NATROYAL INDUSTRIES P.LTD, MUMBAI V. DCIT 13(1)(1), MUMBAI

ITA 7403/MUM/2016

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 9855 (ITAT-MUMBAI)
• Duration Of Justice: 6 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-07-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2013-2014
• Appeal Filed On: 16-12-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: N P SINGH
• Keywords: Business income; Depreciation; Question of law; Bad and doubtful debts; Capital expenditure
• Section: 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, MUMBAI BEFORE SHRI B.R. BASKARAN (AM) & SHRI AMARJIT SINGH (JM) I.T.A. NO. 7403 /MUM/20 16 (ASSESSMENT YEAR 20 13 - 14 ) M/S. NATROYAL INDUSTRIESPVT. LTD. (FORMERLY KNOWN AS VIJAYJYOT SEATS PVT. LTD.) 60CB, SHLO K, 1 ST FLOOR GOVERNMENT INDUSTRIAL ESTATE, CHARKOP KANDIVALI WEST MUMBAI - 400 067. VS. DCIT 13(1)(1) MUMBAI. ( APPELLANT ) ( RESPONDENT ) I.T.A. NO. 78/MUM/2017 (ASSESSMENT YEAR 2013 - 14) DCIT 13(1)(1) MUMBAI. VS. M/S. NATROYAL INDUSTRIESPVT. LTD. (FO RMERLY KNOWN AS VIJAYJYOT SEATS PVT. LTD.) 60CB, SHLOK, 1 ST FLOOR GOVERNMENT INDUSTRIAL ESTATE, CHARKOP KANDIVALI WEST MUMBAI - 400 067. ( APPELLANT ) ( RESPONDENT ) PAN NO . AAACV1235H ASSESSEE BY SHRI J.P. BAIRAGRA DEPARTMENT BY S HRI N.P. SINGH DATE OF HEARING 24 .5 . 201 7 DATE OF PRONOUNCEMENT 12 . 7 . 201 7 O R D E R PER B.R. BASKARAN (AM) : - THESE CROSS APPEALS ARE DIRECTED AGAINST THE ORDER DATED 18.10.2016 PASSED BY THE LEARNED CIT(A) - 21, MUMBAI AND THEY RELATE TO A.Y. 2013 - 14. THE ASSESSEE IS AGGRIEVED BY THE DECISION OF THE LEARNED CIT(A) IN CONFIRMING THE DISALLOWANCE OF CLAIM OF TRADE ADVANCE WRITTEN OFF . THE REVENUE IS AGGRIEVED BY THE DECISION OF THE LEARNED CIT(A) IN GRANTING RELIEF IN RESPECT OF ADDITIONS RELATING TO BAD DEBTS AND BUSINESS INCOME ASSESSED U/S. 28(IV) OF THE ACT. M/S. NATROYAL INDUSTRIES PVT. LTD. 2 BOTHH THE APPEALS WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS COMMON ORDER, FOR THE SAKE OF CONVENIENCE. 2. THE ASSESSEE - COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING PVC COATED LEATHER CLOT H AND ALSO TRADER OF PVC VINYL FLOORING , BOTH RELATING TO SEATING SYSTEM . THE ASSESSEE WAS ALSO ENGAGED IN THE FOLLOWING BUSINESSES: - (A) MANUFACTURING OF SEATING MATERIALS (B) MANUFACTURING OF SEATING SYSTEMS (C) ASSEMBLING OF SEATS, SEATING PRODUCT S. THE BUSINESS UNITS OF THE ASSESSEE WERE LOCATED AT PUNE, DHARWAD AND BASKA. IT FILED ITS RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATION DECLARING TOTAL INCOME OF ` 4.68 CRORES. THE ASSESSING OFFICER HOWEVER COMPLETED THE ASSESSMENT AT ` 67.27 CRORES , BY MAKING VARIOUS ADDITIONS . 3. WE SHALL FIRST TAKE UP THE APPEAL FILED BY THE REVENUE. THE FIRST ISSUE RELATES TO ASSESSMENT OF PROFIT ARISING ON TRANSFER OF A BUSINESS UNDERTAKING AS BUSINESS INCOME OF THE ASSESSEE U/S. 28(IV) OF THE ACT. 4. DU RING THE YEAR UNDER CONSIDERATION, THE ASSESSEE TRANSFERRED ITS BUSINESS ACTIVIT IES RELATING TO ASSEMBLING OF SEATS AND SEATING PRODUCTS LOCATED AT PUNE, DHARWAD AND BASKA TO M/S CVG SEATING (INDIA) PVT. LTD. , VIDE AGREEMENT DATED 9.10.2012 ON SLUMP SALE B ASIS . T HE ASSESSEE COMPUTED THE GAIN ON TRANSFER OF BUSINESS UNDERTAKING AT ` 71.79 CRORES AND OFFERED THE SAME AS LONG TERM CAPITAL GAIN ON SLUMP SALE U/S. 50B OF THE ACT. THE ASSESSEE ACCORDINGLY COMPUTED THE TAX AT 20%. THE ASSESSING OFFICER, HOWEVER, T OOK THE VIEW THAT THE ASSESSEE HAS TRANSFER RED ONLY ITS BUSINESS ES AND NOT UNDERTAKING S , SINCE THE ASSESSEE HAS NOT TRANSFERRED ALL THE ASSETS AND LIABILITIES OF THE BUSINESS UNDERTAKING. ACCORDINGLY, THE ASSESSING OFFICER HELD THAT THE GAIN ARISING ON T RANSFER OF BUSINESS IS ASSESSABLE AS BUSINESS INCOME U/S. 28(IV) OF THE ACT. M/S. NATROYAL INDUSTRIES PVT. LTD. 3 5. THE LEARNED CIT(A) HOWEVER AGREED WITH THE C ONTENTION OF THE ASSESSEE AND ACCORDINGLY DIRECTED THE ASSESSING OFFICER TO ASSESS THE GAIN AS LONG TERM CAPITAL GAIN. AGGRIEVED, THE REVENUE IS CONTENDING THE DECISION OF LD CIT(A) TAKEN ON THIS ISSUE . 6. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. WE NOTICED THAT THE LEARNED CIT(A) HAS GRANTED RELIEF TO THE ASSESSEE ON THIS ISSUE WITH THE FOLLOWING OBSERVATIONS : - 4.3. I HAVE PERUSED THE FACTS OF THE CASE, THE ASSESSMENT ORDER AND SUBMISSION OF THE APPELLANT CAREFULLY. VARIOUS COMPANIES VIZ. ROYAL WELLKNIT P. LTD. (RWPL), VIJAY KNITTING P. LTD. (VKPL), AND ROYAL KNITTING P. LTD. (RKPL) WERE ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF KNITTED AND OTHER FABRICS. VINROYAL PLASTICOATES LTD. (VRPL) WAS ENGAGED IN MANUFACTURING AND SELLING OF VARIOUS KINDS OF POLYMERS. ALL THESE COMPANIES WERE AMALGAMATED WITH THE APPELLANT COMPANY VIJAYJYOT SEATS P. LTD. W.E.F. 1 .04.2012 PURSUANT TO THE SCHEME APPROVED BY THE HON'BLE BOMBAY HIGH COURT VIDE ITS ORDER DATED 27.09.2013. UNDER THE BUSINESS TRANSFER AGREEMENT DATED 9.10.2012, THE BUSINESS OF ASSEMBLY OF SEATS WAS TRANSFERRED TO CVG SEATING (INDIA) P. LTD. (CVG) THE ISS UE THAT ARISES IN THIS APPEAL IS THE TRANSACTION OF TRANSFER OF BUSINESS TO CVG AND WHETHER IT CONSTITUTES 'SLUMP SALE'. 4.4. THE TERM 'SLUMP SALE' IS DEFINED IN SECTION 42 (C) OF THE I.T.ACT, 1961 WHICH IS - AS FOLLOWS: [ (42C) 'SLUMP SALE' MEANS THE TRAN SFER OF ONE OR MORE UNDERTAKINGS AS A RESULT OF THE SALE FOR A LUMP SUM CONSIDERATION WITHOUT VALUES BEING ASSIGNED TO THE INDIVIDUAL ASSETS AND LIABILITIES IN SUCH SALES. EXPLANATION 1. - FOR THE PURPOSES OF THIS CLAUSE, 'UNDERTAKING' SHALL HAVE THE MEAN ING ASSIGNED TO IT IN EXPLANATION 1 TO CLAUSE (1 9AA). EXPLANATION 2. - FOR THE REMOVAL OF DOUBTS, IT IS HEREBY DECLARED THAT THE DETERMINATION OF THE VALUE OF AN ASSET OR LIABILITY FOR THE SOLE PURPOSE OF PAYMENT OF STAMP DUTY, REGISTRATION FEES OR OTHE R SIMILAR TAXES OR FEES SHALL NOT BE REGARDED AS ASSIGNMENT OF VALUES TO INDIVIDUAL ASSETS OR LIABILITIES; ] 4.5. IT IS NOTED THAT IN THE PRESENT CASE LUMP SUM CONSIDERATION FOR SUCH BUSINESS TRANSFER WAS DETERMINED BASED ON AN AGREED MULTIPLE OF APPELL ANT'S EARNINGS BEFORE INTEREST, DEPRECIATION, TAX AND AMORTISATION ('EBIDTA'), OF THE TRANSFERRED BUSINESS UNDERTAKING. THE LUMP SUM M/S. NATROYAL INDUSTRIES PVT. LTD. 4 CONSIDERATION WAS NOT DEPENDENT ON VALUE OF INDIVIDUAL ASSETS AND LIABILITY BEING TRANSFERRED AND THUS THERE WAS NO ITEMIZE D SALE OF ASSETS. 4.6. APPELLANT HAD PLANTS AT THREE LOCATIONS NAMELY PUNE, DHARWAD AND BASKA. AT PUNE AND DHARWAD, APPELLANT WAS CARRYING ON THE ACTIVITIES OF THE ASSEMBLING OF SEATS AND SEATING PRODUCTS. ON THE OTHER HAND, AT BASKA FACILTY, APPELLANT WA S CARRYING ON BOTH THE BUSINESS ACTIVITIES VIZ. 1) MANUFACTURING OF SEATING MATERIALS AND COMPONENTS AND 2) ASSEMBLING OF SEATS AND SEATING PRODUCTS THE APPELLANT TRANSFERRED ONLY THE BUSINESS ACTIVITY OF ASSEMBLING SEATS AND SEATING PRODUCTS UNDER THE B USINESS TRANSFER AGREEMENT ALONG WITH THE ASSETS AND LIABILITIES PERTAINING TO ONLY THIS BUSINESS ACTIVITY. THE BUSINESS OF MANUFACTURING OF SEATING MATERIALS AND COMPONENTS WAS NOT TRANSFERRED. THERE IS NO REQUIREMENT THAT CAN BE READ IN THE PROVISIONS TH AT ALL THE ASSETS AND LIABILITIES OF THE BUSINESS SHOULD BE TRANSFERRED. ALL THE BUSINESSES NEED NOT BE TRANSFERRED. THE DEFINITION OF THE TERM 'UNDERTAKING' INCLUDES PART OF UNDERTAKING AS WELL AS ANY BUSINESS ACTIVITY TAKEN AS A WHOLE. AS FAR AS ASSEMBLY BUSINESS IS CONCERNED, THE PARTS REQUIRED FOR ASSEMBLY ARE PROCURED FROM THIRD PARTIES AND ARE NOT NECESSARILY AND COMPULSORILY SOURCED FROM THE APPELLANT'S MANUFACTURING ACTIVITY, AND IS THUS AN INDEPENDENT BUSINESS ACTIVITY. 