PRATIBHUTI VYAPAR P. LTD, MUMBAI V. DCIT 2(2), MUMBAI

ITA 625/MUM/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 48580 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 3 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-04-2011
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 29-03-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 25-01-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: HARIGOVIND SINGH
• Assessee Lawyers: PRADIP KEDIA
• Keywords: Bad and doubtful debts

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES, C, MUMBAI BEFORE SHRI J SUDHAKAR REDDY, ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO, JUDICIAL MEMBER ITA NO. 625/MUM/2010 (ASSESSMENT YEAR -2005-06) PRATIBHUTI VYAPAR P LTD, 28 RAJABHADUR MANSUION, 3 RD FL. BOMBAY SAMACHAR MARG, FORT, MUMBAI-400001 PAN:AAACP2694Q . APPELLANT VS DCIT CIRCLE 2(2) AAYAKAR BHAVAN M K ROAD, MUMBAI-400020 ..RESPONDENT ASSESSEE BY : SHRI PRADIP KEDIA REVENUE BY : SHRI HARI GOVIND SINGH O R D E R PER VIJAY PAL RAO THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 4.12.2009 OF THE CIT(A) FOR THE ASSESS MENT YEAR 2005-06. 2. THE ASSESSEE HAS RAISED THE FOLLOWING EFFECTIVE GROUNDS IN THIS APPEAL: ITA NO. 625/MUM/2010 (ASSESSMENT YEAR -2005-06) 2 1. THE LD. CIT(A) ERRED IN LAW AND ON FACTS IN SUSTAINING THE DISALLOWING OF BAD DEBTS CLAIMED BY THE ASSESSEE; 2. THE ;D./ CIT(A) FURTHER ERRED IN LAW AND ON FACT S IN REJECTING THE IMPUGNED CLAIM AS A BUSINESS LOSS U/S 28 BEING IRRECOVERABLE TRADING ADVANCE IN THE ALTERNATIVE 3. THE FACTS OF THE CASE ARE THAT THE ASSESSEE, DUR ING THE YEAR UNDER CONSIDERATION, HAD WRITTEN OFF AN AMOUNT OF RS.1,15,01,600/- AS BAD DEBTS. THIS AMOUNT CONSTIT UTES O F RS.70 LAKHS MADE AN ADVANCE LOAN TO ONE M/S OFFI CE MANAGEMENT SYSTEM LTD AND THE BALANCE AMOUNT WAS IN TEREST OUTSTANDING AT THE RATE OF 18%. THE AO ASKED THE ASSESSEE TO EXPLAIN AS TO WHY THE BAD DEBTS CLAIMED SHOULD B E ALLOWED SINCE THE PROVISIONS OF SECTION 36(1)(VII) R.W.S.3 6(2) OF THE ACT ARE NOT SATISFIED. THE ASSESSEE SUBMITTED AN D EXPLAINED BEFORE THE AO THAT THE AMOUNT WAS OUTST ANDING FOR RECOVERY FOR LAST SO MANY YEARS FROM THE PARTIE S. THE MONEY WAS GIVEN TO THE DEBTOR ON THE PROPOSAL TO BU Y THE SHARES OF THE SAID COMPANY WHICH IS THE MAIN BUSINE SS OF THE ASSESSEE. IT WAS FURTHER STATED BEFORE THE AO THAT THE ASSESSEE AGREED TO GIVE MONEY ON THE CONDITION THAT THE MONEY SO ADVANCED WILL BEAR INTEREST UP TO 31.3.200 2. IN THE INTERVENING PERIOD, THE ASSESSEE SHALL HAVE THE OPT ION TO BUY SHARES OF THE DEBTOR COMPANY M/S OFFICE MANAGEMENT SYSTEM LTD. HOWEVER, IF THE OPTION IS NOT EXERCISE D BY THE ASESEEE FOR