TMI Blog2016 (8) TMI 215X X X X Extracts X X X X X X X X Extracts X X X X ..... . - Decided in favour of the assessee Disallowance of interest on account of interest free advance given to M/s. Madhavdas Tulsidas & Co. - Held that:- Since the principal amount itself is doubtful and there was pending civil and criminal litigation, the disallowance of interest is required to be deleted. We are, therefore, of the view that the Tribunal has rightly deleted the disallowance. - Decided in favour of the assessee - TAX APPEAL NO. 1671 of 2007 With TAX APPEAL NO. 1439 of 2007 With TAX APPEAL NO. 1440 of 2007 - - - Dated:- 8-7-2016 - MR. KS JHAVERI AND MR. G.R.UDHWANI, JJ. FOR THE APPELLANT : MR NITIN K MEHTA, SENIOR STANDING COUNSEL FOR THE OPPONENT : MR MANISH J SHAH, ADVOCATE ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE KS JHAVERI) By way of these appeals under section 260A of the Income-tax Act, 1961, the appellant-revenue has challenged the order of the Income-tax Appellate Tribunal, Ahmedabad, whereby the Tribunal has reversed the view taken by the Commissioner (Appeals) by allowing the appeal preferred by the assessee. 2. While admitting the appeals, this court has framed the following substantial questions of law in Tax Appeal No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal. The Tribunal after hearing both the sides and considering the material on record, passed the order as aforesaid. 4. Learned counsel for the appellant-revenue Mr. Nitin Mehta has taken us through the order of the Assessing Officer and contended that the assessee was carrying on the business of manufacturing and marketing of pharmaceutical products and commission agent. The commission income from the agency business was credited to profit and loss account in the respective years. However, the activity was discontinued as it was not profitable. The main reason for discontinuance is that the company had to bear losses by way of bad debts from the customers. The assessee tried to recover the dues from the customers. However, the assessee could not recover the dues and wrote off the same. The Assessing Officer, while making assessment, took a view that the bad debts could not be allowed in respect of discontinued business as there was no business in the previous year. He, therefore, disallowed the bad debts claim of the assessee and added it to the total income. In that view of the matter, the learned counsel for the revenue has contended that the Assessing Officer and the Comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plication. From the fact that no appeal was filed by the revenue against the allowance of litigation expenses, it does not follow that the Department acquiesced in the contention of the appellants. 5. He has also relied on the decision of the Apex Court in the case of State Bank of Travancore v. Commissioner of Income-tax, Kerala reported in 158 ITR 102 and contended that in the light of the decision of the Apex Court, the view taken by the Tribunal is required to be reversed. He has also relied on the decision of the Madras High Court in the case of India Manufacturers (Madras) P. Ltd. v. Commissioner of Income-tax, reported in (1985) 155 ITR 0774, particularly, paragraph No. 5 which is extracted below: The learned counsel for the assessee contends that the service department which was closed down is not a separate and independent business of the assessee but is a part of the main business as distributors for the products of Rayala Corporation and, therefore, the retrenchment compensation paid on closure of a portion of the business which is beneficial to the main business that was being carried on by the assessee should be taken to be an allowable expenditure as the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arded as the same business or different business depends not upon the special methods prescribed by the IT Act for computation of the taxable income, but upon the nature of the business, the nature of their organisation, management, source of capital and fund utilised, the method of book keeping used and other related circumstances which stamp them as same or distinct. Thus, the test is whether one of the business can be closed without affecting the conduct of the other business. In this case, though an attempt was made by the assessee before the AAC to show that the business of servicing typewriters and the trading activities in typewriters is one and the same and, therefore, the retrenchment compensation paid on the closure of the servicing part of the business should be taken to be allowable deduction, the assessee has not adduced any evidence in support of the said assertion or claim. The assessee has not even attempted to prove, before the Tribunal that the business of servicing typewriters is part of the business of trading in typewriters. The mere fact that the assessee called the servicing organization carried on by it as a Department is not conclusive one way or the other. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had to pay interest on that lost capital in 1924-25, the year of assessment, claimed deduction therefor from the assessable profits of his remaining banking business for the year 1924-25. It was held that though the branches were distinct the trade was one and though the lost capital was not available for use in the trade, namely, the banking business, in the year of assessment, the interest paid on it should be deducted under s. 10(2)(iii) of the Indian IT Act. The facts were that the assessee were a Nattukottai Chetty firm trading under the vilasam of A.L.A.R., their primary business being the usual Nattukottai Chetty business of banking and money lending. Under the style of Ramaswami Co., they also traded in piecegoods in Madras. That business was unsuccessful and when closed down in 1924 had sustained a loss of ₹ 11,00,000 odd. It was found by the CIT that the business of Ramaswami Co., was quite separate and distinct from that of A.L.A.R. The Full Bench of which I was a member, however, did not agree with this finding and held that it was not a separate business but only a branch of the same business and the finding of principle arrived at is upon that basis and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upon the underwriting business ceased. The company claimed that the underwriting business was a business separate from their other activities and that it should be treated as a separate business in computing their liability. The Special Commissioners allowed their appeal. It was held by the High Court that the question was one of fact and that there was evidence on which the Commissioners could come to their decision. Rowlatt, J., in his judgement says: `This company carried on the business of underwriting. It also had a fleet of steamers. I cannot conceive two business that could be more easily separated than those two .. One does not depend upon the other; they are not interlaced; they do not dovetail into each other, except that the people who are in them know about ships; but the actual conduct of the business shows no dovetailing of the one into the other at all. They might stop the underwriting; it does not affect the ships. They might stop the ships and it does not affect the underwriting. 7. So far as the second issue regarding deletion of disallowance of interest on account of interest free advance given to Sardar Patel Foundation is concerned, the learned couns ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is found that during the period, the appellant was having sufficient credit balance with IDBI Bank and the said transaction is shown in bank statement. This fact is admitted by the AO also. From the submission of the appellant it is seen that the total reserves available with the company were of nearly ₹ 23.33 crore (included in the net owned funds of ₹ 34.18 crore). The borrowing from the banks was ₹ 7.78 crore. Thus, the appellant has claimed that it has utilised its own funds for giving interest free loans. However, the assessee has not been able to prove that the loan given to Sardar Patel Foundation is out of the reserves only and not from the borrowed funds. The assessing officer has also not brought on record any material evidence to establish that the loans are given out of borrowed funds and there is direct nexus between the borrowed funds and the loan given, in fact, the funds are so mixed up that it is not clear whether the actual source of loan given is borrowed money or the reserves. In these circumstances, I am of the view that the disallowance of interest should be worked out in the proportion the borrowed funds have with the noninterest bearing ..... X X X X Extracts X X X X X X X X Extracts X X X X
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