Dy.Commissioner of Income Tax, Bareilly V. M/s Dhampur Sugar Distillery Pvt. Ltd., Bijnor

ITA 83/LKW/2014

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 7993 (ITAT-LUCKNOW)
• Duration Of Justice: 10 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-12-2014
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 15-10-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 14-02-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: VIVEK MISHRA
• Assessee Lawyers: A K GUPTA
• Keywords: Earning of tax free income; Proportionate interest; Revenue expenditure
• Section: 14A; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL LUCKNOW BENCH B, LUCKNOW BEFORE SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI. A. K. GARODIA, ACCOUNTANT MEMBER ITA NO.83/LKW/2014 ASSESSMENT YEAR:2009-10 DY. CIT CENTRAL CIRCLE BAREILLY V. M/S DHAMPUR SUGAR MILLS LTD. DHAMPUR DISTT. BIJNOR TAN/PAN:AABCT2827N (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI. VIVEK MISHRA, CIT (DR) RESPONDENT BY: SHRI. A. K. GUPTA, FCA DATE OF HEARING: 15 10 2014 DATE OF PRONOUNCEMENT: 16 12 2014 O R D E R PER SUNIL KUMAR YADAV: THIS APPEAL IS PREFERRED BY THE REVENUE AGAINST THE ORDER OF THE LD. CIT(A), INTER ALIA, ON THE FOLLOWING GROUNDS:- 1. THAT THE LD. CIT (A) HAS ERRED IN LAW AND ON FACTS IN DELETING ADDITION OF RS.53,55,83,509/- ON ACCOUNT OF UNDER VALUATION OF CLOSING STOCK OF SUGAR WITHOUT VERIFYING THE FACTS ON RECORDS AND ASSIGNING ANY LOGICAL REASON. 2. THAT THE LD. CIT (A) HAS ERRED IN LAW AND ON FACTS IN ALLOWING RS.1,70,46,929/- U/S 14A OF THE ACT READ WITH RULE 8D WITHOUT VERIFYING THE FACTS ON RECORDS AND ASSIGNING ANY LOGICAL REASON. THE ASSESSEE HAS ALREADY ADDED BACK IN THE COMPUTATION OF INCOME FOR THE RELEVANT ASSESSMENT YEAR BUT AS AN AFTERTHOUGHT HAD CLAIMED THIS AMOUNT AS ALLOWABLE EXPENSES WHICH WAS REJECTED BY THE A.O. DURING THE COURSE OF :- 2 -: ASSESSMENT PROCEEDINGS. 3. THAT THE LD. CIT(A) HAS ERRED IN LAW IN NOT APPRECIATING THE FACT THAT SINCE NO SEPARATE RECORDS ARE KEPT FOR THE INCOME AND EXPENDITURE ACTIVITIES, THE A.O. HAS RIGHTLY COMPUTED INCOME BY APPLYING PROVISIONS OF SECTION 14A OF THE L. T. ACT READ WITH RULE 8D OF THE INCOME TAX RULE, 1962. 4. THAT THE LD. CIT (A) HAS ERRED IN LAW AND ON FACTS IN DELETING ADDITION OF RS.35,62,653/- ON A/C OF DISALLOWANCE OF BALANCE WRITTEN OFF AND IN ALLOWING THE CLAIM OF DEDUCTION OF RS.252.03 LAKHS WITHOUT VERIFYING THE FACTS ON RECORDS AND ASSIGNING ANY LOGICAL REASON. 5. THAT THE LD. CIT (A) HAS ERRED IN LAW AND ON FACTS IN DELETING ADDITION OF RS.3,35,06,424/- ON ACCOUNT OF DISALLOWANCE OF TRIAL RUN EXPENSES WITHOUT VERIFYING THE FACTS ON RECORDS AND ASSIGNING ANY LOGICAL REASON. 6. THAT THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETING ADDITION OF RS.1,48,03,212/- ON ACCOUNT OF 'DISALLOWANCE OF PROPORTIONATE INTEREST WITHOUT VERIFYING THE FACTS ON RECORDS AND ASSIGNING ANY LOGICAL REASON. 7. THAT THE ORDER OF THE LD. CIT (A) BEING ERRONEOUS IN LAW AND ON FACTS WHICH NEEDS TO BE VACATED AND THE ORDER OF THE A.O. BE RESTORED. 