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Dy. CIT, Circle-2, Kolhapur Versus Shri Anilpant Prabhakarpant, Korgaonkar (HUF) and Vica-Versa

2015 (10) TMI 806 - ITAT PUNE

Bad debts claimed by assessee as business loss - CIT(A) treating the bad debts as business loss u/s 28 - whether the block assessment has been completed by applying deeming provisions and despite agreeing that conditions laid down u/s 36(1) (vii) are not satisfied? - assessee is the Karta of the HUF - assessee before the Tribunal had challenged the order of the CIT(A) restricting the bad debts to ₹ 25,26,000/- as against the claim of ₹ 1,46,54,468/- Held that:- It is undisputed fact .....

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by the assessee" leads to only conclusion that it deals with different types of activities not at all related to those with the first part of business activities. In other words the submission is that in the case of advances/ loans made by any concern doing business of banking or money lending it was not obligatory that such advances/loans or part thereof should be shown to have become irrecoverable and consequently written off in the accounts of the assessee in the previous year. The money len .....

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would not qualify for deduction as bad debt. The only condition laid down in second part of Sub. S. (2) of S. 36 of the Act is that the amount should be advanced in the ordinary course of business which by itself proves its revenue nature and no further conditions are required to be satisfied which are only applicable with regard to debts qualifying as bad debts in the first part of sub. S. (2).

Revenue authorities were not justified in restricting the claim of bad debts/business loss .....

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SHRI R.K. PANDA, AM AND SHRI VIKAS AWASTHY, JM For The Assessee : Shri M.K. Kulkarni For The Department : Shri.B.C. Malakar ORDER PER R.K. PANDA, AM : ITA No.693/PN/2013 filed by the Revenue and CO No.90/PN/2014 filed by the assessee are directed against the order dated 30-12-2005 of the CIT(A), Kolhapur relating to block period 1997-98 to 2003-04. ITA No.694/PN/2013 filed by the Revenue and CO No.91/PN/2014 filed by the assessee are directed against the order passed u/s.154 of the I.T. Act, 196 .....

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appeals after removing the defects within a reasonable time. Accordingly, the Revenue has filed the above appeals. ITA No.693/PN/2013 : 3. The grounds raised by the Revenue are as under : 1. On the facts and in the circumstances of the case and in law, the CIT (A), Kolhapur is not justified in granting further relief of ₹ 25,26,000/ - out of the amount of ₹ 37,17,000 / - disallowed by the Assessing Officer being bad debts claimed. 2. On the facts and in the circumstances of the case .....

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ould be furnished. 3. On the facts and in the circumstances of the case and in law, the CIT (A), Kolhapur erred in treating the bad debts as business loss u/s 28 ignoring the fact that the block assessment has been completed by applying deeming provisions and despite agreeing that conditions laid down u/s 36(1) (vii) are not satisfied. 4. On the facts and in the circumstances of the case and in law, the CIT (A), Kolhapur failed to appreciate that the basic requirement by which any bad debts beco .....

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m of depreciation by the assessee on assets purchased out of undisclosed income during the block period, as the assessment has completed an asset and expenditure basis. 7. On the facts and in the circumstances of the case and in law, the CIT (A), Kolhapur is not justified in directing the Assessing Officer to reduce an amount of ₹ 3,64,309/- from the unexplained investment computed by the Assessing Officer. 7-a In allowing the above relief, the Hon'ble CIT (A) failed to consider the fa .....

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A search and seizure action u/s.132 of the I.T. Act was carried out in the residential premises of the assessee as well as various business premises on 25-07-2002. During the course of search and seizure it was revealed that the assessee is mainly engaged in money lending business as well as dealing in properties. The godowns have been sold. However, these transactions were never reflected in regular returns furnished. Similarly, the assessee has made huge investments in FDRs in various Pat San .....

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l amount of ₹ 74.69 lakhs to cover up any other liability on account of additions, disallowances, etc. While computing the undisclosed income, it was found by the Assessing Officer that an amount of ₹ 1,68,84,468/- was claimed as bad debts. This claim was not supported by entries in the books. The income of the assessee was computed on the basis of aggregating of assets and expenses incurred during the block period. Investments, according to the table at page 4 of the assessment orde .....

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total accretion to the loans given during the block period is computed at ₹ 2,11,70,108/- as under : Undisclosed loss as on 25-07-02 Rs.3,92,40,739/- Undisclosed loss as on 01-04-96 as per seized books Rs.1,80,70,631/- Balance Rs.2,11,70,108/- 6. The net accretion of ₹ 2,11,70,108/- was finally reduced to ₹ 1,39,29,108/- on account of the following : a) Bad debts written off in the regular books Rs.24,18,000/- b) Post dated cheques taken from debtors Included in the gross figur .....

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t of bad debts, showing the names of the debtors, amount, date of loan and the reason for write off has been given. At page 9 of the assessment order, the list has been recasted according reasons given for write off. The amount of loans as per reasons given is as follows: i) Persons deceased Rs.7,30,000/- ii) Persons incapable of repayment Rs.10,70,000/- iii) Persons absconding Rs.12,60,000/- iv) Persons in financial difficulty Due to losses in business Rs.4,60,000/- v) Amount borrowed by cheati .....

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, the Assessing Officer allowed only an amount of ₹ 7,30,000/- as bad debts/business loss in respect of loans where the debtor had expired. In effect, the disallowance of claim of bad debt was made at ₹ 37,17,000/-, excluding the FDRs with the Pat Sanstha of ₹ 15 lakhs. 11. Before CIT(A) it was submitted that the assessee had maintained memorandum books relating to the business of money lending. These books contained ledger accounts of various borrowers. On the basis of these b .....

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ng Officer had observed that the undisclosed income as shown in these books was very low compared to the assets. He also observed that the assessee had claimed huge deduction on account of bad debts and depreciation. The allowability of bad debts and depreciation was a legal issue. The Assessing Officer could have disallowed the claims with resorting to rejecting the books and computing income on asset basis and thereby treating the business investment and income as unexplained investments. The .....

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relied upon. 13. It was further argued that computation of undisclosed income was made in terms of section 158BB, which states that the computation had to be made by applying all the provisions of the Income-tax Act. Therefore, the income should be computed by allowing exemptions, deductions, etc., permitted by the Act. The assessee was entitled for deduction of business loss under section 29 and bad debts under section 36(1)(vii). The loans are stock in trade of a money lending business. At the .....

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arguments advanced by the assessee the Ld.CIT(A) allowed an amount of ₹ 25,26,000/- out of the disallowance of ₹ 37,17,000/- added by the AO. The relevant observations of the CIT(A) from Para 13 to 23 are as under : 13. I have considered the submission of the appellant. The Assessing Officer has accepted that the appellant carried on a business of money lending. It is mentioned in the assessment order that separate books of account had been operated for this business, which were not .....

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with the provisions and on the basis of evidence found as a result of search or requisition of books of account or other documents or information available with the Assessing Officer and relatable to such evidence. The books of account relating to money lending business are in the nature of evidence found as a result of search. These, therefore, form the basis of computation of undisclosed income according to the provisions laid down in the Act. The provisions of the Act allow for certain deduct .....

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sactions. The transactions are explainable with reference to the business carried on. New loans are given from funds secured out of loans received back, interest income and in general, the funds in circulation. It would not be justified to treat each transaction as an unexplained investment or asset under section 69. There being reliable evidence found during the search that a business of money lending was carried on and books of account including ledgers were maintained, the transactions of loa .....

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ows that the total income under section 58BB should be computed after allowing deduction under Chapter VI A. Similar views have been taken by the Chandigarh bench in Sat Pal Singh Vs. ACIT 67 TTJ 602 and S.S. Gems International Vs. DCIT, 120 Taxman 18 decided by the Jaipur Bench. 15. Once the above position is accepted, there can be no doubt that the undisclosed income from money lending business would fall under the head of 'business income'. Thus, all deductions from sections 28 to 44 .....

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itten off in the regular books maintained upto the date of search. Since the debts themselves have not been declared in the returns, there is no doubt that the income from such loans etc. have not been offered to tax earlier. In the case of the appellant, therefore, the provisions of section 36(1)(vii) are not strictly applicable. 16. However, the fact is that the appellant has carried on a money lending business as stated earlier. A loan or advance, which is not recovered is a revenue loss in s .....

