DCIT Cir 2(1), Mumbai V. M/s Herbertsons Ltd, Mumbai

ITA 7209/MUM/2003

• Counselvise Citation: 720919914 RSA 2003
• Duration Of Justice: 8 year(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-11-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 24-10-2011
• Assessment Year: 2000-2001
• Appeal Filed On: 06-11-2003
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PARTHSARTHI NAIK
• Assessee Lawyers: A V SONDE
• Keywords: Recovery proceedings

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH A : MUMBAI BEFORE SHRI D. K. AGARWAL, (JM) AND SHRI RAJENDRA SINGH,(ACCOUNTANT MEMBER) ITA NO.7209/MUM/2003 ASSESSMENT YEAR : 2000-01 DY. COMMISSIONER OF INCOME TAX CIRCLE-2(1) AAYAKAR BHAVAN ROOM NO.575, 5 TH FLOOR M.K. ROAD MUMBAI-20. ..( APPELLANT ) VS. M/S. HERBERTSONS LTD. EWART HOUSE 22, HOMI MODY STREET FORT MUMBAI-400 023. ..( RESPONDENT ) P.A. NO. (AAACH 0463 R) APPELLANT BY : SHRI PARTHSARTHI NAIK RESPONDENT BY : SHRI A. V. SONDE DATE OF HEARING : 4.11.2011 DATE OF PRONOUNCEMENT : 18 TH NOVEMBER, 2011 O R D E R PER RAJENDRA SINGH (AM). THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDE R DATED 22.8.2003 OF CIT(A) FOR THE ASSESSMENT YEAR 2000-01. THE ONLY DISPUTE RAISED BY THE REVENUE IN THIS APPEAL IS REGARDI NG DISALLOWANCE OF LOSS OF RS.40.17 LACS MADE BY THE AO WHICH HAS BEEN DEL ETED BY THE CIT(A). ITA NO.7209/M/03 A.Y:00-01 2 2. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT THE ASSE SSEE WHO WAS IN THE BUSINESS OF MANUFACTURING AND TRADING OF I NDIAN MADE FOREIGN LIQUOR, HAD CLAIMED DEDUCTION OF RS.40,17,164/ - BASED ON THE ARBITRATION AWARD. THE ASSESSEE EXPLAINED THAT THERE W AS LEASE AGREEMENT ENTERED BETWEEN THE ASSESSEE AND M/S. WALCHAND HINDUSTAN LTD. (WHL) FOR LEASE OF BOTTLES IN THE YEAR 1 991. THE LEASE RENTALS WERE INITIALLY PAID BY ANOTHER COMPANY I.E. I NDRAYANI AGRO LTD.(IAL) WHICH WAS THE FRANCHISEE OF THE ASSESSEE COMPANY. IAL HAD PAID LEASE RENT AGGREGATING TO RS.11.03 LACS FROM 1991T O 1995. DUE TO DEFAULT IN FULL PAYMENT OF LEASE RENT, WHL HAD M ADE CLAIM ON THE ASSESSEE COMPANY AS RESULT OF WHICH THE ASSESSEE CAME TO KNOW AB OUT THE LEASE AGREEMENT WHICH HAD BEEN FRAUDULENTLY ENTE RED INTO BY SHRI D.R. PINGE, WHO WAS THE VICE PRESIDENT AND DIRECTOR OF THE ASSESSEE COMPANY AND WHO HAD INTEREST IN IAL ALSO. THE ASSESSEE DI SPUTED THE CLAIM AND, THEREUPON, WHL INVOKED ARBITRATION PROCEEDI NGS AS PER TERMS OF THE AGREEMENT. AS PER ARBITRATION AWARD DAT ED 24/2/1996, THE ASSESSEE WAS MADE LIABLE TO PAY A SUM OF RS.14.45 LACS W HICH WAS ALSO CONFIRMED BY THE HONBLE BOMBAY HIGH COURT VIDE OR DER DATED 28.2.2000. THE ASSESSEE FILED COPIES OF LETTER DATED 28. 