Shri Satishchandra A. Dhomse, Ahmedabad v. The ACIT., Circle-15,, Ahmedabad

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH D BEFORE SHRI N.S. SAINI ACCOUNTANT MEMBER AND SHRI MAHAVIR SINGH JUDICIAL MEMBER DATE OF HEARING: 28.04.10 DRAFTED ON:28.04.10 ITA NO.863/AHD/2006 ASSESSMENT YEAR : 2003-2004 SATISHCHANDRA A. DHOMSE 91/B SATELLITE PLAZA NEAR MANSI COMPLEX VASTRAPUR AHMEDABAD. VS. ASST. COMMISSIONER OF INCOME TAX CIRCLE-15 AHMEDABAD. PAN/GIR NO. :ABNPD 4289 J (APPELLANT) .. (RESPONDENT) APPELLANT BY : SHRI TUSHAR HEMANI AND ANKIT TALSANIA A.R. RESPONDENT BY: SHRI C.K. MISHRA D.R. O R D E R PER N.S.SAINI ACCOUNTANT MEMBER :- THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS)-XX AHM EDABAD DATED 03- 01-2006 BY TAKING THE FOLLOWING GROUNDS OF APPEAL. 1. THE LEARNED CIT(A) HAS GROSSLY ERRED IN LAW AND ON FACTS IN CONFIRMING THE ACTION OF LD. AO IN NOT ALLOWING SET OFF OF BUSINESS LOSS OF RS.9 00 000/- AGAINST SALARY INCOME OF THE APPEL LANT. 2. THE LEARNED CIT(A) HAS GROSSLY ERRED IN LAW AND ON FACTS IN CONFIRMING THE ACTION OF LD. AO IN NOT ALLOWING IRR ECOVERABLE ADVANCES OF RS.9 00 000/- AS BUSINESS LOSS U/S 28(I ) OF THE ACT. FOR THE YEAR UNDER CONSIDERATION AFTER HOLDING THAT SUCH CL AIM OF IRRECOVERABLE SECURITY DEPOSIT IS PREMATURE AND UNS UBSTANTIATED BY - 2 - EVIDENCE AND THEREFORE NOT ELIGIBLE FOR CONSIDERATI ON DURING THE YEAR IN APPEAL. 3. THE LEARNED CIT(A) HAS FURTHER GROSSLY ERRED IN LAW AND ON FACTS IN HOLDING THAT EVEN IF IT IS ESTABLISHED AT ANY STAGE THAT THE SAID SECURITY DEPOSIT HAD BECOME IRRECOVERABLE THE SAME CANNOT BE TREATED AS BUSINESS LOSS U/S 28(I) OF THE ACT BUT AS LOSS OF CAPITAL AND THEREFORE DISALLOWABLE UNDER TH E IT ACT. 4. BOTH THE LOWER AUTHORITIES HAVE ERRED IN LAW AND ON FACTS IN PASSING THE ORDERS WITHOUT PROPERLY APPRECIATING THE FACT AND THAT HE FURTHER ERRED IN GROSSLY IGNORING VARIOUS S UBMISSIONS EXPLANATIONS AND INFORMATION SUBMITTED BY THE APPEL LANT FROM TIME TO TIME WHICH OUGHT TO HAVE BEEN CONSIDERED BE FORE PASSING THE IMPUGNED ORDER. THIS ACTION OF BOTH TH E AUTHORITIES IS IN CLEAR BREACH OF LAW AND PRINCIPLES OF NATURAL JUSTICE AND THEREFORE DESERVES TO BE QUASHED. 5. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS OF THE CASE IN CONFIRMING ACTION OF THE LD. LEARNED ASSESS ING OFFICER IN LEVYING INTEREST U/S 234B/C/D OF THE ACT. 6. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS OF THE CASE IN INITIATING PENALTY PROCEEDINGS U/S 271(1)(C ) OF THE ACT. 2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIALS A VAILABLE ON RECORD. THE UNDISPUTED FACTS OF THE CASE ARE THAT THE ASSES SEE HAS CLAIMED TO HAVE ENTERED INTO AN AGREEMENT WITH SHRI. PUSHPENDR A AGARWAL DIRECTOR OF M/S. AGARWALS COURSES AND TEST SERVICE S UDAIPUR FOR OBTAINING FRANCHISE FOR COMMERCE AND COMPUTER CENTR E AND FOR SCIENCE CENTRE. THE ASSESSEE CLAIMED TO HAVE PAID RS.9 LAKHS IN CASH TO SAID SHRI. PUSHPENDRA AGARWAL WHICH WAS REFUNDAB LE TO THE - 3 - ASSESSEE AFTER COMPLETION OF ONE YEAR OR ON TERMINA TION OF THE AGREEMENT AS THE CASE MAY BE ALONGWITH INTEREST TH EREON. THE ASSESSEE HAS CLAIMED THAT SHRI. PUSHPENDRA AGARWAL HAS DEFRAUDED HIM AND ABSCONDED WITH THE MONEY AND THEREFORE THE DEPOSIT GIVEN BECAME IRRECOVERABLE AND CAUSED LOSS OF RS.9 LAKHS TO THE ASSESSEE. ASSESSEE CLAIMED THE SAME AS BUSINESS LOSS WHICH WA S DISALLOWED BY THE LEARNED ASSESSING OFFICER. 