4.7. A PERUSAL OF THE BUSIN ESS TRANSFER AGREEMENT DATED 9.10.2012 SHOWS THAT BUSINESS IS TRANSFERRED AS A GOING CONCERN ON A SLUMP SALE BASIS (PARA 2.1 OF THE AGREEMENT). IT IS NOT T RA NSFER OF MERE ASSETS. THERE IS A CLEAR RE FERENCE TO THE BASKA FACILITY, DHARWAD FACILITY AND PUNE F ACILITY. IN THE DEFINITION OF BASKA FACILITY (PARA 1.1.8. OF THE AGREEMENT), IT IS CLEARLY MENTIONED THAT THE REFERENCE IS TO THE PORTION OF THE FACILITIES CARRYING OUT ASSEMBLY OF SEATING PRODUCTS FOR COMMERCIAL VEHICLES AND CINEMA. THE AGREEMENT ALSO REFERS TO KEY EMPLOYEES AND WORKMEN TRANSFERRED. THE CONSIDERATION FOR THE TRANSFER IS RS 75,45,99,538/ - WHICH IS COMPUTED AT 11 TIMES OF THE EBDITA FOR FY 2011 - 12 OF RS 6,85,99,958/ - OF THE BUSINESS ACTIVITY BEING TRANSFERRED (PARA 3.1.2. OF THE AGREEMENT ). THE CORRESPONDING DEBTORS, INVENTORY AND CREDITORS ARE ALSO TRANSFERRED. THE TRANSFERRED ASSETS ARE DEFINED AND LISTED IN PARA 2.2. AND SCHEDULE 17 OF THE AGREEMENT. 4.8. IN THE COURSE OF APPELLATE PROCEEDINGS, THE DETAILS OF GROSS BLOCK, DEPRECIATION IN RESPECT OF TRANSFER OF BUSINESS WAS CALLED FOR. FURTHER DETAILS OF UNIT - WISE TRANSFER OF FIXED ASSETS IN RESPECT OF PUNE, DHARWARD AND BASKA WAS CALLED. IT IS SEEN THAT THE ASSETS VALUE OF RS. ` 121,84,207/ - AT BASKA, RS.36,03,148/ - AT PUNE AND RS.33,14 ,323/ - AT DHARWARD TOTALING TO RS.191,01,714/ - WERE TRANSFERRED. DEPRECIATION OF RS 79,62,829 WAS CLAIMED AND NET WDV WAS ` 111,38,885/ - AS PER IT - M/S. NATROYAL INDUSTRIES PVT. LTD. 5 DEPRECIATION. AS PER BOOKS, THE FIGURES WERE GROSS VALUE RS 17289203/ - , DEPRECIATION ` 45,69,299/ - AND WDV RS 127,19,904. FURTHER, THE DETAILS OF ITEM - WISE ASSETS TRANSFERRED WAS ALSO FILED. THE ASSETS IN RESPECT OF MANUFACTURING ACTIVITIES AT BASKA UNIT WERE NOT TRANSFERRED. A PORTION OF PREMISES AT BASKA WERE LEASED TO THE TRANSFEREE FOR CARRYING OUT BUSINESS O F ASSEMBLING. AS PER SCHEDULE '17' OF THE BUSINESS TRANSFER AGREEMENT, THE PREMISES COMPRISES OF PART OF ONE BUILDING/ SHADES WITH AREA OF 16805 SQ. FT. WAS LEASED TO M/S. CVG SEATING (INDIA) PVT. LTD. ON A RENT FREE BASIS TO ENABLE THE TRANSFER FOR CARRYI NG OUT THE TRANSFERRED FROM THIS PREMISES. THE VALUATION OF ONGOING BUSINESS OF THE ASSEMBLY WAS COMPUTED AT EBIDTA. 4.9. THE SECTION 2(42C) DOES NOT REQUIRED THAT ALL THE BUSINESS RUN BY THE TRANSFEROR SHOULD BE TRANSFERRED. IN THE PRESENT CASE NO MANUFA CTURING ACTIVITY WAS CARRIED OUT AT PUNE AND DHARWAD UNIT. FURTHER, THE ACTIVITY OF THE ASSEMBLY IS DISTINCT FROM MANUFACTURING ACTIVITY. THE BUSINESS OF MANUFACTURING OF SEATING MATERIAL AND COMPONENTS CONTINUES AND WAS NOT TRANSFERRED. THE SALE IS TO AN INDEPENDENT COMPANY PART OF A MULTINATIONAL GROUP. THUS THE TRANSFER OF BUSINESS OF ASSEMBLY OF SEATING PRODUCTS IS WITHIN THE DEFINITION OF SLUMP SALE. THE SAME IS TAXABLE U/S 50B. 4.10. THE ASSESSING OFFICER HAS ALSO TREATED THE TRANSACTION AS FALLING W ITHIN THE PURVIEW OF SECTION 28(IV) OF THE ACT. THE APPELLANT HAS RIGHTLY POINTED OUT THAT IN THE PRESENT CASE THE CONSIDERATION IS RECEIVED IN TERMS OF MONEY WHEREAS SECTION 28(IV) REFERS TO THE VALUE OF ANY BENEFIT OR PERQUISITE WHETHER CONVERTIBLE INTO MONEY OR NOT. COURTS HAVE HELD THAT WHERE THE CONSIDERATION IS MONETARY, SECTION 28(IV) WILL NOT APPLY. EVEN OTHERWISE THE APPELLANT IS NOT IN THE BUSINESS OF SALE OF BUSINESS UNDERTAKINGS, AND AS SUCH THE CONSIDERATION IS NOT LIABLE TO BE TAXED AS BUSINES S INCOME. THE ASSESSING OFFICER HAS NOT RECOMPUTED THE INCOME ON THIS ACCOUNT BUT HAS MERELY TREATED IT AS BUSINESS INCOME INSTEAD OF LONG TERM CAPITAL GAIN AS PER SECTION 50B CLAIMED BY APPELLANT THEREBY TAXING THE INCOME AT A HIGHER RATE. 4.11. IN THE C ASE OF PREMIER AUTOMOBILES LTD. VS. INCOME TAX OFFICER & ANR. REPORTED IN (2003) 182 CTR 0202 (2003) 264 ITR 0193 (BOM): THE ASSESS E E HAD PLANTS TO MANUFACTURE CARS AT KALYAN, KURLA AND PUNE. THE BUSINESS OF MANUFACTURE OF PREMIER 118NE AND PLANT AT KALYAN AS A GOING CONCERN AND BUSINESS WAS TRANSFERRED. THE MANUFACTURING BUSINESS OF PREMIER PADMINI WAS NOT TRANSFERRED. AN ARGUMENT WAS TAKEN THA T THE ENTIRE BUSINESS HAD NOT BE EN TRANSFERRED. IT WAS NOT A SLUMP SALE. THE ENTIRE LAND AT KALYAN WAS NOT SOLD/ T RANSFERRED. SOME MACHINERY FROM PUNE AND KURLA WERE ALSO TO BE SHIFTED TO KALYAN AND WERE TO BE PART OF BUSINESS SOLD. THE HON'BLE HIGH COURT HELD THAT THE BASIC TEST WHICH ONE MUST APPLY TO ASCERTAIN WHETHER THERE EXISTED A SLUMP SALE IS CONTINUITY OF BUS INESS. IT WAS NOTED THAT IN THE ENTIRE JOINT VENTURE M/S. NATROYAL INDUSTRIES PVT. LTD. 6 AGREEMENT, THERE IS NO EVIDENCE OF SALE OF ITEMIZED ASSETS. IT WAS HELD THAT THE GAIN WAS ASSESSABLE AS CAPITAL GAINS. 4.12. IN THE CASE OF COMMISSIONER OF INCOME TAX VS. NARKESHARI PRAKASHAN LTD. REPOR TED IN (1992) 196 ITR 0438 (MUM), THE ASSESS E E WAS A PUBLISHING HOUSE. IT SOLD TWO OF ITS BRANCHES ALONG WITH ITS ASSETS AND LIABILITIES. THE TRIBUNAL HAD RELIED ON THE APEX COURT DECISION AS FOLLOWS. RECENTLY IN THE CASE OF MUGNEERAM BANGUR AND CO. (LAN D DEPARTMENT) (1965) 56 ITR (SH. N) 13, THE SUPRE M E COURT CONSIDERED THE QUESTION ABOUT THE TAXABILITY OF THE SURPLUS AMOUNT ARISING ON THE SALE OF A BUSINESS AS A GOING CONCERN. THE DECISION OF THE SUPREME COURT WAS THAT WHERE THE SALE WAS OF THE CONCERN AS A WHOLE AND A SLUMP PRICE WAS PAID, NO PORTION OF THIS PRICE WAS ATTRIBUTABLE TO THE STOCK - IN - TRADE AND, THEREFORE, IT WAS NOT POSSIBLE TO HOLD THAT THERE WAS A PROFIT OTHER THAN WHAT RESULTED FROM THE APPRECIATION OF CAPITAL. IT FOLLOWS, THEREFORE, THA T WHERE A BUSINESS IS SOLD AS A GOING CONCERN, THE EXCESS MAY NOT BE A BUSINESS PROFIT, BUT WILL BE A CAPITAL GAIN CHARGEABLE TO TAX. THIS VIEW ALSO FINDS SUPPORT FROM THE CASE OF RAI BAHADUR LACHMAN DAS MOHANLAL AND SONS VS. CIT (1964) 54 ITR 315 (ALL). ' THE HON'BLE HIGH COURT AFFIRMED THAT THIS WAS SALE AS A GOING CONCERN FOR SLUMP PRICE. 4.13. IN THE FACT MATRIX DISCUSSED ABOVE, I DO NOT FIND MERIT IN THE ACTION OF THE ASSESSING OFFICER IN TREATING THE TRANSFER OF THE BUSINESS ALONG WITH THE ASSETS AS GIVING RISE TO BUSINESS INCOME INSTEAD OF CAPITAL GAINS ARISING FROM SLUMP SALE. THE GROUND OF APPEAL NO 1 IS ALLOWED. 7. WE NOTICED THAT THE LEARNED CIT(A) HAS ANALYSED PROVISIONS OF SECTION 2(42C) OF THE ACT, WHICH DEFINES SUMP SALE BY FOLLOWING THE D ECISION RENDERED BY HONBLE JURISDICTIONAL BOMBAY HIGH COURT IN THE CASE OF PREMIER AUTOMOBILES LTD (SUPRA). ACCORDINGLY HE HAS GIVEN CATEGORICAL FINDING THAT THE SALE OF THE ASSESSEES UNIT S FALLS UNDER THE CATEGORY OF SLUMP AS DEFINED U/S. 2(42C) OF THE ACT. ACCORDINGLY HE HAS HELD THAT THE ASSESSEE HAS RIGHTLY COMPUTED THE CAPITAL GAIN U/S 50B OF THE ACT. THE LD CIT(A) HAS ALSO GIVEN SPECIFIC FINDING THAT THE IMPUGNED TRANSACTION CANNOT BE BROUGHT UNDER THE AMBIT OF SEC. 28(IV) OF THE ACT. SINCE THE LEARNED CIT(A) HAS TAKEN A CONSCIOUS VIEW ON THIS MATTER BY FOLLOWING THE BINDING DECISION RENDERED BY HONBLE JURISDICTIONAL BOMBAY HIGH COURT AND SINCE NO MATERIAL WAS PLACED BEFORE US BY THE REVENUE TO CONTRADICT THE FINDINGS GIVEN BY THE LEARNED CIT(A) , WE M/S. NATROYAL INDUSTRIES PVT. LTD. 7 UPHOLD THE ORDER PASSED BY THE LEARNED CIT(A) ON THIS ISSUE. 