DCIT, NEW DELHI vs. M/S NEMINATH INDUSTRIES PVT. LTD.,, NEW DELHI

From the aforesaid grounds, it is clear that the Revenue has challenged the deletion of following additions : & CO No. 282/Del/2016 3

We first take up the appeal of the Revenue. The first issue involved in this appeal pertains to deletion of addition of Rs.1,25,00,000/- as premium received against transfer of tenancy rights. The Assessing Officer treated this receipt as revenue receipts whereas the ld. CIT(A) has accepted the plea of assessee of it being the capital receipt. The brief facts of the issue are that the assessee had tenancy rights at 8th floor, west tower, Hotel Le meridian, Janpath New Delhi. As per Assessing Officer, the said rights were acquired by the assessee for his business activities and the assessee transferred the tenancy rights of part of the leased premises to M/s. Lalit Modi HUF against which the receipts of Rs.1,25,00,000/- constituted to be the revenue receipts to compensate the business losses of the assessee, as it was in the nature of trading receipts. The learned DR has also supported the contention of the Assessing Officer. The contention of the assessee, as pleaded by the ld. AR, on the other hand, has been that the said property was an income generating asset and the receipts against transfer of tenancy right on such an asset, would amount to compensate the loss of asset of enduring value and as such, these & CO No. 282/Del/2016 4 receipts were capital in nature. Having disregarded the contention of the assessee and relying on some case laws, the Assessing Officer made addition of Rs.1,25,00,000/- as revenue receipts treating the premium received against transfer of tenancy rights as compensation of business activities and taxed the same in the hands of the assessee. The first appellate authority, after considering the detailed submissions of the assessee and following the decision of ITAT in the case of assessee itself for A.Y. 2005-06, 2006-07 & 2007-08 and of CIT(A) for A.Y. 2009-10, deleted the addition observing as under :

Having considered the rival contentions, we do not find any justification to interfere with the decision reached by the ld. CIT(A). The ld. CIT(A) has decided the issue in favour of the assessee after considering the documentary evidences furnished by the assessee and the decision reached by the ITAT in the case of assessee for A.Y. 2005-06 which was followed in assessment year 2006-07, 2007-08 and 2008-09. The ld. CIT(A) has also followed the decision of Tribunal in A.Y. 2009-10. There being no contrary material on record from the side of Revenue to take a contrary view, we find no justification to disturb the findings reached by the ld. CIT(A). We, think it appropriate to add that the asset, the tenancy right of which were transferred by the assessee was & CO No. 282/Del/2016 7 undoubtedly an income earning source and therefore, the amount received against transfer of tenancy rights should have been treated as compensation for sterilization of profit earning source and not in ordinary course of its business. For this, we find support from the decision of Hon’ble Supreme Court in CIT vs. Saurashtra Cement Ltd. (2010) 192 taxman 300(SC) relied by the ld. AR. Viewed from this angle also the order of the ld. CIT(A) does not suffer from any infirmity. Accordingly, the first issue is decided against the Revenue and in favour of the assessee.

The second issue relates to disallowance u/s. 14A. The Assessing Officer noticed that the assessee had made investments of Rs.72,32,400/- in shares, but no suo moto disallowance of expenses were made u/s. 14A. The Assessing Officer observed that since the investment have been made in shares, the income from which shall be tax free in the hands of the assessee, the expenses made for earning such tax free income is liable to be disallowed. The contention of the assessee has been that the investments in shares shown in the balance sheet were not made out of any interest bearing funds. The investments were made in the year 1990 and no exempt income has come in the hands of the assessee in the year under consideration. The Assessing Officer after relying on the decision of ITAT Special Bench in the case of M/s. Cheminvest Ltd. vs. ITO dated 05.08.2009, made disallowance u/s. 14A of Rs.4,77,433/- by applying the formula given u/r 8D of the IT Rules. The addition so made by Assessing Officer stood deleted by the ld. CIT(A) by the impugned order. & CO No. 282/Del/2016 8

