MORESHWAR TRADING CO. P. LTD, MUMBAI V. ITO 6(3)(4), MUMBAI

ITA 5090/MUM/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 79276 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-06-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 16-06-2014
• Assessment Year: 2005-2006
• Appeal Filed On: 30-06-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SAMBIT MISHRA
• Assessee Lawyers: PANKAJ TOPRANI
• Keywords: Proportionate interest; Bad and doubtful debts

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, MUM BAI , ! BEFORE SHRI SANJAY ARORA, AM AND DR. S. T. M. PAVA LAN, JM ' # I.T.A. NO.5090/MUM/2011 ( / ASSESSMENT YEAR: 2005-06) MORESHWAR TRADING CO. PVT. LTD. 53, DUTTA BHAVAN, VIJAY MANJREKAR LANE, GOKHALE ROAD (NORTH), DADAR (WEST), MUMBAI-400 028 # VS. INCOME TAX OFFICER 6(3)(4), R. NO. 524, AAYKAR BHAVAN, MUMBAI-400 020 $ #'%' ./PAN/GIR NO. AAACM 7515 P ( $& /APPELLANT ) : ( '($& / RESPONDENT ) $&) / APPELLANT BY : SHRI PANKAJ TOPRANI '($&*) / RESPONDENT BY : SHRI SAMBIT MISHRA + ,*- / DATE OF HEARING : 16.06.2014 ./0 *- / DATE OF PRONOUNCEMENT : 30.06.2014 '1# O R D E R PER SANJAY ARORA, A. M.: THIS IS AN APPEAL BY THE ASSESSEE CHALLENGING THE C ONFIRMATION OF THE LEVY OF PENALTY U/S. 271(1)(C) OF THE INCOME TAX ACT, 1961 (THE ACT HEREINAFTER) FOR THE ASSESSMENT YEAR (A.Y.) 2005-06 BY THE COMMISSIONER OF INCOME TAX (APPEALS)-12, MUMBAI (CIT(A) FOR SHORT) VIDE HIS ORDER DATED 04 .01.2011. 2 ITA NO.5090/MUM/2011 (A.Y. 2005-06) MORESHWAR TRADING CO. PVT. LTD. VS. ITO 2.1 OPENING THE ARGUMENTS FOR AND ON BEHALF OF THE ASSESSEE, IT WAS SUBMITTED BY THE LD. AUTHORIZED REPRESENTATIVE (AR), THE ASSESSEES COUNSEL, THAT PENALTY IN THE INSTANT CASE STANDS LEVIED QUA FOUR ADJUSTMENTS MADE TO THE ASSESSEES INCOME IN A SSESSMENT, BEING: I. DISALLOWANCE U/S.14A OF THE ACT AMOUNTING TO RS.70, 689/-; II. DISALLOWANCE REGARDING PROVISION FOR DOUBTFUL DEBTS AT RS.1,25,393/-; III. PROPORTIONATE INTEREST PAID, AMOUNTING TO RS.15,96, 499/-, DISALLOWED ON INTEREST-FREE LOANS ADVANCED TO DIRECTORS; AND IV. DISALLOWANCE FOR RENT PAID AT RS.1,20,000/-. PLACING A COPY OF THE ORDER BY THE TRIBUNAL IN ITS OWN CASE FOR THE RELEVANT YEAR (IN ITA NO.5091/MUM/2011 DATED 25.09.2013) ON RECORD, HE CO NTINUED THAT THE MATTER IN THE QUANTUM PROCEEDINGS HAD TRAVELLED TO THE TRIBUNAL, WHICH, WHILE RESTORING THE MATTER BACK TO THE FILE OF THE ASSESSING OFFICER (A.O.) WITH A DIRECTION QUA THE DISALLOWANCE OF INTEREST RELATABLE TO INTEREST-FREE LOANS TO DIRECT ORS (AT RS.15,96,499/-), CONFIRMED THE DISALLOWANCE OF RENT U/S.40A(2)(A) AT RS.1,20,000/- . THERE HAD BEEN IN FACT NO APPEAL TO THE FIRST APPELLATE AUTHORITY