8. NEXT ISSUE CONTESTED BY THE REVENUE RELATES TO DISALLOWANCE OF CLAIM OF BAD DEBTS. THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS WRITTEN OFF A SUM OF ` 34.40 LAKHS AS BAD DEBTS AN D CLAIM ED THE SAME AS DEDUCTION. THE ASSESSING OFFICER FURTHER NOTICED THAT THE ABOVE SAID CLAIM INCLUDED BAD DEBTS CLAIM OF ` 28.68 CRORES WRITTEN OFF BY THE ASSESSEE RELATING TO THE AMOUNT RECEIVABLE FROM A SISTER CONCERN NAMED ROYAL CUSHION VINYL PRODUC TS LTD. WE HAVE EARLIER NOTICED THAT THE ASSESSEE HAD DECLARED CAPITAL GAIN OF ` 71.79 CRORES ARISING ON TRANSFER OF ITS BUSINESS UNDERTAKING S. T HE ASSESSING OFFICER TOOK THE VIEW THAT BAD DEBTS SO WRITTEN OFF BY THE ASSESSEE IS COLOURABLE DEVICE ADOPTED BY THE ASSESSEE TO REDUCE THE TAX INCIDENCE ARISING ON TRANSFER OF ITS UNDERTAKINGS . ACCORDINGLY, BY PLACING RELIANCE ON THE DECISION RENDERED BY HON'BLE BOMBAY HIGH COURT IN THE CASE OF SOVEREIGN SECURITIES (P) LTD., THE ASSESSING OFFICER DISALLOWED THE CLAIM OF BAD DEBTS TO THE EXTENT OF ` 28.68 CRORES RELATING TO ROYAL CUSHION VINYL PRODUCTS LTD, REFERRED ABOVE. 9. THE LEARNED CIT(A) , HOWEVER, ALLOWED THE CLAIM AND HENCE THE REVENUE IS CHALLENGING THE SAID DECISION OF THE LEARNED CIT(A ). 10. WE HAVE HEARD THE PARTIES AND PERUSED THE RECORD. WE NOTICED THAT THE LEARNED CIT(A) HAS DELETED THE ADDIT I ON WITH THE FOLLOWING OBSERVATIONS : - 5.3 I HAVE CONSIDERED THE SUBMISSIONS OF THE APPELLANT , CAREFULLY . IN THE COURSE OF THE APPELLATE PROCEEDIN GS THE DETAILS OF THE SALE MADE AND WRITTEN OFF WAS CALLED . ALSO COPY OF LEDGER ACCOUNT IN RESPECT OF THE PARTIES IN WHICH BAD DEBTS WERE WRITTEN OFF WAS CALLED AND HAS BEEN PERUSED. THE DETAILS OF SALES TO RCVPL IS TABULATED BELOW: - M/S. NATROYAL INDUSTRIES PVT. LTD. 8 THUS, THE BAD DEB TS WRITTEN OFF IS SEEN TO BE FOR A PERIOD FY 97 - 98 TILL 2012 - 13 AND NOT ONLY FOR FY 2012 - 13. THESE SALES HAVE BEEN OFFERED AS INCOME BY THE APPELLANT COMPANY AND ITS AMALGAMATING COMPANIES IN RESPECTIVE YEARS. THE SALES WERE MADE BY THE VARIOUS COMPANIES WHICH HAVE AMALGAMATED WITH THE APPELLANT COMPANY AS WELL AS THE APPELLANT COMPANY. IT IS SEEN THAT THERE IS A CLEAR WRITE OFF OF RS.23,40,75,685/ - IN THE CASE OF OUTSTANDING OF ERSTWHILE VINROYAL PLASTICOATES P LTD., RS 5,33,76,359/ - IN THE CASE OF VIJAYJ YOT SEATS P. LTD. AND BALANCE IN THE CASE OF OTHER ERSTWHILE COMPANIES THAT HAVE AMALGAMATED (RWKPL, RKPL). IT IS FURTHER SEEN FROM THE LEDGER ACCOUNT COPY THAT THE AMOUNT HAS BEEN WRITTEN OFF AGAINST THE SPECIFIC DEBTOR RCVPL IN ITS ACCOUNTS. 5.4. THE REQ UIREMENT OF LAW POST AMENDMENT OF 1989 IN RESPECT OF CLAIM OF BAD DEBTS WRITE - OFF HAS BEEN LAID DOWN BY THE APEX COURT IN THE CASE OF TRF LTD. VS CIT REPORTED IN (2010) 230 CTR 0014 : (2010) 323 ITR 0397 : IT WAS NOTED THAT POST 1.04.1989, THE REQUIREMENT TO SH OW THAT THE DEBT HAS BECOME BAD HAS BEEN OMITTED. ALL THAT IS REQUIRED IS TO SHOW THAT THE DEBT REPRESENTS INCOME OFFERED TO TAX EARLIER AND THAT THE DEBTS HAVE M/S. NATROYAL INDUSTRIES PVT. LTD. 9 ACTUALLY BEEN WRITTEN OFF AS IRRECOVERABLE IN THE DEBTORS' ACCOUNTS. THIS HAS ALSO BEEN CL ARIFIED IN THE CIRCULAR NO. 12/2016 DATED 30.05.2016 TO AVOID UNPRODUCTIVE LITIGATION AND EXPLAINING THE INTENTION BEHIND THE AMENDMENT OF LAW W.E.F. 1.04.1989. THE SAID CIRCULAR IS REPRODUCED BELOW. CIRCULAR NO. 12/2016, DATED: 30 - 05 - 2016 30/05/2016 ADM ISSIBILITY OF CLAIM OF DEDUCTION OF BAD DEBT UNDER SECTION 36(1)(VII) READ WITH SECTION 36(2) OF THE INCOME - TAX ACT, 1961 - REG. PROPOSALS HAVE BEEN RECEIVED BY THE CENTRAL BOARD OF DIRECT TAXES REGARDING FILING OF APPEALS/PURSUING LITIGATION ON THE ISSUE OF ALLOWABILITY OF BAD DEBT THAT ARE WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE. THE DISPUTE RELATES TO CASES INVOLVING FAILURE ON THE PART OF ASSESSEE TO ESTABLISH THAT THE DEBT IS IRRECOVERABLE. 2. DIRECT TAX LAWS (AMENDMENT) ACT, 1987 A MENDED THE PROVISIONS OF SECTIONS 36(1)(VII) AND 36(2) OF THE INCOME TAX ACT 1961, (HEREAFTER REFERRED TO AS THE ACT) TO RATIONALIZE THE PROVISIONS REGARDING ALLOWABILITY OF BAD DEBT WITH EFFECT FROM THE 1ST APRIL, 1989. 3. THE LEGISLATIVE INTENTION BEHIND THE AMENDMENT WAS TO ELIMINATE LITIGATION ON THE ISSUE OF THE ALLOWABILITY OF THE BAD DEBT BY DOING AWAY WITH THE REQUIREMENT FOR THE ASSESSEE TO ESTABLISH THAT THE DEBT, HAS IN FACT, BECOME IRRECOVERABLE. HOWEVER, DESPITE THE AMENDMENT, DISPUTES ON THE I SSUE OF ALLOWABILITY CONTINUE, MOSTLY FOR THE REASON THAT THE DEBT HAS NOT BEEN E S TABLISHED TO BE IRRECOVERABLE. THE HON'BLE SUPREME COURT IN THE CASE OF TRF LTD. IN CA NOS. 5292 TO 5294 OF 2003 VIDE JUDGMENT DATED 9.2.2010W HAS STATED THAT THE POSITION OF LAW IS WELL SETTLED. 'AFTER 1.4.1989, FOR ALLOWING DEDUCTION FOR THE AMOUNT OF ANY BAD DEBT OR PART THEREOF UNDER SECTION 36(1)(VII) OF THE ACT, IT IS NOT NECESSARY FOR ASSESSEE TO ESTABLISH THAT THE DEBT, IN FACT HAS BECOME IRRECOVERABLE; IT IS ENOUGH IF BAD DEBT IS WRITTEN OFF AS IRRECOVERABLE IN THE BOOKS OF ACCOUNTS OF ASSESSEE. 4. IN VIEW OF THE ABOVE, CLAIM FOR ANY DEBT OR PART THEREOF IN ANY PREVIOUS YEAR, SHALL BE ADMISSIBLE UNDER SECTION 36(1)(VII) OF THE ACT, IF IT IS WRITTEN OFF AS IRRECOVERABL E IN THE BOOKS OF ACCOUNTS OF THE ASSESSEE FOR THAT PREVIOUS YEAR AND IT FULFILLS THE CONDITIONS STIPULATED IN SUB SECTION (2) OF SUB - SECTION 36(2) OF THE ACT. M/S. NATROYAL INDUSTRIES PVT. LTD. 10 5. ACCORDINGLY, NO APPEALS MAY HENCEFORTH BE FILED ON THIS GROUND AND APPEALS ALREADY FILED, IF ANY, ON THIS ISSUE BEFORE VARIOUS COURTS/TRIBUNALS MAY BE WITHDRAWN/NOT PRESSED UPON. 6. THIS MAY BE BROUGHT TO THE NOTICE OF ALL CONCERNED. 5.5. THE SUB - SECTION (2) OF SECTION 36 READS AS FOLLOWS: (2) IN MAKING ANY DEDUCTION FOR A BAD D EBT OR PART T HEREOF, THE FOLLOWING PROVISIONS SHALL APPLY - (I) NO SUCH DEDUCTION SHALL BE ALLOWED UNLESS SUCH DEBT OR PART THEREOF HAS BEEN TAKEN INTO ACCOUNT IN COMPUTING THE INCOME OF THE ASSESSEE OF THE PREVIOUS YEAR IN WHICH THE AMOUNT OF SUCH DEBT OR PART THEREOF IS WRITTEN OFF OR OF AN EARLIER PREVIOUS YEAR, OR REPRESENTS MONEY LENT IN THE ORDINARY COURSE OF THE BUSINESS OF BARKING OR MONEY - LENDING WHICH IS CARRIED ON BY THE ASSESSEE;] (II) IF THE - AMOUNT ULTIMATELY RECOVERED ON ANY SUCH DEBT OR PART OF DEBT IS LESS THAN T HE DIFFERENCE BETWEEN THE DEBT OR PART AND THE AMOUNT SO DEDUCTED, THE DEFICIENCY SHALL BE DEDUCTIBLE IN THE PREVIOUS YEAR IN WHICH THE ULTIMATE RECOVERY IS MADE; (III) ANY SUCH DEBT OR PA R T OF DEBT MAY BE DEDUCTED IF IT HAS ALREADY BEEN WRITTEN OFF AS IRRECOVER ABLE IN THE ACCOUNTS OF AN EARLIER PREVIOUS YEAR [(BEING A PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR COMMENCING ON THE 1ST . DAY OF APRIL, 1988, OR ANY EARLIER ASSESSMENT YEAR)] BUT THE [ASSESSING OFFICER] HAD NOT ALLOWED IT TO BE DEDUCTED ON THE GROUND THAT IT HAD NOT BEEN - ESTABLISHED TO HAVE BECOME A BAD DEBT IN THAT YEAR; (IV) WHERE ANY SUCH DEBT OR PART OF DEBT IS WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE PREVIOUS YEAR [(BEING A P:EVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR COMMENCING ON THE 1ST DAY OF APRIL, 1988, OR ANY EARLIER ASSESSMENT YEAR)] AND THE [ASSESSING OFFICER] IS SATISFIED THAT SUCH DEBT OR PART BECAME A BAD DEBT IN ANY EARLIER PREVIOUS YEAR NOT FALLING BEYOND A PERIOD OF FOUR PREVIOUS YARS IMMEDIATELY PRECEDING THE PREVIOUS YEAR IN WHICH SUCH DEBT OR PART IS WRITTEN OFF, PROVISIONS OF SUB - SECTION (6) OF SECTION 155 SHALL APPLY; (V) WHERE SUCH DEBT OR PART OF DEBT RELATES TO ADVANCES MADE BY AN ASSESSEE TO WHICH CLAUSE (VIIA) OF SUB - SECTION (1) APPLIES, NO SUCH DEDUCTION SHALL BE ALL OWED UNLESS THE ASSESSEE HAS DEBITED THE AMOUNT OF SUCH DEBT OR PART OF DEBT IN THAT PREVIOUS YEAR TO THE M/S. NATROYAL INDUSTRIES PVT. LTD. 11 PROVISION FOR BAD AND DOUBTFUL DEBTS ACCOUNT MADE UNDER THAT CLAUSE.] (VI) IN THE PRESENT CASE SUCH AMOUNTS OF DEBT WRITTEN OFF HAVE BEEN TAKEN INTO ACCOU NT AS INCOME AND ARE COMPLYING WITH THE REQUIREMENTS OF SECTION 36(2). 