Tainwala Chemicals And Plastics ... vs Department Of Income Tax on 27 April, 2011

Income Tax Appellate Tribunal - Mumbai

IN THE INCOME TAX APPELLATE TRIBUNAL

MUMBAI 'I' BENCH

BEFORE SHRI T.R.SOOD, ACCOUNTANT MEMBER &

SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER

I.T.A.NO.3338/Mum/2008 - A.Y 2004-05

Tainwala Chemicals & Plastics India Vs. Asst. Commissioner of I.T. 8(3), Limited, Mumbai. Tainwala House, Opp. Plot No.118,

Road No.18, MIDC, Marol,

Andheri (E), Mumbai 400 093.

PAN: AAACT 0212 C

(Appellant) (Respondent)

AND

I.T.A.NO.3250/Mum/2008 - A.Y 2004-05

Asst. Commissioner of I.T. 8(3), Vs. Tainwala Chemicals & Plastics India Mumbai Limited, Mumbai.

Appellant by : S/Shri Sajjan Kumar Tulsiyan & Shashi Tulsiyan.

Respondent by : Shri Sanjiv Dutt.

ORDER

Per T.R.SOOD, AM:

These cross appeals are heard together and disposed of by this

common order.

2. I.T.A.No.3338/M/08- [assessee's appeal]: In this appeal various

grounds have been raised out of which ground No.4 was not pressed

and, therefore, same is dismissed as not pressed. Ground No.1 is of

general nature and does not require separate adjudication. The other

grounds raised are as under:

"2. The C.I.T. Appeal erred in making disallowance u/s.14A of the I.T.Act 1961 an adhoc basis at the rate of 5% of the Dividend income aggregating to `.1,07,882/-.

3. The C.I.T. Appeal erred in disallowing long term capital loss of `.3,06,75,158/- on surmise, conjecture and guess work that the sale is "executed by management to create the long term capital loss which can be adjusted in future against capital gain if any."

These appeals were originally heard on 8-2-1011 and on that

date the Ld.DR sought permission to file written submissions with a

week, which were ultimately filed on 14-3-2011 in which an issue was

also raised regarding some paper book containing 106 pages and it

was submitted that all these documents were not filed before the AO.

Therefore, to clarify the situation, the matter was again put for hearing

for clarification and the appeals were finally heard on 25-3-2011.

As far as the issue raised regarding big paper book vide para 5.4

of the written submissions of the Ld.DR is concerned, Ld.counsel of the

assessee submitted that these are basically balance-sheet and

computation of income of earlier years which have been filed in earlier

years and these papers have been filed to prove a point that the

assessee had accounted for interest on the loan given to Tainwala

Holdings Pvt. Ltd. These documents are part of the record of the

Revenue for earlier years. At this juncture, Ld.DR submitted that in any

case copy of the minutes of the Board meeting were not filed earlier.

The Ld.counsel of the assessee responded that in that case this paper

may not be considered. Both the parties also made certain arguments

with reference to the written submissions which have been considered

by us while adjudicating the respective grounds.

3. Ground No.2: After hearing both the parties, we find that during

assessment proceedings AO noticed that assessee had earned dividend

income and, therefore, assessee company was asked why expenses 3

attributable to such dividend income should not be disallowed. It was

mainly submitted that assessee has not incurred any expenses for

earning this income. However, AO observed that assessee must have

incurred at least 10% of expenses and, therefore, disallowed a sum of

`.2,15,l764/- u/s.14A. The action of the AO has been confirmed by the

ld. CIT[A].

4. Both the parties have been heard.

5. After considering the rival submissions, we find that this issue

has been recently decided by the Hon'ble Bombay High Court in the

case of Godrej & Boyce Mfg. Co.Ltd. vs. DCIT [43 DTR 171], wherein it

has been held that only a reasonable expenditure should be disallowed

after examining the nature of expenditure. Therefore, we set aside the

order of the ld. CIT[A] and remit the matter back to the file of the AO

with a direction to decide the same in the light of the decision of the

Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co.Ltd.

vs. DCIT [supra].

6. Ground No.3: After hearing both the parties, we find that during

assessment proceedings AO noticed that assessee had made a claim

for long term capital loss amounting to `.3,06,75,158/-, details of

which are as under:

Name of the No. of Purchase detail Indexed Sale Profit/ script shares Cost value (Loss) Year Amount

Tainwala

Polycontainers 132000 1999-00 264000 314221 141240 (172981) Ltd.

Tainwala

polycontainers 400000 1994-95 4000000 7150579 784000 (6366579) Ltd.

Larsen &

Toubro Ltd. 200 1994-95 57120 102110 57854 (44256) 4

Samsonite

India Ltd. 2500000 1996-97 2500000 37950820 25000000 (12950820) Tainwala

Trading & 36796 1994-95 3679600 6577818 36796 (6541022) Investment

Co.Ltd.

Concept

Reality & 305000 1996-97 3050000 46300000 30500 (4599500) Securities Ltd.

Total 3373996 13550720 56725548 26050390 (30675158)

In response to the query why this loss should not be disallowed, the

assessee filed its reply vide letter dated 17-11-2006 which is as under:

"During the year under consideration the assessee has sold certain quoted as well as unquoted shares. The unquoted shares have been sold after taking into account the net worth of these shares as per the latest available audited financial statements i.e. for the year ended 31-03- 2003.

Computation of the net work for the unquoted shares along with a copy of the balance sheet is attached as per Annexure "1"

On a review of the computation of the net worth you shall observe that the shares have been sold at a price higher than the net intrinsic value of the unquoted shares."

AO after examining the reply observed that unquoted shares of the

group companies were sold at cost price and the loss has been

incurred mainly due to indexation of the cost price. He also observed

that such shares were mainly sold to the group companies only,

wherein the family members had substantial interest. He observed that

these transactions have not taken place in the normal course of

business, but have been planned by the assessee only to generate long

term capital loss. He also observed that assessee company, for

example, sold shares amounting to `.2,60,50,000/- to Katayan

Construction & Developers Ltd. and on verification of list of loans and

advances it was seen that account of this party was shown of credit 5

balance of `.2.50 crores which means the sale consideration has not

been received by the assessee. It was also noted that assessee has

already written off provision of doubtful debts amounting to

`.1,90,51,000/- in respect of Katayan Construction & Developers Ltd.

When that party had already become doubtful, how the shares could

be sold on credit to such a party. He also referred to the provisions of

Sale of Goods Act, 1930 and observed that a contract of sale would be

completed when the price has been received which has not been done

so in the present case and sale of shares was done in the month of

June whereas consideration was not received even till the end of

March, 2004. In this background, the capital loss claimed by the

assessee was disallowed.

