SIRUS PHARMACEUTICALS P.LTD, MUMBAI V. ITO WD 8(3)(2), MUMBAI

ITA 6859/MUM/2014

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 92997 (ITAT-MUMBAI)
• Duration Of Justice: 7 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-06-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: E
• Assessment Year: 2008-2009
• Appeal Filed On: 11-11-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: NEIL PHILIP
• Assessee Lawyers: N H GAJARIA
• Keywords: Capital asset; Business income; Bad and doubtful debts; Capital expenditure
• Section: 115JB; 37(1); 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH E, MUMBAI BEFORE SHRI R.C. SHARMA, ACCOUNTANT MEMBER AND SHRI SANJAY GARG, JUDICIAL MEMBER ITA NO.6859/M/2014 ASSESSMENT YEAR: 2008-09 M/S. SIRIUS PHARMACEUTICALS PVT. LTD. , 301, SAINARA, 3 RD FLOOR, 21, NORTH AVENUE, LINKING ROAD, SANTACRUZ (WEST), MUMBAI 400 054 PAN: AAECS 6240D VS. INCOME TAX OFFICER, WARD 8(3)(2), MUMBAI (APPELLANT) (RESPONDENT) PRESENT FOR: ASSESSEE BY : SHRI N.H. GAJARIA, A.R. REVENUE BY : SHRI NEIL PHILIP, D.R. DATE OF HEARING : 25.03.2015 DATE OF PRONOUNCEMENT : 24.06.2015 O R D E R PER SANJAY GARG, JUDICIAL MEMBER: THE PRESENT APPEAL HAS BEEN PREFERRED BY THE ASSE SSEE AGAINST THE ORDER DATED 17.10.2014 OF THE COMMISSIONER OF INCOME TAX (APPEALS) [(HEREINAFTER REFERRED TO AS CIT(A)] RELEVANT TO ASSESSMENT YEAR 2008-09. 2. THE ASSESSEE HAS TAKEN THE FOLLOWING GROUNDS OF APPEAL: 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN CONFIRMING THE DISALLOWANCE OF CLAIM OF RS. 1,40,90,240/- U/S 37 (1) / 28 OF THE ACT BEING THE CLAIM OF LOSS SUFFERED ON ACCOUNT OF IRRECOVERABLE OF ADVANCES MADE FOR PURCHASES AND LA BOUR CHARGES FOR GOODS MANUFACTURED. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN DISALLOWING THE ABOVE CLAIM OF LOSS SUFFERED ON ACCOUNT ITA NO.6859/M/2014 M/S. SIRIUS PHARMACEUTICALS PVT. LTD. 2 OF IRRECOVERABLE ADVANCES U/S 37(1) / 28 OF THE ACT ON THE GROUND THAT THE ORIGINAL CLAIM HAS BEEN U/S 36 (1) (VII) OF THE ACT TOWARDS BAD DEBTS AND THE REVISED CLAIM IS AFTER THOUGHT. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN NOT ALLOWING THE DEDUCTION O F THE CLAIM OF RS. 1,40,90,240/- BEING ADDED TO THE INCOME IN THE PROF IT AND LOSS ACCOUNT WHICH DID NOT CONSTITUTE AN INCOME. 4. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN MISINTERPRETING THE FACTS OF THE CASE IN RESPECT OF THE ABOVE CLAIM AS AN ITEM OF EXPENSE INSTEAD OF SAME B EING AN ITEM OF INCOME. 5. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN CONFIRMING THE DISALLOWANCE OF RS.20,03,595/- BEING FREIGHT CHARGES PAYABLE FOR NON DEDUCTION OF TAX AT SOURCE U/S 40 (A) (IA) OF THE ACT. 6. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN CONFIRMING THE APPLICABILITY OF THE PROVISIONS OF SECTION 115JB OF THE ACT THOUGH THE INCOME DETERMINED U/S 143 (3) OF THE ACT IS HIGHER THAN THE INCOME CHERGEABLE U/S 115 JB OF THE ACT. 7. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN NOT ALLOWING THE CLAIM O F REDUCTION OUT OF BOOK PROFIT THE AMOUNT OF PROVISION FOR BAD DEBTS WRITTEN BACK IN T ERM OF THE CLAUSE (I) OF EXPLANATION 1 TO SECTION 115 JB OF THE ACT. GROUNDS NO.1 AND 2: 3. THIS IS A SECOND ROUND OF APPEAL BEFORE US. THE BRIEF FACTS OF THE CASE ARE THAT DURING THE ASSESSMENT PROCEEDINGS THE ASSESSIN G OFFICER (HEREINAFTER REFERRED TO AS THE AO) OBSERVED THAT I N THE PROFIT& LOSS ACCOUNT OF THE ASSESSEE, THE AMOUNT OF RS.1,40 ,19,240/- WAS WRITTEN OFF AS BAD DEBTS. HOWEVER, WHEN THE ASSESSE E WAS CONFRONTED TO EXPLAIN HOW THIS AMOUNT WAS ALLOWABLE AS BAD DEBTS U/S.36(1)(VII) OF THE I.T. ACT AS THIS AMOUNT WAS N OT SHOWN AS INCOME IN THE EARLIER YEARS, THEN THE ASSESSEE CHAN GED ITS VERSION AND CLAIMED IT AS BUSINESS LOSS U/S.37(1) READ WITH SEC TION 28 OF THE I.T. ACT. THE AO, HOWEVER, HELD THAT THOUGH, THE ASSESSE E HAD ITA NO.6859/M/2014 M/S. SIRIUS PHARMACEUTICALS PVT. LTD. 3 CHANGED ITS CLAIM FOR DEDUCTION FROM BAD DEBTS TO A DVANCE NOT RECOVERABLE, YET, THE CLAIM OF DEDUCTION U/S 37(1) AS A LOSS ON ACCOUNT OF NOT RECOVERABLE ADVANCE WAS NOT ACCEPTABLE BECAUSE THE PROVISIONS OF SECTION 37(1) OF THE IT. ACT DO NOT PERMIT THE CLAIM OF LOS S OF THE CAPITAL AND PERSONAL NATURE. THE AO ALSO OBSERVED THAT FROM THE CONFIRMATION OF ADVANCE FOR LABOUR CHARGES FOR THE PERIOD 1.1.2002 TO 1.4.2004 THE ASSESSEE COMPANY HAD ADVANCED 23 AMOUNTS DURING THE PERIOD F ROM 21.1.2002 TO 28.3.2003 TOTALING TO RS.58,65,884/-. HE OBSERVED THAT IT WAS SURPRISING TO NOTE THAT DURING THE ENTIRE PERIOD OF 15 MONTHS THE ASSESSEE COMPANY HAD ADVANCED 23 AMOUNTS AND THERE WAS NO SINGLE ENTRY O F TRANSACTION OF LABOUR JOB WORK DONE BY M/S. THIA CHEM P. LTD. HE T HEREFORE WAS OF THE VIEW THAT THIS WAS A STORY CONCOCTED BY THE ASS ESSEE AS THE ADVANCES FOR LABOUR CHARGES DID NOT AT ALL COMMENSU RATE WITH THE FACTS AND FIGURES. HE OBSERVED THAT SINCE THE ASSESSEE HAD NO T FILED ANY EVIDENCE ON THE BASIS OF WHICH IT COULD EXPLAIN THAT OUT OF THE TOTAL AMOUNT OF RS.5,20,30,153/- DUE FROM M/S. THIA CHEM PVT. LTD, HOW THE CLAIM OF WRITE OFF OF RS.1,40,90,240/- WAS ARRIVED. IN VIEW OF THESE FACTS AND CIRCUMSTANCES THE BAD DEBTS WRITTEN OFF W ERE HELD AS NOT ELIGIBLE FOR DEDUCTION EITHER UNDER SECTION 36(1)(V II) OR UNDER SECTION 37(1) OF THE I.T. ACT. THEREFORE, THE AMOUNT OF RS, 1,40,90,240/- WAS ADDED BACK TO THE TAXABLE INCOME OF THE ASSESSEE. 4. THE LD. CIT(A) HOWEVER ALLOWED THE CLAIM OF THE ASSESSEE HOLDING IT TO BE A BUSINESS LOSS UNDER SECTION 28 O F THE ACT BY WAY OF A NON-SPEAKING ORDER. THE ORDER OF THE LD. C IT(A) DATED 29.07.2011 WAS SET ASIDE BY THE THIS TRIBUNAL VIDE ORDER 12.6.2014 AND THE MATTER WAS AGAIN RESTORED TO THE FILE OF LD. CIT(A) FOR PASSING A SPEAKING AND REASONED ORDER. IN THE S ET-ASIDE ITA NO.6859/M/2014 M/S. SIRIUS PHARMACEUTICALS PVT. LTD. 4 PROCEEDINGS, THE ASSESSEE MADE THE FOLLOWING SUBMIS SIONS BEFORE THE LD.CIT(A): THE COMPANY HAD ADVANCED THE SUM OF RS.5,20,30,153 /- TO THIA CHEM INDIA PVT. LTD (THIA CHEM) OVER A PERIOD OF LAST TH REE YEARS. THE COPY OF THE ACCOUNT FOR THE THREE YEARS WERE SUBMITTED TO THE A SSESSING OFFICER. THE COMPANY IS AN EXPORTER OF BULK DRUGS & INTERMED IATES. IT PROCURES THE PRODUCTS FROM PRIME MANUFACTURERS AND ALSO GETS MANUFACTURED ON JOB WORK BASIS AND EXPORTS THE SAME TO THEIR BUYERS. THE COMPANY TIED UP WITH THIA CHEM FOR MANUFACTURE OF THEIR PRODUCTS FR OM TIME TO TIME. THIA CHEM HAS THEIR OWN PREMISES WHICH THE COMPANY DESIRED TO HAVE IT ON LEASE ARRANGEMENT TO SMOOTHEN THEIR PRODUCTION L INE. THIA CHEM BEING SICK COMPANY, THE ASSESSEE COMPANY FIRST APPR OACHED THEIR BANKERS FOR APPROVAL