5.6. IT IS FURTHER SEEN THAT 'RCVPL' HAD MADE AN APPLICATION U/S. 15(1) OF THE SICK INDUSTRIAL COMPANIES (SPECIAL PROVISIONS) ACT, 1985. THE PROCEEDINGS WERE UNDER CONSIDERATION BEFORE THE BOARD FOR INDUSTRIAL AND FINANCIAL RECONSTRUCTION. THUS, EVEN OTHERWISE, THERE WAS A CLEAR BASIS FOR WRITING OFF OF THE AMOUNT OF SALE MADE TO 'RCVP L '. IT IS NOT UNUSUAL FOR COMPANIES TO CLEAN UP ITS BOOKS OF ACCOUNTS IN THE YEAR IN WHICH PROFITS ARE G OOD. HOWEVER, THIS BY ITSELF CANNOT BE A BASIS TO DISALLOW CLAIM FOR BAD DEBTS WRITTEN OFF AS LONG AS IT MEETS THE REQUIREMENTS OF LAW. 5.7. THE ASSESSING OFFICER HAS POINTED OUT THAT 'RCVPL' DID NOT SHOW THE REMISSION OF CREDIT/LIABILITY TO THE APPELLANT COMPANY IN ITS BOOKS FOR AY 2013 - 14. THE LD. A.R. HAS MENTIONED THAT THIS WAS CONSIDERED AS INCOME IN SUBSEQUENT YEAR IN THE CASE OF 'RCVPL'. THE ASSESSING OFFICER IS LIBERTY TO HOLD THAT THERE WAS REMISSION OF LIABILITY IN AY 2013 - 14 IN THE CASE OF RCVPL AND TO BRING THE AMOUNT OF REMISSION TO TAX U/S.41(1) IN AY 2013 - 14. HOWEVER, THIS DOES NOT IN ANY WAY DETRACT FROM THE CLAIM MADE BY THE APPELLANT AS BAD DEBTS WRITE OFF IN AY 2013 - 14. 5.8. IN LIGHT OF THE FACTS AND DISCUSSIONS ABOVE, THE DISALLOWANCE OF BAD DEBTS WRITE - OFF MADE BY THE ASSESSING OFFICER IS DELETED AND GROUND OF APPEAL NO 2 IS ALLOWED. 11. WE HAVE HEARD RIVAL CONTENTIONS ON THIS ISSUE AND PERUSED THE RECORD. THE LD D.R SUBMITTED THAT THE ORDER PASSED BY LD CIT(A) ON THIS ISSUE IS A LEGALISTIC VIEW TAKEN WITHOUT APPRECIATING SURROUNDING CIRCUMSTANCES. HE SUBMITTED THAT THE CASE OF THE ASSESSING OFFICER IS THAT THE ASSESSEE HAS ADOPTED A COLOURABLE DEVICE TO REDUCE ITS TAX LIABILITY ARISING ON SALE OF ITS BUSINESS UNDERTAKINGS. ON THE CONTRARY, THE LD A.R SUBMITTED THAT THE AO HAS ENTERTAINED THE VIEW THAT THE WRITE OFF WAS A COLOURABLE DEVICE ONLY ON THE BASIS OF SURMISES AND CONJECTURES. HE SUBMITTED THE LD CIT(A) HAS APPRECIATED THE FACT THAT RCVPL HAS FILED APPLICATION UNDER SICK INDUSTRIAL COMPANIES (SPECIAL PROVISIONS) ACT, SINCE ITS NET WORTH HAS ERODED. HENCE THE ASSESSEE HAS TAKEN A COMMERCIAL DECISION TO WRITE OFF THE AMOUNTS DUE FROM M/S M/S. NATROYAL INDUSTRIES PVT. LTD. 12 RCVPL. HE SUBMITTED THAT THE LD CIT(A) HAS TAKEN HIS DECISION BY CONSIDERING THE DECI SION RENDERED BY HONBLE SUPREME COURT IN THE CASE OF TRF LTD (SUPRA) AND THE ALSO THE CIRCULAR ISSUED BY CBDT (REFERRED SUPRA). HE SUBMITTED THAT THE ASSESSEE HAS SATISFIED THE CONDITIONS PRESCRIBED U/S 36(1)(VII) R.W.S 36(2) OF THE ACT IN RESPECT OF THE BAD DEBT CLAIM. HE SUBMITTED THAT THE DECISION RENDERED BY HONBLE BOMBAY HIGH COURT IN THE CASE OF SOVEREIGN SECURITIES (P) LTD (SUPRA) IS DISTINGUISHABLE ON FACTS. HE SUBMITTED THAT THE ASSESSEE BEFORE HONBLE BOMBAY HIGH COURT HAD BUSINESS DEALING WIT H ANOTHER SISTER CONCERN NAMED M/S SOVEREIGN NARIMAN BROKING (P) LTD. ANOTHER SISTER CONCERN NAMED M/S SOVER E IGN NARIMAN FINVEST LTD WAS ACTING AS ASSESSEE COMPANYS SUB - BROKER . THE AMOUNT WAS RECEIVABLE BY THE ASSESSEE FROM THE SISTER CONCERN WAS CLAIME D AS NOT RECEIVABLE AND ACCORDINGLY THE OUTSTANDING BALANCE WAS CLAIMED AS BAD DEBT. T HE SE COMPANIES HAD COMMON DIRECTORS AND SHARE HOLDERS. ONE OF THE SHAREHOLD ERS OF THE ASSESSEE COMPANY NAMED MR. HARSHAD P CHOKSI WAS HOLDING SUBSTANTIAL SHARES IN M/S SOVERIGN NARIMAN FINVEST P LTD AND ACCORDINGLY IT WAS NOTICED THAT HE WAS IN A POSITION TO CONTROL THE WORKINGS OF THAT COMPANY. BASED ON THE PECULIAR FACTS OF THE CASE, THE AO, CIT(A) AND TRIBUNAL FOUND THAT THE DEALINGS WERE SO ARRANGED BETWEEN SISTER CO NCERN S AND THE BAD DEBTS WAS CLAIMED. HENCE THE HONBLE BOMBAY HIGH COURT HELD THAT NO SUBSTANTIAL QUESTION OF LAW ARISES FOR ITS DETERMINATION AND ACCORDINGLY DID NOT ADMIT THE APPEAL. HE SUBMITTED THAT, IN THE INSTANT CASE, THE ASSESSEE HAS BEEN DOING BUSINESS WITH M/S RCVPL FOR THE PAST SEVERAL YEARS. FURTHER M/S RCVPL WAS A PUBLIC HELD LISTED COMPANY. ITS FINANCIAL POSITION BECAME WEAK AND HENCE IT HAS FILED PETITION FOR DECLARING IT AS A SICK INDUSTRIAL COMPANY. HENCE THE ASSESSEE CHOSE TO WRITE O FF THE DEBTS. ACCORDINGLY THE LD A.R SUBMITTED THAT THE INFERENCE HAS BEEN DRAWN BY THE AO ONLY ON SURMISES. HE SUBMITTED THAT IT WAS NOT A COLOURABLE DEVICE AND ACCORDINGLY CONTENDED THAT THE LD CIT(A) HAS RIGHTLY ALLOWED THE CLAIM. M/S. NATROYAL INDUSTRIES PVT. LTD. 13 12. HAVING HEAR D RIVAL CONTENTIONS, WE DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER PASSED BY LD CIT(A) ON THIS ISSUE. THE ASSESSING OFFICER HAS DISALLOWED THE CLAIM OF BAD DEBT BY HOLDING THE SAME AS COLOURABLE DEVICE AND IN THIS REGARD, HE HAS PLACED RELIANCE ON THE DECISION RENDERED BY HONBLE BOMBAY HIGH COURT IN THE CASE OF SOVEREIGN SECURITIES (P) LTD (SUPRA). THE LD A.R HAS RIGHTLY POINTED OUT THAT THE FACTS AVAILABLE IN THE ABOVE SAID CASE ARE DISTINGUISHABLE AND WE TEND TO AGREE WITH THIS CONTENTIONS. HEN CE WE ARE OF THE VIEW THAT THE AO WAS NOT CORRECT IN PLACING HIS RELIANCE ON THE DECISION RENDERED IN THE CASE OF SOVERIEGN SECURITIES P LTD. THE LD CIT(A) HAS ALSO TAKEN NOTE OF THE FACT THAT M/S RCVPL HAS BECOME A SICK COMPANY AND THE SAID FACTS ALSO TU RNS AGAINST THE VIEW TAKEN BY THE AO. WE NOTICE THAT THE LD CIT(A) HAS CONSIDERED THE PROVISIONS OF SEC. 36(1)(VII), THE CIRCULAR ISSUED BY CBDT AND THE DECISION RENDERED BY HONBLE SUPREME COURT IN THE CASE OF TRF LTD (SUPRA) AND ACCORDINGLY TAKEN THE VI EW THAT THE BAD DEBTS CLAIMED BY THE ASSESSEE IS ALLOWABLE. ACCORDINGLY WE DO NOT FIND ANY REASON TO INTE R FERE WITH HIS ORDER PASSED ON THIS ISSUE. 13. WE SHALL NOW TAKE UP THE APPEAL FILED BY THE ASSESSEE, WHEREIN THE ASSESSEE IS CONTESTING THE DISALLOW ANCE OF EXPENDITURE RELATING TO TRADE ADVANCE WRITTEN OFF BY IT. THE FACTS RELATING THERETO ARE STATED IN BRIEF. THE ASSESSEE ENTERED INTO AN AGREEMENT ON 16.07.2012 TITLED AS MANUFACTURING SUPPORT AND SUPPLY AGREEMENT WITH ANOTHER COMPANY NAMED M/S RO YAL CUSHION VINYL PRODUCTS LTD (RCVPL). AS PER THE AGREEMENT, THE ASSESSEE WOULD PURCHASE PRODUCTS MANUFACTURED BY RCVPL. IN ORDER TO ENSURE THAT THE ASSESSEE IS GIVEN PREFERENTIAL TREATMENT IN MANUFACTURING THE PRODUCTS ACCORDING TO THE REQUIREMENT OF A SSESSEE, IT WAS PROVIDED THAT THE ASSESSEE SHALL GIVE TRADE ADVANCE OF RS.40.00 CRORES TO RCVPL. THE SAID TRADE ADVANCE WAS AGREED TO BE ADJUSTED AGAINST THE BILLS RAISED BY RCVPL UPON THE ASSESSEE AGAINST SUPPLY OF GOODS. DURING THE YEAR END, THE ASSES SEE WROTE OFF THE OUTSTANDING TRADE ADVANCE OF RS.33.90 CRORES AS IRRECOVERABLE AND CLAIMED THE SAME AS DEDUCTION. M/S. NATROYAL INDUSTRIES PVT. LTD. 14 14. THE ASSESSEE STATED IN THE NOTE ON ACCOUNTS ATTACHED TO ITS FINANCIAL STATEMENT THAT DUE TO OCCURRENCE OF UNFAVOURABLE DEVELOPMENTS AND UNFORESEEN EVENTS WHICH TOOK PLACE SUBSEQUENT TO EXECUTION OF AGREEMENT, RCVPL FAILED TO HONOUR ITS COMMITMENTS UNDER THE AGREEMENT. IT WAS FURTHER STATED THAT THE ASSESSEE COULD NOT SUCCEED IN ITS CONSTANT ENDEAVOR TO ENFORCE THE TERMS OF THE AGREEMENT. IT WAS FURTHER STATED THAT UNDER THE GIVEN CIRCUMSTANCES AND CONSIDERING THE SICK COMPANY STATUS OF RCVPL, THE MANAGEMENT TOOK THE VIEW THAT THE OUTSTANDING DEPOSIT AMOUNT OF RS.33.90 CRORES IS NOT RECOVERABLE AND HENCE HAS BEEN WRITTEN OFF DURING THE YEA R. 15. THE AO NOTICED THAT THE ASSESSEE HAS WRITTEN OFF THE ADVANCE WITHIN 10 MONTHS OF GIVING THE SAME. THE AO ALSO NOTICED THAT M/S RCVPL WAS ONE OF THE GROUP COMPANIES AS STATED IN THE ANNUAL REPORT. THE AO, ACCORDINGLY, TOOK THE VIEW THAT THE ASSESSEE HAS WRITTEN OFF THE TRADE ADVANCE AND CLAIMED THE SAME AS DEDUCTION ONLY TO REDUCE THE TAX LIABILITY ARISING ON SALE OF ITS UNDERTAKINGS. HE ALSO TOOK THE VIEW THAT THE SAID CLAIM IS NOT ALLOWABLE AS DEDUCTION UNDER THE PROVISIONS OF THE ACT . THE AO HAS ALSO OBSERVED THAT THE ASSESSEE HAD ONLY SALE TRANSACTION WITH RCVPL AND NOT PURCHASE, WHICH WAS FACTUALLY NOT CORRECT. 