WALLACE SPORTS AND RESEARCH FOUNDATION,CHENNAI vs. ACIT, CHENNAI

आदेश / O R D E R

Per A. Mohan Alankamony, AM:-

This appeal filed by the assessee is directed against the

order passed by the learned Commissioner of Income Tax

(Appeals)-4, Chennai dated 01.02.2016 in ITA No.112/2014-

15/A.Y.2012-13/CIT(A)-4 for the assessment year 2012-13

passed U/s.250(6) r.w.s. 143(3) of the Act.

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For the sake of convenience the concise grounds are stated herein below for adjudication:

(i) The Ld.CIT(A) has erred in confirming the order of the

Ld.AO for disallowing the claim of bad debt of Rs.5 crores. (ii) The Ld.CIT(A) has erred in confirming the order of the Ld.AO who had invoked the provisions of Section 40(a)(ia)

of the Act and thereby made disallowance of Rs.27,87,184/-

engaged in the business of motor racing, rallying and real estate business, filed its return of income for the assessment year 2012- 13 electronically on 30.09.2012 admitting total income of

Rs.27,37,490/-. Initially the return was processed U/s.143(1) of the Act. Subsequently the case was selected for scrutiny and the finally the assessment was completed U/s.143(3) of the Act on

24.02.2015, wherein the Ld.AO made the above mentioned disallowances.

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Rs.5 crores:-

During the course of scrutiny proceedings it was noticed by the Ld.AO that the assessee had claimed deduction of Rs.5

crores under the head bad debts written off in the books of accounts. On query it was submitted that the amount of Rs.5 crores was advance given to Mrs. Sandhya Mulchandani during

the Financial Year 2009-10 onwards on various dates as detailed herein bellow:-

S.No. Date Cheque No. Amount 1. 17.08.2009 909341 3,00,00,000/- 2. 19.08.2009 909346 50,00,000/- 3. 19.08.2009 909347 50,00,000/- 4. 05.10.2009 172471 30,00,000/- 5. 06.10.2009 172477 25,00,000/- 6. 04.11.2009 909396 25,00,000/- 7. 04.11.2009 909397 5,00,000/- 8. 04.11.2009 909400 5,00,000/- 9. 27.11.2009 909423 5,00,000/- 10. 27.11.2009 909424 5,00,000/- Total 5,00,00,000/-

It was further revealed that the assessee has extended the

aforesaid loan to Mrs. Sandhya Mulchandani as interest free loan

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for purchase of residential property in New Delhi in good faith.

Since the assessee’s business was primarily to promote and

encourage motor sports amongst amateurs and professionals,

compete in such events and not in the business of money lending,

the Ld.AO disallowed the claim of bad debts. Subsequently the

assessee changed its stand by stating that the amount of Rs.5

crore was short-term advance paid to M/s. Sandhya Mulchandani

because she is their commission agent and real estate broker.

However, the assessee could not produce any evidence to

suggest that Ms. Sandhya Mulchandani was acting as

commission agent and real estate broker. Further the Ld.AO

opined that bad debts U/s.36(1)(vii) of the Act can be claimed only

if such amount was offered as income of the assessee in the

earlier years. In the case of the assessee the assessee had not

offered this amount as its income in any of the earlier years.

Therefore the Ld.A.O opined that it was merely an advance given

in good faith to third party. Hence the Ld.AO disallowed the claim

of deduction of Rs.5 crore under the head bad debts. While doing

so the Ld. A.O relied on the following letters:-

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July 29, 2009

Mr. Vicky Chandhok, Wallace Sports & Research Foundation, 713, (New #244), Mount Road, Chennai – 600 006.

Dear Vicky,

This is in reference to our discussion with you regarding providing finance as Unsecured Interest free loan for a sum of Rs.5,00,00,000/- (Rupees Five Crore only) from your company. The sum is required for the purchase of residential property in New Delhi.

The loan agreement will be sent to you shortly.

Kindly get approval from your Board and inform us.

Yours truly,

SANDHYA MULCHANDANI

SANDHYA MUCHANDANI No.8, Friends Colony (west) New Delhi 110065 February 24, 2014 Ph.# 26329205/9810081835

M. KARTHIK MANICKAM Assistant Commissioner of Income Tax, Business Circle XV, Chennai. Room No.623-A, VI Floor, Wanaparthy Block (New Block), Aayakar Bhawan, No.121, Nungambakkam High Road, Chennai – 600 034. e-mail: Chennai_acit-c15@incometax.gov.in ph.044-28338636

In the matter of Wallace Sports and Research Foundations.

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Dear Sir, In reference to above, I hereby give the requested details:

1.Whether you have taken the amount of Rs.5,00,00,000/- from M/s. Wallace Sports and Research Foundations? If so, please provide date and mode of receipt of the same?

