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Income Tax Appellate Tribunal, ‘’ C’’ BENCH, AHMEDABAD
Before: SHRI RAJPAL YADAV & SHRI WASEEM AHMED
आदेश/O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER:
The captioned appeal has been filed at the instance of the Assessee against the order of the Learned Commissioner of Income Tax(Appeals)-3, Ahmedabad, dated 07/063/2018 (in short “Ld.CIT(A)”) arising in the matter of assessment order passed under s.143(3) of the Income Tax Act, 1961 (here-in-after referred to as "the Act") dt.16/12/2016 relevant to the Assessment Year 2014-2015.
The assessee has raised the following grounds of appeal.
The Learned Commissioner of Income Tax(Appeals)-3, Ahmedabad has erred in law and on facts of the case by confirming the disallowance made by the Assessing officer in respect of bad debt of rs.11,50,00,000/- in respect of sale of project to Shakun Corporation Pvt. Ltd. after holding that the claim of bad debt has arisen within the same assessment year and is immature and highly susceptible.
The Learned Commissioner of Income tax (Appeals)-3, Ahmedabad has erred in law and on facts of the case by confirming the disallowance of rs.33,42,400/- made by the Assessing Officer being land leveling expenses incurred by the appellant after considering the same as bogus expenditure, which has been claimed just to reduce tax liability. 3. Your Appellant prays to reserve the right to add, alter, amend and/or with draw any of the above grounds of appeal.
2. The first issue raised by the assessee is that the learned CIT (A) erred in confirming the disallowances of bad debt of Rs. 11.5 crores only.
The briefly stated fact is that the assessee is an individual engaged in the business of Construction and Real Estate Development. The assessee during the year under consideration i.e. dated 18-04-2013 sold his running project at Gota Town Plot no. 24/1 to Shakun Corporation Pvt. Ltd. (for short SCPL) for Rs. 14 crores only. However, the assessee was able to collect Rs. 2.5 crore only from the purchaser i.e. M/s SCPL. It was submitted that the party namely M/s SCPL became insolvent. Accordingly the assessee claimed bad debt of Rs. 11.5 crores in the books of accounts.
3.1 However, the AO found that i. The assessee has not filed any FIR in Police Department against M/s SCPL for default in payment. ii. The project was mortgaged with Kotak Mahindra Bank by the M/s SCPL which was transferred to M/s Shree Hari Enterprise through auctioned by the Kotak Mahindra Bank. iii. The partner of M/s Shree Hari Enterprise in a statement recorded u/s 131 admitted that as per understating with original owner (the assessee) it has to pay remaining amount of Rs. 11.5 to him.
In view of the above, the AO show caused the assessee for not allowing the bad debts in the given facts and circumstances.
3.2 The assessee in response the show cause notice submitted that he has taken legal action after repeated default by giving public notice and also by joining as a party in the case filed in the court against the company and its promoters. In support assessee furnished copy of public notice and copy of court case in which he is a party. The assessee further contended that in order to claim the deduction for bad debt under section 36(1)(vii) of the Act, he only needs to write off debt in the books. It is not necessary to establish that the debt actually became irrecoverable. The assessee in this regard placed his reliance on Hon’ble Apex Court decision in case of TRF Ltd in CA No. 5292 of 2003.
3.3 The assessee further vide letter dated 16-02-2016 submitted that though M/s Shree Hari Enterprises agreed to pay the amount but it is third party to the transaction and it doesn’t have any legal obligation. Accordingly, he cannot bind them for the payment. As such the promise of M/s Shree Hari Enterprises is moral and not legal.
3.4 However the AO held that assessee had not taken any concrete step to get sale contract cancelled after repeated dishonor of the cheques. He should have stayed the sale of flats by the purchaser. Further the claim of the assessee that M/s shree Hari Enterprise has no legal obligation to pay is not true. As in transfer letter by the Debt Recovery Tribunal it is specifically mentioned that the purchaser M/s Shree Hari Enterprises has to bear all the charges and liability including the claim of the original owner i.e. the assessee for Rs. 11.5 crore. Hence assessee has legal right to recover the money from M/s Shree Hari Enterprises. Accordingly, the AO in view of the above disallowed the claim of bad debt and added the same to the total income of the assessee
Aggrieved assessee preferred an appeal before the learned CIT (A). The assessee before the ld. CIT-A reiterated the submissions as made before the AO.
However, the learned CIT (A) observed that the assessee has not been doing any business of real estate development. As the assessee is showing income from capital gain and income from partnership consistently from A.Y. 2012-13 which is available on record. The assessee has shown impugned property as investment in balance sheet for A.Y 2012-13, 2013-14. The assessee had no closing stock or any other income with respect to business in the Profit & Loss account from 2012-13 to 2016-17. Accordingly the learned CIT-A held that the assessee is not doing any business activity. Accordingly the learned CIT (A) confirmed the disallowances made by the AO.
Aggrieved by the order of the learned CIT (A) the assessee is in appeal before us.
The learned AR for the assessee before us filed a paper book running from page 1 to 394 and submitted that the assessee offered the sale of the project to tax in his profit and loss account. Therefore, the bad debts claim against such sale is eligible for deduction under the provisions of the Act. The learned AR reiterated the submissions as made before the authorities below.
