SUMMIT INVESTMENTS LTD.,KOLKATA vs. JCIT, SPL. RG-16, KOLKATA, KOLKATA

This appeal of the assessee arises out of the order of the Learned CITA in Appeal No. 355/A-XV/SR-16/98-99 dated 17-12-98 for the Asst Year 1995-96 passed against the order of assessment framed by the Learned AO u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’).

“The Court : After hearing the learned Advocates appearing for the parties the matter is remanded to the learned tribunal to reconsider the matter in the light of the judgement in the case of Badridas Daga vs CIT reported in (1958) 34 ITR 10 wherein the following views were adopted:- a. the theory that once moneys were put into the bank they had ‘got home’ and their subsequent withdrawal from the bank would be de hors the business was inapplicable to a business such as banking or money-lending; b. as the business of the appellant consisted in lending moneys, realizing them and making fresh loans, a continuous operation on the bank account by the agent was incidental to the conduct of the business ; c. once it was established that the agent was in charge of the business, that he had authority to operate on the bank account and that he withdrew moneys in the purported exercise of that authority, his action was referable to this character as agent and any loss resulting from misappropriation of funds by him was a loss incidental to the carrying on of the business; and d. the loss sustained by the appellant as a result of misappropriation by the agent was one which was incidental to the carrying on of the business and should, therefore, be deducted in computing the profits under section 10(1) of the Act.”

The learned tribunal is directed to dispose of the matter within six months from the date of communication of this order.

The intention is not however to preclude the parties to cite other judgemetns, if they are so advised.

Accordingly, this appeal has been restored back to the file of this tribunal to decide the issue as per the directions contained hereinabove.

a) Bad debts – Rs.11,62,253/- “For that the learned CIT(Appeals) was not justified in ignoring the provisions of the Income Tax Act in disallowing the said Bad Debts although the claim was fully allowable as per the provisions of Sec.36 and he did not dispute the same. For that the learned CIT(Appeals) failed to appreciate that the appellant did not file any claim with the Special Court and therefore, irrespective of the outcome of its proceedings, the appellant would not be able to recover any amount. On the facts and in the circumstances of the case, the learned CIT(Appeals) was not justified in disallowing the amount irrecoverable from Broker of Rs.11,62,253/-“ 4.2. We have heard the rival submissions and perused the materials available on record. The Learned AR filed the sequence of events before us about the conduct of the said broker and the difficulties underwent by him due to his fraudulent acts committed earlier. It is not in dispute that the broker Shri.Pallav Sheth was declared a defaulter and suspended by the Bombay Stock Exchange from entering the capital markets due to his involvement in securities scam in the year 1992. The sequence of events filed by the Learned AR is reproduced herein below for the sake of convenience :- List of Dates and Events -C-AM

3. M/s. Summit Investments Ltd

May 20, 1992 A sum of Rs.2 crores was advanced to Pallav Sheth under of portfolio management scheme June 6, 1992 Special Court (Trial of Offences relating to Transactions in Securities) Ordinance, 1992 was promulgated, subsequently replaced by the Special Court (Trial of Offences relating to Transactions in Securities) Act, 1992 (“the Special Court Act”). The said law was made because of large scale irregularities and malpractices indulged in by some brokers in collusion with the employees of various banks and financial institutions resulting in diversion of funds from the banks and financial institutions to the individual accounts of the brokers. The law was made� i) to ensure the speedy recovery of the huge amount involved; ii) to punish the guilty and to restore confidence in and maintain the basic integrity and creditability of the banks and financial institutions . The law provided for establishment of a Special Court for speedy trial of offences relating to transactions in securities and disposal of properties attached. It also provided for appointment of Custodian for attaching the property of the offender with a view to prevent diversion of such property.