OF THE ARRANGEMENT TO BE ENTERED INTO. THE COMPANY USED TO GET THEIR PRODUCT MANUFACTURE F ROM THEM FROM TIME TO TIME. THE COMPANY ENTERED INTO THE ARRANGEM ENT WITH THEM FOR SUPPLY OF MATERIAL AND GET THE MANUFACTURING ACTIVITY DONE ON JOB WORK BASIS. AS THIA CHEM WAS A COMPANY WHO HAVE BORROWED FUNDS FROM BAN K AND WERE NOT IN A POSITION TO REPAY AS SCHEDULED, THE APPELLANT COMPA NY HAD APPROACHED THEIR BANKERS SEEKING CLEARANCE FOR THIS TYPE ARRANGEMENT EXPLAINING THEM THAT THIS WOULD ALSO RESULT IN CLEARING THE OUTSTANDING OF TH E BANK. THE ACCOUNT OF THE THIA CHEM WOULD SHOWN THAT SOME OF THE PAYMENT DUE TO THIA CHEM ON ACCOUNT OF LABOUR CHARGES HAVE BEEN MADE TO THEIR B ANKERS. BASED UPON BANKERS ASSURANCES, THE APPELLANT HAD PROCEEDED WIT H REGULAR BUSINESS OF GETTING THEIR MANUFACTURING CARRIED OUT IN THEIR PR EMISES AND ACCORDINGLY THE APPELLANT WENT ON ADVANCING FUNDS TO THIA CHEM FOR MEETING THEIR DAY TO DAY EXPENSES. SUBSEQUENTLY THEIR BANKERS REVERSED THEIR DECISION OF ALLOWING THIS TYPE OF ACTIVITY AND WENT FOR RECOVERY OF THEI R DUES AND AUCTIONED OF ALL THE ASSETS BELONGING TO THIA CHEM TO RECOVER TH EIR DUES. THE COPY OF THE AGREEMENT AND SOME OF THE LETTERS A DDRESSES TO THEIR BANKERS WERE SUBMITTED TO THE ASSESSING OFFICER IN SUPPORT OF THE CLAIM. THE TOTAL AMOUNT DUE FROM THIA CHEM WAS RS.5,20,30,153/ -. THE COMPANY MAINTAINED TWO ACCOUNTS OF THIA CHEM ONE WAS ADVANC E ACCOUNT WHICH SHOWS THE OUTSTANDING AMOUNT AT RS.3,72,07,221/- WH ICH WAS TO BE ADJUSTED AGAINST THE PURCHASES OF RAW MATERIAL AND ANOTHER ONE WAS ADVANCE ACCOUNT AGAINST THE LABOUR JOB CARRIED OUT WHICH SH OWS AMOUNT OUTSTANDING AT PS.1,48.22,9321-. OUT OF THESE TWO A CCOUNTS THE SUM OF RS. 1,40,19,2401- HAS BEEN CLAIMED AS AMOUNT NOT RE COVERABLE, HENCE, WRITTEN OFF. THE AMOUNT OF RS.1,40,19,240/- HAS BEEN CLAIMED BY WAY OF BAD DEBTS IN ACCOUNTS WHICH IS DUE FROM THIA CHEM. THOU GH THE ACCOUNTING ITA NO.6859/M/2014 M/S. SIRIUS PHARMACEUTICALS PVT. LTD. 5 TERMINOLOGY USED IN ACCOUNTS WAS A BAD DEBTS WRITTE N OFF, THE CLAIM WAS MADE U/S 28/37(1) OF THE ACT BEING THE LOSS SUFFERE D ON ACCOUNT OF NON RECOVERY OF ADVANCES MADE IN THE COURSE OF THE BUSI NESS AND FOR THE PURPOSE OF BUSINESS WHICH DOES NOT AMOUNT TO CAPITAL OR PER SONAL EXPENDITURE. IN VIEW OF THE ABOVE, AS ALL ARRANGEMENTS AND NEGOT IATION WERE MADE IN THE NORMAL COURSE OF THE BUSINESS ACTIVITY AND B USINESS TRANSACTION WHICH IS PRUDENT BUSINESS MAN WOULD CARRY OUT IN TH E BEST INTEREST OF THE BUSINESS, THE GAIN OR LOSS ARISING THERE FROM WOULD CONSTITUTE BUSINESS INCOME OR LOSS. MOREOVER THE DIRECTORS OF THE COMPA NY ACTED PRUDENTLY IN THE INTEREST OF THE COMPANY. HOWEVER DUE TO UNFORTU NATE CIRCUMSTANCES, THE DEAL DID NOT MATERIALIZE AND THE LOSS WAS OCCUR RED TO THE COMPANY. THIS LOSS BEING NOT OF THE CAPITAL NATURE, YOUR APPELLAN T HAS CLAIMED THE SAID AMOUNT AS NOT RECOVERABLE. THUS THE CLAIM OF THE AP PELLANT IS JUSTIFIABLE. 