S.P JAIN SECURITIES P. LTD, MUMBAI v. ITO 4(2)(2), MUMBAI

ITA 3333/MUM/2009 | 2004-2005
Pronouncement Date: 05-01-2011 | Result: Allowed

Appeal Details

RSA Number 333319914 RSA 2009
Assessee PAN AADCS2423F
Bench Mumbai
Appeal Number ITA 3333/MUM/2009
Duration Of Justice 1 year(s) 7 month(s) 15 day(s)
Appellant S.P JAIN SECURITIES P. LTD, MUMBAI
Respondent ITO 4(2)(2), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 05-01-2011
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted E
Tribunal Order Date 05-01-2011
Date Of Final Hearing 07-12-2010
Next Hearing Date 07-12-2010
Assessment Year 2004-2005
Appeal Filed On 20-05-2009
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES E MUMBAI BEFORE SHRI R V EASWAR PRESIDENT AND SHRI R K PANDA ACCOUNTANT MEMBER I T A NO: 3333/MUM/2009 (ASSESSMENT YEAR: 2004-05) M/S S P JAIN SECURITIES PVT. LTD. MUMBAI APPELLA NT (PAN: AADCS2423F) VS INCOME TAX OFFICER 4(2)(2) MUMBAI RESPONDENT APPELLANT BY: MS ARTI VISSANJI RESPONDENT BY: MR D SONGATE O R D E R R V EASWAR PRESIDENT: THIS IS AN APPEAL BY THE ASSESSEE WHICH IS A PRIVA TE LIMITED COMPANY ENGAGED IN SHARE BROKING BUSINESS. IT IS A MEMBER OF THE BOMBAY STOCK EXCHANGE AND IS ALSO CARRYING OUT THE ACTIVITIES OF A DEPOSITORY PARTICIPANT OF THE CENTRAL DEPOSITORY SE RVICES (INDIA) LTD. THE APPEAL ARISES OUT OF THE ASSESSMENT MADE UNDER SECTION 143(3) OF THE INCOME TAX ACT 1961 BY ORDER DATED 4 TH DECEMBER 2006. 2. THE FIRST GROUND OF APPEAL IS THAT THE INCOME TA X AUTHORITIES ERRED IN NOT ALLOWING THE CLAIM OF ` 10 70 018/- ON ACCOUNT OF BAD DEBTS WRITTEN OFF IN THE BOOKS. THE BRIEF FACTS IN RELATION TO THIS GROUND IS THAT THE ASSESSEE CLAIMED DEDUCTION ON AC COUNT OF BAD DEBTS WRITTEN OFF IN RESPECT OF TWO PARTIES NAMELY ARUN ASSOCIATES ` 9 97 950/- AND PANKAJ SHAH ` 72 068/-. IN THE COURSE OF THE ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER CALLED UPON THE ASSESSEE TO JUSTIFY THE CLAIM. THE ASSESSEE SUBMIT TED IN WRITING THE ITA NO: 3333/MUM/2009 2 DETAILS RELATING TO THE CLAIM AND THE CIRCUMSTANCES UNDER WHICH THE DEBTS WERE WRITTEN OFF AS BAD. THE ASSESSING OFFIC ER TOOK THE VIEW THAT ON THE FACTS SUBMITTED BY THE ASSESSEE THE DEB TS CANNOT BE SAID TO HAVE BECOME BAD. HE NOTED THAT NO LEGAL AC TION WAS TAKEN BY THE ASSESSEE TO RECOVER THE MONEY. THE ASSESSEE HAD ALSO SUBMITTED THAT AFTER 01.04.1989 WHEN SECTION 36(1)( VII) WAS AMENDED IT WAS NO