Yes. Date and mode is given below

a) 17.08.2009 Chq. No.909341 drawn on HDFC Bank Ltd., Chennai : Rs.3,00,00,000 b) 19.08.2009 Chq. No.909346 drawn on HDFC Bank Ltd., Chennai : Rs. 50,00,000 c) 19.08.2009 Chq. No.909347 drawn on HDFC Bank Ltd., Chennai : Rs. 50,00,000 d) 05.10.2009 Chq. No.172471 drawn on HDFC Bank Ltd., Chennai : Rs. 30,00,000 e) 06.10.2009 Chq. No.172477 drawn on HDFC Bank Ltd., Chennai : Rs. 25,00,000 f) 04.11.2009 Chq. No.909396 drawn on HDFC Bank Ltd., Chennai : Rs. 25,00,000 g) 04.11.2009 Chq. No.909397 drawn on HDFC Bank Ltd., Chennai : Rs. 5,00,000 h) 04.11.2009 Chq. No.909400 drawn on HDFC Bank Ltd., Chennai : Rs. 5,00,000 i) 27.11.2009 Chq. No.909423 drawn on HDFC Bank Ltd., Chennai : Rs. 5,00,000 j) 27.11.2009 Chq. No.909424 drawn on HDFC Bank Ltd., Chennai : Rs. 5,00,000 ============ TOTAL Rs.5,00,00,000 ============

Thanking you,

Yours truly,

SANDHYA MULCHANDANI

4.2 The Ld.CIT(A) upheld the view of the Ld.AO by observing

as under:-

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“On the first aspect of claim of bad debts of Rs. 5,00,00,000/-, at the first place, the claim of the appellant that it is a business debt is unacceptable. Smt. Sandhya Mulchandhani has clearly, in a letter dated 03/02/2015 has expressed that the amount is an interest free loan taken from WSRF to purchase a residential property. The Appellant firm is not engaged in the business of money lending and hence the amount lent to Smt.Sandhya Mulchandani to help her acquire a residential property cannot, by any stretch of imagination be termed as a business transaction undertaken in the Real Estate business of the Appellant. If it were a real estate transaction, the firm would have issued a cheque in favour of the owner of the house property and not to Mrs. Sandhya Mulchandhani. The contents of the assessment order have incorporated two other letters dated 29/07/2009 and 24/02/2014 addressed to the Assessing Officer by Mrs. Sandhya Mulchandhani have also emphasized that the amount is lent as an interest free loan to help her acquire her property. When the transaction is a loan simplicitor and not an amount advanced in the course of business transaction of the Appellant firm, the various case laws relied upon by the appellant being CIT v. Girish Bhagwat Prasad 265 ITR 772 (Guj.), TRF Ltd. 230 CTR 14 (Se), etc. do not come to the rescue of the Appellant.

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4.3 Thereafter relying on the decision of the Hon’ble High

Court of Bombay in the case of Salem Magnesite (P) Ltd. vs CIT reported in 321 ITR 43, decisions of the Hon’ble Supreme Court in the case of CIT,Bombay vs. Abdullabhai Abdulkadar reported in

41 ITR 545 (SC) and Badridas Daga vs. CIT (1958) reported in 34 ITR 10 (SC), the Ld.CIT(A) confirmed the order of the Ld.AO by holding as under:- “The lending of Rs.5 crores to Mrs Sandhya Mulchandani may have some connection with the business of the appellant, but while the same as substantiated earlier, does not spring directly from the business of the Appellant. The AO has discussed the case in great length and has rightly and appropriately dismissed the contentions of the assessee. I do not find any infirmity in the findings of the AO. Therefore, I am of the considered view that the claim of bad debt written off by the appellant as business expenditure is incongruous, and hence, the Grounds of Appeal on this issue is dismissed.”

4.4 Before us, the Ld.AR vehemently argued by stating that the assessee was not only engaged in motor racing activities but also involved in real estate business. He further submitted that in

order to take advantage of the real estate boom in Delhi, the assessee had advanced Rs.5 crores to Ms. Sandhya Mulchandani to purchase residential house property. However, till date neither

she has purchased the house on behalf of the assessee nor

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returned the advance given to her. The chance of recovering the

amount is also bleak because there was no proper agreement in writing between them to take up legal recourse and therefore the assessee had no other option but write it off as bad debts. The

Ld.AR further argued by stating that even though the loss suffered by the assessee may not be allowable as deduction U/s.36(1)(vii) of the Act towards bad debts, it is a loss suffered by the assessee

during the course of its business and hence it should be allowable as deduction U/s.28 of the Act. The Ld.AR further explained that though Ms. Sandhya Mulchandani has acknowledged the loan before the Revenue, she has no intention to repay the same and

since there were no proper agreements between the parties legal enforcement was difficult. It was therefore pleaded that the loss suffered by the assessee should be excluded from the profit

earned by the assessee. The Ld.DR on the other hand relied on the orders of the Ld.Revenue Authorities and pleaded for confirming the same.

