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Income Tax Appellate Tribunal, “H” BENCH, MUMBAI
28/10/2020 सुनवाई क" तार"ख/ Date of Hearing घोषणा क" तार"ख /Date of Pronouncement 01/12/2020 आदेश / O R D E R
PER PAVAN KUMAR GADALE - JM:
The appeal is filed by the assessee against the order of the Commissioner of Income Tax (Appeals)-3, Mumbai passed u/s 143(3)and 250 of the Act. The assessee has raised the following grounds of appeal: Karnataka Quarries Pvt Ltd, Mumbai. “1. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in confirming the action of the AO for disallowing a sum of Rs. 1,08,50,000 as bad debts.
2. Without prejudice and in the alternative, the LD. CIT(A) erred in not allowing an amount of Rs. 1,08,50,000/- as business expenditure u/s 28 or 37(1) of the Act.
3. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in disallowing the loss of Rs. 14,77,960/- as allowed by the A.O, without giving any opportunity to the appellant.
4. The appellant craves leave to add, to alter or amend the grounds of appeal on or before the hearing of this appeal.
At the time of hearing, the assessee has filed an additional ground of appeal along with an application for admission. The Ld.DR has no serious objection, accordingly the additional ground of appeal is admitted as under:
‘1. The Ld. CIT(A) has erred in law and in facts in treating the interest income of the appellant under the head, income from other sources as against income from business offered by the appellant.
2. The Ld. CIT(A) has erred in law and in facts in enhancing the income of appellant which is not in accordance with law’. Karnataka Quarries Pvt Ltd, Mumbai. 3.The brief facts of the case are that the assessee company is engaged in the business of granting loans and advances and filed the return of income for the A.Y 2004-05 on 20.10.2004 with total income of Rs(-) 1,10,27,964/-and the return of income was processed u/s 143(1) of the Act. Subsequently, the case was selected for scrutiny and notice u/s 143(2) and 142(1) of the Act were issued. In compliance, the Ld. AR of the assessee appeared from time to time and submitted details. The A.O on perusal of the profit and loss account found that the assessee has claimed administrative expenses of Rs. 1, 09,25,656/- which includes bad debts of Rs1,08,50,000/-.The A.O has called for the details for justification of writing of the bad debts. Whereas, the assessee has submitted the reply explaining that, it is engaged in the business of granting of loans and advances on interest. During the course of business, the assessee has advanced loan of Rs.1,08,50,000/- to M/s. Indessa Infotech Pvt Ltd and submitted the details of loans and advances referred in the assessment order. The A.O found that the loan was provided by the assessee company to its sister concern, who are having the same conduct of Karnataka Quarries Pvt Ltd, Mumbai. the business operations and at the same place. Further, the authorized representative and company secretary are also same. The assessee has treated the loan as bad and not recoverable, but the barrower company has disclosed this loan liability in its balance sheet as on 31.03.2004 and also as on 31.03.2005.The observations of the A.O are that, the assessee does not comply the conditions required for claim of deduction u/s 36(1)(vii) r.w.s 36(2) of the Act. The A.O found that the assessee is engaged in the business of money lending and there is no license granted to the assessee for carryout such activity. The A.O. is of the opinion that the loss on account of bad debts on advances provided to the sister concerns does not satisfy the provisions of law and also the assessee could not substantiate with any information on recovery of loan and has disallowed the claim of bad debts and assessed the total income of Rs.(- )1,77,960/-and passed the order u/s 143(3) of the Act dated 26.12.2006.
Aggrieved by the order, the assessee has filed an appeal with the CIT(A), the Ld. CIT(A) has considered the facts and findings of the A.O and dealt on the Karnataka Quarries Pvt Ltd, Mumbai. activities of the assessee and finally concord with the action of the A.O in disallowing the claim of bad debts and dismissed the assessee’s appeal. Aggrieved by the order the assessee has filed an appeal with the Tribunal.
At the time of hearing the Ld. AR of the assessee submitted that the CIT(A) has erred in confirming the disallowance of the bad debts irrespective of the fact that the assessee has provided the loan to its sister concerns in the ordinary course of business. The Ld. AR emphasized that the bad debt has to be allowed as deduction u/s 36(1)(vii) r.w.s 36(2) of the Act. Further, on the observations of the CIT(A), that the assessee company has provided loans to the related borrower and has disclosed the loan amount due to the assessee company in their books of accounts. The LdAR mentioned that such observations of appellate authorities are lack of merits and referred to the amendment to section 36(1)(vii) w.e.f 01.04.1989. The contentions of the Ld. AR that the debt has become bad and is written off in the books of account and has to be allowed and supported with judicial decisions and paper book. On the additional ground of appeal Karnataka Quarries Pvt Ltd, Mumbai. the Ld. AR submitted that the income of the assessee to be treated as an income from other sources is bad in law, irrespective of the fact that the assessee is engaged in the business of money lending and emphasized that in the earlier years the A.O has accepted and treated as income from business and prayed for allowing the appeal.
6. Contra, Ld. DR supported the orders of the CIT(A).
We heard the rival submissions and perused the material on record. The first disputed issue as envisaged by the Ld. AR with respect of claim of bad debts in respect of amount advanced to M/s Indessa Infotech Pvt Ltd., the contention of the Ld. AR that the loan has become bad, therefore the assessee has claimed deduction of bad debts u/s 36(1)(vii) r.w.s 36(2) of the Act. We find the observations of the A.O that the assessee has given loans to its sister concerns M/s Indessa Infotech Pvt Ltd., and the loan has been disclosed by the related concerns in their financial statements for the A.Y 2004-05 and 2005- 06. The Ld. AR has been emphasizing that the Karnataka Quarries Pvt Ltd, Mumbai. borrower is a related concern which is not disputed and cannot have impact on the claim of bad debts, irrespective of the fact that they have disclosed in their financial statements. The Ld. AR further emphasized that as per amendment to Sec. 36(1)(vii) effective from 01.04.1989, the assessee is not required to prove the debt has actually become bad but the assessee has to establish that the debt has written off in the books of account and it is not recoverable. The Ld. AR also submitted that there is no doubt on the genuineness on the claim as the loan was verified and accepted. The contentions of the Ld. AR that since the entries are made in the books of accounts, the claim has to be allowed. We find that the assessee has advanced the loan to its sister concerns and the loan is not recoverable and as per the decision of the Hon’ble Supreme Court in the case of TRF Ltd., Vs. CIT 323 ITR 397 (SC),the assessee has to establish that the debt has become bad and was written off. We find that the assessee could not substantiate the efforts made in respect of recovery of loan and further more in the case of sister concern, it will be easy for the assessee considering the advance Karnataka Quarries Pvt Ltd, Mumbai. given in the normal course of trade and place of business is the same. Further, no material was filed before the A.O. or before us to establish that the assessee has made efforts for recovery of debt or correspondence with barrower for non-payment. Even in the assessment order the A.O has only referred to the fact that it is a related concern but could not establish that the verification and enquiry has been conducted. We considering the nature of transactions with the related concern and the assessee could not establish the efforts under taken for the recovery. We set aside the order of the CIT(A) and restore the entire disputed to the file of the A.O for the limited purpose to verify the claim made by the assessee as per ratio of decision of Hon’ble Supreme Court in the case of TRF Ltd Vs CIT (supra) and the efforts made by the assessee in recovery of the loan. The assessee should be provided adequate opportunity of hearing and shall cooperate in submitting the information and allow the grounds of appeal of the assessee for statistical purposes. In respect of additional ground of appeal, since the assessee has consistently follow the method of disclosing as income from business and Karnataka Quarries Pvt Ltd, Mumbai. in the earlier year also the revenue has accepted. We direct the A.O to treat the income as business income and allow the additional ground of appeal.
In the result, the appeal filed by the assessee is partly allowed for statistical purposes.