July 27, 1992 Movable and immovable properties of Pallav Sheth were provisionally attached under section 281B of the Income Tax Act, 1961. The said provisional attachment order was modified on October 14, 1993 October 1992 Equity shares and debentures of various Indian companies were seized by the CBI from the reisidential and office premises of Pallav Sheth October 30, 1992 Last transaction between the assessee and Pallav Sheth March 31, 1993 Pallav Seth acknowledgted having received Rs. 2 crores from the assessee under portfolio management scheme. October 15, 1993 Notice issued by the Bombay Stock Exchange advising members not to deal in shares attached by the Income Tax Department including those seized by CBI. February 24, 1994 Pallav Sheth submitted to a consent decree for a sum of Rs.51.49 crores upon application by the Custodian -C-AM 4 M/s. Summit Investments Ltd appointed under the Special Court Act. The said amount was to be paid in instalments. Pallav Sheth paid only Rs. 2 crore and defaulted in the payment of further instalments [ para 3 of (2001) 7SCC 549 at page 555] August 24, 1994 The Special Court passed further interim order of attachment in respect of assets of Pallav Sheth [ para 4 of (2001) 7SCC 549 at page 555] March 30, 1995 Because of unlikely recovery, the Board of Directors of the assessee resolved to write off Rs.11,62,253/- due from Pallav Sheth on account of normal share dealings conducted through him and Rs.1,99,08,500/- advanced to him on account of portfolio management scheme. The amounts were accordingly. June 14, 1996 Having committed an act of insolvency on April22, 1996, Pallav Sheth filed Insolvency Petition No.49 of 1996 for being adjudicated insolvent.

4.3. We find that the assessee’s efforts to recover the dues from the Broker Shri.Pallav Sheth were in vain and the assessee treated the irrecoverable trade debts amounting to Rs. 11,62,253/- and decided to write off the same by crediting the concerned debtor’s account. It is not in dispute that the assessee had duly offered income emanating out of this trade debts and hence the assessee is entitled for deduction u/s 36(1)(vii) read with section 36(2) of the Act.

4.4. We find that the reliance placed by the Learned AR on the following decisions squarely supports the case of the assessee:-

