The DCIT, Circle-2, Surat V. Shri Manukant C.Shah,HUF, Surat

ITA 896/AHD/2010

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 6120 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-06-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Assessment Year: 2006-2007
• Appeal Filed On: 26-03-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: C K MISHRA SRDR
• Assessee Lawyers: M K PATEL
• Keywords: Bad and doubtful debts

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH D AHMEDABAD BEFORE SHRI N.S.SAINI, ACCOUNTANT MEMBER AND SHRI MAHAVIR SINGH, JUDICIAL MEMBER ITA NO.896/AHD/2010 ASSESSMENT YEAR:2006-07 DATE OF HEARING:4.6.10 DRAFTED:7.6.10 DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-2, SURAT, ROOM NO.110,1 ST FLOOR, AAYAKAR BHAVAN, MAJURA TAGE, SURAT V/S . M/S. MANUKANT C SHAH (HUF), BUNGALOW NO.38, SAHIL, MAHADEV NAGAR SOCIETY, MAJURA GATE, SURAR PAN NO.AACHM8178B (APPELLANT) .. (RESPONDENT) APPELLANT BY :- SHRI C.K. MISHRA, SR-DR RESPONDENT BY:- SHRI M.K. PATEL, AR O R D E R PER MAHAVIR SINGH JUDICIAL MEMBER:- THIS APPEAL BY THE REVENUE IS ARISING OUT OF THE OR DER OF COMMISSIONER OF INCOME-TAX (APPEALS)-II, SURAT IN APPEAL NO.CAS/II/ 498.08-09 DATED 29-12-2009. THE ASSESSMENT WAS FRAMED BY ACIT, CIRCLE-2, SURAT U/S.143(3) OF THE INCOME-TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT) VI DE HIS ORDER DATED 31-12-2008 FOR ASSESSMENT YEAR 2006-07. 2. AT THE OUTSET LD. SR-DR, SHRI C.K. MISHRA STATED THAT APPEAL IS DELAYED BY THREE DAYS AND THIS DELAY IS DUE TO PRESSURE OF COL LECTION WORK ON THE DEPARTMENT AT THE END OF FINANCIAL YEAR AND DUE TO DISLOCATION OF FILE. HE STATED THAT IN VIEW OF THIS REASON APPEAL FILED COULD NOT BE FILED WITHIN 60 DA YS. HE REQUESTED FOR CONDONATION ITA NO.896/AHD/2010 A.Y. 2006-07 DCIT CIR-2, SRT V. M/S. MANUKANT C SHAH PAGE 2 OF DELAY. LD. COUNSEL FOR THE ASSESSEE SHRI M.K. P ATEL ALSO NOT OBJECTED TO CONDONATION OF DELAY. IN VIEW OF THE ABOVE REASONS , WE CONDONE THE DELAY AND ADMIT THE APPEAL. 3. THE ONLY ISSUE IN THIS APPEAL OF REVENUE IS AGAI NST THE ORDER OF CIT(A) IN ALLOWING THE CLAIM OF BAD DEBS. FOR THIS, REVENUE H AS RAISED THE EFFECTIVE FOLLOWING GROUND NO.1 :- 1) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE LEARNED CIT(A) HAS ERRED IN DELETING THE ADDITION MADE BY T HE A.O. OF RS.11,78,950/- ON ACCOUNT DISALLOWANCE OF BAD DEBTS. 4. THE BRIEF FACTS LEADING TO THE ABOVE ISSUE ARE T HAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF CHEQUES DISCOUNTING (SHROFF) AND CI T(A) ALLOWED THE CLAIM OF THE ASSESSEE BY GIVING FOLLOWING FINDINGS IN PARA-5 TO 5.4 OF HIS APPELLATE ORDER:- 5. I HAVE CAREFULLY CONSIDERED BOTH THE POSITIONS. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF CHEQUES DISCOUNTING WHEREIN HE RECE IVES CHEQUES FROM PARTIES, PAYS CASH AFTER DEDUCTING HIS COMMISSION F ROM THE CHEQUES AMOUNTS. HE THEN DEPOSITS THE CHEQUES IN HIS BANK ACCOUNT AN D REALIZES/ENCASHES THE SAME. THE DIFFERENCE BETWEEN WHAT IS REALISED FROM ENCASHING THE CHEQUES AND THE CASH THAT HE PAYS OUT, IS HIS COMMISSION IN COME. IN THIS PARTICULAR CASE, THE ASSESSEE HAD RECEIVED CHEQUES FROM CERTAI N PARTIES WHICH WERE DISHONOURED BY THE CONCERNED BANKS. SINCE, THIN THE MEAN TIME, THE ASSESSEE HAD PAID OUT THE CASH AND SINCE THE CHEQUE S WERE DISHONOURED PREVENTING HIM FROM REALIZING SUCH AMOUNTS, IT BECA ME A DEBT WHICH COULD NOT BE RECOVERED. IN OTHER WORDS, IT WAS A BAD DEBT. TH E TOTAL AMOUNT OF SUCH BAD DEBTS WAS RS.11,78,950 WHICH WAS CLAIMED BY THE ASS ESSEE IN THE P & L ACCOUNT. THE AO REJECTED THE ASSESSEES CLAIM ON CE RTAIN GROUNDS. THE GROUND WHAT THAT, THE ASSESSEE HAD FAILED TO FURNIS H ANY EVIDENCE TO SUBSTANTIATE ITS CLAIM THAT CASH HAS BEEN PAID TO T HE SAID PARTIES AND THAT THE ENTRIES OF CHEQUES DEPOSITED AND CASH WITHDRAWN WAS DONE UNDER THE SHROFF ACCOUNT AND NAMES OF THE CLIENTS WERE NO MENTIONED . BOTH THE GROUNDS WERE NOT JUSTIFIED. THE VERY FACT THAT THE ASSESSEE OPER ATED AS A SHROFF MEANT THAT BEFORE ENCASHING THE CHEQUES FROM THE BANK HE WOULD HAVE HAD TO PAY THE CASH. THE PAYMENT AS REFLECTED IN THE CASH BOOK AND THE DETAILS OF PAYMENT WAS REFLECTED IN THE LEDGER ACCOUNT. SIMPLY BECAUSE THE NAMES OF THE PARTIES WAS NOT MENTIONED IN THE CASH BOOK COULD NOT BE A G ROUND TO REJECT THE ASSESSEES CLAIM OF BAD DEBTS. THE NEXT GROUND TAKE N BY THE AO WAS THAT, THE ASSESSEES CLAIM WAS NOT ALLOWABLE AS PER THE P ROVISIONS OF SECTION 36(2) OF THE IT AC. THE AO HAS REFERRED TO CLAUSE (I) OF SUB-SECTION (2) OF SECTION 36 TO ARGUE THAT IT HAD NO BEEN SHOWN BY THE ASSESSEE THAT SUCH DEBTS HAD BEEN ITA NO.896/AHD/2010 A.Y. 2006-07 DCIT CIR-2, SRT V. M/S. MANUKANT C SHAH PAGE 3 TAKEN INTO ACCOUNT WHILE COMPUTING THE INCOME OF TH E PREVIOUS YEAR IN WHICH THE AMOUNT OF THE DEBTS HAD BEEN WRITTEN OFF OR IN AN EARLIER PREVIOUS YEAR OR, IT REPRESENTED MONEY LENT IN THE ORDINARY COURSE OF BUSINESS OF BANKING OR MONEY LENDING CARRIED OUT BY THE ASSESSEE. 5.1 FIRSTLY, THE ASSESSEE BEING A SHROFF, THE ENTIR E DEBT COULD NOT BE TAKEN INTO ACCOUNT IN COMPUTING THE ASSESSEES INCOME. AS STAT ED EARLIER, THE INCOME OF A SHROFF IS THE COMMISSION REPRESENTED BY THE DIFFE RENCE BETWEEN THE CHEQUES AMOUNT AND THE CASH GIVEN OUT. THE COMMISSI ON INCOME EARNED BY THE ASSESSEE FROM THE TRANSACTIONS IN QUESTION HAD BEEN DISCLOSED AS SINCE. SECONDLY, THE AO HELD THAT THE BUSINESS OF CHEQUES DISCOUNTING IS NOT MONEY LENDING. THOUGH, IN THE STRICT TECHNICAL SENSE, CHE QUES DISCOUNTING MAY NOT BE TREATED AS MONEY-LENDING YET, THERE ARE SIGNIFIC ANT PARALLELS BETWEEN CHEQUES DISCOUNTING AND MONEY-LENDING. A MONEY LEND ER TAKES A SECURITY WHILE LENDING MONEY, EVEN THOUGH HE EARNS INTEREST ON THE MONEY LENT. A SHROFF TAKES A CHEQUES AGAINST THE CASH GIVEN. THIS CHEQUES IS HIS SECURITY, AT LEAST FOR THE TIME BEING, AND UNTIL THE TIME THE CH EQUES IS DISHONOURED. IN ANY CASE CLAUSE (I) TO SUBSECTION (2) OF SECTION 36 IS NOT APPLICABLE SINCE, THE MAIN PROVISION PERTAINING TO THE DEBT BEING INCLUDED IN THE INCOME OF THE YEAR, DOES NOT APPLY TO THE BUSINESS OF A SHROFF. 