2. APROPOS GROUND NO.1, IT WAS CONTENDED ON BEHALF OF THE ASSESSEE THAT THIS GROUND IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE ORDER OF THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2008-09 AS WELL AS THE JUDGMENT OF THE JURISDICTIONAL HIGH COURT IN THE ASSESSEES OWN CASE INCOME-TAX APPEAL NO.211 OF 2011. COPIES OF THE ORDER OF THE TRIBUNAL AS WELL AS THE JUDGMENT OF THE HON'BLE JURISDICTIONAL HIGH COURT ARE PLACED ON RECORD. :- 3 -: 3. ON A CAREFUL PERUSAL OF THE ORDER OF THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2008-09 AND THE JUDGMENT OF THE HON'BLE JURISDICTIONAL HIGH COURT IN INCOME-TAX APPEAL NO.211 OF 2011, WE FIND THAT THE IMPUGNED ISSUE IS SQUARELY COVERED BY THE JUDGMENT OF THE HON'BLE JURISDICTIONAL HIGH COURT, IN WHICH IT HAS BEEN HELD THAT CHANGE IN METHOD OF ACCOUNTING ADOPTED FROM 1991-92 TO 1997-98 WAS MORE SCIENTIFIC AND DID NOT RESULT ANY EVASION OF PAYMENT OF TAX. THEIR LORDSHIPS ACCORDINGLY HELD THAT NO ADDITION CAN BE MADE FOR UNDERVALUATION OF CLOSING STOCK. THIS JUDGMENT OF THE HON'BLE HIGH COURT WAS ALSO FOLLOWED BY THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2008-09 BY HOLDING THAT SINCE NO DIFFERENCE IN THE FACTS WAS POINTED OUT BY THE LD. D.R., THERE WAS NO REASON TO INTERFERE WITH THE ORDER OF THE LD. CIT(A). SINCE THE METHOD OF ACCOUNTING HAS BEEN CONSISTENTLY FOLLOWED BY THE ASSESSEE, WE ARE OF THE VIEW THAT THE LD. CIT(A) HAS RIGHTLY DELETED THE ADDITION MADE ON ACCOUNT OF UNDERVALUATION OF CLOSING STOCK. ACCORDINGLY, WE UPHOLD THE ORDER OF THE LD. CIT(A) ON THIS ISSUE. 4. APROPOS GROUNDS NO.2 AND 3, OUR ATTENTION WAS AGAIN INVITED TO THE ORDER OF THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2008- 09 WITH THE SUBMISSION THAT IDENTICAL ISSUE WAS EXAMINED BY THE TRIBUNAL AND HELD THAT INVESTMENT WAS AN OLD INVESTMENT MADE OUT OF SURPLUS FUNDS IN 1993 IN THE SUBSIDIARIES FOR ACQUIRING THEIR SHARES. THEREFORE, NO DISALLOWANCE CAN BE MADE UNDER SECTION 14A OF THE ACT. THE TRIBUNAL, HOWEVER, CONFIRMED THE DISALLOWANCE TO THE EXTENT OF 0.5% OF THE AVERAGE VALUE OF INVESTMENT. IT WAS FURTHER CONTENDED ON BEHALF OF THE ASSESSEE THAT THE LD. CIT(A) HAS EXAMINED THIS ASPECT AND ALSO FRESH INVESTMENT OF RS.327.63 LAKHS AND FRESH CAPITAL OF RS.754 LAKHS. IN THE LIGHT OF CASH PROFIT, IT WAS ALSO OBSERVED BY THE LD. CIT(A) THAT THE ASSESSEE HAS ALSO EARNED CASH PROFIT IN EXCESS OF RS.5500 LAKHS DURING THE YEAR. KEEPING IN VIEW THE TOTALITY OF THE FACTS OF THE CASE, NO FURTHER DISALLOWANCE WAS MADE. :- 4 -: 5. THE LD. D.R., ON THE OTHER HAND, HAS PLACED RELIANCE UPON THE ASSESSMENT ORDER, WITH THE SUBMISSION THAT THE ASSESSEE HAS MADE INVESTMENTS OUT OF BORROWED FUNDS AND ONCE THE INVESTMENT WAS MADE IN SHARES, PROVISIONS OF SECTION 14A OF THE ACT IS TO BE INVOKED AND THE DISALLOWANCE OF THE CORRESPONDING EXPENDITURE CAN ONLY BE COMPUTED AS PER RULE 8D OF THE I.T. RULES. THE LD. D.R. HAS FURTHER INVITED OUR ATTENTION TO THE COMPUTATION OF INCOME IN WHICH THE ASSESSEE HIMSELF HAS ADDED BACK RS.1,70,46,926/- AS INADMISSIBLE EXPENSES AS PER PROVISIONS OF SECTION 14A OF THE ACT READ WITH RULE 8D, BUT LATER ON VIDE LETTER DATED 13.12.2011, THE ASSESSEE CLAIMED THAT IT HAS WRONGLY DISALLOWED RS.1,70,46,926/- IN THE COMPUTATION OF INCOME, AS NO AMOUNT IS INADMISSIBLE IN ITS CASE UNDER SECTION 14A OF THE ACT AND RULE 8D OF THE RULES. 