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Income Tax Appellate Tribunal, “D BENCH, MUMBAI
Before: SHRI MAHAVIR SINGH & SHRI S. RIFAUR RAHMAN&
O R D E R Per Mahavir Singh, VP: This appeal by the Revenue and Cross Objection by the assessee are arising out of the order of the Commissioner of Income Tax (Appeals)-8, Mumbai (‘CIT(A)’ for short) in appeal no. CIT(A)-8/IT-616/2016-17 vide order dated 20.11.2018. The assessment was framed by the ITO-3(1)(2), Mumbai u/s. 143(3) of the Income Tax Act, 1961 (‘the Act’ hereinafter) for the assessment year (A.Y.) 2014-15 vide his order dated 30.12.2016.
2 & CO No. 240/M/19(AY: 2014-15) ITO vs. Dhoot Industrial Finance Pvt. Ltd. 2. First we will take up the Revenue’s appeal in . The only issue in this appeal of the Revenue is against the order of the ld. CIT(A) deleting the addition made by the Assessing Officer (A.O. for short) of claim of bad debts written off by the assessee. For this, the Revenue has raised the following four effective grounds:
Whether on the facts and in the circumstances of the case and in law, the ld. CIT(A) was correct in allowing relief to the assessee in respect of claim of bad debts claimed written off by the assessee ? 2. Whether on the facts and in the circumstances of the case and in law, the ld. CIT(A) was correct in allowing the claim of bad debts without ascertaining the factual correctness of the amount claimed written off as bad debts by the assessee? 3. Whether on the facts and in the circumstances of the case and in law, the ld. CIT(A)’s order is not perverse in ignoring that as per the ledger submitted by the assessee during the assessment proceedings in respect of trade receivables, the outstanding balance as on 31.03.2014 in the case of Systematix Commodity Services Pvt. Ltd. i.e. assessee’s broker for NSEL, was only Rs.67,79,578/- as over Rs.25.95 crores had been received the relevant previous year? 4. Whether on the facts and in the circumstances of the case and in law, the ld. CIT(A)’s order is not perverse in ignoring that since the outstanding balance was only Rs.67,79,578/-, assessee could not have claimed bad debts written off in respect of Rs.1,58,19,016/-? 3. Brief facts are that the assessee company is engaged in the business of trading and generation of power. The assessee is also earning income from shares, mutual funds and stock-in-trade. The Assessing Officer (A.O. for short) received information about the illegal claims of bad debts by brokers, traders claiming bogus losses for transaction entered with National Spot Exchange Ltd. (NSEL) for the A.Ys. 2014-15 and 2015-16, this was circulated by CBDT. Subsequently, for recovery process, a Monetary Committee was appointed by Hon'ble Bombay High Court as there were enough assets to liquidate and recover the outstanding amounts. The assessee also claimed bad debts to the tune of Rs.1,58,19,016/- on account of stopping of trading with NSEL. The A.O. required the assessee to explain and the assessee vide letter dated 07.11.2016 explained the entire amount that at the time of entering into the contract of committees, i.e., Rahul in NSEL through its broker, Systematix Committee Services P. Ltd. amount of Rs.240.97 lacs was received by the assessee. Out of this, an amount of Rs.14.99 lacs was recovered till
3 & CO No. 240/M/19(AY: 2014-15) ITO vs. Dhoot Industrial Finance Pvt. Ltd. 31.03.2014. Thus an amount of Rs.225.98 lacs was outstanding and the same is not recovered even till after a lapse of three years. Accordingly, the assessee in its books of accounts written off an amount of Rs.158.19 lacs, i.e., 70% of the outstanding dues, keeping in view of the suspicious trading and legal action taken by the Government against NSEL. The A.O. was not convinced by the reply and disallowed the claim of bad debts of Rs.1,58,19,016/- and added to the total income of the assessee by stating that the claim made by the assessee is premature in nature. For this, he reasoned that a Monitoring Committee of Hon'ble Bombay High Court is monitoring the recovery process and there is sufficient and enough assets to liquidate and recover the outstanding amount. Hence, he disallowed the claim of bad debts.
Aggrieved, the assessee preferred an appeal before the ld. CIT(A). The ld. CIT(A) after considering the submissions of the assessee and considering the decision of the ITAT, Chennai in the case of M/s. Megh Sakariya International P. Ltd. vs. Dy. CIT (in vide order dated 05.09.2018) allowed the claim of the assessee.
Aggrieved, the Revenue is in appeal before the Tribunal.
We have heard the rival contentions and gone through the facts and circumstances of the case. Before us, the ld. Counsel of the assessee made submissions that the assessee company has received an amount of Rs.92,719/- in A.Y. 2016-17 and the balance amount is outstanding at Rs.66,86,858/- as on 31.03.2015. The balance amount was also written off as bad debt as on 30.09.2015 and after that, i.e., till today, the assessee company is not received anything from NSCL. The ld. Counsel of the assessee stated that the amount of Rs.1,58,19,016/- was not received by the assessee and claimed the same as bad debt. Hence, he claimed that the issue is covered by the decision of the Hon'ble Supreme Court in the case of TRF Ltd. vs. CIT [2010] 323 ITR 397 (SC), wherein it is held that once the assessee has made written off in the books of accounts, the tax paid has to establish that the debt has actually become irrecoverable. On the other hand, the ld. Sr. DR relied on the assessment order.