5. THE LD CIT(A) HOWEVER DID NOT AGREE WITH THE CONTENTIONS MADE BY THE ASSESSEE AND THEREFORE REJECTED THE CLAIM OF THE ASSESSEE OBSERVING AS UNDER: 2.3 I HAVE CONSIDERED THE SUBMISSIONS OF THE AS SESSEE AND FACTS OF THE CASE CAREFULLY. IT IS NOTICED THAT IN THE PROFIT AND LOS S ACCOUNT THE ASSESSEE HAS WRITTEN OFF RS.1,40,90,240/- AS BAD DEBTS. HOWEVER, WHEN THE AO HAS CONFRONTED DURING THE ASSESSMENT PROCEED INGS TO EXPLAIN THE ALLOWABILITY OF BAD DEBTS U/S.36(1)(VII) OF THE IT ACT THEN THE AR OF THE ASSESSEE HAS CHANGED ITS STAND AND MADE CLAIM U/S.37(1) OF THE I.T. ACT. IN THE A.Y.2007-08 THE ASSESSEE HAD MADE PROVI SION FOR DOUBTFUL DEBTS AMOUNTING TO RS.5,47,67,653/ - OUT OF WHICH THE ASSESSEE HAD WRITTEN OFF RS.1,40,90,240/-WHEN THE AO HAS ASKED T HE BASIS FOR WRITING OFF THIS AMOUNT THEN THE AR HAS FAILED TO E XPLAIN THE SAME. THE AO HAS ALSO HELD THAT NOWHERE M/S. THIA CHEM PV T. LTD HAS REFUSED TO PAY THE SUM ADVANCED BY THE ASSESSEE. T HE ASSESSEE HAS NOT PRODUCED ANY CORRESPONDENCE MADE WITH M/S. THIA CHEM PVT. LTD. FOR RECOVERY OF THE AMOUNTS. SINCE THE ASSESSEE HA S NOT FULFILLED THE CONDITIONS OF SECTION 36(1)(VII) BECAUSE THIS AMOUN T WAS NOT SHOWN AS INCOME IN THE EARLIER YEARS THEREFORE NOT ELIGIBLE FOR THE CLAIM OF BAD DEBTS U/S.36(1)(VII) AND EVEN THE AO HAS HELD THAT THE PROVISIONS OF SECTION 37(1) OF THE I.T. ACT DOES NOT PERMIT THE C LAIM OF LOSS OF THE CAPITAL AND PERSONAL NATURE. THEREFORE, WAS NOT EL IGIBLE FOR CLAIMING DEDUCTION U/S. 37(1) OF THE I.T. ACT. 6. ON THE OTHER HAND THE AR OF THE ASSESSEE HAS SUB MITTED THAT THE COMPANY IS A EXPORTER OF BULK DRUGS AND INTERMEDIAT ES. IT PROCURES THE PRODUCTS FROM PRIME MANUFACTURERS AND ALSO GETS MAN UFACTURED ON JOB ITA NO.6859/M/2014 M/S. SIRIUS PHARMACEUTICALS PVT. LTD. 6 WORK BASIS AND EXPORTS THE SAME. THE ASSESSEE COMPA NY HAD TIED UP WITH M/S. THIA CHEM PVT.LTD FOR MANUFACTURING OF THEIR P RODUCTS FROM TIME TO TIME . M/S. THIA CHEM PVT. LTD HAS THEIR OWN PREMISES WHICH THE COMPANY DESIRED TO HAVE IT ON LEASE ARRANGEMENT TO SMOOTHEN THEIR PRODUCTION LINE. M/S. THIA CHEM PVT. LTD. BEING A SICK COMPANY THE ASSESSEE COMPANY FIRST APPROACHED THEIR BANKERS FOR APPROVAL OF THEI R ARRANGEMENT TO BE ENTERED INTO. THE COMPANY HAD ENTERED INTO AN AGREEMENT FOR SUPPLY OF MATERIAL AND GETTING THE MANUFACTURING ACTIVITY DONE ON JOB WORK BASIS. THE ASSESSEE HAD ALSO APPROACHED THEIR BANKERS SEEKING CLEARANCE FOR THIS TYPE OF ARRANGEMENT. BUT LATER ON THE BANKER HAD AUCTIONED THE ASSETS BE LONGING TO THIA CHEM PVT. LTD TO RECOVER THEIR DUES. THE TOTAL AMOUNT DUE FRO M THIA CHEM PVT. LTD WAS RS.5,20,30.153/-. THE COMPANY HAS MAINTAINED TWO ACCOUNTS OF M/S. THI A CHEM PVT. LTD ONE WAS ADVANCE ACCOUNT WHICH SHOWS THE OUTSTANDING AMOUNT OF RS.3,72,07,221/- WHICH WAS TO BE ADJUSTED AGAINST T HE PURCHASE OF RAW MATERIAL AND OTHER ONE WAS ADVANCE ACCOUNT AGAINST THE LABOU R JOB CARRIED OUT WHICH WAS SHOWN OUTSTANDING OF RS.1,48,22,932/- OUT OF TH ESE TWO AMOUNTS, THE SUM OF RS.1,40,90,240/- WAS CLAIMED AS NOT RECOVERED HE NCE WRITTEN OFF. THIS AMOUNT WAS CLAIMED AS BAD DEBTS IN ACCOUNTS. THOUGH THE ACCOUNTING TERMINOLOGY USED WAS A BAD DEBT WRITTEN OFF THE CLA IM WAS MADE U/S.28/37(1) BEING LOSS SUFFERED ON ACCOUNT OF NON RECOVERY OF ADVANCES. THUS THE CLAIM OF THE ASSESSEE WAS JUSTIF IABLE. THE AR OF THE ASSESSEE HAS ALSO RELIED ON THE DECISION OF HON'BLE J & K HIGH COURT IN THE CASE OF CHINAV FOREST CO. V. CIT. FROM THE PERUSAL OF THE SUBMISSIONS AND FACTS OF TH E CASE IT IS NOTICED THAT THE ASSESSEE HAS MADE PROVISION FOR DO UBTFUL DEBTS OF RS.5,47,67,653/- IN F.Y.2006-07 I.E. A.Y.2007-08 OU T OF WHICH THE ASSESSEE