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Income Tax Appellate Tribunal, DELHI BENCH : D : NEW DELHI
Before: SHRI R.K. PANDA & SHRI KULDIP SINGH
ORDER PER R.K. PANDA, AM: These are cross appeals. The first one is filed by the assessee and the second one by the Revenue and are directed against the order dated 22nd April, 2015 of the CIT(A)-11, New Delhi, relating to assessment year 2010-11.
ITA No.4574/Del/2 (by the Revenue) 2. The grounds raised by the Revenue read as under:-
“1. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the disallowance of Rs.54,08,93,273/- on account of bad debts claimed in computation of income, without appreciating the fact that the assessee is NBFC registered with RBI under the category of investment company and the loan advance to M/s. VTL was not in the ordinary course of business.
On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the disallowance of Rs.54,08,93,273/- by accepting the additional evidence and other submissions filed by the assessee without a reasonable opportunity being allowed to the AO under 46A(3) of the Income tax Rules : a) To examine the evidence or documents submitted by the assessee; b) To produce any evidence or document in rebuttal of the additional evidence produced by the appellant.
3. On the facts and in the circumstances of the case, Ld. CIT(A) has erred in not taking cognizance nor distinguished the instant case on the facts and in law in placing reliance on SA Builders case as in the instant case the issue involved is not related to claim of expenditure but related to claim of bad debts.
4. The appellant craves to be allowed to add any fresh grounds(s) of appeal and/or delete or amend any of the ground(s) of appeal.”
Facts of the case, in brief, are that the assessee is a domestic company trading in units of mutual funds and making investment in shares, debentures, etc. It filed its return of income on 28th March, 2012 declaring loss of Rs.42,49,69,592/- and under MAT of Rs.17,04,96,123/-. During the course of assessment proceedings, the Assessing Officer noted that that assessee has written off Rs.55.08 crore as bad debts and after crediting, provision for doubtful debts of Rs.54,08,93,273/- against this, which was created in the assessment year 2008-09, Rs.l crore to the P & L account under the head “bad debt.” From the computation statements the Assessing Officer noted that the amount of Rs.54.08 crore was added back both to the total income as well as to the book profit for the purpose of section 115JB of the IT Act which has resulted in reducing the tax liability. Considering this fact, AO vide order sheet entry dated 13.12.2012 asked the assessee to furnish the details in this regard. In response to the same it was submitted that assessee had advanced a sum of Rs.54,08,93,273/- to M/s. Vasu Tech Ltd. and out of this a sum of Rs. 21.20 crore was recovered under a written loan agreement dated 15.04.2005 and sum of Rs.32,88,93,272/- was advanced from time to time after the execution of above loan agreement. As per the terms of the agreement, the loan was liable to be repaid along with interest @12% p.a. The loan was claimed to be advanced to M/s. Vasu Tech Ltd. and Mr. Dhruv Verma and Mr. R.L. Verma and M/s. R.L Verma & Sons (HUF) stood surety for repayment of loan in terms of above agreement. With regard to repayment of loan, M/s. Vasu Tech Ltd. issued post dated cheques i.e. 01.01.2007 and 01.04.2007. However, when represented, except a few cases, all these cheques were returned dishonoured, therefore, assessee company initiated proceedings u/s. 138 r.w.s. 142 of the Negotiable Instruments Act which was pending in the court of Magistrate at Patiala House, New Delhi. It was further mentioned that apart from the above proceedings, assessee company had also filed two civil suits for recovery of a sum of Rs.26,26,91,544/- and Rs.41,64,47,667/- and these suits were pending before the Hon’ble Delhi High Court being CS (OS) No. 850/2007 and CS (OS) No. 3 1093/2008. It was further explained that both the above suits were decreed by the Hon’ble Court in favour of the assessee company vide order dated 26.11.2009 against which appeal was filed by the defendants. It was further submitted that assessee company initiated proceedings for execution of the decree being Execution Petition No. 160/2011 and accordingly two of the properties belonging to the defendants were initially directed to be attached but it was discovered later that one of the property was tenanted and the other property was mortgaged with the Bank against financial assistance availed by M/s. Vasu Tech Ltd. Assessee company filed an application before the High Court for examination of the Judgment Debtor for disclosure of their properties and assets. Before the Hon’ble Court Mr. Dhruv Verma and Mr. R.L. Verma filed affidavits stating that there was no immovable properties under their ownership and control. Assessee company filed winding up Petition u/s. 433 of the Companies Act against Vasu Tech Ltd. in the High Court of Punjab & Haryana at Chandigarh which was admitted under Petition No. 13/2007 and Provisional Liquidator was appointed in respect of the assets of M/s. Vasu Tech Ltd.