LONGER REQUIRED OF THE ASSESSEE TO ESTABLISH THAT THE DEBTS HAVE BECOME BAD AND THAT THE CLAIM H AS TO BE ALLOWED IF IT IS SHOWN THAT THE DEBTS WERE WRITTEN OFF IN ITS BOOKS OF ACCOUNT. ON THIS ASPECT THE ASSESSING OFFICER DISA GREED WITH THE ASSESSEE AND OBSERVED THAT THE ONLY EFFECT OF THE A MENDMENT WAS THAT IT WAS NOT NECESSARY FOR THE ASSESSEE TO PROVE THAT THE DEBT HAD BECOME BAD IN THE RELEVANT ACCOUNTING YEAR AND THAT THE BASIC REQUIREMENT OF PROVING THAT THE DEBT HAD BECOME BAD STILL REMAINED. IN THIS VIEW OF THE MATTER HE REJECTED THE ASSESSEE S CLAIM. HE ALSO REJECTED THE ALTERNATIVE PLEA OF THE ASSESSEE THAT THE DEBT SHOULD BE ALLOWED AS A DEDUCTION AS BUSINESS LOSS UNDER SECTI ON 28 OF THE ACT. 3. ON APPEAL THE CIT(A) REJECTED THE ASSESSEES PL EA BASED ON SECTION 28. SO FAR AS THE CLAIM OF BAD DEBT IS CON CERNED HE HELD THAT THE DEBTS HAD BECOME BAD AND THAT THE CONDITIO NS OF SECTION 36(1)(VII) WERE FULFILLED. NEVERTHELESS HE REJECTE D THE CLAIM FOR DEDUCTION ON ACCOUNT OF BAD DEBTS ON THE GROUND THA T THE CONDITIONS OF SECTION 36(2) WERE FULFILLED ONLY WIT H RESPECT TO THE BROKERAGE INCOME EARNED THROUGH ARUN ASSOCIATES AND PANKAJ SHAH WHICH WERE INCLUDED IN THE INCOME OF THE ASSE SSEE FOR AN EARLIER PREVIOUS YEAR AND THEREFORE THE ASSESSEE S CLAIM SHOULD BE ITA NO: 3333/MUM/2009 3 LIMITED TO THE AMOUNT OF BROKERAGE INCOME SHOWN BY THE ASSESSEE IN THE EARLIER YEARS. THE EFFECT OF THE DECISION O F THE CIT(A) WAS THAT THE PRINCIPAL AMOUNTS DUE FROM BOTH THE DEBTOR S WERE NOT ALLOWED AS BAD DEBTS SINCE THE ASSESSEE WAS ONLY A SHARE BROKER AND IT WAS ONLY THE BROKERAGE INCOME DUE FROM THE T WO DEBTORS THAT COULD HAVE BECOME BAD AND THE PRINCIPAL AMOUNTS WER E NOT REALLY THE BAD DEBTS OF THE ASSESSEE WHO IS A SHARE BROKE R AND WHO WAS MERELY PUTTING THROUGH THE TRANSACTIONS ON BEHALF O F THOSE TWO PERSONS. 4. IN THE FURTHER APPEAL BEFORE US THE LEARNED COUN SEL FOR THE ASSESSEE SUBMITTED THAT THE VIEW TAKEN BY THE CIT(A ) THAT IN THE CASE OF A SHARE BROKER THE CLAIM OF BAD DEBTS SHOUL D BE LIMITED TO THE BROKERAGE INCOME DUE FROM THE CLIENTS AND THAT THE PRINCIPAL AMOUNTS DUE CANNOT BE CONSIDERED AS DEBTS OF THE SH ARE BROKER HAS NOT BEEN ACCEPTED BY A SPECIAL BENCH OF THE TRI BUNAL AT MUMBAI IN THE CASE OF DEPUTY COMMISSIONER OF INCOME -TAX RANGE 7(2) MUMBAI VS. SHREYAS S MORAKHIA (2010) 40 SOT 4 32 (MUM) (SB). IN THIS SPECIAL BENCH DECISION IT WAS HELD T HAT IN THE CASE OF A SHARE BROKER THE AMOUNT RECEIVABLE BY THE SHARE B ROKER FROM HIS CLIENTS AGAINST TRANSACTIONS OF PURCHASE OF SHARES ON THEIR BEHALF CONSTITUTES DEBTS AND IS ALSO A TRADING DEBT AND IT WAS FURTHER HELD THAT THE BROKERAGE OR COMMISSION INCOME ARISING FRO M SUCH TRANSACTIONS IF IT HAS BEEN TAKEN INTO ACCOUNT IN COMPUTING THE BROKERS INCOME OF THE RELEVANT PREVIOUS YEAR OR AN Y EARLIER YEAR THAT WOULD SATISFY THE CONDITION STIPULATED IN SECT ION 36(2)(I) TO THE EFFECT THAT THE DEBT SHOULD HAVE BEEN TAKEN INTO AC COUNT IN COMPUTING THE INCOME OF THE ASSESSEE FOR THE RELEVA NT PREVIOUS ITA NO: 3333/MUM/2009 4 YEAR OR ANY EARLIER PREVIOUS YEAR. IT WAS CONSEQUE NTLY HELD THAT IF THIS CONDITION IS SATISFIED AND IF THE CONDITION OF WRITING OFF THE DEBT IS ALSO SATISFIED THE ASSESSEE WOULD BE ENTITLED TO T HE DEDUCTION OF BAD DEBTS UNDER SECTION 36(1)(VII) READ WITH SECTIO N 36(2) OF THE ACT. IN COMING TO THIS CONCLUSION NAMELY THAT IF THE B ROKERAGE INCOME IS TAKEN INTO ACCOUNT IN COMPUTING THE INCOME OF THE S HARE BROKER IT AMOUNTS TO THE DEBT ITSELF HAVING BEEN TAKEN INTO A CCOUNT IN THE ASSESSMENT OF THE ASSESSEE THE SPECIAL BENCH RELIE D ON THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF CIT VS . VEERABHADRA RAO K KOTESHWAR RAO & CO. (1985) 155 ITR 152 (SC) A S ALSO THE JUDGMENT OF THE MADRAS HIGH COURT IN THE CASE OF CI T VS. CITY MOTOR SERVICE LTD. (1966) 61 ITR 418 (MAD). 5. IN THE LIGHT OF THE AFORESAID ORDER OF THE SPECI AL BENCH OF THE TRIBUNAL MUMBAI THE VIEW TAKEN BY THE CIT(A) APPE ARS TO US WITH RESPECT TO BE ERRONEOUS. THE CIT(A) HAS RECORDED A FINDING THAT THE BROKERAGE INCOME EARNED FROM ARUN ASSOCIATES AN D PANKAJ SHAH HAS BEEN TAKEN INTO ACCOUNT AS THE ASSESSEES INCOME IN AN EARLIER YEAR. THERE IS ALSO NO DISPUTE THAT THE DE BTS FROM BOTH THESE PARTIES WERE WRITTEN OFF IN THE ASSESSEES ACCOUNTS FOR THE YEAR UNDER CONSIDERATION. THEREFORE RESPECTFULLY FOLLO WING THE ORDER OF THE SPECIAL BENCH CITED ABOVE WE UPHOLD THE ASSESS EES CLAIM AND DIRECT THE ASSESSING OFFICER TO ALLOW DEDUCTION OF ` 10 70 018/- ON ACCOUNT OF BAD DEBTS WRITTEN OFF. WE MAY CLARIFY T HAT NO ARGUMENTS WERE ADVANCED BEFORE US ON THE ALTERNATIVE PLEA THA T THE DEBTS SHOULD BE ALLOWED AS BUSINESS LOSS UNDER SECTION 28 OF THE ACT. GROUND NO.1 IS THUS ALLOWED. ITA NO: 3333/MUM/2009 5 6. THE SECOND GROUND IS THAT THE INCOME TAX AUTHORI TIES ERRED IN