M/S. NAKODA PLAST INDUSTRIES, MUMBAI V. ASST.C.I.T.24(2), MUMBAI

ITA 6267/MUM/2008

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 49517 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 8 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-07-2011
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 12-07-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 23-10-2008
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: F V IRANI
• Keywords: Capital asset

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES B, MUMBAI BEFORE SHRI R.S.SYAL, AM AND SHRI V.DURGA RAO, JM ITA NO.6267/MUM/2008 : ASST.YEAR 2005-2006 M/S.NAKODA PLAST INDUSTRIES K-60, SONAL HEAVY INDUSTRIAL ESTATE RAMCHANDRA LANE EXTN. MALAD (WEST) MUMBAI 400 064. PAN :AACFN1490M. VS. THE ASSTT.COMMISSIONER OF INCOME-TAX CIRCLE 24(2) MUMBAI. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI F.V.IRANI RESPONDENT BY : SHRI R.K.GUPTA O R D E R PER R.S.SYAL, AM : THIS APPEAL BY THE ASSESSEE ARISES OUT OF THE ORDER PASSED BY THE COMMISSIONER OF INCOME-TAX (APPEALS) ON 14.08.2008 IN RELATI ON TO THE ASSESSMENT YEAR 2005-2006. 2. THE ONLY ISSUE RAISED THROUGH VARIOU S GROUNDS IS AGAINST THE CONFIRMATION OF DISALLOWANCE OF BAD DEBT / ADVANCE WRITTE N OFF AMOUNTING TO RS.11,50,000. BRIEFLY STATED THE FACTS OF THE CASE ARE THAT THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF MANUFACTURING OF PLASTIC GOODS. A SUM OF RS.11.61 LAKHS WAS CLAIMED AS BAD DEBT WHICH INTER ALIA, INCLUDED A SUM OF RS.11. 50 LAKHS REPRESENTING DEBIT BALANCE LYING IN THE ACCOUNT OF M/S.SUPER BEADS MACHIN ERY PRIVATE LIMITED WRITTEN OFF DURING THE YEAR. ON BEING CALLED UPON TO JUSTIFY THE DEDUCTION, TH E ASSESSEE STATED THAT THE ADVANCE WAS GIVEN TO THIS PARTY AS PER THE ARRANGEMENT AS DECIDED FOR PURCHASE OF PLASTIC INJECTION MOULDING MACHINE. CO PY OF PROFORMA INVOICE OF THE SAID PARTY WAS ENCLOSED FROM WHERE IT WA S NOTICED THAT THE TOTAL CO ST OF MACHINERY TO BE SUPPLIED WAS RS.23.05 LAKHS. THE ASSESSEE PA ID INITIAL AMOUNT OF RS.3 LAKHS AND ITA NO.6267/MUM/2008 M/S.NAKODA PLAST INDUSTRIES. 2 THEREAFTER PAYMENT OF RS.8.50 LAKHS IN INSTALMENTS. THE LA ST INSTALMENT WAS PAID ON 01.02.2002. IT WAS STATED THAT THE PARTY WAS REQUIRING FURTHER ADVANCE MONEY WHICH THE ASSESSEE DID NOT PAY. AS THE PARTY COULD NOT SUPPLY THE MACHINERY, THE ASSESSEE STOPPED MAKING FURTHER ADVA NCE PAYMENTS AND ASKED THE PARTY FOR REFUND OF ADVANCE. EVENTUALLY SOMETIME IN 2003 THE PARTY CLOSED DOWN THE FACTORY AND WOUND UP ITS BUSINESS. IN JUNE 2004 TH E PARTY ALSO REPLIED TO ONE OF THE CORRESPONDENCES SENT BY THE ASSESSEE STATI NG THAT THEY WERE FINANCIALLY BROKEN. UNDER THESE CIRCUMSTANCES, THE ASSESSEE WROTE OFF THE SAID AMOUNT OF RS.11.50 LAKHS IN ITS ACCOUNTS FOR THE Y EAR IN QUESTION. IN SUPPOR T OF THE DEDUCTIBILITY OF LOSS THE ASSESSEE RELIED ON THE JUDGEMENT OF THE HONBLE RAJASTHAN HIGH COURT IN CIT VS. ANJANI KUMAR CO. LTD. [(2003) 259 ITR 114 (RAJ.)]. THEN THE ASSESSING OFFICER OBSERVED THAT THE CONDITIONS OF SECTION 36(2) WERE NOT COMPLIED WITH INASMUCH AS THE AMOUNT OF DE BT OR PART THEREOF WRITTEN OFF IN THIS YEAR WAS NOT TAKEN INTO ACCOUNT IN COMPU TING THE INCOME OF THIS OR AN EARLIER YEAR. HE, THEREFORE, HELD THAT DEDUCTI ON ON ACCOUNT OF BAD DEBT WAS NOT PERMISSIBLE. ON THE QUESTION OF BUSINESS LOSS, THE ASSESSING OF FICER DID NOT ACCEPT THE SAME BY RELYING ON THE OBSERVATIONS FROM THE JUDGEMENT OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. MYSORE SUGAR CO. LTD. [(1962) 46 ITR 649 (SC)] . WHEN THE MATTER CAME UP BEFORE THE LEARNED CIT(A), HE NOTI CED THAT LOSS WAS NOT ALLOWABLE IN VIEW OF THE JUDGEMENT OF THE HONBL E SUPREME COURT IN THE CASE OF HASIMARA INDUSTRIES LTD. VS. CIT [(1998) 230 ITR 927 (SC)] . THE ASSESSEE IS IN APPEAL AGAINST THE UPHOLDING OF THIS DISALLOWANCE. 3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RE LEVANT MATERIAL ON RECORD. FROM THE FACTS RECORDED ABOVE IT IS NOTICED THAT TH E ASSESSEE ADVANCED RS.11.50 LAKHS TO M/S.SUPER BEADS MACH INERY PRIVATE LIMITED SOMEWHERE IN 2002 AGAINST THE PURCHASE OF PLASTIC INJECTION MOULDING MACHINE. EV ENTUALLY THE PARTY COULD NOT SUPPLY THE MACHINERY AND THE AMOUNT , ON BECOMING IRRECOVERABLE, WAS WRITTEN OFF BY THE ASSESSEE IN THE PREVIOUS YEAR RELEVA NT TO THE ASSESSMENT YEAR ITA NO.6267/MUM/2008 M/S.NAKODA PLAST INDUSTRIES. 3 2005-2006. ADMITTEDLY THE CASE CANNOT BE CO VERED U/S.36(1)(VII) BEING BAD DEBT IN VIEW OF THE PRESCRIPTION OF SECTION 36(2). THE LEARNED A.R. WAS FAIR ENOUGH NOT TO ARGUE ON THIS ASPECT. 4. NOW THE ONL Y POINT WHICH ARISES FOR OUR CONSIDERATION IS WHETHER THE ADVANCE GIVEN FOR THE PURCHASE OF MACHIN ERY CAN BE CATEGORIZED AS CAPITAL OR REVENUE LOSS. IF IT IS HELD AS CAPITAL LOSS THEN TH E AMOUNT WOULD NOT BE DEDUCTIBLE AND VICE VERSA . THE LEARNED A.R. HAS RELIED ON THE CASE OF ANJANI KUMAR CO. LTD. (SC) (SUPRA). ON THE OTHER HAND THE AUTHORITIES BELOW HAVE RELIED ON THE JUDGEMENTS OF THE HON BLE SUPREME COURT IN HASIMARA INDUSTRIES LTD. (SUPRA) AND MYSORE SUGAR CO. LTD. (SUPRA) . THE ASSESSEE IN THE CASE OF HASIMARA INDUSTRIES LTD. (SUPRA) DEPOSITED A SUM OF RS.20 LAKHS W ITH THE LICENSOR COMPANY FOR CERTAIN LICENCES UNDER WHICH THE ASSESSEE ACQUIRED LI CENCE OF COTTON MILL. SUBSEQUENTLY THE AMOUNT OF RS.20 LAKHS COULD NOT BE REPAID TO THE ASSESSEE, WHICH WAS WRITTEN OFF. THE ASSESSING OFFICER DID NOT ALLOW DEDUCTI ON. THE HONBLE HIGH COURT HELD THAT THE AMOUNT WAS NOT DEDUCTIBLE AS IT WAS NOT A BUSINESS LOSS. THE SAID JUDGEMENT OF THE HONBLE HIGH COUR T CAME TO BE UPHELD BY THE H ONBLE SUPREME COURT IN THE CASE OF HASIMARA INDUSTRIES LTD. (SUPRA) . THE LEARNED AR HAS TR IED TO DISTINGUISHED THIS JUDGEMENT BY CONTENDING THAT THE A SSESSEE IN THAT CASE ACQUIRED THE CAPITAL ASSET DE HORS THE PAYMENT OF RS.20 LAKHS INASMU CH AS THE SAID PA YMENT OF DEPOSIT WAS NOT TOWARDS ACQUIRING TH E CAPITAL ASSET. IN HIS OPI NION THE AMOUNT WAS RIGHTLY NOT ALLOWABLE BUT IN THE PRESENT CASE THE MACHINERY ITSELF WAS NOT ACQUIRED AND THE AMOUNT ADVANCED BY THE ASSESSEE SHOULD BE CONSIDERED AS REVENUE LOSS. 5. WE ARE NOT IN CLINED TO ACCEPT THIS CONTENTION FOR THE OBVIOUS REASON THAT THE AMOUNT WAS ADVANCED BY THE ASSESSEE FOR ACQUIRING A CAPITAL ASSET. THIS PAYMENT HAD NO CONNECTION WITH THE TRADING OPERA TIONS OF THE ASSESSEE. AS THE LOSS OF SECURITY DEPOSIT WAS DIRECTLY CONNECTED WITH THE ACQUISITION OF CAPITAL ASSETS, IN OUR CONSIDERED OPINION, SUCH LOSS COULD NO T HAVE BEEN HELD AS REVENUE LOSS. THE ITA NO.6267/MUM/2008 M/S.NAKODA PLAST INDUSTRIES. 4 JUDGEMENT OF THE H ONBLE SUPREME COURT IN THE CASE OF HARIMARA INDUSTRIES LTD. (SUPRA) SQUARELY APPLIES TO THE FACTS OF THE INSTANT CASE INASMUCH AS IN THAT CASE ALSO IT WAS THE AMOUNT OF DEPOS IT FOR ACQUIRING THE CAP ITAL ASSET WHICH BECAME IRRECOVERABLE. THE SAID AMOUNT OF RS.20 LA KHS WAS NOT GIVEN AS A CONSIDERATION FOR THE ACQUISITION OF CAPITAL ASSET. THE LINE OF DISTINCTION SOUGHT TO BE DRAWN BY THE LEARNED A.R. IS NOT APPLICABLE IN THIS CAS E FOR THE REASON THAT THE PAYMENT OF RS.20 LAKHS AS DEPOSIT IN THAT CASE DID NOT CONSTITU TE THE COST OF CAPITAL ASSET ACQUIRED BY THAT ASSESSEE. FOLLOWING OBSERVATIONS OF THE HONBLE SUPREME COURT IN THIS CASE ARE MATERIAL : THE DEPOSIT WAS, CLEARLY, MADE FO R THE PURPOSE OF ACQUIRING A PROFIT- MAKING ASSET TO CARRY ON BUSINES S IN COTTON. IT COULD NOT, TH EREFORE, BE HELD THAT THE DEPOSIT WAS MADE ON THE REVENUE ACCOUNT OR THAT THE LOSS TH EREOF MUST BE TREATED AS A BUSINESS LOSS. THE LOSS THEREOF WAS A LO SS SUFFERED ON THE CAPITAL ACCOUNT AND COULD NOT BE DEDUCTED. IN SUCH A SITUATION IT WAS HELD THAT THE LOSS WAS NOT ALLOWABLE AS REVENUE LOSS. TH E HONBLE SUPREME COURT IN MYSORE SUGAR CO. LTD. (SUPRA) , RELIED ON BY THE A.O., HAS DEVISED A PRINCIPLE FOR DETERMINING WHETHER A PARTICULAR LOSS IS TO BE TAKEN AS CAPITA L OR REVENUE, WHICH IS AS FOLLOWS : THE QUESTIONS TO CONSIDER IN THIS CONNECTI ON ARE : FOR WHAT WAS THE MONEY LAID OUT? WAS IT TO ACQUIRE AN ASSET OF AN ENDURING NATURE FOR THE BENEFIT OF THE BUSINESS, OR WAS IT AN OUTGOING IN THE DO ING OF THE BUSINESS. IF MON EY BE LOST IN THE FIRST CIRCUMSTANCES, IT IS A LOSS OF CAPITAL, BUT IF LOST IN THE SECOND CIRCUMSTANCES, IT IS A REVENUE LOSS . AS THE AMOUNT WAS GIVEN BY THE ASSESSEE AS AN ADVANCE FOR ACQUIRING AN ASSET OF ENDURING NATURE WHICH WAS ULTIMATELY LOST, IN OUR CONSIDERED OPINION, THE SAID AMOUNT HAS BEEN RIGHTLY HELD AS CAPITAL LO SS. IN VIEW OF THE RATIO DECIDENDI OF THE ABOVE DISCUSSED TWO JUDGEME NTS OF THE HONBLE SUPREME COURT, WE ARE OF THE CONSIDERED OPINION THAT NO CONTRARY JUDGEMENT OF ANY HIGH COURT CAN BE HELD AS A BINDING PRECEDENT. WE, TH EREFORE, UPHOLD THE IMPUGNED ORDER. ITA NO.6267/MUM/2008 M/S.NAKODA PLAST INDUSTRIES. 5 6. IN THE RESULT, THE APPEAL IS DISMISSED. ORDER PRONOUNCED ON THIS 15 TH DAY OF JULY, 2011. SD/- SD/- ( V.DURGA RAO ) ( R.S.SYAL ) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI : 15 TH JULY, 2011. DEVDAS*` COPY TO : 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT CONCERNED 4. THE CIT(A) - XXIV, MUMBAI. 5. THE DR/ITAT, MUMBAI. 6. GUARD FILE. TRUE COPY. BY ORDER ASSISTANT REGISTRAR, ITAT, MUMBAI.