Considering the above submissions, the AO specifically asked the assessee on 13.02.2013 to furnish the loan agreement entered into between the assessee company and M/s. Vasu Tech Ltd. along with year wise ledger accounts of M/s. Vasu Tech Ltd. in the books of assessee. On 26.02.2013, Loan agreement was furnished before the AO and AO noted the following points: Loan agreement was made on 15.04.2005 whereas an amount of Rs. 19.20 crore had already been extended to M/s. Vasu Tech Ltd. even prior to entering of this loan agreement. • The above loan was advanced on monthly/fortnightly basis w.e.f. Nov, 2003 to Nov, 2005 in the installments of Rs.25 lac/50 lac/1 crore/5 crore etc. • There was no prior loan agreement for advancing the above loan nor there was any security guarantee in respect of repayment. • On the date of loan agreement i.e. 15.04.2005 entire loan of Rs. 19.20 crore was outstanding. • The above loan agreement was for further loan of Rs.2 crore provided to M/s. Vasu Tech Ltd. • No interest payment was made by M/s. Vasu Tech Ltd. to the assessee company during the period 2003 to 2004 during which Rs.8 crore were advanced. • Though as per above loan agreement, there was provision of interest payment @12% p.a. but as per ledger account, no interest was either provided or paid during the F.Y. 2005-06. • As per clause 2.5 of the above loan agreement, there was provision for default interest @ 2% to be paid by borrower to the lender but this provision was not invoked by the assessee company but on the contrary it Rs.33 crore which was not covered by this loan agreement. • It was further noted by the AO that though Mr. R.L. Verma and M/s. R.L. Verma & Sons (HUF) stood as surety for repayment of loan but loan agreement was signed only by one person in all four capacities i.e. Mr. Dhruv Verma for M/s. Vasu Tech Ltd., Mr. Dhruv Verma in his personal capacity, Mr. Dhruv Verma for and on behalf of Mr. R.L. Verma, Mr. Dhruv Verma for and on behalf of M/s. R.L. Verma & (HUF). In view of these facts, it was held by the AO that loan agreement was entered into without any basic precaution or diligence without the mandatory surety/guarantor/co-guarantor which indicates that the loan agreement was a farce with complete disregard for all procedural requirements. It was further noted by the AO that above loan agreement was made on stamp paper of Rs.500 and even was not notarized by Notary Public. • On perusal of ledger accounts of M/s. Vasu Tech Ltd. in the books of assessee, it revealed that there was no interest income received nor provided in the books of the assessee for financial year 2003-04 and even for the F.Y. 2005-06 when the above loan agreement was entered into on 15.04.2005 neither there was interest received nor provided in the books on accrual basis though as per agreement there was provision for interest @ 12% p.a. It was further noted by the AO that as per section 36(i)(vii) r.w.s. 36(2) of the IT Act, no deduction shall be allowed in respect of bad debts which have been written off unless the same have been taken into account in computing the income of the assessee in any earlier previous year or represents money lent in the ordinary course of business of banking or money lending which is carried out by the assessee. It was further observed by the AO that in the instant case, above debts were neither ever been a part of income of the assessee nor the above transactions can be labeled as lent in the ordinary course of money lending business because there were glaring lacunae/procedural irregularities which shows that these can be in no way can be treated an amount advanced in the normal course of money lending business.
Apart from the above, it was further noted by the AO that as per Memorandum of Association of the assessee company, the main objects were dealing in stocks and shares, acting as commission agents, stockiest etc. and money lending was not included in the main objects of the company as it was appearing as the 8th objective under the “Incidental or Ancillary Objects”. Further, AO observed that as per clause 8 of the loan agreement, there was option to convert into equity to the lender as per which the lender can convert in part or whole, the outstanding dues into equity share capital of the borrower. It was noted by the AO that in the F.Y. 2005-06, assessee company acquired 738234 shares in M/s. Vasu Tech Ltd. covering an amount of Rs.2.25 crores which shows that the above 7 transaction was in the nature of investment made by the assessee out of the surplus fund and not part of regular business of advancing loans. In this regard, AO placed reliance in the case of M/s. Datamatic Financial Services Ltd. vs. DCIT, 2011 TIOL - 124 - ITAT - Mum, wherein it was held that such deposits cannot be allowed to be written off as bad debts u/s. 36(i)(vii).
It was claimed by the assessee before the AO that since it is a registered non banking financial company, therefore, debt should be allowed u/s. 36(i)(vii) of the IT Act. The claim of the assessee was examined by the AO and it was noted by her that as per section 36(i)(vii) r.w.s. 36(2) of the IT Act, such a deduction is available only if debt represents money lent in the ordinary course of business of banking or money lending which is carried on by the assessee.
From the provisions of section 36(i)(vii) r.w.s.36(2), it was noted by the AO that for making claim as per above provisions two conditions are required to be fulfilled, i.e., firstly, the business of the assessee should be of banking or money lending and, secondly, the debt shall have been advanced in the ordinary course of business or money lending. AO further examined the claim of assessee that it is a registered NBFC as per guidelines of RBI, 1998 wherein NBFC has been categorized into four categories namely a loan company or an investment company or an asset finance company or a mutual benefit finance company. Considering the above, AO verified from the copy of return submitted by the assessee to the RBI to ascertain as to in which category does the assessee company falls. It was noted by AO that assessee company falls under the category of “Investment Company” and “Investment Company” has been defined in section 2(vi) of the above Rules and guidelines as “ meaning any company which is financial institution carrying on as its principal business the acquisition of securities. ”In view of the above examination and provisions of law as discussed above, it was held by the AO that assessee company is registered with RBI as an NBFC in the category of an “Investment Company” which is altogether a distinct category from loan company which has been defined in section 2(viii) of the NBFC Directions, 1998 as “a financial institution carrying on as its principal business the providing of finance whether by making loan or advances or otherwise for any activity other than its own”. Thus, it was held by the AO that assessee company is not in the business of money lending. Further, it was also noted by the AO that on the basis of her finding in para 5.2 of the assessment order, it was clear that debt claimed by the assessee company cannot be treated as advanced in the ordinary course of business of money lending. Further, while assessee is claiming writing off the amount advanced to M/s Vasutech Ltd. in the year under consideration, on the other than litigation has been filed in the court in respect of this amount and on 26.11.2009, the Civil Suit was also instituted by the assessee and decree order was passed in favour of the assessee along with future interest and pendentelite and in 2011 a suit for execution of decree was also filed.
Further, AO referred to the RBI’s Guidelines vide notification No. 115 of 02.01.1998 for NBFCs which provides as under: “in respect of accounts where there are potential threats to their recovery on account of erosion in the value/non-availability of security or existence of other factors such as frauds committed by borrowers, it will not be prudent for NBFCs to classify them first as sub-standard assets and wait till the expiry of two years for classification as doubtful assets. We advise that such accounts should be straightway classified as ‘doubtful assets’ or ‘loss assets ’, as appropriate, irrespective of the period for which these have remained as NPAs.”
