PRATIBHUTI VYAPAR P. LTD, V. DCIT CIR 2(2),

MA 296/MUM/2011

• Counselvise Citation: [2011] 123 COUNSELVISE.COM (IT) 6982 (ITAT-MUMBAI)
• Duration Of Justice: 3 month(s) 25 day(s)
• Appeal Type: Miscellaneous Application
• Pronouncement Date: 14-09-2011
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2005-2006
• Appeal Filed On: 20-05-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: P K B MENON
• Assessee Lawyers: PRADIP KEDIA
• Keywords: Business income; Question of law; Bad and doubtful debts
• Section: 254(2)

Judgement Text

1 MA NO. 296/MUM/2011 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI C BENCH MUMBAI BENCHES, MUMBAI BEFORE SHRI J SUDHAKAR REDDY, AM & SHRI VIJAY PA L RAO, JM MA NO. 296/MUM/2011 ARISING OUT OF ITA NO.625/MUM/2010 (ASST YEAR 2005-06) PRATIBHUTI VYAPAR P LTD 28 RAJABHADUR MANSION 3 RD FL BOMBAY SAMACHAR MARG FORT, MUMBAI 400 001 VS THE DY COMMR OF INCOME TAX CIR 2(2), MUMBAI (APPLICANT) (RESPONDENT) PAN NO. AAACP2694Q ASSESSEE BY SHRI PRADIP KEDIA REVENUE BY SHRI P K B MENON DT.OF HEARING 12 TH AUG 2011 DT OF PRONOUNCEMENT 14 TH SEPT 211 PER VIJAY PAL RAO, JM THIS MISCELLANEOUS APPLICATION BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE TRIBUNAL DATED 29 TH APRIL 2011 WHEREBY THE APPEAL OF THE ASSESSEE WAS DISMISSED. 2 THE ASSESSEE HAS STATED IN THE MISCELLANEOUS APPL ICATION THAT WHILE DISPOSING OF THE APPEAL, THE TRIBUNAL HAS COMMITTED ERRORS AN D OMISSIONS OF NOT DECIDING THE QUESTION OF ALLOWABILITY OF DEDUCTION U/S 36(1)(VII ) WITH RESPECT TO THE LOSS OF MONEY ADVANCED. THE MAIN GRIEVANCE OF THE ASSESSEE HAS BEEN SUMMARIZED IN PARAS 4 TO 4.2 OF THE APPLICATION AS UNDER: 4. THEREFORE, WITH ALL HUMILITY IN COMMAND, THE FOLL OWING FACTUAL ERRORS AND OMISSIONS ON QUESTION OF LAW REMAINED TO B DECIDED WHILE PASSING THE ORDER HAS BEEN SUMMARIZED. 4.1 WHILE EXERCISING ITS WISDOM, THE HONBLE ITAT H AS MERELY HELD THAT THE MONEY ADVANCED COULD NOT BE HELD TO B TOWARDS THE O PTION OF PURCHASE OF SHARES OF THE DEBTOR CO. HOWEVER, THERE IS NO DECISIO N RENDERED ON THE 2 MA NO. 296/MUM/2011 QUESTION OF ALLOWABILITY OF DEDUCTION U/S 37(1)(VII IN THE FACTS OF THE CASE DEHORS THE CLAIM OF OPTION TO ACQUIRE THE SHARES. 