9.92, 11.12.92 AND 20.07.93 WRITTEN BY THE ASSESSEE TO WHL INFORMING AB OUT THE NON-EXISTENCE OF THE AGREEMENT. THE AO, HOWEVER, OBSE RVED THAT THE ASSESSEE WAS AWARE OF SUCH AGREEMENT IN THE YEAR 1992, BUT NO ITA NO.7209/M/03 A.Y:00-01 3 EFFORTS WERE MADE TO CANCEL SUCH BOGUS LEASE AGREEMENT. SHRI PINGE HAD ALSO ADMITTED COMMITTING FRAUD VIDE LETTER DATED 31.9.93 AS MENTIONED IN THE CIVIL SUIT FILED BY THE ASSESSEE AGAINST FAMILY MEMBERS OF SHRI PINGE IN APRIL 1998. SHRI PINGE VID E LETTER DATED 12.8.94 HAD REASSURED THE LESSOR THAT ALL LEGITIMATE DUES WILL BE SETTLED. THE ASSESSEE WAS AWARE OF THE DEVELOPMENT AND TURNED A BLIND EYE. THE AO ALSO OBSERVED THAT NO ONE HAD APPE ARED BEFORE ARBITRATOR TO REPRESENT THE CASE. THOUGH THE ASSESSEE CLA IMED THAT SHRI PINGE HAD BEEN SACKED BUT NO DETAILS HAD BEEN GIV EN. SHRI PINGE ULTIMATELY DIED ON 2.12.1994. THE AO THEREFORE, DI D NO TREAT THE ARBITRATION EXPENSES AS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE AND DISALLOWED THE CLAIM OF RS.40 ,17,164/- , DETAILS OF WHICH WERE AS UNDER:- A OUTSTANDING LEASE RENTALS FOR THE PERIOD DEC. 1991 TO 30.06.95 RS.17,13,740/ B PENAL CHARGES ON THE DELAYED PAYMENTS @ 36% UP TO 30.63.1995 RS.10,18,260/- C INTEREST FROM 24.2.1996 TILL THE DATE OF PAYMENT RS.12,65,163/- D COST OF LITIGATION RS. 20,000/- RS.40,17,164/- 2.1 THE ASSESSEE DISPUTED THE DECISION OF THE AO. THE ASSESSEE SUBMITTED BEFORE CIT(A) THAT AS LATE AS JULY 1993 ASSESSE E KEPT ON DENYING THE EXISTENCE OF LEASE AGREEMENT AND HAD REQUE STED WHL VIDE ITA NO.7209/M/03 A.Y:00-01 4 LETTER DATED 20.7.1993 TO SEND A COPY OF LEASE AGREEME NT. FURTHER, AS LATE AS AUGUST 1994, SHRI PINGE KEPT ON ASSURING THE L ESSORS THAT ALL LEGITIMATE DUES WOULD BE PAID. SHRI PINGE WAS A VERY SENIOR OFFICIAL OF THE COMPANY WHO WAS ALSO DIRECTOR AND, THEREFORE, IT WA S NOT POSSIBLE NOR DESIRABLE IN THE INTEREST OF THE BUSINESS TO SACK HIM IMMEDIATELY. SHRI PINGE DIED ON 2.12.1994. SHRI PINGE HAD BEEN GIVEN THE GENERAL POWER OF ATTORNEY BY VIRTUE OF HIS OFFICIAL POSITION T O CARRY OUT THE DAY TO DAY BUSINESS OF THE ASSESSEE COMPANY. THE AO HAD NOT D OUBTED THE EXERCISE OF AUTHORITY BY SHRI PINGE AND DELIVERY OF LEASE BOTTLES TO ONE OF THE CONCERNS. THE LOSS HAD OCCURRED DUE TO MISUSE OF AUTHORITY BY OFFICIAL OF THE COMPANY AND, THEREFORE, IT HAS TO BE HELD AS BUSINESS LOSS OCCURRED DURING THE COURSE OF CARRYING ON OF THE BUSI NESS. THE ASSESSEE PLACED RELIANCE ON SEVERAL JUDGMENTS INCLUDING JUD GMENT OF HON'BLE SUPREME COURT IN THE CASE OF BADRIDAS DAGA VS. C IT (34 ITR 10) AND THE JUDGMENT OF HONBLE HIGH COURT OF PUNJAB & HARYANA IN CASE OF PUNJAB STEEL STOCKHOLDERS SYNDICATE LTD. VS COMMI SSIONER OF INCOME-TAX (P&H) (125 ITR 519). CIT(A) WAS SATISFIED BY THE EXPLANATION GIVEN. IT WAS OBSERVED BY HIM THAT ACQUISI TION OF BOTTLES WAS NORMAL BUSINESS ACTIVITY OF THE ASSESSEE COMPANY AND DURI NG THE COURSE OF BUSINESS, THE SR. VICE PRESIDENT HAD ENTERED IN TO AGREEMENT WITH WHL BUT HE HAD