IN RESPECT OF THE FIR ST TWO ADJUSTMENTS, LISTED AT (I) AND (II) (SUPRA) IN THE QUANTUM PROCEEDINGS. AT THIS STAGE, HE WAS ASKED TO TAKE US THROUGH THE ASSESSMENT ORDER AS WELL AS THE PENALTY ORDER, SO A S TO BE ABLE TO UNDERSTAND THE ASSESSEES CASE WITH REGARD TO EACH OF THE FOUR DIS ALLOWANCES; PENALTY PROCEEDINGS, IT BEING TRITE, ARE SEPARATE AND DISTINCT FROM THE QUA NTUM PROCEEDINGS. THE SAID ORDERS, AS WELL AS THE IMPUGNED ORDER, WERE GONE THROUGH DURIN G HEARING, TO FIND NO EXPLANATION BY THE ASSESSEE QUA ANY OF THE FOUR ADJUSTMENTS, WITH, IN FACT, THE APP EAL BEFORE THE TRIBUNAL IN THE QUANTUM PROCEEDINGS ARISING OUT OF THE RECTI FICATION PROCEEDINGS MOVED BY THE ASSESSEE U/S.154 OF THE ACT, AND WHICH ARE SEVERELY LIMITED IN ITS SCOPE AND PURVIEW. 2.2 THE LD. DEPARTMENTAL REPRESENTATIVE (DR), ON TH E OTHER HAND, WOULD SUBMIT THAT NO CASE WHATSOEVER WITH REGARD TO ANY OF THE DISALL OWANCES HAVING BEEN MADE OUT BY THE 3 ITA NO.5090/MUM/2011 (A.Y. 2005-06) MORESHWAR TRADING CO. PVT. LTD. VS. ITO ASSESSEE AT ANY STAGE, PENALTY STANDS RIGHTLY LEVIE D AND, FURTHER, SUSTAINED BY THE FIRST APPELLATE AUTHORITY, SO THAT ITS CONFIRMATION WAS P RAYED FOR. 3. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. WE SHALL PROCEED TO DISCUSS THE RELATIVE MERITS OF THE CASE FOR EACH OF THE DISALLOWANCES QUA WHICH PENALTY STANDS LEVIED AND SUSTAINED. 3.1 THE ASSESSEE WAS OBSERVED TO HAVE MADE INVESTME NT IN SHARES AT RS.11.26 LACS. IT HAVING, BESIDES OWN FUNDS, BORROWED FUNDS (OUTSTAND ING AS ON 31/3/2005 AT RS.527.26 LACS), INCURRING INTEREST AT RS.103.55 LACS, THE SA ME STOOD DISALLOWED ON A PROPORTIONATE BASIS U/S.14A OF THE ACT. THE ASSESSEES BALANCE-SH EET FOR THE YEAR ENDING 31/3/2005 (AS WELL AS 31/3/2004), FORMING PART OF THE RECORD (PB PGS. 19-38), STANDS PERUSED. THE ASSESSEES SHARE CAPITAL IS AT RS. 175 LACS. HOWEVE R, AS AGAINST THIS, IT HAS UNABSORBED LOSSES AT RS. 440.69 LACS AND RS. 424.30 LACS AS AT 31/3/2005 & 31/3/2004 RESPECTIVELY, SO THAT IN EFFECT THE ENTIRE CAPITAL STANDS WIPED OUT BY LOSSES. AS SUCH, THE ENTIRE ASSETS, INCLUDING INVESTMENT IN SHARES, OF THE ASSESSEE-COM PANY STAND FINANCED BY BORROWED CAPITAL, ON WHICH INTEREST STANDS PAID. IN FACT, TH EREFORE, THE INVESTMENT IN ITS TOTALITY IS FINANCED THUS, RATHER THAN PROPORTIONATELY, AS ASSU MED BY THE REVENUE. THE RESERVE AND SURPLUS AS ON 31/3/2005 (RS. 255.20 LACS) IS ONLY B Y WAY OF REVALUATION RESERVE CREATED DURING THE YEAR, I.E., ON REVALUING THE (FIXED) ASS ETS AND, THUS, NOT IN THE NATURE OF FREE RESERVES. RATHER, EVEN INCLUDING THE SAME DOES NOT INCREASE THE CAPITAL TO EXCEED THE ACCUMULATED LOSSES. UNDER THE CIRCUMSTANCES, WITH N O EXPLANATION HAVING IN FACT BEEN RENDERED BY THE ASSESSEE TOWARD THE IMPUGNED DISALL OWANCE - WHICH EMANATES FROM THE FACTS ON RECORD, AT ANY STAGE OF THE PROCEEDINGS, I NCLUDING BEFORE US, WE CONFIRM THE LEVY OF PENALTY ON THE IMPUGNED DISALLOWANCE. WE DECIDE ACCORDINGLY. 3.2 DISALLOWANCE REGARDING PROVISION FOR DOUBTFUL DEBTS AT RS.1,25,393/- : CLEARLY, A PROVISION AGAINST BAD AND DOUBTFUL DEBTS IS PROSCRIBED FOR BEING ALLOWED DEDUCTION U/S. 36(1)(VII) R/W EXPLANATION THERETO. WE ARE CONSCIOUS THAT THERE COULD BE A CASE WHERE THE PROVISION AMOUNT, WHICH STANDS REDUC ED FROM THE AMOUNT OF SUNDRY 4 ITA NO.5090/MUM/2011 (A.Y. 2005-06) MORESHWAR TRADING CO. PVT. LTD. VS. ITO DEBTORS IN THE BALANCE-SHEET AS AT THE YEAR-END, I S NOT SO FOR PRESENTATION PURPOSES ONLY, AND IN FACT NOT CARRIED FORWARD TO THE FOLLOWING YE AR IN THE ACCOUNTS, AND THE DEBTORS, SIMILARLY, CARRIED FORWARD AT THE REDUCED, NET AMOU NT, I.E., AS STATED IN THE BALANCE-SHEET, SO THAT THE SAME (PROVISION) IS IN EFFECT AND SUBST ANCE ONLY A WRITE OFF, AS EXPLAINED BY THE APEX COURT IN VIJAYA BANK VS. CIT [2010] 323 ITR 166 (SC). HOWEVER, THIS DOES NOT APPEAR TO BE SO IN-AS-MUCH AS THE PROVISION REDUCED (FROM THE AMOUNT OF TOTAL DEBTORS) IN ACCOUNTS (RS. 3,86,350/-) IS HIGHER THAN THE AMOUNT OF PROVISION DEBITED TO THE OPERATING STATEMENT (PROFIT AND LOSS ACCOUNT) FOR THE YEAR, S O THAT THE PROVISION MADE AND CLAIMED IS CARRIED FORWARD FROM YEAR TO YEAR UNDER A SEPARATE ACCOUNT, IN WHICH CASE IT IS ONLY A PROVISION, PRECLUDED FOR DEDUCTION U/S.36(1)(VII). NO EXPLANATION TOWARD CLAIM OF A PROVISION HAVING BEEN RENDERED BY THE ASSESSEE AT A NY STAGE, WE CONFIRM THE LEVY OF PENALTY SUBJECT TO IT BEING SO, FOR WHICH THE A.O. SHALL CAUSE VERIFICATION, IN TERMS OF OUR DELINEATION AS ABOVE. THAT IS, SUBJECT TO THE A.O., UPON VERIFICATION, CONFIRMING THE IMPUGNED AMOUNT AS HAVING BEEN CARRIED FORWARD IN A CCOUNTS UNDER THE PROVISION ACCOUNT AND, CORRESPONDINGLY, INCLUDED IN THE AMOUN T AT WHICH THE DEBTORS STAND CARRIED FORWARD IN ACCOUNTS TO THE FOLLOWING YEAR. WE DECID E ACCORDINGLY. 3.3 PROPORTIONATE INTEREST PAID IS DISALLOWED ON INTERE ST-FREE LOANS ADVANCED TO DIRECTORS AMOUNTING TO RS.15,96,499/- : EVEN AS APPARENT FROM THE FOREGOING (REFER PARA 2. 1), THE MATTER STANDS SINCE RESTORED BY THE TRIBUNAL BACK TO THE FILE OF THE A. O. PENALTY, UNDER THE CIRCUMSTANCES, CANNOT SURVIVE, AND IS ACCORDINGLY SET ASIDE. SO HO WEVER, THE REVENUE SHALL BE AT LIBERTY TO LEVY PENALTY, IF DEEMED FIT AND PROPER IN THE FA CTS AND CIRCUMSTANCES OF THE CASE, I.E., IN THE SET ASIDE PROCEEDINGS. WE DECIDE ACCORDINGLY. 