4.2 THE HONBLE ITAT HAS PROCESSED ON FACTUALLY INC ORRECT PRESUMPTION AND MISGIVING THAT THE CLAIM OF THE ASSESSEE IS THAT H IS ENGAGED IN MONEY LENDING IN THE ORDINARY COURSE OF BUSINESS CONTEMP LATED IN SECOND PART OF S. 36(2) AND ACCORDINGLY, DISLODGED THE SAME IN THE FAC TS OF THE CASE. HOWEVER, THE CORR3ECT CLAIM OF THE ASSESSEE WAS THAT H WAS I NTER ALIA ENGAGED IN MONEY ADVANCING ACTIVITY (AUTHORIZED BY MOA AS MAIN BUSINESS) WHERE THE INTEREST HAS BEEN OFFERED TO TAX AS BUSINESS INCOME AND HENCE COVERED UNDER FIRST PART OF 36(2). THE BAD DEBT CLAIM OF THE ASSESSEE IS SQUARELY COVERED BY 155 ITR 152(SC) AND 245 ITR 724(CAL); 61 ITR 418(MAD) ONCE THE FACTS ARE CORRECTLY APPLIED. 4.2.1 IT WAS ALSO THE CASE OF THE ASSESSEE THAT STR INGENT CONDITION OF SYSTEMATIC, REGULAR AND ORGANIZED BUSINESS ACTIVITY C ONTEMPLATED IN SECOND PART IS NOT VISUALIZED IN THE FIRST PART OF S. 36(2) . ONCE, THE INTEREST ON MONEY ADVANCED HAS BEEN TAKEN INTO ACCOUNT AS BUSINESS I NCOME OF THE ASSESSEE, IT CANNOT B SAID THAT MONEY ADVANCING ACTIVITY HAS NO CHARACTERISTIC OF BUSINESS WHATSOEVER. THE FIRST PART (UNLIKE SECOND PART) DOES NOT COMPREHEND THE BUSINESS ACTIVITY IN TRADITIONAL SENSE. THE MAND ATE GIVEN IN THE FIRST PART IS DEVOID OF ANY SUBJECTIVITY. UNDER THE FIRST PART IS SUFFICIENT IF A PART OF THE DEBT (INTEREST IN THIS CASE) HAS BEEN TAKEN INTO ACCOUNT IN COMPUTING THE INCOME OF THE ASSESSEE. 4.2.2 THE FACT THAT (I) THE MONEY ADVANCING ACTIVI TY WAS ONE OF THE MAIN BUSINESS ACTIVITIES AS PERMITTED BY ITS MOA(II) INTE REST AND OTHER INCOME ARISING FROM THE DEBT HAS BEEN OFFERED AS BUSINESS INCOME (III) THE OUTSTANDING HAS BEEN DECLARED AS TRADE DEBTORS AND (IV) MONEY HAS BEEN ADVANCED ENTIRELY OUT OF BORROWED CAPITAL; HAS DIRECT BEARING ON DECIDING THE ISSUE VIS A VIS FIRST PART OF S. 36(2). NONE OF THESE VITAL FA CTS HAVE NOT BEEN DEALT WITH. 2, 1 THUS, THE LD AR OF THE ASSESSEE HAS CONTENDED THAT THE TRIBUNAL HAS NOT ANSWERED THE QUESTION OF LAW ARISING IN REL ATION TO DEDUCTION OF BAD DEBTS U/S 36(1)(VII) R.W.S 36(2); SPECIFICALLY WHEN INTEREST AND COMPENSATION ACCRUED ON THE MONEY ADVANCED WAS TAK EN INTO ACCOUNT AS BUSINESS INCOME IN THE EARLIER YEARS AND THEREFORE, CONDITIONS PRESCRIBED U/S 36(2) HAS BEEN FULFILLED. HE HAS SUBMITTED THAT THE ASSESSEE RELIED UPON THE DECISION OF THE H ONBLE SUPREME COURT IN THE CASE OF VERABHADRA RAO REPORTED IN 155 ITR 152 (SC). 3 MA NO. 296/MUM/2011 2.2 IN NUTSHELL, THE LD AR HAS SUBMITTED THAT THE T RIBUNAL HAS NOT GIVEN A SPECIFIC FINDING ON THE ISSUE OF CLAIM OF B AD DEBTS U/S 36(1)(VII) R.W.S 36(2). 