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erent view in taxing the net accretion to the loans given by the appellant during the block period as undisclosed income. If the accretion to the loans is taken into consideration, loss suffered as a result of non-recovery of loans should also be allowed to arrive at the real undisclosed income. The aggregate loans and advances on the date of search, has been taken as the basis to compute the net accretion during the black period. The aggregate of loans and advances includes the advances some of .....

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sessing Officer, it is seen, relates to bad debts/business loss on account of non-recovery of such loans, which have been advanced during the block period. The remaining amount claimed by the appellant pertained to loans, which had been advanced prior to the block period but in which case there were certain transactions during the block period after which the loans were treated as not recoverable. 18. I agree with the Assessing Officer on this count. The loans given prior to the block period are .....

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icer for not allowing the other claims is mainly that the appellant could not give any evidence with respect to the claim that the loans were not recoverable or there was no evidence that the appellant had taken adequate steps to recover the amount. The appellant was asked during appellate proceedings to furnish a fresh chart showing details of loans, which had been advanced during the block period and which had become irrecoverable along with the amount advanced in cash and the amount advanced .....

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the block period. They are as follows : i) Parag Deshmukh - 01/01/96 - Cheque No.23945 Gadhinglaj Urban a. Bajirao Shelke - 26/03/96 - Co-op. Bank Cheque No.23510 In both the above cases, the loans have been given in instalments where one of the instalments falls prior to the block period although the other instalments have been given during the block period. In the list furnished, the amount which is advanced prior to the block period, has not been given. The Assessing Officer should, verify th .....

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khs given prior to the block period. 21. It is seen from the list that in case of the following loans, there has not been any recovery for the last few years after 1999. Name Amount of loan Year last recovery i) L. Kapase Rs.45,000/- 1997 ii) V.V. Patil Rs.4,00,000/- 1998 iii) S.Patil Rs.60,000/- 1999 iv) S. Berde Rs.2,30,000/- 1999 v) A. Bagwan Rs,20,000/- 1999 vi) S.V. Bhogate ** Rs.60,000/- 1999 vii) B.K. Redekar Rs.55,000/- 1999 viii) Shivaji Patil Rs.50,000/- 1999 TOTAL Rs.9,20,000/- ** The .....

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ss and, therefore, not in a position to repay any loan. In cases of S. Patil, S. Berde and A. Bagwan, it is stated that the parties are not traceable. 22. The following parties are stated to be absconding : i) R. Nhavelkar Rs.4,50,000/- ii) A. Nayar Rs.2,00,000/- TOTAL Rs.6,50,000/- In both the cases, arrest warrants have been issued but could not be executed, which is adequate proof that the persons are not traceable. 23. In the following cases, the appellant has filed criminal cases against th .....

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mes. It is a case of fraud committed on the appellant. The appellant has filed a copy of the letter from the advocate, explaining the fraud and stating that both the loans had been obtained actually by Shri B. Shelke, who has absolutely no means to repay. The appellant has filed cases in the court against the persons and a warrant has been issued. As regards Shri Dharangutti, a criminal case has been filed for recovery of dues. Shri R. Joshi is absconding. The above details would show that the l .....

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book filed on behalf of the assessee. We find the assessee before the Tribunal had challenged the order of the CIT(A) restricting the bad debts to ₹ 25,26,000/- as against the claim of ₹ 1,46,54,468/-. We find the Tribunal while deciding the appeal filed by the assessee has held that revenue authorities are not justified in restricting the claim of bad debts/business loss to ₹ 25,26,000/- as against the claim of ₹ 1,46,54,468/- made by the assessee. It was held that the .....

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/-; ₹ 7,30,000/-, ₹ 4,90,000/- sale of flat at Mumbai. The main thrust for allowing the Bad debts from Money lending business was on irrecoverability of loans advanced and outstanding because of that reason. The CIT(A) further granted relief of ₹ 25,26,000/- (Rs. 9,20,000/- observing in these accounts there was no recovery from the persons; ₹ 6,50,000/- persons stated to be absconding; ₹ 9,56,000/- where it was held the criminal cases were filed against these person .....

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oks of account of money lending business have been maintained in the form Ledger account and entries regarding loans given, interest received, repayment of loans etc. have been recorded in these books. In appeal, the CIT(A) observed that on the basis of these books a complete set of books were written for the block period 1-4-92 to 25-07-2002. The books were audited by Chartered Accountant. In this background, CIT(A) observed that the Assessing Officer was not correct in discarding these books a .....

