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Income Tax Appellate Tribunal, ‘A’ BENCH, CHENNAI
Before: SHRI V. DURGA RAO, HON’BLE & SHRI MANJUNATHA. G, HON’BLE
PER MANJUNATHA. G, ACCOUNTANT MEMBER:
This appeal filed by the revenue is directed against the order passed by the learned Commissioner of Income Tax (Appeals)-14, Chennai, dated 26.06.2018 and pertains to assessment year 2012-13.
The revenue has raised the following grounds of appeal:
1. The order of the learned CIT(A) is contrary to facts and circumstances of the case. 2.1 The learned CIT(A) erred in deleting the addition made towards claim of advance written off to the extent of Rs.6.32 Crores.
:-2-: ITA. No:2558/Chny/2018 2.2 The learned CIT(A) ought to have appreciated the fact the amount was shown in the books of account of the lender and borrower as unsecured loan only. 2.3 The learned CIT(A) ought to have considered that the amount advanced falls under the capital field only since the amount advanced got no connection with the expansion or advancement of assessee's business . 2.4 The learned CIT(A) ought to have appreciated the fact the assessee failed to adduce any evidence before the assessing officer that the amount advanced got proximate nexus with the business of the assessee by producing document evidence to the above effect.
3. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned CIT(A) may be set aside and that of the Assessing Officer restored.”
The brief facts of the case are that, the assessee has filed his return of income for the assessment year 2012-13 on 25.10.2012, admitting a total loss of Rs. 2,12,88,544/-. The case was selected for scrutiny and during the course of assessment proceedings, the Assessing Officer noticed that the assessee has debited a sum of Rs. 6,32,96,032/- under the head ‘investment written-off’ to its profit & loss account of Meena Enterprises, a proprietary concern. The Assessing Officer, called upon the assessee to explain nature of expenses debited into profit & loss account. In response, the assessee submitted that he has advanced a sum of Rs. 7.5 crores loan to M/s. Samjass IT Services India Ltd, to develop a software for his proprietary concern for an efficient management of its business. The business of company failed due to global set :-3-: ITA. No:2558/Chny/2018 back and the assessee was forced to take over the fixed assets of the company. The outstanding amount was adjusted against assets and balance amount has been treated as business loss. The Assessing Officer, however was not convinced with the explanation furnished by the assessee and according to the Assessing Officer, loss incurred by the assessee on account of write off of advances given to company in which he was a director is capital loss and which cannot be treated as revenue expenditure. The Assessing Officer has discussed the issue at length in light of certain judicial precedence and observed that, although assessee claims to have paid amount to company for development of software in connection with his proprietary concern, but fact remains that the company has classified said loss as unsecured loans in their books of accounts. From the above, it is very clear that the assessee has given unsecured loans to company but not in the ordinary course of its business and thus, opined that write off of advances is in the nature of capital loss, which cannot be allowed as deduction. The relevant findings of the AO are as under: “The contention of the assessee as expressed above, the final accounts of the assessee, the nature of transactions and the final accounts of M/s. Samjass IT Services India Ltd were carefully examined.
:-4-: ITA. No:2558/Chny/2018 First and foremost, the assessee has hidden the fact that the assessee and M/s. Samjass IT Services India Ltd are related enterprises. The paid up capital of the company is 50000 equity shares of Rs.10 each amounting to Rs.5 lakhs, out of which 12500 equity shares valued at Rs.1,25,000/- is held by the assessee. Thus it makes the assessee a substantial stake holder in the company. The assessee tries to project that the transaction is in the normal course of business of the assessee to enable its up gradation of software for efficient management. But if it were so, the payment from the assessee should have got credited to the P & L account or else under the head sundry creditors. On the contrary, the amount received from Shri V.R. Krishnamurthy is shown as unsecured loans under schedule of the balance sheet as on 31/03/2008. Hence, the investment made by the assessee in a related enterprise cannot be classified as a business transaction and the outstanding is not an amount paid by the assessee in the normal course of his business. In this regard, the observation of the Supreme Court in Badridas Daga vs Commissioner of Income-tax (1958) reported in 34 ITR 10 (SC) reproduced below attains significance. "a business debt springs directly from the carrying on of the business and is incidental to it and not any loss sustained by the assessee, even if it has some connection with his business " As per the balance sheet of M/s. Samjass IT Services India Ltd, the reserves & surplus as on 31/03/2007, was a deficit of Rs.1,63,70,277/-. It got increased by Rs.3,60,73,660/- to Rs.5,24,43,937/-. The depreciation claimed for the year is Rs.63,34,059/-. Thus the cash loss for the year is Rs.2,97,07,349/-. The unsecured loan granted by Shri V.R. Krishnamurthy and outstanding as on 31/03/2007 is Rs,4,05,70,001/-. The corresponding value for the year ended 31/03/2008 is Rs.7,18,53,001/- which implies that the cash losses for the FY 2007-08 has been borne by the assessee in his capacity as a stakeholder of the company. It is not the business of the assessee to support ailing companies in which he is stakeholder. On this aspect, the department's contention is further concretized by the decision of the Hon'ble High Court of Madras in the case of Amarchand Sobhachand vs CIT Madras reported in 56 ITR 594 (MAD) decided on :-5-: ITA. No:2558/Chny/2018 September 11, 1964, wherein on the question of write-off of loan given to recoup the losses, it was held that: "The advances were not made in the regular course of the assessee's business with the Bombay firm but with a view to save that firm from its financial collapse. It was certainly not the assessee's business to save crashing firms. " This finding was affirmed by the apex court in Amarchand Sobhachand vs. CIT reported in 82 ITR 591 (SC). The failure to recuperate the losses from the company in which he has substantial stake will result in a capital loss and by no stretch of imagination can it be termed as a revenue loss. Further, treating the transaction as a bad debt written-off by inviting the provisions of S.36(2)(ii) is also ill founded since the money was not lent in the ordinary course of business of M/s. Meena Advertisers. Alternatively, a loan sum can be treated as bad debt, if it were lent by a person in the normal course of money lending business. But the assessee is not a money lender. He does not possess the necessary license to lend money as business from the Tahsildar. Further, if it were a money lending transaction, while the assessee follows mercantile system of accounting, as exhibited in column 11(a) of Form no.3CD-Part B, the income accrued even if not received should be offered to taxation. While the assessee has failed to undertake the same, the transaction cannot be treated as a debt at the first place and hence its write- off does not fall under the purview of S.36(1)(vii) read with S.36(2)(ii). Therefore the assessee fails on this count, as well. In the case of Salem Magnesite (P) Ltd. vs CIT reported in 321 ITR 43, the High Court of Bombay on an issue of similar write-off of loan, it pronounced that "The amount written off was not deductible as business loss since loan given was not incidental to its business of mining, even if it has some connection with it." There cannot be a more appropriate decisions on this aspect since the fact situation in the cases cited are exactly similar in respect of each and every characteristic of the claim. Therefore, the capital loss of Rs.6,32,96,032/- wrongly treated as revenue loss by the assessee and that which does not possess any connection even remotely with :-6-: ITA. No:2558/Chny/2018 that of the business of the assessee, is disallowed and added to the taxable income of the assessee for the year. Add: Rs. 6,32,96,032/-)”
Being aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A). Before the ld. CIT(A), assessee has reiterated its arguments made before the Assessing Officer and claimed that loss incurred by written off of loans given to company is having extricable link to its proprietary concern and thus, said loss partakes nature of business loss, which can be allowed as deduction.
The ld. CIT(A), after considering relevant submissions of the assessee and also taken note of certain judicial precedents, including the decision of ITAT, Chennai in the case of ACIT vs M/s. Yubo Investment Co. Pvt Ltd in dated 20.07.2012, deleted additions made the Assessing Officer by holding that the assessee has proved written off of advances as revenue expenditure by filing relevant evidences and from the above it is very clear that said loss is a business loss, which is of revenue in nature. The relevant findings of the ld. CIT(A) are as under: 3.3.3 I have considered both the points of view. After examining the appellant's submission supported by relevant particulars of accounts, I am convinced that :-7-: ITA. No:2558/Chny/2018 the advance of Rs.6.32 cr. as given by the appellant to M/s Samjass IT Services India Ltd. Neither the appellant nor the aforesaid company treated the advance as capital investment. The AO has not controverted the appellant's claim that the advance was given for the expansion of proprietary concern = Vrish Business Services, as a strategic alliance. When the appellant has not claimed as bad debt written off u/s 36(1)(vii), it is not clear why the AO has disallowed the same by invoking the conditions stipulated u/s 36(2)(ii) of the I.T.Act. Further, the AO has not brought any material evidence on record to hold that the write off of aforesaid advance amounts to capital loss. By furnishing relevant particulars of account from the books of appellant as well as the recipient company, the appellant has proved that the advance was given during the ordinary course of appellants business and the write off of the same amounts to business loss which is of revenue in nature. 3.3.4 The AR has relied on the decision of Hon'ble ITAT Chennai, in the case of ACIT v. M/s Yubo Investment Co. Pvt. Ltd in ITA No.807 /Mds/2012 or AV 2005-06 Cated 0.07.2012, and :r have reproduced the conclusion hereunder: "10. The Hon'ble Supreme Court in the case of CIT v. WoodWard Governor India P. Ltd [312 ITR 254} held that the expression "any expenditure "used in section 37 of the Act is to cover both "expenses incurred" as well as an amount, which' rear a "loss", even though such amount has not gone out from he pocket o, the assesses. 11. In view of the above, we hold that the advance written off by the assessee as irrecoverable is allowable as business loss under section 28 of the Act. Thus, we sustain the order of the Commissioner of Income Tax (Appeals) in allowing the claim of the assessee and reject the grounds of appeal
of the Revenue. No.807/M/807/},,i/ 12/1Y1/ 12
12. In the result, the appeal of the Revenue is dismissed." 3.3.5 In the above decision, the Honrble ITAT has relied on the following Decisions :-8-: ITA. No:2558/Chny/2018 (a) Hon’ble Supreme Court in the case No. .307/M/807/M/12/M/12 of CIT v. WoodWard Governors India Pvt Ltd. 179 Taxman 326 (SC). (b) Hon'ble Supreme Court in the case of Badridas Daga v. CIT (34 ITR 10) Calcutta Co. Ltd v. CIT (37 ITR 1). (c) No.807 /M/807 /M/12/M/12 The Mumbai Bench of this Tribunal in the case of DCIT vs. Shri T. Pitamber, Proprietor in & 869/Mum./2010 dated 22.07.2011. (d) Hon'ble Apex Court in the case of Ramchander Shiv Narayan v / s CIT, 111 ITR 263 (SC). (e) Hon'ble Jurisdictional High Court in Jethabhai Hirji & Jethabhai Ramdas. (f) Hon'ble Delhi High Court in the case of Mohan Meakin Ltd [2012] 348 ITR 109 (Delhi).”
The Ld. Senior AR, Mr. AR V Sreenviasan, submitted that the ld. CIT(A) erred in deleting the addition made towards claim of advance written off to the extent of Rs. 6.32 crores without appreciating the fact that the amount was shown in the books of accounts of the lender and borrower as unsecured loan only. The Ld. DR, further referring to financial statement of M/s. Samjass IT Services India Ltd, submitted that amount given by the assessee to company has been treated as unsecured loans. Further, the assessee could not file necessary evidences to prove that said loan was given in the ordinary course of its business for development of software to be used in its proprietary concern. The assessee, except making oral statement, could not file any details to justify its :-9-: ITA. No:2558/Chny/2018 stand,. But, the ld. CIT(A) without appreciating relevant facts simple deleted additions made by the Assessing Officer.
The Ld. Counsel for the assessee, referring to various documents submitted that it is a fact of matter that the assessee was director of M/s. Samjass IT Services India Ltd. The company was engaged in software development and IT related services. The assessee has given loans and advances of Rs. 7.5 crores to the company for development of a software for his proprietary concern. Since, the business of the company failed due to global set back, the assessee was forced to take over the assets of the company, which resulted in loss to the tune of Rs. 6.32 crores. Since, the assessee has lent money in the ordinary course of its business for development of software, it has rightly treated it as business loss. The ld. CIT(A), after considering relevant facts has rightly deleted additions made by the Assessing Officer and their order should be upheld.
We have heard both the parties, perused materials available on record and gone through orders of the authorities below. The facts borne out from record indicates that the :-10-: ITA. No:2558/Chny/2018 assessee had given loan and advance of Rs. 7.5 crores to M/s. Samjass IT Services India Ltd, a company in which the assessee was one of the director and shareholder. It is also a matter on record that the company was engaged in the business of software development and IT related services. The evidences filed by the assessee and appraised by the ld. CIT(A) clearly shows that the assessee has lent money in the ordinary course of its business for development of software for his proprietary concern Vkrish Business Services. Further, when the business of the assessee was failed due to various reasons, the assessee was forced to take over assets and liabilities of the company and in this process, he had incurred a loss of Rs. 6.32 crores on account of advances given to said company. Since, there was an inextricable link between advances given to the company and business of the assessee, and further, the assessee has derived business advantage by lending money to said company, in our considered view, written off of irrecoverable advances given to said company partakes the nature of business loss which can be allowed as deduction. The ld. CIT(A), after considering relevant facts has rightly held that the assessee has filed all evidences to prove that how advances given to company is in the nature of :-11-: ITA. No:2558/Chny/2018 revenue loss. Therefore, we are of the considered view that there is no error in the reasons given by the ld. CIT(A) to delete additions made towards disallowance of written off of advances and thus, we are inclined to uphold the findings of the ld. CIT(A) and dismiss appeal filed by the revenue.