN NATURE. HE, THEREFORE, DISALLOWED TH E CLAIM OF LOSS AND ADDED THE SAME TO THE TOTAL INCOME IN BOTH THE ASSE SSMENT YEARS. 2.1 ASSESSEE DISPUTED THE DECISION OF AO AND SUBMIT TED BEFORE CIT(A) THAT LOSS ON TERMINATION OF LEASE AGREEMENTS WERE INCURRED DURING THE COURSE OF BUSINESS ACTIVITY OF LEASE FIN ANCING AND HENCE THE SAME WAS NOT CAPITAL IN NATURE. IT WAS ALSO SUB MITTED THAT IN PALLONJI LEASING PRIVATE LIMITED - 3 - PRECEDING YEARS I.E. ASSESSMENT YEARS 2002-03 TO 20 05-06 THE ASSESSEE HAD EARNED PROFIT ON TERMINATION OF LEASE AGREEMENTS WHICH WERE DULY CREDITED TO THE PROFIT & LOSS ACCOUNT WHI CH WERE OFFERED TO TAX AS BUSINESS INCOME WHICH HAD NOT BEEN ACCEPTED BY THE DEPARTMENT. THEREFORE, THE DISALLOWANCE OF CLAIM OF LOSS HOLDING THE SAME AS CAPITAL IN NATURE WAS NOT CORRECT. IT WAS F URTHER SUBMITTED THAT LOSS ON TERMINATION OF LEASE AGREEMENT WAS ALS O ALLOWABLE AS DEDUCTION UNDER THE PROVISIONS OF SECTION 36(1) R.W .S 36(2) OF THE INCOME TAX ACT. IT WAS EXPLAINED THAT THE DIFFERENC E BETWEEN THE SELLING PRICE OF THE ASSETS REPOSSESSED AND THE NO N REALIZED EQUATED MONTHLY INSTALLMENTS REPRESENTED NOTHING BUT IRRECO VERABLE PORTION OF THE MONEY LENT BY THE ASSESSEE IN THE COURSE OF CARRYING ON THE BUSINESS OF FINANCING MOTOR CAR AND THE SAME WAS AL LOWABLE AS BAD DEBT. RELIANCE WAS PLACED ON THE DECISION OF TRIBUN AL IN CASE OF ACIT VS. CITICORP MARUTI FINANCE LTD. 2010-TIOL-36-INCOM E-TAX APPELLATE TRIBUNAL-DEL. CIT(A) HOWEVER REJECTED THE CONTENTIO NS RAISED BY THE ASSESSEE. IT WAS OBSERVED BY HIM THAT LOSS WAS DIRE CTLY RELATED TO THE SALE OF VEHICLES WHICH ARE CAPITAL ASSETS AND, THER EFORE, THE LOSS COULD NOT BE ALLOWED AS DEDUCTION. IT WAS ALSO OBSERVED B Y HIM THAT PROXIMITY OF THE SAID DEDUCTION TO LEASING BUSINESS AND NON RECOVERY OF EMI WAS TOO DISTANT AND REMOTE FOR CLAIMING DEDU CTION AS REVENUE EXPENDITURE. HE, THEREFORE, DID NOT ACCEPT THE CLAI M OF BAD DEBT AND CONFIRMED THE DISALLOWANCE MADE BY AO, AGGRIEVED BY WHICH THE ASSESSEE IS IN APPEAL BEFORE TRIBUNAL IN BOTH THE Y EARS UNDER CONSIDERATION. 2.2 BEFORE US THE LEARNED AR FOR THE ASSESSEE SUBMI TTED THAT THE ISSUE WAS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF DELHI BENCH OF TRIBUNAL IN CASE OF ACIT VS. CITICORP MARU TI FINANCE LTD (SUPRA) IN WHICH IT HAS BEEN HELD THAT THE CLAIM WA S ALLOWABLE AS BAD DEBT. IT WAS ALSO POINTED OUT THAT THE SAID DECISIO N OF TRIBUNAL HAS BEEN FOLLOWED BY THE TRIBUNAL IN CASE OF DCIT VS. M ARUTI PALLONJI LEASING PRIVATE LIMITED - 4 - COUNTRYWIDE AUTO FINANCIAL SERVICES PVT. LTD IN ITA NOS. 2181 TO 2183/DEL/2010 FOR ASSESSMENT YEARS 2002-03, 2005-06 AND 2006- 07. IT WAS ACCORDINGLY URGED THAT THE CLAIM OF THE ASSESSEE SHOULD BE ALLOWED. THE LEARNED DR ON THE OTHER HAND DEFENDED THE ORDERS OF AUTHORITIES BELOW AND PLACED RELIANCE ON THE FINDIN GS GIVEN IN RESPECTIVE ORDERS. 