THE DCIT, GANDHINAGAR CIRCLE,, GANDHINAGAR vs. GUJARAT GAS FINANCIAL SERVICES LTD.,, AHMEDABAD

Revenue by: Shri L.P. Jain, Sr. D.R. Assessee by: Shri S.N. Soparkar, Sr. A.R. & Ms. Urvashi Shodhan, A.R. Date of hearing : 05-01-2021 Date of pronouncement : 01-02-2021 आदेश/ORDER PER : AMARJIT SINGH, ACCOUNTANT MEMBER:-

These two appeals filed by revenue for A.Y. 2001-02 & 2002-03, arise from order of the CIT(A)-2, Ahmedabad, in proceedings under section 143(3) r.w.s. 254 of the Income Tax Act, 1961; in short “the Act”.

I .T.A No. 2951/Ahd/2016 & 939/Rjt/2018 A.Y. 2001-02 & 2002-03 Page No 2 Dy/Jt. CIT vs. Gujarat Gas Financial Services Ltd.

A.Y. 2001-02 2. The solitary ground of appeal of the revenue is directed against the decision of ld. CIT(A) in allowing claim of reduction of bad debt of Rs. 2,52,41,464/-.

3. The fact in brief is that return of income of Rs. 3,74,34,040/- was filed on 30th October, 2001. The original assessment was completed u/s. 143(3) on 6th Feb, 2004 determining total income at Rs. 6,64,10,88/-0 after making various additions including disallowance of bad debt which is contested in the instant appeal of the revenue. Out of total disallowance of bad debit of Rs. 2,64,93,888/-, the ld. CIT(A) has allowed the claim of the assessee company for Rs. 12,52,424/- and upheld the remaining disallowance of Rs. 2,52,41,464/-. The ITAT Ahmedabad vide composite order for assessment year 2001-02 and 2002-03 in ITA No. 515/Ahd/2005 and ITA No. 1059/Ahd/2016 dated 31st October, 2013 set aside the issue of bad debt to the file of Assessing Officer for fresh adjudication by the Assessing Officer as to whether the ratio laid down in the case laws relied by the assessee is applicable to the facts of the case or not. The bad debt amount was consisted of Rs. 1,15,17,780/- pertaining to bill discounting and an amount of Rs. 1,37,23,684/- pertaining to inter-corporate deposits. Thereafter, during the course of assessment made u/s. 143(3) r.w.s. 254 of the Act, the Assessing Officer stated that the facts of the cases relied upon I .T.A No. 2951/Ahd/2016 & 939/Rjt/2018 A.Y. 2001-02 & 2002-03 Page No 3 Dy/Jt. CIT vs. Gujarat Gas Financial Services Ltd.

by the assessee are distinguishable from the facts of the case in respect of bad debt of Rs. 1,15,17,780/- on account of discounting of bills. The Assessing Officer was of the view that the main business of the assessee in the referred cases was share broker activity whereas in the case of the assessee the main business activities was discounting of bills. After referring the finding of ld. CIT(A), the Assessing Officer has stated that bill discounting cannot be equated with the business of banking and it is separate category of business and the business of bill discounting can never be considered as money lending business as in the case of bill discounting the money is not considered as stock in trade. Therefore, a sum of Rs. 1,15,17,780/- pertaining to bad debt on account of bill discounting was disallowed and added to the total income of the assessee. In respect of bad debt written off in respect of inter corporate deposit of Rs. 1,37,23,689/-, the Assessing Officer has stated that as directed by the ITAT the decision of Delhi Tribunal in the case of Poysha Oxygen Pvt. Ltd. vs. ACIT in ITA 3457/Del/2004 was considered and observed that the case relied upon by the assessee are distinguishable from the facts of the assessee. The Assessing Officer has stated that in the aforesaid cases relied upon by the assessee the bad debt was claimed in respect of transaction in ordinary course of money lending business whereas in the case of assessee the bad debt in respect of inter corporate despot was not allowable as the main business activity of the assessee was not money lending business. Therefore, a sum of Rs. 1,37,23,684/- pertaining to bad debit on account of inter corporate deposit was disallowed and added to the total income of the assessee.