16. THE ASSESSEE SUBMITTED THAT IT GAVE THE ADVANCE TO ENS URE UN - INTERUPTED SUPPLY OF PRODUCTS FROM RCVPL AS PER THE SPECIFICATION S AND REQUIREMENTS OF THE ASSESSEE COMPANY. THE ADVANCE WAS AGREED TO BE ADJUSTED AGAINST THE SUPPLY OF PRODUCTS. THE ASSESSEE SUBMITTED THAT IT WAS EXPLORING ALTERNATIVE BUSINESS OPPORTUNITY OF DEALING IN PVC FLOOR COVERING AND THE SAME WAS READILY AVAILABLE WITH RCVPL. SUBSEQUENTLY IT WAS REALISED THAT RCVPL WAS NOT IN A POSITION TO REPAY THE ADVANCE AND IT WAS ALSO NOT READY TO ADJUST THE SAME AGAINST THE SUPPLY BILLS. HOWEVER, IT WAS IMPERATIVE FOR THE ASSESSEE TO CONTINUE THE ALTERNATI VE BUSINESS FOR THE PURPOSE OF ITS SURVIVAL. M/S RCVPL HAS ALSO FILED APPPLICATION BEFORE BIFR DUE TO ITS WEAK FINANCIAL POSITION. ACCORDINGLY, IN ORDER TO ENABLE RCVPL TO CONTINUE ITS MANUFACTURING ACTIVITY SO THAT ASSESSEE WOULD BE GETTING SUPPLIES CON TINUOUSLY IT WAS DECIDED TO WRITE M/S. NATROYAL INDUSTRIES PVT. LTD. 15 OF THE TRADE ADVANCE. THE ASSESSEE ALSO SUBMITTED THAT IT HAS RECEIVED SUPPLIES CONTINUOUSLY IN THE SUBSEQUENT YEARS ALSO. IT WAS ACCORDINGLY SUBMITTED THAT THE ASSESSEE HAS TAKEN THE DECISION TO WRITE OFF THE TRADE ADVA NCE ON COMMERCIAL CONSIDERATIONS AND IT WAS A COMMERCIAL DECISION TAKEN BY THE ASSESSEE IN THE COURSE OF CARRYING ON ITS BUSINESS. ACCORDINGLY IT WAS SUBMITTED THAT THE AMOUNT SO WRITTEN OFF IS ALLOWABLE AS DEDUCTION AND IN THIS REGARD, THE ASSESSEE ALSO PLACED RELIANCE ON THE FOLLOWING CASE LAWS: - (A) MOHAN MEAKIN LTD VS. CIT (2011)(11 TAXMANN.COM 141)(DELHI) (B) CHENAB FOREST CO. VS. CIT (1974)(96 ITR 568)(J &K) (C) CIT VS. MYSORE SUGAR CO. LTD (1962)(46 ITR 649)(SC). 17. THE AO, HOWEVER, TOOK N OTE OF THE FACT THAT THE ASSESSEE AND RCVPL ARE SISTER CONCERNS. HE ALSO NOTICED THAT THE AGREEMENT ENTERED BETWEEN THE TWO PARTIES PROVIDED CLAUSES FOR PENALTIES FOR TERMINATION OF AGREEMENT. THE AO OBSERVED THAT THE ASSESSEE HAS NOT CLARIFIED AS TO WHO HAS VIOLATED THE TERMS OF AGREEMENT. THE AO ALSO OBSERVED THAT THE FINANCIAL CONDITION OF RCVPL WAS NOT GOOD AT THE TIME WHEN THE ADVANCE WAS GIVEN. SINCE BOTH THE COMPANIES BELONGED TO SAME GROUP, THE AO TOOK THE VIEW THAT ASSESSEE MUST BE AWARE AT THE TIME OF GIVING ADVANCE THAT THE ADVANCE SO GIVEN MAY NOT BE RECOVERABLE. ACCORDINGLY THE AO TOOK THE VIEW THAT THE ASSESSEE HAS WRITTEN OFF THE TRADE ADVANCE AND CLAIMED THE SAME AS DEDUCTION IN ORDER TO REDUCE THE TAX LIABILITY ARISING ON SALE OF ITS UN DERTAKINGS. THE AO, BY PLACING RELIANCE ON THE DECISION RENDERED BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF SOVEREIGN SECURITIES (P) LTD VS. ITO (REFERRED SUPRA), TOOK THE VIEW THE DEDUCTION CLAIMED BY THE ASSESSEE IS NOT ALLOWABLE. ACCORDINGLY HE DI SALLOWED THE CLAIM OF THE ASSESSEE. 1 8. THE LD CIT(A) AGREED WITH THE VIEW TAKEN BY THE AO. HE OBSERVED THAT THE POOR FINANCIAL C ONDITION OF RCVPL DOES NOT MEAN THAT THE ADVANCE GIVEN SHOULD BE WRITTEN OFF IN THE SAME YEAR ITSELF. THOUGH THE LD CIT(A) ACCEPTED THE CONTENTIONS OF THE ASSESSEE THAT IT DID NOT ADJUST THE ADVANCE AGAINST THE PAYMENT DUE FOR SUPPLIES IN ORDER TO IMPROVE THE WORKING CAPITAL OF RCVPL, YET THE LD CIT(A) TOOK THE VIEW THAT THE SAME WOULD NOT JUSTIFY WRITING OFF ADVANCE. M/S. NATROYAL INDUSTRIES PVT. LTD. 16 THE FIRST APPELLATE AUTHORITY ALSO AGREED WITH THE VIEW TAKEN BY THE AO THAT THE ASSESSEE HAS WRITTEN OFF ADVANCE IN ORDER TO REDUCE TAX LIABILITY. HE FURTHER TOOK THE VIEW THAT THE ADVANCE SO GIVEN WAS NOT SHOWN AS INCOME EARLIER AND HENCE THE WRITING O FF ADVANCE WOULD NOT FALL IN THE CATEGORY OF BAD DEBTS. THE LD CIT(A) FURTHER TOOK THE VIEW THAT THERE WAS NO NECESSITY FOR BOTH THE PARTIES TO ENTER INTO MANUFACTURING SUPPORT AND SUPPLY AGREEMENT, SINCE THERE WAS NO MUCH IMPROVEMENT IN THE PURCHASES MADE BY THE ASSESSEE FROM RCVPL. FURTHER THE ASSESSEE HAS BEEN CONTINUING THE BUSINESS TRANSACTIONS OF PURCHASE AND SALES WITH RCVPL DESPITE ITS POOR FINANCIAL POSITION AS ON 31 - 03 - 201 2 AND WAS ALSO NOT RECOVERING THE SALE PROCEEDS. THE LD CIT(A) ACCORDINGLY OBSERVED THAT THE ASSESSEE WAS SUPPORTING RCVPL FINANCIALLY. HOWEVER, HE TOOK THE VIEW THE SAME MAY NOT JUSTIFY THE WRITE OFF ADVANCES. THE LD CIT(A) ALSO OBSERVED THAT THE REAL ISSUE IS WHETHER THE WRITING OFF OF ADVANCE WITHIN A SHORT SPAN OF 10 MONTHS IS JUSTIFIED (PARA 6.11). 19. THE LD CIT(A) PLACED RELIANCE ON THE DECISION RENDERED BY HONBLE MUMBAI HIGH COURT IN THE CASE OF INDEQUIP LTD VS. CIT (1994)(116 CTR 0261), WHEREIN IT WAS HELD THAT THE WRITE OFF OF LOAN GIVEN TO A CUSTOMER CANNOT BE TR EATED AS ALLOWABLE DEDUCTION. THE LD CIT(A) ALSO REFERRED TO THE DECISION RENDERED BY HONBLE BOMBAY HIGH COURT IN THE CASE OF PADGIRWAR BROTHERS VS. CIT (1971)(80 ITR 0096), WHERE IN IT WAS HELD THAT WRITE OFF OF THE ADVANCE GIVEN TO N TO PURCHASE MATERI AL, BUT NOT HONOURED COULD NOT BE TREATED AS BAD DEBT AND CANNOT BE ALLOWED. ACCORDINGLY THE LD CIT(A) CONFIRMED THE DISALLOWANCE MADE BY THE AO. 20. THE LD A.R SUBMITTED THAT THOUGH RCVPL WAS A GROUP CONCERN, YET THE FACT REMAINS THAT RCVPL IS A PUB LIC LIMITED COMPANY AND THE PROMOTERS OF ASSESSEE COMPANY WAS HOLDING SHARE OF ABOUT 36% ONLY. THE REMAINING SHARES ARE HELD BY PUBLIC AT LARGE. ACCORDINGLY HE SUBMITTED THAT IT IS NOT CORRECT TO SAY THAT THE BENEFIT, IF ANY, GIVEN TO RCVPL SHALL ACCRUE TO THE GROUP FULLY. M/S. NATROYAL INDUSTRIES PVT. LTD. 17 21. THE LD A.R SUBMITTED THAT THE RCVPL WAS USING 40% - 50% OF ITS INSTALLED CAPACITY ONLY AND THUS WAS HAVING HUGE SURPLUS CAPACITY FOR PRODUCTION . THE ASSESSEE WAS PLANNING TO EXPAND ITS TRADING AND EXPORT BUSINESS IN PVC FLOO R COVERINGS . THE ASSESSEE WOULD HAVE INCURRED HUGE CAPITAL OUTLAY IN SETTING UP NEW PLANTS AND HENCE IT STRATEGICALLY ENTERED INTO AN AGREEMENT WITH RCVPL IN ORDER UTILISE ITS SURPLUS CAPACITY SO THAT RCVPL WOULD GIVE PREFERENCE TO THE ASSESSEE AND ALSO W OULD MANUFACTURE THE PRODUCTS AS PER THE SPECIFIC REQUIREMENT S OF THE ASSESSEE. AS PER THE TERMS OF AGREEMENT, THE ASSESSEE PAID TRADE ADVANCE OF RS.40.00 CRORES, WHICH WAS REQUIRED TO BE ADJUSTED AGAINST THE VALUE OF GOODS SUPPL IED. HE SUBMITTED THAT TH E AGREEMENT WAS ENTERED INTO ONLY ON COMMERCIAL CONSIDERATIONS AND THE ADVANCE OF RS.40.00 CRORES WAS ALSO AGREED TO BE PAID ON COMMERCIAL CONSIDERATIONS IN ORDER TO SUPPORT THE WORKING CAPITAL NEEDS OF RCVPL, OTHERWISE THE ASSES SEE WOULD BE INCURRING HUGE CAPITAL OUTLAY ON SETTING UP A NEW PLANT FACILITY. SUBSEQUENT TO ENTERING INTO THE AGREEMENT, RCVPL WAS DECLARED SICK. FURTHER THE COST OF MANUFACTURING TO RCVPL ALSO WENT UP AND IT WAS NOT COMMENSURATE WITH THE PRICE AT WHICH THE GOODS WERE SUPPLIED TO THE ASSESSEE. DUE TO ACCUMULATED LOSSES, RCVPL DID NOT ADJUST THE ADVANCE AGAINST SUPPLY BILLS AND DEMANDED MONEY AGAINST THE SUPPLY BILLS. THE ASSESSEE HAD TO PAY THE AMOUNT IN ORDER TO CONTINUE ITS BUSINESS OPERATIONS. AT THIS STAGE, THE ASSESSEE REAL ISED THAT THERE WAS LITTLE CHANCE OF RECOVERY OF THE TRADE ADVANCE AND HENCE THE ASSESSEE TOOK A COMMERCIAL DECISION TO WRITE OFF THE TRADE ADVANCE AS BUSINESS LOSS. HAD THE ASSESSEE INSISTED UPON ADJUSTMENT OF TRADE ADVANCE AGAINST THE SUPPLY BILLS, THE BUSINESS OF RCVPL WOULD HAVE COMPLETELY STOPPED, THUS ENDANGERING THE OPERATIONS OF BOTH ASSESSEE AND RCVPL. 