3. ON APPEAL LEARNED COMMISSIONER OF INCOME TAX(APPEALS) CONFIRMED THE SAID DISALLOWANCE BY OBS ERVING AS UNDER: 4. I HAVE PERUSED THE VARIOUS DOCUMENTS FURNISHED BY THE APPELLANT AND CONSIDERED THE VARIOUS SUBMISSIONS MA DE BY HIM AND THE FINDINGS OF THE ASSESSING OFFICER. VIDE DO CUMENT DATED 1-1-2003 THE APPELLANT ENTERED INTO AN AGREEMENT W ITH SHRI PUSHPENDRA AGARWAL DIRECTOR OF AGARWALS COURSES & TEST SERIES TO RUN COACHING CENTERS OF NARAPNURA AND VAS TRAPUR AHMEDABAD. THE APPELLANT WAS REQUIRED TO PAY A REF UNDABLE SECURITY DEPOSIT OF RS.5 LAKHS IN RESPECT OF THE CO MMERCE & COMPUTER CENTRE AND RS.4 LAKHS IN RESPECT OF THE SC IENCE CENTRE WHICH WERE REQUIRED TO BE PAID FULLY AT THE TIME OF AGREEMENT AND TO BE REFUNDED BY THE FRANCHISER TO THE APPELLANT FRANCHISEE AFTER ONE YEAR. BOTH PARTIES COULD TER MINATE THE AGREEMENT AFTER GIVING NOTICE AND THE SECURITY DEP OSIT OF RS.9 LAKHS WAS TO BE REFUNDED WITH INTEREST AT THE RATE OF 12% PER ANNUM TO THE APPELLANT. THE AGREEMENT WAS SIGNED O N 2-1- 2003 BY BOTH THE PARTIES AND THE SECURITY DEPOSIT WAS PAID BY THE APPELLANT TO THE FRANCHISER ON VARIOUS DATES IN JANUARY 2003. THE CLASSES WERE INAUGURATED ON 16-2-2003. TH US THE PAYMENT OF RS.9LAKHS BY WAY OF SECURITY DEPOSIT WAS MADE BY THE APPELLANT IN ORDER TO ACQUIRE THE RIGHT TO RUN THE TUITION CLASSES AS FRANCHISEE OF AGARWALS COURSES & TEST S ERIES. AS PER SECTION 36(2) DEDUCTION ON ACCOUNT OF BAD DEBT CAN BE ALLOWED ONLY IF SUCH DEBT HAS TAKEN INTO ACCOUNT IN COMPUTING THE INCOME OF THE ASSESSEE OF THE PREVIOUS YEAR IN WHICH THE DEBT IS WRITTEN OFF OR OF AN EARLIER PREVIOUS YEAR. IN THE PRESENT CASE THE MONEY PLACED AS SECURITY DEPOSIT BY THE A PPELLANT IS OUT OF HIS SAVINGS AND OTHER RECEIPTS AND NOT OUT O F HIS RECEIPTS - 4 - TAXABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINES S OR PROFESSION EITHER IN THIS YEAR OR PREVIOUS YEARS. HENCE THE LEARNED ASSESSING OFFICER RIGHTLY REJECTED THE CLAI M OF THE APPELLANT FOR DEDUCTION OF THIS AMOUNT UNDER SECTIO N 36(1)(VII) OF THE ACT. 4.1 THE ALTERNATE CLAIM OF THE APPELLANT THAT THE S ECURITY DEPOSIT IS IN THE NATURE OF AN ADVANCE AND THEREFOR E LOSS THEREOF IS A LOSS WITHIN THE MEANING OF SECTION 28(I) OF TH E INCOME-TAX ACT 1961 AS PER THE RATIO OF THE DECISION OF THE S UPREME COURT IN THE CASE OF CIT VS. MYSORE SUGARCANE CO. LTD. 46 ITR 649 AND THEREFORE ELIGIBLE FOR SET OFF I FIND THE ARGU MENT TO BE UNTENABLE. IN THAT CASE THE ASSESSEE COMPANY WAS A SUGAR MANUFACTURER AND PURCHASED SUGARCANE FROM SUGAR GRO WERS. AS A PART OF ITS BUSINESS OPERATION IT ENTERED INTO A GREEMENT WITH THE SUGARCANE GROWERS AND ADVANCED SUGARCANE SEEDS FERTILIZERS AND CASH. THE SUGARCANE GROWERS IN TURN AGREED TO SELL SUGARCANE EXCLUSIVELY TO THE ASSESSEE COMPANY AND T O HAVE THE ADVANCES ADJUSTED TOWARDS THE PRICE OF SUGARCANE A GREEING TO PAY INTEREST IN THE MEANTIME. THE AGREEMENT TOOK P LACE AT THE HARVEST SEASON EACH YEAR IN PREPARATION FOR