6. HAVING CAREFULLY EXAMINED THE ORDERS OF THE LOWER AUTHORITIES AS WELL AS THE ORDER OF THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2008-09, WE FIND THAT IN THAT ASSESSMENT YEAR THE TRIBUNAL WAS OF THE VIEW THAT THE INVESTMENT WAS AN OLD INVESTMENT MADE IN 1993 IN THE SUBSIDIARIES FOR ACQUIRING THEIR SHARES AND SUCH INVESTMENT WAS MADE OUT OF OWN FUNDS OF THE ASSESSEE. KEEPING IN VIEW THESE FACTS, THE TRIBUNAL HAS HELD THAT THE ENTIRE BORROWED FUNDS, ON WHICH INTEREST WAS PAID, WERE USED FOR BUSINESS PURPOSES AND NO PORTION THEREOF WAS USED FOR MAKING INVESTMENT. THE AMOUNT OF INTEREST EXPENDITURE CANNOT BE CONSIDERED FOR PROPORTIONAL DISALLOWANCE UNDER RULE 8D OF THE RULES. THE TRIBUNAL, HOWEVER, HAS MADE DISALLOWANCE ON ACCOUNT OF OTHER EXPENDITURES TO THE EXTENT OF 0.5% OF THE AVERAGE VALUE OF THE INVESTMENT. FOR THE SAKE OF REFERENCE, WE EXTRACT THE RELEVANT PORTION OF THE ORDER OF THE TRIBUNAL AS UNDER:- 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS, PERUSED THE MATERIAL AVAILABLE ON RECORD, GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW AND THE JUDGMENTS CITED BY LEARNED D.R. OF THE :- 5 -: REVENUE. ON PAGE NO. 11 OF HIS ORDER, THIS FINDING IS GIVEN BY LEARNED CIT(A) THAT THE INVESTMENT WAS MADE IN 1993 IN SUBSIDIARIES FOR ACQUIRING THEIR SHARES AND SUCH INVESTMENT WAS MADE OUT OF OWN FUNDS OF THE ASSESSEE. HE HAS ALSO GIVEN FINDING THAT EXISTING TERM LOANS ON WHICH INTEREST WAS PAID DURING THE YEAR UNDER CONSIDERATION WERE RECEIVED FOR SPECIFIC PURPOSES AFTER 1993 AND THE CASH CREDIT ACCOUNT WAS USED FOR WORKING CAPITAL OF THE BUSINESS. HE HAS FURTHER GIVEN A FINDING THAT THE INTEREST PAID ON THESE LOANS IS NOT DISALLOWABLE U/S 14A OF THE ACT READ WITH RULE 8D. REGARDING THE INVESTMENTS IN SUBSIDIARIES AND OTHER COMPANIES PROMOTED BY THE ASSESSEE IN THE NATURE OF PROMOTION, THIS FINDING IS GIVEN BY LEARNED CIT(A) THAT THESE INVESTMENTS WERE MADE OUT OF OWN FUNDS OF THE ASSESSEE COMPANY. THESE FINDING OF FACTS GIVEN BY LEARNED CIT(A) COULD NOT BE CONTROVERTED BY LEARNED D.R. OF THE REVENUE. ONCE IT IS ESTABLISHED THAT NO BORROWED FUNDS ON WHICH INTEREST WAS PAID HAS BEEN INVESTED FOR EARNING TAX FREE INCOME, NO DISALLOWANCE OF ANY AMOUNT OUT OF INTEREST CAN BE MADE U/S 14A EVEN AFTER INSERTION OF RULE 8D. AS PER CLAUSE (II) OF SUB RULE (2) OF RULE 8D, PROPORTIONATE DISALLOWANCE OUT OF INTEREST EXPENDITURE IS TO BE MADE IN RESPECT OF THOSE INTEREST EXPENDITURES WHICH ARE NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT. WHEN IN THE FACTS OF A GIVEN CASE, THE ENTIRE INTEREST EXPENDITURE IS ATTRIBUTABLE TO BUSINESS IN WHICH THE INCOME IS ASSESSABLE TO TAX, SUCH INTEREST EXPENDITURE CANNOT BE CONSIDERED FOR THE PURPOSE OF PROPORTIONATE DISALLOWANCE AS PER RULE 8D. IN THE LIGHT OF THESE FINDINGS OF LEARNED CIT(A) THAT ENTIRE BORROWED FUNDS ON WHICH INTEREST WAS PAID WERE USED FOR BUSINESS