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on and books of account including ledgers were maintained. Having said so that the income from money lending was business income "the assessee was entitled to deductions as envisaged by S. 28 to 44 of the Act and Bad debts, which are allowed under S. 36(1)(vii) should also be allowed. It can be argued that one of the conditions of allowability of bad debts is that it should have been written off in the books of account and income from such debts should have been offered for tax in an earli .....

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ave admitted that appellant was carrying on the money lending business. But both the authorities failed to interpret the provisions of S. 36(1)(vii) r/w S. 36(2) in its proper perspective when it comes to the money lending business. The interpretation of the provision contained in CI. (i) of sub. S. (2) of S. 36 and second part of this clause starting from "or represents money lent in the ordinary course of business of banking or money lending which is carried on by the assessee" leads .....

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ing business being stock-in-trade automatically comes into revenue account. In other words it need not be taken into account in computing the income as required in the first limb in relation to money lending business to prove that it is on revenue account. As per second limb it should be found out in relation to money lending business that debt is advanced in the ordinary course of money lending business. If this debt is not advanced in the ordinary course of business, it would not qualify for d .....

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ce & Investments (P) Ltd. v. CIT (2012) 66 DTR (Del) 131 concurring with the Hon'ble Madras High Court judgment in the case of P. C. Dharmalinga Mudaliar v. CIT (1985) 152 ITR 568 (Mad), held as under: "There is no dispute that the amounts of debts in question were advanced by the assessee in the ordinary course of money lending. The question for consideration would be as to whether the condition prescribed in the first limb. of s 36(2)(i) for taking the debt into account while comp .....

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of bad debts peculiar to each limb concerned. The only condition laid down in second part of sub-so (2) of s. 36 is that the amount should be advanced in the ordinary course of business which by itself proves its revenue nature and no further conditions are required to be satisfied which are only applicable with regard to debt qualifying as bad debt in the first part of sub-so (2). The authorities below are not justified in holding that the amount of ₹ 34,95,000 was not allowable as bad de .....

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i) read with second limb of sub-section 2 of section 36 of the Act. The Assessing Officer is directed accordingly. 17. Since the Tribunal has already taken a view that the entire claim of ₹ 1,46,54,468/- made by the assessee has to be allowed, therefore, the grounds raised by the Revenue does not survive. It was also brought to our notice that the Revenue is already in appeal before the Hon ble High Court against the order of the Tribunal and the same is pending. The Revenue has filed the .....

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00/- granted vide order dated 30-12-2005 to the assessee being Bad debts claimed which were rightly disallowed by the Assessing Officer. 2. On the facts and in the circumstances of the case and in law, the CIT (A), Kolhapur erred in treating the bad debts as business loss u/s.28 without considering that the basic condition as is prescribed u/s.36(1)(vii) of the I.T. Act, 1961, is not satisfied in the case of assessee. 3. The appellant prays that the order of the Commissioner of Income Tax (Appea .....

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te order : Name of the party Amount(Rs.) Khavara Vasant S. Gandhinglaj 50,000/- Chipare Ashok/Prakash, Laxmipuri, Kolhapur 2,00,000/- Lingraj Mangal, Rajarampuri, Kolhapur 35,000/- Lingraj Mangal, Rajarampuri, Kolhapur 25,000/- Gaikwad Shankar Kerli, Kolhapur 3,00,000/- Karanjkar Ramesh (Bhushan Rang Bhandar) 35,000/- Total 6,45,000/- 20. It was submitted that the account extracts which was a part of the seized material were already produced at the time of hearing of the appeal. It was submitted .....

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granted further relief of ₹ 3,50,000/-, the details of which are as under : 1. Vasant Khavare Gandhinglaj ₹ 50,000/- 2. Gaikwad Shankar Kerli ₹ 3,00,000/- 22. Aggrieved with such order of the CIT(A) the Revenue is in appeal before us. 23. We have considered the rival arguments made by both the sides. As mentioned in ITA No.693/PN/2013, the Tribunal in assessee s own case has already allowed the entire claim of bad debt of ₹ 1,46,54,468/-. Therefore, the grounds raised by .....

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