THE NE XT CROP. IN THE YEAR 1948-49 DUE TO DRAUGHT THE ASSESSEE COMPA NY COULD NOT WORK ITS SUGAR MILLS AND THE SUGARCANE GROWERS COULD NOT GROW OR DELIVER THE SUGAR CANE. THE ADVANCES MADE IN 1948-89 THUS REMAINED UN-RECOVERED BECAUSE THEY COULD ONLY BE RECOVERED BY THE SUPPLY OF SUGARCANE TO THE ASSESSE E COMPANY. THE ASSESSEE COMPANY HAD TO FOREGO SOME OF ITS DUES AMOUNTING TO RS.2 87 422/- AND CLAIMED DEDUCTION UN DER SECTION.10(2) OF THE ITACT 1922. THE ITO DECLINED TO ALLOW THE DEDUCTION BECAUSE IN HIS OPINION IT WAS NEITH ER A TRADE DEBT NOR A BAD DEBT BUT AN EX-GRATIA PAYMENT ALMOST LIKE A GIFT. BOTH THE AAC AS WELL AS THE TRIBUNAL HELD THAT THEY WERE NOT BAD DEBTS BECAUSE THEY WERE ADVANCES NOT ARISING OUT OF SALES AND DID NOT CONTRIBUTE TO THE PROFITS OF THE BUSINESS. IT WAS OPINED THAT THE LOSS IF ANY REPRESENTED A CAPITAL LOSS AN D NOT A TRADING LOSS. THE HIGH COURT HELD THAT THE EXPENDITURE WAS NOT IN THE NATURE OF A CAPITAL EXPENDITURE AND WAS DEDUCTIBLE AS A REVENUE EXPENDITURE. THE SUPREME COURT HELD THAT TAX UNDER THE HEAD BUSINESS WAS PAYABLE UNDER SECTION 10 OF THE INCO ME-TAX ACT 1961 1922. THAT SECTION PROVIDED UNDER SUBSEC TION (1) THAT THE TAX SHALL BE PAID BY AN ASSESSEE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS. SECTION 10(2) PROVIDED THA T THE PROFITS OR GAINS WERE TO BE COMPUTED AFTER MAKING CERTAIN A LLOWANCES. CLAUSE (XI) ALLOWED DEDUCTION OF BAD AND DOUBTFUL D EBTS. - 5 - CLAUSE(XV) ALLOWED ANY EXPENDITURE NOT INCLUDED IN CLAUSE(I) TO (XIV) WHICH WAS NOT IN THE NATURE OF CAPITAL EXPEND ITURE OR PERSONAL EXPENDITURE OF THE ASSESSEE TO BE DEDUCTE D IF LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF SUCH BUSINESS. THE GENERAL SCHEME OF THE SECTION WAS TH AT PROFITS OR GAINS MUST BE CALCULATED AFTER DEDUCTING OUTGOINGS REASONABLY ATTRIBUTABLE AS BUSINESS EXPENDITURE BUT NOT AN EXP ENDITURE OF A CAPITAL NATURE. THE SUPREME COURT OBSERVED THAT TO FIND OUT WHETHER THE EXPENDITURE IS ON THE CAPITAL ACCOUNT O R ON REVENUE ONE MUST CONSIDER THE EXPENDITURE IN RELATION TO TH E BUSINESS. SINCE ALL PAYMENTS REDUCE CAPITAL IN THE ULTIMATE A NALYSIS ONE IS APT TO CONSIDER A LOSS AS AMOUNTING TO A LOSS OF CAPITAL. BUT THIS IS NOT TRUE OF ALL LOSSES BECAUSE LOSSES IN TH E RUNNING OF THE BUSINESS CANNOT BE SAID TO BE OF CAPITAL. THE QUES TIONS TO CONSIDER IN THIS CONNECTION ARE; FOR WHAT WAS THE M ONEY LAID OUT? WAS IT TO ACQUIRE AN ASSET OF AN ENDURING NATU RE FOR THE BENEFIT OF THE BUSINESS OR WAS IT AN OUTGOING IN T HE DOING OF THE BUSINESS? IF MONEY BE LOST IN THE FIRST CIRCUMSTANC E IT IS A LOSS OF CAPITAL BUT IF LOST IN THE SECOND CIRCUMSTANCES IT IS A REVENUE LOSS. IN THE FIRST IT BEARS THE CHARACTER OF AN I NVESTMENT BUT IN THE SECOND TO USE A COMMONLY UNDERSTOOD PHRASE IT BEARS THE CHARACTER OF CURRENT EXPENSES. 4.2 THE COURT HELD THAT THE ADVANCES AGAINST PRICE OF ONE CROP WAS BY WAY OF ASSISTANCE TO THE SUGARCANE GROW ERS AND NOT AN INVESTMENT BY THE ASSESSEE CO. IN AGRICULTURE. THE AMOUNT SO FAR AS THE ASSESSEE COMPANY WAS CONCERNED REPRE SENTED THE CURRENT EXPENDITURE TOWARDS THE PURCHASE OF SUGAR C ANE. IT WAS NO MORE THAN MAKING A FORWARD ARRANGEMENT FOR THE N EXT YEARS CROP AND PAYING AN AMOUNT IN ADVANCE OUT OF THE PRI CE. THERE WAS HARDLY ANY ELEMENT OF INVESTMENT. THE RESULTIN G LOSS TO THE ASSESSEE CO. WAS A LOSS ON THE REVENUE SIDE AS WOUL D HAVE BEEN IF IT HAD BEEN PAID FOR THE READY CROP WHICH WAS N OT DELIVERED. 