DISALLOWING THE ASSESSEES CLAIM ON ACCOUNT OF INTE REST PAID TO THE DIRECTORS / RELATIVES BY APPLYING THE PROVISIONS OF SECTION 40A(2)(A) OF THE ACT. THE BRIEF FACTS IN THIS CONNECTION ARE THAT IN THE ACCOUNTS THE ASSESSEE CLAIMED DEDUCTION ON ACCOUNT OF INTERE ST OF ` 12 74 569/- IN RESPECT OF LOANS TAKEN FROM PERSONS WHO ARE ADMITTEDLY COVERED BY THE AFOREMENTIONED SECTION. THE RATE OF INTEREST WAS 18%. THE ASSESSING OFFICER ASKED THE ASSESSEE TO JUSTIFY THE INTEREST RATE TO WHICH THE ASSESSEE RE SPONDED IN WRITING BY POINTING OUT THAT ALL THE LOANS WERE UNSECURED L OANS WITHOUT FURNISHING ANY SECURITY THAT THEY WERE LONG TERM L OANS THAT THE INTEREST CHARGED BY BANKS WAS 14% EVEN IN RESPECT O F SECURED LOANS WITH STRICT STIPULATION FOR REPAYMENT AND IN THESE CIRCUMSTANCES AND HAVING REGARD TO THE ADVANTAGES E NJOYED IN TAKING SUCH LOANS FROM RELATED PERSONS THERE CAN B E NO DISALLOWANCE ON THE GROUND THAT THE RATE OF INTERES T PAID WAS EXCESS OR UNREASONABLE. 7. THESE SUBMISSIONS WERE NOT ACCEPTED BY THE ASSES SING OFFICER. HE NOTED THAT EVEN THOUGH THE ASSESSEE HA D PAID INTEREST AT THE RATE OF 18% IN RESPECT OF THE LOAN ADVANCED BY IT TO INTERNATIONAL HOMETEX LTD. THE INTEREST CHARGED WA S ONLY 12% AND THIS SHOWED THAT THE RATE OF INTEREST PAID BY THE A SSESSEE WAS EXCESSIVE AND UNREASONABLE. HE ALSO OBSERVED THAT THE BANK RATE DURING THE RELEVANT YEAR WAS 12%. HE ALSO OBSERVED THAT THERE WAS NO EVIDENCE TO SHOW THAT THE ASSESSEE MADE EFFORTS TO OBTAIN LOANS AT THE RATE OF 12% FROM THE MARKET. FOR THESE REAS ONS HE TOOK THE VIEW THAT THE 18% INTEREST PAID BY THE ASSESSEE WAS EXCESSIVE AND ITA NO: 3333/MUM/2009 6 UNREASONABLE WITHIN THE MEANING OF SECTION 40A(2)(A ). THE EXCESS OVER THE RATE OF 12% CAME TO ` 4 24 856/- WHICH WAS DISALLOWED. 8. ON APPEAL THE CIT(A) CONFIRMED THE DECISION OF THE ASSESSING OFFICER AGAINST WHICH THE ASSESSEE IS IN FURTHER APPEAL BEFORE THE TRIBUNAL. 9. WE HAVE CONSIDERED THE FACTS AND THE RIVAL CONTE NTIONS. IT IS SEEN FROM THE BALANCE SHEET AS ON 31.03.2004 THAT A LL THE LOANS ARE UNSECURED THAT THEY HAVE BEEN TAKEN FROM RELAT IVES AND THEY ARE ALL BROUGHT FORWARD FROM THE EARLIER YEARS. TH E DIFFERENCE BETWEEN THE FIGURE OF UNSECURED LOANS AS ON 31.03.2 003 AND 31.03.2004 IS STATED TO BE ONLY ON ACCOUNT OF INTER EST THAT HAS ACCRUED. THE LOANS ARE ALSO LONG TERM LOANS. IT I S SEEN FROM GROUND NO. 5(E) TAKEN BEFORE THE CIT(A) THAT