7. Before the CIT[A] it was mainly argued that sales were effected

during the restructuring of the company in which it was decided to

reduce the investment in non core business so as to improve over all

efficiency of the management. The assessee was a limited company

and listed in the stock exchange and could not have possibly created

paper loss in view of the restrictions imposed by the SEBI. It was also

pointed out that provision for doubtful debt was in the case of

Tainwala Holdings Pvt. Ltd. and not against the name of Katayan

Construction & Developers Ltd. as observed by the AO. Some of the

shares were sold through stock exchange and, therefore, the loss was

genuine.

8. The ld. CIT[A] after examining the submissions did not find

force in the same and confirmed the addition on the reasoning given 6

by the AO. He also observed that some of the shares were stated to be

sold at the rate more than intrinsic value, but that was not correctly

done because value of the land and building was taken on the basis of

book value.

9. Before us Ld. Counsel of the assessee submitted that the

assessee company is a public limited company in which public are

substantially interested and is also a listed company in the Bombay

Stock Exchange (BSE) as well as National Stock Exchange (NSE). This

means most of the transactions have to be carried on only as per the

SEBI regulations and it is not possible just to enter into paper

transactions. He submitted that the assessee company had invested in

shares of various companies and in order to restructure the whole

company so as to improve the efficiency and to concentrate only on

core business, it was decided to dispose of the shares of quoted as

well as unquoted companies. This decision was taken in the Board

meeting held on 26-04-2003 and a copy of the resolution has been

filed at page-1 of assessee's paper book. Then he referred to the

assessment order wherein the list of companies in which shares have

been sold is extracted by the AO and pointed out that as far as the sale

of shares in the case of Tainwala Polycontainers Ltd. And Larsen &

Toubtro Ltd. is concerned, same were quoted companies and shares

were sold through the stock market through broker at the market

price. The loss of `.65 lacs approximately was incurred in these two

transactions and at least no fault can be found in respect of these two

transactions. Further, the other major sale was in respect of shares of 7

Samsonite India Ltd. where intrinsic value of the company was `.5.57

per share as on 31-3-2003, whereas same shares have been sold @

`.10/- i.e. at the rate at which the same were acquired and loss of

about `.1.29 crores has arisen mainly because of indexation of the cost

of acquisition. Similarly, shares of Tainwala Trading & Investment Co.

Ltd. and Concept Reality & Securities are concerned, same were sold

much above intrinsic value and loss has arisen mainly on account of

indexation. In fact, assessee has received premium over the intrinsic

value. He submitted that CIT[A] has rejected this argument by

observing that land and building was not valued at market price, but if

that is the case, the department should have asked the assessee to

calculate the value accordingly. In fact, break up value is an accepted

method of valuation and that is why assessee determined the intrinsic

value on break up value basis and sold the shares. The transactions

cannot be brushed aside merely by observing that shares have been

sold to concerns in which some of the directors are related.

10. He then referred to the objection of the AO wherein he referred

to the provisions of Sale of Goods Act and submitted that AO has not

correctly interpreted the provision. What is required under the law is

that sale would be effected only when the property has been

transferred for a price. Price does not mean that it should be

immediately paid across the table. If this interpretation is given

towards contract of sale of goods then perhaps no sale on credit basis

would be valid. The assessee has continuously sold the shares for a

consideration and in two cases the consideration was received later on. 8

The other objection of the AO is that sales have been made to Katayan

Construction & Developers Ltd. against which assessee has already

created a provision of doubtful debt amounting to Rs.1.90 crores. This

is not correct because loan has been written off in the case of Tainwala

Holdings Pvt. Ltd. and not the case of Katayan Construction &

Developers Ltd.

11. He then referred to the provisions of sec.45 and pointed out

that for bringing any transaction under this section what is required is

that there should be a capital asset and the same should have been

transferred for a consideration. Further, the computation provision of

section 48 provides that capital gain/loss would be computed after

reducing the cost of acquisition from the sale consideration. The facility

of indexation is also given for computing the cost of acquisition. In the

case before us all through shares of quoted and unquoted companies

were shown under the head 'investment' and most of the shares have

been acquired long back and this fact has not been disputed. The

shares of quoted companies have been sold through stock exchange

through the brokers and this fact has also not been denied. The shares

have been sold for a consideration. In the case of unquoted companies

shares have been sold for more than intrinsic value of the shares and

this fact has also not been denied and, therefore, these transactions

could not have been ignored.

12. Then he referred to the celebrity decision of Hon'ble Supreme

Court in the case of Varghese (K.P.) vs. ITO [131 ITR 597] wherein it

was clearly held that it was not sufficient for the Revenue to say that 9

assessee has received more consideration than shown in the

documents. The burden was on the Revenue to prove that clearly more

consideration has been received and, in fact, because of this decision

section 52 itself was omitted from the Act and this decision was

followed later on in the case of CIT vs. Shivkani Co. P. Ltd. [159 ITR

71] and CIT vs. Godavari Corporation Ltd. [200 ITR 567]. He then

referred to the decision of the Hon'ble Bombay High Court in the case

of Mrs. Alpana Chinnai vs. ITO [269 ITR 123] wherein it was observed

as under:

"To invoke section 52[2] of the Income-tax Act, 1961, it is not only necessary for the Revenue to establish that the fair market value of the capital asset transferred by the assessee exceeds the full value of the consideration declared in respect of the transfer by not less than 15 per cent. of the value so declared, but it is also necessary for the Revenue to establish that the full value of the consideration declared by the assessee is less than the amount actually received by the assessee. without establishing that the consideration actually received by or accrued to the assessee is more than what is declared, the Revenue cannot invoke section 52(2) of the Act."

13. Lastly, he referred to a recent decision of the Hon'ble Delhi High

Court in the case of CIT vs. Gillette Diversified Operations P. Ltd. [324

ITR 226] wherein in almost identical circumstances shares of the group

companies were sold to other group companies and such loss was

accepted by the Hon'ble Court by holding that such sale cannot be

treated as colourable device.

14. On the other hand, Ld.DR referred to the assessment order and

appellate order and submitted that a combined reading of the same

would show that shares sold by the assessee company were mainly

consisted of shares belonging to Tainwala Group only. The transactions

have not been done in the normal course of business because money 10

was not received immediately which only shows that transactions were

carried out for the purpose of creating the losses. In any case, the ld.

CIT(A) has pointed out that the sale transactions of the shares were

done during the family settlement. He argued that the family

settlement would not be covered by the definition of 'transfer' and in

this regard he relied on the decision of the Chennai Bench of the

Tribunal in the case of Kay Art Enterprises vs. JCIT [97 ITD 291].

15. He further argued tat the decision relied on by the Ld.counsel of

the assessee on the point whether there was any understatement of

consideration has no relevance because that is not the issue before us.

Even the decision of Hon'ble Delhi High Court in the case of CIT vs.

Gillette Diversified Operations P. Ltd. [supra] is not relevant because

issue was not whether the sale of shares was a colourable device.