4.3 IN THE PRESENT CASE THE APPELLANT AN EMPLOYEE OF ONGC TOOK VOLUNTARY RETIREMENT DURING THE RELEVANT PREVI OUS YEAR. EVEN THOUGH THE ASSESSEE HAD NO PRIOR EXPERIENCE OF RUNNING TUITION CLASSES HE UNDERTOOK TO START AND RUN TUIT ION CLASSES UNDER THE NAME OF AGARWALS INSTITUTE OF COMPETITIV E EXAMS AS FRANCHISEE OF AGARWALS COURSES & TEST SERIES. THU S UNLIKE THE ABOVE CASE RELIED UPON BY THE APPELLANT THE A PPELLANT WAS NOT IN THE BUSINESS OF RUNNING TUITION CLASSES BUT ON THE CONTRARY PLACED THE SECURITY DEPOSIT BY WAY OF CAP ITAL OUTLAY TO ACQUIRE THE RIGHT TO RUN TUITION CLASSES UNDER THE FRANCHISE OF - 6 - AGARWALS COURSES & TEST SERIES. SUCH PAYMENT WAS IN THE NATURE OF CAPITAL INVESTMENT TO ACQUIRE A NEW BUSIN ESS AND NOT TO EARN PROFITS IN THE COURSE OF BUSINESS. THEREFO RE IN TERMS OF THE RATIO OF THE CASE QUOTED BY THE APPELLANT LOSS OF THE SECURITY DEPOSIT IS A LOSS OF CAPITAL NOT DEDUCTIBLE UNDER ANY OF THE PROVISIONS OF THE STATUTE. 4.4 HAVING STATED THAT THE LOSS CLAIMED BY THE APPE LLANT AS DEDUCTION IS NOT ADMISSIBLE AS BEING A CAPITAL LOSS IT IS ALSO REQUIRED TO BE SEEN AS TO WHETHER THE IMPUGNED LOSS HAD OCCURRED TO THE APPELLANT DURING THIS YEAR. IN THI S CONTEXT THE RELEVANT CLAUSES OF THE AGREEMENT FOR FRANCHISE DAT ED 2-1-2003 ARE REPRODUCED BELOW:- 1 .. 2 ... 3. THAT SINCE THE CASH TRANSACTIONS IN FIRST PARTY S COACHING CENTERS WILL BE USUALLY DAILY WHICH AMOUNTS TO APPR OX. RS.50 000/- RS.1 00 000/- SO FOR ITS PROPER MAINTEN ANCE OF CASH AND RECORD. SECOND PARTY IS REQUIRED TO DEPOSIT A REFUNDABLE SECURITY OF RS.5 00 000/- IN CASE OF COMMENCE AND C OMPUTER CENTER AND RS.4 00 000/- IN CASE OF SCIENCE CENTER. FOR SECURITY AMOUNT THE FIRST PARTY WILL PAY 1% PM INTEREST TO SECOND PARTY IN LUMPSUM EXTRA THAN MONTHLY PACKAGE. 4. THAT SECOND PARTY WILL PAY 100% OF THE SECURITY AMOUNT AT THE TIME OF AGREEMENT BY CASH/CHEQUE/DD WHICH IS RE FUNDABLE AFTER ONE YEAR. 11. THAT ABOVE SECURITY AMOUNT SHALL BE KEPT WITH F IRST PARTY FOR ONE(1) YEAR AND AS AND WHEN SECOND PARTY MADE UP HIS MIND OR DID NOT LIKE TO WORK HE SHALL GET THE SAME REFUNDED FROM FIRST PARTY WITH INTEREST @ 12% PA. ALTERNATI VELY IF WORK OF SECOND PARTY HAS NOT BEEN FOUND SATISFACTORY DUR ING THE SERVICE TENURE OF SECOND PARTY FIRST PARTY CAN TER MINATE SERVICES OF SECOND PARTY AND IN THAT CASE SECOND PARTY WILL GET SECURITY WITH 12% PA. BY CASH/CHEQUE/DD FROM FIRST PARTY. THE TERMINATION OF CONTRACT CAN BE MADE BY EITHER PARTY ONLY AFTER A PERIOD OF THREE MONTHS OF THE AGREEMENT. 16) THAT IN CASE FIRST PARTY DEEMS FIT TO TERMINATE SERVICES OF SECOND PARTY DUE TO UNSATISFACTORY PERFORMANCE OF A LL THE NECESSARY WORKS/DUTIES OF SECOND PARTY IN THAT CAS E SIX MONTHS ADVANCE NOTICE IN WRITING WILL BE SERVED TO SECOND PARTY ELSE - 7 - ONE MONTH PARTY IMMEDIATELY AND ALTERNATIVELY IF SE COND PARTY ELSE ONE MONTHS PACKAGE PLUS INTEREST ON SECURITY @ 12% PA. WILL BE GIVEN TO SECOND ELSE ONE MONTH PARTY IN TH AT CASE HE SHALL HAVE TO SUBMIT ONE MONTHS ADVANCE NOTICE OT HERWISE LEAVING SERVICE IMMEDIATELY MAKE SECOND PARTY LIAB LE TO GET DEDUCTED SIX MONTHS PACKAGE FROM SECURITY DEPOSIT 12% INTEREST AMOUNT IN THAT CASE SECOND PARTY SHALL GE T BALANCE SECURITY & INTEREST AMOUNT IF LEFT IMMEDIATELY SERV ICE OF THE FIRST PARTY. 4.5 ON THE BASIS OF THE ABOVE IT CAN BE STATED THA T THE FRANCHISER WAS LIABLE TO REFUND THE SECURITY DEPOSI T OF RS.9 LAKHS TO THE APPELLANT FRANCHISEE ONLY UNDER THE FOLLOWIN G CONDITIONS:- I) ON COMPLETION OF ONE YEAR FROM THE DATE OF AGREE MENT I.E. 1-1-2004 II) ON THE APPELLANT DECIDING TO TERMINATE THE AGRE EMENT. III) ON THE FRANCHISER DECIDING TO TERMINATE THE AG REEMENT. 4.6 THE APPELLANT HAS CLAIMED THAT THE SECURITY DEP OSIT BECAME IRRECOVERABLE DURING THE PREVIOUS YEAR ENDED ON 31-3- 2003 I.E. WITHIN 3 MONTHS OF THE EXECUTION OF THE AGREEMENT AND ACCORDINGLY CLAIMED THE SAME AS A BUSINESS LOSS . HOWEVER ON THE FACTS OF THE CASE AS EVIDENCED FROM THE ABOV E AGREEMENT DATED 2-1-2003 BEING THE BASIS OF THE ENTIRE BUSINESS VE NTURE AND ON PERUSAL OF THE SUBMISSIONS OF THE APPELLANT BEFORE THE ASSESSING OFFICER THE CLAIM OF THE APPELLANT THAT THE SECURI TY DEPOSIT HAD BECOME IRRECOVERABLE IS NOT SUSTAINABLE. THE REAS ONS ARE DETAILED AS UNDER: I) THE REPAYMENT OF THE SECURITY DEPOSIT HAD NOT BE COME DUE AS THE STIPULATED PERIOD OF ONE YEAR HAD NOT EX PIRED ON 31- 3-2003. II) NEITHER THE FRANCHISER NOR THE FRANCHISEE HAD G IVEN THE OTHER PARTY A NOTICE FOR THE TERMINATION OF THE AGR EEMENT BEFORE 31-3-2003. IN FACT AS EVIDENT FROM THE FOLLOWING LETTER DATED 20-1-2005 ADDRESSED BY THE LD. AUTHORISED REPRESENT ATIVE TO THE ASSESSING OFFICER THE APPELLANT WAS CONTINUING TO RUN THE CLASSES:- - 8 - WITH REFERENCE TO THE ABOVE SUBJECT & AS DESIRED BY YOU I EXPLAIN AS UNDER: AS PER CONTRACT OF FRANCHISE I HAVE TO RUN THE CL ASSES. THE EXPENSES OF WHICH ARE GOING TO BE INCURRED BY T HE FRANCHISER. THE PROFIT AND LOSS ACCOUNT OF MINE CO NSIST OF OTHER MISCELLANEOUS EXPENSES SO I HAVE NOT CLAIMED THE E XPENDITURE. THE BALANCE SHEET CONSISTS OF INVESTMENT IN FRANCHI SEE VEHICLES & OTHER MISCELLANEOUS ASSETS SO I HAVE NOT PREPARED THE BALANCE-SHEET. THE ASSETS WERE ACQUIRED OUT OF RET IREMENT BENEFIT. THE PAYMENT FOR FRANCHISEE WERE MADE OUT OF RETIRE MENT BENEFIT & WITHDRAWAL FROM NSS. THE EXPENSES IS ALLOWABLE BECAUSE THE EXPENSES WER E INCURRED FOR THE PURPOSE OF EARNING INCOME. IT WAS DONE WHOLLY NECESSARILY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. IT IS NEITHER PERSONAL EXPENSES AND NOR A CAPITAL E XPENDITURE. I WAS ABLE TO DO THE PROFESSIONAL BECAUSE OF CONNECTI ON THROUGH FRANCHISE. 4.7 THE PROFIT AND LOSS ACCOUNT SUBMITTED BY THE AP PELLANT US AS UNDER: DHOMSE S.A. PROFIT & LOSS ACCOUNT FOR THE YEAR ENDED ON 31-3-20 03 EXPENDITURE AMOUNT INCOME AMOUNT PAYMENT TO AGARWALS 9 00 000 LOSS FOR 9 00 000 FOR FRANCHISEE THE YEAR ------------ ----------- 9 00 000 9 00 000 4.8 THUS THE APPELLANT HAS NOT FURNISHED ANY ACCOU NTS FOR THE BUSINESS OF RUNNING TUITION CLASSES CONSEQUENT TO THEIR INAUGURATION ON 16-2-2003 REFLECTING THE FEES COLL ECTED FROM THE STUDENTS AND THE EXPENSES INCURRED IN THE RUNNI NG OF THE COACHING CLASSES. EVEN IF THE RESULT OF THE RECEIP TS AND PAYMENTS FOR THE BUSINESS IS NIL INCOME THE APPELL ANT WAS LIABLE TO HAVE FILED THE SAME TO SHOW THAT THE BUSINESS WA S CARRIED ON DURING THE YEAR. WITHOUT EVIDENCE OF THE BUSINESS BEING CARRIED ON DURING THE YEAR NO LOSS CAN BE COMPUTED UNDER T HE HEAD PROFITS & GAINS OF BUSINESS OR PROFESSION MUCH LES S BE SET OFF AGAINST INCOME UNDER ANY OTHER HAND AS PER SECTION 71 OF THE INCOME-TAX ACT 1961. - 9 - III) THE FIR LODGED BY THE APPELLANT IS DATED 17-7- 2003/26- 7-2003 I.E. MUCH AFTER THE END OF THE RELEVANT ACC OUNTING PERIOD. IV) THERE IS NO DOCUMENTARY EVIDENCE ON RECORD TO S HOW THAT (A) THE APPELLANT HAD DEMANDED THE REFUND OF THE SE CURITY DEPOSIT OF RS.9 LAKHS FROM THE FRANCHISER AND (B) T HAT THE FRANCHISER HAD REFUSED TO REFUND THE SAID AMOUNT TO HIM. V) NO LEGAL ACTION APPEARS TO HAVE BEEN TAKEN BY TH E APPELLANT AGAINST THE FRANCHISER. VI) THE APPELLANT IS TOTALLY SILENT ABOUT THE AMOUN TS HE WAS LIABLE TO PAY THE FRANCHISER IN TERMS OF CLAUSE 9 O F THE AGREEMENT REFERRED TO HEREIN ABOVE WHICH STIPULAT ES AS UNDER:- (9) THAT PACKAGE WILL BE GIVEN BY FIRST PARTY TO TH E SECOND PARTY AS UNDER: I) ON ACHIEVING THE STRENGTH OF 50 STUDENTS THE BA SIC RETENTION PACKAGE OF RS.20000/- PER MONTH WILL BE P AID BUT DUE TO UNAVOIDABLE AND UNEXPECTED CIRCUMSTANCES IF THE MINIMUM STRENGTH IS NOT ACHIEVED THEN THE FIRST PARTY WILL PAY THE BASIC PACKAGE FROM THE FIRST MONTH FOR EACH CENTER. II) ON ACHIEVING THE STRENGTH OF 51-100 FIRST PAR TY WILL BE PAID 15% IF THE OVERALL COLLECTION OF THE F EES AND 10% OF THE TOTAL ADVERTISEMENT EXPENDITURE WILL BE REFUNDE D BACK BY THE FIRST PARTY TO THE SECOND PARTY. III) ON ACHIEVING THE STRENGTH OF 150 STUDENTS 2 0% OF OVERALL COLLECTION AND 10% OF TOTAL ADVERTISEMEN T EXPENDITURE WILL BE REFUNDED BACK TO THE SECOND PAR TY. IV) ON ACHIEVING THE STRENGTH OF 150 STUDENTS TO 2 50 STUDENTS INCREMENT OF 25% OF OVERALL COLLECTION AND INITIAL ADVERTISEMENT EXPENDITURE MADE BY THE SECOND PARTY WILL BE REFUNDED BACK BY THE FIRST PARTY WILL ALSO PROVIDE A FACILITY OF MOBILE SERVICES UP TO RS.1500/- (RUPEES ONE THOUSAN D FIVE HUNDRED) PER MONTH TO SECOND PARTY 4.9 AS APPARENT FROM THE ABOVE THE APPELLANT WAS N OT ENTITLED TO COLLECT AND APPROPRIATE THE ENTIRE FEES THE MAJOR PORTION OF WHICH WAS DUE TO THE FRANCHISER. IN THE ABSENCE OF ACCOUNTS IT IS NOT POSSIBLE TO ASCERTAIN AS TO WHA T EXTENT THE - 10 - APPELLANT HAD APPROPRIATED THE FEES IN CONTRAVENTIO N OF CLAUSE 9 OF THE AGREEMENT. (VII) VIDE LETTER DATED 13-12-2004 THE APPELLANT H AS FURNISHED THE REASON FOR THE CLAIM OF LOSS OF SECURITY DEPOSI T OF RS.9 LAKHS AS UNDER: HIS FRAUD CAME TO OUR KNOWLEDGE WHEN SOME PERSONS CAME FROM UDAIPUR TO COLLECT MONEY IN THE MONTH OF MARCH 2003. THERE WAS A BIG QUARREL BETWEEN THEM AND THE Y WERE ANTI SOCIAL PEOPLE. ABOVE EVENT LEAD ME TO REALIZE THAT I WAS DEFRAUDED .. WE USED COERCIVE TECHNIQUES TO RECOVER THE MO NEY AND COLLECTED ADVANCE CHEQUE. THUS IN THE END WH EN HE HAD GRABBED THE FEES FROM THE STUDENTS AND DEFAULTED TH E PAYMENTS TO THE TEACHING AND ADMINISTRATIVE STAFF WE DECIDE D TO FILE A POLICE COMPLAINT AGAINST HIM. NEEDLESS TO ADD THAT THEREAFTER I HAVE CONTINUED THE SAME PROFESSION BECAUSE OF THE MATERIAL GATHERED BY ME FROM THE FRANCHISER. 5. ON PERUSAL OF THE ABOVE EXPLANATION OF THE APPEL LANT IT IS APPARENT THAT THE APPELLANT HAS RECEIVED FEES FROM THE STUDENTS BY COERCIVE MEASURES WHICH HE HAS NOT ACCOUNTED FO R. THERE IS NO EVIDENCE TO SHOW THAT THE FRANCHISER IS ANTI SOC IAL AS NO OTHER COMPLAINT AGAINST THE FRANCHISER HAS BEEN FURNISHED BY THE APPELLANT. THE APPELLANT ADMITTEDLY CONTINUES TO R UN TUTION CLASSES UNDER THE FRANCHISE OF M/S. AGARWAL COURSES & TESTS SERIES. ADMITTEDLY THE POLICE COMPLAINT WAS FILED BY THE APPELLANT AGAINST THE FRANCHISER WHEN HE DEFAULTED IN PAYMENT TO THE TEACHING AND ADMINISTRATIVE STAFF WHICH WAS IN JULY 2003. BEFORE THE ASSESSING OFFICER THE APPELLANT HAS NOT REVEALED THE OUTCOME OF THE POLICE COMPLAINT MADE I N 2003 EVEN THOUGH TWO YEARS HAD PASSED SINCE THEN. INCID ENTALLY THE OFFICIAL SEAL AND STAMP OF THE POLICE AUTHORITY BEF ORE WHOM THE FIR WAS LODGED AND THE NAME OF THE OFFICER ARE NOT LEGIBLE FROM THE PHOTOCOPIES FILED BY THE APPELLANT. - 11 - 6. THUS THE CLAIM OF THE APPELLANT IS ARBITRARY AN D UNILATERAL. THERE IS NO CORRESPONDENCE WHAT SO EVE R BETWEEN HIM AND THE FRANCHISER REGARDING THE FRANCHISERS D EFAULT IN PAYMENTS TO HIM THE STAFF AND THE REFUND OF THE SE CURITY DEPOSIT. A VAGUE ALLEGATION THAT SHRI PUSHPENDRA A GARWAL IS AN ANTI SOCIAL PERSON HAS BEEN MADE BY THE APPELLANT I N THE POLICE COMPLAINT AND NEWS PAPER REPORT. FURTHER AS ALREA DY OBSERVED BY ME ABOVE THE EARLIEST ACTION ON THE PART OF THE APPELLANT APPEARS IN JULY 2003 AND NOT ON 31-3-2003. THEREF ORE THE CLAIM OF THE APPELLANT THAT THE SECURITY DEPOSIT HA D BECOME IRRECOVERABLE AS ON 31-3-2003 IS PREMATURE AS WELL AS UNSUBSTANTIATED BY EVIDENCE AND THEREFORE NOT ELIGI BLE FOR CONSIDERATION DURING THE YEAR IN APPEAL. ADDITIONA LLY THE IMPUGNED DEPOSIT REPRESENTS THE APPELLANTS INVESTM ENT FOR THE PURPOSE OF ACQUIRING FRANCHISE AND THEREFORE IN TH E NATURE OF CAPITAL OUTLAY. HENCE EVEN IF IT IS ESTABLISHED A T ANY STAGE THAT THE SAID SECURITY DEPOSIT HAD BECOME IRRECOVERABLE; THE SAME CANNOT BE TREATED AS BUSINESS LOSS UNDER SECTION 28 (I) BUT AS LOSS OF CAPITAL AND THEREFORE DISALLOWABLE UNDER THE IT ACT. I THEREFORE HOLD THAT THE LEARNED ASSESSING OFFICER W AS JUSTIFIED IN DISALLOWING THE SET OFF OF LOSS OF RS.9 LAKHS CL AIMED BY THE APPELLANT UNDER THE HEAD PROFITS AND GAINS OF BUSI NESS OR PROFESSION AGAINST HIS INCOME FROM SALARIES. ACCO RDINGLY THE DISALLOWANCE IS CONFIRMED AND THE APPEAL IS DISMIS SED. 3. BEFORE US THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE CONTENDED THAT AS SOON AS AGREEMENT WAS EN TERED WITH PUSHPENDRA AGARWAL THE ASSESSEES BUSINESS WAS COM MENCED AND THEREFORE THE LOSS OF RS.9 LAKHS WAS DURING THE COU RSE OF BUSINESS AND THEREFORE WAS A BUSINESS LOSS WHICH IS ALLOWABLE TO THE ASSESSEE AS THE ASSESSEE HAS WRITTEN IT OFF AS IRRECOVERABLE AND AS PER THE PROVISIONS OF SECTION 71 BUSINESS LOSS IS ALLOWABLE AS SET OFF AG AINST SALARY INCOME DURING THE YEAR UNDER CONSIDERATION. 