Income Tax Appellate Tribunal - Mumbai
Triumph International Finance India ... vs Assessee on 19 February, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH "I", MUMBAI
BEFORE SHRI D. KARUNAKARA RAO, ACCOUNTANT MEMBER AND
DR. S.T.M. PAVALAN, JUDICIAL MEMBER
ITA No. 6879/Mum/2008
Assessment Year: 2004-05
Triumph International Deputy Commissioner of
Finance India Ltd. Income Tax, Central Circle
Oxford Centre, 10 Shorff 40, Aayakar Bhavan, M.K.
Vs.
Lane, Colaba Causeway, Road, Mumbai 400020
Mumbai-. 400005
PAN : AAACE0308A
(Appellant) (Respondent)
Appellant by : Shri Rajiv Khandelwal
Respondent by : Shri P. Daniel
Date of hearing : 19-02-2013
Date of Pronouncement : 19-04-2013
ORDER
PER Dr.S.T.M. PAVALAN, JM:
This appeal filed by the assessee is directed against the order of the Ld. CIT (A)-VII, Mumbai dated 21.08.2008 for the assessment year 2004-05.
2. At the outset, the Ld.AR of the assessee has insisted that it is necessary to adjudicate ground no. 9(a) first since the decision on the same may have relevance and impact on the proposed adjudication of the remaining grounds and hence the same is adjudicated at the first instance.
2.1 Ground no. 9(a) relates to the issue of enhancing the income of the assessee by Rs.1,07,98,248/- by disallowing the carry forward loss of Rs.1,07,98,248/- on account of trading in shares and securities claimed by the 2 ITA No. 6879/M/08 Triumph International Finance India Ltd.
AY . 2004-05 assessee as the assessee has not carried any business activity during the year under consideration.
2.2 The relevant facts are that the assessee, a company, engaged in the business of trading in shares and securities had claimed carry forward business loss of Rs.38.68 crores and loss from speculation business in shares and securities of Rs.1,07,98,248/-. The speculation business loss was mainly on account of decrease in the value of stock in trade. The Ld.CIT(A) disallowed the carry forward of the impugned speculation loss and added the same to the total income of the assessee as no business activity was carried on by the assessee consequent to the ban imposed and cancellation of the registration by the SEBI by its orders dated 04.04.2001, 21.06.2001 and 16.05.2002 by holding that the AO had wrongly allowed the loss carried forward for setting off in the subsequent year. Aggrieved by the impugned decision, the assessee has raised this ground in the appeal before us.
2.3 Before us, the Ld.AR of the assessee has pointed out that the ITAT in the assessee own case in ITA No. 76/Mum/2009 for the A.Y. 2005-06 has held that the assessee has carried on the business during the year under reference (2005-06). In the process, the ITAT has relied on another decision of the Co-ordinate Bench in the case of Triumph Securities Ltd 1053 & 2111/m/08 for the AYs 2001-02 and 2002-03 dated 31.12.2010 which is an associate concern of the assessee which in turn has relied on the decision of ITAT in the case of KNP Securities Ltd ITA Nos 5008 & 5009/Mum/2007 and 5245/Mum/2011 for the AYs. 2003-04, 2004-05 & 2007-08 dated 29.05.2009 which is another associate concern of the assessee. The Ld.AR has also relied on various decisions of the ITAT in the cases of assessees's associate concern which are stated as below:-
(i) Triumph Securities Ltd. ITA Nos 1053 & 2111/Mum/2008 for the AYs 2001-02 & 2002-03.
(ii) KNP Securities in ITA Nos 5008 & 5009/Mum/2007 and 5245/Mum/2011 for the AYs. 2003-04, 2004-05 & 2007-08.3 ITA No. 6879/M/08
Triumph International Finance India Ltd.
AY . 2004-05
(iii) Classic shares and Stock Broking Securities Ltd in ITA Nos. 191 & 1135/M/2008, 5244/Mum/2011 AYs 2002-03, 2003-04 & 2007-08.
(iv) V. N. Parekh Securities, ITA Nos. 6876, 7047 & 7048/Mum/2007 5243/Mum/2011 for the AYs. 2002-03, 2003-04, 2004-05 & 2007-08.
(v) NH Securities Ltd. in ITA Nos 6875/Mum/2008, 6312/ Mum/2009 for the AYs 2005-06 & 2006-07.
2.3.1 On the other hand, the counsel for the Revenue Shri P. Daniel has vehemently argued that the SEBI has cancelled the registration of the assessee with immediate effect from the date of its order dated 16.05.2005 which has been subsequently affirmed by the Supreme Court. When the cancellation attains the finality, the same dates back to the original date with effect from when the cancellation order has been passed by the SEBI. Hence, the presumption is that the assessee has not carried any business during the year under consideration and the Ld.CIT(A) has correctly disallowed the claim and thus enhanced the income of the assessee.
] 2.4 We have heard both the parties on this ground and perused the material on record. The ITAT in the assessee's own case in ITA No. 76/Mum/2009 for the A.Y. 2005-06 after considering the relevant facts including the ban imposed by the SEBI which are similar to the year under consideration in the present case, has held that the assessee has been carrying on business during the assessment year 2005-06 and the relevant portion of the said order are contained in para 17 to 22 and the same is extracted hereunder for ready reference:
"Ground no. 5 raised by the assessee reads as follows:
'5. The CIT(A) erred in enhancing the income of the appellants by Rs.37,99,796/- by not allowing expenses claimed by the appellants on the ground that the appellants have not carried on any business activity during the year under reference and thereby not allowing carry forward of loss of Rs.37,99,796/-.
The appellants contend that on the fact and circumstances of the case and in law, the CIT(A) ought not to have disallowed the expenses claimed by the appellants inasmuch as the 4 ITA No. 6879/M/08 Triumph International Finance India Ltd.
AY . 2004-05 appellants have incurred the impugned expenses in pursuit of business. Consequently, the appellants claim that the appellants have incurred loss which ought to be allowed to be carried forward.'
18. The business of assessee was trading in shares and securities. There was no sale and purchase of shares for the year. However the assessee had shown decrease in value of closing stock of shares to the tune of Rs.37,99,796/-. In view of explanation below section 73, the AO held that the assessee is deemed to have been carrying on a speculation business to the extent to which the business consists of purchase and sale of shares. He therefore, treated the loss on account of diminution in the value of shares of Rs.37,99,796/- as a speculation loss and refused to allow the set off of such loss against business income. The AO allowed the loss to be carried forward for being set off against speculation income in the succeeding assessment years in accordance with law.
19. When this matter was challenged by the assessee before CIT(A) the assessee submitted that the loss in question should be treated as business loss and not speculation loss and such loss should be allowed to be carried forward. The CIT(A) was of the view that the lost in question was speculation lose. He was further of the view that the AO ought to have allowed this loss to be carried forward because the assessee's registration as share broker was cancelled by SEBI and there was no purchase and sale of shares by the assessee from the previous year. In exercise of his powers of enhancement he concluded that the AO ought not to have allowed carry forward of the loss for being set off in future. He held that there being no business activity in shares and securities form 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. He held that the Assessee has neither dealt with in shares etc nor done any other business. In such a situation, the loss in shares which has been disallowed by the Assessing Officer as per the computation of income, could not be in the same breath allowed to be carried forward as speculation business loss. To this extent he held that the action of the Assessing Officer was not correct. He held that as an appellate authority having co-terminus powers as of the Assessing Officer he had power to direct the AO to withdraw allowing carrying forward of the loss in question. Accordingly the AO was directed to withdraw carry forward of loss in question carry forward to subsequent assessment years.
20. Aggrieved by the order of the CIT(A) the assessee has raised ground no. 5 before the Tribunal.5 ITA No. 6879/M/08
Triumph International Finance India Ltd.
AY . 2004-05
21. At the time of hearing before us it was agreed by the parties that similar issue arising under identical facts and circumstances, was considered by the Tribunal in the case of NH Securities vs. ACIT, ITA NO. 6875/Mum/08 (another group company of the Assessee) and this Tribunal held as follows:
'2. Ground no. 1 raised by the assessee reads as under:-
"1. The CIT(A) erred in enhancing the income of the appellants by Rs.31,47,188/- by not allowing expenses claimed by the appellants on the ground that the appellants have not carried out any business activity during the year under reference and thereby not allowing carry forward of loss of Rs.31,47,188/-
The appellants contend that on the facts and circumstances of the case and in law, the CIT(A) ought not to have enhanced the income of the appellants and ought to have allowed the carry forward of the business loss of Rs.31,47,188/- inasmuch as the appellants have carried on business during the years."
3. During the course of assessment proceedings, 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 non-genuine 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 observed that the work 'business' connotes some real, substantial and systematic or organized course of activity or conduct with a set of purpose. The CIT(A) held that for the purpose of claiming deduction u/s 37 of the Act, the expenditure must be incurred for the purpose of business which was in existence during the year and the profit of which are under assessment and, if during the year no business was in existence either because it was discontinued or for some other reason, the 6 ITA No. 6879/M/08 Triumph International Finance India Ltd.
AY . 2004-05 question of computation of income does not arise at all. The learned CIT(A) relying on various case laws, directed the AO to withdraw such loss carried forward to subsequent assessment years. He, accordingly, held that there would be enhancement of income to the extent of Rs.31,47,188/-, which has been wrongly allowed to be carried forward by the AO. Aggrieved by the order of the CIT(A) the assessee is in appeal before us.
4. Before us, the learned counsel for the assessee submitted that the assessee was in the business of share trading activity and the assessee was unable to carry forward the business activities because of the SEBI order and the same was challenged before the Hon'ble High Court and also before the Hon'ble Supreme Court. Stoppage of t he business is only temporary and not permanent and even the order passed by the SEBI is only a temporary order, therefore, it cannot be said that the assessee is not in the business activity. The learned counsel further submitted that similar issue has been considered by the Mumbai Bench of ITAT in the assessee's sister concern case, viz. KNP securities P. Ltd. in ITA Nos. 6008 & 5009/Mum/07 for AYs 2003-04 & 2004-05 vide order dated 29th May, 2009. The said decision was followed by the ITAT, Mumbai Bench in another sister concern case of the 2111/Mum/08 for Assessment Year 2001-02 & 2002-03, order dated 31.12.2010.
5. On the other hand, the learned DR submitted that finally the Hon'ble High Court and Supreme Court confirmed the order passed by the SEBI and he supported the order passed by the CIT(A) in support of revenue's case.
6. We have heard both the parties, perused the record and gone through the orders of the authorities below. The CIT(A) passed enhancement order on the ground that the assessee has not carried out any business during the year and allowability of business expenses 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 decision in the case of KNP securities P. Ltd (supra), held as under:-
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 11.04.2001. In appeal, the CIT(A) upheld the action of the Assessing Officer and on further appeal, the Tribunal vide order dated 29.05.2009 allowed the various expenses claimed by the assessee. The relevant portion of the order of the Tribunal reads as under:-7 ITA No. 6879/M/08
Triumph International Finance India Ltd.
AY . 2004-05 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 etc. Various business expenses incurred for the purpose of its business activities were held as allowable in past. In the year under consideration, the ld AO negatived the claim of the assessee for the reason that there is no business activity during the year under consideration as SEBI has imposed restriction vide order dated 11.04.2001. Copy of the order issued by SEBI is placed at pages 82 to 84 of the paper book. It is mentioned in this order that the assessee is barred from undertaking any fresh business as stock broker till further order as on account of indications of the prima facie involvement of Mr. Ketan Parekh in manipulating certain scrips of various companies. It has been noticed that M/s V N Parekh Securities Ltd and M/s KNP Securities Ltd are also the entities controlled by and connected with Mr Ketan Parekh or Mr Kartik Parekh. Therefore, in view of the powers conferred under the provisions of sub section (3) of sec. 4 r.w.s. 11 and 11B of the SEBI Act, 1902, the assessee was barred from undertaking any fresh business as stock brokers till further orders as stated above. Thereafter, SEBI passed another order on 21st June 2001 stating that in view of the order of SEBI dated 4.4.2001 and 10.4.2001 debarring them from undertaking any fresh business as a stock broker and merchant bankers till further orders should be continued. This action of the SEBI has been challenged by the assessee before the appropriate authorities. Copy of the petition filed before the Securities Appellate Tribunal is placed at page 94 of the paper book. In view of these facts and circumstances, the assessee was not allowed to do its business activity in share on the stock exchange floor.
5.1 Not doing business activity was not on account of assessee's will but on account of forced circumstances;
therefore, it cannot be said that the assessee has closed/discontinued us business activity its own. The establishments of the assessee were intact and they were to be maintained. Staff members were kept and salaries were paid to them Loans taken from various banks and others for the purpose of business activity in past were outstanding during the years under consideration; therefore, any interest accrued was to be paid during the year under consideration or was payable. The assessee is having valid BSE card which could not be used for the reason that SEBI has passed an order barring the assessee not to do any business activity. Therefore, it also cannot be said that the assessee could not use the BSE card its 8 ITA No. 6879/M/08 Triumph International Finance India Ltd.
AY . 2004-05 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 implied 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 pate 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 order. The assessee was barred till further orders clearly mean that the assessee was not barred permanently. The permanent order issued in the year 2007 and from the year of 2007, the assessee cannot do any business activity; therefore, at the most it can be said that no expenses can be allowed from that year. However, for the earlier year, in our considered view, the expenses incurred by the assessee for the purpose of its business activity are allowable as the establishment was not scraped and the assessee was still hopeful to start its business activity.
6. In the case of CIT vs Vellore Electric Corporation Ltd reported in 243 ITR 529, the Hon'ble Madras High Court has held that:
'It could not be said that there was a permanent closure, as the validity of the Act was yet to be finally settled by the Supreme Court. In the event of the Act being struck down, the assessee could resume business. The fact that it had continued to maintain an establishment was indication of its intention to resume business, if an opportunity for it arose by reason of the Supreme Court holding in its favour. The expenses incurred by it while awaiting the decision of the Supreme Court could not altogether be regarded as unconnected with the business that it had been carrying on by supply of electricity and and that business was interrupted only by reason of the Act. The possible resumption of the business was dependent on the outcome of the appeals pending before the Supreme Court. The amounts claimed were also not very substantial. The Tribunal had taken a broad view of the matter and had held in favour of the assessee. There was no ground to differ.' 6.1 The facts before the Hon'ble High Court were that the assessee was a private electric company. Its undertaking vested 9 ITA No. 6879/M/08 Triumph International Finance India Ltd.
AY . 2004-05 with the State Government by reason of the enactment of the Tamil Nadu Electricity Supply Undertaking (Acquisition) Act, 1973. After an unsuccessful attempt to challenge the validity of that Act in the High Court, the assessee had filed appeals before the Supreme Court which were pending during the relevant years i.e. AYs 1975-76 to 1979-80. The AO held that the assessee was not carrying on any business and limited the salary paid to the employees of the assessee to 10% and the audit fee was limited to 15%. That was affirmed by t he first appellate authority. However, the Tribunal held that the assessee was carrying on business and was entitled to the deductions claimed by the assessee. On reference, the Hon'ble Madras High Court affirmed the view taken 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 Mill 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 yearn or cloth of specified description except to such person or persons and subject to such conditions as he might specify. Accordingly, the order passed by the Textile Commissioner directing the company not to sell or deliver yarn manufactured by it except to such person or persons as he might specify. However, the company continued to deliver yarn to weavers outside factory. The action of the Commissioner was challenged before the appellate authority and the same was rejected by the High Court as well as the Supreme Court. On appellate proceedings, the expenses incurred by the assessee were claimed as business expenditure and they were not allowed by the AO by observing that these expenses were not for the purpose of business and were not incurred during the year under consideration. Matter reached up to the stage of the Hon'ble Supreme Court who has allowed the expenditure incurred by the company as business expenditure by holding as under:
