ITO 2(1)(2), MUMBAI v. BHAGWANDAS BHERUMAL RAMCHANDANI, MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH B MUMBAI BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI J.SUDHAKAR R EDDY(A.M) ITA NO.261/MUM/2010(A.Y. 2005-06) THE ITO 2(1)(2) AAYKAR BHAVAN R.NO.543 5 TH FLOOR MK ROAD MUMBAI 20. (APPELLANT) VS. MR. BHAGWANDAS BHERUMAL RAMCHANDANI PROP. BHAGWANDAS BHERUMAL & CO. 26/27F SITARAM BUILDING 2 ND FLOOR OPP. PHULE MARKET MARKET ROAD MUMBAI 400 001 PAN:AABPR 3773N (RESPONDENT) APPELLANT BY : SHRI NARESH KUMAR BALODIA RESPONDENT BY : S/SHRI M.J.KAPADIA/ DEEPAK P. TIKEKAR ORDER PER N.V.VASUDEVAN J.M THIS IS AN APPEAL BY THE REVENUE AGAINST THE ORDER DATED 27/10/2009 OF CIT(A)-4 MUMBAI RELATING TO ASSESSMENT YEAR 200 5-06. GROUND NO.1 RAISED BY THE ASSESSEE READ AS FOLLOWS: ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT(A) ERRED IN ALLOWING THE WRITING OFF OF DEBTS AMOUNTIN G TO RS.2 65 15 063/- WITHOUT APPRECIATING THE FACT THAT THE SAME WERE WRITTEN OFF WITHOUT ANY COMMERCIAL DECISION AND NO EVIDENCE WAS PRODUCED BY THE ASSESSEE TO SHOW THAT THE SAID DEBT S HAD BECOME IRRECOVERABLE AS HELD BY THE HONBLE BOMBAY HIGH CO URT IN THE CASE OF DCIT (IT) VS. OMAN INTERNATIONAL BANK REPORTED IN 313 ITR 12(BOM) (2009). 2. THE ASSESSEE AN INDIVIDUAL AND IS ENGAGED IN THE BUSINESS OF IMPORT AND EXPORT OF FRUITS AND VEGETABLES. THE ASSESSEE CLAIMED A SUM OF RS. 2 65 15 063/- AS DEDUCTION ON ACCOUNT OF BAD DEBTS. THE ASSESSEE ITA NO.261/MUM/2010(A.Y. 2005-06) 2 SUBMITTED THAT IT HAD APPOINTED GOLDEN TRADING COMP ANY (GTC) AS SOLE SELLING DISTRIBUTORS. THE ASSESSEE SOLD GOODS WORT H RS. 3 01 75 063/- TO GTC BUT COULD RECOVER ONLY RS. 36 60 000/- FROM GTC . THE ASSESSEE HAD OFFERED TO TAX THE SALE VALUE IN THE RESPECTIVE YEA RS AND THIS FACT IS NOT IN DISPUTE. SINCE THE ASSESSEE COULD NOT RECOVER THE DUES OF RS. 2 65 15 063/- IN SPITE OF REPEATED FOLLOW UP THE ASSESSEE WROTE OFF THE AMOUNT AS BAD DEBTS IN THE BOOKS OF ACCOUNT. THE ASSESSING OFFIC ER DID NOT ALLOW THE CLAIM OF THE ASSESSEE FOR THE REASON THAT THE ASSESSEE DI D NOT ESTABLISH THAT THE DEBTS WHICH WERE WRITTEN OFF HAD IN FACT BECOME BAD . 3. ON APPEAL BY THE ASSESSEE THE CIT(A) FOLLOWING T HE DECISION OF THE SPECIAL BENCH IN THE CASE OF OMAN INTERNATIONAL BAN K 100 ITD 285(SB)(MUM) HELD THAT THE ASSESSEE IS NOT REQUIRED TO PROVE THAT THE DEBT WHICH WAS WRITTEN OFF AS BAD DEBT HAS IN FACT BEC OME BAD AND A MERE WRITE OFF OF A DEBT AS BAD IN THE BOOKS OF ACCOUNT WOULD BE SUFFICIENT TO CLAIM THE DEDUCTION. THE DEDUCTION WAS ACCORDINGLY DIRECTED TO ALLOWED BY THE CIT(A). 4. AGGRIEVED BY THE ORDER OF THE CIT(A) THE REVENUE HAS RAISED GROUND NO.1 BEFORE THE TRIBUNAL. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS . PRIOR TO 1STAPRIL 1989 EVERY ASSESSEE HAD TO ESTABLISH AS A MATTER OF FACT THA T THE DEBT ADVANCED BY THE ASSESSEE HAD IN FACT BECOME IRRECOVERABLE. THAT P OSITION GOT ALTERED BY DELETION OF THE WORD ESTABLISHED WHICH EARLIER E XISTED IN SECTION 36(1)(VII) OF THE INCOME TAX ACT 1961 [`ACT' FOR SHORT]. FOR THE SAKE OF CLARITY WE RE- PRODUCE HEREINBELOW PROVISIONS OF SECTION 36(1)(VI I) OF THE ACT BOTH PRIOR TO 1ST APRIL 1989 AND POST-1ST APRIL 1989: PRE- 1 S T APRIL 1989 : OTHER DEDUCTIONS. 