HAS WRITTEN OFF RS.1,40,90,240/- DURING THE YEAR UNDER ITA NO.6859/M/2014 M/S. SIRIUS PHARMACEUTICALS PVT. LTD. 7 CONSIDERATION. THE AO HAS ALSO OBSERVED THAT THIS A MOUNT WAS IN THE NATURE OF ADVANCE GIVEN TO M/S. THIA CHEM PVT. LTD AND HAS NOT FULFILLED THE CONDITIONS OF SECTION 36(1)(VII) OF T HE I.T. ACT FOR CLAIMING OF DEBTS, BECAUSE THE ASSESSEE HAS TO FULF ILLED THE CONDITIONS THAT IT IS WRITTEN OFF IN THE BOOKS OF ACCOUNTS AND SECONDLY IT SHOULD HAVE SHOWN AS INCOME IN THE EARLIER YEARS. BUT IN T HE PRESENT CASE THE ASSESSEE HAS FAILED TO PROVE THAT THIS AMOUNT WAS S HOWN AS INCOME IN THE EARLIER YEARS. THEREFORE, THE CLAIM OF THE ASSESSEE U/S 36(1)(VII) IS NOT ACCEPTABLE. TO STRENGTHEN THE VIEW OF THE AG RELIAN CE IS PLACED ON THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF BI RLA BROTHERS V. CIT 77 ITR 75 WHERE IT IS HELD THAT THE ASSESSEE GUARAN TEEING LOAN TO SELLING AGENTS AND SELLING AGENTS COMPELLING TO PAY THE SAME AND NO CIRCUMSTANCES SHOWING THAT THE ASSESSEE WAS UNDE R OBLIGATION TO PROVIDE SUCH GUARANTEE THE AMOUNT WAS HELD NOT TO B E DEDUCTIBLE AS BAD DEBT. IN CASE OF CIT VS. PRODUCIN LTD 197 TAXMANN I T WAS HELD THAT PROVISION MADE FOR BAD AND DOUBTFUL DEBTS IS NOT CO VERED UNDER SECTION 36(1)(VII) OF THE I.T. ACT. THUS THE TRIBUNAL WAS N OT RIGHT IN ALLOWING THE CLAIM. IN THE CASE OF KERALA TRADING CO V. CIT 156 TAXMANN 327 IT WAS HELD THAT WHERE THE SAID AMOUNT COULD NOT BE CO NSIDERED AS BAD DEBTS DUE TO ASSESSEE WITHIN THE MEANING OF SECTION 36(2) AND ASSESSEE COULD NOT BE ENTITLED TO CLAIM DEDUCTION OF SAID AM OUNT U/S.36(2) HELD, YES. IN VIEW OF THESE FACTS AND DECISION OF HONORABLE CO URTS THAT THE ASSESSEE HAS NOT FULFILLED THE CONDITIONS OF SECTIO N 36(1)(VII) R.W.S. 36(2) OF THE I.T. ACT. THEREFORE, THE CLAIM OF BAD DEBTS OF RS.1,40,97,240/- IS NOT ALLOWABLE. SECONDLY ALTHOUGH THE AR OF THE ASSESSEE HAS CLAIMED THE AMOUNT OF RS.1,40,90,240/- AS BAD DEBTS BUT DURING THE ASSESSMENT PROCEEDINGS IT WAS ADMITTED THAT THE CONDITIONS OF SECTION 36(1)(VII) WERE NOT FULFILLED. THEREFORE, THE ASSESSEE HAS CHANGED ITS STAND AND CLAIMED ITA NO.6859/M/2014 M/S. SIRIUS PHARMACEUTICALS PVT. LTD. 8 THE DEDUCTION U/S.36(1)(VII) OF THE I.T. ACT. FROM THE FACTS OF THE CASE IT IS CLEAR THAT THE ASSESSEE HAS ADVANCED LOAN TO M/S. T HIA CHEM PVT. LTD FOR THE PURCHASE OF MACHINERY AND IN PERSONAL CAPACITY FOR LABOUR ETC. AS PER THE PROVISIONS OF SECTION 37(1) ONLY THE REVENUE EXPEND ITURE WHOLLY AND EXCLUSIVELY INCURRED FOR THE BUSINESS PURPOSE IS AN ALLOWABLE DEDUCTION. BUT IN THE PRESENT CASE THE ASSESSEE HAS ADVANCED T HIS LOAN TO M/S. THIA CHEM PVT. LTD FOR THE PURCHASE OF MACHINERY AND IN PERSONAL CAPACITY TO HELP THE SICK UNIT WHICH IS NOT ALLOWABLE AS PER THE PROVISIONS OF SECTION 37(1) OF THE I.T. ACT. TO STRENGTHEN THE VI EW OF THE AO RELIANCE IS PLACED ON THE DECISION OF HON'BLE MADRA S HIGH COURT IN THE CASE OF SCENVI TRADERS PVT. LTD VS. CIT 221 ITR 410 , IN CASE OF HASSI MARG INDUSTRIAL LTD V. CIT 230 ITR 927 AND IN CASE OF TULIP STAR HOTELS LTD V. CIT 316 ITR 340 (AT) WHERE IT IS HELD THAT THAT MONEY ADVANCED TO ACQUIRE CAPITAL ASSET IS NOT ALLOWABLE U/S.36(1) (VII) OF THE I.T. ACT. IN CASE OF PITNIE BOOS INDIA LTD VS. CIT 17 TAXMANN.COM 116 IT IS HELD THAT THE EXPENDITURE INCURRED BY THE ASSESSEE