BUYING THE SHARES THE DEBTOR COMPANY WI LL REFUND ITA NO. 625/MUM/2010 (ASSESSMENT YEAR -2005-06) 3 THE MONEY ALONG WITH THE INTEREST IMMEDIATELY AFTER 31.3.2002. THE INTEREST CHARGED ON THE MONEY ADV ANCED OF RS.45,01,600 WAS CREDITED TO THE PROFIT AND LOSS AC COUNT AND OFFERED FOR TAXATION IN THE EARLIER YEARS. THE DEB TORS COMPANY FINALLY WENT INTO TO LIQUIDATION, THEREFO RE, THE AMOUNT BECAME UNRECOVERABLE AND WRITTEN OF AS BAD DEBTS BY THE ASSESSEE. THE ASSESSEE ALSO MADE AN ALTERN ATIVE CLAIM OF THE SAID AMOUNT AS BUSINESS LOSS UNDER THE PROVISIONS OF SECTION 28A(I)/37(1) AND SUBMITTED TH AT IF THE SAID CLAIM OF THE BAD DEBTS IS NOT ALLOWED THEN THE SAME CAN BE ALLOWED AS BUSINESS LOSS UNDER THE GENERAL RULE . THE LOSS OF LOAN ADVANCED WERE CONVERTIBLE INTO SHARES PURCHASED INCIDENTAL TO THE SHARES TRADING BUSINESS OF THE ASSESSEE. IT WAS ALSO CONTENDED THAT THE ADVANCEM ENT OF THE MONEY AND EARNING INTEREST THEREON IS ALSO MAIN BUSINESS OF THE ASSESSEE. THE MONEY ADVANCE WAS IN THE ORD INARY COURSE OF BUSINESS OF THE ASSESSEE AND HAS DIRECT A ND PROXIMATE NEXUS TO THE NATURE OF THE BUSINESS OF SH ARE TRADING, THEREFORE, THE ASSESSEE CLAIMED THAT THE S AID AMOUNT MAY BE ALLOWED AS BUSINESS LOSS. THE AO DID NOT AC CEPT THE CLAIM OF THE ASSESSEE TOWARDS THE LOAN OF RS.70 LA KHS OUT OF TOTAL CLAIM OF BAD DEBT OF RS.1,15,01,600/- AND HE LD THAT THE SAID LOAN CANNOT BE ALLOWED AS BAD DEBTS SINCE THE PROVISIONS OF SECTION 36(1)(VII) R.W. SECTION 36(2) ARE NOT SATISFIED. THE AO HAS ALSO OBSERVED THAT THE ASSES SEE IS NOT ITA NO. 625/MUM/2010 (ASSESSMENT YEAR -2005-06) 4 IN THE BUSINESS OF MONEY LENDING AND THEREFORE THE LOAN GIVEN IS NOT CONNECTED WITH THE BUSINESS OF THE ASS ESSEE OR NOT ARISING OUT OF THE OPERATION OF THE BUSINESS OF THE ASSESSEE. THE AO HAS RELIED UPON THE DECISION OF TH E JURISDICTIONAL HIGH COURT IN THE CASE OF INDIQUIP LTD V CIT REPORTED IN 202 ITR 417(BOM) AND THE DECISION OF TH E ALLAHABAD HIGH COURT IN THE CASE OF ROOMNARAIN RAMCHANDRA V ACIT REPORTED DIN 112 ITR 890. 4. ON APPEAL, THE CIT(A) CONFIRMED THE ACTION OF TH E AO ON PRINCIPLE. HOWEVER, IT WAS DIRECTED TO THE AO TO VERIFY THE CORRECTNESS OF THE FIGURES AS ALLEGED BY THE ASSESS EE ON ACCOUNT OF CERTAIN RECOVERY MADE OUT OF THE SAID LO AN. 5. BEFORE US, THE LEARNED AR HAS REITERATED THE CON TENTION RAISED BEFORE THE LOWER AUTHORITIES AND SUBMITTED THAT THE ADVANCE WAS GIVEN FOR PURCHASE OF THE SHARES OF TH E DEBTOR M/S OFFICE MANAGEMENT SYSTEM LTD . THE LD. AR HAS FURTHER CONTENDED THAT THE SAID ADVANCE WAS GIVEN WITH T HE CONDITIONS THAT THE ASSESSEE TO EXERCISE ITS OPTION TO PURCHASE THE SHARES UP TO 31.3.2002 AND IN CASE