PURPOSE AND NO PORTION WAS USED FOR MAKING INVESTMENT, THE AMOUNT OF INTEREST EXPENDITURE CANNOT BE CONSIDERED FOR PROPORTIONATE DISALLOWANCE UNDER RULE 8D. OUT OF TOTAL DISALLOWANCE MADE BY THE ASSESSING OFFICER U/S 14A OF RS.67.75 LAC, THE DISALLOWANCE OF RS.66.79 LAC IS OUT OF INTEREST EXPENDITURE AND THEREFORE, TO THIS EXTENT, THE DISALLOWANCE IS DELETED. THE REMAINING DISALLOWANCE OF RS.0.96 LAC IS ON ACCOUNT OF OTHER EXPENDITURE TO THE EXTENT OF 0.5% OF AVERAGE VALUE OF INVESTMENT AND BY RESPECTFULLY FOLLOWING THE :- 6 -: TRIBUNAL DECISION RENDERED IN THE CASE OF R G P MOULDS PVT. LTD. VS. DY. CIT (SUPRA), THIS PART DISALLOWANCE OF RS.0.96 LAC IS CONFIRMED. GROUND NO. 1 & 2 ARE PARTLY ALLOWED. 7. ON A CAREFUL PERUSAL OF THE ORDER OF THE LD. CIT(A), IT IS NOTICED THAT DURING THAT YEAR, THE ASSESSEE HAS MADE FRESH INVESTMENT OF RS.327.63 LAKHS BUT THE TOTAL LOAN WAS REDUCED FROM RS.1,51,224.51 LAKHS TO RS.1,51,004.02 LAKHS. THEREFORE, NO BORROWED FUNDS WERE UTILIZED IN THE INVESTMENT OF SHARES. SIMILARLY, THE RESERVE AND SURPLUS WERE ALSO RAISED DURING THE YEAR. THEREFORE, THERE IS NO EVIDENCE ON RECORD WHEREFROM IT CAN BE EVIDENCED THAT THE INVESTMENT WAS MADE OUT OF FUNDS BORROWED DURING THE YEAR. WHILE ADJUDICATING THE ISSUE, THE LD. CIT(A) HAS EXAMINED ALL THESE ASPECTS AND FOR THE SAKE OF REFERENCE, WE EXTRACT THE RELEVANT PORTION OF THE ORDER OF THE LD. CIT(A) AS UNDER:- I HAVE CAREFULLY CONSIDERED THE DETAILED WRITTEN SUBMISSIONS OF THE AR FOR THE APPELLANT AND PERUSED THE ASSESSMENT ORDER. IT IS SEEN THAT THE AO DISALLOWED RS.1,70,46,926/- BEING INTEREST AND OTHER EXPENSES WITHOUT RECORDING REASONS FOR APPLYING RULE 8D. IN THE COMPUTATION OF INCOME THE APPELLANT ADDED BACK RS.1,70,46,926/- AS INADMISSIBLE EXPENSES AS PER PROVISION OF SECTION 14 A READ WITH RULE 8D. THIS INCLUDED DISALLOWANCE OF PROPORTIONATE INTEREST OF RS.153.39 LACS AND 0.5% OF AVERAGE INVESTMENT ON ACCOUNT OF EXPENDITURE AMOUNTING TO RS.17.08 LACS. THE APPELLANT IS HOLDING INVESTMENT IN SHARES AND PARTNERSHIP FIRM AMOUNTING TO RS.2774.70 LACS AS AT 31ST MARCH 2009 AND THEIR MAJOR INVESTMENT IS IN SHARES OF DHAMPUR SUGAR DISTILLERY PVT. LTD. AND KASHIPUR SUGAR MILLS LTD, IT HAD NOT RECEIVED ANY DIVIDEND INCOME DURING THE YEAR FORM ANY OF THE SHARES HELD BY THEM. THE APPELLANT ONLY RECEIVED INCOME FROM TAX FREE UTI 64 BONDS AMOUNTING TO RS.1.28 LACS. IT NEVER BORROWED ANY MONEY FOR MAKING INVESTMENTS IN SHARES OR CAPITAL IN PARTNERSHIP FIRM. ALL THE INVESTMENTS HAVE BEEN MADE OUT OF NET OWNED FUNDS. THE NET :- 7 -: OWNED FUND AS AT 31ST MARCH 2009 IS RS.49113.99 LACS. DURING THE YEAR, IT MADE FRESH INVESTMENT OF RS. 32.63 LACS AND RAISED FRESH CAPITAL OF RS.754 LACS. IT ALSO EARNED CASH PROFIT IN EXCESS OF RS.5500 LACS DURING THE YEAR. IN THE PREVIOUS YEAR, THE APPELLANT MADE INVESTMENT IN THE SHARES OF DHAMPUR SUGAR DISTILLERY PVT. LTD. OUT OF SALE OF ASSETS AND OUT OF FRESH ISSUE OF CAPITAL. SINCE THE APPELLANT HAD NOT USED BORROWED FUND FOR MAKING INVESTMENT IN SHARES AND PARTNERSHIP FIRM, PROPORTIONATE INTEREST COULD NOT BE DISALLOWED U/S 14A READ WITH RULE 