TMI Blog2019 (11) TMI 863X X X X Extracts X X X X X X X X Extracts X X X X ..... eme Court in TRF Ltd. [ 2010 (2) TMI 211 - SUPREME COURT] and the binding decisions of the jurisdictional High Court cited supra. In view of the above discussion and in view of the detailed reasoning given by the ld.CIT(A) on this issue, we find no infirmity in the order of the CIT(A). Accordingly, the same is upheld and the grounds raised by the Revenue are dismissed. Addition being the advance given to Mrs. Anuradha Shyam Chandani which was written off as bad debt on its forfeiture by the party during the year - claim of the appellant if not allowable as bad debt u/s 36(1)(vii), is allowable as business/trading loss under section 37(1 )/28 - HELD THAT:- CIT(A) upheld the action of the Assessing Officer on the ground that the advance given by the assessee for purchase of property which was later written off is not allowable under the provisions of section 36(1)(iii) as bad debt as the same is not a trading debt which was taken as income in earlier years or money advanced in the ordinary course of business of money lending, hence, also not in the ordinary course of business. It is the submission of the assessee that in view of the various decisions cited by him, even if the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the CIT(A) and direct the Assessing Officer to delete the addition. The ground raised by the assessee is accordingly allowed. Addition to the book profit u/s 115JB being the amount of estimated expenditure disallowed under Section 14A / Rule 8D - HELD THAT:- We find, the Special Bench, Delhi, of the Tribunal in the case of VIREET INVESTMENT (P.) LTD. [ 2017 (6) TMI 1124 - ITAT DELHI] has held that the computation under clause (f) is to be made without resorting to the computation as contemplated u/s 14A r.w. Rule 8D of the Incometax Rules, 1962. Since the issue has been decided in favour of the assessee by the decision of the Special Bench of the Tribunal, therefore, in absence of any contrary material brought to our notice by the ld. DR, we set aside the order of the CIT(A) on this issue and allow the ground raised by the assessee. - ITA No.3796/Del/2015, ITA No.4574/Del/2015 - - - Dated:- 13-11-2019 - Shri R.K. Panda, Accountant Member And Shri Kuldip Singh, Judicial Member For the Assessee : Shri M.P. Rastogi, Advocate For the Revenue : Shri J.K. Mishra, CIT, DR ORDER PER R.K. PANDA, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ited a net amount of Rs.l crore to the P L account under the head bad debt. From the computation statements the Assessing Officer noted that the amount of ₹ 54.08 crore was added back both to the total income as well as to the book profit for the purpose of section 115JB of the IT Act which has resulted in reducing the tax liability. Considering this fact, AO vide order sheet entry dated 13.12.2012 asked the assessee to furnish the details in this regard. In response to the same it was submitted that assessee had advanced a sum of ₹ 54,08,93,273/- to M/s. Vasu Tech Ltd. and out of this a sum of ₹ 21.20 crore was recovered under a written loan agreement dated 15.04.2005 and sum of ₹ 32,88,93,272/- was advanced from time to time after the execution of above loan agreement. As per the terms of the agreement, the loan was liable to be repaid along with interest @12% p.a. The loan was claimed to be advanced to M/s. Vasu Tech Ltd. and Mr. Dhruv Verma and Mr. R.L. Verma and M/s. R.L Verma Sons (HUF) stood surety for repayment of loan in terms of above agreement. With regard to repayment of loan, M/s. Vasu Tech Ltd. issued post dated cheques i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. The above loan was advanced on monthly/fortnightly basis w.e.f. Nov, 2003 to Nov, 2005 in the installments of ₹ 25 lac/50 lac/1 crore/5 crore etc. There was no prior loan agreement for advancing the above loan nor there was any security guarantee in respect of repayment. On the date of loan agreement i.e. 15.04.2005 entire loan of ₹ 19.20 crore was outstanding. The above loan agreement was for further loan of ₹ 2 crore provided to M/s. Vasu Tech Ltd. No interest payment was made by M/s. Vasu Tech Ltd. to the assessee company during the period 2003 to 2004 during which ₹ 8 crore were advanced. Though as per above loan agreement, there was provision of interest payment @12% p.a. but as per ledger account, no interest was either provided or paid during the F.Y. 2005-06. As per clause 2.5 of the above loan agreement, there was provision for default interest @ 2% to be paid by borrower to the lender but this provision was not invoked by the assessee company but on the contrary it further advanced a sum of ₹ 33 crore which w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gents, stockiest etc. and money lending was not included in the main objects of the company as it was appearing as the 8th objective under the Incidental or Ancillary Objects . Further, AO observed that as per clause 8 of the loan agreement, there was option to convert into equity to the lender as per which the lender can convert in part or whole, the outstanding dues into equity share capital of the borrower. It was noted by the AO that in the F.Y. 2005-06, assessee company acquired 738234 shares in M/s. Vasu Tech Ltd. covering an amount of ₹ 2.25 crores which shows that the above transaction was in the nature of investment made by the assessee out of the surplus fund and not part of regular business of advancing loans. In this regard, AO placed reliance in the case of M/s. Datamatic Financial Services Ltd. vs. DCIT, 2011 TIOL - 124 - ITAT - Mum, wherein it was held that such deposits cannot be allowed to be written off as bad debts u/s. 36(i)(vii). 6. It was claimed by the assessee before the AO that since it is a registered non banking financial company, therefore, debt should be allowed u/s. 36(i)(vii) of the IT Act. The claim of the assessee was examine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of this amount and on 26.11.2009, the Civil Suit was also instituted by the assessee and decree order was passed in favour of the assessee along with future interest and pendentelite and in 2011 a suit for execution of decree was also filed. 8. Further, AO referred to the RBI s Guidelines vide notification No. 115 of 02.01.1998 for NBFCs which provides as under: in respect of accounts where there are potential threats to their recovery on account of erosion in the value/non-availability of security or existence of other factors such as frauds committed by borrowers, it will not be prudent for NBFCs to classify them first as sub-standard assets and wait till the expiry of two years for classification as doubtful assets. We advise that such accounts should be straightway classified as doubtful assets or loss assets , as appropriate, irrespective of the period for which these have remained as NPAs. 9. Considering the above, it was noted by the AO that assessee company clearly violated the above guidelines and further in the year 2000, RBI issued comprehensive directions and guidelines to all NBFCs in the category of l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant s case as the appellant s position was upheld by the governing High Court. The A.O s comments that such money lent is not in the ordinary course of money lending cannot be acceded to as that would amount to the APO stepping into the shoes of the appellant to decide on the course of business of the assessee - which is a proposition that has repeatedly been struck down by various Court judgments. 4.9.2 The case of Datamatic Financial Services Ltd. v. DCIT reported in 2011 TIOL- 124 relied upon by the AO is distinguishable on facts. In Datamatic case the assessee made no specific claim that it was engaged in money lending, accordingly, it was held that the assessee was not engaged in the business of money lending. In the instant appeal before me, the facts are different as the are multiple transactions involving substantial sums of money with many parties over several years. These appear to have been accepted in past relevant authorities and courts. 4.9.3 The AO cannot decide on the extent precautions or diligence for advancing funds/moneys or loans. This is particularly considering that the defaulting party M/s VTL is an unrelated party of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of CIT v. Morgan Securities and Credits P. Ltd. [2007] 292 ITR 339 (Delhi), while interpreting section 36(l)(vii) and 36(2)(i), observed as under: A conjoint reading of section 36(2) and section 36(l)(vii) makes it clear that the assessee would be entitled to a deduction of the amount of any bad debt which has been written off as irrecoverable in its accounts for the previous year. Any lingering doubt would vanish on a careful reading of Circular No. 551, dated January 23, 1990 ([1990]183 ITR (St.) 7) (the relevant portion of which reads as follows : 'The old provisions of clause (vii) of sub-section (1) read with subsection (2) of the section laid down conditions necessary for allowability of bad debts. It was provided that the debt must be established to have become bad in the previous year. This led to enormous litigations on the question of allowability of bad debt in a particular year, because the bad debt was not necessarily allowed by the Assessing Officer in the year in which the same had been written off on the ground that the debt was not established to have become bad in the year. In order to eliminate the disputes in the matter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the submissions of Ld. AR for the appellant as regards the interpretation of section 36(l)(vii) read with section 36(2) and accordingly hold that the amount of ₹ 54,08,93,273/- is allowable as bad debt and as such the addition as made by the AO of the same to the total income is deleted. 11. Aggrieved with such order of the CIT(A), the Revenue is in appeal before the Tribunal. 12. The ld. DR strongly objected to the order of the CIT(A) in deleting the addition made by the Assessing Officer amounting to ₹ 54.08 crores. The ld. DR submitted that the assessee company has advanced a loan to M/s Vasu Tech Ltd., and the copy of the loan agreement dated 5th April, 2005 was furnished before the Assessing Officer. However, the assessee company has advanced a loan of ₹ 19.20 crore before the loan agreement was entered with M/s Vasu Tech Ltd.(VTL) No interest payment has been made by VTL to the assessee company during the period 2003-2004. Further, no interest has been provided during F.Y. 2005-06. The ld. DR, referring to the provisions of section 36(1)(vii) w.r.s 36(2), submitted that as per the said provision, no deduction shall be all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee can lend and advance money either with or without security. So far as the allegation of the Revenue that the assessee has not received interest in the earlier years is concerned, he submitted that the assessee has earned interest in the preceding years and the same was offered to tax as business income. Referring to page 107 of the paper book, the ld. counsel drew the attention of the Bench to the interest received of ₹ 63,74,489/- for the year ended on 31.03.2008 and ₹ 118,24,872/- for the year ended on 31.03.2007. Referring to page 79 of the paper book, he submitted that the interest received for the year ended 31.03.2009 was ₹ 5,56,15,601.70. Referring to page 47 of the paper book, he drew the attention of the Bench to the interest income of ₹ 9,76,70,350.26 for the year ended 31.03.2010. Referring to page 296 of the paper book, he submitted that the assessee has received interest of ₹ 1,67,28,717/- for the financial year 2004-05 from M/s Vasu Tech Ltd. which has been assessed as business income u/s 143(3). Referring to page 297 of the paper book, he drew the attention of the Bench to the copy of interest received from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that since the order of the CIT(A) is in consonance with the law, it should be upheld and the grounds raised by the Revenue should be dismissed. 14. We have considered the rival arguments made by both the sides, perused the orders of the Assessing Officer and the CIT(A), and the paper book filed on behalf the assessee. We have also considered the various decisions cited before us. We find the Assessing Officer, in the instant case, disallowed the claim of bad debt of ₹ 54,08,93,273/- on the ground that the assessee does not fulfill the conditions of sub-section 36(1)(vii) r.w.s. 36(2) of the IT Act. Further, the main object of the assessee company is that of dealing in stocks and shares acting as commission agents, stockist, etc., and money lending was not included in the main objects of the company. It was also the allegation of the Assessing Officer that the assessee company violated the guidelines issued by the RBI from time to time. The Assessing Officer also noted that although Mr. R.L. Verma and M/s. R.L. Verma Sons (HUF) stood as surety for repayment of loan but loan agreement was signed only by one person in all four capacities i.e. Mr. D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same once the condition laid down in the second part of sub-section (2) of section 36 of the Act is fulfilled. 14.1 We find merit in the above argument of the ld. counsel for the assessee. A perusal of the page 296 of the paper book filed on behalf of the assessee shows that the assessee has received interest of ₹ 1,67,28,717/- from VTL for the year ended 31st March, 2005 and the submissions of the ld. AR that the same was assessed as business income u/s 143(3) of the IT Act could not be controverted by the ld. DR. Similarly, the assessee has received an amount of ₹ 5,55,947/- as interest from VTL for the year ended 31st March, 2007 copy of which is placed at page 297 of the paper book. The submission of the ld. counsel that the same was also assessed u/s 143(3) could not be controverted by ld. DR. Therefore, the allegation of the Revenue that the assessee has not received any interest in the earlier years is incorrect. Further, as per clause 8 of Memorandum of Association which are objects incidental or ancillary to the attainment of the main objects, the assessee is authorized to lend and advance money either with or without secur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Section 36(2) are not fulfilled. .. 13. We are of the view that the only condition laid down in second part of subsection 2 of Section 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 debt qualifying as bad debt in the first part of sub-section 2 in the manner as interpreted above. 14. For the aforesaid reasons, we are in agreement with the submissions of learned counsel for the appellant/assessee as regards the interpretation of subsection 2(i) of Section 36 and that being so, we are of the view the authorities below are not justified in holding that the amount of ₹ 34,95,000/- was not allowable as bad debt under Section 36(1)(vii) read with Section 36(2) of the Act. 15. We find the Hon'ble Delhi High Court in the case of Global Capital Ltd. (supra) has held that under the provisions of section 36(1)(vii) of the IT Act, as amended w.e.f. 1st April, 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by her, therefore, the same was claimed as bad debt in the P L account. However, in absence of any evidence to substantiate the above claim or to prove that it is a trading debt and the money was advanced in the ordinary course of business, the Assessing Officer rejected the claim of writing off the debt and added the same to the total income of the assessee. 18. Before the CIT(A), it was submitted that the assessee intended to purchase the property in the course of its business as stock-in-trade. Certain additional evidences were filed before the CIT(A) such as agreement to sell dated 16th April, 2009, communication letters leading to forfeiture of advance, Board Resolution regarding agreement to purchase the property, etc. It was further submitted that the assessee has paid a sum of ₹ 1 crore as advance to Mrs. Anuradha Shyam Chandani for purchase of industrial plot in terms of agreement to sell dated 16th April, 2009 for reasons of commercial expediency as market was weak in the prevailing circumstances at that time. It was not considered expedient to purchase that property or to complete the transaction. Since the advance amount was forfeited by the selle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh Court in the case of Harshad J. Choksi vs. CIT, 349 ITR 250 , he submitted that where the amount was disallowed as bad debt u/s 36(2), the assessee can claim for deduction as business loss u/s 28. It was held that there is no bar in claiming a loss as business loss if it is incidental to carrying on of a business. The fact that the conditions for deduction as bad debt were not satisfied by the assessee would not prevent him from claiming deduction as a business loss. He accordingly submitted that even if the claim of bad debt was rejected by the Assessing Officer or the CIT(A), the same should be allowed as a business loss. 22. The ld. DR, on the other hand, heavily relied upon the order of the CIT(A). He submitted that since the object of the assessee was not to carry on the real estate business, therefore, it pertains to capital and, therefore, the ld.CIT(A) was fully justified in upholding the action of the Assessing Officer. 23. We have considered the rival arguments made by both the sides; perused the orders of the Assessing Officer and the CIT(A); and the paper book filed on behalf of the assessee. We have also considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (iii). Section 14A is not applicable in respect of shares held as stock in trade as the profit therefrom is taxable as business income and dividend if any thereon is incidental. 25. Facts of the case, in brief, are that the Assessing Officer, during the course of assessment proceedings, noted that the assessee has made a disallowance of ₹ 55,92,603/- u/s 14A. He further noted that the assessee has not included the opening stock and closing stock of shares and mutual funds while making disallowance u/s 14A. He observed that the assessee received dividend on account of the above stock. In the P L Account, the dividend received has been bifurcated into two heads, namely, on investments and on investments held as stock-in-trade. Thus, the assessee has shown dividend income at ₹ 39,97,165/- as dividend on shares held as stock-in-trade. Since, disallowance u/s 14A arises out of the exempt nature of dividend income, the fact of shares being investment or stock is not material. After considering the average of both the opening and closing stock which works out to 5,62,10,198/-, the Assessing Officer made disallowance of ₹ 2,81,051/- unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e has paid a custody fee of ₹ 4,72,389/- on account of demat charges during the year and the same related to investments yielding exempt income or stock-in-trade which yield exempt income to the assessee. Since the assessee has not disallowed the same in the working of disallowance u/s 14A and since the above forms direct nexus with the investments and would fall under the purview of Rule 8D(2)(i), therefore, the Assessing Officer, applying the Rule 8D(2)(i) made disallowance of ₹ 4,72,389/-. In appeal, the ld.CIT(A) upheld the action of the Assessing Officer. 32. Aggrieved with such order of the CIT(A), the assessee is in appeal before the Tribunal. 33. We have considered the rival arguments made by both the sides; perused the orders of the Assessing Officer and the CIT(A); and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find merit in the argument of the ld. counsel for the assessee that the provisions of section 14A is not applicable in respect of the shares held as stock-in-trade as the profit therefrom is taxable as business income and dividend in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the computation under clause (f) of Explanation 1 to section 115JB(2) is to be made without resorting to the computation as contemplated u/s 14A r.w. Rule 8D of the Income-tax Rules, 1962. He accordingly submitted that this issue being a covered matter in favour of the assessee, the grounds raised by the assessee should be allowed. 38. The ld. DR, on the other hand, heavily relied on the order of the CIT(A). 39. We have heard the rival arguments made by both the sides. We find, the Special Bench, Delhi, of the Tribunal in the case of Vereet Investment Pvt. Ltd. (supra) has held that the computation under clause (f) is to be made without resorting to the computation as contemplated u/s 14A r.w. Rule 8D of the Incometax Rules, 1962. Since the issue has been decided in favour of the assessee by the decision of the Special Bench of the Tribunal, therefore, in absence of any contrary material brought to our notice by the ld. DR, we set aside the order of the CIT(A) on this issue and allow the ground raised by the assessee. 40. In the result, the appeal filed by the Revenue is dismissed and the appeal filed by the assessee is allowed ..... X X X X Extracts X X X X X X X X Extracts X X X X
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