Considering the above, it was noted by the AO that assessee company clearly violated the above guidelines and further in the year 2000, RBI issued comprehensive directions and guidelines to all NBFCs in the category of loan companies for establishment of an asset liability management system as part of overall system for effective risk management in various portfolios. In view of the above facts, it was noted and held by the AO that assessee company never obtained collateral security for the loan extended to M/s Vasutech Limited clearly violating the guidelines issued by the RBI, as discussed above, therefore, in anyway, the amount in question given by the assessee company to Vasu Tech Limited cannot be treated as loan given in ordinary course of money lending business. Therefore, it was finally held that assessee company is not entitled to deduction u/s 36(l)(vii) in respect of amount of Rs.54,08,93,273/-, which was not even debited in the profit and loss account but it was reduced for the total income as well as from Book Profit in the statement of computation of total income. Therefore, it was held by the AO that both the total income and book profit u/s 115JB are liable to be enhanced by the above amounts. Accordingly, Assessing Officer disallowed the amount of Rs.54,08,93,273/- and added back the same to the total income of the assessee as well as to the book profit u/s 115JB of the IT Act.
Before the CIT(A), the assessee filed detailed submissions along with certain additional evidences which were forwarded by the CIT(A) to the Assessing Officer for obtaining a remand report. After considering the remand report and rejoinder of the assessee to such remand report, the ld.CIT(A) deleted the addition made by the Assessing Officer by observing as under:-
“4.9 I have carefully considered the facts of the case, the assessment order, the submissions made by the appellant. 4.9.1 A.O.’s remarks that as per NBFC rules of RBI, it falls in category of Investment Company the principal business of which is acquisition of securities cannot be accepted prima facie. The business profile is indicative per the RBI definitions and not restrictive or limiting. Further, the money lending activities by the appellant are accepted by RBI, as seen from additional evidence and other submissions filed. Even, the A.O. says that Investment is the principal business of appellant. That does not preclude activities pertaining to money lending. The decree per the civil suit in litigation in appellant’s favour reinforces the merits of the appellant’s case as the appellant’s position was upheld by the governing High Court. The A.O’s comments that such money lent is not in the ordinary course of money lending cannot be acceded to as that would amount to the APO stepping into the shoes of the appellant to decide on the course of business of the assessee - which is a proposition that has repeatedly been struck down by various Court judgments. 4.9.2 The case of Datamatic Financial Services Ltd. v. DCIT reported in 2011 TIOL- 124 relied upon by the AO is distinguishable on facts. In Datamatic case the assessee made no specific claim that it was engaged in money lending, accordingly, it was held that the assessee was not engaged in the business of money lending. In the instant appeal before me, the facts are different as the are multiple transactions involving substantial sums of money with many parties over several years. These appear to have been accepted in past relevant authorities and courts. 4.9.3 The AO cannot decide on the extent precautions or diligence for advancing funds/moneys or loans. This is particularly considering that the M/s VTL is an unrelated party of appellant. It is not the duty of the AO to decide as to how the assessee should conduct business. This is a settled proposition. Reference to the decision of the Apex Court reported in 288 ITR 1 (SC) in the case of S.A. Builders v. CIT (A) is pertinent here, wherein it was held that the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. 4.9.4 The AO disallowed the appellant’s claim for bad debts on the ground that the appellant company is not in the business of money lending and as such is not covered u/s 36(l)(vii) read with section 36(2) of the Act. From perusal of the details of interest income and past assessment orders u/s 143(3), I find that the Interest from loans and advances given by the assessee including interest on loan to VTL has previously been assessed as its business income. In the year of write off of the loan, it cannot be decided that the money lending is not the business of the appellant. This inference of the A.O. is contrary to the judicial principle of consistency approved by the Hon’ble Apex Court and Hon’ble Jurisdictional High Court respectively in the case of [Radhasoami Satsang v. CIT 1992] 193 ITR 321 (SC) and [Dalmia Promoters Pvt. Ltd. 2006] 281 ITR 346 (Del) 4.9.6 The condition precedent for such an action by the appellant is that the loan or advance given in the ordinary course of money lending business is written off during the relevant Assessment Year. The assessee has written off the loan as bad debt in the AY 2010-11 which is not disputed by the AO. Hon’ble Delhi High Court in the case of All Grow Finance and Investment P. Ltd. v. CIT 338 ITR 496 (Del) has held that the amounts of debts were advanced by the assessee in the ordinary course of money lending. The only condition laid down in the second part of sub-section(2) of section 36 of the Act was that the amount should be advanced in the ordinary course of business which by itself proves its revenue nature and no further conditions were required to be satisfied which were only applicable with regard to debt qualifying as bad debt in the first part of sub-section (2). 4.9.7 The Division Bench of jurisdictional High Court in the case of CIT v. Morgan Securities and Credits P. Ltd. [2007] 292 ITR 339 (Delhi), while interpreting section 36(l)(vii) and 36(2)(i), observed as under: "A conjoint reading of section 36(2) and section 36(l)(vii) makes it clear that the assessee would be entitled to a deduction of the amount of any bad debt which has been written off as irrecoverable in its accounts for the previous year. Any lingering doubt would vanish on a careful reading of Circular No. 551, dated January 23, 1990 ([1990]183 ITR (St.) 7) (the relevant portion of which reads as follows :
'The old provisions of clause (vii) of sub-section (1) read with sub- section (2) of the section laid down conditions necessary for allowability of bad debts. It was provided that the debt must be established to have become bad in the previous year. This led to enormous litigations on the question of allowability of bad debt in a particular year, because the bad debt was not necessarily allowed by the Assessing Officer in the year in which the same had been written off on the ground that the debt was not established to have become bad in the year. In order to eliminate the disputes in the matter of determining the year in which a bad debt can be allowed and also to rationalize the provisions, the Amending Act, 1987, has amended clause (vii) of sub-section (1) and clause (i) of sub-section (2) of the section to provide that the claim for bad debt will be allowed in the year in which such a bad debt has been written off as irrecoverable in the accounts of the assessee. Clauses (iii) and (iv) of sub-section (2) of the section provided for allowing deduction for a bad debt in an earlier or later previous year, if the Income-tax Officer was satisfied that the debt did not become bad in the year in which it was written off by the assessee. These clauses have become redundant, as the bad debts are now being straightway allowed in the year of write off The Amending Act, 1987, has, therefore, amended these clauses to withdraw them after the assessment year 1988-89.