We have heard the rival submissions and have gone through the entire material available on record. The contention of the ld. DR has been that it is not necessary to earn the exempt income for invoking the provisions of section 14A in view of decision of Hon’ble Supreme Court in CIT vs. Rajendra Prasad Moody, 115 ITR 519. The ld. CIT(A) while deleting the addition has observed that the investments in shares were made in the year 1990 and no dividend income has ever been earned by the assessee. It was also observed that there exists no evidence on record that the assessee had made any expenditure to earn exempt income. The balance sheet furnished by the assessee goes to substantiate the contention of the assessee that the assessee had sufficient own funds and as such, it cannot be said that the investment so made in the year 1990 was out of any interest bearing funds. The Assessing Officer has not given any cogent finding to discard this contention of the assessee. Therefore, keeping in view the decision of Hon’ble jurisdictional High Court in the case of Maxopp Investment Ltd. vs. CIT (2012) 347 ITR 272 (Del), the ld. CIT(A), in our opinion, appears to have committed no error while deleting the impugned addition on the premise that the provisions of Rule 8D have been mechanically applied by the Assessing Officer. No such situation exists in the decision of Hon’ble Supreme Court in the case of Rajendra Prasad Moody (supra), as relied by the ld. DR. Therefore, there being disparity of facts, this decision is not found applicable to the present facts of the case in hand. The ld. AR of the assessee has also relied on various decisions on this issue. In the recent decision relied by assessee, in Pr. CIT v. IL & FS Energy Development Company Ltd., 84 taxmann.com 186(Delhi), Hon’ble jurisdictional High Court after considering the decision of Special Bench of & CO No. 282/Del/2016 9 Tribunal in Cheminvest Ltd. (supra) and of Hon’ble Supreme Court in Rajendra Prasad Moody (supra) has held that merely because tax auditor had suggested in tax audit report that there ought to be such disallowance, it could not be a ground to make disallowance in terms of section 14A read with rule 8D. In the instant case also, the Assessing Officer has only speculated that the income from investment in share shall be exempt from tax, but there is no finding that any such income has been earned by the assessee or not. There are plethora of decisions to support the aforesaid finding. We accordingly, do not find any infirmity in the impugned order on this count. Accordingly, the appeal of the Revenue deserves to be dismissed.

Adverting to the cross objection of assessee, the only issue involved is with respect to disallowance of bad debt written off at Rs.3,95,00,000/- in the name of Punjab Fibers Ltd., the details of which, as given by assessee are mentioned in the assessment order. The Assessing Officer after considering the submissions of the assessee and relying on various decisions, disallowed the bad debts written off by assessee in its books of account. The Assessing Officer observed that the impugned amount was only the advance and not a bad debt for the purpose of its business, as the assessee was not engaged in the business of lending money. The agreement under which the said amount was given to the debtor was also not considered as authentic having been made on plain paper. The ld. CIT(A) also sustained the impugned addition vide impugned order. & CO No. 282/Del/2016 10

During the course of hearing, the AR of the assessee submitted that the debtors, M/s Punjab Fibres Ltd. was in the business of manufacture and sale of fabrics/Acrylic Yarns having two textile Spinning Mills, one at Vill. RIL Majra, Tehsil Balachaur, Distt. Nawanshahar (Punjab) and the other at Vill. Gulistanpur, Tehsil Dadri, Distt, Gautam Budh Nagar, Uttar Pradesh. The assessee company entered into an agreement with the said debtor in April, 2008 to the effect that M/s Punjab Fibres Ltd. would regularly supply a specified quantity of acrylic yarn, each month to the assessee company for a period of 3 years against consideration of sum of Rs. 4 Crores. The payment of Rs. 3,95,00,000/- was made by the assessee company to the said party on this account. The supplier party, however, failed to honour the agreement. It neither made up the supplies as agreed to nor refunded the advances paid therefor. It was submitted that the transaction was pure and simple a business transaction and it was not a case of loan or that of some extraneous payment having nothing to do with the assessee's business. Copy of business agreement dated 10.04.2008, signed by both the parties to the agreement and witnessed by two independent witnesses, duly attested by the Notary Public. The Assessing Officer has wrongly considered the agreement as incredible without any plausible reason. He also relied on the judgment of Hon’ble Supreme Court in the case of Aloka Bose vs. Parmatma Devi and Ors. (2009) 2 SCC 582.