NO DIS ALLOWANCE OF THE INTEREST WAS MADE IN THE EARLIER ASSESSMENT YEAR WH ERE ALSO THE ASSESSMENT WAS MADE UNDER SECTION 143(3) OF THE ACT AFTER SCRUTINY. THE DETAILS GIVEN AT PAGE 63 OF THE PAPE R BOOK UNDER THE HEAD INTEREST RATE STRUCTURE OF SCHEDULED COMMERCI AL BANKS SHOW THAT BETWEEN DECEMBER 2002 AND JULY 2003 THE P RIME LENDING RATE (PLR) RANGED FROM 13.25% TO 15.50%. E VEN IF THE AVERAGE RATE OF PLR IS TAKEN AT 14% I.E. THE RATE FIXED BY COMMERCIAL BANKS FOR LENDING MONIES IT IS COMMON K NOWLEDGE THAT BANKS DO NOT ADVANCE LOANS WITHOUT FULL SECURITY AN D IN ADDITION THERETO THERE ARE A LOT OF FORMALITIES AND DOCUMENT ATION TO BE GONE THROUGH. IN THE CASE OF LOANS TAKEN BY THE ASSESSE E FROM THE PERSONS WHO ARE ADMITTEDLY COVERED BY SECTION 40A(2 )(B) THERE ARE NO FORMALITIES OR DOCUMENTATION TO BE GONE THROUGH. THEY ARE ALSO UNSECURED LOANS AS THE ASSESSEES BALANCE SHEET SHO WS. FURTHER ITA NO: 3333/MUM/2009 7 THEY ARE ALSO LONG TERM LOANS AND SINCE THE CREDITO RS ARE RELATIVES THERE CAN ALWAYS BE ADJUSTMENTS MADE TO THE TERMS A ND CONDITIONS OF THE LOAN. THERE ARE THUS DISTINCT ADVANTAGES FO R WHICH THE EXTRA INTEREST OVER AND ABOVE THE MARKET RATE OF INTEREST APPEARS TO HAVE BEEN PAID BY THE ASSESSEE. SECTION 40A(2)(A) DOES NOT PROVIDE FOR A BLANKET DISALLOWANCE AND WHERE THE BENEFITS DERIV ED OR ACCRUING TO THE ASSESSEE BY THE HIGHER PAYMENTS DO JUSTIFY S UCH PAYMENTS THEN NO DISALLOWANCE CAN BE MADE. IT SEEMS TO US T HAT IN THE PRESENT CASE THE INTEREST RATE OF 18% PAID BY THE A SSESSEE ON THE LOANS TAKEN BY IT FROM PERSONS REFERRED TO IN SECTI ON 40A(2)(B) CANNOT BE CONSIDERED TO BE EXCESSIVE OR UNREASONABL E IF REGARD IS HARD TO THE BENEFITS DERIVED BY OR ACCRUING TO THE ASSESSEE. NO DISALLOWANCE HAS BEEN MADE IN THE EARLIER YEAR WHER E THE FACTS WERE THE SAME. WE ACCORDINGLY DELETE THE DISALLOWA NCE AND ALLOW THE SECOND GROUND. 10. THIRD GROUND IS GENERAL AND REQUIRES NO DECISIO N. 11. IN THE RESULT THE APPEAL OF THE ASSESSEE IS AL LOWED WITH NO ORDER AS TO COSTS. ORDER PRONOUNCED IN THE OPEN COURT ON 5 TH JANUARY 2011. SD/- SD/- (R K PANDA) (R V EASWAR) ACCOUNTANT MEMBER PRESIDENT MUMBAI DATED 5 TH JANUARY 2011 SALDANHA ITA NO: 3333/MUM/2009 8 COPY TO: 1. M/S S P JAIN SECURITIES PVT. LTD. 14 AMBALAL DOSHI MARG 2 ND FLOOR FORT MUMBAI 400 023 2. ITO 4(2)(2) 3. CIT-4 4. CIT(A)-IV) 5. DR E BENCH TRUE COPY BY ORDER ASSTT. REGISTRAR ITAT MUMBAI