36.(1) THE DEDUCTIONS PROVIDED FOR IN THE FOLLOWING CLAUSES SHALL BE ALLOWED IN RESPECT OF THE MATTERS DEALT WITH THE REIN IN COMPUTING THE INCOME REFERRED TO IN SECTION 28(I) T O (VI) ITA NO.261/MUM/2010(A.Y. 2005-06) 3 XXXX XXXX XXXX (VII) SUBJECT TO THE PROVISIONS OF SUB-SECTION(2) THE AMOUNT OF ANY DEBT OR PART THEREOF WHICH IS ESTABLISHED TO HAVE BECOME A BAD DEBT IN THE PREVIOUS YEAR. POST- 1 S T APRIL 198 9: OTHER DEDUCTIONS. 36.(1) THE DEDUCTIONS PROVIDED FOR IN THE FOLLOWING CLAUSES SHALL BE ALLOWED IN RESPECT OF THE MATTERS DEALT WITH THE REIN IN COMPUTING THE INCOME REFERRED TO IN SECTION28(I) TO (VI) XXXX XXXX XXXX (VII) SUBJECT TO THE PROVISIONS OF SUB-SECTION(2) THE AMOUNT OF ANY BAD DEBT OR PART THEREOF WHICH IS WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE FOR THE PREVIOUS YE AR. 6. IN TRF LIMITED VS. CIT 230 CTR 14 (SC) THE HON BLE SUPREME HAS HELD THAT AFTER 1 ST APRIL 1989 IT IS NOT NECESSARY FOR THE ASSESSEE TO ESTABLISH THAT THE DEBT IN FACT HAS BECOME IRRECOVERABLE. I T IS ENOUGH IF THE BAD DEBT IS WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE. 7. WE MAY ALSO CLARIFY THAT WHILE ALLOWING THE CLAI M OF THE ASSESSEE FOR DEDUCTION ON ACCOUNT OF BAD DEBTS WRITTEN OFF THE CIT(A) HAD REFERRED TO THE FACT THAT BAD DEBTS WERE SUNDRY BALANCES WRITTEN OF F IN THE IMPUGNED ORDER. HOWEVER BY A RECTIFICATION ORDER DATED 24/3/2010 PASSED UNDER SECTION 154 OF THE ACT THE CIT(A) HAS RECTIFIED THIS DEFEC T AND HAD BROUGHT OUT CORRECT FACTS WITH REGARD TO THE CLAIM FOR DEDUCTIO N ON ACCOUNT OF BAD DEBTS. FOR THE REASONS GIVEN ABOVE WE CONFIRM THE ORDER O F CIT(A) ON THIS ISSUE AND DISMISS GROUND NO.1 RAISED BY THE REVENUE. 8. GROUND NO.2 RAISED BY THE REVENUE READS AS FOLLO WS: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE CIT(A) ERRED IN DELETING THE ADDITION OF RS. 23 15 380/- ON ACCOUNT OF SUNDRY BALANCE WRITTEN OFF WITHOUT APPRECIATING THE FACT THAT THE ASSESSEE FAILED TO ESTABLISH THAT SUCH DEBTS HAD B ECOME BAD AND WERE NOT RECOVERABLE. ITA NO.261/MUM/2010(A.Y. 2005-06) 4 9. THE ASSESSEE CLAIMED AS DEDUCTION A SUM OF RS. 2 3 15 380/- UNDER THE HEAD SUNDRY BALANCES WRITTEN OFF. THE ASSESSEE HAD CLAIMED THAT THESE SUNDRY BALANCES WRITTEN OFF REPRESENTS TDS PAID WI THOUT THE RECEIPT OF MONEY INTEREST ON STAFF LOAN AND ADVANCES PAID TO SUPPLIERS OF MATERIALS WHO DID NOT MAKE SUPPLIES AND STOPPED BUSINESS DEAL INGS WITH THE ASSESSEE FOR A CONSIDERABLE LENGTH OF TIME. ACCORDING TO TH E ASSESSING OFFICER THE DEDUCTION WAS BEING CLAIMED AS A LOSS INCIDENTAL TO BUSINESS UNDER SECTION 28 OF THE ACT AND THEREFORE IT WAS NECESSARY THAT THE LOSS SHOULD HAVE CRYSTALLIZED DURING THE PREVIOUS YEAR. ACCORDING T O THE ASSESSING OFFICER THERE WAS NO EVIDENCE TO SHOW THAT THE JUDGMENT OF THE ASSESSEE THAT THE LOSS HAD CRYSTALLIZED IN THE PREVIOUS YEAR WAS JUST IFIED. ACCORDING TO THE ASSESSING OFFICER IT WAS A UNILATERAL ACT ON THE PA RT OF THE ASSESSEE IN WRITING OFF THE SUNDRY BALANCES AND THERE WAS NO EVIDENCE T O SHOW THAT THE SUNDRY BALANCES WRITTEN OFF BECAME IRRECOVERABLE DURING TH E PREVIOUS YEAR. THE ASSESSING OFFICER THEREFORE REFUSED TO ALLOW THE CLAIM OF THE ASSESSEE FOR DEDUCTION. 