2.3 ON THE OTHER HAND, THE LD DR HAS SUBMITTED THAT THE TRIBUNAL HAS GIVEN A FINDING ON MERIT AFTER CONSIDERING ALL THE CONTENTIONS OF THE PARTIES. WHEN THE ISSUE HAS BEEN DECIDED ON MERIT T HEN, IT IS BEYOND THE SCOPE OF SECTION 254(2) TO REVIEW THE SAME. 3 WE HAVE CONSIDERED THE RIVAL CONTENTION AND RELEV ANT MATERIAL ON RECORD. IN THE APPEAL, THE ASSESSEE HAS RAISED T WO ISSUES REGARDING THE CLAIM OF WRITING OFF OF THE AMOUNT OF RS. 1,50 ,10,600/-. THE FIRST GROUND RAISED BY THE ASSESSEE IS REGARDING THE CLAI M OF BAD DEBT U/S 36(1)(VII) R.W.S 36(2) AND AN ALTERNATIVE GROUND W AS ALSO RAISED REGARDING THE ALLOWABILITY OF CLAIM OF BUSINESS LOS S U/S 28. THE TRIBUNAL, AFTER RECORDING THE CONTENTIONS OF THE PARTIES HAS ADJUDICATED THE ISSUE IN PARAS 7 & 8 AS UNDER: 7. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND RELEVANT RECORD. WE FIND THAT THE MAIN CONTENTION OF THE ASSESSEE ON THE POINT IS THAT THE SAID ADVANCES WERE GIVEN FOR PURCHASE OF THE SH ARES OF THE DEBTOR COMPANY. SINCE THE OPTION HAS TO BE EXERCISED FOR PURCHASE OF SHARES OF THE DEBTOR COMPANY AND IN CASE THE ASSESSEE DOES NOT EXERCISE THE OPTION THE SAID AMOUNT WAS TO BE REFUNDED WITH INTE REST. THE ASSESSEE HAS NOT BROUGHT ON RECORD ANY MATERIAL T O SHOW ANY AGREEMENT REGARDING SUCH OPTION TO BE EXERCISED B Y THE ASSESSEE FOR PURCHASE OF SHARES OF M/S OFFICE MANAGEMENT SYST EM LTD. EVEN THE ASSESSEE HAS NOT EXPLAIN THE NUMBER OF SHARES AND R ATE AT WHICH THE SHARES WERE TO BE PURCHASED BY THE ASSESSEE AGAINST THE SAID ADVANCE OF RS.70 LAKHS. MOREOVER, THIS AMOUNT OF AD VANCE WAS NOT SHOWN BY THE ASSESSEE IN THE BOOKS OF ACCOUNT AS SH ARE APPLICATION MONEY AS ADVANCE FOR PURCHASE OF SHARES OF M/S OFF ICE MANAGEMENT SYSTEM LTD IS A PUBLIC LIMITED COMPANY, THOUGH THE SAME WAS NOT LISTED IN THE STOCK EXCHANGE, HOWEVER, THE ASSESSE E FAILED TO SHOW AS TO HOW THE SHARES WERE TO PURCHASED AND WHOSE SH AREHOLDING WAS 4 MA NO. 296/MUM/2011 TO BE PURCHASED. THE ASSESSEE COULD NOT PURCHASE SHARES FROM BUT THE ASSESSEE HAD TO PURCHASE THE SHARE HELD BY SHAR EHOLDERS . THE ASSESSEE FAILED TO BRING ANY COGENT MATERIAL TO EST ABLISH THE CLAIM NOR ANY FACT HAS BEEN BROUGHT ON RECORD IN THIS RESPE CT. THEREFORE, THE CONTENTION OF THE ASSESSEE THAT THE SAID AMOUNT WAS GIVEN TO M/S OFFICE MANAGEMENT SYSTEM LTD FOR PURCHASE OF THE SH ARES IS TOTALLY UNFOUNDED AND NOT SUSTAINABLE IN LAW AS ALSO CONTRA RY TO THE FACTS OF THE CASE. 8. AS REGARDS THE ALTERNATIVE CONTENTION OF THE ASS ESSEE THAT THE SAID AMOUNT BE CONSIDERED AS BUSINESS LOSS AND MAY BE ALLOWED U/S 28 OF THE ACT AS THE ASSESSEE IS IN MONEY LANDING BUSINESS. IT IS TO BE NOTED THAT THIS WAS THE ONLY AND ISOLATED TRANSA CTION OF ADVANCED LOAN GIVEN BY THE ASSESSEE. NEITHER PRIOR TO THIS T RANSACTION NOR SUBSEQUENTLY, THE ASSESSEE HAD EVER