22. THE LD A.R FURTHER SUBMITTED THAT THE FINANCIAL STATEMENTS ARE PREPARED UNDER THE CONCEPT OF PRUDENCE, AS PER WHICH IT IS IMPERATIVE T O PROVIDE FOR ALL KNOWN LIABILITIES. THE CONCEPT OF PRUDENCE HAS BEEN RECOGNISED IN ACCOUNTING STANDARD - 1 ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA AS WELL AS BY CBDT. M/S. NATROYAL INDUSTRIES PVT. LTD. 18 23. TH E LD A.R, FURTHER PLACED RELIAN CE ON THE FOLLOWING CASE LAWS T O SUPPORT THE CLAIM MADE BY THE ASSESSEE: - (A) CIT VS. DALMIA CEMENT (254 ITR 377)(DELHI), WHEREIN IT WAS HELD THAT ONCE IT IS ESTABLISHED THAT THERE IS A NEXUS BETWEEN EXPENDITURE AND PURPOSE OF BUSINESS, REVENUE CANNOT JUSTIFIABLY CLAIM TO PUT ITSELF IN ARMCHAIR OF A BUSINESSMAN OR IN POSITION OF BOARD OF DIRECTORS AND ASSUME SAID ROLE TO DECIDE HOW MUCH IS REASONABLE EXPENDITURE HAVING REGARD TO CIRCUMSTANCES OF CASE. (B) CIT VS. PADMINI PACKAGING (P) LTD (155 TAXMANN 268)(DELHI) , WHEREIN IDENTICAL VIEW AS IN THE CASE OF DALMIA CEMENT WAS EXPRESSED. (C) RAVI MARKETING (P) LTD VS. CIT (198 CTR 354)(CALCUTTA), WHEREIN IT WAS HELD THAT ONCE IT IS ESTABLISHED THAT AMOUNT WAS GENUINELY EXPENDED AND IT WAS EXPENDED FOR A PARTICULA R PURPOSE, ONLY DISCRE TION THAT IS LEFT TO AUTHORITY IS TO APPLY LAW ON BASIS OF SUCH ESTABLISHED FACT OR FINDING AND IF PURPOSE FOR WHICH IT IS EXPENDED IS ELIGIBLE FOR DEDUCTION UNDER A PARTICULAR HEAD, NO DISCRETION IS LEFT FOR AUTHORITY TO SURMISE ABOUT QUANTUM THAT OUGHT T O HAVE BEEN SPENT OR TO SURMISE OR PRESUME PURPOSE DIFFERENTLY AND CONVERT THE SAME UNDER SOME OTHER HEAD. (D) BAKEMANS HOME PRODUCTS VS. ITO (7 ITD (CHD) 371), WHEREIN THE CHANDIGARH BENCH OF ITAT HAS HELD AS UNDER: - AT THE POINT OF TIME WHEN THE AGREEMENT WAS ENTERED INTO IT COULD NOT BE SAID WITH CERTAINTY THAT THERE WILL BE SUCH PROFITS AS WOULD MAKE THE PAYMENTS UNDER THE AGREEMENT LOOK EXCESSIVE OR UNREASONABLE TO THE REVENUES POINT OF VIEW. IF THE ASSESS E E HAD TO SET UP AN ESTABLISHMENT OF THE TYPE THAT IT GOT UNDER THE TERMS OF THE AGREEMENT, SUBSTANTIAL CAPITAL INVESTMENTS WOULD BE NECESSARY FOR IMPORT OF REQUISITE MACHINERY AND IT WOULD HAVE SUFFICIENT GESTATION PERIOD IN WHICH SUBSTANTIAL AMOUNT WOULD REMAIN LOCKED UP. THE ASSESSEE, TH EREFORE, THOUGHT THAT THE TERMS OF THE AGREEMENT WITH THE LESSOR FOR PARTING WITH THE ASSETS FOR EXPLOITATION BY THE ASSESSEE FOR THE MANUFACTURE OF BISCUITS WAS A BETTER PROPOSITION. THE LESSOR DID NOT HAVE ANYTHING WHICH WOULD BE SAID AS PAYMENT WITHOUT COMMERCIAL CONSIDERATIONS.. A SUCCESSFUL INDUSTRIAL UNDERTAKING DOES NOT NECESSARILY OPERATE UPON THE STRENGTH OF ITS CAPITAL, THOUGH IT IS INDEED IMPORTANT. MUCH DEPENDS UPON THE BUSINESS ACUMEN OF THE PARTIES INVOLVED. THIS IS AMPLY DEMONSTRATED BY T HE EXAMPLE IN HAND. WHEREAS THE LESSOR S WERE FINDING IT DIFFICULT TO MAKE ANY HEADWAY WITH THE SAME PLANT AND MACHINERY, THE M/S. NATROYAL INDUSTRIES PVT. LTD. 19 LESSEE - ASSES S EE HAD MADE IT A THUMPING SUCCESS. SO THE GENUINE PAYMENTS WHOLLY AND EXCLUSIVELY MADE FOR THE PURPOSE OF BUSINESS C ANNOT BE CONSIDERED EXCESSIVE OR UNREASONABLE BY APPLYING THE SUBJECTIVE STANDARDS OF THE ITO. REASONABLENESS OF THE EXPENDITURE HAS TO BE SEEN FROM BUSINESSMANS POINT OF VIEW. THE PAYMENTS ENVISAGED UNDER THE AGREEMENT ARE REAL, THESE HAVE BEEN INCURRE D BY THE ASSESSEE - FIRM IN THE CHARACTER OF A TRADER AND THAT THESE ARE WHOLLY AND EXCLUSIVELY LAID OUT FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE. THE AGREEMENT WAS A GENUINE DOCUMENT AND ACTED UPON BY THE PARTIES. THE PAYMENTS ARE ON FACTS OF THE C ASE NOT EXCESSIVE OR UNREASONABLE - J.K. WOOLEN MANUFACTURERS VS. CIT (1969)(72 ITR 612)(SC) APPLIED. 24. THE LD A.R SUBMITTED THAT THE LD CIT(A) HAS RELIED UPON CERTAIN CASE LAWS AND THEY ARE DISTINGUISHABLE. HE SUBMITTED THAT THOSE CASE LAWS DEALT WITH THE CASE OF GIVEN LOAN, WHEREAS THE PRESENT CASE IS RELATED TO TRADE ADVANCE GIVEN. HE SUBMITTED THAT THE FOLLOWING CASE LAWS SUPPORT THE CLAIM OF THE ASSESSEE: - (A) SHREE GOURI SHANKAR JUTE MILLS VS. DEPT. OF INCOME TAX (ITA NO.1185/KOL/2012, WHER E IN IT WAS HELD THAT THE TRADE ADVANCE GIVEN DURING THE COURSE OF BUSINESS AND IF THE SAME IS NOT RECOVERABLE, IT IS ALLOWABLE AS BUSINESS LOSS. THE TRIBUNAL PLACED ITS RELIANCE ON THE DECISION RENDERED BY HONBLE SUPREME COURT IN THE CASE OF CIT VS. MYS ORE SUGAR CO. LTD (1962)(46 ITR 649). (B) HARSHAD J CHOKSI VS. CIT (25 TAXMANN.COM 567)(BOM), WHEREIN IT WAS HELD THAT IF THE AMOUNT IS HELD TO BE NOT DEDUCTIBLE AS BAD DEBT IN VIEW OF NON - COMPLIANCE OF PROVISIONS OF SEC. 36(2), THE SAME CAN BE ALLOWED AS BUSINESS LOSS. THE BOMBAY HIGH COURT FOLLOWED THE DECISION OF HONBLE SUPREME COURT RENDERED IN THE CASE OF BADRIDAS DAGA VS CIT (1958)(34 ITR 10), WHEREIN IT WAS HELD THAT IN ASSESSING THE AMOUNT OF PROFITS AND GAINS LIABLE TO TAX, ONE MUST NECESSARIL Y HAVE REGARD TO THE ACCEPTED COMMERCIAL PRACTICE TH A T DEDUCTION OF SUCH EXPENSES AND LOSSES IS TO BE ALLOWED, IT IS ARISES IN CARRYING ON BUSINESS AND IS INCIDENTAL TO IT. (C) CIT VS. MYSORE SUGAR CO LTD (46 ITR 649)(SC): - THE QUESTION TO CONSIDER IN TH IS CONNEC TION ARE: FOR WHAT PURPOSE 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 DOING OF THE BUSINESS? IF MONEY BE LOST IN THE FIRST CIRCUMSTANCE, IT IS LOSS OF CA PITAL, BUT IF LOST IN THE SECOND CIRCUMSTA N CE, IT IS A REVENUE LOSS. M/S. NATROYAL INDUSTRIES PVT. LTD. 20 IN THE FIRST, IT BEARS THE CHARACTER OF AN INVESTMENT, BUT IN THE SECOND, TO USE A COMM O NLY UNDERSTOOD PHRASE, IT BEARS THE CHARACTER OF CURRENT EXPENSES. (D) IN THE CASE OF IBM WORL D CORPORATION VS. CIT (186 ITR 412)(BOM), THE ADVANCE GIVEN IN THE COURSE OF BUSINESS, WHICH WAS NOT RECOVERED, WAS ALLOWED AS A BUSINESS LOSS. (E) IN THE CASE OF CIT VS. EKL APPLIANCES LTD (2012)(20 TAXMANN.COM 509)(DELHI), THE ADVANCE GIVEN FOR SUPPLY OF PACKAGING MATERIAL, WHICH WAS NOT RECOVERED, WAS HELD AS ALLOW ABLE AS DEDUCTION U/S 37(1) R.W.S. 28(I) OF THE ACT. 25. THE LD A.R FURTHER SUBMITTED THAT THE DECISION RENDERED BY HONBLE BOMBAY HIGH COURT IN THE CASE OF SOVEREIGN SECURITIES P LTD, WH ICH WAS RELIED UPON BY THE AO, WAS DISTINGUISHABLE , SINCE THE SAID DECISION WAS RENDERED UNDER PECULIAR FACTS PREVAILING IN THAT CASE . I N THE ABOVE SAID CASE, I T WAS ESTABLISHED BY THE TAX AUTHORITIES AND THE TRIBUNAL THAT THESE COMPANIES HAD MADE ARRANGE MENT IN SUCH A WAY TO CLAIM BAD DEBTS AND ALL THE ENTRIES WERE SHOWN TO BE MERE EYE WASH. HENCE THE HONBLE BOMBAY HIGH COURT HELD THAT THE DECISION HAS BEEN RENDERED ON THE BASIS OF FACTS AVAILABLE IN THAT CASE AND HENCE NO SUBSTANTIAL QUESTION OF LAW WO U L D ARISE. HE FURTHER SUBMITTED THAT CASE LAW RELIED UPON BY LD CIT(A) , VIZ., M/S INDEQUIP LTD (SUPRA) RELATED TO WRITE OFF LOAN GIVEN ON CAPITAL ACCOUNT (NOT ON TRADING ACCOUNT) AND HENCE THE SAID DECISION IS DISTINGUISHABLE ON FACTS. ANOTHER DECISION R ELIED UPON BY LD CIT(A), VIZ., PADGIRWAR BROTHERS (SUPRA) RELATED TO AY 1962 - 63 RENDERED UNDER OLD PROVISIONS OF LAW. 26. THE LD A.R SUBMITTED THAT THE CLAIM OF THE ASSESSEE CANNOT BE TERMED AS MERE EYE WASH AS THE ASSESSEE HAS TAKEN A CONSCIOUS COMM ERCIAL DECISION TO WRITE OFF THE TRADE ADVANCE UNDER COMPELLING CIRCUMSTANCES. HE FURTHER SUBMITTED THAT SUCH KIND