TMI Blog2011 (4) TMI 840X X X X Extracts X X X X X X X X Extracts X X X X ..... res have been held by the assessee company from AYs 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. Therefore, loss claimed by the assessee is allowable. Dis-allowance of business loan becoming bad on ground of it being of capital nature - Revenue contended that same has not been declared as income in earlier years so this amount cannot be allowed as deduction u/s 36(1)(vii) - Held 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. Once a provision of doubtful debt has been debited in the P&L A/c and the corresponding provision has been credited or reduced from the debtor's account on the assets side ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 (P.) 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. Ground No. 2 3. After hearing both the parties, we find that during assessment proceedings Assessing Officer noticed that assessee had earned dividend income and, therefore, assessee company was asked why expenses 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, Assessing Officer observed that assessee must have incurred at least 10 per cent of expenses and, therefore, disallowed a sum of Rs. 2,15,l764 under section 14A. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ended 31-3-2003. 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." Assessing Officer 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 Rs. 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 balance of Rs. 2.50 crores which means the sale consideration has not been received by the assessee. It was also noted that assessee has alre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n was taken in the Board meeting held on 26-4-2003 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 Assessing Officer 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 Rs. 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 Samsonite India Ltd. where intrinsic value of the company was Rs. 5.57 per share as on 31-3-2003, whereas same shares have been sold at the rate of Rs. 10 i.e., at the rate at which the same were acquired and loss of about Rs. 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 m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge 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 K.P. Varghese v. ITO [1981] 131 ITR 597/7 Taxman 13 wherein it was clearly held that it was not sufficient for the revenue to say that 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 v. Shivakami Co. (P.) Ltd. [1986] 159 ITR 71/25 Taxman 80K (SC) and CIT v. Godavari Corpn. Ltd. [1993] 200 ITR 567/68 Taxman 344 (SC). He then referred to the decision of the Hon'ble Bombay High Court in the case of Mrs. Alpana Chinai v. ITO [2004] 269 ITR 123/134 Taxman 484 wherein it was observed as under: "To invoke section 52(2) of the Income-tax Act, 196 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y on core business of the company. The Assessing Officer 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 Assessing Officer 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 Assessing Officer, shares have been sold to companies which were belonging to Tainwala 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 crore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igher 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 Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransfer 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 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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 decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant and therefore, allowable as deduction under section 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 (P.) 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 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 ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el 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 Bank v. CIT [2010] 323 ITR 166/190 Taxman 257 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 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. v. CIT [1998] 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 Assessing Officer noticed that assessee has debited a sum of Rs. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in assessment year 1998-99 and 2000-01 and interest amounting to Rs. 21,16,362 and Rs. 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 assessment year 2000-01. The assessee company found that only a part of the amount was recoverable and accordingly, it made a provision of Rs. 1,90,51,000. He referred To the decision of the Hon'ble Delhi High Court in the case of CIT v. Realest Builders Services Ltd. [2009] 308 ITR 246/178 Taxman 163 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 Realest Builders Services Ltd. (supra) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rincipal and interest. 31. In the rejoinder, ld. counsel of the assessee pointed out that the provision for doubtful debt is definitely in respect of Tainwala Holdings (P.) 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 grounds which clearly mentioned the name of Tainwala Holdings (P.) Ltd. In any case, this can be verified by the Assessing Officer. 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 (supra) which was rendered on 15-4-2010 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 financial year 2003-04 of the assessee company and in particular he invited our attention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considering weak financial position of the Tainwala Holdings Private Limited. This is clearly loss of fund of the appellant and therefore, allowable as deduction under section 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." 33. From the above it is clear that provision for doubtful debt seems to be only against Tainwala Holdings (P.) Ltd. However since a doubt has been raised, therefore, we remit the matter back to the file of the Assessing Officer 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 as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 under section 36(1)(vii) by way of bad debts after having written of the said debts from his books of account as irrecoverable. We, therefore, answer the question referred to this Special Bench in the affirmative that is in favour of the assessee." 34. 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 tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause : (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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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