It is our view that Circular No. 551 leaves no scope for debate since it specifically notices the previous practice of having to establish that a debt had become bad in the previous year, which had generated enormous litigation on the question of allowability of bad debt in a particular year. The Circular expressed the hope that this litigation would be eliminated by permitting a debt to be treated as a bad or irrecoverable no sooner it was written off in the books of the assessee concerned."
4.9.8 The claim of the assessee is further supported by the decision of the Honb’le Apex Court in the case of TRF Ltd. v. CIT reported in 323 ITR 397 (SC) wherein it was held that after the amendment of section 36(l)(vii) of the Income Tax Act, 1961, with effect from April 1, 1989, in order to obtain a deduction in relation to bad debts, 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. It would be pertinent to refer to the provisions of section 36(l)(vii) which is being reproduced below:
Subject to the provisions of sub-section (2), the amount of any bad debt or part their of which is written off as irrecoverable in the accounts of assessee for the previous year]” 4.9.9 In view of the aforesaid discussions, I am in agreement with the submissions of Ld. AR for the appellant as regards the interpretation of section 36(l)(vii) read with section 36(2) and accordingly hold that the amount of Rs. 54,08,93,273/- is allowable as bad debt and as such the addition as made by the AO of the same to the total income is deleted.”
Aggrieved with such order of the CIT(A), the Revenue is in appeal before the Tribunal.
The ld. DR strongly objected to the order of the CIT(A) in deleting the addition made by the Assessing Officer amounting to Rs.54.08 crores. The ld. DR submitted that the assessee company has advanced a loan to M/s Vasu Tech Ltd., and the copy of the loan agreement dated 5th April, 2005 was furnished before the Assessing Officer. However, the assessee company has advanced a loan of Rs.19.20 crore before the loan agreement was entered with M/s Vasu Tech Ltd.(VTL) No interest payment has been made by VTL to the assessee company during the period 2003-2004. Further, no interest has been provided during F.Y.
2005-06. The ld. DR, referring to the provisions of section 36(1)(vii) w.r.s 36(2), submitted that as per the said provision, no deduction shall be allowed in respect of bad debts that has been written off unless such debts have been taken into account in computing the income of the assessee in any earlier previous year and represents money lent in the ordinary course of business of banking by money lending which is carried out by the assessee. He submitted that in the instant case, debts have neither been ever a part of the income of the assessee nor the transaction carried out in the ordinary course of money lending. So far as the claim of the assessee that it is registered as NBFC and, therefore, the debts should be allowed u/s 36(1)(vii) is concerned, he submitted that as per the RBI guidelines, the assessee company falls in the category of investment company and it is not in the business of money lending. Further, the assessee has not followed the RBI Guidelines since it has never obtained as much as collateral security for the loan extended to M/s VTL. Referring to clause 8 of the loan agreement dated 15th April, 2005, he submitted that the same gives the option to the assessee company to convert into equity to the lender any day which the lender can convert in part or whole the outstanding dues into equity share capital of the borrower. Therefore, it is in the nature of investment made by the assessee out of surplus funds and not part of regular business of advancing loans. For the above proposition, he relied on the decision of the Mumbai Bench of the Tribunal in the case of M/s Datamatic Financial Services Ltd. (supra) which has been relied on by the Assessing Officer. He also relied on the decision of the Hon'ble Allahabad High Court in the case of CIT vs. Kohli Brothers Colour Lab Pvt. Ltd. reported in 329 ITR 80 and the decision of the Hon'ble Rajasthan High Court in the case of Kashmir Trading Company vs. DCIT, 291 ITR 228 and submitted that order of the CIT(A) be reversed and that of the order of the Assessing Officer be restored.
13. The ld. counsel for the assessee, on the other hand, heavily relied on the order of the CIT(A). Referring to the copy of Memorandum and Articles of Association, copy of which is placed at pages 1 to 22 of the paper book, the ld. counsel for the assessee drew the attention of the Bench to the other objects and submitted that as per clause 8 of the objects incidental or ancillary to the attainment of main objectives, the assessee can lend and advance money either with or without security. So far as the allegation of the Revenue that the assessee has not received interest in the earlier years is concerned, he submitted that the assessee has earned interest in the preceding years and the same was offered to tax as business income. Referring to page 107 of the paper book, the ld. counsel drew the attention of the Bench to the interest received of Rs.63,74,489/- for the year ended on 31.03.2008 and Rs.118,24,872/- for the year ended on 31.03.2007. Referring to page 79 of the paper book, he submitted that the interest received for the year ended 31.03.2009 was Rs.5,56,15,601.70. Referring to page 47 of the paper book, he drew the attention of the Bench to the interest income of Rs.9,76,70,350.26 for the year ended 31.03.2010. Referring to page 296 of the paper book, he submitted that the assessee has received interest of Rs.1,67,28,717/- for the financial year 2004-05 from M/s Vasu Tech Ltd. which has been assessed as business income u/s 143(3). Referring to page 297 of the paper book, he drew the attention of the Bench to the copy of interest received from M/s VTL for the year ended 31st March, 2007 at Rs.5,57,947/- which has been assessed as business 143(3). He submitted that the interest income was forming part of the business income of the assessee which was duly shown in the return of income.
13.1 Referring to the decision of the Hon'ble Supreme Court in the case of TRF Ltd., 323 ITR 397, he submitted that after the amendment of section 36(1)(vii) of the IT Act, 1961 w.e.f. 1st April, 1989 in order to obtain a deduction in relation to bad debts, it is not necessary for the assessee to establish that the debt has, in fact, become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee.
13.2 Referring to the decision of the Hon'ble Delhi High Court in the case of All Grow Finance & Investment P. Ltd. vs. CIT, 338 ITR 496, he submitted that the Hon'ble High Court in the said decision has held that where an amount advanced by a non-banking finance company in the ordinary course of business becomes bad, the assessee can write off the same once the condition laid down in the second part of sub-section (2) of section 36 of the Act is fulfilled. It was held that the only condition laid down in the second part of sub-section (2) of section 36 of the Act was that the amount should be advanced in the ordinary course of business which by itself proves its revenue nature and no further conditions were required to be satisfied which were only applicable with regard to debt qualifying as bad debt in the first part of the sub-section (2). The Hon'ble High Court accordingly reversed the order of the Tribunal and allowed the appeal of the assessee.
13.3 Referring to the decision of the Hon'ble Delhi High Court in the case CIT vs. Global Capital Ltd., 306 ITR 332, he submitted that the Hon'ble High Court in the said decision has held that proof that debt has become bad is not necessary and the debt must be written off in accounts in view of amendment of section 36(1)(vii) of the IT Act. So far as the decision relied on by the ld. A.O. and ld. DR in the case of Datamatic Financial Services Ltd. (supra) is concerned, he submitted that the said decision is not applicable since, in that case, the money lending was not the business of Datamatic Financial Services Ltd. He accordingly submitted that since the order of the CIT(A) is in consonance with the law, it should be upheld and the grounds raised by the Revenue should be dismissed.
14. We have considered the rival arguments made by both the sides, perused the orders of the Assessing Officer and the CIT(A), and the paper book filed on behalf the assessee. We have also considered the various decisions cited before us. We find the Assessing Officer, in the instant case, disallowed the claim of bad debt of Rs.54,08,93,273/- on the ground that the assessee does not fulfill the conditions of sub-section 36(1)(vii) r.w.s. 36(2) of the IT Act. Further, the main object of the assessee company is that of dealing in stocks and shares acting as commission agents, stockist, etc., and money lending was not included in the main objects of the company. It was also the allegation of the Assessing Officer that the assessee RBI from time to time. The Assessing Officer also noted that although Mr. R.L. Verma and M/s. R.L. Verma & Sons (HUF) stood as surety for repayment of loan but loan agreement was signed only by one person in all four capacities i.e. Mr. Dhruv Verma for M/s. Vasu Tech Ltd., Mr. Dhruv Verma in his personal capacity, Mr. Dhruv Verma for and on behalf of Mr. R.L. Verma and Mr. Dhruv Verma for and on behalf of M/s. R.L. Verma & Sons (HUF). This loan agreement was entered into without any basic precaution or diligence without the mandatory surety/guarantor/co-guarantor which indicates that the loan agreement was a farce with complete disregard for all procedural requirements. In view of the above the Assessing Officer disallowed the claim of bad debt of Rs.55.08 crores. We find the ld.CIT(A) deleted the disallowance so made by the Assessing Officer the reasons of which have already been reproduced in the preceding paragraphs. It is the submission of the ld. DR that the loan was sanctioned by the assessee company to VTL even prior to the date of loan agreement was entered into and no interest payment has been made by VTL to the assessee in the period from 2003 to 2004. Further, no interest has been provided during F.Y. 2005-06. It is also the allegation of the ld. DR that the assessee has not followed the RBI guidelines as the assessee company has never obtained as much as collateral security as the loan extended to VTL. It is the submission of the ld. counsel for the assessee that although money lending is not the main object of the assessee company, however, as per the objects incidental or ancillary to attainment of the main object, the assessee is authorized to lend and 19 advance money either with or without security and give credit to such persons and upon such terms and conditions as the company may think fit. It is also his submission that the assessee has always been showing the interest income as business income for the last so many years which has been accepted by the Department. It is also his submission that in view of the decision of the Hon'ble Supreme Court in the case of TRF Ltd. (supra), after the amendment of section 36(1)(vii) of the IT Act w.e.f. 1st April, 1989, in order to obtain a deduction in relation to bad debts, 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 accounts of the assessee. Further, it is also his submission that where an amount advanced by a non-banking finance company in the ordinary course of business becomes bad, the assessee can claim the same once the condition laid down in the second part of sub-section (2) of section 36 of the Act is fulfilled.
14.1 We find merit in the above argument of the ld. counsel for the assessee. A perusal of the page 296 of the paper book filed on behalf of the assessee shows that the assessee has received interest of Rs.1,67,28,717/- from VTL for the year ended 31st March, 2005 and the submissions of the ld. AR that the same was assessed as business income u/s 143(3) of the IT Act could not be controverted by the ld. DR. Similarly, the assessee has received an amount of Rs.5,55,947/- as interest from VTL for the year ended 31st March, 2007 copy of which is placed at page 297 of the paper book. The submission of the ld. counsel that the same was also assessed u/s 143(3) could not be controverted by ld. DR. Therefore, the allegation of the Revenue that the assessee has not received any interest in the earlier years is incorrect. Further, as per clause 8 of Memorandum of Association which are objects incidental or ancillary to the attainment of the main objects, the assessee is authorized to lend and advance money either with or without security and give credit to such persons and upon such terms and conditions as the company may think fit.
