MAHINDRA & MAHINDRA LTD,MUMBAI vs. DCIT CIR 2(2), MUMBAI

The captioned appeal filed by the assessee pertaining to Assessment Year 2004-05 is directed against an order passed by CIT(A)-5, Mumbai dated 01.08.2011, which in turn arises out of an order passed by the Assessing Officer under Section 143(3) r.w.s. 263 of the Income Tax Act, 1961 (in short ‘the Act’) dated 21.12.2009.

Claim of deduction U/s. 80HHC on certain receipts On the facts and in the circumstances of the case and in law the learned CIT(A) erred in confirming the action of the D.C.I.T in not considering following receipts in computing deduction u/s. 80HHC. a) Income from services rendered - Rs. 4065.22 lakhs b) Property development Activity - Rs. 1720.27 lakhs c) Income from Scrap and Royalty - Rs. 2743.94 lakhs Appellant contends that the C.I.T. should have accepted the Appellant's claim that the aforesaid receipts were part of the business income of the Appellant and accordingly the deduction was rightly allowed on such income in the assessment.”

Insofar as the Ground of appeal No.1 is concerned, the same relates to a claim made by the assessee in the return of income of `15,11,15,380/- representing write-off or waiver of advance given to its subsidiary Mahindra Gesco Developers Ltd. ( hereinafter referred to as MGDL). The facts relevant in this context can be summarized as follow. The assessee had a ‘property development division’, which was engaged in the business of development and sale of residential and commercial properties. As a part of this activity in the nineties, assessee acquired land banks at various places in Mumbai and Pune which were held as stock-in- trade being a part of the property development business activity of the company. As a part of its development activities, assessee had entered into an agreement with New Great Eastern Weaving Company Ltd. (hereafter referred to as ‘NGE’) for development/redevelopment of a portion of NGE’s property for residential cum commercial complex. In pursuance to such agreement NGE availed from the assessee various types of services for the joint development from time to time and made on account of payment by way of advances to NGE aggregating to ` 42 crores for purchasing development rights in respect of the land. In March, 1996, some projects of the property development division of the assessee company were transferred to its subsidiary namely, Mahindra Realty and Infrastructure Developers Ltd. (hereinafter referred to as MRIDL), in fact, the projects so transferred included the aforesaid NGE projects. MRIDL also agreed to repay the advances given to NGE in respect of the NGE projects and also compensated the assessee to the tune of `10.45 crores for the services rendered by assessee to NGE till then in pursuance of the development agreement. As a consequence of such transfer, the amounts due from NGE become due to MRIDL. Similarly, the advances paid by the assessee from time to time to NGE for acquiring development rights by way of stock-in-trade is recoverable from MRIDL. It transpires that in April, 2001 the real estate division of MRIDL demerged. As a result, the rights in the NGE land become part of the stock-in-trade of MGDL pursuance to the scheme of demerger. Thus, the aforesaid sums owed by MRIDL now become debts due by MGDL to the assessee.

Before us, the Ld. Representative for the assessee pointed out that the primary claim of the assessee was that the impugned deduction was allowable under section 36(1)(vii) of the Act . It has been pointed out that the impugned waiver/write-off was of a sum, which was transacted in the normal course of business of property development. Referring to the facts, which have been briefly noted by us in the earlier paras, the Ld. Representative for the assessee pointed out that the monies were advanced to NGE in the normal course of the business of property development and the same was towards cost of acquisition of stock-in- trade. It was also pointed out that in the course of advancing monies for trade, it is a normal instance that an advance may become bad on account of various exigencies. The Ld. Representative for the assessee pointed out that a sum of `10,45,00,000/- as well as `39,00,00,000/- on account of service charges and interest respectively were earned by the assessee from the impugned transaction of development of NGE land, which have been offered to tax under the head ‘profits and gains of business’. It was therefore, contended that the amount of `15,11,15,380/- was written- off/waived out of such advances and, therefore, it was to be understood as a ‘part of debt’ within the meaning of Section 36(1)(vii) of the Act. It was submitted that even otherwise the waiver was to be seen as a matter of business decision which facilitated recovery of the balance amount from MGDL in June, 2005. i.e. in the subsequent year. It was pointed out that a sum of `22,72,00,000/- crores was received in full and final settlement of the outstanding dues from MGDL in June 2005. So however, as far as the waiver of `15,11,15,380/- is concerned, this had occurred in the instant year and, therefore, the assessee had claimed the deduction in the instant year.

Repudiating the claim that the said amount was actually not written-off in the books of account, the Ld. Representative for the assessee drew our attention to Pages 26 & 33 of the Paper Book, which are a part of the Annual Accounts of the assessee, to point out that the amounts have actually been written-off. The Ld. Representative for the assessee pointed out that while debiting it in the Profit & Loss Account, an equivalent amount was transferred to the credit of the Profit & Loss Account from an account styled ‘Investment Fluctuation Reserve Account’, which had no impact on the profit for the year. It is for this reason, that the claim was effectively made in the computation of income while determining the total income while filing the return of income. So however, the account of MGDL was actually credited by this amount and the amount due from MGDL stood reduced to this extent, which showed that the impugned sum is actually written-off in the books of account. In support of the claim that the impugned sum is allowable as a deduction under Section 36(1)(vii) of the Act, reliance has been placed on the following decisions:-

CIT vs. Shreyas S Morakhia, 342 ITR 285(Bom)

Mahindra Engineering & Chemical Products Ltd. (ITA No. 2947/Mum/2010 dated 30/10/2016.(mum Tribunal)

M/s. Kyati Realtors Pvt. Ltd., dated 04/03/2016 (Mum Tribunal)

We have carefully considered the rival submissions and perused the material on record. We find that the limited controversy before us is whether the waiver of advances of `15,11,15,380/- by the assessee is allowable as deduction under Section 36(1)(vii)/ 37(1)/ 28 and/or any other provision of the Act. We have extensively noted the facts relevant to the dispute in the earlier part of this order, and the same are not repeated for the sake of brevity. First, we shall examine the plea of the assessee in the context of Sec. 36(1)(vii) of the Act.

Section 36(1)(vii) of the Act provides for deduction with respect to bad debts or part thereof which is written-off in the books of account of the assessee. Further, Section 36(2) of the Act states that no deduction under Section 36(1)(vii) of the Act shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year. Thus, we find that twin conditions, namely, (i) bad debts should be written-off in the books of account; and, (ii) debt or part thereof should have been taken into account in computing the income of previous year or earlier previous years, should be satisfied in order to allow the deduction under Section 36(1)(vii) of the Act. As regards the first condition, we find that the assessee has debited the impugned sum of `15,11,15,380/- in its Profit & Loss Account; and, the account of MGDL has been actually credited by the said amount and thus the amount due from MGDL stood abated or written-off to the said extent. We shall now examine the fulfilment of the second condition, i.e., whether the debt or part thereof was offered to tax by the assessee in previous year or any of the earlier previous years. In this regard, we find that assessee has only offered the interest income pertaining to such advances in its books of account and the actual advances was never credited to the Profit & Loss Account in any of the years. The ld. Representative for the assessee has pointed out that the words used in Section 36(2) of the Act are ‘debt or part thereof has been taken into account in computing the income’. As per the appellant, the significance of the later part of the words ‘debt or part thereof’ being ‘part thereof’, should also be appreciated while interpreting the provisions of Section 36(2) of the Act; keeping that in mind, it was argued that interest being the part of the debt was very well offered to tax by the assessee in its return of income and thus, it can be said that ‘part of the debt’ was offered to tax and, therefore, the requirement of Section 36(2) of the Act stood satisfied. In this regard, the ld. Representative for the assessee placed reliance on the decision of the Hon’ble Bombay High Court in the case of Shreyas S Morakhia (supra) to claim that the advances waived by the assessee is allowable u/s 36(1)(vii) of the Act. The assessee in that case was a share broker who could not recover the amount from its clients in respect of transactions effected by him on behalf of his clients apart from the commission earned by him, which was offered to tax. The amount which could not be recovered from clients was claimed as deduction u/s 36(1)(vii) of the Act. In this context, the following observations of the Hon'ble High Court are worthy of notice:-

In the present case, it is not in dispute that the assessee earned interest income of `39,00,00,000/- and assignment charges of `10,45,00,000/- from the transaction of development of NGE land. Following the ratio laid down by the Hon’ble Supreme Court in the case of T. Veerabhadra Rao (supra), which has been applied by the Hon’ble Bombay High Court in Shreyas S Morakhia (supra), we find that the income offered by the assessee in the form of interest and assignment charges formed part of the entire debt owned by the assessee from NGE and since the assessee had offered to tax a part of the debt, the requirement of Section 36(2) of the Act stood satisfied and the assessee is eligible to claim the deduction of `15,11,15,380/- under Section 36(1)(vii) of the Act. We hold so.

Since we have accepted the plea of the assessee for deduction of the said sum in terms of Sec. 36(1)(vii) of the Act, the alternate pleas made by the assessee for deductibility of the said sum in terms of Sec. 37(1) of the Act or as a ‘business loss’ in terms of Sec. 28 of the Act, are rendered academic and are not being adjudicated for the present. Accordingly, Ground of appeal no. 1 of the assessee is allowed, as above.

Insofar as Ground of appeal no. 2 is concerned, it pertains to disallowance of claim of Short Term Capital Loss and Long Term Capital Loss claimed by the assessee on sale of assets used for Research & Development activities for which deduction under Section 35 of the Act was already claimed by the assessee holding it to be double deduction.

In the course of hearing it was pointed out that the above issue is decided against the assessee by the Tribunal in in assessee’s own case for Assessment Year 2006-07 holding that the claim of short term and long term loss will amount to double deduction, which is not permissible.

Since there is no change in facts, following the decision of our co- ordinate Bench in assessee’s own case, this Ground of appeal is decided against the assessee.

Insofar as the Ground of appeal no. 3 is concerned, it pertains to disallowance of claim of special pension liability based on actuarial valuation of `1,27,75,558/-. In the course of hearing, the ld. Representative for the assessee did not press for allowance of the entire claim of special pension liability and only pressed the alternative Ground with respect to proportionate amount allowable under Section 35DDA of the Act. It was submitted that the Assessing Officer himself has allowed deduction under Section 35DDA of the Act on the above payments in subsequent years. It was submitted that there was amendment in Section 35DDA of the Act and after the amendment, any payment made in connection with a Voluntary Retirement Scheme (VRS) was allowed as deduction over a period of 5 years in equal instalments. It has been pointed out that this aspect has been accepted by the Assessing Officer in the order giving effect to the order of the Tribunal for Assessment Year 2006-07.

Insofar as Ground of appeal

Per Contra, the ld. DR relied on the orders of lower authorities to substantiate the action of the Assessing Officer. With respect to the decision cited by the ld. Representative for the assessee, the ld. DR did not cite any adverse decision.

We have carefully considered the rival submissions. We find that as rightly pointed out by the ld. Representative for the assessee, the Hon’ble Bombay High Court in the case of Diamond Dye Chem Ltd. (supra) has already dealt with the issue whether addition on account of MODVAT credit is warranted or not. The Hon’ble High Court relying on the decision of the Hon’ble Supreme Court in the case of CIT vs. Indo Nippon Chemicals Co. Ltd., 261 ITR 275 held that the unutilised credit cannot be directly added to the income of the assessee. The relevant para of the said decision is reproduced hereunder:-

Insofar as Ground of appeal no. 5 is concerned, the same relates to the manner of computation of deduction under Section 80HHC of the Act.

Insofar as income from services rendered and Property Development activity is concerned, the plea of the Ld. Representative was that the same are a part of regular operations, and same have been accepted as ‘profits of business’ for the purpose of Sec. 80HHC of the Act in the past years also. It is contended that the same cannot be excluded by applying Explanation (baa) to Sec. 80HHC of the Act. It has also been pointed out that the said receipts have been considered by the Assessing Officer as part of the ‘total turnover’ while calculating deduction under Section 80HHC of the Act and, therefore, the same ought to be considered as a part of ‘profits of business’ while computing the deduction under Section 80HHC of the Act. Even with regard to the income from scrap, it is pointed out that the same represents the scrap generated during the process of production and, therefore, it ought to be taken as a part of ‘profits of business’. It is pointed out that the said income merely represents recoupment of the cost of raw materials. The Ld. Representative pointed out that these elements of receipt have indeed been included in the ‘total turnover’ of the assessee establishing its nature as operational income. Insofar as the element of receipt by way of Royalty is concerned, the Ld. Representative conceded the position that the same falls within the exclusions prescribed in Explanation (baa) to Sec. 80HHC of the Act. On this aspect, his limited plea was that once Explanation (baa) to Sec. 80HHCA of the Act is applied on such receipts, the same may also be excluded from the ‘total turnover’ while computing the deduction under Section 80HHC of the Act.

The Ld. DR appearing for the Revenue defended the action of the lower authorities and contended that the aforesaid receipts have been rightly excluded to the extent of 90% from the profits of business as required by Explanation (baa) to Sec. 80HHC of the Act.

We have carefully considered the rival submissions. Insofar as the receipts by way of income from Services rendered and Property Development activity is concerned, undoubtedly the same are in respect of activities which fall within the ambit of ‘income from business’, a treatment which has been accepted by the Revenue in the past years also. The Assessing Officer has excluded 90% of the above items by applying Explanation (baa) to Sec. 80HHC of the Act on the premise that said receipts are not directly related to exports. Pertinently, the said position taken by the Assessing Officer is in variance with his stand in the earlier assessment years, as contended by the Ld. Representative for the assessee. Moreover, earnings by way of Services rendered and Property Development activity as well as income from scrap is an integral part of diverse activities being carried out by the assessee and the income has otherwise also been assessed from such activities as business income. In fact, the Ld. Representative pointed out, without controversion, that such receipts do figure as a part of ‘total turnover’ of business for the purpose of computing deduction under Section 80HHC of the Act. We are also in agreement with the Ld. Representative that so far as scrap income is concerned, since it has been generated from production process and assessee is not in the business of sale of scrap, any income from such scrap tantamounts to recoupment of cost of raw material/production and, therefore, is includible in the ‘profits of business’ for the purpose of Sec. 80HHC of the Act. The requirement of reducing 90% of such receipts from the ‘profits of business’ as contained in Explanation (baa) to Sec. 80HHC of the Act, in our view, is not relevant qua the aforesaid three receipts, since same are in the nature of operational incomes. Thus, on this aspect, assessee succeeds. Insofar as receipt from Royalty is concerned, the same has been rightly excluded as required by Explanation (baa) to Sec. 80HHC of the Act by the Assessing Officer, which is hereby affirmed. Insofar as the alternate plea of the assessee for exclusion of the same from the figure of total turnover is concerned, the Assessing Officer shall verify the same and thereafter decide on the plea of the assessee afresh. Thus, this Ground of appeal is partly allowed.

Resultantly, the appeal of assessee is partly allowed.