8D. FURTHER THE APPELLATE AUTHORITY IN THE A.Y. 2008-09 HAS DELETED THE DISALLOWANCE U/S 14A IN APPELLANT'S CASE. THE AO HAS NOT BROUGHT ON RECORD ANYTHING WHICH PROVES THAT THERE IS ANY EXPENDITURE INCURRED TOWARDS EARNING OF DIVIDEND INCOME. FURTHER THE AO HAS NOT EXAMINED THE ACCOUNTS OF THE ASSESSEE AND THERE IS NO SATISFACTION RECORDED BY THE AO ABOUT THE CORRECTNESS OR OTHERWISE OF THE CLAIM OF THE ASSESSEE AND WITHOUT THE SAME HE INVOKED RULE 8D THE AO HAD NOT EXAMINED THE ACCOUNTS OR GIVEN A FINDING AS TO HOW THE. ASSESSEE'S COMPUTATION WAS WRONG. CONSEQUENTLY, THE INVOCATION OF RULE 8D WAS IMPROPER AND THE DISALLOWANCE WAS NOT PERMISSIBLE. IN THIS BACK GROUND OF THE CASE AND VARIOUS JUDICIAL, PRONOUNCEMENT CITED BY THE AR FOR THE APPELLANT THE DISALLOWANCE OF RS.1,70,46,929/ UNDER SECTION 14 A READ WITH RULE 8D WHEN NO BORROWED MONEY'WAS USED FOR THE PURCHASE OF SHARES/ NO EXPENDITURE WAS INCURRED BY THE APPELLANT AND NO EXEMPT INCOME WAS RECEIVED BY WAY OF DIVIDEND ON SHARES, IS DELETED. THE GROUND OF APPEAL AS RAISED BY THE APPELLANT STANDS ALLOWED. 8. THE LD. CIT(A) HAS DELETED THE ENTIRE ADDITION MADE BY THE ASSESSING OFFICER WITHOUT LOOKING TO THE FACT THAT ONCE INVESTMENTS ARE MADE IN SHARES, PROVISIONS OF SECTION 14A OF THE ACT READ WITH RULE 8D OF THE RULES, CANNOT BE OUT RIGHTLY IGNORED. IN ASSESSMENT YEAR 2008-09, THE TRIBUNAL, WHILE DELETING THE DISALLOWANCE ON ACCOUNT OF INTEREST EXPENDITURE, HAS RESTRICTED IT TO THE EXTENT OF 0.5% OF THE AVERAGE VALUE OF INVESTMENT ON ACCOUNT OF OTHER EXPENDITURES, BY FOLLOWING THE ORDER OF THE TRIBUNAL IN THE :- 8 -: CASE OF R.G.P. MOULDS PVT. LTD. VS. DY. CIT IN I.T.A. NO. 555/LKW/2011. IN THE INSTANT CASE, THE LD. CIT(A) HAS NOT MADE ANY DISALLOWANCE ON ACCOUNT OF OTHER EXPENDITURES AS PER SUB-RULE (2)(III) OF RULE 8D. WE, THEREFORE, MODIFY THE ORDER OF THE LD. CIT(A) ON THIS ISSUE AND DIRECT THE ASSESSING OFFICER TO COMPUTE THE DISALLOWANCE AT 0.5% OF THE AVERAGE VALUE OF INVESTMENT ON ACCOUNT OF OTHER EXPENDITURES, FOLLOWING THE ORDER OF THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2008-09. 9. APROPOS GROUND NO.4, IT IS NOTICED THAT THE ASSESSING OFFICER HAS MADE DISALLOWANCE OF BALANCES WRITTEN OFF OF M/S VASULINGA SUGAR AND GEN. MILLS FOR RS.35.62 AND RS.252.03 LAKHS HAVING NOTED THAT THE ASSESSEE HAS GIVEN LOANS AND INCURRED EXPENSES ON BEHALF OF M/S VASULINGA SUGAR AND GEN. MILLS FOR SETTING UP A NEW SUGAR FACTORY. THEREFORE, THE LOANS AND ADVANCES GIVEN BY THE ASSESSEE WERE FOR CREATING A NEW ASSET AND HENCE CAPITAL IN NATURE AND NOT ALLOWABLE AS REVENUE EXPENDITURE. 10. BEFORE THE LD. CIT(A), IT WAS CONTENDED ON BEHALF OF THE ASSESSEE THAT RS.35.63 LAKHS WERE RECOVERABLE FROM M/S VASULINGA SUGAR AND GEN. MILLS IN RESPECT OF DEBITS OF SPARES AND STORE SUPPLIES AND EXPENSES DEBITED TO THEM IN RESPECT OF DEPUTATION OF STAFF, TRAVELLING, ETC., AS THESE WERE INCURRED FOR THE FURTHERANCE OF BUSINESS OF THE SUBSIDIARY AND RECOGNIZED AS INCOME BY DEDUCTING THE EXPENSES ON ACCOUNT OF EARLIER YEARS. THE SUGAR FACTORY WAS ULTIMATELY CLOSED AND RAISED HUGE LIABILITY OF BANKS