5.2 THE NEXT GROUND TAKEN BY THE AO IS THAT, THE LO SS SUFFERED BY THE ASSESSEE WAS A CAPITAL LOSS. THIS AGAIN WAS AN ERRO NEOUS VIEW. THE CASH THAT THE SHROFF PAYS IS HIS INVESTMENT IN THE STOCK -IN-TRADE FROM WHICH HE EARNS HIS COMMISSION INCOME AFTER ENCASHING THE CHEQUES T AKEN AGAINST THE CASH. JUST AS INCOME A FIRE IN A SHOP OF ELECTRONIC GOODS , THE LOSS OF GOODS IS ALLOWED AS A REVENUE LOSS EVEN THOUGH THE DESTRUCTI ON OF THE SUPER STRUCTURE OF THE SHOP MAY BE READ AS A CAPITAL LOSS. IN THE S AME MANNER, THE LOSS SUFFERED BY A SHROFF WHEN A CHEQUES RECEIVED FROM A PARTY AGAINST CASH PAYMENT IS DISHONOURED, HAS NECESSARILY TO BE TREAT ED AS A REVENUE LOSS. 5.3 NOW COMES THE QUESTION OF BAD DEBS. THE AR HAS PLACED RELIANCE ON HE PROVISIONS OF SECTION 36(1)(VII) TO ARGUE THAT SINC E THE DEBTS HAD BEEN WRITTEN OFF IN THE BOOK OF ACCOUNTS, IT HAS TO BE ALLOWED A S BAD DEBTS. THIS POSITION IS NOT ACCEPTABLE. THE AMENDMENT TO THE SAID SECTION D ID NOT REMOVE THE WORD BAD WHICH PRECEDES AND QUALIFIES HE WORD DEBT. IF THE INTENTION OF THE LEGISLATURE WAS TO ALLOW THE WRITING OFF OF ANY DEB T BY SIMPLY DEBITING THE SAME TO THE P&L A/C., THEN THE WORD BAD WOULD HAV E BEEN REMOVED FROM THE STATUTE. SINCE THIS WAS NOT SO, THE WORD DEBT CON TINUES TO BE DEFINED BY THE WORD BAD WHICH MEANS THAT A DEBT WOULD ESSENTIALL Y HAVE TO BE BAD BEFORE IT COULD BE WRITTEN OFF IN THE ACCOUNTS. IN ORDER T O ESTABLISH THAT A DEBT HAS INDEED GONE BAD, THE ASSESSEE WOULD NECESSARILY HAV E TO FURNISH RELEVANT EVIDENCE TO SHOW THAT A PARTICULAR DEBT HAD BECOME IRRECOVERABLE AFTER ALL NECESSARY STEPS HAD BEEN TAKEN TO RECOVER THE SAME. 5.4 IN THE CASE OF THE ASSESSEE HOWEVER, THE VERY F ACT THAT THE ASSESSEE HAD FILED CRIMINAL PROCEEDINGS AGAINST THE DEFAULTING P ARTIES SHOWED THAT THE DEBTS HAD BECOME BAD, AND HAD BECOME IRRECOVERABLE. HE AO THEREFORE, WAS NOT JUSTIFIED IN REJECTING THE ASSESSEES CLAIM. HE/SHE IS DIRECTED TO ALLOW THE ITA NO.896/AHD/2010 A.Y. 2006-07 DCIT CIR-2, SRT V. M/S. MANUKANT C SHAH PAGE 4 ASSESSEES CLAIM OF BAD DEBTS OF RS.11,78,950. THE ADDITION OF THE SAID SUM WILL STAND DELETED. 5. WE FIND THAT ASSESSEE IS ENGAGED IN THE BUSINESS OF CHEQUES DISCOUNTING (SHROFF) AND ASSESSEE CLAIMED A SUM OF RS.11,78,950 /- TOWARDS BAD DEBTS. IN COURSE OF ASSESSMENT PROCEEDINGS LD COUNSEL FOR THE ASSESS EE MADE A SUBMISSION VIDE LETTER DATED 210-10-2008 AND RELEVANT PORTION OF WH ICH HAS BEEN REPRODUCED BY ASSESSING OFFICER IN THE BODY OF ASSESSMENT ORDER. HE REJECTED THE ASSESSEES SUBMISSION ON THE GROUND THAT, ALTHOUGH IT HAD BEEN CLAIMED THAT THE CHEQUES HAD GOT DISHONOURED AND ASSESSEE HAD ALREADY MADE THE P AYMENTS IN CASH YET, NAMES OF THE PARTIES HAD NOT BEEN MENTIONED. AS PER THE P ROVISIONS OF SECTION 36(2) OF THE ACT, NO CLAIM OF BAD DEBTS WAS TO BE ALLOWED, SINCE THE AMOUNT CLAIMED AS BAD DEBTS HAD NOT BEEN OFFERED AS INCOME IN ANY OF THE EARLIER YEARS. AS REGARDS THE ASSESSEES CLAIM THAT CRIMINAL CASE U/S.138 HAD BEE N FILED AGAINST THE SAID PARTIES, AO REJECTED THE SAME AS THE MATTER WAS YET TO BE DE CIDED BY COURT. PLACING RELIANCE ON HE PROVISIONS OF SEC. 36(1)(VII) OF THE ACT, AO DISALLOWED THE SUM OF RS.11,78,950/- AND ADDED THE SAME AS ASSESSEES TOT AL INCOME. AGGRIEVED, THE ASSESSEE PREFERRED APPEAL BEFORE CIT(A). THE CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE AS MENTIONED ABOVE. AGGRIEVED, REVENUE CA ME IN APPEAL BEFORE US. 6. WE FURTHER FIND THAT THE ASSESSEE HAD WRITTEN OF F THESE AMOUNTS AS BAD DEBTS / BUSINESS LOSS. THE ASSESSEE HAD FIELD CRIMINAL CA SES AGAINST THE CONCERNED PARTIES. IT IS THE CONTENTION OF THE LD. COUNSEL F OR THE ASSESSEE THAT SINCE THE LOSS HAD OCCURRED IN COURSE OF ASSESSEES BUSINESS OF CH EQUES DISCOUNTING THE SAME SHOULD BE ALLOWED AS DEDUCTION AGAINST ITS INCOME. THE LD. COUNSEL FOR THE ASSESSEE HAS STRONGLY OBJECTED THE AO'S OBSERVATION THAT ASS ESSEES BOOKS OF ACCOUNT DID NOT SHOW THE PAYMENT OF CASH TO THE CONCERNED PARTIES. THERE WAS A TOTAL OF EIGHT PARTIES WHOSE CHEQUES HAD BEEN DISHONOURED AND DEBI T ENTRIES WITH REGARD TO DISHONOURED CHEQUES HAD BEEN MADE IN THE LEDGER. CO PIES OF RELEVANT PAGES OF THE CASH BOOK AND LEDGER ACCOUNTS HAVE BEEN ANNEXED TO THE WRITTEN SUBMISSIONS BEFORE US. IT HAS BEEN SUBMITTED BY LD. COUNSEL FOR THE ASSESSEE THAT OUT OF DISHONOURED CHEQUES OF RS.38,950/- RECEIVABLE FROM SHRI PRAFUL PARMAR, THE ITA NO.896/AHD/2010 A.Y. 2006-07 DCIT CIR-2, SRT V. M/S. MANUKANT C SHAH PAGE 5 ASSESSEE HAD RECEIVED A SUM OF RS.35,000/-, IN CASH WHICH WAS DULY DEBITED TO THE LEDGER ACCOUNT LEAVING THE WRITTEN OFF AMOUNT AT RS .3,950/-. IT HAS BEEN PLEADED THAT THE DISALLOWANCE MADE BY AO BE DELETED. LD. COUNSEL PLACE ON THE PROVISIONS OF SECTION 36(2) OF THE ACT AND ON THE FOLLOWING CASE LAWS:- I) CIT V. BANANZA PORFOLIO LTD. (2009) 29 DTR 280 ( DEL) II) COLOURCHEM LIMITED V. CIT (1997) 225 ITR 164 (B OM) III) ACIT V. M. RANGA PAI & ORS. (1975) 100 ITR 413 (KAR) IV) R.B. NARAIN SINGH MILLS LD. V. DCIT (2003) 85 I TD 552 (DEL) IN VIEW OF THE ABOVE FACTS AND CIRCUMSTANCES, WE AR E OF THE VIEW THAT THE LOSS INCURRED BY THE ASSESSEE IS A BUSINESS LOSS ALLOWAB LE. WE ALLOW THE CLAIM OF THE ASSESSEE AND UPHOLD THE ORDER OF CIT(A) ON THIS ISS UE. THIS APPEAL OF THE REVENUE IS DISMISSED. 7. IN THE RESULT, REVENUES APPEAL IS DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON 04/06/2010 SD/- SD/- (N.S.SAINI) (MAHAVIR SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER AHMEDABAD, DATED :04/06/2010 *DKP COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT(APPEALS)- II, SURAT 4. THE CIT CONCERNS. 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER, /TRUE COPY/ DEPUTY / ASSTT.REGISTRAR ITAT, AHMEDABAD