THE GODAVARI SUGAR MILLS P. LTD,MUMBAI vs. ACIT 2(1), MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL, ‘G‘ BENCH MUMBAI BEFORE: SHRI AMIT SHUKLA, JUDICIAL MEMBER & SHRI M.BALAGANESH, ACCOUNTANT MEMBER (Assessment Year :2006-07) M/s. Somaiya Properties and Vs. Dy. Commissioner of Investments Pvt. Ltd. Income Tax (Formerly known as The Additional CIT Range 2(1) 5th Floor, Aayakar Bhavan Godavari Sugar Mills Pvt. Ltd) 45/47, Somaiya Bhavan M.K.Road, Churchgate M.G. Road, Fort Mumbai -400 020 Mumbai – 400 001 PAN/GIR No. AAACT5004A (Appellant) .. (Respondent) Assessee by Shir Vipul Doshi Revenue by Shri Kishor Dhule Date of Hearing 10/01/2023 Date of Pronouncement 19/01/2023 आदेश / O R D E R PER M. BALAGANESH (A.M):

This appeal in A.Y.2006-07 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-4, Mumbai in appeal No.CIT(A)4/ACIT-2(1)/IT-467/08-09 dated 28/02/2011 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 31/12/2008 by the ld. Asst. Commissioner of Income Tax, Circle – 2(1), Mumbai (hereinafter referred to as ld. AO).

M/s. Somaiya Properties and Investments Pvt. Ltd. (Formerly known as The Godavari Sugar Mills Pvt. Ltd.)

2.1. We have heard rival submissions and perused the materials available on record. The assessee is a 60 year old company and presently engaged in the business of manufacturing of sugar, chemical and co- generation of power. During the year under consideration, the assessee had written of bad debts of Rs. 35,00,000/- in its profit and loss account in respect of sundry debtors related to sale in its dairy business which the assessee company was carrying on in earlier years. Since certain debts could not be recovered from the customers belonging to dairy business, the assessee wrote off the same as bad debts during the year by crediting concerned debtors account and by debiting the profit and loss account. The assessee furnished the annual accounts of earlier years where the sales in respect of dairy business were made by the assessee were duly offered to tax before the ld. AO. Since the assessee at present is engaged only in the business of sugar, chemical and power generation and since the bad debts written off pertain to the discontinued business of the assessee company, the ld. CIT(A) by placing reliance on the decision of the Hon’ble Jurisidictional High Court in the case of Chinai & Co. Pvt. Ltd vs. CIT reported in 206 ITR 616 upheld the action of the ld. AO in disallowing the bad debts. We have gone through the said decision relied upon by the ld. CIT(A) and find that the said decision is factually distinguishable. In that case, there was no evidence to prove that assessee company carried on any business and that mere obligation to have its accounts presented and passed at a general meeting would not justify the incurrence of expenses post discontinuance of a particular

M/s. Somaiya Properties and Investments Pvt. Ltd. (Formerly known as The Godavari Sugar Mills Pvt. Ltd.) business. In other words, certain expenses were incurred by that assessee without carrying on any business and the Hon’ble Jurisdictional High Court held that those expenses would not be allowed as a deduction as there was no genuine business activity for that assessee. Whereas in the instant case, the assessee company was previously engaged in dairy business and thereafter had migrated to engage in the business of manufacturing of sugar, chemicals, distilleries and co-generation of power. All these business were carried on by the same assessee company with the same management. This crucial fact makes the decision of the Hon’ble Jurisdictional High Court distinguishable with that of the assessee company. The issue in dispute before us was also subject matter of adjudication of this Tribunal in the case of Manoj Shivyog Singh vs. DCIT, Central Circle-5(2), Mumbai dated 27/05/2020 in for A.Y.2012-13 wherein it was held as under:-

“11. The business of the assessee is that a share trader and was trading both in his own behalf as well as on behalf of third parties. In earlier year, the assessee sold Stock Exchange Membership Card and discontinued trading in shares on behalf of third parties. Trading in shares on own account was continued. On these facts, we have to see as to whether it can be said that the assessee is continuing with his business. We examined the case laws relied upon both the parties.

shares is a single transaction and the purchase of those shares is also more or less of the same character; (3) The business of the company as well as the transaction relating to the shares were attended to as part and parcel of the assessee-company; (4) A common fund was utilised both for business purposes as well as for the purchase of shares. A part of the overdraft of Rs. 6,80,046 taken from the bank on 31st Dec., 1947, has been discharged from out of the income of the business; and (5) the share transaction work as well as the other business of the assessee- company were carried on in the same place of business. From the facts found by the Tribunal, it is clear that the share transaction as well as the other business of the company were dealt with by a common management, common -Manoj Shivyag Singh business organization, common administration, common fund and common place of business. The business of the company of dealing in shares and the business of manufacturing sugar and other commodities constitute the same business within the meaning of s. 24(2). Standard Refinery & Distillery Ltd. vs. CIT (1965) 55 ITR 139 (Cal) : TC 45 R.502 reversed."

2.2. It is not in dispute that assessee in the instant case had duly satisfied the requirements of Section 36(2) of the Act by way of offering income from sales in earlier years. It is not in dispute that the party wise details of sundry debtors written off by the assessee had been duly furnished before the lower authorities. Hence, all the conditions of Section 36(1)(vii) of the Act had been satisfied in the instant case. It is not in dispute that the assessee was previously engaged in dairy business and that business had been discontinued and subsequently the assessee had migrated into new line of business. It is not in dispute that the assessee had duly written off the said bad debts as irrecoverable in its books of accounts and claimed the same as deduction. Hence, the decision rendered by the Hon’ble Supreme Court in the case of TRF Ltd. vs. CIT reported in 323 ITR 397 (SC) would come to the rescue of the assessee herein.