10. ON APPEAL BY THE ASSESSEE THE CIT(A) HELD AS FO LLOWS: IN THE CASE OF CIT V. MYSORE SUGAR CO. LTD. (1962) 46 ITR 649 (SC) IT WAS HELD THAT ADVANCES GIVEN AGAINST PURCHASE AND S UBSEQUENTLY WRITTEN OFF REPRESENT LOSSES IN RUNNING OF BUSINES S AND ARE NOT ON CAPITAL ACCOUNT. IF FIND THAT THE WRITING OFF OF S UNDRY BALANCES IS ALLOWABLE AS BUSINESS LOSS OF THE ASSESSEE IN VIEW OF SUPREME COURTS DECISION IN THE CASE OF CIT VS. MYSORE SUGAR CO. LT D. AS REPORTED IN 46 ITR 649 (SC). AS IN THIS CASE ALSO ASSESSEE HAS GI VEN ADVANCES BUT HE HAS TO WRITE IT OFF AS PARTY DID NOT SUPPLY ANY MAT ERIAL NOR PAID BACK THE AMOUNT. THE ADVANCE WAS GIVEN NOT FOR PURCHASE OF ANY CAPITAL ASSET BUT FOR PURCHASE OF STOCKIN-TRADE. HENCE TH E LOSS INCURRED BY THE ASSESSEE IS BUSINESS LOSS AND NOT CAPITAL LOSS. 11. AGGRIEVED BY THE ORDER OF THE CIT(A) THE REVENU E HAS RAISED GROUND NO.2 BEFORE THE TRIBUNAL. ITA NO.261/MUM/2010(A.Y. 2005-06) 5 12. WE HAVE HEARD THE RIVAL SUBMISSIONS. THE LD. D.R SUBMITTED THAT THE ASSESSEE SHOULD GIVE SOME EVIDENCE TO SHOW THAT THE LOSS HAD CRYSTALLIZED DURING THE PREVIOUS YEAR. 13. WE HAVE CONSIDERED HIS SUBMISSIONS. WE ARE OF THE VIEW THAT THE ASSESSING OFFICER HAS NOT DISPUTED THE FACT THAT TH E LOSS IN QUESTION WAS INCIDENTAL TO THE BUSINESS OF THE ASSESSEE. HIS ON LY OBJECTION WAS THE POINT OF TIME AT WHICH LOSS HAS CRYSTALLIZED. IN OUR VIE W THE ASSESSEE HAD PLEASED THAT THE ADVANCES IN QUESTION REMAINED OUTSTANDING FOR A LONG PERIOD AND THIS SUBMISSION OF THE ASSESSEE HAS NOT BEEN FOUND TO BE INCORRECT BY THE ASSESSING OFFICER. IN SUCH SITUATION WE HAVE TO A CCEPT THAT THE WRITE OFF BY THE ASSESSEE WAS BONA FIDE. IN THAT VIEW OF THE MA TTER WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT(A). CONSEQUENTLY GROUND NO.2 RAISED BY THE REVENUE IS ALSO DISMISSED. 14. IN THE RESULT THE APPEAL OF THE REVENUE IS DIS MISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 23 RD DAY OF FEBRUARY 2011. SD/- SD/- (J.SUDHAKAR REDDY) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI DATED. 23RD FEB.2011 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3 . THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RE BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR I TAT MUMBAI BENCHES MUMBAI. VM. ITA NO.261/MUM/2010(A.Y. 2005-06) 6 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 15/2/11 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 17/2/11 SR.PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7. FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER