G.G. PHOTO LTD, MUMBAI V. ACIT 8(1), MUMBAI

ITA 6663/MUM/2011

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 8262 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 1 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-11-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: G
• Next Hearing Date: 08-11-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 04-10-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: PANKAJ TOPRANI
• Keywords: Bad and doubtful debts

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH G , MUMBAI BEFORE SHRI H.L. KARWA, PRESIDENT AND SHRI RAJENDRA SINGH, ACCOUNTANT MEMBER ITA NO. 6663/MUM/2011 ASSESSMENT YEAR : 2007-08 M/S. G.G. PHOTO LTD. 42, G.G. HOUSE, IRISH PARK JUHU, ANDHERI MUMBAI-400 049. PAN NO. AAACG 3410 B VS. ASSTT. COMMISSIONER OF INCOME TAX -8(1) AAYAKAR BHAVAN, M.K. ROAD MUMBAI-400 020. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI PANKAJ TOPRANI RESPONDENT BY : SHRI MOHIT JAIN DATE OF HEARING : 8.11.12 DATE OF PRONOUNCEMENT : 16.11.2012 O R D E R PER RAJENDRA SINGH, AM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER D ATED 12.7.2011 OF CIT(A) FOR THE ASSESSMENT YEAR 2007-08. T HE ONLY DISPUTE RAISED BY THE ASSESSEE IN THIS APPEAL IS REGARDING DISALLOWANCE OF CLAIM OF BAD DEBTS. 2. THE FACTS IN BRIEF ARE THAT THE AO DURING THE ASSESSM ENT PROCEEDINGS NOTED THAT THE ASSESSEE HAD CLAIMED DEDUCTION O F RS.41,40,000/- ON ACCOUNT OF BAD DEBT WRITTEN OFF WHIC H RELATED TO ITA NO.6663/M/11 A.Y. 07-08 2 INTEREST RECEIVABLE FROM THE PARTIES. THE DETAILS OF BA D DEBTS WRITTEN OFF ARE GIVEN IN THE TABLE BELOW:- DATE PARTICULARS AMOUNT(RS.) 31.3.2007 LAXMI MOVIE MAKERS 6,75,000 BEING INTEREST RECEIVABLE ON 75 LACS @ 12% FOR THE PERIOD OF 01.07.2006 TO 31.3.2007 TRANSFERRED TO BAD DEBTS ACCOUNT AS IRRECOVERABLE FROM PARTY 31.3.2007 S.K. FILM ENTERPRISES 5,25,000 BEING INTEREST RECEIVABLE ON 35 LACS @ 15% FOR THE YEAR ENDED 31.3.2007 TRANSFERRED TO BAD DEBTS ACCOUNT AS IRRECOVERABLE FROM PARTY 31.3.2007 SRI SATYANARAYANAMMA PRODUCTION 90,000 BEING INTEREST RECEIVABLE ON 5 LACS @ 18% FOR THE PERIOD FROM 1.4.2006 TO 31.3.2007 TRANSFERRED TO BAD DEBTS ACCOUNT AS IRRECOVERABLE FROM PARTY 31.3.2007 NARSIMHA ENTERPRISES 28,50,000 BEING INTEREST PROVIDED FOR THE FINANCIAL YEAR 2006-07 @ 15% NOT RECOVERABLE TRANSFERRED TO BAD DEBTS ACCOUNT AS IRRECOVERABLE FROM PARTY. TOTAL 41,40,000 2.1 THE AO ASKED THE ASSESSEE TO EXPLAIN AS TO WHY THE CLA IM OF BAD DEBT SHOULD NOT BE DISALLOWED. THE ASSESSEE SUBMITTED THAT IT WAS IN THE BUSINESS OF FINANCING AND MONEY LENDING WHICH WAS CL EAR FROM AUDIT REPORT WHICH CLEARLY SHOWED THE NATURE OF BUSINE SS AS FINANCING. IT WAS ALSO SUBMITTED THAT A LARGE PROPORTION OF INCOME IN THE CURRENT AS WELL AS PREVIOUS YEARS CONSISTED OF INTEREST INCOME EARN ED ON LOANS GIVEN DURING THE COURSE OF BUSINESS. IT WAS ARGUED THAT I N VIEW OF THE AMENDMENT TO THE INCOME TAX ACT W.E.F. 1.4.1989, THE ASSESSEE WAS NOT OBLIGED TO ESTABLISH THAT THE DEBT HAD ACTUALLY BE COME ITA NO.6663/M/11 A.Y. 07-08 3 IRRECOVERABLE. RELIANCE WAS PLACED ON THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF OMAN INTERNATIONAL BAN K (286 ITR (AT) 8). IT WAS ALSO SUBMITTED THAT THE DECISION TO WRITE OFF INTEREST WAS A BUSINESS DECISION AND CLAIM COULD NOT BE DISALLOWED AS CONDIT IONS FOR ALLOWANCE OF BAD DEBTS WERE FULFILLED. THE AO HOWEVER DID NOT ACCEPT THE CONTENTIONS RAISED. IT WAS OBSERVED BY HIM THAT THE INTEREST RECEIVABLE IN THE CURRENT YEAR HAD BEEN WRITTEN OFF I N THE SAME YEAR. THE INTEREST HAD BEEN CREDITED TO THE ACCOUNTS OF THE PA RTIES ON 31.3.2007 AND ON THE SAME DATE, IT WAS WRITTEN OFF AS BAD DEBT. THE AO FURTHER OBSERVED THAT THE CLAIM COULD BE ALLOWED ON LY WHEN WRITE OFF IS BONAFIDE AND IS REASONABLE AND NOT ARBITRARY OR IRRECOVERABLE AS HELD BY HON'BLE HIGH COURT OF BOMBAY IN THE CASE OF DI T VS. OMAN INTERNATIONAL BANK (313 ITR 128). HE, THEREFORE, REJ ECTED THE CLAIM OF THE ASSESSEE. IN APPEAL CIT(A) OBSERVED THAT THE LOANS T AKEN BY THE ASSESSEE HAD NOT BEEN WRITTEN OFF AND, THEREFORE, THE I NTEREST COULD NOT BE WRITTEN OFF. HE, THEREFORE AGREED WITH THE AO THAT THE CLAIM OF BAD DEBT WAS NOT ALLOWABLE AND ACCORDINGLY CONFIRMED DI SALLOWANCE MADE BY AO AGGRIEVED BY WHICH THE ASSESSEE IS IN APPEAL B EFORE THE TRIBUNAL. 3. BEFORE US, THE LD. AR REITERATED THE SUBMISSIONS MAD E BEFORE THE LOWER AUTHORITIES THAT THE CONDITIONS FOR ALLOWANCE OF BAD DEBT WERE SATISFIED AS ASSESSEE WAS NOT REQUIRED TO PROVE THAT THE DE BT HAD ITA NO.6663/M/11 A.Y. 07-08 4 BECOME BAD AND IRRECOVERABLE. RELIANCE FOR THE SAID PRO POSITION WAS PLACED ON THE JUDGMENT OF HON'BLE SUPREME COURT IN TH E CASE OF TRF LTD. (323 ITR 397). IN RESPONSE TO QUERY BY THE BENCH THAT SINCE THERE WERE MANY ENTRIES OF REPAYMENTS BY THE PARTIES, HOW I T COULD BE ASCERTAINED WHETHER THE ASSESSEE HAD RECEIVED MONEY TOWAR DS INTEREST OR TOWARDS PRINCIPAL, THE LD. AR CLARIFIED THA T WHENEVER INTEREST WAS RECEIVED, TAX HAD BEEN DEDUCTED AT SOURCE WHICH WAS D ULY MENTIONED IN THE LEDGER ACCOUNT AND ALL OTHER PAYMENT S ON WHICH THERE WAS NO TDS RELATED TO THE PRINCIPAL. IT WAS ALSO SUBMITTED THAT THE BALANCE INTEREST WHICH WAS NOT RECEIVED, HAD BEEN DE BITED TO THE ACCOUNT OF THE PARTIES AT THE END OF THE YEAR AND ON T HE SAME DATE IT WAS WRITTEN OFF SINCE THE ASSESSEE WAS OF THE VIEW THAT TH E INTEREST MAY NOT BE RECOVERED. IT WAS FURTHER SUBMITTED THAT UN DER THE PROVISIONS OF SECTION 36(2) EVEN INCOME SHOWN IN CURRENT Y EAR MAY BE WRITTEN-OFF AS BAD DEBT. IT WAS ACCORDINGLY URGED THAT THE CLAIM OF THE ASSESSEE SHOULD BE ALLOWED. THE LD. DR SUPPORTED THE ORDE RS OF AUTHORITIES BELOW AND PLACED RELIANCE ON THE FINDINGS G IVEN IN THE RESPECTIVE ORDERS. 4. WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING ALLOWAB ILITY OF CLAIM OF BAD DEBT ON ACCOUNT OF INTEREST ON LOANS GIVEN TO PARTI ES DURING THE COURSE OF BUSINESS. THE ASSESSEE AFTER CREDITING INTEREST TO T HE PARTIES ITA NO.6663/M/11 A.Y. 07-08 5 ACCOUNT AT THE END OF THE YEAR, HAS WRITTEN OFF THE IN TEREST AS BAD IN THE SAME YEAR. THE AO HAS DISALLOWED THE CLAIM AFTER OB SERVING THAT WRITING OFF OF THE CLAIM IN THE SAME YEAR WAS NOT BONA FIDE. CIT(A) HAS AGREED WITH THE FINDING OF THE AO AND ALSO OBSERVED T HAT UNLESS LOANS WERE WRITTEN OFF, INTEREST COULD NOT BE WRITTEN OFF. WE HAVE CAREFULLY CONSIDERED THE VARIOUS ASPECTS OF THE MATTER. THE PROVISIO NS FOR ALLOWABILITY OF CLAIM ON ACCOUNT OF BAD DEBT ARE CONTA INED IN SECTION 36(1)(VII) R.W.S. 36(2) OF THE ACT. AS PER PROVISIONS A PPLICABLE TILL ASSESSMENT YEAR 1988-89, A CLAIM OF BAD DEBT COULD BE ALL OWED ONLY IF DEBT WAS ESTABLISHED TO HAVE BECOME BAD. THE LAW WAS AM ENDED FROM ASSESSMENT YEAR 1989-90 AND AS PER AMENDED PROVISIONS, ANY BAD DEBT WHICH IS WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNT OF THE ASSESSEE IS ALLOWABLE AS DEDUCTION SUBJECT TO FULFILLMENT OF CONDITIONS UNDER SECTION 36(2) OF THE ACT. THE SCOPE OF AMENDMENT T O PROVISIONS HAS BEEN SUBJECT MATTER OF DISPUTE OVER A LONG PERIOD O F TIME AS TO WHETHER UNDER THE AMENDED PROVISIONS ALSO, THE ASSESSEE I S REQUIRED TO PROVE THAT THE DEBT HAD BECOME IRRECOVERABLE. THE ISSUE IS FINALLY SETTLED BY THE JUDGMENT OF HON'BLE SUPREME COURT IN CA SE OF TRF LTD. (323 ITR 397), IN WHICH IT HAS BEEN HELD THAT FROM ASSE SSMENT YEAR 1989-90, IT WAS NOT NECESSARY FOR THE ASSESSEE TO ESTABLISH T HAT THE DEBT IN FACT HAD BECOME IRRECOVERABLE, IT WAS ENOUGH IF THE BAD DEBT HAS BEEN WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE. ITA NO.6663/M/11 A.Y. 07-08 6 THERE IS NO DISPUTE THAT THE ASSESSEE IN THIS CASE HAS ACTUAL LY WRITTEN OFF THE DEBT ON ACCOUNT OF INTEREST AS IRRECOVERABLE. 4.1 WE HAVE TO DEAL WITH THE OTHER OBJECTION RAISED B Y THE AO THAT THE DEBT CANNOT BE RECOVERABLE IN THE SAME YEAR IN WH ICH INCOME WAS DUE. THE SUB SECTION (2) OF SECTION 36 PROVIDES THAT DEDU CTION ON ACCOUNT OF BAD DEBT SHALL BE ALLOWED ONLY IF SUCH DEBT HAS BEEN TAKEN INTO ACCOUNT IN COMPUTING INCOME OF THE ASSESSEE IN THE PRE VIOUS YEAR IN WHICH AMOUNT OF SUCH DEBT OR PART THEREOF IS WRITTEN OFF OR OF AN EARLIER PREVIOUS YEAR. IT IS THEREFORE CLEAR THAT THE INCOME WHICH HAS ACCRUED IN THE CURRENT YEAR CAN ALSO BE WRITTEN OFF BY T HE ASSESSEE WHICH CAN BE ALLOWED AS DEDUCTION IF THE AMOUNT IS ACTUAL LY WRITTEN OFF IN THE BOOKS OF ACCOUNT. WE DO NOT AGREE WITH THE OBS ERVATIONS OF CIT(A) THAT INTEREST CANNOT BE WRITTEN OFF UNLESS THE P RINCIPAL IS WRITTEN OFF. IT IS POSSIBLE THAT A PERSON MAY FOREGO INTEREST AN D STILL BE HOPEFUL OF RECOVERING THE PRINCIPAL IN FUTURE. THEREFORE IT CA N NOT BE ACCEPTED AS A GENERAL RULE THAT INTEREST CAN BE WRITTEN OFF ONL Y WHEN PRINCIPAL IS WRITTEN OFF. 5. IN VIEW OF THE FOREGOING DISCUSSION AND FOR THE REA SONS GIVEN EARLIER, WE ARE OF THE VIEW THAT DISALLOWANCE OF CLAIM OF BAD DEBT ON FACTS OF THE CASE IS NOT JUSTIFIED. WE ACCORDINGLY SET ASIDE THE ORDER OF CIT(A) AND ALLOW THE CLAIM OF THE ASSESSEE. ITA NO.6663/M/11 A.Y. 07-08 7 6. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 16.11.2012. SD/- SD/- (H.L. KARWA ) PRESIDENT (RAJENDRA SINGH) ACCOUNTANT MEMBER MUMBAI, DATED: 16.11.2012. JV. COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR BENCH TRUE COPY BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.