2.3. In view of the aforesaid observations and respectfully following the judicial precedents relied upon hereinabove, we hold that assessee would

M/s. Somaiya Properties and Investments Pvt. Ltd. (Formerly known as The Godavari Sugar Mills Pvt. Ltd.) be entitled for deduction of bad debts written off in the sum of Rs.35,00,000/-. Accordingly, the ground No.1 raised by the assessee is allowed.

3.1. We have heard rival submissions and perused the materials available on record. The assessee had earned dividend income of Rs.80,995/- and claimed the same as “exempt income” u/s.10 of the Act. No expenditure incurred for the purpose of earning exempt income was disallowed by the assessee u/s.14A of the Act in the return of income. The ld. AO applied the computation mechanism provided in Rule 8D(2) (ii) and Rule 8D(2)(iii) of the Rules and disallowed a sum of Rs.1,89,000/-. At the outset, we find that the provisions of Rule 8D of the Rules were introduced in the statute only w.e.f. 24/03/2008 and hence, would be applicable only from A.Y.2008-09 onwards. Accordingly, Rule 8D computation mechanism cannot be applied for the year under consideration. As sufficient interest free funds are available with the assessee company as is evident from its financial statements, it could be reasonable to presume that investments which had yielded exempt income had been made by the assessee out of such interest free funds. Accordingly, no interest expenditure could be subject matter of disallowance u/s.14A of the Act. With regard to disallowance of indirect expenses, the ld. AR agreed for adhoc disallowance of expenses at the rate of 10% of exempt income at the time of hearing. The same is reckoned as a statement made from the Bar and accordingly, we hold that disallowance of 10% of dividend income i.e. Rs.8,100/- u/s.14A of the Act would meet the ends of justice in the facts and circumstances of M/s. Somaiya Properties and Investments Pvt. Ltd. (Formerly known as The Godavari Sugar Mills Pvt. Ltd.) the instant case. Accordingly, the ground No.2 raised by the assessee is partly allowed.

4.1. We have heard rival submissions and perused the materials available on record. We find that assessee had furnished the revised workings for depreciation before the ld. AO based on the assessment order framed for A.Y.2005-06. We find that assessee had claimed depreciation of Rs.20,88,93,193/- which has been restricted by the ld. AO to Rs.9,67,31,846/-. The assessee submitted before the ld. CIT(A) that the ld. AO had not considered the correct figure of opening Written Down Value (WDV). The assessee also submitted that there were some adjustments in A.Yrs. 2003-04 to 2005-06 in respect of grant of subsidy and accordingly, the block of assets had to be revised after adjustments of grants and subsidies. Considering these submissions, the ld. CIT(A) had directed the ld. AO to look into the matter and grant depreciation after adjusting the grants and subsidies to the block of assets after verification as per law. We do not find any infirmity in the said direction of the ld. CIT(A) as this is purely a mathematical calculation that is required to be done by the ld. AO for allowing the depreciation. But the ld. AO while passing an order giving effect to order of ld. CIT(A) had ignored this direction, which, in our considered opinion, is erroneous and breach of superior hierarchy. Hence, we direct the ld. AO to re-work the depreciation as directed by the ld. CIT(A) in accordance with law. Accordingly, the revised ground No.3 raised by the assessee is allowed for statistical purposes.

M/s. Somaiya Properties and Investments Pvt. Ltd. (Formerly known as The Godavari Sugar Mills Pvt. Ltd.)

5.1. We have heard rival submissions and perused the materials available on record. It is not in dispute that assessee had placed certain electricity deposits with Maharashtra State Electricity Board for the purpose of obtaining electricity connection for running the manufacturing units and its office premises. The said electricity deposit had apparently fetched the interest income to the assessee. This interest income is adjusted by the Electricity Board against the power charges payable by the assessee to State Electricity Board for the month of May 2006. This adjustment of interest income of Rs.2,24,544/- was not offered by the assessee to tax in the return of income during the year under consideration and accordingly the ld. AO proceeded to add the same while completing the assessment. This action of the ld. AO was upheld by the ld. CIT(A). Since assessee is following the mercantile system of accounting, this interest on electricity deposit in the sum of Rs. 2,24,544/- should have been recognised as income by the assessee in A.Y.2006-07 i.e. the year under consideration. The same was however, omitted to be done by the assessee. The ld. AR vehemently pleaded that assessee has been constantly offering this interest income only on receipt basis as the information is known to the assessee after the end of the financial year by way of adjustment in the electricity bills payable for May 2006. Hence, the ld.AR pleaded that based on the principle of consistency, the practice followed by the assessee should be accepted.

M/s. Somaiya Properties and Investments Pvt. Ltd. (Formerly known as The Godavari Sugar Mills Pvt. Ltd.)

5.2. The ld. AR also pleaded that rate of tax remains the same and hence, there is no loss to the exchequer by way of offer of income of this amount in the immediately succeeding year. He also placed reliance on the decision of the Hon’ble Jurisdictional High Court in the case of CIT vs. Nagri Mills Co. Ltd. reported in 33 ITR 681 (Bom) in support of this view. We find force in this argument made by the ld. AR that in as much as the principle of consistency in these peculiar facts and circumstances is disturbed, then it would result in double addition of the very same sum of Rs.2,24,544/-. In order to avoid such a situation, we endorse the consistent approach followed by the assessee by offering this interest income to tax on receipt basis. Accordingly, the ground No.4 raised by the assessee is allowed.

M/s. Somaiya Properties and Investments Pvt. Ltd. (Formerly known as The Godavari Sugar Mills Pvt. Ltd.)

Order pronounced on 19/01/2023 by way of proper mentioning in the notice board.