ASST CIT 18(1), MUMBAI V. ANAND KESHAV SHEJWAL, MUMBAI

ITA 5516/MUM/2015

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 8205 (ITAT-MUMBAI)
• Duration Of Justice: 6 year(s) 8 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-08-2022
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2012-2013
• Appeal Filed On: 03-12-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business income; Bad and doubtful debts; Commercial expediency
• Section: 191; 73

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “A”, MUMBAI BEFORE SHRI G.S. PANNU, PRESIDENT AND SHRI VIKAS AWASTHY, JUDICIAL MEMBER ITA NO. 5516/MUM/2015 : A.Y : 2012-13 Asst. Commissioner of Income Tax-18(1), Mumbai. (Appellant) Vs. Anand Keshav Shejwal 33/35, Ground floor, Matru Vatsalya, 2 nd Fofal Wadi, Bhuleshwar, Mumbai 400 002. PAN : AAATC7307E (Respondent) Appellant by : Shri Mehul Jain Respondent by : Shri Vipul Joshi Date of Hearing : 17/06/2022 Date of Pronouncement : 12/08/2022 O R D E R This appeal by the Revenue is directed against the order of Commissioner of Income Tax (Appeals)-29, Mumbai (in short ‘the CIT(A)’) dated 15.09.2015 for the Assessment Year 2012-13. 2. The Revenue has assailed the order of CIT(A) by raising 10 grounds in appeal. In ground nos. 1 to 3 of appeal, the Revenue has assailed the findings of CIT(A) in restricting addition made under Section 36(1)(iii) of the Income Tax Act, 1961 (in short ‘the Act’) to Rs.5,91,365/- as against Rs.45,46,301/- made by the Assessing Officer. In ground nos. 4 and 5 of appeal, the Revenue has assailed the order of CIT(A) in deleting addition of Rs.94,44,971/- in respect of bad debts. 2 ITA No. 5516/Mum/2015 Anand Keshav Shejwal In ground nos. 6 to 8 of appeal, the Revenue has assailed the findings of CIT(A) in deleting the addition of Rs.6,64,64,982/- on account of alleged transfer of goodwill. 3. Shri Mehul Jain representing the Department submitted that the assessee had advanced interest bearing loan amounting to Rs.6,06,57,610/- to Bombay Fruits & Vegetables Import & Export Pvt. Ltd. and other related parties. The assessee has paid interest of Rs.45,46,301/- on the interest bearing funds and has advanced the same to its related parties without charging any interest. The ld. DR submitted that the assessee had stopped his business operations from October, 2011, but still claimed interest expenses without corresponding volume of transactions or benefit from Bombay Fruits & Vegetables Import & Export Pvt. Ltd. The assessee on the one hand paid huge interest on borrowed funds and on the other hand did not charge any interest from the aforesaid company. The ld. DR vehemently supported the findings of Assessing Officer for making the addition under Section 36(1)(iii) of the Act and placed reliance on the decision of Hon'ble Punjab & Haryana High Court in the case of CIT vs Kudu Industries reported as 62 taxmann.com 191 (P&H). The ld. DR to buttress his submissions further placed reliance on the decision in the case of CIT vs Harrisons Malayalam, 25 taxmann.com 546 (Ker). The ld. DR finally submitted that the assessee could not substantiate any commercial expediency for advancing interest-free loans from interest bearing funds. The ld. DR also placed reliance on the decision of the Hon'ble Apex Court in the case of S.A Builders Ltd. vs CIT, 158 taxmann.com 74. 3.1 In respect of ground nos. 4 and 5 wherein the Department has assailed deleting of addition on account of bad debts, the ld. DR submitted that assessee has claimed bad debts to the tune of Rs.94,44,971/-. The ld. DR has 3 ITA No. 5516/Mum/2015 Anand Keshav Shejwal drawn our attention to Schedule 18, i.e. Notes to the Accounts for the year ended 31.03.2012. The ld. DR pointed that the Auditor has categorically observed that the debtors are recoverable and accordingly no provision for bad and doubtful debts is made in the accounts. Despite categorical observation of the Auditors, the assessee has claimed bad debts to the tune of Rs.94,44,971/-. The Assessing Officer disallowed assessee’s claim of bad debts, however, the CIT(A) deleted the addition ignoring the remarks of the Auditors. 3.2 In respect of issue raised in ground nos. 6 to 8 of the appeal, the ld. DR submitted that the assessee had stopped its proprietary business in October, 2011. The same business was transferred in the name of limited company. The Assessing Officer after considering the entire gamut of transactions made addition of Rs.6,64,64,982/- on account of transfer of goodwill. The CIT(A) without appreciating the fact that the assessee has transferred his capital in the form of interest-free loan of Rs.5.96 crores and converted proprietorship firm into a private limited company, which is nothing but transfer of goodwill of the proprietary business. The ld. DR prayed for reversing the findings of CIT(A) and upholding addition made in the assessment order. 4. Per contra, Shri Vipul Joshi appearing on behalf of the assessee submitted that out of the total advances of Rs.6,06,57,610/-, assessee has advanced interest-free loans amounting to Rs.5,96,10,000/- to Bombay Fruits & Vegetables Import & Export Pvt. Ltd. The assessee is a promoter-Director of the said company. The advance was given by the assessee to the aforesaid company purely for business of the company. Thus, the transaction of advancing loan by the assessee to Bombay Fruits & Vegetables Import & Export Pvt. Ltd. was on account of commercial expediency. The ld. AR supporting the findings of CIT(A) submitted that a perusal of books would show that the 4 ITA No. 5516/Mum/2015 Anand Keshav Shejwal assessee has own funds much more than interest free advance given to the company. Hence, no disallowance under Section 36(1)(iii) is warranted. The ld. AR placed reliance on the decision in the case of CIT vs Hotel Savera, 239 ITR 795 (Madras) and CIT vs Reliance Utilities & Power Ltd., 313 ITR 340 (Bom). 4.1 On the issue of bad debts, the ld. AR supporting the findings of CIT(A) submitted that during assessment proceedings, the assessee had specifically informed the Assessing Officer that in the Notes to the Accounts, clause (d) was inadvertently recorded as a result of copy-paste from the preceding financial year. The assessee has, in fact, written off bad debts in its books and this is evident from Annual Accounts of the assessee (Schedule 5 at page 63 of the Paper Book). The ld. AR further referred to the application made to the Union Bank of India at page 181 of the Paper Book whereby permission was sought from the bank to write off the outstanding dues from M/s. Nahadat Muscat Co. LLC, Oman. The Union Bank of India vide letter dated 22.05.2013 (page 186 and 187 of the Paper Book) advised the assessee to surrender proportionate export incentive received against the exports to the aforesaid Oman entity. The CIT(A) after considering the documents furnished by the assessee has allowed assessee’s claim. 4.2 The ld. AR of the assessee in respect of transfer of goodwill submitted that there was no agreement between the proprietary concern and the company formed subsequently. The ld. AR referred to CBDT Circular no. 495 dated 22.09.1987 and reiterated the contentions raised before the CIT(A). 5. We have heard the submission made by rival sides and have examined the orders of authorities below. The Revenue in appeal has primarily raised three issues. The same are dealt with in seriatim hereunder: 5 ITA No. 5516/Mum/2015 Anand Keshav Shejwal 5.1 Interest-free loans : Assessee has advanced interest-free loans to its group entities aggregating to Rs.6.06 crores. Substantial interest-free loans are advanced to Bombay Fruits & Vegetables Import & Export Pvt. Ltd., i.e. Rs.5.96 crores. The assessee is promoter-Director of the said company. Interest-free loan has been purportedly advanced by the assessee to the aforesaid company primarily out of commercial expediency. Out of the total disallowance of Rs.45,46,301/- made by the Assessing Officer, the CIT(A) has deleted disallowance to the tune of Rs.39,54,936/- and has upheld disallowance of interest expense on unsecured loans amounting to Rs.5,91,365/-. One of the arguments raised by the assessee before the CIT(A) was that the assessee is having own interest-free funds amounting to Rs.13.99 crores. The assessee is maintaining a common bank account where the assessee has mixed pool of interest bearing and interest free funds. The loans are advanced from mixed bag of funds. The CIT(A) deleted the addition under Section 36(1)(iii) of the Act by placing reliance on the decision of Hon'ble jurisdictional High Court in the case of CIT vs Reliance Utilities & Power Ltd. (supra) and has confirmed the addition only in respect of interest on unsecured loans. We find no infirmity in the findings of CIT(A) on this issue, hence the same is upheld and ground nos. 1 to 3 of appeal are dismissed sans merit. 5.2 Bad debts written off : During the period relevant to assessment year under appeal, the assessee has written off bad debts amounting to Rs.94,44,971/-. The assessee has debited the aforesaid amount in the Profit & Loss Account. The primary reason for disallowing assessee’s claim of bad debts by the Assessing Officer is the observation made by the Auditors in the Notes to the Accounts in Schedule 18, wherein the Auditors have observed as under : 6 ITA No. 5516/Mum/2015 Anand Keshav Shejwal “d) The Assessee has made exports in GBP & US$. Debtors totalling to Rs.94,44,971/- are pending of recovery. The proprietor is of the opinion that these debtors are recoverable and accordingly no provision of bad & doubtful debts made in accounts.” Assessee has clarified that the aforesaid Note was inadvertently recorded and has figured in the Notes to the Accounts as a result of copy and paste error from the Accounts of the preceding financial year. It has been pointed that the amount written off is in respect of the amount receivable from M/s. Nahadat Muscat Co. LLC, Oman. The assessee had written to the bank for writing off the outstanding dues from exports to M/s. Nahadat Muscat Co. LLC, Oman and the bank has also allowed the same subject to surrender of proportionate export incentive received by the assessee. Thus, the intention of the assessee to write off the outstanding dues from the Muscat entity is substantiated from the communication with the bank. The CIT(A) has allowed relief to the assessee after taking cognisance of the aforesaid communication. The finding of CIT(A) on this issue are well-reasoned. We find no merit in ground nos. 4 and 5 of the appeal of Revenue, hence dismissed. 5.3 Transfer of goodwill : The Assessing Officer has made addition of Rs.6.64 crores on the presumption that assessee has gained on transfer of goodwill after transfer of business of proprietorship concern to M/s. Bombay Fruits & Vegetables Import & Export Pvt. Ltd. The contention of the assessee is that in October, 2011 the proprietary concern, “M/s. Bombay Exports” stopped its business and the new company, M/s. Bombay Fruits & Vegetables Import & Export Pvt. Ltd. commenced its business activities. There was no continuity of business except that the plant and machinery and land of proprietorship concern was taken over by the company for which compensation of Rs.4.50 lacs was paid by the company for plant and machinery and Rs.9,41,658/- for 7 ITA No. 5516/Mum/2015 Anand Keshav Shejwal land. There was no agreement with respect to the goodwill or transfer of goodwill. After considering the decisions rendered in the case of Godhra Electricity Co. Ltd. vs CIT, 91 taxman 351 (SC), CIT vs Arihant Avenue and Credit Ltd., 36 taxmann.com 14 (Guj) and CIT vs J. Chelladurai 17 taxmann.com 73 (Mad) and also the Board Circular no. 495 (supra), the CIT(A) held that there is no transfer of goodwill. The CIT(A) further observed that “M/s. Bombay Exports” is not a registered trademark on which goodwill could be earned. We observed that the Assessing Officer has made addition merely on surmises and conjectures. The Assessing Officer initially observed that the assessee has earned goodwill of Rs. 6.64 crores (Capital Gain) and in concluding para treated the amount of Rs.6.64 crores as Business Income. We see no infirmity in the findings of CIT(A) on this issue, hence the same are upheld and ground nos. 6 to 8 of the appeal are dismissed being devoid of any merit. 6. Ground nos. 9 and 10 of the appeal are general in nature, hence requires no adjudication. 7. In the result, appeal of the Revenue is dismissed. Order pronounced in the open court on 12th August, 2022. Sd/-- Sd/-/- (G.S. PANNU) PRESIDENT (VIKAS AWASTHY) JUDICIAL MEMBER Mumbai, Date : 12.08.2022 *SSL* 8 ITA No. 5516/Mum/2015 Anand Keshav Shejwal Copy to : 1) The Appellant 2) The Respondent 3) The CIT(A) concerned 4) The CIT concerned 5) The D.R, “A” Bench, Mumbai 6) Guard file By Order Asstt. Registrar/Sr. Private Secretary I.T.A.T, Mumbai