AND OTHERS. SINCE THERE WAS PROSPECT OF RECOVERY, THE ASSESSEE HAS WRITTEN OFF ITS INVESTMENTS AND ADVANCES IN THE BOOKS OF ACCOUNT. IT WAS PRAYED THAT THE LOSS SUFFERED ON ACCOUNT OF NON-RECOVERY OF LOAN SHOULD BE ALLOWED AS BUSINESS LOSS UNDER SECTION 28 OF THE ACT. IT WAS FURTHER ARGUED THAT RS.35.63 LAKHS WAS ACCOUNTED EARLIER AS INCOME AND THE SAME SHOULD BE ALLOWED UNDER SECTION 36(1)(VII) OF THE ACT, SINCE ACTUALLY WRITTEN OFF OR ALTERNATIVELY UNDER SECTION 28 OF THE ACT AS BUSINESS LOSS. BEING CONVINCED WITH THE CONTENTIONS OF THE ASSESSEE, THE LD. CIT(A) DELETED THE ADDITION. :- 9 -: 11. NOW THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL WITH THE SUBMISSION THAT THE ASSESSEE HAS MADE EXTENSION OF ITS FACTORY, THEREFORE, THE INVESTMENT WAS A CAPITAL INVESTMENT AND CANNOT BE ALLOWED AS REVENUE LOSS ON ACCOUNT OF CLOSURE OF THE FACTORY. 12. THE LD. COUNSEL FOR THE ASSESSEE, ON THE OTHER HAND, HAS SUBMITTED THAT THERE IS NO DISPUTE THAT THE ASSESSEE HAS SUFFERED LOSS ON ACCOUNT OF CLOSURE OF THE FACTORY DUE TO UNREST IN NEPAL. NOW THE QUESTION ARISES WHETHER THE LOSS SHOULD BE ALLOWED AS BUSINESS LOSS UNDER SECTION 28 OF THE ACT OR UNDER SECTION 36(1)(VII) OF THE ACT? THE ASSESSEE HAS ALREADY ACCOUNTED FOR THE SAID AMOUNT IN EARLIER AS INCOME, THEREFORE, THE SAME SHOULD BE ALLOWED UNDER SECTION 36(1)(VII) OF THE ACT ON ITS ACTUAL WRITTEN OFF IN THE BOOKS OF ACCOUNT. 13. HAVING GIVEN A THOUGHTFUL CONSIDERATION TO THE RIVAL SUBMISSIONS AND FROM THE CAREFUL PERUSAL OF THE RECORD AND THE ORDERS OF THE AUTHORITIES BELOW, WE FIND THAT WHILE ADJUDICATING THE ISSUE, THE LD. CIT(A) HAS CATEGORICALLY HELD THAT RS.35.63 LAKHS WERE ACCOUNTED FOR IN EARLIER YEARS AS INCOME AND THE REVENUE HAS NOT BROUGHT ANYTHING ON RECORD TO DISPUTE THESE FACTS. THEREFORE, ONCE THERE IS A COMPLIANCE OF PROVISIONS OF SECTION 36(2) OF THE ACT, THE SAME SHOULD BE ALLOWED AS BAD DEBT ON ITS WRITTEN OFF. MOREOVER, THE ASSESSEE HAS SUFFERED A LOSS ON ACCOUNT OF CLOSURE OF THE FACTORY DUE TO UNREST IN NEPAL. THE AFORESAID AMOUNT WAS RECOVERABLE FROM M/S VASULINGA SUGAR AND GEN. MILLS IN RESPECT OF DEBITS OF SPARES AND STORE SUPPLIES AND EXPENSES DEBITED TO THEM IN RESPECT OF DEPUTATION OF STAFF, TRAVELLING, ETC. AND THE SAID AMOUNT WAS TAKEN INTO ACCOUNT WHILE COMPUTING THE INCOME OF THE ASSESSEE. THEREFORE, WE ARE OF THE VIEW THAT THE ASSESSEE IS ENTITLED FOR THE LOSS ON ITS WRITTEN OFF IN THE BOOKS OF ACCOUNT EITHER IN THE FORM OF BAD DEBT OR IN THE FORM OF BUSINESS LOSS AND :- 10 -: THE LD. CIT(A) HAS DISCUSSED BOTH THE ASPECT IN HIS ORDER. THE RELEVANT OBSERVATIONS OF THE LD. CIT(A) ARE EXTRACTED HEREUNDER:- I HAVE CAREFULLY CONSIDERED THE ISSUE, PERUSED THE ASSESSMENT ORDER AND GONE THROUGH THE DETAILED WRITTEN SUBMISSIONS MADE BY THE AR FOR THE APPELLANT. IT IS SEEN THAT THE APPELLANT HAD SET UP A SUGAR MILL IN NEPAL IN SUBSIDIARY COMPANY VIZ. VASULINGA SUGAR AND GENERAL MILLS LTD. THE APPELLANT HAD INCURRED EXPENDITURE ON ACCOUNT OF DEPUTATION OF EMPLOYEES, TRAVELLING EXPENSES, SUPPLY OF SPARES ETC. AGGREGATING TO RS.35,62,653/- IN EARLIER YEARS AND