I .T.A No. 2951/Ahd/2016 & 939/Rjt/2018 A.Y. 2001-02 & 2002-03 Page No 4 Dy/Jt. CIT vs. Gujarat Gas Financial Services Ltd.

1 Overseas Synthetics Ltd Bill Discounting 1,15,17,780 2 Maftatlal Industries Ltd. Intercorporate deposit 83,53,684 3 Precession Fasteners Intercorporate deposit 53,70,600 Ltd:

Total 2,52,41,464 3.4. Subsequently, in the first ground of appeal the Hon'ble' ITAT Ahmedabad vide its order in !TA No.35/Ahd/2005, 515/Ahd/2005 dtd. 31.10.2013 has set-aside the appeal of the appellant and the revenue for fresh adjudication with the following observations:- "8. Aggrieved now both the parties are before us. Assessee is in appeal in respect of confirming the disallowance of Rs.2,52,41,464/-for bad debt written off that were in the nature of bill discounting and inter-corporate deposits while revenue 'is in appeal in respect of bad debt allowed by Ld.CIT(A) of Rs. 12,52,424/- in respect of assessee's business of hire purchase. At the time of hearing learned counsel of the assessee at the outset submitted that issue in respect of claim of assessee of bod debt in respect of its business of hire purchase is now covered in favour of assessee by this Tribunal's decision in the case of assessee for A. Y. 2004-05 therefore L.d. CIT(A) order deserves to be confirmed on this issue. As far as claim of assessee of bad debt of Rs. 1,21,58,127/- relating to bill discounting was concerned, reliance was placed on the same decision of Tribunal. As far as bad debt written off Rs.1,37,23,684/- in respect of M7s. Mafatlal Industries and Precision Fosters which were in the nature of inter-corporate deposits was concerned, reliance was placed on the decision of Delhi Tribunal (Third Member) in the Poysha Oxgen Pvt. Ltd. vs. ACIT in IT Appeal No. 3457 (Delhi) of 2004 A. Y. 2001-2 [19 SOT 711 (Delhi)]. Ld. DR on the other hand relied on the order of AO. . . .

9. After hearing both the parties and perusing the record, we find that the issue in respect of bad debt claim of the assessee of Rs. 12,52,424/- in the normal course of assessee's business of hire purchase is covered in assessee's favour by the decision of this Tribunal in assessee's own case for the assessment year 2004-05 therefore relief given by Ld.CIT(A) is hereby upheld. As for as bad debt claim of remaining amount of Rs.2,52,41,464/- which is in the nature of bill discounting and inter- corporate deposits is concerned, the matter requires fresh adjudication by the AO as to whether the ratio as laid down in the case lows now relied by assessee is applicable to the facts of this case or not. For this purpose matter is restored back to the file of AO.

10. In the result assessee's ground No. 1 is allowed for statistical purpose while that of revenue's appeal is dismissed."

I .T.A No. 2951/Ahd/2016 & 939/Rjt/2018 A.Y. 2001-02 & 2002-03 Page No 5 Dy/Jt. CIT vs. Gujarat Gas Financial Services Ltd. 3.5. Thereafter, the AO has not accepted the contentions of the appellant and the disallowance of the bad debt in respect of the bill discounting business and also with regard to intercorporate deposit were 'fully disallowed with the findings in para No.3.5.1 and 3.5.2 of the assessment order. The AO has mentioned that the appellant's reliance upon the decision of Hon'ble Bombay High Court and Delhi High Court was not identical of the facts of the case. It has been observed that the main business of the assessee in those cases was share broking activities whereas in appellant's case bill discounting was not the main activity. Further held that the ld.CIT(A) had adjudicated the first ground by saying that the bill discounting cannot be equated with the business of banking and a separate category of business and it was admitted that various bills which were discounted for were not appearing in the profit and loss account items as on 31.3.2011. 3.6. Further with regard to the bad debts written off in respect of intercorporate deposit it was observed by the AO that the ICD was not the main business of the assessee and hence bad debt written off cannot be allowed as deduction u/s.28 or 26(l)(vii) r.w.s. 37{2)(1) of the I.T. Act. Thus the ratio laid down in the case law relied upon by the appellant i.e. Poysha Oxygen Pvt. Ltd. of Hon'ble Delhi ITAT is found not acceptable over the facts of the case. 3.7. On the other side the appellant has given a written submission which has been reproduced in the preceding paras of this order. Having considered the facts and submission, it is noticed that the appellant has claimed the bad debt written off of Rs. 1,15,17,780/- in respect of the bill discounting business for Overseas Synthetics Ltd. Since the appellant company was a finance company engaged in the business of financing industrial commercial enterprises and other customers by way of hire purchasing, bill discounting, inter corporate deposit etc. The income of the company therefore comprises of hire charges, bill discounting charges, interest and dividend etc. which has been offered as business income in the profit and loss account. The appellant has been granted and registered as non-banking financial company (NBFC) by the RBI. On further verification of the facts, it has been noticed that the appellant has derived a total bill discounting charges of Rs. 1,00,79,155/- and processing fee of Rs.9,00,555/- totalling to Rs.l,09,79,710/- from Overseas Synthetics Ltd. which has been offered as business income in the preceding years and during the year as under:- .