DIVERTED THE BOTTLES FRAUDULENTLY TO IAL AND MATTER WAS COVERED UP BY HIM DUE TO HIS SENIOR POSITION IN THE ITA NO.7209/M/03 A.Y:00-01 5 COMPANY AND SUBSEQUENTLY HE ADMITTED THE FRAUDULENT A CTIVITY AND ASSURED WHL OF PAYING ALL DUES. HOWEVER, IN THE MEANTIME HE EXPIRED AND ARBITRATION PROCEEDINGS WERE INITIATED AGAINST TH E ASSESSEE COMPANY WHICH WAS MADE LIABLE TO PAY RS.40,17,167/- AS P ER ARBITRATION AWARD WHICH WAS CONFIRMED BY THE HIGH COURT . THE ASSESSEE HAD ALSO INITIATED RECOVERY PROCEEDINGS AGAINST FAM ILY MEMBERS OF SHRI PINGE. HOWEVER, THE ASSESSEE CLAIMED THE LOSS IN THE YEAR IN WHICH THE JUDGMENT OF HIGH COURT WAS DELIVERED . HE ACCORDINGLY ALLOWED THE CLAIM OF THE ASSESSEE AGGRIEVED BY WHICH, THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL. 3. BEFORE US, THE LD. AR REITERATED THE SUBMISSIONS MADE BEFORE THE LOWER AUTHORITIES. HE REFERRED TO VARIOUS LETTERS DATE D 23.9.1992, 11.12.1992 AND 20.7.1993 ADDRESSED TO WHL INFORMING AB OUT NON EXISTENCE OF THE AGREEMENT. FURTHER, SHRI PINGE VIDE LETTER DATED 12.8.1994 (COPY AT PAGE 37 OF THE PAPER BOOK ) ADDRE SSED TO WHL HAD STATED THAT HE WOULD PAY AMOUNTS IN INSTALLMENTS. THE SAID LETTER WAS ON THE LETTER HEAD OF IAL WHICH SHOWED THAT SHRI PING E ADMITTED THAT IT WAS LIABILITY OF IAL. SUBSEQUENTLY, SHRI PINGE EXPIR ED AND AS DUES WERE NOT PAID, WHL INVOKED ARBITRATION PROCEEDINGS VI DE LETTER DATED 24.7.1995. AS AGREEMENT WAS IN THE NAME OF ASSESSEE COMP ANY, THE ARBITRATOR MADE ASSESSEE COMPANY LIABLE WHICH WAS CONFIR MED BY HIGH ITA NO.7209/M/03 A.Y:00-01 6 COURT. THE LD. AR FURTHER SUBMITTED THAT IT WAS A CASE OF BUSINESS LOSS AND NOT EXPENDITURE, WHICH HAD OCCURRED DUE TO FRAUDUL ENT ACTIVITY OF SENIOR EMPLOYEE. HE REFERRED TO THE JUDGMENT OF HONB LE BOMBAY HIGH COURT IN THE CASE OF SASSOON J. DAVID AND CO. (P. ) LTD. VS CIT (98 ITR 50) IN WHICH IT WAS HELD THAT LOSS OCCURRING ON ACCOUNT OF FRAUDULENT ACTIVITY OF THE DIRECTOR WAS ALLOWABLE AS DEDUCTION AS THE SAME HAD OCCURRED DURING THE COURSE OF CARRYING ON OF BUSI NESS. IT WAS ACCORDINGLY URGED THAT THE CLAIM OF THE ASSESSEE SHOULD BE ALLOWED. 3.1 THE LD. DR ON THE OTHER HAND SUBMITTED THAT IT W AS NOT A CASE OF EMBEZZLEMENT. IT WAS A CASE OF FRAUDULENT ACTIVITY OF DIRECTOR OF THE ASSESSEE COMPANY WHICH THE ASSESSEE WAS AWARE BUT DID NOT TAKE ANY ACTION. SHRI PINGE ADMITTED THAT IT WAS LIABILITY OF IAL BUT NO EFFORTS WERE MADE TO RECOVER THE AMOUNT. FURTHER, THE ASSESSEE ALSO DID NOT APPEAR BEFORE THE ARBITRATOR AND THE HIGH COURT. IT WAS ACCORDINGLY SUBMITTED THAT IT WAS NOT A CASE OF ALLOWABLE LOSS AND SAM E HAD BEEN RIGHTLY DISALLOWED BY THE AO. 4. WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING ALLOWA BILITY OF DEDUCTION OF RS.40,17,164/- BEING AMOUNT PAYABLE BY T HE ASSESSEE TO WHL AS PER ARBITRATION AWARD. THE SAID AMOUNT