16. In the rejoinder Ld.counsel of the assessee submitted that the

shares were sold because of restructuring exercise as the company

wanted to concentrate mainly on core business of the company. The

AO has never whispered a single word about a family settlement and

even CIT(A) has also merely casually mentioned about the family

settlement and, therefore, Ld.DR cannot make a new case that it was a

case of family settlement.

17. We have considered the rival submissions carefully and find that

AO has rejected the claim of the assessee mainly because assessee

sold the unquoted shares of the group companies at cost price and the

loss arose due to indexation of the cost price. According to the AO,

shares have been sold to companies which were belonging to Tainwala 11

Group only wherein family members have substantial interest and,

therefore, these transactions could not be construed in the normal

course of business. He also observed that the transactions are devoid

of any creditability or justification to hoodwink the tax authorities. He

also quoted various provisions of the Sale Goods Act and noted that

since consideration has not been received immediately, therefore, it

cannot be said that shares have been sold for a price. He also noted

that assessee has already written off a sum of Rs.1.90 crores as

doubtful debts against Katayan Construction & Developers Ltd. then

how shares could be sold to the same company for which consideration

was received later.

18. Thus from the above observations it is clear that AO has not

rejected the claim because it was a family arrangement, he has rather

rejected the claim that it cannot be said that assessee has sold the

shares for proper consideration. It has also been alleged that it was

merely paper transaction. The ld. CIT(A) adjudicated the issue vide

para 5.2 which is as under:

"I have considered the facts of the case, submission of the appellant and also the finding of the AO. The capital loss has been worked out as under:

Name of the No. of Purchase detail Indexed Sale Profit/ script shares Cost value (Loss) Year Amount

Tainwala

Polycontainers 132000 1999-00 264000 314221 141240 (172981) Ltd.

Tainwala

polycontainers 400000 1994-95 4000000 7150579 784000 (6366579) Ltd.

Larsen &

Toubro Ltd. 200 1994-95 57120 102110 57854 (44256) Samsonite

India Ltd. 2500000 1996-97 2500000 37950820 25000000 (12950820) Tainwala

Trading & 36796 1994-95 3679600 6577818 36796 (6541022) Investment

Co.Ltd.

Concept

Reality & 305000 1996-97 3050000 46300000 30500 (4599500) Securities Ltd.

Total 3373996 13550720 56725548 26050390 (30675158)

From the details filed, it is seen that these shares pertain to the associate concern only. It is further noticed that all these shares have been sold to associate concerns namely Katyayan Construction & Developers Ltd. and Tainwala Holdings P. Ltd. The appellant has stated that the unquoted shares have been sold after taking into consideration the net worth of these shares as per latest available audited financial statements of the year 31-3-2003. According to the appellant, computation of the net worth of these shares would show that the shares were sold at a price higher than the Net Intrinsic Value of these shares. According to the appellant, shares were held as investment and were sold with a view to reduce all investment in non core business, as a part of business restructuring and an overall efficiency management program. The appellant has further stated that since the appellant is a listed company, there is no possibility of any subterfuge regarding sale transactions of these shares. From the above chart, it can be seen that an amount of Rs.1.29 crores loss is worked out on account of sale of Rs.25 lacs shares of Samsonite India Ltd. These shares were sold to other group concern at Rs.10 per share. It has been stated that Net Asset Value of the shares is Rs.5.57 per share as on 31-3-2003. They were purchased at Rs.10 and sold at same rate and the loss has occurred because of indexation. In respect of other shares, it is seen that they have been sold at much lower rate than purchase price. For example, shares of Tainwala Polycontainers Ltd. purchased for Rs.40 lacs in 1994-95 were sold for Rs.7,84,000/-. Similarly, shares of Tainwala Trading and Investment Co. Ltd. purchased for Rs.36,79,600/- were sold for Rs.36,796/- and shares of Concept reality and Security Ltd. purchased for Rs.30,50,000/- were sold for Rs.30,500/-. The AO has further noted in the assessment order that except in one case, all the shares have been sold to Katyayan Construction & Developers P. Ltd, but the appellant did not receive the money for quite some time. It was also noted by the AO tat provision for doubtful debts have been made in respect of loan amounting to Rs.1,90,51,000/- given to M/s Katyayan Construction & Developers P. Ltd. From the facts on records, it is apparent and as fairly admitted by the appellant that transaction of shares took place in view of family settlements..."

Even the above appellate order shows that it was not alleged that it

was a case of family arrangement and the claim has been mainly

rejected because consideration was not proper. There is no specific

allegation that it was a case of family settlement. Therefore, Ld.DR 13

could not have possibly argued that it was merely a case of family

arrangement particularly without any evidence on record in the form of

family settlement.

19. We further find that assessee is a public limited company which

is listed in the stock exchange which means that assessee is bound by

the listing agreement as well as various regulations of the SEBI and

could not have sold the shares or indulged in any other paper

transactions without informing the stock exchange. The copy of the

Board's resolution, filed at page-1 of the paper book, reads as under:

"CERTIFIED TRUE COPY OF THE MINUTES OF MEETING OF THE BOARD OF DIRECTORS OF TAINWALA CHEMICAL AND PLACTICS [INDIA] LIMITED HELD ON STAURDAY, 26TH APRIL, 2003 AT 11.00 A.M. AT THE REGISTERED OFFICE OF THE COMPANY AT TAINWALA HOUSE, ROAD NO.18, M.I.D.C., MAROL, ANDHERI [EAST], MUMBAI 400 093.

The chairman informed the Board that Company had invested in shares of many companies. Now the Company want to restructure the uncore business and want to put the strength in core business and the Board require to dispose off the quoted and unquoted shares.

After much discussion the Board approved the sale of Shares and passed the following resolution in this regard:

"RESOLVED THAT the consent of the Board be and is hereby accorded to dispose off the quoted and unquoted shares of Companies.

FURTHER RESOLVED THAT Mr. Dungarmal Tainwala be and is hereby authorised to execute the share transfer deed and to do all such acts, deeds, matters and things as may be considered necessary to give effect to the aforementioned resolution.

Dr. Raesh Taiwala, Mr. Rakesh Tainwala and Mr. Dungarmal Tainwala being interested did not participated in the discussion and vote upon the resolution.

CERTIFIED TRUE COPY

For Tainwala Chemicals and Plastics (India) Ltd."

The above only shows that the shares have been sold because the

company was in the process of restructuring and wanted to strengthen 14

its core business. The assessee company during the year has sold

shares in six companies out of which shares in the case of Larson &

Toubro Ltd. and Tainwala Polycontainers Ltd. were said to have been

sold through stock exchange through various brokers at market price.

