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Income Tax Appellate Tribunal, : ‘B’ BENCH, KOLKATA
Before: Shri P.M. Jagtap & Shri S.S.Viswanethra Ravi
This appeal by the Revenue is against the order dt. 13-11-2014 of the CIT-A, IV, Kolkata for the A.Y 2010-11.
The only issue is to be decided as to whether the CIT-A justified in deleting the impugned addition made on account of bad debt written off in the facts and circumstances of the case.
The brief facts relating to the issue in hand are that the assessee is a non-banking finance company, in short ‘NBFC’ hereinafter and dealing in giving loans, advances and investments. The assessee filed its return of income showing income at Rs. Nil. Notices u/s. 143(2) and 142(1) of the Act were issued. In response to which, the ld.AR of the assessee appeared from time to time and produced necessary documents and evidences, books of account, ledger, cash book, purchase and sale register and bank statements etc. The AO found that the assessee claimed expenditure under the head “bad debt written off” to an extent of Rs.2,59,67,905/- in its Profit & Loss account and requested the assessee to furnish the details of said expenditure. The assessee filed a letter dt. 21-05-2012 2 M/s.Achman Vanijya Pvt.Ltd stating that it had given loan to Mr. Kalpesh Navin Chandra Daftari in short ‘K.D hereinafter @ 18% interest p.a and the said person turned out to be a scrupulous and fraudulent element, which resulted in bad debt of Rs.2,59,67,905/- for non recovery of the same.
On examination of ledger account of Mr. K.D, the AO found that the payments totaling to Rs. 9,67,00,000/- were made to Vani Exports between 12-03-2010 to 31-03-2010 and assessee received payments to an extent of Rs.7,07,32,095/- from M/s. Shivangi Enterprises. The AO doubted the export transaction that it happened in the short span of 07 days and asked the assessee vide a letter dt. 06-12-2012 whether any legal step has been taken to realize the debt and to give names of all companies or firms, in which Mr. K.D was major shareholder. The assessee filed reply dt. 17-12-2012 stating that it has no information in respect of provision for Mr. K.D.
Thereafter, the AO issued show cause notice dt. 31-12-2012 to assessee to explain the nexus between Mr. K.D with that of said two companies i.e M/s.Vani Exports & M/s. Shivangi Enterprises and asked the assessee how an amount which has never been credited in the Profit & Loss Account in any year can be debited in the Profit & Loss Account as bad debt and how the balance amount of Rs.2,59,67,905/- can be written off as bad debt, when part payment of Rs.4,90,000/- received on 31-03-2010.
In response to which, the assessee filed written submission dt. 18-02-2013 stating that the said two companies as above, were creditors and debtors of Mr. K.D and stated that money was advanced to said Mr. K.D in the course of money lending business and board decided to write off the same (bad debt) as there was no chance of immediate recovery, as Mr. K.D was absconding. The AO found that the submissions of the assessee was not acceptable and 3 M/s.Achman Vanijya Pvt.Ltd disallowed the amount of Rs.2,59,67,205/- under the head ‘bad debt written off’ and added the same to the total income of the assessee by an order dt. 04-03-2013 passed u/s. 143(3) of the Act by stating as under:-
3.3. In view of the above facts the assesse was issued a letter dated 06-12-2012, requiring him to furnish the details in respect of a) whether any legal steps was taken to realize the debt and whether any money suit as filed in this case. b ) to give the names of all the companies or firms in which Shri Kalpesh Daftari was the major share holder , director or partner/ proprietor during the relevant period. In response to the above query the asses se company filed a written reply dated 17-12-2012 stating that" a) we have no information available with respect to directorships in other companies as well as his association as partner/ proprietor with others b) that no legal steps or money suit was filed as the person was absconding and later behind bars on getting arrested.
3.4. Thereafter a Show Cause notice dated 31-12-2012 was issued to the assesse requiring him to explain the following " A) on verification of the ledger filed by you, it is seen that amount of Rs. 9,67,00,0001- was paid to Vani Exports towards loan from 12- 03-2010 to 31-03-2010, in a short span of 19 days and out of which you received payment of Rs. 7,07,32,0951- from Shivangi Enterprises from the period of 25-03-2010 to 31-03-2010 (6 days). Please explain the nexus of Mr. Kalpesh Navin Chandra Daftari with the above two concerns. B ) It was also noticed by the undersigned that the assesse company had given loan which is a capital assets to Mr. Kalpesh Navin Chandra Daftari and at the end of the financial year the amount of Rs. 2,59,67,905/- which was due from him had been written off as bad debt. But the amount of Rs. 2,59,67,9051- which has been written off as Bad Debt has never been offered for taxation in the earlier year. You are therefore requested to explain as to how an amount which has never been credited in the Profit & Loss Account in any year can be debited in the P& L Account as Bad Debt.