ALSO ADVANCED RS.252.03 LACS. DUE TO UNREST IN NEPAL THE OPERATION OF THE SUGAR MILL WAS BADLY AFFECTED AND THE SUBSIDIARY COMPANY INCURRED HUGE LOSSES. SINCE THERE WAS NO PROSPECT OF RECOVERY THE APPELLANT HAD WRITTEN OFF DEBIT BALANCE ON ACCOUNT OF EXPENDITURE AGGREGATING TO RS.35,62,653/- AND ALSO WRITTEN OFF ADVANCES OF RS.252.03 LACS. THE APPELLANT HAD CLAIMED DEDUCTION OF RS.35,62,653/- IN THE RETURN OF INCOME AND CLAIMED DEDUCTION OF RS.252.03 LACS.. THE ACIT TREATED THESE ADVANCES AS BEING OF CAPITAL NATURE AND DISALLOWED THE CLAIM FOR WRITE OFF. THE AO HAS NOT BROUGHT ON RECORD ANY ACCOUNTING SYSTEM ON THE BASIS OF WHICH HE TREATED IT AS CAPITAL IN NATURE WHEREAS IT IS IN THE NATURE OF REVENUE EXPENDITURE. THE CLAIM OF THE APPELLANT IS THAT THE LOSS SUFFERED WAS ON ACCOUNT OF NON-RECOVERY OF LOAN & IT SHOULD BE ALLOWED AS BUSINESS LOSS U/S 28 OF THE ACT. RS.35.63 LACS WERE ACCOUNTED FOR EARLIER AS INCOME AS EXPLAINED & THE SAME SHOULD BE ALLOWED U/S 36(1) (VII) SINCE IT WAS ACTUALLY WRITTEN OFFER ALTERNATIVELY IT SHOULD BE ALLOWED U/S 28 AS BUSINESS LOSS. TO MY MIND IN ORDER TO CLAIM THE DEDUCTION IN RESPECT OF BAD DEBT, THE BAD DEBT MUST BE DEBITED TO THE PROFIT AND LOSS ACCOUNT AND CORRESPONDINGLY SIMULTANEOUSLY THE AFORESAID BAD DEBT SHOULD BE OBLITERATED OR REDUCED FROM LOANS AND ADVANCES/DEBTORS ON THE ASSETS SIDE OF THE BALANCE-SHEET AND CONSEQUENTLY AT THE END OF THE YEAR, THE FIGURE OF THE LOANS AND ADVANCES OR THE DEBTORS ON THE ASSETS SIDE OF THE BALANCE SHEET SHOULD BE SHOWN AS NET OF THE PROVISION FOR THE IMPUGNED BAD DEBT. IN THE TOTALITY OF THE :- 11 -: CIRCUMSTANCES OF THE APPELLANT'S CASE, THEREFORE, THE DISALLOWANCE AS MADE BY THE AO IS DELETED. 14. SINCE THE LD. CIT(A) HAS ADJUDICATED THE ISSUE IN PROPER PERSPECTIVE IN THE LIGHT OF THE GIVEN FACTS AND CIRCUMSTANCES, WE DO NOT FIND ANY INFIRMITY THEREIN AND WE CONFIRM THE SAME. 15. APROPOS GROUND NO.5, IT WAS CONTENDED ON BEHALF OF THE ASSESSEE THAT THIS GROUND, RELATING TO DISALLOWANCE MADE ON ACCOUNT OF TRIAL RUN EXPENSES, IS SQUARELY COVERED BY THE JUDGMENT OF THE HON'BLE JURISDICTIONAL HIGH COURT IN THE ASSESSEES OWN CASE IN INCOME-TAX APPEAL NO.211 OF 2011, IN WHICH THEIR LORDSHIPS HAVE HELD THAT PRE-OPERATIONAL EXPENSES IN TRIAL RUN WERE REVENUE EXPENSES AND NOT CAPITAL EXPENSES. THE RELEVANT PORTION OF THE JUDGMENT OF THE HON'BLE HIGH COURT IS EXTRACTED HEREUNDER:- 18. IN THE PRESENT CASE, THE PRE-OPERATION EXPENSES HAVE BEEN DETAILED IN THE MATERIAL PRODUCED BEFORE THE ASSESSING OFFICER AND WHICH HAS BEEN REFERRED TO IN THE PAPER BOOK AT PAGES 14, 15 AND 17 IN RESPECT TO CO-GENERATION PLANT, RAUZAGAON; OXALIC ACID, DHAMPUR AND THUS THE PRE-OPERATIONAL EXPENSES, WERE REVENUE EXPENSES AND NOT CAPITAL EXPENSES. THESE EXPENSES WERE ACTUALLY CLAIMED AS REVENUE EXPENSES IN THE COMPUTATION WITH THE RETURN AND WERE TO BE ALLOWED AS REVENUE EXPENSES 16. WE, THEREFORE, FOLLOWING THE AFORESAID JUDGMENT OF THE HON'BLE HIGH COURT, HOLD THAT PRE-OPERATIONAL TRIAL RUN EXPENSES ARE REVENUE EXPENSES AND ACCORDINGLY WE UPHOLD THE ORDER OF THE LD. CIT(A) ON THIS ISSUE. 17. APROPOS GROUND NO.6, IT WAS CONTENDED ON BEHALF OF THE ASSESSEE THAT THIS GROUND IS ALSO COVERED BY THE ORDER OF THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2008-09. NO ADVANCE WAS GIVEN TO DSM AGRO PRODUCTS, KASHIPUR. THIS COMPANY WAS PROMOTED BY THE :- 12 -: ASSESSEE-COMPANY AND THE LOANS WERE ADVANCED TO THEM IN EARLIER YEARS AS PROMOTER CONTRIBUTION AND TO PROMOTE AND RUN THE BUSINESS OF THE SUBSIDIARY IN THE INTEREST OF SUBSIDIARY COMPANY AND IN THOSE YEARS NO DISALLOWANCE OF PROPORTIONATE INTEREST WAS MADE ON ACCOUNT OF NOT CHARGING INTEREST BY THE ASSESSEE. THEREFORE, IN THE IMPUGNED ASSESSMENT YEAR NO DISALLOWANCE CAN BE MADE. 18. THE LD. D.R., ON THE OTHER HAND, HAS PLACED RELIANCE UPON THE ORDER OF THE ASSESSING OFFICER. 19. HAVING CAREFULLY EXAMINED THE ORDERS OF THE AUTHORITIES BELOW AND THE ORDER OF THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2008-09, WE FIND THAT THE IMPUGNED ISSUE WAS EXAMINED BY THE TRIBUNAL IN THE ASSESSEES OWN CASE IN ASSESSMENT YEAR 2008-09 AND THE TRIBUNAL, RELYING UPON OTHER ORDERS OF THE TRIBUNAL FOR ASSESSMENT YEAR 2001-02 AND 2002-03, HAS CONFIRMED THE ORDER OF THE LD. CIT(A) DELETING THE DISALLOWANCE OF PROPORTIONATE INTEREST MADE BY THE ASSESSING OFFICER. THE RELEVANT OBSERVATIONS OF THE TRIBUNAL ARE EXTRACTED HEREUNDER:- 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS, PERUSED THE MATERIAL AVAILABLE ON RECORD AND GONE THROUGH THE ORDER OF THE TRIBUNAL CITED BY LEARNED A.R. OF THE ASSESSEE. WE FIND THAT IN ASSESSMENT YEAR 2003-04, 2004-05 AND 2005-06, THIS VERY ISSUE WAS BEFORE THE TRIBUNAL REGARDING DISALLOWANCE MADE BY THE ASSESSING OFFICER OF INTEREST PAID ON BORROWED FUND. THE TRIBUNAL IN THESE YEARS, FOLLOWED ANOTHER TRIBUNAL ORDER IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2001-2002 AND 2002-2003 AND CONFIRMED THE ORDER OF CIT(A) AND DISMISSED THE GROUND RAISED BY THE REVENUE. IN THE PRESENT YEAR, NO DIFFERENCE IN FACTS COULD BE POINTED OUT BY LEARNED D.R. OF THE REVENUE AND THEREFORE, WE DO NOT FIND ANY REASON TO TAKE A CONTRARY VIEW IN THE PRESENT YEAR. THEREFORE, RESPECTFULLY FOLLOWING THE EARLIER TRIBUNAL ORDER IN ASSESSEES OWN CASE, WE DECIDE THIS ISSUE IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. ACCORDINGLY, GROUND NO. 3 & 4 ARE REJECTED. :- 13 -: 20. SINCE NOTHING HAS BEEN BROUGHT ON RECORD BY THE LD. D.R. THAT THESE ADVANCES WERE GIVEN DURING THE IMPUGNED ASSESSMENT YEAR, THE ADVANCES ON WHICH PROPORTIONATE DISALLOWANCE WAS MADE ARE CONSIDERED TO BE OLD ADVANCES, ON WHICH NO DISALLOWANCE MADE IN EARLIER YEARS. THEREFORE, FOLLOWING THE AFORESAID ORDER OF THE TRIBUNAL, WE FIND THAT NO INFIRMITY IN THE ORDER OF THE LD. CIT(A), WHO HAS RIGHTLY DELETED THE DISALLOWANCE. 21. IN THE RESULT, APPEAL OF THE REVENUE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER WAS PRONOUNCED IN THE OPEN COURT ON THE DATE MENTIONED ON THE CAPTIONED PAGE. SD/- SD/- [A. K. GARODIA] [SUNIL KUMAR YADAV] ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 16 TH DECEMBER, 2014 JJ:1012 COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR ASSISTANT REGISTRAR