• 326 ITR 315 (Mad) CIT Vs. Ramakrsihna & Sons Ltd Held, dismissing the appeal, that the transaction of the assessee of financing the subsidiary company was genuine and bonafide. The assessee paid further advances in its own interest with a view to recover the amount given earlier, to sustain a share and to avoid the guarantee being invoked. There mere fact of payment of money after stoppage of interest from the subsidiary company by itself could not be a ground to hold that the transactions were not in the course of the business. There was no bar in law for finacing the subsidiary company. The income -C-AM 5 M/s. Summit Investments Ltd received by the assessee from the subsidiary company by way of interest was subjected to tax and the advance made by the assessee to that company was also subjected to tax. At the time of writing off the debt, the subsidiary company had accumulated huge losses. The assessee also suffered a loss while selling the shares of the subsidiary company which resulted in the subsidiary company cesing to be the subsidiary of the assessee. Therefore, in the circumstances the money advanced by the assessee had become irrecoverable and was given during the course of the business. What was not paid by the subsidiary company was only the interest and there was no principal amount due at the time of advancing the amount thereafter. The advances made by the assessee were also utilized by the subsidiary company for the purpose for which they were obtained which was to run the foundry. This would also indicate that the amount had been given out of commercial expediency as well. Both the Commissioner(Appeals) as well as the Tribunal had considered the materials on record and came to the conclusion that the transactions involved were true and genuine. They had also held that the advances had been made during the course of the business and they had become irreovcoverable as bad debts and hence the assessee was entitled to the benefit under section 36(1)(vii). The question as to whether a debt had become bad or not was a pure question of fact and, therefore, it could not be construed as a question of law. “ • 323 ITR 397(SC) TRF Ltd Vs. CIT “BAD DEBT-LAW AFTER APRIL 1, 1989- ASSESSEE ONLY TO ESTABLISH THAT DEBT WAS WRITTEN OFF- NOT NECESSARY TO ESTABLISH THAT DEBT IN FACT HAD BECOME IRRECOVERABLE – INCOME-TAX ACT, 1961, s. 36 (1)(vii). After the amendment of section 36(1)(vii) of the Income-tax Act, 1961, with effect from April 1, 1989, in order to obtain a deduction in relation to bad debts, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable: The Supreme Court accordingly remanded the matter to the Assessing Officer to examine, solely to the extent of write off, whether the debt or part thereof was written off in the accounts of the assessee.” • (2013) 36 taxmann.com 537 (AAllahabad HC) CIT vs. Smt. Sushila Mallick- “To treat a debt as a bad debt had to be a commercial or business decision of the assessee based on the relevant material in the possession of the assessee. Once the assessee records the debt as a bad debt in his books of account, that would prima facie establish that it was bad debt unless the Assessing Officer for good reasons holds otherwise. The writing off in the accounts had to be bonafide. Once that the case, -C-AM 6 M/s. Summit Investments Ltd the assessee was not called upon to discharge any further burden. After the 1989 amendment in section 36(1)(vii) it was neither obligatory nor was the burden on the assessee to prove that the debt written off by him was indeed a bad debt as long as it was bona fide and based on commercial wisdom or expediency. [Para 10] In the instant case, the assessee has written off bad debt when it was felt that the amount is not recoverable. The satisfaction of the assessee is sufficient for claiming write off the bad debt. Moreover, both the companies have disappeared from Lucknow without making any payment. [ Para 13]. In the light of the above discussion and by considering the totality of the facts and circumstances of the case, there was no reason to interfere with the impugned order passed by the Tribunal. [ Para 14]”. • Dy.CIT vs. Oman International Bank Saog in (Mum) of 1997 dated 17.5.2006 for Asst Year 1994-95 passed by Mumbai Tribunal Special Bench “Held the Direct Tax Laws (Amendment) Act, 1987 with effect from assessment year 1989-90 has liberalized the requirement of writing off of debts by an assessee by altogether doing away with the condition precedent of the satisfaction of the AO in writing off a bad debt, which used to lead to enormous litigations. The amendment bad debt has been written off as irrecoverable in the accounts of the assessee for the previous year [para 30]. In pre-amended provision the assessee was required to establish that the debt in question has become bad in the previous year. In the post- amended period it is sufficient if the bad debt or part thereof is written off as irrecoverably in the accounts of the assessee. The law has done away with the onerous obligation on the part of the assessee to establish that the debt has become bad in the previous year. Now the requirement is only the write off of such debt as irrecoverable in the accounts of the assessee. [para 31]. As explained by the CBDT Circular No.551 dt. 23-1-1990 the amendment has been brought to the do away with all the complications involved in determining the issue of deductibility of bad debts under section 36(1)(vii). The amendment decided the year in which the deduction has to be allowed, as the year in which the assessee has written off the debt as bad debt in the books of account. The amendment has also done away with the requirement of establishing that the debt has become bad. This is clear from the circular of the Board where it is stated that the amendment has been brought to eliminate the disputes in the matter of determining the year in which a bad debt can be allowed and also to rationalize the provisions. Even after the amendment , if the assessee is again called upon to establish that the debt has become bad, -C-AM 7 M/s. Summit Investments Ltd the true spirit of the amendment is to avoid litigations and do away with all sorts of disputes regarding the allowability of bad debts as a deduction in computing the income of an assessee. The dispute regarding the year in which the debt has to be allowed as a deduction has been resolved by the clear statement of the amended law that the deduction shall be allowed in the year in which the debt has been written off as irrecoverable. It is very important to note that the earlier expression “any debt, or part thereof, which is established to have become a bad debt in the previous year “has been conspicuously omitted by the amendment and substituted by the expression “written off as irrecoverable”. The word of the law are clear and the intent and purpose of the amendment are manifest. The earlier rule of establishing that the debt has become bad is omitted from the provisions of law. Therefore, there is no occasion or provocation to consider whether the assessee has again to establish that the debt has become dad. In fact, there is no provocation at all to go to that extent of discussion because the amendment has omitted the expression “debt which is established to have become a bad debt.”When the amendment has been brought to cure a defect and the amendment has omitted the expression which has made way for such defect there is no reason to ponder over the past and to decide the matter still under the law which stood prior to the amendment [para 33]”.

In view of the aforesaid judicial decisions, we hold that the assessee is entitled to claim deduction towards write off of bad debts amounting to Rs. 11,62,253/- and we have no hesitation in directing the Learned AO to grant deduction towards the same. Accordingly, the grounds raised by the assessee in this regard are allowed.

a) Bad Advance – Rs.1,99,08,500/- “For that the learned CIT(Appeals) was not justified in ignoring the provisions of the Income Tax Act in disallowing the said write off although there was no dispute that it had become bad. For that the learned CIT(Appeals) failed to appreciate that the appellant did not file any claim with the Special Court and therefore, irrespective of the outcome of its proceedings, the appellant would not be able to recover any amount. On the facts and in the circumstances of the case, the learned CIT(Appeals) was not justified in disallowing the amount irrecoverable from Broker of Rs.1,99,08,500/-“

“On the facts and in the circumstances of the case, the learned CIT(Appeals) was not justified in disallowing the amount irrecoverable from Broker of Rs.1,99,08,500/-“

5.2. We have heard the rival submissions and perused the materials available on record. The Learned AR filed the sequence of events before us about the conduct of the said broker and the difficulties underwent by him due to his fraudulent acts committed earlier. It is not in dispute that the broker Shri.Pallav Sheth was declared a defaulter and suspended by the Bombay Stock Exchange from entering the capital markets due to his involvement in securities scam in the year 1992. We find that the aspect of irrecoverability of trade advances given during the course of business of the assessee is proved beyond doubt from the sequence of events in tabular form stated hereinabove which shows the conduct of the broker Shri.Pallav Sheth. We find that on 27.7.1992, movable and immovable properties of Shri.Pallav Sheth were provisionally attached u/s 281B of the Income Tax Act which was later modified on 14.10.1993. We -C-AM 9 M/s. Summit Investments Ltd find in October 1992, the equity shares and debentures of various Indian companies were seized by CBI from the residential and office premises of Shri.Pallav Sheth. We also find that a notice was issued by Bombay Stock Exchange advising members not to deal in shares attached by the Income Tax Department including those seized by CBI. We find that Shri.Pallav Sheth had submitted to a consent decree for a sum of Rs. 50 crores upon application by the Custodian appointed under the Special Court Act which was agreed to be paid in installments. But he paid only Rs 2 crores and defaulted in the payment of further installments. The Learned AR placed the copy of the Hon’ble Supreme Court judgement to prove these facts in the case of Pallav Sheth vs Custodian and Others reported in (2001) 7 Supreme Court Cases 549. We find that the assessee had patiently waited for recovery of the dues by watching the various judicial proceedings of Shri.Pallav Sheth due to fraudulent acts committed by him and finally decide to write off the advances as bad and irrecoverable in its books by crediting the advance vis a vis the concerned broker Shri. Pallav Sheth account in its books in Asst Year 1995-96.

5.3. We also appreciate the statement of the Learned AR that till date not even a single penny could be realized by the assessee from said broker. We also find that the said broker Shri.Pallav Sheth had committed an act of insolvency on 22.4.1996 vide Insolvency Petition No. 49 of 1996 and declared insolvent by the competent authority. Though this act of insolvency had happened subsequent to the write off the trade debt and trade advance by the assessee, we hold that the subsequent conduct and negative development in the hands of the broker Shri.Pallav Sheth only strengthens the earlier conscious and judicious decision of the assessee to write off the advances and debts as irrecoverable.

5.4. We are not in agreement with the arguments of the Learned DR that the contention of assessee paying advance to Shri.Pallav Sheth under portfolio management scheme is a fresh point raised before this tribunal in the second round of -C-AM 10 M/s. Summit Investments Ltd appellate proceedings, as, we find from Para 2 of old tribunal order, a clear finding has been given that the assessee had indeed advanced monies to the broker under portfolio management scheme.

5.5. We also find that the decision of Hon’ble Calcutta High Court relied by the Learned AR in the case of CIT vs Coates of India Ltd reported in 232 ITR 324 (Cal) fully supports the view of the assessee. The relevant extract is reproduced herein below:- Held, that what had been taken into consideration by the Commissioner of Income-tax (Appeals) and the Tribunal was the ability or feasibility of the recovery of the debt from the angle of the assessee and not of the debtor and in those circumstances both of them erred in law. Therefore, the Tribunal was not justified in law in deleting the disallowance of the bad debts.

5.6. We find that since the trade advance was made during the course of its business by the assessee, any loss on account of recoverability would automatically fall under the category of trade debt / receivable and hence is allowable as business loss. Reliance in this regard is placed on the decision of the Hon’ble Supreme Court in the case of CIT vs Mysore Sugar Co. Ltd reported in (1962) 46 ITR 649 (SC) . The facts before the Hon’ble Apex Court and decision rendered thereon is given below:-“ Facts: The assessee who carried on the manufacture of sugar used to advance seedlings, fertilisers and money to sugarcane growers under an agreement by which the growers agreed to sell the next crop of the sugarcane grown by them exclusively to the assessee at current market rates and to have the advances adjusted towards the price of the sugarcane to be delivered to the company. In a certain year owing to drought the sugarcane growers could not grow sugarcane and the advances remained unrecovered. A Committee appointed by the Government recommended that the assessee should ex gratia forgo some of its dues. The assessee accordingly waived its rights in respect of Rs. 2,87,44 and claimed this amount as a deduction under sections 10(2)(xi) and 10(2)(xv) of the income- -C-AM 11 M/s. Summit Investments Ltd tax Act. The question was whether the amount of Rs.2,87,422 which was given represented a loss of capital or was a revenue expenditure: Held, that so far as the assessee company was concerned it was merely making a forward arrangement for the next year’s crops and paying an amount in advance out of the price; there was no element of a capital investment in making the advance and the loss incurred by the assessee was, therefore, a loss on the revenue side and was deductible.”

5.7. We find that the decision of Hon’ble Bombay High Court in the case of Harshad J. Choksi vs CIT reported in (2012) 25 taxmann.com 567 (Bom) also supports the view of the assessee. The question raised before the Hon’ble Bombay High Court and the decision rendered thereon is reproduced below:- “Questions: • Whether if an amount is held to be not deductible as a bad debt in view of non-compliance of the condition precedent as provided under section 36(2), could the same be considered as an allowable business loss? • Whether, therefore, the amount of Rs. 44.98 lakhs could be considered as an allowable business loss? Held: • Section 28 imposes a charge on the profits or gains of business or profession. The expression 'Profits and gains of business or profession' is to be understood in its ordinary commercial meaning and the same does not mean total receipts. What has to brought to tax is the net amount earned by carrying on a profession or a business which necessarily requires deducting expenses and losses incurred in carrying on business or profession. The Supreme Court in the case of Badridas Daga v. CIT [1958] 34 ITR 10 has held that in assessing the amount of profits and gains liable to tax, one must necessarily have regard to the accepted commercial practice that deduction of such expenses and losses is to be allowed, if it arises in carrying on business and is incidental to it. [Para 10] • On the basis of the aforesaid decision, it can be concluded that even if the deduction is not allowable as bad debts, the Tribunal ought to have considered the assessee's claim for deduction as business loss. This is particularly so, as there is no bar in claiming a loss as a business loss, if the same is incidental to carrying on of a business. The fact that condition of bad debts were not satisfied by the assessee would not prevent him from claiming deduction as a business loss incurred in the course of carrying on business as share broker. [Para 11] • In fact, the Bombay High Court in the case of CIT v. R.B. Rungta & Co. [1963] 50 ITR 233 upheld the finding of the Tribunal that the loss could be allowed on general principles governing computation of profits under section 10 of the Indian Income-tax Act, 1922, which is similar/identical to section 28 of the 1961 Act. The -C-AM 12 M/s. Summit Investments Ltd revenue in that case urged that the assessee having claimed deduction as a bad debt the benefit of the general principle of law that all expenditure incurred in carrying on the business must be deducted to arrive at a profit cannot be extended. This submission was negatived by the Court and it was held that even where the debt is not held to be allowable as bad debts yet the same would be allowable as a deduction as a revenue loss in computing profits of the business under section 10(1) of the Indian Income-tax Act, 1922. [Para 12] • Therefore, the amount of Rs. 44.98 lakhs, which was held to be not deductible as bad debts in view of the provisions of section 36(2), could be considered as an allowable business loss. [Para 13] 5.8 In view of the aforesaid judicial decisions, we hold that the assessee is entitled to claim deduction towards write off of bad advances amounting to Rs. 1,99,08,500/- and we have no hesitation in directing the Learned AO to grant deduction towards the same. Accordingly, the grounds raised by the assessee in this regard are allowed.