10 ITA No. 6879/M/08Triumph International Finance India Ltd.
AY . 2004-05 "that the object of the petition was t secure a declaration that the order dated Feb 20th 1946, in so far as it sought to put restrictions upon the right of the company to carry on its business in the manner in which it was accustomed to do was unauthorised, and to prevent enforcement of that order. Thereby, the company was seeking to obtain an order from the court enabling the business to be carried on without interference. The amounts expended by the company on that behalf were expenditure laid out wholly and exclusively for the purpose of its business and were deductible u/s 10(2) (xv). It was further held that;
"the question of admissibility u/s 10(2) (xv) had to be decided not on what was found or observed by the High Court in appeal from the order in the proceedings u/s 45 of the Specific Relief Act or by the Privy Council but upon the findings of fact recorded by the Tribunal. Expenditure incurred to resist in a civil proceedings the enforcement of a measure, legislative or executive, which imposes restrictions on the carrying on of a business, or to obtain a declaration that the measure is invalid, would, if other conditions are satisfied, be admissible as a deduction u/s 10(2) (xv)"
7.1 The ratio of the decision of the Apex Court also goes in favour of the assessee as the litigation expenses incurred in respect to its business were held as business expenditure. 7.2 In the present case also all the expenses incurred are connected with the business of the assessee only; therefore, the expenses claimed by the assessee are allowable.
8. In the case of 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 dullness 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 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 11 ITA No. 6879/M/08 Triumph International Finance India Ltd.
AY . 2004-05 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 activity, its own but it was forced by SEBI not to do any business activity. Therefore, the ratio of this decision of the Hon'ble Bombay High Court is not applicable on the facts of the present case.
11. Similarly, the decision of the Hon'ble Gujarat High Court in the case of Nathalal Asharam in 194 ITR 110 is also not applicable on the facts of the present case as the company paid compensation to its employees under the provisions of sec. 25 FFF of Industrial Disputes Act 1947 on account of retrenchment which were held as not related to the business carried on by the assessee.
11.1 We have also taken into consideration various other case laws relied upon by the ld DR and found that they are distinguishable on facts.
12. In the present case, no such facts are involved as all the expenses incurred were in connection with the business activity only and for keeping the business alive, the maintain its business establishment and to meet that the obligation of interest on loan etc taken for its business activity, therefore, we hold that various expenses incurred by the assessee are allowable as deduction. However, admissibility of the expenditure was not examined by the AO for the reason that he has disallowed the expenditure on the ground that they are not allowable as the assessee has not done any business activity. Therefore, for the purpose of examining the admissibility/ genuineness of these expenses, the matter is sent t the file of the AO. The assessee has contended that depreciation and interest have been allowed by the Tribunal as allowable while passing order for Assessment Year 2000-01. The AO will take into consider the order of the Tribunal and if it is found that facts are similar then of course, in view of the decision of the Tribunal, the claim of the assessee on account of depreciation and interest has to be allowed.'' 17.1 Since the facts of the impugned appeal are identical to the facts in the case of the sister concern of the assessee i.e. KNP Securities P Ltd; therefore, respectfully following the decision of the Tribunal, we hold that the assessee is entitled to claim various expenses debited in the P&L Account. We hold and direct accordingly. The ground raised by the assessee is accordingly allowed".