4.5 We have heard the rival submissions and carefully perused the materials available on record. There is no doubt that the

assessee is engaged in real estate business other than motor

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racing, etc., because the Ld.AO himself in his order dated 24.02.2015 has specifically mentioned in the title of the order item No.10 ‘Motor racing and rallying, Real estate’. Therefore it is crystal clear that one of the activities of the assessee firm is real estate business. From the facts of the case and the letter addressed to the assessee and the Assistant Commissioner of Tax by Ms.Sandhya Mulchandani supra, it is evident that the amount was advanced interest free by the assessee to Ms. Sandhya Mulchandani for purchase of residential house property in Delhi. Further in the letter addressed by Ms. Sandhya Mulchandani to the assessee dated 29th July 2009, it is not mentioned whether the immovable property is to be purchased in the name of the assessee or Ms. Sandhya Mulchandani. It is pertinent to mention that no business house will give interest free loan to third party without any quit-pro-quo. Therefore there is an implied inference that the assessee’s expectation is to participate in the gain arising out of the purchase and sale of the immovable property. From the facts of the case it also appears that the job of purchasing the property was vested with Ms. Sandhya Mulchandani. Moreover any person can perform as a real estate agent because there is no prescribed qualification for indulging in

11 ITA No. 1304/Mds/2016

such activity. Thus according to the assessee, in the transaction,

the amount advanced has become irrecoverable, thereby the assessee has suffered loss of Rs.5 crore and the same cannot be brushed aside. The Revenue has also not brought out any

materials to suggest that the assessee has not suffered any loss other than the letter written by Ms. Sandhya Mulchandani. Further there is no dispute that the amount of Rs.5 crore is sourced from

the tax paid resources of the assessee firm. The assessee’s stand is that, it is under the bonafide belief, the loan amount of Rs.5 crores has become irrecoverable and therefore the loan amount is written off as bad debts. Though in strict parlance the loss

suffered by the assessee cannot be considered as bad debts arising out of trade debts, it is certainly a loss suffered by the assessee during the course of its business of real estate if such

advance is not recoverable. Further the assessee alone can access whether the loan is recoverable or not, and the Revenue cannot sit on judgment of the same. Moreover the Revenue has

recourse U/s.41(1) of the Act, if the assessee recovers the loan amount in any of the subsequent years. Further there is no bar on the Revenue to scrutinize the case of Ms. Sandhya Mulchandani

and to examine the possibility whether the loan amount of Rs.5

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crore can be treated as income in her hands because the assessee had written off the same in its books of accounts. Further in common business practice every transaction is not necessarily made by entering into written agreements. Inference can be also drawn from the circumstances and situations pertaining to every transaction. In the case of the assessee, the explanation offered cannot be simply overlooked without looking into each and every event occurred between both the parties. The argument of the Ld.AR that, when the assessee had suffered loss due to irrecoverable of advances made during the course of its business, the same has to be allowed as deduction U/s.28 of the Act has merits. Section 28(iv) of the Act provides that “the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession; shall be chargeable to income-tax under the head “Profits and gains of business or Profession”. Conversely the loss arising from business has also to be set off from the profits of the business. Further the ratio laid down in the case TRF Limited vs. CIT reported in 230 CTR 14 is applicable in the case of the assessee. In the case TRF vs. CIT supra, the Hon’ble Apex Court has held that “After 1st April 1989, it is not necessary to establish that the

13 ITA No. 1304/Mds/2016

debt in fact has become irrecoverable”. Therefore considering the

facts and circumstances of the case and the decision of the

Hon’ble Apex court we are of the considered view that the loss

written off by the assessee is genuine and has to be set off from

the profit earned by it. Further the case cited by the Revenue has

no relevance considering the facts and circumstance of the

assessee’s case before us. Hence, we hereby direct the Ld.AO to

grant deduction of Rs.5 crores being the loss suffered by the

assessee as irrecoverable advances with respect to real estate

business and thereby delete the addition.