14.2 The Hon'ble Supreme Court in the case of TRF Ltd. (supra) has held that after the amendment of section 36(1)(vii) of the IT Act, 1961 w.e.f. 1st April, 1989, in order to obtain a deduction in relation to bad debts, 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. We find the Hon'ble Delhi High Court in the case of All Grow Finance & Investment P. Ltd. (supra) has held as under:-
“3. The assessee is a non-banking financial company. It derives its income from interest on money lent to various parties as a part of its money lending business. On 16th April, 1999 it lent `60 lakhs to M/s Bhav Portfolio. After deducting opening credit balance of `3.10 lakhs, a sum of `56.90 lakhs became due to be recovered. However, this amount could not be recovered even after several requests, reminders and legal notice. Ultimately, `28.45 lakhs (50% of amount due) was written off in assessment year 2000-01. The balance amount was also written off in the year 2004-05 and the same stand allowed in the assessment made under Section 143(1) of the Income Tax Act (for short „the Act‟). Similarly, `6,50,000/- (being 50% of the amount due) was written off in the case of M/s Gallery in the relevant assessment year.
4. The Assessing Officer disallowed assessee‟s claim for bad debts holding that under Section 36(2), to write off any bad debt, same has to be included in the income for earlier years which was not done in the case of assessee.
5. The findings of the Assessing Officer were confirmed by both CIT(A) as well as Tribunal. The Tribunal also observed that the advances made by the assessee were without collateral security or any other type of security. Such non-compliance of safety measures in respect of security of debt shows that the advance was not made in the ordinary course of business. The Tribunal also observed that since the assessee failed to prove that the amount which has been advanced was ever shown as income in any of the previous years, therefore, conditions set out under Section 36(2) are not fulfilled. ………………………………………………………………………………… …………………………………………………………………………………..
We are of the view that the only condition laid down in second part of sub- section 2 of Section 36 of the Act is that the amount should be advanced in the ordinary course of business which by itself proves its revenue nature and no further conditions are required to be satisfied which are only applicable with regard to debt qualifying as bad debt in the first part of sub-section 2 in the manner as interpreted above.
For the aforesaid reasons, we are in agreement with the submissions of learned counsel for the appellant/assessee as regards the interpretation of sub- section 2(i) of Section 36 and that being so, we are of the view the authorities below are not justified in holding that the amount of Rs.34,95,000/- was not allowable as bad debt under Section 36(1)(vii) read with Section 36(2) of the Act.”
We find the Hon'ble Delhi High Court in the case of Global Capital Ltd. (supra) has held that under the provisions of section 36(1)(vii) of the IT Act, as amended w.e.f. 1st April, 1989, the assessee is not required to establish that the concerned debt has actually become bad in the relevant year for the purpose of claiming deduction under this section and the only requirement for claiming the deduction is that the assessee has to write off the relevant debt in its books of account. The various decisions relied on by the ld. DR are distinguishable and not 22
ITA No.4574/Del/2 Hon'ble Supreme Court in TRF Ltd. (supra) and the binding decisions of the jurisdictional High Court cited supra. In view of the above discussion and in view of the detailed reasoning given by the ld.CIT(A) on this issue, we find no infirmity in the order of the CIT(A). Accordingly, the same is upheld and the grounds raised by the Revenue are dismissed.
(By the assessee) 16. Ground Nos.1 and 1.1. raised by the assessee read as under:-
“1. That the Ld. Commissioner of Income Tax (Appeals) [Ld. CIT(A)] has erred in confirming the disallowance of Rs. 1,00,00,000/- being the advance given to Mrs. Anuradha Shyam Chandani which was written off as bad debt on its forfeiture by the party during the year. The advance was given for the purchase of property in the course of appellant’s business as stock in trade. The claim of the appellant if not allowable as bad debt u/s 36(1)(vii), is allowable as business/trading loss under section 37(1 )/28 of the Act. The disallowance as made by the Assessing Officer and confirmed by the Ld. CIT(A) being based on erroneous views and / or non-appreciation of the facts and law deserves to be deleted. 1.1. That without prejudice to the above, if the said amount forfeited by Mrs. Anuradha Shyam Chandani be not allowed as a bad debt or as a business loss/trading loss, the same is allowable as a short term capital loss.”
Facts of the case, in brief, are that the Assessing Officer, during the course of assessment proceedings, noted that the assessee has debited a sum of Rs.1 crore in the P&L account on account of bad debts. On being asked by the Assessing Officer, it was explained that the above amount was given to Mrs. Anuradha Shyam Chandani for purchase of property, but, due to some reasons, the assessee could not purchase the property and the amount was forfeited by her, therefore, the P&L account. However, in absence of any evidence to substantiate the above claim or to prove that it is a trading debt and the money was advanced in the ordinary course of business, the Assessing Officer rejected the claim of writing off the debt and added the same to the total income of the assessee.
Before the CIT(A), it was submitted that the assessee intended to purchase the property in the course of its business as stock-in-trade. Certain additional evidences were filed before the CIT(A) such as agreement to sell dated 16th April, 2009, communication letters leading to forfeiture of advance, Board Resolution regarding agreement to purchase the property, etc. It was further submitted that the assessee has paid a sum of Rs.1 crore as advance to Mrs. Anuradha Shyam Chandani for purchase of industrial plot in terms of agreement to sell dated 16th April, 2009 for reasons of commercial expediency as market was weak in the prevailing circumstances at that time. It was not considered expedient to purchase that property or to complete the transaction. Since the advance amount was forfeited by the seller and it was written off by the assessee and since the amount was expended wholly and exclusively for the purpose of business of the assessee, therefore, such write off, if not allowed as bad debt, should be allowed u/s 28(1) of the IT Act and u/s 37 of the IT Act as business loss. It was further argued that merely because the claim was not made out under one particular provision of the Act, but, was so made out under another provision of the Act, the claim cannot be disallowed. Various decisions were also brought to the notice of the CIT(A) and it was submitted that in case the same was not allowed as bad debt, it should allowed as a business loss.