HAD BECO ME PAYABLE ITA NO.7209/M/03 A.Y:00-01 7 AS PER THE ARBITRATION WARD DATED 24.2.1996 WHICH WAS SUBSEQUENTLY UPHELD BY THE HONBLE HIGH COURT OF BOMBAY VIDE ORDE R DATED 28.2.2000. THE ARBITRATION PROCEEDINGS HAD BEEN INIT IATED AGAINST ASSESSEE BY WHL IN RELATION TO THE AGREEMENT ENTRED IN T HE YEAR 1991 BY SHRI D.R. PINGE, SENIOR VICE PRESIDENT AND DIRECTOR OF THE COMPANY WITH WHL FOR LEASE OF BOTTLES. SHRI PINGE HAD HOWEVE R DIVERTED THE SUPPLY OF BOTTLES TO IAL, A FRANCHISEE OF THE ASSESSEE COMP ANY IN WHICH HE HAD SUM INTEREST. INITIALLY, LEASE RENT HAD B EEN PAID BY IAL. HOWEVER DUE TO DEFAULT LATER IN THE YEAR 1992, WHL HA D TAKEN UP THE MATTER WITH THE ASSESSEE FOR PAYMENT OF RENT. THE ASSE SSEE HAD INFORMED WHL ABOUT THE NON EXISTENCE OF THE AGREEMENT VIDE LETTERS DATED 23.9.1992, 11.12.1992 AND 20.7.1993 IN WHICH T HE ASSESSEE HAD ALSO REQUESTED TO SUPPLY COPY OF THE AGREEMENT. IT APPEARS THAT SHRI PINGE HAD KEPT THE MANAGEMENT OF THE COMPANY IN DARK ABOUT THE EXISTENCE OF THE AGREEMENT. SUBSEQUENTLY, SHRI PIN GE INFORMED THE ASSESSEE COMPANY VIDE LETTER DATED 30.9.1993 ABOUT THE L EASE AGREEMENT IN WHICH HE ALSO MENTIONED THAT THOUGH THE AGREEMENT HAD BEEN MADE IN THE NAME OF THE ASSESSEE COMPANY, THE LIABI LITY TO MAKE THE PAYMENT WAS THAT OF IAL. SHRI PINGE HAD ALSO ASSUR ED WHL THAT IAL WILL BE MAKING THE PAYMENT IN INSTALMENTS. SUBSEQ UENTLY, SHRI PINGE EXPIRED ON 22.12.1994. ITA NO.7209/M/03 A.Y:00-01 8 4.1 THE CASE OF THE DEPARTMENT IS THAT THE ASSESSEE COMPANY BEING AWARE OF THE AGREEMENT IN THE YEAR 1993 DID NOT TAK E ANY ACTION FOR CANCELLATION OF THE SAME AND THEREFORE, THE LOSS ARISING AS PER ARBITRATION AWARD COULD NOT BE CONSIDERED AS GENUINE LO SS. THE CASE OF THE ASSESSEE IS THAT IT WAS NOT AWARE OF THE AGREEMENT W HICH WAS CLEAR FROM THE VARIOUS LETTERS INCLUDING LETTER DATED 2 0.7.1993 ADDRESSED TO WHL AND ONCE IT CAME TO KNOW ABOUT THE AGRE EMENT, IT HAD TAKEN UP THE MATTER WITH SHRI PINGE WHO INFORME D VIDE LETTER DATED 30.9.1993 ABOUT THE EXISTENCE OF THE AGREEMENT . IN THAT LETTER HE AGREED THAT THE LIABILITY OF PAYMENT WAS THAT OF IAL. SUBSEQUENTLY SHRI PINGE ALSO INFORMED WHL THAT THE PAYMENT WILL BE MADE BY IAL. SINCE SHRI PINGE WAS A SENIOR OFFICER OF THE LEVEL OF D IRECTOR, HE COULD NOT BE SACKED IMMEDIATELY AS IT WOULD HAVE ADVERSELY AF FECTED THE WORKING OF THE COMPANY PARTICULARLY WHEN HE ADMITTED THAT THE LIABILITY WAS OF IAL WHO WILL MAKE THE PAYMENTS. ON CAREFUL CONSI DERATION, WE DO NOT FIND ANY UNREASONABLENESS IN THE CONDUCT OF THE ASSESSEE COMPANY IN NOT SACKING SHRI PINGE AND IN NOT CANCELLING AGREEMENT IMMEDIATELY WHEN IT CAME TO KNOW ABOUT IT. SHRI PIN GE WAS AN OFFICER OF THE LEVEL OF DIRECTOR AND SACKING HIM SUDDENLY COULD IMPACT THE BUSINESS OF THE ASSESSEE. MOREOVER, SHRI PINGE HAD ALSO EX PLAINED HIS