GIVEN ANY ADVAN CE, THEREFORE, WE ARE UNABLE TO ACCEPT THE CONTENTION OF THE ASSESSEE THAT THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF MONEY LENDING AND TH E SAID AMOUNT WHICH BECOME IRRECOVERABLE CAN BE ALLOWED AS BUSI NESS LOSS. THE DECISION RELIED UPON BY THE AUTHORIZED REPRESENTATI VE ARE NOT APPLICABLE IN THE PRESENT CASE. IN THE CASE IN HA ND THE SAID AMOUNT WAS NOT GIVEN FOR PURCHASE OF SHARES AND SAID EXPLA NATION AND CONTENTION IS NOT BOUND AS TRUE AND CORRECT. ACCORD INGLY, WE FIND THAT THE APPEAL OF THE ASESEEE IS DEVOID OF ANY MERIT AN D NO INTERFERENCE IS CALLED FOR IN THE ORDERS OF THE LOWER AUTHORITIES. 3.1 THE TRIBUNAL IN PARA 7 OF ITS ORDER HAS GIVEN A FINDING THAT THE ASSESSEE HAS FAILED TO BRING ON RECORD ANY MATERIAL TO SHOW THA T THE AMOUNT WAS PAID TO M/S OFFICE MANAGEMENT SYSTEM LTD FOR PURCHASE OF THE SH ARES. WHEN THE BASIS OF CLAIM OF BAD DEBT U/S 36(1)(VII) R.W.S 36(2) WAS FO UND AS INCORRECT THEN, THE CONTENTION OF THE ASSESSEE THAT INTEREST ACCRUED O N THE SAID MONEY ADVANCED WAS OFFERED AS BUSINESS INCOME WOULD NOT HELP THE CASE OF THE ASSESSEE. IN ANY CASE, WHEN THE TRIBUNAL HAS GIVEN A FINDING THAT THE SAID MONEY ADVANCED BY THE ASSESSEE WAS NOT IN CONNECTION WITH THE BUSINESS AC TIVITY OF THE ASSESSEE THEN THE ONLY POSSIBLE VIEW WOULD B THAT THE LOSS OF THE M ONEY WOULD BE A LOSS OF CAPITAL AND CANNOT BE ALLOWED AS DEDUCTION. THIS VIEW HAS BEEN FORTIFIED BY THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF HASIMARA I NDUSTRIES LTD. V. COMMISSIONER 5 MA NO. 296/MUM/2011 OF INCOME-TAX REPORTED IN 230 ITR 927 WHEREIN THE A SSESSEE COMPANY OWNED SEVERAL TEA ESTATES AND THE MAIN INCOME WAS FROM SALE OF TE A AND THE ASSESSEE DEPOSITED THE AMOUNT OF RS. 20 LACS WITH M/S SAKSARIA COTTON MILLS LTD IN PURSUANCE TO THE FINANCIAL AGREEMENT. IN THAT CASE AGAINST THE SAID DEPOSIT, M/S SAKSARIA COTTON MILLS LTD HANDED OVER ITS PROPERTIES TO THE ASSESSEE ON L EAVE AND LICENSE AGREEMENT. THE ASSESSEE RUNS THE MILLS. THE ASSESSEE HAS ALSO MADE CREDIT ENTRY OF RS. 1,40,000/- BEING THE INTEREST RECEIVABLE BY IT FROM M/S SAKS ARIA COTTON MILLS LTD ON THE SAID DEPOSIT OF RS. 20 LACS. THE HONBLE SUPREME COURT H AS HELD AS UNDER: WE ARE IN NO DOUBT WHATEVER THAT THE HIGH COURT WAS RIGHT IN CONCLUDING THAT THE AMOUNT OF RS. 20 LAKHS HAD BEEN DEPOSITED BY THE ASSESSEE WITH THE LICENSOR COMPANY FOR THE PURPOSE OF SECURING THE LICENC E UNDER WHICH THE ASSESSEE HAD ACQUIRED THE RIGHT TO WORK THE LICENSOR S COTTON MILLS. THIS IS CLEAR FROM THE FACT THAT THE