Religare Finvest Limited by invoking Section 40(a)(ia) of the

Act amounting to Rs.27,87,184/-:-

During the course of scrutiny assessment, it was found that

the assessee had claimed expenditure of Rs.27,87,184/- on

account of interest paid to M/s. Religare Finvest Limited. It was

also revealed that the assessee had not deducted ‘tax at source’

on the interest paid to M/s. Religare Finvest Limited. Therefore

the Ld.AO invoked the provisions of Section 40(a)(ia) of the Act

and disallowed the interest expenditure of Rs.27,87,184/-. On

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appeal, the Ld.CIT(A) upheld the order of the Ld.AO by observing

as under:- “As held by the Assessing Officer in the assessment order, regarding the first argument of the appellant, it is to be mentioned that the second proviso in section 40(ia) was inserted by the Finance Act 2012 w.e.f. first of April 2013 having a prospective effect and not to be applicable prospectively. Regarding the second argument of the assessee that the assessee does not have any amount payable to M/s. Religare as on 31/3/2012. Therefore, in view of the judicial pronouncements, cited by the assessee, the TDS was not deductible by it. In this regard, it is pertinent to mention here that in the case of DCIT vs. Ashika Stock Broking Ltd. reported in 44 SOT 556 the Hon’ble Kolkatta ITAT has decided the matter in favour of the Revenue and after following its decision dated 15.01.2010 in the case of Poddar Son’s ExL P Ltd vs. ITO in ITA no.1418(Kol.)/09 has held that provisions of Section 40(1)8ia) of the Act are applicable to even sums paid during the year. In the recently decided case of M/s. P.M.S Diesels, the Honourable Punjab and Haryana High Court has held that the consequences u/s 40(a)(ia) would operate on account of failure to deduct tax where the tax was liable to be deducted under Chapter XVII of the Act and the term ‘payable’ has been used in that sense. The High Court in the present case, did not agree with the decision of the Allahabad High Court in the case of Vector Shipping Services (p) Ltd. wherein the High Court had held that when expenditure is incurred by the taxpayer were totally paid and did not remain payable at the end of the relevant accounting period, the provisions of section 40(a)(ia) are not applicable. Therefore, relying on the decision of the Honourable Punjab and Haryana High Court, in the above case, and also referring to the CBDT Circular No.10/DV/2013 dated 16.12.2013, I dismiss the contentions of the appellant and

15 ITA No. 1304/Mds/2016

confirm the addition of Rs.27,87,184/- made under section 40(a)(ia) by the AO.

5.1 At the outset, we find the issue to be covered by the

decision of the Hon’ble Apex Court in the case M/s. Palam Gas

Service vs. Commissioner of Income Tax, Civil Appeal No.5512 of

2017 vide order dated 03.05.2017 wherein with respect to the question of law “Whether the provisions of Section 40(a)(ia) shall be

attracted when the amount is not 'payable' to a contractor or sub-contractor but has been actually paid?" the Hon’ble Apex Court held as follows: “In view of the aforesaid discussion, we hold that the view taken by the High Courts of Punjab & Haryana, Madras and Calcutta is the correct view and the judgment of the Allahabad High Court in CIT v. Vector Shipping Services (P) Ltd., (2013) 357 ITR 642did not decide the question of law correctly. Thus, insofar as the judgment of the Allahabad High Court is concerned, we overrule the same. Consequences of the aforesaid discussion will be to answer the question against the appellant/assessee thereby approving the view taken by the High Court.”

Therefore following the decision of the Hon’ble Apex court,

we hereby hold the issue in favour of Ld.Revenue. However the

third proviso of Section 40(a)(ia) of the Act states as under:-

“Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an

16 ITA No. 1304/Mds/2016

assessee in default under the first proviso to sub-section (1) of section 201, then, for the purpose of this sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee referred to in the said proviso.

[Inserted by Finance Act, 2012, w.e.f. 1-4-2013]”

From the above it is clear that, if the assessee in not deemed to be an assessee in default under the first proviso to sub-section(1) of section 201, then, Section 40(a)(ia) of the Act will not be attracted w.e.f. 1-4-2013 i.e., from the assessment year 2012-13. Hence we hereby remit the matter to the file of the Ld.AO to examine the issue with respect to the applicability of the provisions of Section 40(a)(ia) of the Act in totality and thereafter decide this issue afresh in accordance with law and merits.

Order pronounced on the 16th October, 2017 at Chennai.

Sd/- Sd/- (धु�वु� आर.एल रे�डी) (ए. मोहन अलंकामणी) (Duvvuru RL Reddy) (A. Mohan Alankamony) �या�यक सद�य /Judicial Member लेखा सद�य / Accountant Member

17 ITA No. 1304/Mds/2016

चे�नई/Chennai, �दनांक/Dated 16th October, 2017 RSR आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 2. ��यथ�/Respondent 3. आयकर आयु�त (अपील)/CIT(A) 4. आयकर आयु�त/CIT 5. �वभागीय ��त�न�ध/DR 6. गाड� फाईल/GF