2.3 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING ALL OWABILITY OF LOSS INCURRED BY THE ASSESSEE ON SALE OF REPOSSESSED ASS ETS. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF LEASING AND FINANCING MOTOR CARS ETC. THE ASSETS FINANCED BY THE ASSESSEE SUCH AS MOTOR C ARS REMAINED IN THE NAME OF CUSTOMERS WHO HYPOTHECATE THE SAME AGAI NST THE LOAN TAKEN FROM THE ASSESSEE. THE CUSTOMERS ARE REQUIRED TO PAY EQUATED MONTHLY INSTALLMENTS TOWARDS THE LOANS TAKEN FROM T HE ASSESSEE. HOWEVER IN CASE OF NON REALIZATION OF LOAN, THE ASS ESSEE REPOSSESSES THE ASSETS AND SALES THEM IN OPEN MARKET. THE PROFI T/LOSS EARNED IN THE PROCESS IS CREDITED/DEBITED TO THE PROFIT & LOS S ACCOUNT. THE AUTHORITIES BELOW HAVE HELD THAT THE LOSS EARNED BY THE ASSESSEE IS OF CAPITAL IN NATURE AND COULD NOT BE ALLOWED AS DEDUC TION. WE FIND THAT THE SAME ISSUE HAS ALREADY BEEN CONSIDERED BY THE D ELHI BENCH OF TRIBUNAL IN CASE OF ACIT VS. CITICORP MARUTI FINANC E LTD. (SUPRA). IN THAT CASE ALSO, THE ASSESSEE WAS ENGAGED IN THE SAM E BUSINESS OF FINANCING AND GIVING LOANS TO THE PARTIES FOR PURCH ASE OF VEHICLES UNDER HIRE PURCHASE. IN THAT CASE ALSO THERE WAS DE FAULT BY THE CUSTOMERS AND THE ASSESSEE HAD TO REPOSSESS THE ASS ETS AND SELL IN THE OPEN MARKET AND THE SHORTFALL HAD BEEN CLAIMED AS DEDUCTION. THE TRIBUNAL NOTED THAT THE ASSESSEE WAS IN THE BUS INESS OF MONEY LENDING AND GIVING ADVANCES TO PARTIES. THE TRIBUNA L ALSO OBSERVED THAT THE ASSETS WHICH WERE REPOSSESSED BY THE ASSES SEE FROM THE DEBTORS WERE NOTHING BUT A FORM OF DEBT. THE TRIBUN AL REFERRED TO THE JUDGMENT OF HONBLE HIGH COURT OF KOLKATA IN CASE OF A W FIGGIES PALLONJI LEASING PRIVATE LIMITED - 5 - AND CO PVT (254 ITR 63 ) IN WHICH IT WAS HELD THAT AMOUNT ADVANCED BY THE ASSESSEE DURING THE COURSE OF BUSINESS WHICH COULD NOT BE RECOVERED WAS HELD ALLOWABLE AS BAD DEBT U/S 36(2) OF THE INCOME TAX ACT. TRIBUNAL THEREFORE UPHELD THE ORDER OF CIT(A) ALLOWING THE CLAIM OF BAD DEBT. WE ALSO FIND THAT SAID DECISION OF TRI BUNAL IN CASE OF M/S CITICORP MARUTI FINANCE LTD.