TMI Blog2016 (8) TMI 209X X X X Extracts X X X X X X X X Extracts X X X X ..... 39020/- of R.P. Construction and ₹ 2313118/- of Sangam Construction, on perusal of records relating to ledger account of these three parties, we find that there have been regular business transactions in the form of payment through bank and by cash towards supply of material and labour, free supply of goods to the contractors for job work purposes, income-tax has been deducted at source on regular job works bills. We observe that there have been continuous business transactions with a bona fide belief of consistency of business relation with these three parties. However, at one point of time when these three parties were not traceable even after necessary efforts last resort left with the assessee was to transfer these irrecoverable amounts as business loss. We, therefore, are of the view that these advances of ₹ 36,24,540/- (Rs.172402 + ₹ 1139020/- + ₹ 2313118/-) being irrecoverable business advances have been rightly claimed as business expenditure by the assessee. We find no reason to interfere with the order of ld. CIT(A). We uphold the same - ITA No. 2077/Ahd/2011 - - - Dated:- 1-8-2016 - Shri R.P. Tolani, JM And Shri Manish Borad, AM Appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m Bharat petroleum Corporation Ltd for its project named as Mumbai- Manmad-Manglya pipeline extension project Piyala. For the execution of this project, the appellant has given some of the job to others on job work basis. Some of the^ parties of the job work could not perform their part of job properly and therefore, the appellant had to write off some of their accounts in the profit and loss account. From the details of bad debts claimed by the appellant, it is noticed that the debts from the following major parties have been claimed as irrecoverable: Export Benefit (DEPB) 149833 + 745138 Esbee Electricals 172402 Parikaj Singh 325200 R.P.Construction 1139020 Sangam Constructions 2313118 3.1. As regards the-claim of write -off of export benefit (DEPB), it is to be stated that the appellant has shown the same as its income in earlier years or the year under consideration. I have verified the books of accounts of the appellant and found that the DEPB has been shown by the appellant as its income in earlier years/ this year and since the appellant did not receive the amounts as per the calculation of the appellant, the balance amounts were written off in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arch 31. 1968. The assessee advanced a sum of ₹ 20,00,000 to Saksaria Cotton Mills Limited in terms of clause 13 of the leave and licence agreement entered into by the assessee-company with Saksaria Cotton Mills Limited. The agreement originally was for a period of three years from April 1, 1963, to March 31, 1966. Thereafter, it was extended by mutual agreement up to June 30, 1966. The amount of ₹ 20,00,000 was given by way .of advance for modernisation of the mills. Clause 13 of the agreement provided: In the event of any new and complete unit or plant and/or machinery and/or equipment being installed by the licensee at the licensee's own cost within the licenses1 premises, no depreciation will be paid by the licensee to the licensor in respect thereof and on the expiry of the period of the licence ' orits earlier determination by the licensor, the licensee will be entitled to remove and take away at the licensee's own cost such new. plant, machinery and equipment provided that the licensee will, in that event, restore the licensed premises to the condition in which .they were at the time of the commencement of the .licence and make good th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd machinery as the debenture holders of Saksaria Cotton Mills Limited had lien over the entire plant and machinery. The Appellate Assistant Commissioner held that the aforesaid amount of ₹ 20,00,000 represented loss incurred by the assessee in the course of the carrying on of its cotton business and should be allowed as a deduction on ordinary commercial principles. The Tribunal, on appeal, referred to the resolutions-of the board of directors of the assessee- company in sanctioning the advance of ₹ 20,00,000. It was noted that in the resolution, it was clearly stated that the amount was to be treated as capital investment. Before the Tribunal, it was argued on behalf of the department that by making this advance of ₹ 20,00,000, the assessee had acquired an advantage of enduring nature and the claim of the assessee was not allowable as business loss. The amount was spent on the improvement of the mills. It was not advanced in the ordinary course of the assessee's business nor was it incidental to such business. ;. On behalf of the assessee, it was argued that the assessee did not acquire any advantage of an enduring nature. The assessee was only cre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er singly or in partnership since February 28, 1961. The agreement that was entered into for a period of three years with effect from April 1, 1963, to March 31, 1966, provided for installation of a new and complete unit or plant and/or machinery and/or equipment by the assessee as licensee at its own ' cost. If the assesses actually installed'new plant, machinery, equipment or unit at its own cost, the expenditure would have been of capital nature. What the assessee did was to advance ₹ 20,00,000 so that new plant and machinery could be bought by Saksaria Cotton Mills Limited for the use of the assessee during the period of the agreement..-In other words, the assessee had the advantage of using a new and more modern profit-making apparatus. There are certain features of the loan which must also be noted. The amount of ₹ 20,00,000 was not given by way of any advance payment and was not to be adjusted against any dues payable by the assessee-company. It was not a trade debt at all. If the amount was returned, it would not have been shown in the profit and loss account. From the finding of the Tribunal, it appears that it was not a simple loan of money by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee so that the assessee could have use of better plant and machinery. In view, of the aforesaid facts and circumstances and especially in view of the resolution passed by the board of directors of the assessee-company at the time of granting the loan to treat the loan as on capital account, in my judgment, the Tribunal was entitled to come to the conclusion that the loan that was given was on capital account and could not be allowed as deduction in computing the assessee's CGrr.rf.ercial profit. . The question is, therefore, answered in the affirmative and in favour of the Revenue. There will be no order as to costs. Satish Chandra C.J. -I agree. In view of retirement of Satish Cnandra C. J., this judgment may be filed as the judgment of the Division Bench on the basis of the principle embodied in rule 3 of Chapter XVI of the original side rules. 