The ld. DR, on the other hand, relied on the findings reached by the ld. authorities below and supported the impugned order. The agreement was not reliable to prove that it was a business transaction of the assessee. The & CO No. 282/Del/2016 11 assessee was under BIFR notification. Hence, the ld. CIT(A) was justified to sustain the addition.

We have considered the rival submissions and have gone through the entire material available on record. As far as the credibility of agreement, under which the impugned amount was advanced to the creditor is concerned, in our considered opinion, it could not be doubted on flimsy reasons. The Assessing Officer before doubting the credibility of the agreement did not make any enquiry either from any party to agreement nor from any witnesses, who witnessed the same. Even the assessee was not directed to produce any director or principal officer of M/s. Punjab Fibers Ltd. nor does the Assessing Officer issue any notice u/s. 133(6) to ascertain the veracity of the agreement under which the advance was given by the assessee to M/s. Punjab Fibers Ltd. The ld. CIT(A) appears to have discarded the contentions of the assessee on the premise that the terms of agreement were doubtful because M/s. Punjab Fibers Ltd. was notified by BIFR and a sale of asset notification was issued on 05.02.2010. This doubt on the terms of agreement too does not appear to be based on valid reasons because the said notification was stated to have been issued on 05.02.2010 and the agreement between the parties was executed in April, 2008. It is not the case of Revenue that the said party did not deal with any such goods dealt by the assessee. However, at the same time, the advance given was in the normal course of business for supply of goods. Such an advance is purely for business purpose and unless there is any material brought on record to show that either it was sham or make believe arrangement, then no adverse inference can be drawn. & CO No. 282/Del/2016 12 Even if the assessee had made investment in shares and was having interest in the said company, then also nature of advance was purely for commercial consideration. They would hardly affect the terms of agreement, under which the advancing of money by the assessee against supply of goods for continuous three years were agreed to.

It is worthwhile to note that the loss caused due to non-recovery of advances made in the course of business is deductible under the Income Tax Act, provided it is a trading loss. Even the losses caused due to a breach of contract for delivery of goods by either party are also deductible under the IT Act. The learned CIT(A) appears to have concluded that the impugned advance was in the nature of loan and not a trading advance as claimed by the assessee. However, this conclusion of the ld. CIT(A) is neither discernible from the attending facts and circumstances nor is substantiated by any evidence. The Notification of BIFR for sale of assets of Punjab Fibers Ltd. in the year 2010, i.e., after two years from the date of agreement, in our opinion does not go to support the conclusion of the ld. CIT(A) that it was a loan not connected with assessee’s trade. Rather it goes to strengthen the non-recoverability of advance in the year under consideration either in terms of money or in terms of supply of goods. The assessee has filed copy of agreement between the parties which has been doubted without any verification and the impugned amount has been written off in the books of assessee as irrecoverable advance. Even if such write off is not held to be in the nature of bad debt, then also it certainly would be in the nature of business loss.The ld. CIT(A) appears to have further treated the impugned debt as loan given by the assessee on the premise that the purchases made in earlier years and in the year under & CO No. 282/Del/2016 13 consideration were not shown either in the sales or in the closing stock. This, however, at the most be a ground from making trading addition in the hands of the assessee or for rejection of books of account, but cannot be a valid ground to hold the money advanced as loan by the assessee to Punjab Fibers Ltd., which was advanced during the ordinary course of its business. No material is placed on record on behalf of the Revenue to substantiate that the amount advanced by assessee to M/s. Punjab Fibers Ltd. was a loan transaction and not an advance against supply of goods as per agreement produced. We accordingly, are not inclined to justify the sustenance of addition, being a business loss allowable u/s. 28 of the IT Act. Accordingly, the impugned addition deserves to be deleted and the cross-objection of the assessee has to be allowed.

In the result, the appeal of the Revenue is dismissed and the cross objection of assessee is allowed.