POSITION WHICH IS CLEAR FROM THE ORDER OF ARBITRATOR IN WHICH HE HAD SUBMITTED THAT IT WAS A COMMON PRACTICE IN THE TRADE FOR A FRANCHISE ITA NO.7209/M/03 A.Y:00-01 9 HOUSE TO SIGN ACCOMMODATION AGREEMENT/ARRANGEMENT FOR A FRANCHISEE COMPANY. HE ALSO AGREED THAT THOUGH THE AGREEMENT WAS IN THE NAME OF THE ASSESSEE COMPANY LEASE RENT WAS THE LIABILITY OF IA L WHO ALSO AGREED VIDE LETTER DATED 12.8.1994 ADDRESSED TO WHL I N WHICH IT HAD AGREED TO MAKE PAYMENT IN INSTALMENTS. SHRI PINGE HO WEVER EXPIRED ON 22.12.1994 AND THEREAFTER DUE TO DEFAULT OF THE PAYMENTS WHL HAD INVOKED ARBITRATION PROCEEDINGS. 4.2 THE ASSESSEE COULD NOT HAVE ANTICIPATED THE SUDDEN DEM ISE OF SHRI PINGE. ONCE THE PROCEEDINGS WERE INITIATED ASSESSEE WAS FOUND LIABLE TO MAKE PAYMENTS AS AGREEMENT WAS IN ITS NAME. THE FINDING OF THE AO THAT THE ASSESSEE HAD NOT APPEARED BEFORE THE A RBITRATOR IS NOT CORRECT AS ORDER OF THE ARBITRATOR CLEARLY SHOWS THAT SUBM ISSION HAD BEEN MADE ON BEHALF OF THE ASSESSEE. THE ORDER OF THE ARBITRATOR WAS CONFIRMED BY THE HONBLE COURT IN THE RELEVANT ASSESSMENT YEAR AND THEREFORE, ASSESSEE CLAIMED THE DEDUCTION AS BUSINESS LOSS. TH E ASSESSEE HAD ALSO FILED SUITE AGAINST FAMILY MEMBERS BUT SIN CE THE ARBITRATION AWARD HAD BEEN CONFIRMED BY THE HONBLE C OURT THE ASSESSEE HAD MADE THE CLAIM WHICH IN OUR VIEW IS REASONABLE . IT IS A SETTLED LEGAL POSITION THAT ANY LOSS ARISING DURING TH E COURSE OF CARRYING ON OF THE BUSINESS HAS TO BE ALLOWED AS DEDUCTION. SHRI P INGE HAD BEEN GIVEN THE GENERAL POWER OF ATTORNEY FOR CARRYING OUT DAY TO DAY ACTIVITIES OF THE ASSESSEE COMPANY. HE HAD ENTERED INTO TH E ITA NO.7209/M/03 A.Y:00-01 10 AGREEMENT AS A SENIOR OFFICER OF THE ASSESSEE COMPANY AND NOT IN HIS INDIVIDUAL CAPACITY AND AS EXPLAINED BY HIM THE AGREE MENT WAS AN ARRANGEMENT TO HELP THE FRANCHISEE COMPANY. THEREFORE, IN OUR VIEW ANY LOSS ARISING OUT OF ANY SUCH ARRANGEMENT HAS TO BE CO NSIDERED AS A LOSS ARISING DURING THE COURSE OF CARRYING OUT OF THE BUSINESS. EVEN IF THE ARRANGEMENT IS CONSIDERED FRAUDULENT, LOSS WHICH HAD BEEN ACTUALLY INCURRED BY THE ASSESSEE AS PER THE ARBITRATION A WARD HAS TO BE ALLOWED AS A DEDUCTION. THE CLAIM OF THE ASSESSEE IS A LSO SUPPORTED BY THE JUDGMENT OF THE HONBLE HIGH COURT OF BOMBAY I N THE CASE OF SASSON J. DAVID (SUPRA). THE LOSS HAD CRYSTALLIZED IN T HE RELEVANT ASSESSMENT IN WHICH THE ORDER OF THE HONBLE HIGH COURT H AD BEEN RECEIVED. THEREFORE, IN OUR VIEW, THE LOSS HAS BEEN RI GHTLY ALLOWED BY CIT(A). THE ORDER OF CIT(A) IS ACCORDINGLY UPHELD. 5. IN THE RESULT APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 18.11.2011. SD/- SD/- (D. K. AGARWAL) (RAJENDRA SINGH ) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 18.11.2011. JV. ITA NO.7209/M/03 A.Y:00-01 11 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.