The learned DR submitted before us submitted that the assessee is not carrying out any business activity. Therefore there is no question of allowing the deduction for the bad debts. The learned DR reiterated the findings of the lower authorities as contained in the respective orders.
We have heard the rival contentions of both the parties and perused the materials available on record. The facts of the case as discussed above are not in dispute, therefore we are not inclined to repeat the same for the sake of brevity and convenience. From the preceding discussion, the following issues arise for our consideration. i. Whether the assessee is carrying on business of real estate activities in the given facts and circumstances. ii. Whether the assessee is entitled for the deduction of the bad debts in a situation where the 3rd party acknowledges to make the payment to him.
8.1 Regarding the question No. 1 as discussed above, we note certain undisputed facts as alleged by the learned CIT (A) in his order for holding that the assessee is not engaged in the business activity of the real estate. Accordingly, the learned CIT (A) was of the view that the assessee was not entitled for the claim of the bad debts under the provisions of section 36(1)(vii) of the Act. These undisputed facts or detailed as under: a. The assessee has been showing all its properties /lands under the head fixed assets in its balance sheet as on 31st March 2012, 31st March 2013, 31st March 2015, 31st March 2016 and 31st March 2017. Similarly the assessee was showing income under the head capital gain, other income and business income which was limited to the extent of income from the partnership firm in the earlier as well as subsequent assessment years. As such the income from the partnership firm by way of remuneration, interest on the capital and share of profit does not mean that the assessee is actually carrying on any separate business activity of real estate. b. There was no closing viz-a-viz opening stock in trade of the properties either in the earlier years or subsequent years except a single transaction which was shown as opening WIP in the year under consideration for the land under dispute. c. There was the single transaction in the year under consideration which was treated as business whereas no such transaction was shown as business in the earlier and the subsequent assessment years. 8.2 The above allegations of the learned CIT (A) certainly create a doubt that whether the assessee is carrying on any business activity of the real estate or not. However, the finding of the learned CIT (A) suffers from certain infirmities as described below: i. The Revenue has accepted the sale of the property in dispute as business transaction. As such if the learned CIT (A) was of the view that the transaction for the transfer of the property does not represent the business transaction, then it was his duty to classify such transaction under the appropriate head of income in pursuance to the provisions of the Act. But the learned CIT (A) has not commented on the same which implies that he has accepted the sale proceeds as business receipt. Accordingly, we are of the view that the learned CIT (A) has treated part of the transaction as business transaction and disagreed at the same time to accept the bad debts as part of business transaction which is contrary to the settled principles. ii. There was no allegation by the AO in his order alleging that the assessee was not carrying on any business activity of real estate. As such the AO was convinced with the business activities disclosed by the assessee in his income tax return. However, we find that the learned CIT (A) has rejected the transaction for the sale of property as business transaction without issuing a show cause notice to the assessee which is impermissible under the provisions of law. iii. The assessee has got its construction plan approved from the Ahmedabad Municipal Corporation dated 22 October 2012. The copy of the plan is placed on pages 330 to 336 of the paper book.
Similarly there was the project brochure prepared by the assessee showing its business plan. The copy of the same is placed on pages 367 to 374 of the paper book. However, the learned CIT (A) has not pointed out any iota of infirmity in such details filed by the assessee. iv. Indeed, it is transpired that the assessee has carried out single business transactions in the year under consideration out of the earlier and subsequent years. But such a single transaction is supported based on the various documents as discussed above. Thus the intention of the assessee about its business transaction cannot be doubted merely on the basis that there was not any other business transaction carried out by him in the subsequent assessment years. v. There was no doubt about the genuineness of the transaction carried out by the assessee with M/s Shukan Corporation Pvt. Ltd. Similarly, there was no connection of whatsoever between assessee with M/s Shukan Corporation Pvt. Ltd. As such the transaction was carried out at the arm length price. Therefore, in the absence of any such allegation i.e. bogus transaction, the assessee cannot be denied the benefit of the deduction as provided under section 36(1)(vii) of the Act. vi. There was the recovery of the bad debts written off by the assessee in the year under consideration in the subsequent assessment year as evident from the profit and loss account for the year ended 31st March 2016 for Rs. 2.6 crore which is placed on page 108 of the paper book. As such the recovery of the bad debts was offered to tax by the assessee and the same was accepted by the Revenue.
8.3 In view of the above, we hold that the assessee was carrying out the business activities in the year under consideration. Accordingly, we are not impressed with the finding of the learned CIT (A) for the reasons as discussed above on the issue that the assessee was not carrying out any business activity of the real estate.
