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TMI Blog2011 (12) TMI 625X X X X Extracts X X X X X X X X Extracts X X X X ..... roceedings, the AO treated the business of Rs. 31,47,188/- as speculation loss and allowed to be carried forward as speculation in view of the Explanation below section 73 of the Act. No such set-off was allowed on the income from other sources. During the course of appellate proceedings, the learned CIT(A) had observed that business loss had been determined by the AO at Rs. 31,47,188/-, which had been treated as speculative loss and had been allowed to be carried forward in view of the Explanation below to section. 73 of the Act. However, it was noticed from the audited accounts that no business activity was carried out by the assessee during the year under consideration and a loss of Rs. 80,000/- was shown under the head 'shares and securities' on account of valuation of closing stock which had been treated as nongenuine by the AO. The CIT(A) further observed that the assessee has not carried any business activity in shares and securities from the year 2001 on account of cancellation of registration as share broker, loss arising from mere valuation of the opening stock of shares would not lead to the conclusion that the assessee was carrying on any such activity. The CIT(A) also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses u/s 37 the assessee has to carry out the business activity and directed the AO to enhance the assessment. Under similar facts and circumstances, the ITAT in the case of Triumph Securities (supra) following the decision in the case of KNP securities P. Ltd. (supra), held as under:- 17. After hearing both the parties, we find identical issue had come up before the Tribunal in the case of KNP Securities P Ltd (supra) wherein the Assessing Officer had disallowed various expenses claimed by the assessee in its P&L Account on the ground that the assessee has not carried out any business activity since SEBI made restriction vide order dated 11.4.2001. In appeal, the CIT(A) upheld the action of the Assessing Officer and on further appeal, the Tribunal vide order dated 29.5.2009 allowed the various expenses claimed by the assessee. The relevant portion of the order of the Tribunal reads as under: "5 We have heard the rival submissions and considered them carefully. We have also perused the material on record along with various case laws relied by both the parties. After considering the relevant material it is seen that the assessee was doing business of share trading and security e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring the assessee not to do any business activity. Therefore, it also cannot be said that the assessee could not use the BSE card its own which was ready to use. In these circumstances, we are of the considered view that the assessee's business does not come to an end or discontinued. 5.2 The meaning of discontinuation is explained in the Law Lexicon where "it implies a voluntary act and abandonment of possession followed by the actual possession of another, it implies that the person discontinuing has given up the lend and left it to the possessed by anyone choosing to come in as held in the case of Qadir Bux vs Ramchand 1917 AIR 289 at page 295. It is further explained at the same page at 563 of the law Lexicon that "discontinue; to cause to cease or to put a stop. 5.3 In the present case neither the business is discontinued on account of voluntary act of the assessee nor the same has put to stop its own. The business could not be done for the reason that SEBI has barred the assessee not to do any business activity till further orders. The assessee was barred till further orders clearly mean that the assessee was not barred permanently. The permanent order issued in the yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Tribunal. 6.2 The ratio of the decision of the Hon'ble Madras High Court is squarely applicable on the facts of the present case as in the present case also the assessee was restricted by the order of the SEBI not to do any business activity, however, establishment of the assessee was maintained and various expenses were incurred which were necessary and they were connected with the business activity of the assessee. 7. In the case of Sree Meenakshi Mills Ltd, in 63 ITR 207, the Apex Court has allowed various expenses on account of expenditure for prosecuting civil proceedings. In this case, the assessee company which carried on the business of cotton spinning and weaving, finding its own handlooms in its factory premises inadequate, distributed yarn produced by it to weavers outside the factory. Under clause 18B of the Cotton Cloth and Yan (Control) order 1945, the Textile Commissioner was authorised to direct any manufacture or dealer or any class of manufacturers or dealers, inter-alia, not to sell or deliver any yarn or cloth of specified description except to such person or persons and subject to such conditions as he might specify. Accordingly, the order passed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f M/s Marine Labour Supplying Co, decided in ITA No.6048 & 6049/Mum/07 vide order dated 2.12.2008, the Tribunal by following the decision in the case of Ruia Shelters Ltd in 10 SOT 157 (Mum) and in the case of Chunilal &Co in 4 SOT 309(Mum(TM) held that if for the reason due to lullness of business no business can be done for AYs 2002-03 to 2005-06, the assessee is entitled to deduction in respect of administrative and other expenses which are required to be incurred for keeping the business alive. 9. We have also taken into consideration various case laws on which reliance has been placed by the ld DR and found that they are distinguishable on facts. 10. In the case of Chinai and Co P Ltd in 206 ITR 616, the Hon'ble Bombay High Court has held that the assessee company could not be entitled for any deduction of expenses claimed by it as business expenditure u/s 37 as the assessee company has stopped carrying on its business at the end of December, 1969. The mere fact that it continued to hold its investments would not be sufficient for the purpose of establishing that it continued to carry on business. 10.1 In the present case, the assessee has not stopped the business act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respectfully follow the same and in the light of that this ground of the assessee is allowed. 8. Ground No. 2, reads as under:- "The CIT(A) erred in upholding the action of the AO in not allowing business loss of Rs. 80,000/-, being loss on account of valuation of shares, on the ground that the transactions are not genuine in nature and also that the appellants have not carried on any business activity during the year. The appellants contend that on the facts and in the circumstances of the case and in law, the observations, of the CIT(A) in upholding the action of the AO in not allowing the impugned loss arising on transactions carried out in the pursuit of business, are erroneous, baseless and contrary to the provisions of law. The CIT(A) ought to have allowed the impugned loss as claimed by the appellants. 9. During the course of assessment proceedings, the AO asked the assessee to furnish the details of business loss of Rs. 80,000/- vide its letter dated 12/10/07. The assessee had furnished the details of loss from shares on securities at Rs. 80,000/-, which is on account of valuation at market to market valuation of stock held by the assessee. The shares had been held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the CIT(A), we do not find any reason to interfere in the order of the CIT(A) and, therefore, the order of the CIT(A) is hereby upheld on this issue. Accordingly, this ground of appeal of the asessee is dismissed. 13. Ground No. 3 is directed against the action of the CIT(A) in upholding the action of the AO in considering interest received on fixed deposits Rs. 6,19,480/- as 'income from other sources' instead of business income. 14. The AO treated the business loss in shares etc. as speculation loss in view of the Explanation below section 73, since the assessee being a company was trading in shares. Therefore, the AO treated the interest on FD as 'income from other sources'. On appeal, after considering the submissions of the assessee, the CIT(A) held that it is an undisputed fact that the assessee was engaged in share trading since long and not engaged in any financing activity. Simply for the fact that the interest was earned on pledged fixed deposits, it does not lead to the conclusion that the assessee was engaged in the business of earning interest. He, therefore, held that there is no direct nexus between the interest and the normal business activity carried on by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness had not closed and the claim of expenditure had to be allowed. Respectfully following the said decision of the tribunal we hold that the business of the assessee had not been closed in the relevant year and therefore FDRs had to be treated as pledged in connection with the business which was in existence and therefore the interest income had to be treated as incidental business income. We accordingly set aside the order of CIT(A) and allowed the claim of the assessee." 17. Since the issue under consideration is identical to that of the case decided by the co-ordinate bench in the case of assessee's sister concern as above, we respectfully follow the same and in the light of that we set aside the order of CIT(A) and allow the claim of the assessee. 18. Ground No. 4 is directed against the action of the CIT(A) in upholding the order of the AO in disallowing a sum of Rs. 8,54,540/- being bad debts written off. 19. The AO noted that in schedule 2 to the profit and loss account shown under operating and administrative costs, the assessee claimed vatav expenses of Rs. 8,54,540/-. On scrutiny, it was revealed that this party was client of the assessee pertaining to the year 1997- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was further contended that the debt had been written off in the accounts by transferring the balance in the debtors account to another account called 'Vatav Account'. As such the requirement of section 36(1)(vii) to write off the bad debt as irrecoverable in the accounts of the assessee was fulfilled. The reasons for writing-off the bad debts among others, are constant follow-up with the client bearing no result and the amount outstanding since long. The AR of the assessee placed reliance on the decisions of the ITAT, Mumbai Benches, which were reproduced by the CIT(A) in his order at page No. 9. After considering the submissions of the assessee, the CIT(A) held as under:- "16. I have carefully considered the above facts and find that the appellant has not been able to rebut the observation and the finding of the AO regarding applicability of section 36(2). Nothing has been brought on record to show that the debt written off was ever taken into consideration for arriving at the income in the past or not. Thus, one of the major conditions for allowing the deduction has not been fulfilled by the appellant. It may also be stated here that the issue requires to be decided in the ligh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome earned by the assessee in respect of the said transaction of purchase of shares was duly declared in its return of income and was assessed as well in the earlier year. The balance amount of Rs. 41 lacs remained unpaid even in the next year also apparently because of the reason that the price of shares fell from Rs. 55 to Rs. 5 per share. In the return of income filed for the said year, the