FOR NON-COMPET ING FEE IS TO BE DISALLOWED BEING OF CAPITAL NATURE AND NOT ELIGIBLE FOR DEDUCTION U/S.37(1) OF THE I.T.ACT. SINCE IN THE PRESENT CASE THE AR OF THE ASSESSEE HAS TAKEN THE ARGUMENT THAT IF THE DEDUCTION IS NOT ALLOWABLE U/S.36(1)(VII) THEN IT SHOULD BE ALLOWED AS BUSINESS LOSS U/S.37(1) IS ALS O NOT ACCEPTABLE IN VIEW OF THESE FACTS THAT PERSONAL EXPENDITURE ADVAN CED AND ADVANCE GIVEN FOR THE PURCHASE OF CAPITAL ASSET IS NOT ALLO WABLE U/S.37(1) OF THE I.T. ACT. THE DECISIONS RELIED ON BY THE AR OF THE ASSESSEE IN CASE OF CHINAV FOREST CO. VS. CIT AND OTHER DECISIONS ARE NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE BECAUSE CAPITAL EXPENDITURE AND PERSONAL EXPENDITURE IS NOT ALLOWABLE DEDUCTION U/S.37(1) OF THE I.T. ACT, HENCE NOT HELPFUL TO THE ASSESSEE. IN TOTALITY OF FACTS AND CIRCUMSTANCE S IT IS HELD THAT ASSESSEE IS NOT ELIGIBLE FOR CLAIMING BAD DEBTS U/S .36(1)(VII) AND ALSO ITA NO.6859/M/2014 M/S. SIRIUS PHARMACEUTICALS PVT. LTD. 9 BUSINESS LOSS U/S.37(1) OF THE I.T. ACT OF RS.1,40, 90,240/-. THUS THE DISALLOWANCE MADE BY THE AO IS UPHELD AND THE GROUN D OF APPEAL IS DISMISSED. BEING AGGRIEVED BY THE ORDER OF THE CIT(A) ON THIS ISSUE, THE ASSESSEE HAS COME IN APPEAL BEFORE US. 7. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND HAV E ALSO GONE THROUGH THE RECORDS. THE LD. AR OF THE ASSESSEE HAS BROUGHT OU R ATTENTION TO THE VARIOUS CLAUSES OF THE TOLL MANUFACTURING AGREEMENT DATED 6 TH FEB, 2006 ENTERED INTO BETWEEN THE ASSESSEE AND THAI CHE M INDIA PVT. LTD. IT HAS BEEN MENTIONED IN THE AGREEMENT THAT THAI CHEM INDI A PVT. LTD HAS A MANUFACTURING FACILITY AT MAHAD, DISTRICT RAIGHAD; THE ASSESSEE HAS PROPOSED TO TAKE ON LEASE A PLANT MACHINERY THEREON AND HAS INSTALLED NEW EQUIPMENT AT ITS COST AND HAS AGREED TO INVEST ADDITIONAL CAPITA L NECESSARY FOR EQUIPMENT AND FOR FUNDING WORKING CAPITAL REQUIREMENTS TO MANUFAC TURE PRODUCTS; THAI CHEM HAS AGREED TO SECURITIES ALL SIRUS INVESTMENTS; THA I IN THE PAST HAS TAKEN SUBSTANTIAL LOANS FROM SIRUS AND HAS AGREED TO REPA YMENTS FROM THE REVENUE OBTAINED BY THAI FROM OTHERS AND AS WELL FROM THE A GREEMENT WITH SIRUS; THE MACHINERY INSTALLED BY SIRUS SHALL REMAIN ITS EXCLU SIVE PROPERTY; THAI CHEM HAS AGREED TO REPAIR AND MAINTAIN IN PROPER CONDITI ON THE MANUFACTURING FACILITY; THAI CHEM SHALL MANUFACTURE PRODUCTS FOR AND ON BEHALF OF SIRUS; SIRUS SHALL SUPPLY RAW MATERIAL AND PACKAGING MATER IAL TO THE THAI CHEM AND SUCH RAW MATERIAL AND PACKAGING MATERIAL SHALL REMA IN THE EXCLUSIVE PROPERTY OF SIRUS; SIRUS SHALL MAINTAIN A SEPARATE BANK ACCO UNT WHEREIN IT SHALL DEPOSIT THE REQUISITE AMOUNT THAT WILL BE PAYABLE B Y SIRUS TO THAI CHEM AS MANUFACTURING EXPENSES AS DETAILED IN ANNEXURE V; A LL PAYMENTS WILL BE SUBJECT TO TDS; MANUFACTURING EXPENSES SHALL MEAN A LL EXPENDITURE INCURRED BY THAI CHEM IN THE MANUFACTURING OF THE PRODUCT IN CLUDING LABOUR AND ITA NO.6859/M/2014 M/S. SIRIUS PHARMACEUTICALS PVT. LTD. 10 PERSONAL SALARIES, OFFICE SUPPLY, LEASE RENTS, REPA IR OF MAINTENANCE, INTEREST, LOAN REPAYMENTS ETC. ETC. THE LD. AR OF THE ASSESSE E HAS FURTHER RELIED UPON CONFIRMATION OF ACCOUNTS BY THE THAI CHEM AS STANDI NG IN THE BOOKS OF ACCOUNTS OF THE THAI CHEM. IT IS THE CONTENTION OF THE ASSESSEE THAT IT HAS MAINTAINED TWO ACCOUNTS OF M/S. THIA CHEM PVT. LTD ONE WAS ADVANCE ACCOUNT WHICH SHOWS THE OUTSTANDING AMOUNT OF RS.3,72,07,22 1/- WHICH WAS TO BE ADJUSTED AGAINST THE PURCHASE OF RAW MATERIAL AND O THER ONE WAS ADVANCE ACCOUNT AGAINST THE LABOUR JOB CARRIED OUT WHICH WA S SHOWN OUTSTANDING OF RS.1,48,22,932/- OUT OF THESE TWO AMOUNTS, THE SUM OF RS.1,40,90,240/- WAS CLAIMED AS NOT RECOVERED HENCE WRITTEN OFF. 8. WE FIND THAT EARLIER THE LD. CIT(A) HAD ALLOWED THE CLAIM OF THE ASSESSEE WITHOUT EXAMINING THE NATURE AND INDIVIDUA L DETAILS OF ADVANCES GIVEN BY THE ASSESSEE TO THAI CHEM BY WAY OF A NON-SPEAKI NG ORDER. THE TRIBUNAL HAS REMANDED THE MATTER TO RE-EXAMINE THE ISSUE AND PASS A SPEAKING ORDER. HOWEVER THIS TIME AGAIN THE LD. CIT(A) WITHOUT EXAM INING THE ITEM WISE DETAILS OF ADVANCES/ EXPENSES HAS DISALLOWED THE CL AIM BY OBSERVING THAT PERSONAL EXPENDITURE ADVANCED AND ADVANCE GIVEN FOR THE PURCHASE OF CAPITAL ASSET IS NOT ALLOWABLE U/S.37(1) OF THE I.T . ACT. THE LD. CIT(A) HAS FAILED TO GIVE FINDING AS TO WHICH PART OF THE ADVA NCE WAS ON CAPITAL ACCOUNT AND WHICH PART OF MONEY WAS ADVANCED OR USED FOR P ERSONAL PURPOSES. HE HAS ALSO FAILED TO EXAMINE THE CLAIM OF THE ASSESSE E AS REGARDS THE NATURE OF THE ADVANCES WHICH WERE GIVEN FOR BUSINESS/WORKING CAPITAL PURPOSES. THE ORDER OF THE LD. CIT(A) ON THIS ISSUE THEREFORE CAN NOT BE SAID TO BE A REASONED ORDER AS THE SAME SUFFERS FROM AMBIGUITIES , HENCE NOT SUSTAINABLE IN THE EYES OF LAW. WE ACCORDINGLY SET ASIDE THE OR DER OF THE LD. CIT(A) ON THIS ISSUE AND RESTORE THE ISSUE TO THE FILE OF THE AO WITH A DIRECTION TO EXAMINE THE ITEM WISE DETAILS OF ADVANCES GIVEN BY THE ASSESSEE TO THAI ITA NO.6859/M/2014 M/S. SIRIUS PHARMACEUTICALS PVT. LTD. 11 CHEM AND GIVE A SPECIFIC FINDING AS WHICH PART OF T HE AMOUNT WAS ADVANCED OR UTILIZED FOR CAPITAL PURPOSES OR PERSONAL PURPOS ES AND WHICH PART FOR REVENUE PURPOSES. WHETHER THE AMOUNT ADVANCED WAS S ECURED BY THAI CHEM AS PER THE TERMS OF THE AGREEMENT AND WHETHER ANY P ART OF THE SAME HAS BEEN RECOVERED BY THE ASSESSEE. THE AO AFTER EXAMINING T HE EVIDENCES AND DETAILS PRESENTED ON THE FILE SHALL DECIDE THE ISSU E A FRESH AS PER PROVISIONS OF THE LAW. IT IS MADE CLEAR THE AMOUNT ADVANCED/ U TILIZED FOR BUSINESS/REVENUE PURPOSES WILL BE ALLOWABLE AS BUSI NESS LOSS UNDER SECTION 28 READ WITH SECTION 37(1) OF THE ACT. NEEDLESS TO SAY THAT THE AO WILL GIVE PROPER OPPORTUNITY TO THE ASSESSEE TO FURNISH THE R EQUIRED DETAILS AND PRESENT ITS CASE. GROUND NO.3 &4AND 6&7: 9. THE ASSESSEE HAS CLAIMED THAT AN ANOTHER AMOUNT OF RS.1,40,90,240/- HAD BEEN CREDITED TO THE P&L ACCOUNT UNDER THE HEAD SUNDRY BALANCES WRITTEN OFF. IT HAS BEEN CLAIMED THAT SAID AMOUNT WAS PART OF THE PROVISION OF DOUBTFUL ADVANCES AMOUNTING TO RS.5,47,67,653/-WHICH WAS DEB ITED TO THE P&L ACCOUNT IN THE PREVIOUS YEAR BUT THE SAME HAS BEEN DISALLOW ED IN THE COMPUTATION OF INCOME FOR THE PREVIOUS YEAR AY 2007-08. THIS AMOUN T THEREFORE HAS BEEN CREDITED INTO THE P&L ACCOUNT AS AN ACCOUNTING ENTR Y AND CAN NOT BE TREATED AS AN ITEM OF INCOME. THE LD. CIT(A) HOWEVER HAS OBSER VED THAT THE AO HAS NOT MADE ANY SEPARATE ADDITION OF THIS AMOUNT WHILE ASS ESSING THE INCOME OF THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION. THE LD. AR ,BEFORE US, HAS SUBMITTED THAT THE THIS ISSUE HAD BEEN RESTORED BY THE LD. CIT(A) TO THE FILE OF THE AO FO R VERIFICATION OF THE CLAIM OF THE ASSESSEE VIDE ORDER DATED 19.07.2011 IN THE FIR ST ROUND OF LITIGATION. HE HAS FURTHER SUBMITTED THAT ABOVE STATED ISSUE HAS NOT B EEN SET ASIDE BY THE TRIBUNAL TO THE LD. CIT(A) FOR ADJUDICATION A FRESH AS THE R EVENUE HAD NOT TAKEN THIS ITA NO.6859/M/2014 M/S. SIRIUS PHARMACEUTICALS PVT. LTD. 12 ISSUE IN ITS GROUNDS OF APPEAL BEFORE THE TRIBUNAL DURING FIRST ROUND OF LITIGATION. 