8.4 Now coming to the 2nd question as discussed above, we note that the assessee is entitled for the bad debts once he has written off the same in the books of accounts. As such, the assessee is not required to justify the irrecoverability of the amount from the debtors. In holding so we find support and guidance from the judgment of Hon’ble Supreme Court in the case of T.R.F. Ltd. vs. CIT reported in 190 taxman 391 where it was held as under “This position in law is well-settled. After 1-4-1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. However, in the present case, the Assessing Officer has not examined whether the debt has, in fact, been written off in accounts of the assessee. When bad debt occurs, the bad debt account is debited and the customer's account is credited, thus, closing the account of the customer. In the case of companies, the provision is deducted from sundry debtors. As stated above, the Assessing Officer has not examined whether, in fact, the bad debt or part thereof is written off in the accounts of the assessee. This exercise has not been undertaken by the Assessing Officer. Hence, the matter is remitted to the Assessing Officer for de novo consideration of the above-mentioned aspect only and that too only to the extent of the write off”.
8.5 Admittedly, the party to whom the assessee has sold its properties namely Shukan Corporation Pvt Ltd has become insolvent and accordingly the assessee was of the view that the amount due from it was not recoverable.
8.6 Undisputedly, the party namely M/s Shree Hari Enterprises has agreed to make the payment to the assessee as evident from the order of the Debt Recovery Tribunal dated 29.03.2016 which is placed on pages 260 to 267 of the paper book. This order of the tribunal was passed on 29th of March 2016 whereas the case before us pertains to the assessment year 2014-15 and this fact was not in the knowledge of the assessee at the relevant point of time. As such it was not possible for the assessee to foresee in future for the recovery of the amount by the order of the Debt Recovery Tribunal. As such, the assessee cannot be blamed for claiming the bad debts in the year under consideration.
8.7 In view of the above and after considering the facts in totality, we hold that the assessee was entitled for the bad debts claimed by him in the year under consideration. Accordingly, we set aside the finding of the learned CIT (A) and direct the AO to delete the addition made by him. Hence, the ground of appeal of the assessee is allowed.
9. The 2nd Issue raised by the assessee is that the learned CIT (A) erred in confirming the disallowances of Rs. 33,42,400/- on account of land levelling expenses.
10. The assessee during the year under consideration claimed land leveling expenses of Rs. 33,42,400/- but failed to submit the documentary evidences as required by the AO. Thus the AO disallowed the entire expenses under the head land leveling /Mattipuran.
11. Aggrieved assessee preferred an appeal before the learned CIT(A) who confirmed the disallowances by observing that the assessee has not filled any material evidence such as bill/identity of contractor, confirmation and mode of payment etc with respect to the impugned expenses claimed. Further, the Ld. CIT- A also observed that the assessee has claimed the expenses after transfer of the property.
Being aggrieved by the order of the learned CIT (A) the assessee is in appeal before us.
The learned AR before us submitted that the assessee has incurred the impugned expenses in the course of the business as evident from the copies of the bills issued by the parties. These bills were representing the purchase of sand, therefore there was no question of deducting the TDS.
The DR on the contrary before us vehemently supported the order of the authorities below.
We have heard the rival contentions of both the parties and perused materials available on record. In the present case, the assessee claimed to have incurred certain expenses towards the land leveling /Mati Puran amounting to Rs. 33,42,400/-. However the AO held, in the absence of sufficient documentary evidence, that such expenditure were not incurred by the assessee for its alleged business activities. The view taken by the AO was subsequently confirmed by the learned CIT (A).
14.1 From the preceding discussion, we note that the assessee in support of the expenses incurred toward the land levelling/ Mati puran have furnished the copies of the bills which are placed on pages 36-67 of the paper book. However, none of the authorities has exercised his power granted under the statute to verify the genuineness of the expenses claimed by the assessee by issuing notices under section 131/133(6) of the Act. In our view, the authorities below were under the obligation before rejecting the claim of the assessee to verify the veracity of the bills produced by the assessee.
14.2 However, on perusal of the order of the authorities below, we find that the inspector of the income tax has visited to the site of the assessee and furnished to report that there was no brick bhatta thereon whereas the assessee claimed that the Brick Bhatt was set up the after taking the approval from the Revenue Authorities. However, we note that the report from the inspector is not supported on the basis of any corroborative evidence. As such the revenue was under the obligation to collect the requisite report from the revenue authorities to find out whether there was any brick Bhatta as discussed above. Thus in the absence of any corroborative evidence, we are not impressed with the report of the inspector of the income tax.
14.3 Before parting, we also note that there are certain bills furnished by the assessee pertaining to the prior period, therefore the same, amounting to 9,14,600/-, cannot be allowed as deduction as the assessee has already claimed expenses of Rs. 46,74,000/- under the head Mati Puran in immediate previous year.
14.4 Similarly, we also note that, there was an expenditure incurred by the assessee after the transfer of the property to M/s Shukun Corporation dated 18th April 2013. In our considered view once the property has been transferred, then there was no reason for the assessee to incur any expenditure thereon. As such the assessee before us has not justified, based on any documentary evidence, that he was under the obligation to incur the expense after the date of the transfer of the property. Accordingly, the bills raised upon the assessee after the date of 18th April 2013 are not eligible for deduction. The total of these bill comes to Rs. 15,69,400/-. The same is disallowed. Hence the ground of appeal of the assessee is partly allowed.
In the result the appeal of the assessee is partly allowed.
Order pronounced in the Court on 12/02/2020 at Ahmedabad.