A. Y. 2001 -02 Sr Name Amount W Amount offered as income . Off N o.

95- 96-97 97-98 98-99 99-00 00-01 Head of Total 96 income 1 Oversea 1,21,88.12 11.47,83 28,61,533 27,32.734 23,91,170 9,43.883 Bill 1,00, s 7 5 disc ount 79,15 Syntheti charges 5 cs

— 1,16,743 2,52,336 2,55,482 2,11, 41 9 64,575 Processing 9,00, fees 555

— 12,66,57 31,13,569 29,86,216 26,02,589 10,08,458 1,09, 8 79,71 0 3.8. Further on verification of the profit and loss account for the year under consideration it has been noticed that the appellant has shown the income from operations at Rs.l 9,27,86,096/- as per I .T.A No. 2951/Ahd/2016 & 939/Rjt/2018 A.Y. 2001-02 & 2002-03 Page No 6 Dy/Jt. CIT vs. Gujarat Gas Financial Services Ltd. the schedule-14 to the profit and loss account. Further the details of income from operations under the schedule-14 of the various incomes as per the profit and loss account is also reproduced as under:- Schedule 14 For the year ended on For the year ended 31/03/2001 (Rs.) on31/03/2000(Rs.)

Income from operations Income from lease Less: Lease 148038287 117678417 equalization Income from hire purchase 37763888 59975815 Income from bill discounting 1303356 7426667 Interest on Government Securities 3765701 4171710 Intercorporate deposits 591653 5202737 Term deposit 391039 10548 Others 833456 1621428 Dividend 98716 253543 Profit on sale of investments 2216749 (net)

Total 192786096 198757614 3.9. Thus from the above, it is apparent that the appellant had shown the income from bill discounting at Rs.13,03,356/- in the year under consideration which also included the aforesaid, income of Rs.10,08,458/-received from Overseas Synthetics Ltd. and hence the appellant has shown the income from bill discounting business as income from operations under the profit and loss account and the same has been offered as business income which has not been doubted by the Assessing Officer. Therefore, the AO's observations and the CIT(A)'s observations in the first round is factually incorrect to this extent. 3.10. Since the income from operations including the bill discounting income has been offered as income from business thus it is apparent that bill discounting was also the one of the business activities of the appellant as per the Memorandum of Association. The relevant clause of the Memorandum of Association is reproduced hereunder:- 14. To make draw, accept, endorse, discount, execute, negotiate, assign and Issue cheques, promissory notes, drafts, bundles, bonds, railway receipts, bills of exchange, bills of lading, warrants, debentures and other negotiable or transferrable instrument." ' 3.11. Even otherwise also no company can undertake any business activity which is not envisaged in the Memorandum of Association. Therefore, obviously the bill discounting activities were part of its business approved as per the Memorandum of Association. Therefore, as per the provisions I .T.A No. 2951/Ahd/2016 & 939/Rjt/2018 A.Y. 2001-02 & 2002-03 Page No 7 Dy/Jt. CIT vs. Gujarat Gas Financial Services Ltd. of Section 36(2) (i). the appellant has already offered the bill discounting income in its return of income for the preceding years as business income therefore there is no question of not granting the bad debts to the appellant as per the provisions of Section 36(l)(vii) of IT. Act. The AO's further observation that the bill discounting was not the main activity rather it was a secondary activity would not the material to decide the nature of the business activities when the income derived either from main activity or from secondary activity are assessed to tax under the head of business income only. In fact the appellant had multi activities and therefore, it cannot be said that one activity was the main activity and other was the secondary activity. 3.12. The Hon'ble ITAT has directed to verify the ratio laid down in two decisions i.e. Hon'ble Bombay High Court In the case of Shreyas S. Morakhia and Hon'ble Delhi High Court In the case of C1T Vs. Bonanza Portfolios Ltd. (supra). For ready reference the head notes of above decisions are reproduced as under:- CIT Vs. Shreyas S. Morakhia Deduction u/s. 36(1)(vii) - Condition for allowability of bad debt -Assessee, claim for deduction of bad debts was disallowed on ground that condition stipulated in s. 36(2) was not satisfied) - Special Bench of the Tribunal answered the question in favour of the assessee - Value of the shares transacted by the assessee in a much a part of the debt as is the brokerage charged by the assessee on the transaction - Since both form a component part of the debt, requirements of section 36(2) (I) were fulfilled where a part thereof was taken into account in computing the income of the asse'ssee -View taken by the Special Bench was in accordance with law. CIT Vs. Bonanza Portfolio Ltd. : Business expenditure - Bad debt - Irrecoverable amount from clients written off - Merely because the assessee share broker made payments against shares purchased by it on behalf of its client would not make it an investment by the assessee on his own behalf - Assessee has shown brokerage income in its books of account -money receivable from the client has shown brokerage income in its books of account - Money receivable from the client has to be treated as 'debt' and since it became bad, it was rightly claimed as bad debt. 3.13. On going through the decision of Bombay High Court referred above it has been mentioned that the test is whether the debt or part thereof has been taken into account in computing the income of the assessee. The answer to that test has to be in the affirmative. That being the position the requirement of Section 36(2)(i) are duly fulfilled. In the cited case the brokerage on the value of share transactions by the assessee had been accounted for as income and therefore the payables by the customers of a part of their debt was held to be allowed as bad debt in view of Section 36(2) (i) of the Act. Similarly in the case of Hon'ble Delhi High Court on identical facts as cited in the case of Shreyas S. Morakhia the claim of bad debt was held to be allowable. 