10. WE HAVE CONSIDERED THE CONTENTION OF THE LD. AR . WE FIND FROM THE ASSESSMENT ORDER THAT THOUGH NO SEPARATE ADDITION H AS BEEN MADE BY THE AO IN THE ASSESSMENT ORDER, YET HE HAS DISALLOWED THE CLA IM OF THE ASSESSEE IN RESPECT OF PROVISION FOR DIMINUTION IN VALUE OF PLANT AND M ACHINERY OF RS.67,19,604/- AND OF PROVISION FOR DOUBTFUL ADVANCES OF RS.13,09, 306/- TOTALLING RS.80,28,910/-, WHILE COMPUTING THE BOOK PROFITS UN DER SECTION 115JB. WHILE DISALLOWING THE SAID CLAIM, THE AO OBSERVED THAT TH E ASSESSEE HAD NO WHERE WRITTEN THAT THE SAID AMOUNT WAS ON ACCOUNT OF PROV ISION OF DOUBTFUL ADVANCES DEBITED LAST YEAR WHICH WAS DISALLOWED IN COMPUTATI ON AND HAD BEEN WRITTEN BACK DURING THE YEAR UNDER CONSIDERATION. WE FURTHE R FIND THAT THE ISSUE RELATING TO THE DISALLOWANCE OF THE CLAIM OF THE AS SESSEE IN RESPECT OF PROVISION FOR DIMINUTION IN VALUE OF PLANT AND MACHINERY OF R S.67,19,604/- AND OF PROVISION FOR DOUBTFUL ADVANCES OF RS.13,09,306/- W HILE COMPUTING THE BOOK PROFITS UNDER SECTION 115JB HAS BEEN RAISED BY THE ASSESSEE BEFORE THE CIT(A). THE LD. CIT(A) VIDE PARA NOS. 6 TO 6.3 OF THE IMPUG NED ORDER HAS DEALT WITH THE ISSUE AND HAS CONFIRMED THE DISALLOWANCE HOLDIN G THAT THE AO HAS RIGHTLY ADDED THE SAID AMOUNT OF RS.80,28,910/- TO THE BOOK PROFITS AS PER EXPLANATION (1) OF CLAUSE(I) OF SECTION 115JB. WE FURTHER FIND THAT THE ASSESSEE VIDE GROUND NO. 6 OF THE APPEAL, BEFORE US, HAS CONTESTED THE A PPLICABILITY OF THE PROVISIONS OF SECTION 115 JB OF THE ACT AND FURTHER VIDE GROUN DS NO.7 OF THE APPEAL HAS RAISED THE ISSUE OF DISALLOWANCE OF PROVISION OF BA D DEBTS WRITTEN BACK WHILE COMPUTING THE INCOME OF THE ASSESSEE U/S 115 JB. W E FIND THAT THE TWO SEPARATE ISSUES HAVE BEEN INTERMINGLED BY THE LOWER AUTHORITIES AND THAT SEPARATE FINDINGS ARE REQUIRED TO BE GIVEN IN RELAT ION TO THE ISSUES RAISED VIDE GROUNDS NO. 3&4 AND GROUND NOS.6 &7 RESPECTIVELY. W E THEREFORE RESTORE THE ITA NO.6859/M/2014 M/S. SIRIUS PHARMACEUTICALS PVT. LTD. 13 ABOVE ISSUES TO THE FILE OF THE AO TO SEPARATELY EX AMINE THE ISSUES RAISED VIDE GROUNDS NO.3 &4 AND 6& 7 RESPECTIVELY AND DECIDE TH E SAME AS PER THE PROVISIONS OF LAW. GROUND NO.5 11. THE LD. AR OF THE ASSESSEE HAS STATED AT BAR TH AT AS PER INSTRUCTIONS OF HIS CLIENT, HE DOES NOT PRESS GROUND NO. 5 OF THE A PPEAL. HE HAS ALSO NOTED AND SIGNED IN THIS RESPECT ON THE APPEAL MEMO. THE GROU ND NO.5 IS THEREFORE DISMISSED BEING NOT PRESSED. 12. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 24.06.2015. SD/- SD/- (R.C. SHARMA) (SANJAY GARG) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED: 24.06.2015. * KISHORE, SR. P.S. COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT (A) CONCERNED, MUMBAI THE DR CONCERNED BENCH //TRUE COPY// [ BY ORD ER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.