assesse claimed deduction of Rs. 41 lacs as bad debts u/s 36(1)(vii). The A.O. disallowed the claim of the assessee for the said deduction which was confirmed by the ld. CIT(A). On further appeal by the assessee, the Tribunal, however, allowed the said deduction and when the matter reached to the Hon'ble Delhi High Court, it was sought to be canvassed on behalf of the Revenue that the amount receivable by the assessee from its client against purchase of shares could not be treated as "debt" under the provisions of section 36(2) and therefore, the question of allowing any deduction for the said amount treating the same as bad debt would not arise. Hon'ble Delhi High Court did not find merit in this contention raised on behalf of the Revenue holding that there was a valid transaction between th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ever, as already held by us, the said rules and regulations as well as guidelines are not relevant in the context of issue referred to this special bench which raises a specific question of law. We have already noted that the fact which is not in dispute is that the assessee has actually suffered the loss as a result of the amount in question representing debt becoming irrecoverable. It is therefore not relevant whether such loss has been incurred by the assessee as a result of not following the relevant rules and regulations and guidelines or even after following the same. As observed by us, this aspect may be relevant in the context of quantification of such loss. As a matter of fact, one of the arguments raised on behalf of the Revenue in the case of DB (India) Securities Ltd. (supra) was that the assessee having not sold the shares to anybody else in the market, the assessee could not claim the amount in question as bad debt and while dealing with the same, it was held by the Hon'ble Delhi High Court that the sale consideration which such shares could fetch in the market needs to be adjusted against the amount of bad debt claimed by the assessee for arriving at the actual figur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T(A) in not deciding on the action of the AO in treating business loss of Rs. 31,47,188/- as speculation loss by invoking the provisions of Explanation to section 73 and thereby not allowing set-off of the loss against income computed under the head 'income from other sources' Rs. 6,19,480/-. 24. The CIT(A) had directed the AO to verify the facts and decide the issue in accordance with law. At the time of hearing, the learned counsel for the assessee submitted that the business income of the assessee of Rs. 6,73, 81,303/- claimed u/s 41(1) of the Act, and, therefore, Explanation to section 73 is not applicable to the case of the assessee. The alternate submission of the learned counsel is that, in any case, the business loss claimed by the assessee is less than the business income and, therefore, Explanation to section 73 is not applicable to the case of the asessee. After careful consideration of the orders of the AO as well as CIT(A), we find that the revenue authorities have not dealt the issue properly and, therefore, we remit the issue back to the file of the AO with a direction to examine the issue in detail and decide afresh in accordance with law after providing reasonable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 4,61,24,769/- and interest and other charges re Rs. 2,12,56,534/- The AO further noted that the assessee had already been debited interest and other charges from the profit and loss account in relevant assessment year and increased the liability by way of enhancing the secured loan in the balance sheet and it had benefited by way of written off interest and other charges of Rs. 2,12,56,534/- by order of the Hon'ble DRT(2). The AO, therefore, noted that as per section 41(1) of the Act, 'any person has obtained some benefit in respect of such trading liability by way of remission or cessation thereof the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profit of business and accordingly chargeable as the income of that previous year. In view of the above findings, the AO held that the above liability remitted was now treated as a business income of the assessee and the same was added to the total income. He further held that due to Hon'ble DRT(2) order, the asessee's liability of Rs. 6,73,81,303/- was written off which included principal amount of Rs. 4,61,24,769/- and the assessee had treated this amount as a capital receipt and transf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reas the CIT(A) held that the total amount waived by the Bank amounting to Rs. 6,73,81,303/-, out of which Rs. 4,61,24,769/- was principle and the remaining balance of Rs. 2,12,56,534/- was interest portion. After careful consideration of the orders of the authorities below, we find that it is not clear that exactly what amount waived by the Bank relating to principle amount and interest amount. However, the CIT(A) has allowed the amount of Rs. 4,61,24,769/- on the ground that the above amount of waiver was relating to principle and, therefore, section 41(1) has no application. Against this finding of the CIT(A), no appeal has been preferred by the Revenue. Therefore, the only dispute is the amount of waiver of Rs. 2,12,56,534/- whether the waiver is relating principle or interest. In so far as the application of section 41(1) is concerned, it is a well settled law that if the cessation is given by the Bank on one time settlement towards principle amount only, cannot be treated as cessation of liability chargeable to tax u/s 41(1) of the Act. Therefore, after considering the totality of the facts of the case, we are of the view that the issue needs a detailed verification of facts ..... X X X X Extracts X X X X X X X X Extracts X X X X
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