4. ON THE OTHER HAND THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPORTED THE ORDER OF THE LOWER AUT HORITIES. - 12 - 5. WE ARE UNABLE TO ACCEPT THE CONTENTION OF THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE T HAT AS SOON AS THE ASSESSEE ENTERED INTO AN AGREEMENT TO OBTAIN FRANCHISE OF AGARWAL COMMERCE AND COMPUTER CENTER AND SCIENCE CE NTER THIS SHOWS ITS BUSINESS OF COACHING CENTER COMMENCE D EVEN WITHOUT DOING ANYTHING FURTHER. THE ASSESSEES PRO POSED BUSINESS WAS THAT OF RUNNING COACHING CENTRE AND IN OUR CONSIDERED OPINION SUCH BUSINESS CAN BE CALLED AS C OMMENCED WHEN THE ASSESSEE EITHER ACTUALLY STARTS GIVING COA CHING TO THE STUDENTS OR AT LEAST WHEN IT IS READY TO OPERATE I. E. READY FOR IMPARTING COACHING AFTER ACQUIRING NECESSARY INFRAS TRUCTURE AND COURSE MATERIAL. 6. BE THAT AS IT MAY. WE FIND THAT THE ISSUE INV OLVED WAS PROPERLY APPRECIATED BY THE LEARNED COMMISSIONE R OF INCOME TAX(APPEALS). THE LEARNED COMMISSIONER OF I NCOME TAX(APPEALS) HAS CORRECTLY OBSERVED FROM THE DECISI ON OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. MYSORE SUGARCANE COMPANY LIMITED 46 ITR 649 WHEREIN IT W AS HELD THAT THE QUESTIONS TO CONSIDER IN THIS CONNECTION ARE; F OR WHAT WAS THE MONEY LAID OUT? WAS IT TO ACQUIRE AN ASSET OF AN ENDURING NATURE FOR THE BENEFIT OF THE BUSINESS OR WAS IT AN OUTGOING IN THE DOING OF THE BUSINESS? IF MONEY BE LOST IN THE FIRST CIRCUMSTANCE IT IS A LOSS OF CAPITAL BUT IF LOST IN THE SECOND CIRCUMSTANCES IT IS A REVENUE LOSS. IN THE FIRST IT BEARS THE CHARACTER OF AN INVESTMENT BUT IN THE SECOND TO U SE A COMMONLY UNDERSTOOD PHRASE IT BEARS THE CHARACTER OF CURRENT EXPENSES. THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) IN VIEW OF THE ABOVE SETTLED LAW HAS C ORRECTLY - 13 - ARRIVED AT THE CONCLUSION THAT SECURITY DEPOSIT PAI D BY THE ASSESSEE FOR ACQUIRING FRANCHISE WHICH WAS REFUNDAB LE TO THE ASSESSEE CANNOT BE HELD AS A PAYMENT ON ACCOUNT OF CURRENT EXPENSES AND THEREFORE SUCH LOSS OF SECURITY DEPOSI TS WAS A CAPITAL LOSS. WE THEREFORE DO NOT FIND ANY MERIT IN THIS APPEAL OF THE ASSESSEE AND HENCE THE SAME IS DISMISSED. ORDER SIGNED DATED AND PRONOUNCED IN THE COURT ON 07 TH DAY OF MAY 2010. SD/- SD/- ( MAHAVIR SINGH) ( N.S. SAINI ) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD; ON THIS 07 TH DAY OF MAY 2010 ANKIT COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE LD. CIT(APPEALS)-V AH MEDABAD. 5. THE DR AHMEDABAD BENCH 6. THE GUARD FILE. BY ORDER //TRUE COPY// (DY./ASSTT.REGISTRAR) ITAT AHMEDABAD DATE INITIALS 1. DRAFT DICTATED ON 29.04.2010 ---------------- --- 2. DRAFT PLACED BEFORE AUTHORITY 29.04.2010 ------ ------------- 3. DRAFT PROPOSED & PLACED 29.04.2010 --------- ---------- JM BEFORE THE SECOND MEMBER 4. DRAFT DISCUSSED/APPROVED 29.04.2010 ---------- --------- JM BY SECOND MEMBER 5. APPROVED DRAFT COMES TO P.S 03.05.2010 ------- ------------- 6. KEPT FOR PRONOUNCEMENT ON 07.05.2010 --------- ----------- 7. FILE SENT TO THE BENCH CLERK 07.05.2010 ------ -------------- 8. DATE ON WHICH FILE GOES TO THE ---------------- -------------------- 9. DATE OF DISPATCH OF ORDER ---------------- --- ------------------