DEPOSIT WAS MADE PURSUANT TO A CLAUSE IN THE LEAVE AND LICENCE AGREEMENT. HAD A DEPOSIT AS REQUIRED BY T HAT CLAUSE NOT BEEN MADE, THE ASSESSEE WOULD NOT HAVE SECURED THE LICENC E OF THE COTTON MILL. AT THAT TIME THE ASSESSEE WAS DOING NO BUSINESS IN COT TON. THE DEPOSIT WAS, CLEARLY, MADE FOR THE PURPOSE OF ACQUIRING A PROFIT-MAK ING ASSET TO CARRY ON BUSINESS IN COTTON. IT CANNOT, THEREFORE, BE HELD THA T THE DEPOSIT WAS MADE ON THE REVENUE ACCOUNT OR THAT THE LOSS THEREOF MUST BE TREATED AS A BUSINESS LOSS. THE LOSS THEREOF WAS A LOSS SUFFERED ON THE CA PITAL ACCOUNT AND COULD NOT BE DEDUCTED ON THE BASIS THAT IT WAS A BUSINESS LOS S. AS IT IS CLEAR FROM THE DECISION OF THE HONBLE SUP REME COURT (SUPRA) THAT THE SAID LOSS WAS SUFFERED ON THE CAPITAL ACCOUNT AND COULD NOT B E DEDUCTED ON THE BASIS THAT IT WAS A BUSINESS LOSS. 3.3 SIMILAR VIEW HAS BEEN TAKEN BY THE HONBLE DELH I HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME-TAX V. R. G. SCIENTIFIC ENTE RPRISES P. LTD. 311 ITR 401. 6 MA NO. 296/MUM/2011 4 EVEN OTHER OTHERWISE, WE FIND THAT THE SCOPE OF SEC 254(2) IS VERY LIMITED AND CIRCUMSCRIBED. FOR EXERCISING THE JURISDICTIONAL U/ S 254(2), IT IS THE MANDATORY CONDITION THAT SUCH MISTAKE SHOULD BE WIDE APPARENT , MANIFEST AND PATENT AND NOT SOMETHING WHICH COULD BE INVOLVED SERIOUS CIRCUMSTA NCES OF DISPUTES OF QUESTION OF FACTS OR LAW AND CAN BE ESTABLISHED BY LONG DRAWN P ROCESS AND REASONING ON THE POINT TO BE RECTIFIED. A PATENT MISTAKE AS WELL AS EVIDENT ERROR, WHICH DOES NOT REQUIRE AN ELABORATE DISCUSSION OF EVIDENCE OR ARGU MENTS TO ESTABLISH CAN BE SAID TO BE AN ERROR APPARENT ON THE FACE OF THE RECORDS AND CAN BE RECTIFIED UNDER THE AMBIT OF SECTION 254(2). IT IS WELL SETTLED THAT S EC 254(2) DOES NOT CONFER POWER ON THE TRIBUNAL TO REVIEW IS EARLIER ORDER. THUS, THE TRIBUNAL HAS NO POWER TO REVIEW ITS ORDER PASSED ON MERIT AND IN THE GRAB OF RECTIFICAT ION OF MISTAKE NO ORDER CAN BE PASSED U/S 254(2) WHICH AMOUNTS TO REVERSAL OF THE ORDER PASSED AFTER DISCUSSING ALL THE FACTS AND STATUTORY PROVISIONS IN DETAIL. THER EFORE, WE DO NOT FIND ANY MERIT IN THE MISCELLANEOUS APPLICATION FILED BY THE ASSESSE E. 5 IN THE RESULT, THE MISCELLANEOUS APPLICATION FILE D BY THE ASSESSEE IS DISMISSED. ORDER PRONOUNCED ON THE 14 TH DAY OF SEPT 2011. SD/ SD /- ( J SUDHAKAR RDDY ) ACCOUNTANT MEMBER ( VIJAY PAL RAO ) JUDICIAL MEMBER PLACE: MUMBAI : DATED: 14 TH , SEPT 2011 RAJ* COPY FORWARDED TO: 1 APPELLANT 2 RESPONDENT 3 CIT 4 CIT(A) 5 DR /TRUE COPY/ BY ORDE DY /AR, ITAT, MUMBAI