C) It is also observed from the ledger account of Mr. Kalpesh Navin Chandra Daftari that transaction with him started on 12-03-2010 and even after receiving Rs. 4,90,00,000/- on 31-03-2010 from that person, how can the balance amount be written off as Bad Debt from the books ? you are requested to explain the reason for doing so. D) You have also stated vide letter dated 17-12-2012 that no legal steps or money suits was filed by you against the above person or no steps were taken by your company for the recovery of the given loan. Keeping in consideration all the above facts, you are hereby requested to Show cause in writing as to why the entire amount of Rs. 2,59,67,9051- debited in Profit & Loss Account under the head Bad Debt Written off, shall not be disallowed and added the total income of the relevant year. "
In response to the above mentioned show cause notice, the assesse furnished a written submission dated 18-0 1- 2013, stating that it was on instruction of Shri Kalpesh Navin Chandra Daftari and on his behalf the amount was paid to Vani Exports. As per information the Vani Exports andShivangi Enterprises were both creditorsl debtors of Kalpesh Daftari. Further the assesse argued that the assesse company is a NBFC carrying on the main business of advancement of loans and the amount lent to Kalpesh Daftari was absolutely in the ordinary course of money lending business and as no money was recovered after 31-03-2010 and as Kalpesh Daftari was absconding the board took the decision to write off in the same year as there was no chance of immediate recovery.
3.5. After going through the submission filed by the assesse and the details and documents available on record, it has been observed that during the relevant financial year the assesse had made payments on various dates from 12-03-2010 to 31-03- 2010 , total amounting to Rs. 9,67,00,000/- to Vani Exports as per the instruction of Shri Kalpesh Daftari . But the asses se company also received the payments from 25-03-2010 to 31-03-2010 total amounting to Rs. 7,07,32,095 1- from Shivangi Enterprises. The was also noted that in spite of receiving back amount of Rs. 7,07,32,0951- in the short span of 07 days and the payment of Rs. 4,90,00,0001- being received on 31-03-2010 itself, the assesse declared the remaining loan of Rs. 2,59,67,905/- on 01-04-2010 as the Bad Debt written off from its account. Further the assesse has also not taken any legal steps for recovery of the loan given but has in the same year written it off as bad debt. Hence the mere fact that Kalpesh Navin Chandra Daftari to whom the loan was given at the fag end of the financial year is behind bars does not prove that the loan has become irrecoverable and can be written off from the accounts of the same financial year in which it was given in spite of receiving the payment of Rs. 4,90,00,000/- on 31-03-2010 . During the course of the scrutiny proceeding the assesse was unable to explain the nexus between Shri Kalpesh Daftari and the two companies named Vani Exports and 4 M/s.Achman Vanijya Pvt.Ltd Shivangi Enterprises who received and paid the loans respectively. Further to write off a debt, there should be an existing debt , but in this case no such loan to Shri Kalpesh Daftari has been reflected in the Balance sheet of the assesse company as on 31-03- 2010. The assesse was also unable to furnish the I.T. details such as , I.T. return filing details, and details of the business activities of Shri Kalpesh Daftari , Vani Exports and Shivangi Enterprises, hence the genuineness of the loan transaction is doubtful and unverifiable due to assessee's inability to furnish the above details. 3.6. In view of the all the above facts, the explanation of the asses se is not at all tenable and the asses se has failed to establish the fact that the loan has become a bad debt in the relevant financial year. Therefore the claim of the assesse is rejected and the entire amount of Rs.2,59,67,905/- debited in Profit & Loss Account under the head Bad Debt Written off, is hereby ,disallowed and added to the total income of the assessee company of the relevant year."
Aggrieved, the assessee before the CIT-A contended that the provisions of section 36(1)(vii) of the Act provides deduction that if any bad debt or part thereof written off in the account is sufficient for claiming it as deduction. Before him, the assessee submitted that the assessee advanced said loan to Mr. K.D and having entangled in economic irregularities, which warranted his arrest and could not recover the said loan. The said loan was given in the ordinary course of assessee’s business and, the assessee is entitled to claim the same as deduction u/s. 36(1)(vii) of the Act. In support of the contention, the assessee relied on following case laws:- a. All Grow Fin. & Inv. P.Ltd 338 ITR 496(Del) b. P.C.Dharmalinga Mudaliar 152 ITR 588(Mad.) c. Morgan Securities & Credit P.Ltd 162 Taxmann 124(Del) d. and other case laws, which available/mentioned in the order of the CIT-A.
The CIT-A considering the submissions as well as the various case laws available in his order held that bad debt of Rs.2,59,67,905/- is an allowable business expenditure by observing and stating as under:- 4.2 I have examined the assessment order as well as the written submission of the A.R. of the appellant. On each of the queries raised by the A.D. through his show cause letter dated 31.12.2012, the A.R. of the appellant has given point-wise reply. During the assessment proceedings, documents like loan application papers of Mr. K.D. along with a photocopy of his PAN Card and Passport were also provided. M/s. Vani Exports had also given a certificate confirming the receipt of total payment of Rs. 9,67,00,000/-. The A.O. was also provided with instructions of Mr. K.D. to make payment to M/s. Vani Exports. Furthermore, all the legal papers like warrant of arrest of Mr. K.D. issued by the DRI, the bail petition of Mr. K.D. and affidavit from the DRI challenging the bail petition was also made available to the A.O. All these papers make it clear that Mr. K.D. was involved in large scale financial irregularities and forgery, the quantum of which as estimated by the DRI was more than Rs.60 crores. Before his arrest, Mr. K.D. was also absconding. It was under these circumstances that the Board of Directors of the appellant company considered it prudent to pass a resolution on 30.08.2010 giving approval to the write off. The relevant extracts from the Board resolution is as below:- "The Chairman placed before the meeting the Fifteenth Annual Account of the Company for the year ended 31st March, 2010. The Board hereby approves the following write off 5 M/s.Achman Vanijya Pvt.Ltd in accounts for the year: (a) Bad Debts Rs, 2,59,67,905/- (b) Deferred Revenue Expenses of Rs. 11,300/-.
Therefore a general discussion took place on the accounts and the Board unanimously:
RESOLVED that the write off of Bad Debts of Rs. 2,59,67,905/- and Deferred Revenue Expenses of Rs. 11,300/- into the Profit & Loss Account for the year ended 31st March, 2010 be and is hereby approved.
The A.O. has argued that unless the debt is taken into account in computing the income of the appellant for the previous year, it cannot be allowed as a deduction for bad debt. The A.O. has failed to recognize that the primary business of the appellant company is money lending and in such cases the only requirement is that the money should have been lent in the normal course of business. It has been held in the case of P.C. Dharmalinga Mudaliar Vs. CIT (1985) 152 ITR 588 by the Hon'ble High Court of Madras that in the money lending business, the money lent is regarded as stock-in- trade and would be taken into revenue account. Similar judgement has been given by the Hon'ble High Court of Delhi at 338 ITR 496 in the case of an NBFC Company.
4.3 Regarding the argument of the A.O. that no legal steps have been taken to recover the money, the Apex Court has already held that w.e.f 01.04.1989 it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. Relevant accounting entries are sufficient for making claim of bad debt. The Hon'ble Kolkata High Court in the case of A.W.Figgis and CO.(P) Ltd. Vs CIT (2002) reported at 123 Taxman 361 (Cal) has held that filing of Civil suit for recovery of debt is not necessary to claim the bad debt. Furthermore, it is not even necessary for the assessee to prove the year in which the debt actually became bad [ITAT, Kolkata in the case of J.D Castings and Forging (P) Ltd Vs ACIT reported at (1998) 100 Taxman 109)].
4.4 It has been argued by the A.D. that when the appellant is receiving back an amount of Rs. 4,90,00,000/- even as on 31.03.2010, how can the balance amount of Rs. 2,59,67,905/- be claimed as bad debt written off on the same date. The question that arises is whether there is anything in the language or the Act which gives a time period for declaring a debt to be bad. To my mind there is nothing in the language of the Act to suggest that a debt can be called bad only after a lapse of certain time period. On the other hand, the A.R. of the appellant has cited several cases where it has been held that there is no time period for a debt to become bad. Some of these cases cited are:- 1) CIT Vs. Morgan Securities and Credit (P) Ltd. 162 Taxman 124 (Delhi) 2) ACIT Vs. Pullen Pump Industries (2012) 20 Taxman 389Guj) 3) Jindal Iron & Steel Co. Ltd. Vs. DCIT (2013) 33 'Taxman 96 (Mumbai ITAT)
4.5 From the above discussion it is clear that neither the time period for a loan to be considered as bad debt nor the lack of legal steps to recover the money are of any relevance in the case of the appellant. It is not even necessary for the appellant to establish that the debt has become irrecoverable [TRF Ltd. Vs. CIT 190 Taxman 391 (SC)]. In my opinion, one very important issue is to consider and ascertain /whether the loan was given in the normal course of business of the appellant. This aspect has been overlooked by the A.O. while considering the merits of allowability of bad debts. It has been held in various judicial pronouncements that the loans must be given in the normal course of business. I will, therefore, also examine on this aspect while deciding the case of the appellant. The appellant is a NBFC and its main business is giving loans and advances and making investments in shares. I have examined the balance sheet of the appellant company for the year ending on 31.03.2010. I find that loans and advances during the year amount to Rs. 59.45 crores and investments in shares amount to Rs. 26.72 crores. Clearly from the balance sheet of the company, giving loans and advances appears to be the main business activity. Similarly, in the P & L A/e. for the year ending on 31.03.2010, income from financial activities has the lion's share at Rs. 4,35,79,437/-. Therefore, whether we consider the quantum of fund deployed for an activity or the income from that activity, it becomes apparent that giving loans and advances is the main business activity of the appellant. The issue that then arises is as to whether giving loan to Mr. K.D. was in the normal course of business of the appellant. This is the first time that the appellant has given loan to Mr. K.D. and Mr. K.D. is based at Mumbai whereas the appellant is based at Kolkata. Details of loan given over the earlier year and subsequent year was called for from the A.R. of the appellant and it was also asked from the A.R. of the appellant as to how Mr. K.D approached the appellant for loan as he was based at Mumbai. The A.R. of the appellant has stated that Mumbai being the financial capital of the country, large part of his loans over the years have been given to various parties at Mumbai. A complete list of loan given to various parties on city-wise basis with full address was provided for A.Y. 2009-10, A.Y. 2010-11 and A.Y. 2011-12. This list has been analyzed and made into a chart as below:- 6 M/s.Achman Vanijya Pvt.Ltd PARTICULARS A.Y.2009-10 A.Y.2010-11 A.Y.2011-12 Total amount of loans given 2907.42 5707.35 5920.87 Amount of loan to parts in Mumbai 1431.17 3450.41 2628.63 Total No. of parties to whom loan given 27 38 36 Total No. of parties in Mumbai to whom given 12 22 18 % of No. of parties in Mumbai to whom given 44% 58% 50% From the above chart it can be observed that substantial amount of the loan of the appellant has been given to various parties at Mumbai. In fact, during the A.Y. 2010-11 which is under consideration, the appellant disbursed 60%of its total loans amounting to Rs. 34.50 crores to various parties at Mumbai. In the earlier year as well as in the subsequent year too, substantial amount of the loan has been given to various parties at Mumbai. Therefore, it can be concluded, that giving loans to various parties at Mumbai was in the normal course of the business of the appellant. One of the persons at Mumbai to whom loan has been provided by the appellant is Mr. Pankaj Vora. Mr. Pankaj Vora's group companies have been provided loans to the extent of Rs.7.83 crores during A.Y. 2009-10, Rs.10.23 crores during A.Y. 2010-11 and Rs. 3.62 crores during A.Y. 2010-11. Therefore, with Mr.Pankaj Vora the appellant had sustained business relationship over the years. It was Mr. Pankaj Vora who had introduced the loan defaulter Mr. K.D. the appellant. Such documentary evidence in the form of letter of recommendation from Mr. Pankaj Vora about Mr. K.D. addressed to the appellant has been placed on record. In nutshell, the appellant was in a sustained business of advancing loans and substantial part of its business was giving loans to parties at Mumbai. One such party to whom loan was given during A.Y.2010-11 was the loan defaulter Mr. K.D. who was recommended by an old client of the appellant Mr. Pankaj Vora with whom the appellant had long business relationship. Therefore, I will conclude that the appellant had given loan to Mr. K.D. in the ordinary course of business. The Hon'ble Supreme Court in the case of Indian Alumunium Co. Ltd. Vs. CIT 79 ITR 514 has held that the debt to be written off should directly spring from the carrying on of a business or trade and should be incidental to it. In the case of the appellant, money lending is the main business activity and it is on account of money lent to Mr. K.D. that the bad debt has arisen. I, therefore, hold that the appellant had advanced loan to Mr. K.D.in the ordinary course of his business. The action of the A.O. to disallow bad debt amounting to Rs. 2,59,67,905/- and adding it back to the income of the appellant can neither be sustained on facts nor on law. Bad debt claimed by the appellant for Rs. 2,59,67,905/- is held to be an allowable business expenditure. Ground No.2 of the appeal is allowed.”
The ld.DR submits that the said amount was not declared as income of earlier year and the assessee is not entitled to claim as deduction. He also submits that the assessee claimed the same as expenditure shown in the return of income. The CIT-A has given relief by observing that expenditure incurred during the course of ordinary business, which is wrong in the facts and circumstances of the case. In support of his contention, he relied on the order of the AO in disallowing the same. On the other hand, the ld.AR of the assessee submits that the loan was advanced to Mr. K.D in the ordinary course of business and filed a detailed paper book of pages 1-134, wherein various details and evidences in support of the claim of assessee on this issue. The ld.AR supported the order of CIT-A. 7 M/s.Achman Vanijya Pvt.Ltd
Heard rival submissions and perused the material available on record including the detailed paper book. The assessee is a NBFC, which is clear from page no. 63 of paper book. Before the CIT-A the assessee stated that its old customer, Mr. Pankaj Vora introduced Mr. K.D and the assessee advanced Rs. 10 crores to said Mr. K.D and to that effect a loan application of Mr. K.D is at page 82 of the paper book. It is observed that at page 81 of the paper book, Mr. K.D requested the assessee to issue cheques in favour of M/s. Vani Exports. It is also on record that out of said amount the assessee received an amount of Rs. 7,07,32,095/-as on 31-03-2010. The assessee filed a copy of petition filed by the concerned authorities before the Additional Chief Metropolitan Magistrate, which are available at pages 91-99 of the paper book, seeking remand of Mr. K.D to show that Mr. K.D is absconding and it is difficult to recovery the amount lent to him. The assessee placed reliance on CBDT Circular No. 12/2016 dt. 30-05-2016 and to that effect the assessee filed P & L account as on 31-03-2010 available at page 53 of the paper book, which clearly shows the bad debt was written off at Rs.2,59,67,905/-. On perusal of the Circular No. 12/2016 as relied on by the assessee shows that it was issued in pursuance of the decision of the Hon’ble Supreme Court in the case of TRF Ltd reported in 190 Taxman. 391(SC). It is observed that the main ingredients to claim the bad debt written off in accordance with the decision of Hon’ble Supreme Court is that the assessee has to write off bad debt in its books of account as irrecoverable and then the assessee is entitled to claim deduction fulfilling the conditions as provided in sub- section (2) of section 36 of the Act.
In the present case, the condition stipulated in Sec 36(2) of the Act was satisfied in as much as the amount of debt representing money lent in the ordinary course of business of money lending, which is carried on by the assessee was written off in the books of account as 8 M/s.Achman Vanijya Pvt.Ltd irrecoverable. On perusal of the order of the CIT-A, we find that the Chairman of the assessee company vide its Board Meeting/Board Resolution has approved the bad debt of Rs.2,59,67,905/-. We further find that the impugned loan, on which impugned bad debt arisen, was given in the normal course of business, which cannot be ignored in the facts and circumstances of the case. The CIT-A was justified that the bad debt claimed by the assessee for an amount of Rs.2,59,67,905/- is held to be an allowable being business expenditure. Therefore, we find no infirmity in the order of the CIT-A in holding the same. Accordingly, we direct the AO to delete the same. The ground raised by the revenue in the appeal is dismissed.
In the result, the appeal filed by the revenue is dismissed. Order pronounced in the open court on 20-12-2017