However, the ld.CIT(A) was not satisfied with the explanation given by the assessee. He observed that the advance given by the assessee for purchase of property, which was later written off, is not allowable u/s 36(1)(vii) as bad debt as the same is not a trading debt which was taken as income in earlier years or money advanced in the ordinary course of business. He accordingly rejected the grounds raised by the assessee on this issue.
Aggrieved with such order of the CIT(A), the assessee is in appeal before the Tribunal.
The ld. counsel for the assessee, referring to the decision of the Hon'ble Delhi High Court in the case of CIT vs. New Delhi Hotels Ltd., reported in 345 ITR 1, submitted that the Hon'ble High Court in the said decision has allowed the claim of business loss when the amount was advanced for purchase of property, but, the property was not transferred and the amount was not repaid. Referring to the decision of the Hon'ble Delhi High Court in the case of Mohan Meakin Ltd. vs. CIT, 348 ITR 109, he submitted that when the amount has been advanced in the course of business and the advance become irrecoverable even if the claim is not allowed as bad debt, the same can be allowed as business loss. It was held that the right of the assessee to relief is not restricted to the pleas raised by him before the 25 Departmental authorities or before the Tribunal. If, in respect of the contention raised by the assessee, grant of relief to him on another ground is justified, it would be open to the Department and the Tribunal and indeed they would be under a duty to grant that relief. Referring to the decision of the Hon'ble Bombay High Court in the case of Harshad J. Choksi vs. CIT, 349 ITR 250, he submitted that where the amount was disallowed as bad debt u/s 36(2), the assessee can claim for deduction as business loss u/s 28. It was held that there is no bar in claiming a loss as business loss if it is incidental to carrying on of a business. The fact that the conditions for deduction as bad debt were not satisfied by the assessee would not prevent him from claiming deduction as a business loss. He accordingly submitted that even if the claim of bad debt was rejected by the Assessing Officer or the CIT(A), the same should be allowed as a business loss.
The ld. DR, on the other hand, heavily relied upon the order of the CIT(A). He submitted that since the object of the assessee was not to carry on the real estate business, therefore, it pertains to capital and, therefore, the ld.CIT(A) was fully justified in upholding the action of the Assessing Officer.
We have considered the rival arguments made by both the sides; perused the orders of the Assessing Officer and the CIT(A); and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the Assessing Officer, in the instant case, disallowed an amount of Rs.1 crore debited by the assessee as bad debt in the Profit & Loss Account on the ground that the assessee did not furnish any iota of evidence to substantiate the above claim nor was this in any way reflective of either a trading debt or money advanced in the ordinary course of money lending. We find, the ld.CIT(A) upheld the action of the Assessing Officer on the ground that the advance given by the assessee for purchase of property which was later written off is not allowable under the provisions of section 36(1)(iii) as bad debt as the same is not a trading debt which was taken as income in earlier years or money advanced in the ordinary course of business of money lending, hence, also not in the ordinary course of business. It is the submission of the ld. counsel for the assessee that in view of the various decisions cited by him, even if the same is not treated as bad debt, the same should be allowed as business loss. It is an admitted fact that the assessee does not fulfill the conditions prescribed u/s 36(1)(vii) or 36(2) so as to claim the amount as bad debt. It is the alternative contention of the ld. counsel for the assessee that the same should be allowed as a business loss. However, the assessee has to prove before the Assessing Officer that the amount can be allowed as a business loss. Considering the totality of the facts of the case and in the interest of justice we deem it proper to restore this issue to the file of the Assessing Officer with a direction to grant an opportunity to the assessee to substantiate its claim that it fulfills the conditions required for allowing the above amount of Rs.1 crore as business loss. The Assessing Officer shall decide the issue as per fact and law, after giving due opportunity of being heard to the assessee. We hold and direct accordingly. The grounds raised by the assessee on this issue are accordingly allowed for statistical purposes.
Ground of appeal No.2 reads as under:- “That on the facts and law involved the Ld. CIT(A)] has erred in confirming the disallowance of Rs.2,81,051/- being the amount of alleged expenditure in relation to shares held as stock in trade computed by the Ld. AO under Rule 8D(2)(iii). Section 14A is not applicable in respect of shares held as stock in trade as the profit therefrom is taxable as business income and dividend if any thereon is incidental.”
Facts of the case, in brief, are that the Assessing Officer, during the course of assessment proceedings, noted that the assessee has made a disallowance of Rs.55,92,603/- u/s 14A. He further noted that the assessee has not included the opening stock and closing stock of shares and mutual funds while making disallowance u/s 14A. He observed that the assessee received dividend on account of the above stock. In the P&L Account, the dividend received has been bifurcated into two heads, namely, on investments and on investments held as stock-in-trade.
Thus, the assessee has shown dividend income at Rs.39,97,165/- as dividend on shares held as stock-in-trade. Since, disallowance u/s 14A arises out of the exempt nature of dividend income, the fact of shares being investment or stock is not material. After considering the average of both the opening and closing stock which works out to 5,62,10,198/-, the Assessing Officer made disallowance of Rs.2,81,051/- under Rule 8D(2)(iii) of the IT Act. In appeal, the ld.CIT(A) upheld the action of the Assessing Officer.