This fact has not been disputed by the revenue authorities. Out of the

other four companies, the case of the assessee is that shares have

been sold at more than the intrinsic value. The ld. CIT(A) has stated

that the intrinsic value has not been properly calculated in the case of

shares of Samsonite India Ltd. because land and building was taken at

book value. As pointed out by the Ld.counsel of the assessee, firstly

these shares were sold at Rs.10 per share against intrinsic value of

Rs.5.57 per share. Secondly, the Revenue has not brought on record

any material to show that assessee has received extra consideration.

In this regard, the decision of Hon'ble Supreme Court in the case of

Verghese (K.P.) [supra] was cited. The Hon'ble Apex court has

observed as under:

"Capital gains-Understatement-Scope of provisions--Difference between market value and consideration declared not sufficient - Assessee must be shown to have received more than what is declared or disclosed by him as consideration--Burden of proof on the Department--Computation-Only that income which has accrued or been received.

It was held by the Apex Court "Sub-section (2) of section 52 of the I.T.Act, 1961 can be invoked only where the consideration for the transfer has been understated by the assessee or, in other words, the consideration actually received by the assessee is more than what is declared or disclosed by him and the burden of proving such an understatement or concealment is on the revenue. The . Sub-section (2) has no application in the case of an honest and bona fide transaction where the consideration received by the assessee has been correctly declared or disclosed by him.

.........It does not create any fictional receipt. It does not deem as receipt something which is not in fact received. It merely provides a statutory best judgment assessment of the consideration actually received by the assessee and brings to tax capital gains on the footing 15

that the fair market value of the capital asset represents the actual consideration received by the assessee as against the consideration untruly declared or disclosed by him.

The word "declared" is very eloquent and revealing. It clearly indicates that the focus of sub-section (2) is on the consideration declared or disclosed by the assessee as distinguished from the consideration actually received by him and it contemplates a case where the consideration received by the assessee in respect of the transfer is not truly declared or disclosed by him but is shown at a different figure.

Section 42[1] does not deem income to accrue or to be received which in fact never accrued or was never received. It seeks to bring within the net of taxation only that income which has accrued or is received by the assessee as a result of the transfer of the capital asset. Since it would not be possible for the ITO to determine precisely what is the actual consideration received by the assessee or in other words how much more consideration is received by the assessee than that declared by him, precisely how much more consideration is received by the assessee than that declared by him, sub-section (1) provides that the fair market value of the property as on the date of the transfer shall be taken to be the full value of the consideration for the transfer which has accrued to or is received by the assessee. The net effect of this provision is as if a statutory best judgment assessment of the actual consideration received by the assessee is made, in the absence of reliable materials.

Thus, the fundamental principle is that if it is alleged that assessee has

received less consideration the Revenue should have proved that

assessee has received more consideration. In the case before us if

there was doubt on calculation of intrinsic value, the Revenue could

have easily reworked the appropriate value but the matter has been

left only by making an allegation. The Revenue has not discharged the

burden which was caste on it in terms of the decision of the Hon'ble

Supreme Court in the case of Verghese (K.P.) [supra]. In fact, this

decision has been followed by many later decisions of Hon'ble Supreme

Court and various High Courts. The same has been followed even by

the Hon'ble Bombay High Court in the case of Mrs. Alpana Chinnai vs.

ITO [supra].

20. The observations of the AO that since the sale consideration

was not received immediately, therefore, the transaction cannot be

construed as sale in terms of Sales of Goods Act. Section 4(1) as

extracted by the AO reads as under:

"4. (1) A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. There may be a contract of sale between one part-owner and another."

The above only shows that what is required is that the seller transfers

or agreed to transfer of property in goods to a buyer for a "price".

There is no further restriction that such price has to be paid

immediately. If that interpretation is accepted, then perhaps no sale

can ever take place on credit basis. Therefore, this transaction cannot

be rejected merely because the consideration was received later on.

We also find that it was clearly pointed out that assessee has not

written off any doubtful debt against Katayan Construction &

Developers Ltd. but the loan has been written off against Tainwala

Holding Pvt. Ltd. It further becomes clear from para-7 of the appellate

order wherein ground No.6 has been reproduced which reads as

under:

" Ground 6 - Bad Debts Written off

The AO erred in disallowing the provision made for doubtful recovery of loan given to Tainwala Holdings Private Limited on the alleged ground that the said loan given to this company are not declared as income in earlier years so this amount cannot be allowed as deduction u/s.36(1)(vii) of the Act.

In this regard it is respectfully submitted that loan given to Tainwala Holdings Private Limited out of the surplus funds of the appellant, which were already offered to tax in the earlier years. Therefore, the contention of the AO that the loan given to company is not declared as income, is not correct.

Further, it is to be noted that the provision is made after considering weak financial position of the Tainwala Holdings Private Limited. This is clearly loss of fund of the appellant and therefore, allowable as deduction u/s.36(1)(vii) of the Act.

The appellant humbly prays that the proper and appropriate relief be allowed in the appeal to meet the ends of justice as being aggrieved by the assessment made, the appellant is constrained to file this appeal."

Thus, from the above it is clear that the loan was written off against

Tainwala Holding Pvt. Ltd. and not Katayan Construction & Developers

Ltd.

21. Coming to the last allegation that it is merely a paper

transaction, we are not inclined to accept the same because as

mentioned earlier out of six companies, shares of two companies have

been sold through stock exchange it has nowhere been denied that

shares of four other companies were not delivered or transferred. In

fact, no enquiry has been made in this regard. Simply because shares

have been sold to group companies will not prove anything. In fact,

Hon'ble Delhi High Court in the case of CIT vs. Gillette Diversified

Operations P. Ltd [supra] was dealing with a similar situation. In this

case the facts of the case were as under:

"On January 1, 2000, the assessee, engaged in the business of leasing of equipment, amalgamated with GDOPL. The assessee had purchased shares in WSIL on April 4, 1996 for a sum of Rs.7,92,70,381. Those shares were sold on December 30, 1999 for a consideration of Rs.7,88,76,000. However, due to application of the cost index, the cost of these shares for the purpose of computation of capital gain worked out to Rs.10,11,02,224, thereby resulting in a capital loss of Rs.2,22,26,224. The assessee had also purchased shares in GDOPL on April 4, 1996 for a consideration of Rs.8,40,83,094 and had sold those shares to GGIPL on December 30, 1999 for a sale consideration of Rs.8,36,64,770, thereby resulting in loss of Rs. 4,18,324. However, due to application of the cost index, the capital loss on sale of these shares worked out to Rs.2,35,76,735. The assessee-company filed a return declaring loss of Rs.4,71,54,210 for the assessment year 2000-

01. The Assessing Officer noticed that the assessee-company had outstanding liability of Rs. 19.77 crores, used for purchase of shares of 18

group companies. He concluded that the transactions were entered on the same date merely to create capital loss and was a colourable device for tax avoidance. He disallowed the capital loss on sale of shares on the ground that these shares were purchased from the funds made available by the group companies and observed that the assessee- company had entered into these transactions on the same day only to create capital loss of investment held by it. The Commissioner (Appeals) allowed the loss on account of sale of WSIL shares but upheld the disallowance of loss in respect of shares of GDOPL on the ground that the sale proceeds were used to reduce liabilities prior to amalgamation with GDOPL. While allowing the appeal filed by the assessee and dismissing the cross-appeal filed by the Revenue, the Tribunal noted that no plausible objection had been raised before it to justify disallowance of loss on sale of shares of WSIL. The Tribunal, therefore, upheld the order of the Commissioner (Appeals), allowing the loss incurred by the assessee on sale of shares of WSIL. As regards sale of shares of GDOPL, the Tribunal was of the view that the transaction of sale of these shares was quite similar to the transaction of sale of shares of WSIL. The Tribunal noted that no benefit of capital loss had been taken by the assessee till date by adjusting it against other long-term capital gains. It was also noted that even in the assessment of 2002-03 the amalgamated company had brought forward the losses of earlier years. The Tribunal, therefore, felt that had the shares been sold as a device to obtain any unfair tax benefit, the assessee-company or the amalgamated company would have immediately adjusted it against income from long-term capital gains. The Tribunal was of the view that the transaction could not be thrown out merely because it was carried out a few days before amalgamation of the company. The Tribunal was of the view that it was immaterial whether the loan was due to a group company or to an outsider. The Tribunal took note of the fact that actual loss of sale of shares was only Rs.4,18,324 and it was only on account of indexation that the amount of capital loss had increased.

On the above facts, it was held as under:

Held, dismissing the appeal, that as noted by the Commissioner (Appeals) as well as by the Tribunal, the shares in question were held by the assessee-company for more than three years before they were sold. The assessee-company was very much entitled in law to sell the shares held by it at any time, which it considered to be appropriate for such sale. It was for the holder of the shares and not for the Revenue to decide, when to sell the shares held by it. If the sale of shares was not illegal, it could have been made to anyone, including a group company. There was nothing illegal in the assessee-company selling shares held by it, for the purpose of reducing its liabilities. It was also absolutely immaterial that the liabilities of the assessee-company were towards group companies. Similarly, it was also immaterial that the shares sold by the assessee-company were of another group company. It was also immaterial as to who the purchaser of the shares was, so long as the shares were not sold at a price which was higher or lower than their fair price and there was no restriction on sale of such shares to a group company. As noted by the Tribunal, neither the assessee-company nor 19

the amalgamated company adjusted the capital loss on account of sale of these shares against any long-term capital gain even till the assessment year 2002-03. No tax benefit was, therefore, obtained by the assessee-company for at least two years after the capital loss was booked by it. Hence, it could not be said that the transactions in question were a colourable device, meant to gain some unfair tax advantage. No substantial question of law arose to interfere with the order of the Tribunal.

In the case before us also shares have been held by the assessee

company from assessment years 1994-95 to 1999-00 which means

shares were already held for more than 4 to 6 years. The same have

been sold for restructuring of the business so as to concentrate on the

main business of the company. The shares have been already

transferred to the various companies and, therefore, same cannot be

construed only as paper transactions. In view of the above discussion,

we are of the view, that the loss claimed by the assessee is allowable

and, accordingly, we set aside the order of the ld. CIT(A) and direct

the AO to allow the same.

22. In addition to the above ground, assessee has also filed an

additional ground vide letter dated 4-6-2009, filed on 14-7-09/ The

additional ground reads as under:

"In view of the above fact that the business loan of `.1,90,51,000/- granted to Tainwala Polycontainers Ltd. having become bad, the AO and CIT[A] erred in disallowing the claim holding the same to be of capital nature."

23. The Ld. Counsel of the assessee submitted that the issue raised

in the additional ground is purely of legal nature. He also invited our

attention to the decision of the Hon'ble Supreme Court in the case of

Vijaya Bnak vs. CIT [323 ITR 166] wherein it has been explained that if

provision for doubtful debt is reduced from the debtors on the assets

side of the balance sheet, then same is to be allowed. Therefore, this 20

legal ground should be admitted in the light of the decision of the

Hon'ble Supreme Court in the case of National Thermal Power Ltd. vs.

CIT [229 ITR 383].

24. On the other hand, ld. DR did not raise any serious objection for

admission of the additional ground.

25. After considering the rival submissions, we find that the facts

relevant for adjudication of this ground are already on record and,

therefore, we admit this ground.

26. After hearing both the parties we find that during the

assessment proceedings AO noticed that assessee has debited a sum

of `.1,90,51,000/- as exceptional items and in response to a query it

was stated that these items pertain to the provision for doubtful debt

on account of specific liability and, therefore, same was not added to

the taxable income in accordance with the general accepted accounting

policy. Further, para 6 of Schedule-O of notes to the accounts reads

as under:

"Considering the weak financial position of the company concerned, the provision have been made towards doubtful loan given in the earlier years to director's interested company amounting to `.1,90,51,000/- and shown as "Exceptional items" in the Profit & Loss Account."

Therefore, loans given were not on account of revenue

expenditures/receipts, but were in the nature of capital expenditure

and even if the same have become bad, it cannot be claimed as a bad

debt. It was further observed that since loans have not been

accounted for while computing the income of earlier years, the loans

have not been granted in respect of the business carried on by the 21

assessee. The same has not been established to have become bad. He

also relied on the decision of the Hon'ble Kerala High Court in the case

of Trvancore Tea Estates Ltd. vs. CIT 198 ITR 528 and accordingly

disallowed the claim.

27. On appeal, ld. CIT[A] adjudicated the issue vide para 7.1 which

reads as under:

"7.1 I have considered the facts of the case, submission of the appellant and also the finding of the A.O. I do find any error in AO's orders in this regard. Provision of section 36(1)(vii) of the I.T.Act is very specific in this regard and only the amount which has been offered to tax in earlier years can be written off as bad debts. This provision cannot be extended to surplus written off as bad debts. This provision cannot be extended to surplus accumulated on account of business. According to the appellant, the loan was given from profit which is covered u/s.36(1)(vii) of the I.T.Act, this is the stretching logic to beyond the breaking point. What was claimed as bad debt is not an unrealized trading receipt, but a loan. This claim of the appellant is not allowable."

28. Before us, Ld. Counsel of the assessee referred to various

documents filed in the paper book and pointed out that loan to

Tainwala Polycontainers Ltd. was given in A.Y 1994-95. The initial loan

was of `.3,62,72,256/- and interest was charged @ 15%. Later on

Tainwala Polycontainers Ltd. returned a sum of `.1,77,22,221/-.

Further fresh loans were also granted in A.Y 1998-99 and 2000-01 and

interest amounting to `.21,16,362/- and `.49,64,333/- was charged.

This was duly returned as income and in this respect he referred to the

assessment orders of these years. Later on, the financial position of

Tainwala Polycontainers Ltd. became very bad because of fall in the

share market and ultimately it was decided to waive the interest in A.Y

2000-01. The assessee company found that only a part of the amount

was recoverable and accordingly, it made a provision of 22

`.1,90,51,000/-. He referred To the decision of the Hon'ble Delhi High

Court in the case of CIT vs. Realest Builders & Pvt. Ltd. [308 ITR 246]

wherein part of the loan was written off because debtor company had

suffered heavy losses and the same were held to be allowable.

29. He further argued that CIT[A] has mainly disallowed the claim

because it was only a provision for doubtful debt. He referred to the

decision of the Hon'ble Delhi High Court in the case of CIT vs. Realest

Builders Pvt. Ltd. [308 ITR 246] wherein part of the loan was written

off because debtor company had suffered heavy losses and the same

were held to be allowable. He further argued that the CIT(A) has

mainly disallowed the claim because it was only a provision for

doubtful debt. He submitted that recently Hon'ble Supreme Court has

clearly held in the case of Vijaya Bank vs. CIT [supra] that if provision

for has been ultimately debited to the profit & loss account and

reduced from the debtor in the assets side of the balance-sheet, then

same has to be construed as writing off of the debt. Then he referred

to various documents, which is copy of the balance sheet and pointed

out that this provision was debited to the profit & loss account and the

same has been reduced from the over all loans granted by the

assessee company, therefore, it is not a case of provision for doubtful

debt but it is simply because of write off of debt.

31. On the other hand, Ld.DR submitted that first of all before the

AO it was claimed that doubtful debt was in respect of Katayan

Construction & Developers Ltd. and this fact can be further verified

from letter dated 17-11-2006 vide para-6, whereas before the CIT(A) 23

the provision for doubtful debts was shown to be against Tainwala

Holdings Pvt. Ltd. This clearly shows that assessee has been changing

its stand. Further, assessee has not accounted for these debts while

computing its income. Since assessee is not in the business of money

lending because it is not a NBFC therefore it cannot be said that

assessee has lent the money in the ordinary course of business and,

therefore, conditions of sec.36(2) are not complied with. It was further

argued that in response to notice u/s.274 for levy of penalty

u/s.271[1][c] against this disallowance, it was claimed by the assessee

that the said provision was erroneously considered as bad debt. This

only shows that assessee is shifting its stand. In any case loan against

Tainwala Holdings Pvt. Ltd. has been shown at Rs.40,11,59,942/-. This

only shows that the amount of provision was not reduced and in this

regard he has filed copy of the list showing loans and advances in the

Annual Report. Therefore, the decision of Hon'ble Supreme Court in

the case of Vijaya Bank vs. CIT [supra] is not applicable. He also

referred to pages 59 to 61 of the paper book, which is a copy of the

annexure to the auditor's report of Tainwala Holdings Pvt. Ltd. and

invited our attention to page-60 wherein it was mentioned that the

company was regular in repayment of principal and interest.

32. In the rejoinder, Ld.counsel of the assessee pointed out that the

provision for doubtful debt is definitely in respect of Tainwala Holdings

Pvt. Ltd. only and it was by mistake mentioned as Katayan

Construction & Developers Ltd. This fact becomes further clear from

the order of the CIT(A) wherein at page-7 he has reproduced the 24

grounds which clearly mentioned the name of Tainwala Holdings Pvt.

Ltd. In any case, this can be verified by the AO. He also submitted that

there is no force in the submission that assessee made arguments

while representing his appeal proceedings that provision for doubtful

debt was erroneously claimed as bad debt, because penalty

proceedings are different from assessment proceedings and in any

case provision for doubtful debts made not have become allowable

before the decision of the Hon'ble Supreme Court in the case of Vijaya

Bank vs. CIT [supra] which was rendered on 15th April, 2010 whereas

reply in penalty proceedings was made on 26-12-2006. Then he

referred to pages 82 to 101 of the paper book which is a copy of the

balance sheet for F.Y 2003-04 of the assessee company and in

particular he invited our attention to page-92 which is the copy of the

balance-sheet wherein loans and advances have been shown at

Rs.8,11,21,850/- as per Schedule I. Then he referred to page-95 which

is the copy of the Schedule I wherein loans to body corporates have

been shown at Rs.45884926/- which is net of the provision for doubtful

debt. Thus, it is clear that provision was reduced from the outstanding

debt. He then referred to page 98 of the paper book and submitted

that the schedule given by the Ld.DR, in fact, is part of the Schedule-O

which is the copy of the "Significant Accounting Policies and Notes

Forming Part of the Accounts" and information given is by way of

additional information under the Companies Act. Total amount of

outstanding loans and maxim amounts of outstanding during the year

have to be given in the Annual Report. Therefore, information relied by 25

the Ld.DR is in a different context though it is also part of the balance-

sheet. He also submitted that as far as Annual Report of Tainwala

Holdings Pvt. Ltd. is concerned, it was the comment of the debtor

company which is totally incorrect because nothing was paid to the

assessee after 1999-2000 and in view of the bad financial position

even no interest was charged from that year.

33. We have considered the rival submissions carefully. The first

objection of the Ld.DR is that originally the provision for doubtful debt

was claimed against Katayan Construction & Developers Ltd. before

the AO, whereas before the CIT(A) this provisions was shown to be

against Tainwala Holdings Pvt. Ltd. We find that the ld. CIT(A) has

reproduced ground No.6 in para-7 which reads as under:

" Ground 6 - Bad Debts Written off

34. From the above it is clear that provision for doubtful debt seems

to be only against Tainwala Holdings Pvt. Ltd. However since a doubt 26

has been raised, therefore, we remit the matter back to the file of the

AO for verification of the name against whom the provision for doubtful

debt has been claimed. The second objection that since assessee is not

a NBFC, therefore, it cannot be said that assessee company was

engaged in the business of granting loans. It was pointed out by the

Ld.counsel of the assessee that whenever assessee company has

surplus funds they were lent as inter corporate deposits and this fact

becomes clear from page-17 of the paper book wherein interest has

been accounted for. This fact can be further verified from assessment

order for A.Y 1995-96, copy of which has been filed at pages 53 to 57

of the paper book wherein interest from loans amounting to

Rs.33,00,238/- has been assessed as business income. Similarly, in A.Y

1996-97 from the assessment order, copy of which is placed at pages

75 to 78 of the paper book wherein while dealing with the issue of

deduction u/s.80IA against interest income it has been clearly

mentioned that assessee has earned interest income of Rs.30,68,014/-

and it has been observed that no deduction u/s.80IA was available. But

it clearly shows that assessee's interest income has been clearly

assessed as business income. Thus, it is clear that whenever assessee

has earned income from giving money to inter corporate deposits same

has been offered as business income and has been assessed also as

business income. The Ld.DR in the written submissions had also relied

on the decision of the Bombay Bench of the Tribunal in the case of

M/s. Maini Shipping Pvt. Ltd. in I.T.A.Nos.2687/M/08 and 2718/M/07

and 3531/M/07. In that case it was clearly found that interest has been 27

charged only from two parties and, therefore, lending of money could

not be considered as business of the assessee. Whereas in the case

before us, interest has been charged from all the parties. Moreover, in

the case of M/s.Maini Shipping Pvt. Ltd.I.T.A.No.2687/M/07 [supra] it

was also observed that there was no discussion regarding charging of

interest income as business income and section 143[3] order was

available only for one year, whereas in the case before us section

143[3] orders are available for A.Yrs.1995-96 and 1996-97 and also

there is discussion regarding interest income while adjudicating the

issue for deduction u/s.80IA. Thus, those decisions are clearly

distinguishable and we hold that once assessee has lent the surplus

money and offered the interest income as business income, then the

activity of lending the money has to be treated as business activity. In

any case, if this claim cannot be allowed as bad debt, same has to be

allowed as business loss because money was lent during the course of

business for earning income. This view is further supported by the

decision of the Special Bench of the Tribunal in the case of Dy. CIT vs.

Shri Shreyas S.Morakhia I.T.A.No.3374/Mum/2004 dated 16th July,

2010. In this case vide para-32 it was held as under [210 ITR 1] in

which it was held as under:

"32. Keeping in view all the facts of the case and the legal position emanating from the various judicial pronouncements as discussed above, we are of the view that the amount receivable by the assessee, who is a share broker, from his clients against the transactions of purchase of shares on their behalf constitutes debt which is a trading debt. The brokerage/commission income arising from such transactions very much forms part of the said debt and when the amount of such brokerage/commission has been taken into account in computation of income of the assessee of the relevant previous year or any earlier year, it satisfies the condition stipulated in section 36(2)(i) and the assessee is entitled to deduction u/s.36(1)(vii) by way of bad debts after having written of the said debts from his books of account as 28

irrecoverable. We, therefore, answer the question referred to this Special Bench in the affirmative that is in favour of the assessee."

35. The third objection is that the amount was really not reduced

from the debtor on the assets side of the balance-sheet and in this

regard the Ld.DR had filed a copy of the Annual Report. However, we

find that the portion of the report which has been filed by the Ld.DR is

a copy of the Schedule-O which consists of "Significant Accounting

Policies and Notes Forming Part of the Account for the year ended 31st

March, 2004", therefore, it is not the part of the balance sheet as such.

Under Companies Act every company is required to file certain

statistical information, e.g., production capacity, quantitative details of

stock etc. Similarly, in the case of loans extended to the companies

within the same group, every company has to disclose the amount

outstanding at the end of the year, maximum amount outstanding

during the year, number of shares held in such companies and

maximum numbers of shares held in such companies, so this part of

the schedule basically deals with the statistical information in

compliance with the requirement of the Companies Act. Whereas

actual schedule of loans and advances is schedule I wherein the loan

amount has been shown after reducing the provision for doubtful

debts.

36. The Hon'ble Bombay High Court in the case of CIT vs. General

Insurance Corporation Ltd. [254 ITR 204] wherein one of the issue was

that if a debt has been written off then what would be the procedure

for writing off of the debt. The Hon'ble court analysed the concept of 29

writing off and made the following observations at page 209 of the

report which read as under:

"In the case of Jwala Prasad Tiwari [1953] 24 ITR 537, the Bombay High Court had held that the expression "writing off" is a technical term used by the auditors. That, there are two methods of dealing with a debt which has been written off in the books of account, viz., by giving corresponding credit to the debtor's account or by giving corresponding credit to the bad and doubtful debts account. The first method is only employed where it is desired to close the account of the debtor. The second method is employed where there are some chances of recovery. That, when we talk of "writing off", we are not concerned with the credit to be given to an account. That, "writing off" means raising a debit entry. This can only be to the debit of the profit and loss account. That, this is the only debit which can be raised as a result of writing off a bad debt. To the same effect is the judgment of the Gujarat High Court in the case of Sarangpur Cotton Mfg. Co. Ltd. [1983] 143 ITR 166. In the case of Vithaldas H. Dhanjibhai Bardanwala v. CIT [1981] 130 ITR 95, the Division Bench of the Gujarat High Court has held that under section 36 of the Act, before any claim for allowance for a bad debt is held established by the Assessing Officer, it must appear that the concerned bad debt was written off as irrecoverable in the account books of the assessee. This requirement is a condition for the grant of claim for bad debt allowance. To that extent, there is a departure from the earlier Act. However, so far as the exact requirement of the writing off is concerned, the language used in the Indian Income-tax Act, 1922 and the 1961 Act is identical. If the debit entries posted by the assessee indicate that bad debt has been written off as irrecoverable in the accounts of the assessee, then the statutory condition stands fully complied with. That, if the assessee has posted entries in the profit and loss account and the corresponding entries are posted in the bad debt reserve account, it would be sufficient compliance with the provisions of the statutory requirement for writing off as irrecoverable the concerned debt in the books of the assessee. These judgments squarely apply to the facts of our case. In the present matter, the assessee has posted entries in the profit and loss account and has made corresponding entries in the bad debt reserve account. There- fore, there is compliance with section 36(1)(vii). It may be noted that prior to April 1, 1989, this statutory requirement existed under section 36(2)(i). That entry has been shifted and brought to section 36(1)(vii). Therefore, to the extent of the exact requirement of writing off of the concerned debt as irrecoverable, the law remains the same even after April 1, 1989. Hence, there is compliance with section 36(1)(vii). Rule 5(a) of the First Schedule, inter alia, lays down that where any expenditure or allowance is debited to the profit and loss account by way of reserve which is not admissible under the provisions of section 36(1), then the amount shall be added back in computing the profits of the business. However, in the present case, as stated hereinabove, there is full compliance with section 36(1)(vii). The manner of writing off is as per the statutory requirement. The Department has not raised the 30

relevant factual dispute as to whether the debt has not become irrecoverable.

Recently, the Hon'ble Supreme Court has dealt with this matter in the

case of Vijaya Bank vs. CIT [322 ITR 166]. In that case it was

observed as under:

"Though a mere debit to the profit and loss account would constitute a provision for a bad and doubtful debt, yet that would not constitute actual write off. But where besides debiting the profit and loss account and creating a provision for bad and doubtful debt, the assessee has correspondingly/simultaneously obliterated the said provision from its accounts by reducing the corresponding amount from loans and advances/debtors on the assets side of the balance-sheet, and, consequently at the end of the year, the figure in the loans and advances or the debtors on the assets side of the balance-sheet is shown as net of the provision for "impugned bad debt", the assessee will be entitled to the benefit of deduction under section 36(1)(vii), as there is an actual write off by the assessee in his books. Disallowance cannot be made on an apprehension that if the assessee failed to close each and every individual account of its debtor, it may result in the assessee claiming deduction twice over.

Held, on the facts, that the assessee was entitled to the deduction claimed because : (i) the head office accounts of the assessee clearly indicated that on repayment in subsequent years the amounts were duly offered for tax ; (ii) that under accountancy practice the accounts of the rural branches had to tally with the accounts of the head office, and if the amount repaid in subsequent years is not credited to the profit and loss account of the head office and if the repaid amount in subsequent years is not credited to the profit and loss account of the head office, which was what mattered ultimately, then there would be a mismatch between the rural branch accounts and the head office accounts ; (iii) in any event under section 41(4), where deduction had been allowed in respect of a bad debt or a part thereof under section 36(1)(vii) then if the amount subsequently recovered on any such debt is greater than the difference between the debt and the amount so allowed, the excess is deemed to be profits and gains of business, and accordingly chargeable to tax as the income of the previous year in which it is recovered ; and the Income-tax Officer is sufficiently empowered to tax such subsequent repayments under section 41(4)."

Thus, from the above it is clear that once a provision of doubtful debt

has been debited in the profit & loss account and the corresponding

provision has been credited or reduced from the debtor's account on

the assets side of the balance-sheet, then this would amount to writing

off. In the case before us, the assessee company has debited the 31

provision of doubtful debt to the profit & loss account and

correspondingly has reduced the assets by reducing the amount of

unsecured loans outstanding and thus would amount to writing off of

the loan. Accordingly, assessee would become entitled to the claim of

bad debt. One more objection was raised that the debtor company has

stated in its Annual Report that they were regular in making

repayments, therefore, such write off cannot be treated as bona fide

write off. However, it was clearly pointed out before us that this

observation was also made by the debtor company whereas the fact

remains that no payments were received in 2000-01 and, in fact,

assessee had stopped charging interest after A.Y 1997-98 because the

financial position of the debtor company had become bad. When

assessee company had not received any amount for the last three

years and even no interest charged, then if assessee company after

ascertaining the amount as irrecoverable has written off the balance

amount, then it cannot be said that the same is not bona fide.

Therefore, we find no force in this objection. The Ld.DR had also

mentioned that in penalty proceedings assessee has taken a plea that

this amount was not claimed as bad debt but was only a provision for

doubtful debt. As pointed out by the Ld.counsel of the assessee first of

all it is settled that assessment proceedings are totally separate and

independent from penalty proceedings and in any case the

representation regarding penalty was made on 26-12-2006 whereas

the decision of the Hon'ble Supreme Court in the case of Vijaya Bank

vs. CIT [supra] was rendered on 15th April, 2010 which means at that 32

point of time there was a doubt whether the provision for doubtful

debt could also be considered as claim for bad debts because actual

writing off of the debt was not there and this position got settled only

in 2010 by the Hon'ble Supreme Court.

37. The issue regarding writing off of part of the debt came up for

consideration before the Hon'ble Delhi High Court in the case of CIT

vs. Realest Builders And Services Ltd. [308 ITR 246]. In that case the

facts involved were as under:

"For the assessment year 2001-02, the Assessing Officer disallowed the deduction claimed by the assessee in respect of bad debts written off. The debtor company suffered a heavy loss due to a fire which broke out in its factory. The board of directors of the assessee company took a business decision and passed a resolution on March, 2001, to write off the debts to the extent they were not recoverable. A compromise deed was also executed on 14th May, 2001, with the assessee company. The Commissioner (Appeals) deleted the additions made by the Assessing Officer and recorded the findings (i) that the assessee was in the business of money lending there is no question of the principal amount written off to be treated as capital in nature and (ii) that the assessee had written off the amount in the books of account during the relevant previous year, the compromise for write off was only a formality. The Tribunal upheld the order of the Commissioner (Appeals) that the bad debts written off in the books of account of the assessee had to be allowed as deduction under section 36(1)(vii) of the Income-tax Act, 1961."

On the above facts, it was held as under:

"Held, dismissing the appeal, that the assessee did not have to establish the bad debt and he has to merely indicate that the bad debt was written off in its books in the year in question. The plea that the assessee was not in the business of money-lending could nto be raised in appeal, particularly, when the Commissioner (Appeals) had given a clear finding to the contrary. There was no infirmity in the order of the Tribunal."

Thus, it is clear that even when a part of the debt is written off, same

can be allowed as claim for bad debt. In view of this detailed

discussion, we set aside the order of the ld. CIT(A) and directed the

AO to allow the claim for bad debt.

38. In the result, assessee's appeal is partly allowed.

39. I.T.A.No.3250/M/08: In this appeal, Revenue has raised the

following ground:

"On the facts and in the circumstances of the case and in law, the Ld. CIT[A] erred in deleting the AO's disallowance of provision of doubtful debts in the working of book profit under section 115JB of the I.T.Act without appreciating the facts of the case."

40. The Ld.DR submitted that though this issue is consequential to

the claim of the assessee for allowing provision for doubtful debt, but

since clause [i] of sec.115JB has been inserted by the Finance (No.2)

Act, 2009 with retrospective effect from 1-4-2001 wherein provision for

diminution of any asset is required to be added back.

41. On the other hand, Ld.counsel of the assessee simply submitted

that the Tribunal may decide this issue after considering the decision in

in assessee's appeal regarding allowance of bad debts.

42. We have considered the rival submissions carefully. We find that

a controversy was going whether provision for doubtful debt was

against any ascertained liability or a diminution of asset and whether

same could be added back to the profits u/s.115JB. The controversy

was settled by the Hon'ble Supreme Court in the case of in the case of

CIT vs. HCL Comnet Systems & Services Ltd. [305 ITR 499] by holding

that provision for doubtful debt is a provision against diminution of the

asset and, therefore, same could not be added back to the book

profits. However, Parliament inserted clause [i] to sec.115JB by which

even the provision of diminution in the assets was also required to be

added to the book profits. Therefore, it was a mere case of provision

for doubtful debt, then it is required to be added back to the book 34

profits. However, while deciding the assessee's appeal the issue

regarding claim for bad debt also came up for consideration before the

Tribunal and by following the decision of the Hon'ble Supreme Court in

the case of Vijaya Bank vs. CIT [supra] we have already held that the

claim for bad debt is allowable. Once such claim is allowable as such,

then there is no question of adding back the same to the book profits.

In view of this discussion, we confirm the order of the ld. CIT(A).

43. In the result, assessee's appeal is partly allowed and Revenue's

appeal is dismissed.

Order pronounced in the open Court on this day of 27/4/2011.

sd/- sd/-

(SMT.ASHA VIJAYARAGHVAN) (T.R.SOOD) Judicial Member Accountant Member

Mumbai: 27/4/2011.

P/-*