TH E ASSESSEE DOES NOT EXERCISE THE OPTION, THE AMOUNT WAS TO BE REFUNDED ALONG WITH THE INTEREST AT THE RATE OF 18%. THEREFORE THE ADVANCE WAS GIVEN IN THE NORMAL COURS E OF BUSINESS OF THE ASSESSEE AND ALLOWABLE AS BAD DEBT. HE HAS ITA NO. 625/MUM/2010 (ASSESSMENT YEAR -2005-06) 5 ALTERNATIVELY SUBMITTED THAT THE SAID CLAIM ALSO AL LOWABLE AS BUSINESS LOSS U/S 28 BEING IRRECOVERABLE LOSS INCUR RED DURING THE COURSE OF BUSINESS. THE LEARNED AR HAS STRONG LY CONTENDED THAT THE BUSINESS OF THE ASSESSEE ALSO INCLUDES MONEY LENDING AND THEREFORE THE MONEY ADVANCES GIVE N BY THE ASSESSEE IN THE COURSE OF BUSINESS BECOME IRREC OVERABLE BECAUSE THE COMPANY TO WHOM MONEY WERE GIVEN WENT INTO LIQUIDATION HENCE, THE SAID AMOUNT IS LIABLE TO B E ALLOWED AS BUSINESS. HE HAS RELIED UPON THE DECISION OF THE CALCUTTA HIGH COURT IN THE CASE O F TURNER MORRISON AND CO. LTD V CIT REPORTED IN 245 ITR 724 (CAL), CIT V/S CITY MOTOR SERVICES LIMITED REPORTED IN 61 ITR 418, CIT V/S MYSORE SUG AR CO.LTD REPORTED IN 46 ITR 649 (SC). THE AR OF THE ASSESS EE HAS ALSO RELIED UPON THE ORDER OF SPECIAL BENCH OF MUM BAI TRIBUNAL IN THE CASE OF JCIT V/S SHREYAS S MORAKHI A IN ITA NO.3374/MUMBAI/ ORDER DATED 16.07.2010.. 6. ON THE OTHER HAND, THE LEARNED DR HAS SUBMITTED THAT AS PER MEMORANDUM OF ASSOCIATION OF THE ASSESSEE- COMPANY THE MAIN OBJECT OF THE ASSESSEE COMPANY IS PURCHASE AND SALE OF THE SHARES/BROKERAGE AS MEMBER OF STOCK EXCHANGE. THE ASSESSEE HAS NEVER DONE ANY BU SINESS OF MONEY LENDING AND THEREFORE THE ADVANCES GIVEN B Y THE ASSESSEE CANNOT BE TREATED AS BUSINESS ACTIVITY OF THE ASSESSEE AND HENCE THE CLAIM MADE BY THE ASSESSEE AS ITA NO. 625/MUM/2010 (ASSESSMENT YEAR -2005-06) 6 BUSINESS LOSS U/S 28 IS NOT ALLOWABLE. THE LEARNED DR HAS ALSO FURTHER SUBMITTED THAT SINCE THE LOAN AMOUNT WAS NOT TAKEN INTO ACCOUNT IN THE PROFIT AND LOSS ACCOUNT A ND THEREFORE THE SAME DOES NOT SATISFY THE CONDITION A S PROVIDED U/S 36 (2) R.W. SECTION 37(II). HE HAS RELIED UPON THE ORDERS OF THE LOWER AUTHORITIES AS WELL AS THE DECISION OF THE DELHI BENCH OF THIS TRIBUNAL IN THE CASE OF DCIT V/S KANCHANJUNGA ADVERTISING REPORTED IN (2008) 21 SOT 234 (DEL). 7. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND RELEVANT RECORD. WE FIND THAT THE MAIN CONTENTION OF THE ASSESSEE ON THE POINT IS THAT THE SAID ADVANCES WE RE GIVEN FOR PURCHASE OF THE SHARES OF THE DEBTOR COMPANY. SINCE THE OPTION HAS TO BE EXERCISED FOR PURCHASE OF SHARES OF THE DEBTOR COMPANY AND IN CASE THE ASSESSEE DOES NOT EX ERCISE THE OPTION THE SAID AMOUNT WAS TO BE REFUNDED WITH INTEREST. THE ASSESSEE HAS NOT BROUGHT ON RECORD ANY MATERIAL TO SHOW ANY AGREEMENT REGARDING SUCH OPTION TO BE EX ERCISED BY THE ASSESSEE FOR PURCHASE OF SHARES OF M/S OFF ICE MANAGEMENT SYSTEM LTD. EVEN THE ASSESSEE HAS NOT EXPLAIN THE NUMBER OF SHARES AND RATE AT WHICH THE SHARES WERE TO BE PURCHASED BY THE ASSESSEE AGAINST THE SA ID ADVANCE OF RS.70 LAKHS. MOREOVER, THIS AMOUNT OF AD VANCE WAS NOT SHOWN BY THE ASSESSEE IN THE BOOKS OF ACCOU NT AS ITA NO. 625/MUM/2010 (ASSESSMENT YEAR -2005-06) 7 SHARE APPLICATION MONEY AS ADVANCE FOR PURCHASE OF SHARES OF M/S OFFICE MANAGEMENT SYSTEM LTD IS A PUBLIC LI MITED COMPANY, THOUGH THE SAME WAS NOT LISTED IN THE STOC K EXCHANGE, HOWEVER, THE ASSESSEE FAILED TO SHOW AS TO HOW THE SHARES WERE TO PURCHASED AND WHOSE SHAREHOLDING WAS TO BE PURCHASED. THE ASSESSEE COULD NOT PURCHASE SHA RES FROM BUT THE ASSESSEE HAD TO PURCHASE THE SHARE HELD BY SHAREHOLDERS . THE ASSESSEE FAILED TO BRING ANY COG ENT MATERIAL TO ESTABLISH THE CLAIM NOR ANY FACT HAS B EEN BROUGHT ON RECORD IN THIS RESPECT. THEREFORE, THE CONTENT ION OF THE ASSESSEE THAT THE SAID AMOUNT WAS GIVEN TO M/S OFFI CE MANAGEMENT SYSTEM LTD FOR PURCHASE OF THE SHARES IS TOTALLY UNFOUNDED AND NOT SUSTAINABLE IN LAW AS ALSO CONTRA RY TO THE FACTS OF THE CASE. 8. AS REGARDS THE ALTERNATIVE CONTENTION OF THE ASS ESSEE THAT THE SAID AMOUNT BE CONSIDERED AS BUSINESS LOSS AND MAY BE ALLOWED U/S 28 OF THE ACT AS THE ASSESSEE IS IN MONEY LANDING BUSINESS. IT IS TO BE NOTED THAT THIS WAS THE ONLY AND ISOLATED TRANSACTION OF ADVANCED LOAN GIVEN BY THE ASSESSEE. NEITHER PRIOR TO THIS TRANSACTION NOR SUBSEQUENTLY, THE ASSESSEE HAD EVER GIVEN ANY ADVANCE, THEREFORE, WE ARE UNABLE TO ACCEPT THE CONTENTION OF THE ASSESSEE THA T THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF MONEY LENDI NG AND THE SAID AMOUNT WHICH BECOME IRRECOVERABLE CAN B E ITA NO. 625/MUM/2010 (ASSESSMENT YEAR -2005-06) 8 ALLOWED AS BUSINESS LOSS. THE DECISION RELIED UPON BY THE AUTHORIZED REPRESENTATIVE ARE NOT APPLICABLE IN TH E PRESENT CASE. IN THE CASE IN HAND THE SAID AMOUNT WAS NOT GIVEN FOR PURCHASE OF SHARES AND SAID EXPLANATION AND CONTENT ION IS NOT BOUND AS TRUE AND CORRECT. ACCORDINGLY, WE FIND THAT THE APPEAL OF THE ASESEEE IS DEVOID OF ANY MERIT AND NO INTERFERENCE IS CALLED FOR IN THE ORDERS OF THE LOW ER AUTHORITIES. 9. IN THE RESULT, APPEAL OF THE ASSESSEE STANDS DIS MISSED. PRONOUNCED IN THE OPEN COURT ON 29 TH APRIL, 2011 SD SD (J.SUDHAKAR REDDY) (VIJAY PAL RAO) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, ON THIS 29TH DAY OF APRIL, 2011 SRL:6411 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT CONCERNED 4. CIT(A) CONCERNED 5. DR CONCERNED BENCH BY ORDER TRUE COPY ASSTT. REGISTRAR, ITAT, MUMBAI