Aggrieved with such order of the CIT(A), the assessee is in appeal before the Tribunal.
The ld. counsel for the assessee strongly challenged the order of the CIT(A). He submitted that when the assessee has suo motu disallowed an amount of Rs.55,32,603/- and there is no satisfaction recorded by the Assessing Officer that the disallowance so made by the assessee is incorrect, therefore, the order of the CIT(A) sustaining the disallowance made by the Assessing Officer should be set aside.
The ld. DR, on the other hand, heavily relied on the order of the Assessing Officer and the CIT(A).
We have considered the rival arguments made by both the sides; perused the orders of the Assessing Officer and the CIT(A); and the paper book filed on behalf of the assessee. As held by the Assessing Officer himself, the assessee has received a dividend income of Rs.39,97,165/- on shares held as stock-in-trade which has been claimed as exempt. It is also held by the Assessing Officer that the assessee has made suo motu disallowance of Rs.55,32,603/- u/s 14A of the Act. Therefore, we find merit in the argument advanced by the ld. counsel that when the assessee has himself disallowed an amount of Rs.55,32,603/- and no satisfaction has been recorded by the Assessing Officer, therefore, the disallowance made by the Assessing Officer and sustained by the CIT(A) is not correct. We, therefore, CIT(A) on this issue and direct the Assessing Officer to delete the addition.
Ground of appeal No.3 raised by the assessee reads as under:-
“That on the facts and law involved the Ld. CIT(A)] has erred in confirming the disallowance of Rs.4,72,389/- under Rule 8D(2)(i) being the amount of custodian fee paid in relation to shares held both as stock in trade and investments. Section 14A is not applicable in respect of shares held as stock in trade as the profit therefrom is taxable as business income and dividend if any thereon is incidental.”
Facts of the case, in brief, are that the Assessing Officer, during the course of assessment proceedings, noted that the assessee has paid a custody fee of Rs.4,72,389/- on account of demat charges during the year and the same related to investments yielding exempt income or stock-in-trade which yield exempt income to the assessee. Since the assessee has not disallowed the same in the working of disallowance u/s 14A and since the above forms direct nexus with the investments and would fall under the purview of Rule 8D(2)(i), therefore, the Assessing Officer, applying the Rule 8D(2)(i) made disallowance of Rs.4,72,389/-. In appeal, the ld.CIT(A) upheld the action of the Assessing Officer.
Aggrieved with such order of the CIT(A), the assessee is in appeal before the Tribunal.
We have considered the rival arguments made by both the sides; perused the orders of the Assessing Officer and the CIT(A); and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find merit in the argument of the ld. counsel for the assessee that the provisions of section 14A is not applicable in respect of the shares held as stock-in-trade as the profit therefrom is taxable as business income and dividend income thereon is incidental. Further, the assessee itself has disallowed an amount of Rs.55,32,603/- and the Assessing Officer has not recorded any satisfaction and the assessee has received dividend income of only Rs.39,97,165/- on the shares held as stock-in- trade. Since no satisfaction has been recorded by the Assessing Officer, therefore, we find merit in the argument of the ld. counsel for the assessee that the disallowance made by the Assessing Officer and sustained by the CIT(A) is not proper. We accordingly set aside the order of the CIT(A) and direct the Assessing Officer to delete the addition. The ground raised by the assessee is accordingly allowed.
Ground of appeal No.4 taken by the assessee reads as under:-
“That on the facts and law involved the Ld. CIT(A)] has erred in confirming the addition of Rs.2,81,051/- and Rs. 4,72,389/- to the book profit u/s 115JB of the Act being the amount of estimated expenditure disallowed under Section 14A / Rule 8D. Additions and disallowances as made in the assessed income as per the provisions of the Act cannot be the basis of addition to book profit for the purposes of MAT u/s 115JB unless the same are covered under the explanation to section 115JB of the Act. Provisions of section 14A nowhere prescribe the adjustment of notional expenses disallowed u/s 14A computed on estimate basis for computing book profit u/s 115JB. The addition has been made on erroneous views and / or non-appreciation of the facts and law involved and the same is liable to be deleted.”
After hearing both the sides and perusing the record, we find the Assessing Officer made disallowance of Rs.2,81,051/- u/s 14A r.w. Rule 8D(2)(iii) and Rs. 4,72,389/- u/s 14A r.w. Rule 8D(2)(i). He, therefore, made the addition of the above amount to the total income of the assessee u/s 115JB of the Act. In appeal, the ld.CIT(A) upheld the action of the Assessing Officer.
Aggrieved with such order of the CIT(A), the assessee is in appeal before the Tribunal.
The ld. counsel for the assessee strongly objected to the order of the CIT(A). The ld. counsel submitted that the Special Bench, Delhi, of the Tribunal in the case of ACIT vs. Vereet Investment Pvt. Ltd. reported in 165 ITD 27, has held that the computation under clause (f) of Explanation 1 to section 115JB(2) is to be made without resorting to the computation as contemplated u/s 14A r.w. Rule 8D of the Income-tax Rules, 1962. He accordingly submitted that this issue being a covered matter in favour of the assessee, the grounds raised by the assessee should be allowed.
The ld. DR, on the other hand, heavily relied on the order of the CIT(A).
We have heard the rival arguments made by both the sides. We find, the Special Bench, Delhi, of the Tribunal in the case of Vereet Investment Pvt. Ltd. (supra) has held that the computation under clause (f) is to be made without resorting to the computation as contemplated u/s 14A r.w. Rule 8D of the Income- tax Rules, 1962. Since the issue has been decided in favour of the assessee by the decision of the Special Bench of the Tribunal, therefore, in absence of any contrary material brought to our notice by the ld. DR, we set aside the order of the CIT(A) on this issue and allow the ground raised by the assessee.