OF WRITE OFF IS ALLOWABLE AS DEDUCTION. HE ALSO SUBMITTED THAT THE COMMERCIAL DECISION SO TAKEN AND THE YEAR IN WHICH IT IS WRITTEN OFF SHO ULD NOT BE QUESTIONED BY THE TAX AUTHORITIES. IN THIS REGARD, HE PLACED RELIANCE ON THE FOLLOWING CASE LAWS ALSO: - M/S. NATROYAL INDUSTRIES PVT. LTD. 21 (A) CIT VS. BOMBAY CABLE CORPORATION OF INDIA LTD (2016)(75 TAXMANN.COM 117)(BOM) (B) D CIT VS. FRIENDS SHOE COMPANY (2016)(74 TAXMANN.COM 100)(VISAKA TRIB) (C) MOHAN MEAKIN LTD VS. CIT (348 ITR 109)(DELHI) (D) ALFINO FASHIONS PVT LTD VS. DCIT (2016 - TIOL - 1028 - ITAT - AHM) (E) STERLING AGRO PRODUCTS PROCESSING (P) LTD VS. ACIT (2011)(13 TAXMANN.COM 174)(CHENNAI) (F) RELIANCE JUTE MILLS INTERNATIONAL LTD VS. ITO (2017 - TIOL - 351 - ITAT - KOL) (G) ZEE ENTERTAINMENT ENTERPRISE LTD) TS - 79 - ITAT - 2015)(MUM) (H) PR. CIT VS. STOVEC INDUSTRIES LTD (2017 - TIOL - 948 - HC - AHM - IT) 27. THE LD D.R, ON THE CONTRARY, STRONGLY SUPPORTED THE ORDER PASSED BY LD CIT(A). HE SUBMITTED THAT M/S RCVPL IS A SISTER CONCERN OF THE ASSESSEE COMPANY. THE AGREEMENT WAS ENTERED FOR A PERIOD OF FIVE YEARS AND THE TRADE ADVANCE WAS GIVEN AS PER THE AGREEMENT. THE TRADE ADVANCE WAS AGREED TO BE ADJUSTED AGAINST THE SUPPLIES. HOWEVER, THE ASSESSEE WROTE OFF THE ADVANCE WITHIN A PERIOD OF 10 MONTHS AND THUS BOTH THE PARTIES HAVE VIOLATED THE TERMS OF AGREEMENT. THE DECISION OF THE ASSESSEE CANNOT BE CONSIDERED TO BE A DECISION TAKEN BY A PRUDENT BUSINESSMAN. THE LD A.R SUBMITTED THAT THE ASSESSEE HAS BEEN PUMPING MONEY INTO THE BUSINESS OF M/S RCVPL BY MAKING PAYMENT TOWARDS PURCHASES AND BY NOT COLLECTING MONEY TOWARDS SALES EFFECTED. THOUGH THE ASSESSEE HAS CLAIMED THAT THE AGREEMENT WAS ENTERED INTO BY THE ASSE SSEE TO EXPAND ITS BUSINESS INCLUDING EXPORTS BUSINESS, THE DETAILS OF EXPORT BUSINESS WAS NOT GIVEN. HE FURTHER SUBMITTED THAT THE ASSESSEE HAS EARNED GAINS ON SALE OF ITS UNDERTAKINGS AND HENCE IT HAS ENTERED INTO THIS ARRANGEMENT IN ORDER TO REDUCE TAX LIABILITY. 28. HE SUBMITTED THAT THE DECISIONS RELIED UPON BY THE ASSESSEE ARE DISTINGUISHABLE, I.E., IN ALL THOSE CASES, THE ADVANCE WAS GIVEN TO UNRELATED PARTIES. IN THE CASE OF MYSORE SUGARS, THE SUGAR CANE GROWERS WERE UNRELATED M/S. NATROYAL INDUSTRIES PVT. LTD. 22 PARTIES. IN TH E CASE OF ZEE ENTERTAINMENT, THE BCCI AND ZEE ENTERTAINMENT WERE UNRELATED PARTIES. FURTHER, IT WAS BCCI WHICH TERMINATED THE AGREEMENT. THE AMOUNT WAS WRITTEN OFF AFTER ARBITRATION PROCEEDINGS. HOWEVER, IN THE INSTANT CASE, IT IS NOT CLARIFIED AS TO WH O HAS VIOLATED THE TERMS OF AGREEMENT. HE FURTHER SUBMITTED THAT THE ASSESSEE HAS GIVEN HUGE AMOUNT AS TRADE ADVANCE, WHICH CANNOT BE CONSIDERED TO BE A NORMAL BUSINESS TRANSACTION. HE FURTHER SUBMITTED THAT THE ASSESSING OFFICER HAS RIGHTLY PLACED RELIA NCE ON THE DECISION RENDERED BY HONBLE BOMBAY HIGH COURT IN THE CASE OF SOVEREIN SECURITIES (SUPRA), SINCE THE ENTIRE ARRANGEMENT WAS HELD TO BE AN EYE WASH. 29. IN THE REJOINDER, THE LD A.R SUBMITTED THAT THERE IS NO BASIS TO CONSIDER THE IMPUGNED IS SUE AS A CASE OF TAX EVASION. HE SUBMITTED THAT M/S RCVPL IS A PUBLIC LISTED COMPANY AND HENCE THE SAME CANNOT BE CONSIDERED AS A GROUP COMPANY OR SUBSIDIARY COMPANY. THE PROMOTERS OF THE ASSESSEE COMPANY ARE HOLDING SHARES IN THAT COMPANY . THE SHARES H ELD BY PUBLIC ARE MUCH MORE THAN THAT HELD BY THE PROMOTERS OF ASSESSEE - COMPANY. HENCE THE AMOUNT SO WRITTEN OFF WOULD NOT BRING BENEFIT EITHER TO THE ASSESSEE COMPANY OR TO ITS PROMOTERS. HENCE IT IS NOT CORRECT TO MAKE UNWARRANTED ALLEGATIONS ON THE CO MMERCIAL DECISION TAKEN BY THE ASSESSEE. HE SUBMITTED THAT THE PARTIES HAVE NOT TERMINATED THE AGREEMENT AS ALLEGED BY LD D.R. HE SUBMITTED THAT BOTH THE PARTIES CONTINUE TO HAVE BUSINESS TRANSACTIONS IN THE SUBSEQUENT YEARS ALSO. HE SUBMITTED THAT THE TERMS OF AGREEMENT CLEARLY PROVIDE THE CIRCUMSTANCES UNDER WHICH THE TRADE ADVANCE WAS GIVEN. FURTHER HE SUBMITTED THAT THE ASSESSEE HAS ALSO EXPLAINED IN DETAIL THE CIRCUMSTANCES UNDER WHICH IT CHOSE TO WRITE OFF THE TRADE ADVANCE. 30. WE HAVE HEARD RIVAL CONTENTIONS AND PERUSED THE RECORD. WE NOTICE THAT THE ASSESSING OFFICER HAS REJECTED THE CLAIM OF THE ASSESSEE MAINLY ON THE GROUND THAT (A) THE WRITE OFF OF TRADE ADVANCE WAS A PREMATURE ACTION; (B) M/S RCVPL IS A GROUP COMPANY AND HENCE A REL ATED PARTY ; M/S. NATROYAL INDUSTRIES PVT. LTD. 23 (C) IT WAS A DECISION TAKEN TO REDUCE THE TAX LIABILITY ARISING ON SALE OF UNDERTAKINGS AND (D) FURTHER THE CLAIM OF THE ASSESSEE IS NOT ALLOWABLE UNDER THE PROVISIONS OF THE ACT. THE LD CIT(A) HAS TAKEN THE VIEW THAT (A) THE ADVANCE SHOUL D NOT HAVE BEEN WRITTEN OFF IN THE SAME YEAR, (B) THE POOR FINANCIAL CONDITIONS AND WORKING CAPITAL SUPPORT MAY BE GOOD REASONS BUT THE SAME WOULD NOT JUSTIFY THE WRITE OFF. (C) THE VIEW OF THE AO THAT THE ASSESSEE HAS CHOSE TO WRITE OFF THE TRADE ADVANCE ONLY T O REDUCE ITS TAX LIABILITY (D) THE TRADE ADVANCE WAS NOT SHOWN AS ITS INCOME. (E) THERE WAS NO NECESSITY TO ENTER INTO THE AGREEMENT AT ALL. 31. THERE IS NO DISPUTE WITH REGARD TO THE FACT THAT THE IMPUGNED ADVANCE WAS A TRADE ADVANCE GIVEN BY THE ASSESSEE D URING THE COURSE OF CARRYING ON BUSINESS, I.E., IT IS NOT THE CASE OF THE REVENUE THAT THE ADVANCE WAS GIVEN ON CAPITAL ACCOUNT. THERE SHOULD NOT BE ANY DISPUTE THAT THE LOSS OF ADVANCE GIVEN ON CAPITAL ACCOUNT SHALL BE CONSIDERED AS CAPITAL LOSS AND HENC E NOT ALLOWABLE AS DEDUCTION. THE DECISION RELIED UPON BY LD CIT(A), VIZ., THE CASE OF INDEQUIP LTD (SUPRA) WAS RELATED TO A CASE OF GIVING OF ADVANCE ON CAPITAL ACCOUNT AND HENCE THE LOSS THEREOF WAS CONSIDERED TO BE A CAPITAL LOSS. SINCE THE ADVANCE GI VEN BY THE ASSESSEE IN THE PRESENT CASE WAS A TRADE ADVANCE, THE ABOVE SAID CASE LAW WOULD NOT APPLY TO THE FACTS OF THE PRESENT CASE. 32. THE ASSESSEE HAS CLAIMED THE DEDUCTION OF WRITE OFF OF TRADE ADVANCE U/S 37(1) R.W.S. 28(I) OF THE ACT. HENCE T HE PROVISIONS OF SEC. 36(2), WHICH PROVIDE THE CONDITION THAT THE AMOUNT WRITTEN OFF SHOULD HAVE BEEN OFFERED AS INCOME IS NOT APPLICABLE . HENCE THE OBSERVATION OF THE LD CIT(A) THAT THE TRADE ADVANCE WAS NOT OFFERED AS INCOME WAS NOT LEGALLY CORRECT, AS THE SAME IS NOT APPLICABLE TO THE CLAIM MADE BY THE ASSESSEE. M/S. NATROYAL INDUSTRIES PVT. LTD. 24 33. NOW COMING TO THE FACTS OF THE PRESENT CASE, WE NOTICE THAT THE ASSESSEE HAS GIVEN THE TRADE ADVANCE AS PER THE AGREEMENT ENTERED BY IT WITH M/S RCVPL IN THE COURSE OF CARRYING ON BUSIN ESS. CONSIDERING THE WEAK FINANCIAL POSITION AND ALSO UPON CONSIDERING THE FACT THAT M/S RCVPL HAS BEEN DECLARED AS A SICK COMPANY BY BIFR, THE ASSESSEE HAS COME TO THE CONCLUSION THAT THE ABOVE SAID TRADE ADVANCE WAS NOT RECOVERABLE. IT IS TO BE NOTED H ERE THAT, EVEN THOUGH THE AGREEMENT PROVIDED FOR ADJUSTMENT OF THE TRADE ADVANCE AGAINST THE SUPPLIES MADE BY M/S RCVPL, YET IT WAS STATED THAT M/S RCVPL WAS NOT ALLOWING SET OFF AND WAS DEMANDING MONEY AGAINST THE SUPPLIES MADE. IT WAS STATED THAT THE AS SESSEE WAS ALSO CONSTRAINED TO ACCEPT THE DEMAND OF M/S RCVPL, OTHERWISE ITS BUSINESS WOULD BE AFFECTED VERY BADLY. IN OUR VIEW, THE ASSESSEE HAS TAKEN A CONSCIOUS COMMERCIAL DECISION BY TAKING INTO ACCOUNT THE BUSINESS NECESSITIES TO WRITE OFF THE TRADE DEPOSIT AS NOT RECOVERABLE. IT IS WELL SETTLED PROPOSITION OF LAW THAT THE TAX AUTHORITIES SHOULD NOT SIT IN THE ARM CHAIR OF A BUSINESSMAN AND ASSUME THE SAID ROLE TO DECIDE THE CORRECTNESS OF THE DECISION. (SEE PR. CIT VS. STOVEC INDUSTRIES LTD (2017 - TI OL - 948 - HC - AHM - IT). THE CO - ORDINATE BENCH OF MUMBAI TRIBUNAL HAS OBSERVED IN THE CASE OF ZEE ENTERTAINMENT ENTERPRISES LTD (TS - 79 - ITAT - 2015) HAS OBSERVED AS UNDER: - FACTUALLY SPEAKING, THE LOSS OF RS.33,54,01,600/ - SUFFERED BY THE ASSESSEE IS NOT IN DISP UTE IN AS MUCH AS THERE IS NO AVERMENT BY THE REVENUE THAT THERE HAS BEEN ANY RECOVERY ON THIS COUNT ON A LATER DATE. THE ASSESSING OFFICER AND THE CIT(A) HAVE EMPHASIZED THAT ASSESSEE DID NOT EXPLORE THE POSSIBILITY OF RECOVERY IN FULL AND, THEREFORE, TH E WRITE OFF IS PREMATURE. IN OUR CONSIDERED OPINION, IT IS THE JUDGEMENT OF THE ASSESSEE AS A BUSINESSMAN, WHICH IS RELEVANT TO EXAMINE AS TO WHETHER OR NOT THE LOSS HAS TAKEN PLACE THE VARIOUS CASE LAWS RELIED UPON BY THE ASSESSEE WOULD SUPPORT THIS V IEW. WE NOTICE THAT THE KOLKATTA BENCH OF ITAT HAS TAKEN THE VIEW IN THE CASE OF SHRI GOURISHANKAR JUTE MILLS (ITA NO.1185/KOL/2012) HAS HELD THAT THE UNRECOVERABLE TRADE ADVANCE IS ALLOWABLE AS BUSINESS LOSS. IN COMING TO THIS CONCLUSION, THE TRIBUNAL H AS TAKEN SUPPORT FROM THE DECISION RENDERED BY HONBLE SUPREME COURT IN THE CASE OF MYSORE SUGAR CO. LTD (SUPRA). IDENTICAL VIEW WAS TAKEN BY HONBLE BOMBAY HIGH COURT IN THE CASE OF IBM WORLD TRADE M/S. NATROYAL INDUSTRIES PVT. LTD. 25 CORPORATION VS. CIT (186 ITR 412). HONBLE DELHI HIGH COURT HAS TAKEN AN IDENTICAL VIEW IN THE CASE OF MOHAN MEAKIN LTD VS. CIT (348 ITR 109). WE PREFER TO QUOTE THE OBSERVATIONS MADE BY HONBLE DELHI HIGH COURT IN THE ABOVE SAID CASE IN PARAGRAPH 10 OF ITS ORDER: - THE ADVANCES MADE BY THE ASSESSEE IN THE C ASE WERE CERTAINLY OF A TYPE WHICH WOULD BE WITHIN THE CONTEMPLATION OF THE WORDS LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS. AS NO PORTION OF THE SAID ADVANCES COULD BE STATED TO BE LOSS OF CAPITAL EXPENDITURE, BUT IT BEING A PLAIN CASE OF BUSINESS LOSS, IT WOULD CERTAINLY BE ALLOWABLE TO BE DEDUCTED UNDER THE PROVISIONS OF SECTION 37. 34. BOTH THE TAX AUTHORITIES HAVE TAKEN THE VIEW THAT THE ASSESSEE HAS TAKEN TH E DECISION , ONLY BECAUSE M/S RCVPL WAS A GROUP COMP ANY. THE LD A.R POINTED OUT THAT THE PROMOTERS OF ASSESSEE - COMPANY ARE HOLDING ABOUT 36% OF THE SHARES OF M/S RCVPL AND REST ARE HELD BY PUBLIC AT LARGE. IT WAS ALSO STATED THAT THE SHARES OF M/S RCVPL ARE LISTED IN BOMBAY STOCK EXCHANGE, MEANING THEREBY , M/S RCVPL IS A WIDELY HELD COMPANY IN TERMS OF THE PROVISIONS OF INCOME TAX ACT. HENCE IT CANNOT BE SAID THAT THE PROMOTERS OF ASSESSEE - COMPANY WOULD BE FULLY BENEFITTED BY THE DECISION TAKEN BY THEM. IN THE CASE OF SOVEREIGN SECURITIES P LTD, WHICH W AS RELIED UPON BY THE AO, THE TRANSACTIONS HAVE TAKEN PLACE BETWEEN THREE CLOSELY HELD COMPANIES. FURTHER A SPECIFIC FINDING WAS GIVEN BY THE TAX AUTHORITIES THAT THE CLAIM OF BAD DEBTS WAS AN EYE WASH. HOWEVER, IN THE INSTANT CASE, THE ASSESSING OFFICER HAS TAKEN THE VIEW THAT THE TRANSACTION WAS BETWEEN THE ASSESSEE AND A GROUP COMPANY. HOWEVER, THE GROUP COMPANY M/S RCVPL IS A WIDELY HELD COMPANY. HE DID NOT SPELL OUT AS TO HOW THE ASSESSEE OR PROMOTERS OF THE ASSESSEE COMPANY SHALL BE BENEFITTED BY SUCH WRITE OFF. FURTHER, THERE IS NO FINDING EITHER BY THE AO OR LD CIT(A) THAT THE IMPUGNED TRANSACTION OF WRITE OFF WAS MERE AN EYE WASH. IN FACT, THE QUESTION OF PASSING BOGUS ENTRIES BY WAY OF BOOK ENTRIES MAY NOT ARISE IN NORMAL CIRCUMSTANCES IN TH E CASE OF TRANSACTIONS WITH WIDELY HELD COMPANIES, SINCE THE ENTIRE BENEFIT WOULD NOT ACCRUE TO THE MAIN SHAREHOLDERS . EVEN THOUGH THE ASSESSING OFFICER HAS OBSERVED THAT THE MOTIVE OF WRITE OFF WAS TO REDUCE THE TAX LIABILITY, YET THE SAME CAN BE CONSIDER ED AS A SURMISE ONLY. HENCE, IN OUR CONSIDERED VIEW , IT CANNOT BE SAID THAT IT WAS A M/S. NATROYAL INDUSTRIES PVT. LTD. 26 COLOURABLE DEVICE ADOPTED BY THE ASSESSEE COMPANY TO REDUCE ITS TAX LIABILITY. IN OUR VIEW, THE LD A.R RIGHTLY DISTINGUISHED THE DECISION RENDERED IN THE CASE OF SOVEREI GN SECURITIES P LTD. 35. THE TAX AUTHORITIES HAVE ALSO TAKEN THE VIEW THAT THE ASSESSEE HAS WRITTEN OFF THE TRADE DEPOSIT AMOUNT WITHIN A PERIOD OF 10 MONTHS. THE LD CIT(A) HAS EXPRESSED THE VIEW THAT IT SHOULD NOT HAVE BEEN WRITTEN OFF IN THE SA ME YEAR. IN OUR VIEW, THE BUSINESSMAN SHALL BE THE RIGHT PERSON TO TAKE SUCH KIND OF DECISIONS. AS NOTICED EARLIER, THE CO - ORDINATE BENCH HAS OBSERVED IN THE CASE OF ZEE ENTERTAINMENT ENTERPRISES LTD (SUPRA) HAS OBSERVED THAT THE JUDGEMENT OF THE ASSESSE E, AS A BUSINESSMAN, WOULD BE RELEVANT TO EXAMINE AS TO WHETHER OR NOT THE LOSS HAS TAKEN PLACE. FURTHER, AS SUBMITT ED BY LD A.R, THE PRINCIPLE OF PRUDENCE GENERALLY GUIDES THIS KIND OF DECISIONS, SINCE ACCOUNTING STANDARDS MANDATE THAT ALL LOSSES AND K NOWN LIABILITIES SHOULD BE PROVIDED FOR. HENCE, IT WAS NOT CORRECT ON THE PART OF THE TAX AUTHORITIES TO QUESTION THE TIMING OF WRITE OFF, SINCE IT WAS COMMERCIAL DECISION TAKEN BY THE ASSESSEE. 36. THE AO AS WELL AS THE LD CIT(A) HAS TAKEN THE VIEW THAT THE ASSESSEE HAS TAKEN THE DECISION TO WRITE OFF THE TRADE DEPOSIT IN ORDER TO REDUCE THE TAX LIABILITY ARISING ON SALE OF ITS UNDERTAKINGS. WE NOTICE THAT THE ASSESSEE HAS GIVEN REASONS FOR THE DECISION TAKEN BY IT TO WRITE OFF THE TRADE DEPOSIT. I T IS ALSO SUPPORTED BY THE FACT THAT M/S RCVPL HAS BEEN DECLARED AS SICK COMPANY. FURTHER THE ASSESSEE HAS STATED THAT M/S RCVPL DID NOT ADJUST THE TRADE DEPOSITS AGAINST THE TRADE DEPOSIT AS PER THE TERMS OF THE AGREEMENT AND INSTEAD WAS ASKING FOR PAYME NTS AGAINST THE BILLS. IT WAS ALSO STATED THAT THE ASSESSEE WAS COMPELLED TO MAKE THE PAYMENTS IN ORDER TO ENSURE FUTURE SUPPLIES AND UNDER THESE CIRCUMSTANCES, IT HAS DECIDED TO WRITE OFF THE TRADE DEPOSIT. WE NOTICE THAT THE ASSESSING OFFICER HAS NOT S HOWN THAT THESE SUBMISSI ONS OF THE ASSESSEE ARE CONTRARY TO ACTUAL FACTS. AS STATED EARLIER, IT CAN ONLY BE HELD THAT THE AO HAS ENTERTAINED SUCH A VIEW ONLY ON SURMISES. UNDER THESE SET OF FACTS, WE HAVE TO ACCEPT THE SUBMISSIONS OF THE ASSESSEE. M/S. NATROYAL INDUSTRIES PVT. LTD. 27 ACCOR DINGLY, WE ARE OF THE VIEW THAT IT CANNOT BE TAKEN THAT THE ASSESSEE HAS TAKEN THE DECISION ONLY TO REDUCE THE TAX LIABILITY. 37. THE HONBLE SUPREME COURT HAS HELD IN THE CASE OF MYSORE SUGAR CO LTD (SUPRA) THAT THE MONEY LOST IN DOING THE BUSINESS BE ARS THE CHARACTER OF CURRENT EXPENSES. THE HONBLE BOMBAY HIGH COURT HAS HELD IN THE CASE OF HARSHAD J CHOKSI (SUPRA) HAS HELD THAT THE CLAIM, IF NOT ALLOWABLE IN VIEW OF NON - COMPLIANCE OF S EC.36(2), THE SAME CAN BE ALLOWED AS A BUSINESS LOSS. IN THE INS TANT CASE, THE ASSESSEE HAS WRITTEN OFF TRADE DEPOSIT AS NOT RECOVERABLE AND SINCE THE TRADE ADVANCE WAS GIVEN IN THE COURSE OF CARRYING ON BUSINESS TOWARDS THE PURCHASES, THE AMOUNT SO WRITTEN OFF IS ALLOWABLE AS A BUSINESS LOSS U/S 37(1) R.W.S. 28(I) OF THE ACT. 38. IN VIEW OF THE FOREGOING DISCUSSIONS, WE ARE OF THE VIEW THAT THE CLAIM OF WRITING OFF OF TRADE ADVANCE IS ALLOWABLE AS BUSINESS LOSS U/S 37(1) R.W.S. 28(I) OF THE ACT. ACCORDINGLY WE REVERSE THE ORDER PASSED BY LD CIT(A) ON THIS ISSUE AND DIRECT THE AO TO ALLOW THE CLAIM OF THE ASSESSEE. 39. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED AND THE APPEAL OF THE REVENUE IS DISMISSED. ORDER HAS BE EN PRONOUNCED IN THE COURT ON 12 . 7 .201 7. SD/ - SD/ - ( AMARJIT SINGH ) (B.R.BASK ARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; DATED : 12 / 7 / 20 1 7 COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) 4. CIT 5. DR, ITAT, MUMBAI M/S. NATROYAL INDUSTRIES PVT. LTD. 28 6. GUARD FILE. BY ORDER, //TRUE COPY// ( DY./ASSTT. REGISTRAR) PS ITAT, MUMBAI