3.14. Taking into account the ratio laid down by both the Hon'ble Courts the ratio is found applicable on the facts of the case in the form that the appellant has offered the bill discounting income and processing charges income in the profit and loss account of the year under consideration and of the preceding years as business income in the profit and loss account and therefore the claim of bad debt written off is fully covered in view of Section 36(2)(i) of I.T. Act. Even the appellant company has recovered a sum of Rs.40 lakhs against the above bad debts in the subsequent' year i.e. in F.Y. 2004-05 relevant to A.Y. 2005-06 and the same has been shown as other income in the profit and loss account of that year. Since the recovery of bad debt of Rs.40 lakhs has already been offered for taxation in A.Y. 2005-06, therefore, the same would cause the double taxation of the similar amount. It is worth here to mention that the appellant was. assessed in the same tax bracket in the year under consideration and in the aforesaid assessment year, therefore, it was tax neutral. Moreover the. income shown by the appellant towards bad debt recovery of Rs.40 lakhs has been accepted as income. Therefore, without disturbing the same no disallowance of the same is warranted in the year under consideration. In view of the aforesaid discussion, the claim of bad debt In respect of bill discounting pertaining to Overseas Synthetics Ltd. Is held to be allowed. 3.15. Now with regard to the claim of bad debt in respect of intercorporate deposits for the parties namely Mafatlal Industries Ltd. at Rs.83,53,684/- and Precision Fastners Ltd. at Rs.5370,000/- the appellant has claimed that it was also its business activities as a NBFC by income derived by the I .T.A No. 2951/Ahd/2016 & 939/Rjt/2018 A.Y. 2001-02 & 2002-03 Page No 8 Dy/Jt. CIT vs. Gujarat Gas Financial Services Ltd. appellant have been duly offered as business income in the year under consideration and the preceding years also. Therefore, the claim of the appellant u/s.36(l)(vii) r.w.s. 36(2)(i) was in order. As per the Hon'ble ITAT, Ahmedabad's direction to examine the facts of the case of Poysha Oxygen Pvt. Ltd. given by ITAT Delhi Bench with the facts of the case it has been noticed that the ratio laid down by the Hon'ble ITAT was fully applicable over the facts of the case. In the above cited case, the Hon'ble ITAT has granted the bad debt written off by saying that where monies are lent in the ordinary course of business the condition stipulated in 36(2)(i) is satisfied if the interest from the money lent was assessed as business income in earlier years or even in the year in which the bad debt is written off. Merely the fact that the advance was described by the assessee inter- corporate deposit would not be decisive of the question whether it was given in the course of money lending business of the assessee or purpose of income tax proceedings. It is apparent from the very nature of the business of the appellant more particularly having regard to the Memorandum of Association that the inter-corporate deposit is the money lending business only and on which the appellant has charged the interest and offered the same as business income in the preceding years. Even in the year under consideration, the P & L Account the appellant has shown the interest of Rs.5,91,653/- as intercorporate deposits under the head of 'income from operations as per Schedule 14 to the P & L Account. So the facts of the cited cases are identical and ratio is fully applicable. It has also been noticed that from Mafatlal Industries the appellant has derived the interest income of Rs.44,11,036/-and from Precisions Fastners the interest income was at Rs. 17,00,248/- in the preceding years. Not only that the appellant has also recovered Rs.83 lakhs from Mafatlal Industries against the above bad debt in F.Y. 2011-12 i.e. A.Y. 2012-13 and the same has been offered for taxation in the profit and loss account. Similarly in the case of Precisions Fastners also the appellant has recovered Rs.32,22,000/- in June, 2003 and the same has been duly offered as income of A.Y. 2004-05. 3.16. The intercorporate deposits is one of the business activity of the appellant as per the Memorandum of the Association of the appellant company of which relevant clause Is reproduced as under. - "18. To open and operate current, overdrafts, loan, cash credit or deposit or any type of accounts with any banks, company, firm, association or person," 3.17. As per the business activities the recoveries of the bad debt have been shown, as business income in the profit and loss account of the respective years and offered for taxation. Therefore the addition made by the AO would cause the double taxation of the same amount which is uncoiled for as per the settled position of law. 3.18. In view of the aforesaid discussion, since the bill discounting charges income and the interest income on ICDs have been duly recorded as business Income in the return of income filed for the preceding years and hence the condition of Section 36(2)(1) is duly satisfied. Moreover these business activities are as per the Memorandum of Association of the Company therefore the provisions of Section 36(1)(vii) are duly applicable for the appellant. The AO's observation that these were not the main business activities of the appellant is irrelevant for consideration of the allowability of the written off of the bad debt. In view of the aforesaid discussion and the submission, the disallowance of the claim of bad debt in respect of all the three parties made by the AO is found not correct and hence the same is deleted. Thus the grounds of appeal are partly allowed.”