3.4. It may be mentioned that the decision of Kolkata High Court was confirmed .by honourable .Supreme Court, it would be also relevant.to reproduce .the head notes from the judgment of the honourable apex court as under: [1998] 98 TAXMAN 352 (SC) SUPREME COURT OF INDIA Hasimara Industr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mill. In the resolutions made by the board of directors, it was clear that the transaction entered into was not in the nature of a loan transaction or a money lending transaction and, thus, the loss suffered by the assessee was a capital loss and, hence, the amount could not be deducted from the assessee's income as business loss. The appeal was, therefore,- dismissed. 3.5. From.'the above decision, .it is clear that if the amount has been advanced by an assessee for acquisition of a capital asset then the write off of that amount is not an 'allowable expenditure under section 36 or 28 or 29 of the Income Tax Act since the loss is a capital loss. Whereas, the judgments cited by the AR of the appellant, clearly says that if the advances has been given for the purpose of its business and not for acquiring any capital asset,, then the write off of such advances are allowable under section 28 or 29 of the Income Tax Act. In view of this broad principle, it is clear that if the loans and advances have been given by the appellant incurred for setting up of a plant which did not materialise, in view of the honourable jurisdictional High Court decision and the decision o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h advances/expenses have been incurred by the appellant for the purpose of its business. Further it is also seen that many credit .entries are also shown by the [appellant has its income in the same account. 4. In short, out of the addition of ₹ 45,74,134/- made by the AO, the addition of ₹ 3,25,200/- only is sustained. In other words, the appeal of the appellant is partly allowed. 4. Aggrieved, Revenue is now in appeal before the Tribunal. 5. Ld. DR supported the order of Assessing Officer. 6. On the other hand, ld. AR submitted that the assessee company which is in the business of manufacturing transmission towers, infrastructure and real estate has declared total income at ₹ 144.81 crores. No mistake has been pointed out in the audited financial statements and books of account and the only addition made by ld. Assessing Officer is the disallowance of balances written off of ₹ 45,74,134/-. Ld. AR further submitted that all the necessary details were placed before the Assessing Officer in support of the claim that advances given were to the parties with whom regular business transactions were being carried out and they were mostly contractors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon. High Court has observed as under :- 7. In view of these well accepted legal principles, in our opinion, by necessary implication, either short-term or long-term financing is an integral part of the commission agency business. As a commission agent, one either buys the goods or sells the goods for one's principal. When he acts as a commission agent for sales of goods, he purchases the goods for supply to his principal from his funds and then he is reimbursed by his principal on supply of such goods. A commission agent, therefore, has got to advance amounts from time to time according to the nature of his business. It may be a short-term advance if he is a commission agent for purchase of goods or it may be a long-term advance if it is for sale of goods. We have, therefore, not been able to appreciate as to how the Tribunal approached the problem as if the financial lending which is involved in the business of commission agency is a seperate and exclusive business and not an integral part of the commission agency business. It is an admitted position here before us that the assessee- firm was doing the business as commission agents and dealers in grocery articles. It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess makes advances or lends money to an unknown outsider or to a complete stranger, it would be a part of his commission agency business. In the present case, however, the ITO has not only found that the assessee-firm was making such advances in the course of commission agency business but the ITO, Rajkot, has also recorded the statement of one of the partners of the assessee-firm where Shri Ahmed Ibrahim Sahigra stated, inter alia, that the firm was carrying on money-lending business at Bombay and no licence was necessary for such business and the transactions were recorded in the common trading books of account of the firm. In answer to question No. 10 he stated that M/s. Mohmad Peer Mohmad of Nasik approached them for loan and requested them to send money on their behalf to M/s. Gokaldas Virjibhai of Sangli from whom M/s. Mohmad Peer Mohmad of Nasik had purchased the goods were not prepared to wait for their dues and as the latter enjoyed better credit facility with the assessee-firm they approached them for paying off the dues to the Sangli party. In answer to question No. 17 as to when they post entries for interest in the books, the deponent stated that in the accounts of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... survive and, therefore, does not require to be answered. The Commissioner shall pay the costs of this reference to the assessee 10. Now we proceed ahead by examining the impugned balance in the light of the judgment of Hon. Jurisdicitional High Court in the above referred case. 11. As far as write off of export benefit (DEPB) of ₹ 8,94,971/- we observe that ld. CIT(A) has given specific finding that he has verified the books of account of assessee and has found that the export benefit (DEPB) has been shown by the assessee as an income in the earlier years/this year. We further observe that the reason given by assessee for write off of this expenditure was that the amount of export benefit was calculated at its level and income of ₹ 8,94,971/- was booked and the same was shown receivable from the Government department but thereafter on account of recalculation it was found that this impugned amount of ₹ 8,94,971/- has been booked excessively as income and which is not receivable and the same was transferred to balance written off account. On going through these facts, we are of the view that assessee has rightly claimed ₹ 8,94,971/- as business expend ..... X X X X Extracts X X X X X X X X Extracts X X X X
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