MERIND LTD, MUMBAI V. ACIT CEN CIR 14, MUMBAI

ITA 904/MUM/2011

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 3546 (ITAT-MUMBAI)
• Duration Of Justice: 5 year(s) 3 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-05-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: G
• Next Hearing Date: 29-02-2016
• Assessment Year: 2002-2003
• Appeal Filed On: 01-02-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: K P R R MURTY
• Keywords: Bad and doubtful debts; Capital expenditure
• Section: 143(3); 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, B ENCH G, MUMBAI BEFORE SHRI D. KARUNAKARA RAO, ACCOUNTANT MEMB ER AND SHRI PAWAN SINGH, JUDICIAL MEMBER ITA NO.904/MUM/2011 ASSESSMENT YEAR: 2002-03 MERIND LIMITED, MULUND GOREGAON LINK ROAD, BHANDUP (WEST), MUMBAI- 400078 PAN: AAACM2735P VS. ACIT RANGE- 10(3), AAYAKAR BHAVAN, M. K. ROAD, MUMBAI-400020. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI M.P.LOHIA & NIKHIL TIWARI (AR) REVENUE BY : SHRI K P R R MURTY (DR) DATE OF HEARING : 07.03.2016 DATE OF PRONOUNCEMENT : 31.05.2016 O R D E R PER PAWAN SINGH, JM: 1. THIS APPEAL FILED BY ASSESSEE AGAINST THE ORDER OF CIT(A)-22, MUMBAI DATED 22.11.2010 FOR ASSESSMENT YEAR (AY) 2002-03 RAISING THE FOLLOWING GROUNDS OF APPEAL: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LEARNED CIT(A): DISALLOWANCE OF INTEREST EXPENDITURE 1. ERRED IN UPHOLDING THE DISALLOWANCE OF INTEREST EXPENDITURE TO THE EXTENT OF RS 3.584 CRORES UNDER SECTION 36(1)(III) OF THE ACT ON THE GROUND THAT SUCH INTEREST EXPENDITURE PERTAINED TO ADVANCEMENT OF BORROWED FU NDS FOR GRANT OF INTEREST FREE ADVANCES. DISALLOWANCE OF PROVISION FOR DOUBTFUL DEBTS 2. ERRED IN UPHOLDING THE DISALLOWANCE OF PROVISION FOR DOUBTFUL DEBTS OF RS 12.10 LAKHS DEBITED TO PROFIT & LOSS ACCOUNT (WRITTEN OFF AS BAD DEBTS) AND REDUCED FROM DEBTORS ON THE GROUND THAT THE APPELLANT HAS F AILED TO SATISFY THE CONDITIONS UNDER SECTIONS 36(1)(VII AND 36(2) OF THE ACT. DISALLOWANCE OF WEIGHTED DEDUCTION UNDER SECTION 35 (2AB) OF THE ACT 3. ERRED IN UPHOLDING THE DISALLOWANCE OF WEIGHTED DEDUCTION ON REVENUE EXPENSES OF RS 0.52 CRORES UNDER SECTION 35(2AB) OF THE ACT ON THE GROUND THAT 2 ITA NO. 904/M/2011 MERIND LIMITED. THE APPELLANT FAILED TO COMPLY WITH PROCEDURAL REQU IREMENTS AND FURNISHING OF INFORMATION SUCH AS FORM 3CL, COPY OF AGREEMENTS UN DER SECTION 35(2AB) OF THE ACT. 4. ERRED IN UPHOLDING DISALLOWANCE OF ENTIRE EXPENS ES OF CAPITAL IN NATURE OF RS. 12.51 LAKHS CLAIMED AS WEIGHTED DEDUCTION UNDER SEC TION 35(2AB) ON THE GROUND THAT THE APPELLANT FAILED TO COMPLY WITH PROCEDURAL REQUIREMENTS AND FURNISHING OF INFORMATION SUCH AS FORM 3CL, COPY OF AGREEMENTS UNDER SECTION 35(2AB) OF THE ACT. 5. WITHOUT PREJUDICE TO THE ABOVE, SHOULD HAVE DIRE CTED TO ALLOW DEDUCTION OF CAPITAL EXPENDITURE OF RS. 8.33 LAKHS UNDER SECTION 35(1 )(IV) OF THE ACT. DISALLOWANCE OF PROVISION FOR DIMINUTION IN VALUE O F INVESTMENTS 6. ERRED IN UPHOLDING THE DISALLOWANCE OF PROVISION FOR DIMINUTION IN VALUE OF INVESTMENT TO THE EXTENT OF RS. 7.776 CRORES ON THE GROUND THAT THE APPELLANT FAILED TO EXPLAIN THE NATURE OF DIMINUTION IN VALUE OF INVESTMENTS AND THAT THE LOSS IS CAPITAL IN NATURE. LEVY OF INTEREST UNDER SECTION 234D OF THE ACT 7. ERRED IN CONFIRMING LEVY OF INTEREST UNDER SECTI ON 234D, WITHOUT APPRECIATING THAT: A. THE PROVISIONS OF SECTION 234D WHICH CAME INTO E FFECT FROM 1 JUNE 2003 CANNOT BE APPLIED TO THE YEAR UNDER REFERENCE. B. IN ANY CASE, NO INTEREST CAN BE CHARGED UNDER SE CTION 234D IN RESPECT OF REFUND WHICH WAS GRANTED PRIOR TO 1 JUNE 2003 AND T HAT TOO, FOR PERIOD AFTER DATE OF REGULAR ASSESSMENT. 2. THOUGH THE ASSESSEE HAS RAISED AS MANY AS 7 GROUNDS OF APPEAL, HOWEVER, AT THE TIME OF MAKING SUBMISSION LD. AR OF THE ASSESSEE MA DE A STATEMENT THAT ASSESSEE DOES NOT PRESS GROUND NO. 3 TO 6. FURTHER, GROUND NO. 7 IS CONSEQUENTIAL IN NATURE. THUS, GROUND NO. 1 & 2 ARE LEFT FOR OUR CONSIDERED DECISION. 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE FILED ITS RETURN OF INCOME FOR RELEVANT AY ON 31.10.2002 DECLARING TOTAL LOSS OF RS. 8,26,7 6910/-. THE RETURN WAS SELECTED FOR SCRUTINY AND WHILE FRAMING ASSESSMENT U/S. 143(3) OF THE I.T. ACT, THE AO MADE A VARIOUS DISALLOWANCE INCLUDING DISALL OWANCE OF BAD DEBT OF RS. 12,10,000/- AND INTEREST EXPENDITURE OF RS. 3.584 C RORE U/S. 36(1)(III) OF THE ACT. THE AO DETERMINED TOTAL INCOME AT RS. 38,55,99,275/ -. AGGRIEVED BY THE ORDER OF AO, THE ASSESSEE FILED APPEAL BEFORE THE CIT(A) BUT WITHOUT ANY SUCCESS. HENCE, THIS SECOND APPEAL IS FILED BEFORE US. 4. GROUND NO. 1 FOR OUR CONSIDERATION RELATES TO UPHOL DING OF DISALLOWANCE OF INTEREST EXPENDITURE OF RS. 3.584 CRORE U/S 36(1)(I II) OF THE ACT. WE HAVE HEARD SHRI M.P.LOHIA & NIKHIL TIWARI, LD. ARS OF ASSESSE E AND SHRI K.P.R.R. MURTY, LD. DR FOR REVENUE AND PERUSED THE MATERIAL AVAILAB LE ON RECORD. LD. AR OF THE ASSESSEE ARGUED THAT ASSESSEE HAS GIVEN INTEREST FR EE LOAN AND ADVANCES TO VARIOUS PARTIES AND INCURRED INTEREST EXPENSE AMOUN TING TO RS. 3.54 CRORE ON 3 ITA NO. 904/M/2011 MERIND LIMITED. LOAN BORROWED AMOUNTING TO RS. 184.80 CRORE. THE BR EAKUP OF LOAN WAS PROVIDED TO THE AUTHORITIES BELOW. THE ASSESSEE CLA IMS THAT THE EXPENDITURE HAS BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOS E OF BUSINESS AND THE SAME IS ALLOWABLE U/S. 36(1)(III) R.W.S. 37(1) OF THE AC T. AR OF THE ASSESSEE SUBMITTED THAT ITAT, MUMBAI IN ASSESSEES OWN CASE FOR AY 200 1-02 IN ITA NO. 5438/M/2006 ALLOWED THE CLAIM OF INTEREST EXPENDITU RE INCURRED BY ASSESSEE. THE LD. DR FOR THE REVENUE ARGUED THAT INTEREST EXP ENSE WAS NOT INCURRED FOR THE PURPOSE OF BUSINESS. ON HEARING BOTH THE PARTIES, W E HAVE SEEN THAT A SIMILAR DISALLOWANCE WAS MADE IN THE ASSESSMENT ORDER FOR A Y 2001-02 AND ASSESSEE PREFERRED APPEAL BEFORE CIT(A) WHEREIN THE DISALLOW ANCE WAS DELETED BY HIM. THE REVENUE FILED APPEAL BEFORE ITAT VIDE ITA NO. 5 438/M/2006 AND THE SAME WAS DISMISSED VIDE ORDER DATED 21.01.2009 HOLDING A S UNDER: 9. WE HEARD BOTH THE PARTIES. 10. FIRST, THE AO CANNOT DISALLOW THE INTEREST EXPE NSES FOR THE YEAR UNDER CONSIDERATION AS THE ADVANCE IN QUESTION HAS NOT BE EN MADE DURING THE YEAR UNDER CONSIDERATION. FOLLOWING THE DECISION IN THE CASE OF CIT(A) VS SRIDEV ENTERPRISES 192 ITR 165 (KAR.), THE AO CANNOT DISA LLOW THE INTEREST EXPENSE FOR THE YEAR UNDER CONSIDERATION ON THE PREMISE THA T INTEREST BEARING FUNDS ARE USED TO ADVANCE INTEREST FREE ADVANCES, IF NO S UCH DISALLOWANCES ARE MADE IN ANY PRIOR ASSESSMENT YEAR. THEREFORE THE AS SESSEE'S CLAIM IS TO BE ALLOWED. 11. SECONDLY, IT IS ESSENTIAL TO PROVE DIVERSION OF BORROWED FUNDS FOR NON BUSINESS PURPOSE BEFORE DISALLOWING INTEREST PAID O N BORROWED CAPITAL IN ACIT VS CLARIDGES INVESTMENTS & FINANCE PVT. LTD. 1 8 SOT 390(MUM) IT HAS BEEN HELD AS UNDER: 'THERE IS NO CASE FOR MAKING ANY DISALLOWANCE ON TH E INTEREST PAID ON THE MONIES BORROWED AS THE FACTS CLEARLY REVEAL THA T THE BORROWED FUNDS HAVE BEEN UTILIZED FOR THE PURPOSE OF BUSINES S. MERELY BECAUSE THERE WAS HUGE OVERDRAFT ACCOUNT IT CANNOT BE HELD THAT SUCH BORROWED FUNDS WERE UTILIZED FOR NON-BUSINESS PURPO SE. THE ASSESSEE HAD SUFFICIENT INTEREST FREE FUNDS TAKEN FROM ITS G ROUP CONCERNS. 12. THE AO HAS NOT PROVED THE DIVERSION OF FUNDS FO R NON BUSINESS PURPOSES. THEREFORE THE ASSESSEE'S CLAIM IS TO BE ALLOWED. 13. THIRDLY, SINCE CAPITAL PLUS RESERVES EXCEEDS TH E INVESTMENTS, NO DISALLOWANCE OF INTEREST IS WARRANTED, IN RESPECT O F INTEREST BEARING BORROWINGS. THIS PROPOSITION HAS BEEN LAID OUT IN T HE CASE OF CIT VS RADICO KHAITAN LTD 274 ITR 354 (ALL.) WHEREIN IT HAS BEEN HELD AS UNDER: 'TRIBUNAL HAVING FOUND ON FACTS THAT ASSESSEE HAD S UFFICIENT FUNDS IN THE FORM OF CAPITAL RESERVE AND SURPLUS OTHER THAN THE BORROWED FUNDS, ASSESSEE WAS ENTITLED TO FULL ALLOWANCE OF INTEREST ON BORROWED MONEY. 14. THE CO-ORDINATE BENCH OF THE MURNBAI TRIBUNAL I N THE CASE OF GRASIRN INDUSTRIES VS DCIT 64 TTJ 357(MUM) HAS BEEN HELD AS UNDER: 'HAVING REGARD TO THE PRINCIPLES LAID DOWN BY THE C ALCUTTA HIGH COURT IN THE CASES OF WOOLCOMBERS OF INDIA LTD. VS CIT 134 ITR. 217 (CAL), RECKITT & COLMAN OF INDIA VS. CIT 135 ITR 69 8 (CAL.) AND OTHER AUTHORITIES AND POSITION OF DEPOSITS OUT OF P ROFIT AND OWN FUNDS IN THE COMMON ACCOUNT BEING MORE THAN WITHDRAWALS, THE INVESTMENT 4 ITA NO. 904/M/2011 MERIND LIMITED. IN SECURITIES WAS TO BE PRESUMED TO BE MADE BY THE ASSESSEE OUT OF ITS OWN FUNDS AND NOT OF BORROWINGS. THE AO WRONGLY PLA CED ONUS ON THE ASSESSEE TO LINK THE INVESTMENT AND ERRONEOUSLY DRE W A CONCLUSION AQAIN.ST THE ASSESSEE AND ALLOCATED INTEREST ON PRO PORTIONATE BASIS. 15. RESPECTFULLY FOLLOWING THE DECISION (SUPRA), WE CONFIRM THE ORDER OF THE LD. CIT(A) AND DISMISS THE REVENUE'S APPEAL. 5. WE HAVE SEEN THAT THIS ISSUE UNDER CONSIDERATION IS SQUARELY COVERED BY THE ORDER OF CO-ORDINATE BENCH IN ASSESSEES OWN CASE F OR AY 2001-02 REFERRED ABOVE. HENCE, KEEPING IN VIEW THE PRINCIPLE OF CONS ISTENCY THIS GROUND OF APPEAL IS ALLOWED IN FAVOUR OF ASSESSEE. 6. GROUND NO.2 FOR OUR CONSIDERATION IS UPHOLDING OF D ISALLOWANCE OF DOUBTFUL DEBT OF RS. 12,10,000/-. LD. AR OF THE ASSESSEE ARGUED T HAT THIS EXPENDITURE REPRESENT THE EFFECTIVE WRITE OFFS IN RESPECT OF SPECIFIC DEB TORS AND THE CLAIM IS ALLOWABLE U/S 36(1)(VII) & 37(1) OF THE ACT. LD. AR OF THE AS SESSEE FURTHER SUBMITTED THAT THEY HAD OPENING AND CLOSING BALANCE APPEARING ON S CHEDULE-7 OF BALANCE-SHEET AS ON 31.03.2002 FOR THE PROVISION OF DOUBTFUL DEBT S. DR FOR REVENUE SUPPORTED THE ORDER OF AUTHORITIES BELOW. 7. WE HAVE PERUSED THE ORDER OF AUTHORITIES BELOW AND SCHEDULE-7 OF BALANCE-SHEET OF ASSESSEE AS ON 31.03.2002, WHEREIN THE ASSESSEE HAS SHOWN THE DETAIL OF PROVISIONS FOR DOUBTFUL DEBTS (PAGE 23 OF PB). TH E AO DURING ASSESSMENT PROCEEDINGS OBSERVED THAT 12,10,000/- WAS DEBITED A S PROVISION FOR DOUBTFUL DEBTS AND DEDUCTION OF WHICH COULD NOT BE JUSTIFIED AS THE ASSESSEE HAS NOT FILED ANY EXPLANATION. AO HOLD THAT PROVISION IS DIFFEREN T FROM PROVISIONS FOR DOUBTFUL DEBTS AND DISALLOWED THE CLAIM FOR BAD DE BTS. LD. CIT(A\) WHILE CONSIDERING THIS GROUND OF APPEAL REFERRED THAT IT WAS SUBMITTED BEFORE HIM THAT THIS EXPENDITURE REPRESENT EFFECTIVE WRITE OFF IN R ESPECT OF SPECIFIC DEBTOR WHICH IS COVERED BY THE PROVISIONS OF SECTION 36(1)(VII) OF THE ACT, AND IT WAS NOT A PROVISION BUT ACTUAL WRITE OFF. THE LD. CIT(A) WAS NOT SATISFIED WITH THE SUBMISSION OF ASSESSEE AND UPHELD THE DISALLOWANCE. WE ARE CONSCIOUS THAT ENTRY BY WAY OF WRITING OF IS A PRIMA FACIE EVIDENCE OF D EBT HAVING BECOME BAD. BUT THE SAME IS NOT A CONCLUSIVE CRITERIA AND THE ONUS REST UPON THE ASSESSEE TO ESTABLISH THAT THE DEBT HAS BECOME BAD IN THE RELEV ANT YEAR. THE ASSESSEE SUBMITTED PB BEFORE US CONTAINING THE EXTRACT OF BA LANCE-SHEET OF ASSESSEE AS ON 31.03.2002 AND THE DETAILS OF PROVISION MADE FOR DO UBTFUL DEBTS. WE HAVE NOTICED THAT THE DETAILS FOR PROVISION OF DOUBTFUL DEBT WERE NOT MADE AVAILABLE 5 ITA NO. 904/M/2011 MERIND LIMITED. DURING THE ASSESSMENT PROCEEDING BEFORE AO AND WAS FILED BEFORE CIT(A). THE AO HAS NO OCCASION TO MAKE ANY COMMENT ON THE DETAI LS OF PROVISION MADE FOR DOUBTFUL DEBT. THE ORDER OF CIT(A) IS ALSO SILENT A BOUT THE DETAILS FURNISHED BY ASSESSEE. IN THESE CIRCUMSTANCES, WE DEEM IT APPROP RIATE TO RESTORE THIS GROUND TO THE FILE OF AO TO CONSIDER AFRESH, TAKING INTO A CCOUNT THE ENTRY OF WRITING OFF IN THE PROFIT & LOSS A/C OF ASSESSEE AS ON 31.03.20 02 VIS-A-VIS THE DETAILS PROVIDED BY ASSESSEE (PAGE 25 OF PB) AND PASS THE O RDER IN ACCORDANCE WITH LAW. HENCE, THIS GROUND OF APPEAL IS ALLOWED FOR STATIST ICAL PURPOSES. 8. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS PART LY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 31 ST DAY OF MAY 2016. SD/- SD/- (D. KARUNAKARA RAO) (PAWAN SINGH ) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI; DATED 31/05/2016 / COPY OF THE ORDER FORWARDED TO : / BY ORDER, / (ASSTT.REGISTRAR) , / ITAT, MUMBAI 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A), MUMBAI. 4. / CIT 5. , , / DR, ITAT, MUMBAI 6. !'# / GUARD FILE. //TRUE COPY/