4 & CO No. 240/M/19(AY: 2014-15) ITO vs. Dhoot Industrial Finance Pvt. Ltd. 6. We note that exactly on identical facts, the ITAT Chennai Bench in the case of M/s. Megh Sakariya International P. Ltd. (supra) has considered the claim of the bad debt and allowed the claim of the assessee vide para 7 as under:
We have considered the rival contentions and perused the orders of the authorities below. It is not disputed that assessee had started commodity trading in NSEL through its broker Sugal Commodity Brokers Pvt Ltd during the relevant previous year. It is also not disputed that debt of B2,02,42,194/- became due to the assessee from the said exchange, on account of the commodity trading undertaken by the assessee during the relevant previous year. Observation of the ld. Assessing Officer with regard to the claim as it appears at page 3 of its order is reproduced hereunder:- ''It is pertinent to mention here that the Department has' received information from the National Spot Exchange that due to various reasons the trading on the exchange platform was stopped on 3pt July, 2013, and the NSE has to settle the outstanding receivables of the traders. The NSE also stated that the amounts recovered have been distributed to the brokers under the supervision of the Forward Market Commission (FMC). The NSC further stated that there are enough assets to liquidate and recover the outstanding amounts of the traders / Brokers. It has come to the light that most of the brokers 1 traders have claimed the outstanding amount as deduction as bad debt u/s 36(1) (vii) / 37(i) of the Income tax Act, 1961. Similarly, most of the NBFC companies which had lent money to Brokers / Traders have also written off such amounts as bad debts. The NSC further stated that it is in the process of auctioning of the assets and the process have started. It is evident that significant amounts will be received by the brokers / traders. Thus, the claim of bad-debt are premature''. It is significant to note that ld. Assessing Officer had accepted the debt to be bad, but had disallowed the claim deeming it to be premature. It is also clear that debt arose on account of trading in commodities in the exchange and not due to sale of any capital assets. Hon'ble Apex Court in the case of T.R.F. Ltd (supra) had held as under at para 4 of its judgment. ''4. This position in law is well-settled. After April 1, 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 the accounts of the assessee. When a 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 abovementioned aspect only and that too only to the extent of the write-off''.
It is clear that once a debt is written off as irrecoverable in the accounts of the assessee, it has to be allowed. It is not required that debt should have arose on account of transactions in any preceding years. Once a debt is claimed as bad and written off in the accounts it has to be allowed. No doubt, if the assessee at a later point of time recovers any money against any sum, it is bound to show it as income. Considering the judgment of Hon'ble Apex Court in the case of T.R.F. Ltd (supra), we are of the opinion that the claim of the assessee had to be allowed. Orders of the lower authorities on this issue are set aside.
7. We note that the assessee in its books of accounts has claimed bad debt be written off the amount and till date as stated by the ld. Counsel of the assessee no recovery has taken place, except the amount of Rs.92,719/- which the assessee claimed to have offered in the return of income. Once this is the position, we are of the view that the ld. CIT(A) has rightly allowed the claim of bad debt and we confirm the order of the ld. CIT(A). The Revenue’s appeal is dismissed.
Coming to the cross objection of the assessee in CO No. 240/Mum/2019, the only issue in this cross objection of the assessee is as regards to the order of the ld. CIT(A), confirming the disallowance of expenses of interest by invoking the provision of section 14A of the Act read with Rule 8D(2)(ii) of the Income Tax Rules, 1962 (hereinafter the ‘Rules’) amounting to Rs.10,18,805/-.
We have heard the rival contentions and gone through the facts and circumstances of the case. We note that the assessee has earned the dividend income of Rs.36,90,426/- and claimed the same as exempt u/s.10 of the Act. According to the A.O., the assessee has claimed interest to banks and others amounting to Rs.98,07,000/- being interest on borrowed funds from the banks. According to the A.O., the assessee made investments in shares, stocks and others earned dividend income. Thereby the AO invoked the provisions of section 14A of the Act r/w Rule 8D(2)(ii) and 8D(2)(iii). The A.O. disallowed the interest under Rule 8D(2)(ii) of Rs.10,18,805/- and administrative expenses under Rule 8D(2)(iii) of Rs.4,34,332/-. It is to be mention that this amount of Rs.4,34,332/- was already disallowed by the assessee suo moto. Therefore, even now before us, the ld. Counsel of the assessee has not challenged this. That means, to remain
6 & CO No. 240/M/19(AY: 2014-15) ITO vs. Dhoot Industrial Finance Pvt. Ltd. under challenge is the interest disallowance under Rule 8D(2)(ii), being an amount of Rs.10,18,805/-. The ld. CIT(A) has not gone into the details of available interest free funds vis-à-vis the investment made in stock and shares from where the assessee has earned exempt income.
Before us, the ld. Counsel of the assessee filed complete details of interest free funds available as well as investments made, the relevant reads as under: F.Y. 2013-14 F.Y. 2012-13 A.Y. 2014-15 A.Y. 2013-14 Rs. in lakhs Rs. in lakhs Equity Capital 542 542 Reserves & Surplus 3090 2929 3632 3471 Investments 869 869 Stock in trade 2455 1424 3324 2293 11. Even though the assessee has not made this claim but facts are not emanating from the assessment order or the order of the ld. CIT(A), hence, we remit this issue back for verification purpose only to the file of the A.O. No doubt the balance is available with the assessee but let the A.O. verify the fact situation, but on principle the assessee is eligible for the claim in view of the decision of the Hon'ble Bombay High Court in the case of CIT vs. HDFC Bank Ltd. [2014] 366 ITR 505 (Bom). On principle, the issue is allowed but subject to verification of the facts by the A.O.
In the result, the appeal of the Revenue is dismissed and the cross objection of the assessee is partly allowed for statistical purposes.
Order pronounced in the open court on 18.03.2021.