5. During the course of appellate proceedings before us, ld. counsel has contended that identical issue on similar fact in the case of the assessee itself has been adjudicated by the Co-ordinate Bench of the ITAT vide for assessment year 2004-05 in favour of the assessee. Further the ld. counsel has referred page no. 17 and 18 of the finding of the I .T.A No. 2951/Ahd/2016 & 939/Rjt/2018 A.Y. 2001-02 & 2002-03 Page No 9 Dy/Jt. CIT vs. Gujarat Gas Financial Services Ltd. ld. CIT(A) wherein the details of income from bill discounting and inter corporate deposit in the P & L A/c of the assessee as on 31-03-2000 and 31- 03-2001 were shown. The ld. counsel supported the order of the ld. CIT(A). On the other hand, ld. Departmental Representative has relied upon the order of Assessing Officer.

6. Heard both the sides and perused the material on record. We have gone through the finding of Co-ordinate Bench of the ITAT in the case of the assessee for assessment year 2004-05 as mentioned above. It is noticed that similar issue on identical fact has been adjudicated in favour of the assessee by the Co-ordinate Bench of the ITAT after referring the decision of Mumbai High Court rendered in the case of Shreyas S. Morakhia (2012) 19 taxmann. Commissioner 64 (Mumbai) and the decision of Hon’ble Delhi High Court rendered in the case of Bonanza Portfolio Ltd. (2010) 320 ITR 178 (Delhi). The relevant part of the decision of the Co-ordinate bench as referred supra is reproduced as under:- “5. We have heard the rival submissions, perused the materials available on record, gone through the orders of authorities below and judgments cited by Ld. AR of the assessee. We find that basis of disallowance of bad debt made by Assessing Officer is this that deduction is allowable to the assessee u/s. 36(2) r.w.s. 36(1)(vii) of the Act in respect of interest portion only and not for the principal portion. Accordingly, out of the total amount of Rs.7,45,968/-, he has allowed the deduction of Rs.1,1 1,895/- being interest portion of hire charges and lease charges and disallowed the principal portion of Rs.6,34,073/-. In para-3.2 of the order of Ld. CIT(A) also, it is noted by him that the AO has disallowed Rs.6,34,073/- pertaining to principal portion of lease transaction because the said amount has never been offered as income by the assessee. Now, in the light of this fact, we examine the applicability of the judgment of Hon'ble Bombay High Court rendered in the case of Shreyas S Morakhia (supra) and we find that in this judgment, Hon'ble Bombay High Court has followed the decision of Hon'ble Delhi High Court rendered in the case of CIT v. Bonanza Portfolio Ltd. (2010) 320 ITR 178 (Del) and the relevant portion of the judgment of Hon'ble Delhi High court is as under:- "... the money receivable from the client has to be treated as "debt" and since it became bad, it was rightly considered as 'bad debt" and claimed as such by the assessee in the books of account. Since this bad debt occurred in the year in question, it was shown by the assessee in that manner. Since the brokerage payable by the client is a part of the debt and that debt had been taken into account in the computation of the income, the conditions stipulated in sub-section (2) of section 36 read with section 36(1)(vii) stand satisfied in this case.

I .T.A No. 2951/Ahd/2016 & 939/Rjt/2018 A.Y. 2001-02 & 2002-03 Page No 10 Dy/Jt. CIT vs. Gujarat Gas Financial Services Ltd.

With the assistance of ld. representatives we have also perused the decision of ld. CIT(A) as cited above in this order demonstrating that assessee has shown income from bill discounting and inter corporate deposit in its P & L A/c for the year under consideration and for the preceding year. With the assistance of the ld. representatives, we have also gone through the findings of the Co-ordinate Bench in the case of the assessee itself for assessment year 2004-05 as discussed supra and consider that identical issue on same fact has been adjudicated in favour of the assessee. In the light of the decision of Co-ordinate Bench and elaborately discussed comprehensive findings of the ld. CIT(A), we do not find any merit in the ground of appeal of the Revenue. Accordingly, this appeal of the revenue is dismissed.

ITA No. 939/Ahd/2018 A.Y. 2002-03 7. Without reiterating the facts as discussed above for assessment year 2001-02, the ld. CIT(A) has deleted the disallowance of claim of bad debit amounting to Rs. 2,71,07,143/- with reference to hire purchases and Rs. 1,20,45,621/- with reference to bill discounting. The ld. CIT(A) in his findings given at page no. 20 and 21 of his order has produced the details demonstrating that assessee has offered the income from hire purchase and income from bill discounting in the preceding year and in the year under I .T.A No. 2951/Ahd/2016 & 939/Rjt/2018 A.Y. 2001-02 & 2002-03 Page No 11 Dy/Jt. CIT vs. Gujarat Gas Financial Services Ltd. consideration. The ld. CIT(A) has also held that the facts of the case are similar to the fact of A.Y. 2004-05 wherein the bad debt written off in the case of business of hire purchase were allowed. As the facts and issue involved in ground of appeal vide Assessment Year 2001-02 are similar as in Assessment Year 2002-03 therefore after applying the decision adjudicated vide ITA No. 2951/Ahd/2016 as supra in this order, this appeal of the revenue stands dismissed.

Order pronounced in the open court on 02-01-2021 Sd/- Sd/- (RAJPAL YADAV) (AMARJIT SINGH) VICE PRESIDENT ACCOUNTANT MEMBER Ahmedabad : Dated 02/01/2021 आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order/आदेश से,

उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद