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Income Tax Appellate Tribunal, “C”, BENCH KOLKATA
Before: SHRI S. S. GODARA, JM &DR. A.L.SAINI, AM
आदेश / O R D E R
Per Dr. A. L. Saini: Thesecross-appeals filed by theAssessee and Revenue,pertaining to Assessment Year 2008-09, are directed against an order passed by the Ld. Commissioner of Income Tax (Appeals)-VIII, Kolkata,which in turn arise out of
M/s Merlin Resources Ltd. Assessment Year: 2008-09 an assessment order passed by the Assessing Officer u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’), dated 28.02.2013.
The grievances raised by the assessee are as follows:
“01 For that ld. CIT(A) erred in holding the view of ld. A.O that the assessee is not entitled to reduce its net profit by the provision for NPA/doubtful debts written back amounting to Rs.3,65,64,894/- while computing book profit u/s 115JB. The purported findings of the lower authorities in this behalf is without any materials and are contrary to the facts of the case and are arbitrary, unreasonable, erroneous and perverse.
2. For that the ld. CIT(A) erred in not adjudicating the assessee’s ground against the charging of interest u/s 234B. 03 For that the ld. CIT(A) erred in not adjudicating the assessee’s grounds against the initiation of penalty proceedings u/s 271(1)(c).
For that the order appealed against is otherwise erroneous on facts and/or in law. The assessee craves leave to add, alter, modify or amend any of the grounds taken hereinbefore, before or at the time of hearing of the appeal.”
The grievances raised by the Revenue are as follows:
“1) Ground No.1:That, on the facts and in circumstances of the case and in law, the ld. CIT(A) erred in deleting the disallowance of proportionate interest on borrowed loans given as interest-free loans to other parties without having regard to the fact that the assessee company could not establish ‘commercial expediency’ in advancing such interest- free loans and the Hon’ble Supreme Court had laid down in the case of S.A. Builders Limited vs. CIT (2007) 288 ITR 1, that establishing ‘commercial expediency was essential.’ 2) Ground No.2:That, on the facts and in circumstances of the case and in law, the ld. CIT(A) erred in deleting disallowance of claim of bad debt of Rs.3,80,00,000/- without appreciating the fact that the assessee company could not establish that such loan was advanced in course of its money lending business activities and that is was engaged in money lending business activities. 3) Ground No.3:That, on the facts and in circumstances of the case and in law, the ld. CIT(A) erred in giving relief to the assessee company holding that its claim of long term capital loss of Rs.5,92,14,631/- and short term capital loss of Rs.46,56,642/- was correct, whereas the assessee company failed to establish genuineness of transactions of purchase and sale of shares and loss incurred in course of assessment proceedings and the relief given by the ld. CIT(A) was not on proper appreciation of facts and supporting documents of the assessee company. 4) Ground No.4: That, on the facts and in circumstances of the case and in law, the ld. CIT(A) erred in holding that the profit from sale of shares of TCG Urban Infra Holding Limited (TUIHL) was capital gain and indexation was to be allowed, without having regard to the fact that the genuineness of transactions and antecedents of that company was not established in course of assessment proceedings or before the ld. CIT(A) to be genuine transactions.”
M/s Merlin Resources Ltd. Assessment Year: 2008-09 4. Now, we shall take up assessee`s appeal in ITA No.1239/Kol/2013, for A.Y.2008-09, wherein the solitary grievance of the assessee is that ld. Assessing Officer did not allow assessee to reduce its net profit by the provision of NPA/doubtful debts written back to the tune of Rs.3,65,64,894/-.
5.The facts of the case may be briefly stated. During the assessment proceedings, the AO noted that the assessee earned net profit, as per profit and loss account amounting to Rs.3,40,64,257/-, but has not paid tax on book profit by deducting provision for NPA, doubtful debt written back amounting to Rs. 3,65,64,894/-. The aforesaid provision is not allowable provision for deduction while computing book profit, if the same was not offered for taxation and actually on said provision tax was paid U/s 115 JB or normal tax. At the time of incurring book loss mere provision was made without paying tax and so the same provision cannot be an allowable deduction. Hence, AO noted that book profit of the assessee company should be computed as per profit disclosed in the assessee`s audited profit and loss account.
Aggrieved by the stand so taken by the assessing officer, the assessee carried the matter in appeal before the ld CIT(A) who has confirmed the action of the assessing officer. Aggrieved, the assessee is in appeal before us. The ldDR for the Revenue reiterated the stand taken by the assessing officer, whereas ld counsel for the assessee relied on the submissions made before the authorities below.
We have given a careful consideration to the rival submissions and perused the material available on record we note that the summary of the provisions made by the assessee and the provision written back in the profit and loss account abundantly explains that assessee is entitled to reduce the profit by the bad debt of Rs.3,65,64,894. It is not a provision, but it is a bad debts actually incurred by the assessee. The table showing the details of provisions made and the actual bad debts incurred is given below for ready reference:
M/s Merlin Resources Ltd. Assessment Year: 2008-09 MERLIN RESOURCES PVT. LTD. A.Y. 2008-09 Statement of provision for NPA/Doubtful debts and their write back and closing balance of earlier years and their treatment in income tax computation F.Y A.Y Provision Provision Closing balance Treatment in the computation of made in P/L written back as per balance income of relevant Assessment A/c in P/L A/c sheet Year 02-03 03-04 129,303,414 - 129,303,414 Disallowed in the computation of 03-04 04-05 96,848,997 - 226,152,411 income 04-05 05-06 - 25,194,727 200,957,684 Excluding from the computation of 05-06 06-07 - 19,794,583 181,163,101 income 06-07 07-08 - 86,571,163 94,491,938 07-08 08-09 - 36,564,894 58,027,044 226,152,411 168,125,367 From the above chart, we note that assessee made provision for NPA/doubtful debts in the Assessment Years 2003-04& 2004-05 to the tune of Rs. 129,303,404/- and Rs. 96,848,997/- respectively.These provisionswere added back to the total income of the assessee in normal computation as well as computation u/s 115JB of the Act in the respective years. During the Assessment Year 2008-09, the assessee has actually written back bad debts of Rs.3,65,64,894/- which he has debited to the profit and loss account as an expenditure and excluded from the computation of the income. Based on the factual position we note that assessee had offered these provisions for taxation in earlier years, hence in the A.Y.2008-09 the assessee is entitled to claim the bad debts written off to the tune of Rs.3,65,64,894/- .Therefore, we direct the Assessing Officer to allow the claim of the assessee in normal computation as well as computation u/s 115JB of the Act.
Ground No.2 & 3 raised by the assessee are consequential in nature, therefore, they do not require adjudication.
Now, we shall take Revenue’s appeal in for Assessment Year 2008-09 wherein ground no.1 raised by the Revenue relates to disallowance of proportionate interest on borrowed loans, given as interest free loans to other parties.
The brief facts qua the issue are that during the assessment proceedings, the AO noted that the assessee company borrowed funds by way of unsecured loan
M/s Merlin Resources Ltd. Assessment Year: 2008-09 amounting to Rs.12,93,22,965/- on which interest was claimed amounting to Rs.1,63,74,308/-. On examination of details and accounts of the assessee it was noted by the AO that assessee company advanced interest free friendly loans to the following parties: a) TCG Urban Infrastructure holding Rs.3,06,93,068 b) Snifs securities limited Rs.54,91,696 c) Elbee Securities Limited Rs.7,88,49,484 d) Amalendu Chatterjee Rs.10,00,000 e) Swapan Bhattacharya Rs.5,00,000 Total: Rs.11,65,34,248 The assessing officer therefore, worked out the proportionate interest payment on aforesaid interest free advances to the tune of Rs.1,47,55,057/- and disallowed the same.
Aggrieved by the stand so taken by the Assessing Officer, the assessee carried the matter in appeal before the ld. CIT(A) who has deleted the addition. Aggrieved, the Revenue is in appeal before us.
The ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer which we have already noted in our earlier para and is not being repeated for the sake of brevity. Whereas, ld Counsel relied on the submissions made before the authorities below:
We have given a careful consideration to the rival submissions and perused the material available on record, we note that ld CIT(A) called a proper remand report and counter submissions were made by the assessee, in response to the remand report which is given below for ready reference:
Party Amount (Rs.) Fact sheet/Explanation a) TCG Urban Infrastructure 3,06,93,068 The assessee had given loan to TCG Urban Holding Pvt. Ltd. Infrastructure Holding Pvt. Ltd. in the immediate preceding in F.Y 2006-07 of Rs.3,00,00,000 bearing interest @ 12% p.a interest has been charged in the immediate F.Y 2006-07 of Rs.6,93,068, thus the receivable balance was Rs.3,06,93,068 as on 31/03/2007. This loan of Rs.3,00,00,000 was received back by the assessee at the beginning of the year under Page | 5
M/s Merlin Resources Ltd. Assessment Year: 2008-09 consideration i.e. on 05.04.07. b) Smifs Securities Limited 54,91,696 The company had given loan of Rs.4,00,00,000 to Smifs Securities Ltd in earlier years in FY 2000-01 & 2001-02 and the same was received back by the assessee. However, the interest amount remained irrecoverable which has also been provided as bad and doubtful in earlier years. Elbee Securities Ltd. 7,88,49,484 Interest has been charged when it was a good loan upto 31.03.2003. But ever since it has been decided to provide them as bad and doubtful debts & not to charge interest on such bad and doubtful loan.
Amlendu Chatterjee 10,00,000 Advances for business purposes Swapan Bhattacharya 5,00,000 Advances for business purposes 11,65,34,248 The above details of loans given and party wise explanation which were not controverted by the ld AO. We note that during the remand proceedings, the ld AO had not put forward any challenge to the assessee`s submissions. We note that the Assessing Officer has disallowed interest of Rs.1,47,55,057/- for the reason that the assessee has not charged interest on friendly loan of Rs.11,65,34,248/-.
We note that the assessee has charged interest on loan given to TCG Urban Infrastructure Holding Pvt. Ltd. in the F.Y 2006-07 and has received back the loan amount on 05.04.2007. As regard the loan to Smifs Securities Limited, the assessee has given loan of Rs.4 crores to that company in the F.Y 2000-01 and 2001-02 and has received back the principal amount and the balance of Rs.54,91,696/- is on account of interest which has become irrecoverable and is provided as bad and doubtful debt in earlier year. As regard, the amount of Rs.7,88,49,484/- of Elbee Securities Limited, as per assessee, this loan was good up to 31.03.2003 and interest was charged up to that period. However, this loan has been treated as bad and doubtful in earlier years hence no interest has been charged thereafter. As regard the loan of Rs.10,00,000/- to Amalendu Chatterjee and loan of Rs.5,00,000/- to Swapan Bhattacharya and the ld. Counsel has submitted that these are the advance given for business purpose. We note that in the remand report the A.O has submitted that there was no necessity of giving Page | 6
M/s Merlin Resources Ltd. Assessment Year: 2008-09 friendly loan of Rs.11,65,34,249/- but has not disputed the correctness of the submission of ld. AR in respect of loan to TCG Urban Infrastructure Holding Pvt. Ltd., Smifs Securities Limited &Elbee Securities Limited. Hence it is evident that the loan given to these parties was not interest free loan but due to change in circumstances the assessee has not charged interest on these loans in the previous year relevant to Assessment Year 2008-09.
We note that the Hon’ble Apex Court in the case of S.A Builders Ltd. v CIT [2007] 288 ITR 1, has approved the observation of Delhi High Court in the case of Dalmia Cement wherein the Hon’ble Delhi High Court has held that the revenue authority should not put themselves in the arm chair of the businessman and decide the reasonableness of the expense. It has been held by Hon’ble Madras High Court in the case of CIT v. Hotel Savera (1999) 239 ITR 795 that for making the disallowance of interest or part of it, a finding that the borrowed fund was used for non-business purpose is essential. Since in the case of the assessee, the Assessing Officer has not given such finding and it is also not his case that the borrowed fund has been given to the parties named in the assessment order. Hence, we are of the view that the Assessing Officer was not justified in disputing the business necessity of the loan without bringing on record any material to support his bald statement. It is not the case of the Assessing Officer that the funds borrowed on which interest of Rs.1,63,74,308/- was paid was utilized for non business purpose or for giving the loan to the parties mentioned in the assessment order.That being so, we decline to interfere with the order of Id. C.I T.(A) deleting the aforesaid additions. His order on this addition is, therefore, upheld and the grounds of appeal of the Revenue are dismissed.
15. Ground No.2 raised by the Revenue relates to disallowance of bad debt of Rs.3,80,00,000/-, deleted by the ld CIT(A).
The brief facts qua the issue are that during the assessment proceedings, the ld AO noted that the assessee company has written off a sum of Rs.3,80,00,000/-, friendly loan advanced to Elbee services limited. It was observed by the AO, from Page | 7
M/s Merlin Resources Ltd. Assessment Year: 2008-09 the accounts that no activity took place from 01.04.2004 on said advanced account and no interest provision was made. The assessee company has partly written off bad debt amounting to Rs.1,97,12,371/- in the accounting year ending on 31.03.2006. No write off was made in preceding previous year ending on 31.03.2007 and again in instalments, the assessee wrote off a huge amount of Rs.3,80,00,000/- during the year ended 31.03.2008. The AO was of the view that the assessee company has not brought any evidence on record to prove that the said funds advanced became irrecoverable or details of legal suit/proceedings initiated for realisation of such debt. Mere non-payment of interest by loan debtor does not signify that debt became irrecoverable and should not be simply written off in Profit and Loss account. The primary onus lies on assessee to prove that the debt became irrecoverable and the debt liability and interest accrued liability was previously accepted by Debtor. The ld AO further noted that the assessee has not even brought on record that at the time of advancing of debt, it was carrying out money lending business activity. The sum not advanced in course of business is a capital loss. In absence of any evidence the claim of bad debts amounting to Rs.3,80,00,000/- was disallowed and added back to the total income of the assessee.
Aggrieved by the stand so taken by the Assessing Officer, the assessee carried the matter in appeal before the ld. CIT(A) who has deleted the addition. Aggrieved, the Revenue is in appeal before us.The ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer which we have already noted in our earlier para and is not being repeated for the sake of brevity.On the other hand, the ld. Counsel for the assessee defended the order passed by the ld. CIT(A).
We have given a careful consideration to the rival submissions and perused the materials available on record, we note that the A.O. in the assessment order has observed that the assessee has written off friendly loan of Rs.3,80,00,000/- advanced to Elbee Services Ltd. The A.O further observed that no interest was charged on this advance from 01.04.2004 onwards and the assessee has written off Rs.1,97,12,371/- out of this loan in the F.Y 2005-06 and has written off amount of Page | 8
M/s Merlin Resources Ltd. Assessment Year: 2008-09 Rs.3,80,00,000/- in this year. As per the A.O. since the assessee has not brought any evidence to substantiate its claim that the loan has become irrecoverable in this year or the assessee has taken legal action for the recovery of the loan hence this bad debt which is the part of the tax planning and is not allowable.
In the light of the facts narrated above, we note that this loan was given during the course of assessee’s money lending business and interest has been charged for the year ending 31.03.1998 to 31.03.2003. The interest charged on the loan was offered as business income in earlier years by the assessee. Since the assessee has written off loan in its books of accounts hence the write off of Rs.3,80,00,000/- is allowable as bad debt in view of provision of section 36(1)(viii) of the Income Tax Act. We note that the provisions of section 36(1)(vii) of Income Tax Act has been amended w.e.f. 1.4.1989 and as per the amended section, as held by Hon’ble Supreme Court in the case of T.R.F Ltd. v CIT (2010) 323 ITR 397, that the assessee need not to establish that the debt has become irrecoverable in the year in which it is written off. The only condition is that the debt should be written off in the books of accounts. Since in the case of the assessee it is not in dispute that the assessee has written off the debt of Rs.3,80,00,000/- which relates to its money lending business, in its books of accounts therefore, we are of the view that this write off of bad debt of Rs.3,80,00,000/- is an allowable deduction. That being so, we decline to interfere in the order passed by the ld. CIT(A), his order on this issue is hereby upheld and grounds of appeal raised by the Revenue is dismissed.
21. Ground Nos.3 & 4 relates to relief given to the assessee company for long term capital loss of Rs.5,92,14,631/- and short term capital loss to the tune of Rs.46,56,642/-.
The brief facts qua the issue are that during the assessment proceedings, the AO noted that the assessee computed loss on sale of unquoted shares. The AO observed that assessee has not submitted the required documents and information such as quotation, book value/breakup value of shares, valuation report of Page | 9
M/s Merlin Resources Ltd. Assessment Year: 2008-09 valuation of unquoted shares, and the reason/explanation on how the value of unquoted shares drastically fell, copy of bills to whom the same were sold, purpose of sale of unquoted shares on which no dividend was received etc. The AO was of the view that the shares were sold and the money was given to parties for mere accommodation purposes and to book artificial loss in order to set-off other income. As per AO, the assessee made the following share transactions: 1. Galaxy Entertainment Corp Ltd:In the month of March 2006, the assessee did transactions in huge quantity viz: 239626 shares at cost of Rs.7,52,88,729/-. The aforesaid shares were sold after expiry of one year at Rs.2,42,62,132/- only. Thus, assessee claimed loss of Rs.5,10,34,367/- and after indexation of cost claimed loss of Rs.5,92,14,631/-. The AO also did not accept the short term capital loss to the tune of Rs.46,56,611/- on sale of shares of Galaxy Entertainment Corp Ltd.
The assessing officer noted that all the aforesaid shares in which assessee booked losses to claim deduction are unquoted shares and group company shares or are shares of companies controlled by substantially interested persons. lt is evident from the above that these shares were not acquired by the assessee company for investment purposes to earn dividend income, nor has the assessee company offered any disallowances u/s.14A on these unquoted investments.To examine the book value of shares of aforesaid companies, the assessee was asked to furnish book value of aforesaid shares along with copy of balance sheets for the relevant years or furnish valuation of unquoted shares. But the assessee failed to furnish the same. The assessee stated before the AO that unquoted share are not freely traded in market and so the assessee company sold the shares at whatever price is available because nobody is interested in acquiring unquoted shares. In the assessee`s case the assessee company acquired shares by way of private placement to accommodate various parties in forming their capital and later sold the shares at throwaway prices. Therefore, thelong term capital loss Rs.5,92,14,631/- and short term capital loss of Rs.46,56,611/- claimed in shareswas disallowed by the assessing officer.
M/s Merlin Resources Ltd. Assessment Year: 2008-09 23. Aggrieved by the stand so taken by the Assessing Officer, the assessee carried the matter in appeal before the ld. CIT(A) who has deleted the addition. Aggrieved, the Revenue is in appeal before us. The ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer which we have already noted in our earlier para and is not being repeated for the sake of brevity. On the other hand, the ld. Counsel for the assessee defended the order passed by the ld. CIT(A).
We have given a careful consideration to the rival submissions and perused the materials available on record, we note that shares of Galaxy Entertainment Corp Ltd. is quoted on Bombay Stock Exchange. The Galaxy Entertainment Corp Ltd, is not a group company of the assessee company. The shares were purchased by the assessee on the stock exchange. The assessee company incurred long term capital loss of Rs.5,92,14,631/- and the assessee company also incurred short term capital loss of Rs.46,56,642/-. We note that before the ld CIT(A), the assessee had filed copy of purchase note and sale bill etc. of shares of M/s Galaxy Entertainment Corp. Ltd. These documents were sent by the ld CIT(A), to the AO, during the appellate proceedings. The AO in his remand report had objected to the admission of these documents. The ld CIT(A) admitted these documents stating that purpose of assessment proceedings is to assess the correct tax liability of the assessee in accordance with law.[ National Thermal Power Corporation Vs.CIT 229 ITR 383 ]. The ld CIT(A), considering the facts of the assessee`s case, directed the assessing officer to work out the long term capital loss and short term capital loss. We are of the view that there is no infirmity in the order of ld CIT(A) in directing the AO to compute the long term/short term capital loss. That being so, we decline to interfere in the order passed by the ld. CIT(A), his order on this issue is hereby upheld and grounds of appeal raised by the Revenue is dismissed.
M/s Merlin Resources Ltd. Assessment Year: 2008-09 25. In the result, the appeal filed by the Revenue in ITA No.1316/Kol/2013 is dismissed, whereas the appeal filed by the assessee in ITA No.1239/Kol/2013, is allowed.
Order is pronounced in the open court on 31.12.2018.