(SUPRA) HAS BEEN FOLLOW ED BY THE TRIBUNAL IN CASE OF MARUTI COUNTRYWIDE AUTO FINANCI AL SERVICES PVT. LTD (SUPRA). THE FACTS IN THE CASE OF THE ASSESSEE ARE IDENTICAL. THEREFORE, FOLLOWING THE DECISION OF DELHI BENCH OF TRIBUNAL (SUPRA) WE SET ASIDE THE ORDER OF CIT(A) AND ALLOW THE CLAI M OF THE ASSESSEE AS BAD DEBT. 3. THE SECOND DISPUTE RAISED WHICH IS ALSO IDENTICA L IN BOTH THE YEARS IS REGARDING DISALLOWANCE OF EXPENSES U/S 14A OF THE INCOME TAX ACT. AO DURING THE ASSESSMENT PROCEEDINGS NOTED THAT THE ASSESSEE HAD RECEIVED DIVIDEND INCOME OF RS. 295460 IN ASSESSMENT YEAR 2006-07 AND RS. 1,01,769/- IN ASSESSMENT YEAR 2007-08. AO, THEREFORE DISALLOWED THE CLAIM OF EXPENSES RELATING TO EXEMPT INCOME WHICH WERE COMPUTED BY HIM AS PER RULE 8D AT RS. 95 ,501/- AND 116940/- FOR THE TWO YEARS UNDER REFERENCE. IN APPE AL CIT(A) CONFIRMED THE ORDERS OF AO, AGGRIEVED BY WHICH THE ASSESSEE IS IN APPEAL BEFORE TRIBUNAL. 3.1 WE HAVE HEARD BOTH THE PARTIES, PERUSED THE REC ORDS AND CONSIDERED MATTER CAREFULLY. THE DISPUTE IS REGARDI NG DISALLOWANCE OF EXPENSES RELATING TO EXEMPT INCOME U/S 14A OF THE I NCOME TAX ACT. UNDER THE SAID SECTION DISALLOWANCE OF EXPENSES REL ATING TO EXEMPT INCOME IS REQUIRED TO BE MADE AS PER METHOD PRESCRI BED BY THE GOVERNMENT. THE GOVERNMENT HAVE SINCE PRESCRIBED TH E METHOD IN FORM OF RULE 8D. HOWEVER HONBLE HIGH COURT OF BOMB AY IN CASE GODREJ BOYCE MFG CO LTD. (328 ITR 81) HAVE HELD THA T RULE 8D IS APPLICABLE ONLY FROM ASSESSMENT YEAR 2008-09. THE A SSESSMENT YEARS PALLONJI LEASING PRIVATE LIMITED - 6 - INVOLVED IN THE PRESENT APPEAL ARE ASSESSMENT YEARS 2006-07 AND 2007-08. THEREFORE, APPLICATION OF RULE 8D BY THE A UTHORITIES BELOW IN THE ASSESSMENT YEARS UNDER REFERENCE IS NOT CORR ECT. IN RESPECT ASSESSMENT YEAR 2008-09, HONBLE HIGH COURT HAVE HE LD THAT THE DISALLOWANCE IS REQUIRED TO BE MADE BOTH OF DIRECT AND INDIRECT EXPENSES ON A REASONABLE BASIS AFTER ALLOWING OPPOR TUNITY OF HEARING TO THE ASSESSEE. WE, THEREFORE, SET ASIDE THE ORDER OF CIT(A) AND RESTORE THIS ISSUE BACK TO THE FILE OF AO IN BOTH T HE YEARS FOR PASSING FRESH ORDERS AFTER NECESSARY EXAMINATION IN THE LIG HT OF JUDGMENT OF HONBLE HIGH COURT OF BOMBAY IN CASE OF GODREJ BOYC E MFG CO LTD. (SUPRA) AND AFTER ALLOWING OPPORTUNITY OF HEARING T O THE ASSESSEE. 5. IN THE RESULT BOTH THE APPEALS OF THE ASSESSEE A RE PARTLY ALLOWED. ORDER PRONOUNCED ON 30-8-2013 SD/- SD/- (H.L. KARWA) (RAJENDRA SINGH) HONBLE PRESIDENT ACCOUNTANT MEMBER SKS SR. P.S, MUMBAI DATED 30.8.2013 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CONCERNED CIT(A) 4. THE CONCERNED CIT 5. THE DR, C BENCH, ITAT, MUMBAI BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCHES, MUMBAI