3.4 DISALLOWANCE FOR RENT PAID AT RS.1,20,000/- : THIS DISALLOWANCE STANDS DISCUSSED BY THE TRIBUNAL VIDE PARA 3.2 OF ITS ORDER IN THE QUANTUM PROCEEDINGS. IT WAS NOTED BY IT THAT NO MIS TAKE, MUCH LESS ONE APPARENT FROM RECORD, IS MADE OUT; THE A.O. HAVING TAKEN A CONSCI OUS VIEW IN THE MATTER UPON CONSIDERATION OF THE ASSESSEES EXPLANATION, WITH N O SPECIFIC ARGUMENT HAVING IN FACT BEEN 5 ITA NO.5090/MUM/2011 (A.Y. 2005-06) MORESHWAR TRADING CO. PVT. LTD. VS. ITO RAISED BY THE ASSESSEE EITHER BEFORE THE AUTHORITIE S BELOW OR BEFORE IT. FURTHER, ON A READING OF THE NARRATION OF THE BACKGROUND FACTS VI DE PARA 2 OF THE SAID ORDER IT TRANSPIRES THAT A SIMILAR ADDITION, AGAIN AT THE SAID SUM OF R S.1.20 LACS, HAD BEEN EFFECTED FOR A.Y. 2001-02, AND WHICH HAD NOT BEEN APPEALED AGAINST BY THE ASSESSEE BEFORE THE TRIBUNAL. THE FACTS OF THE CASE AS RECORDED IN THE ASSESSMENT ORDER REVEAL THAT THE DISALLOWANCE HAD BEEN MADE TOWARD RENT TO A DIRECTOR AT THE RATE OF RS.10,000/- PER MONTH. FURTHER, AN INTEREST-FREE DEPOSIT OF RS.100 LACS HAD ALSO BEEN MADE IN RESPECT THEREOF. THE DISALLOWANCE HAD BEEN EFFECTED BY THE REVENUE BY ME RELY DOUBTING THE TRANSACTION; THE ASSESSEE BEING UNABLE TO FURNISH THE COPY OF THE AG REEMENT OR ANY EVIDENCE OF THE OWNERSHIP OF THE SAID PROPERTY. WE FIND THE REVENUE S CASE IN THE PENALTY PROCEEDINGS AS NOT TENABLE. THIS IS AS A DISALLOWANCE U/S. 40A(2)( A) COULD ONLY BE OF AN EXPENDITURE THAT IS OTHERWISE ALLOWABLE, SO THAT THERE COULD BE NO D OUBT WITH REGARD TO THE ASSESSEE HAVING RENTED A HOUSE PROPERTY, AND FOR WHICH RENT STANDS PAID AT RS.10,000/- PER MONTH, HAVING IN FACT ALSO MADE AN INTEREST-FREE DEPOSIT OF RS.10 0 LACS TOWARD THE SAME. THERE IS NO WHISPER IN ANY ORDER IN THE QUANTUM PROCEEDINGS, OR EVEN IN THE PENALTY PROCEEDINGS, TO SHOW THAT THE SAID RENT IS EXCESSIVE HAVING REGARD TO THE ANNUAL VALUE OR THE RENT THAT THE PROPERTY MAY FETCH FROM YEAR TO YEAR. UNDER THE CIR CUMSTANCES, IN OUR VIEW, NO CASE FOR LEVY OF PENALTY IS MADE OUT. WE DECIDE ACCORDINGLY. 4. IN THE RESULT, THE ASSESSEES APPEAL IS PARTLY A LLOWED. 20 -34 52-* '61 7 -* -89! ORDER PRONOUNCED IN THE OPEN COURT ON JUNE 30, 2014 SD/- SD/- (DR. S. T. M. PAVALAN) (SANJAY ARORA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER + :, MUMBAI; ; DATED : 30.06.2014 # ROSHANI , SR. PS 6 ITA NO.5090/MUM/2011 (A.Y. 2005-06) MORESHWAR TRADING CO. PVT. LTD. VS. ITO ! ' #$%& ' &$ # COPY OF THE ORDER FORWARDED TO : 1. $& / THE APPELLANT 2. '($& / THE RESPONDENT 3. '' + <- = > / THE CIT(A) 4. '' + <- / CIT CONCERNED 5. ?@ A'-B4 ' B40 + :, / DR, ITAT, MUMBAI 6. A 5C , # GUARD FILE ! ( / BY ORDER, )/(* + (DY./ASSTT. REGISTRAR) , + :, / ITAT, MUMBAI