7. Since the issue under consideration is identical to that of the case decided by the Co-ordinate in the case of Triumph 12 ITA No. 6879/M/08 Triumph International Finance India Ltd.
AY . 2004-05 Securities Ltd.(supra), we respectfully follow the same and in the light of that this ground of the assessee is allowed."
22. In short the reasoning of the Tribunal is that the Assessee could not do business because of the ban imposed on its trading by SEBI which he was challenging and the business could not be carried on for reasons beyond the Assessee's control. The said reasons would squarely apply in the present case also where the facts are identical as admitted by the parties before us. We therefore, following the order of the Co- ordinate Bench hold that the Assessee is entitled to carry forward the loss for set off in subsequent assessment year as allowed by the AO. For the reasons given above this ground of appeal of the assessee is allowed."
From the above, it is evident that the ITAT has come to the conclusion in the context of allowability of administrative expenses when the business of the assessee has been closed by the orders of the SEBI. It is also seen from the order of the ITAT for the AY 2005-06 that the speculation loss is allowable on the same analogy of administrative expenses.
2.4.1 In the light of the above, the AO is directed to examine the facts of the case and allow the claim of the assessee considering comparability of the facts and circumstances of the cases after giving reasonable opportunity of being heard to the assessee. We order and direct accordingly. Ground No 9(c) is treated as allowed for statistical purposes.
3. Ground No. 1 relates to the disallowance of bad debt written off of Rs.38,30,66,554/- & Rs.97,27,368/- out of provisions made in earlier year, claimed by the assessee under section 36(1)(vii)/section 28 of the Income Tax Act.
3.1 Briefly stated, the assessee in the P&L Account had shown under 'provisions and losses', claimed bad debt written off Rs.38,30,66,554/- as the debts became irrecoverable for the previous year in relation to the stock broking business. Further, the assessee had in computation of total income debited an amount of Rs.97,27,368/- on account of bad debt provision written off. In the assessment completed, the AO disallowed the claim of the assessee as the impugned amounts were not on account of trading in 13 ITA No. 6879/M/08 Triumph International Finance India Ltd.
AY . 2004-05 purchase and sale of shares done by the assessee company and added the same to the total income of the assessee. On appeal, the Ld.CIT(A) confirmed the impugned disallowances/additions. Aggrieved by the impugned decision, the assessee has raised this ground in the appeal before us.
3.2 Before us, the Ld.AR has relied on the decision of the ITAT in the assessee's own case in ITA No. 1389/Mum/2008 and mentioned that the issues stand covered by the said decisions in favour of the assessee. The Ld.AR has further relied on the decisions in the cases of VST Industries Ltd. [41 SOT 415 (Hyd)], Goodlas Nerolac Paints Ltd [188 ITR 1 (Bom)] and Lords Dairy Farm [27 ITR 700 (Bom)] in support of the assessee's case. These decisions are relevant for the proposition that amounts written off of associate concern is allowable and courts will generally not interfere with the decision of the assessee to write-off.
[ 3.2.1 On the other hand, the Ld. Counsel for the assessee has vehemently argued that the assessee has involved in circular trades and adopted colourable devices to reduce the total income as most of the debts are pertaining to the transaction of group concerns, associate concerns of group connected with the assessee company. Hence, the amount written off being stage managed losses/debts have been correctly disallowed by the AO and upheld by the Ld.CIT(A). He has also relied on the decision in Mc Dowell's case reported in 154 ITR 148. In the facts and circumstances of the case, lifting of corporate veil and perusing the substance of the transaction would reveal that assessee has involved in circular trades and adopted colourable devices to reduce the total income.
3.3 We have heard both the parties on this ground and perused the material on record. The perusal of the record reveals that among seven parties connected with the bad debts, six of them are third parties unconnected to the assessee. Only sister/associate concern in the list is Triumph Securities in connection with the bad debt claim of Rs.1,42,56,769/-. The Co-ordinate Bench of the ITAT in the assessee's own case in ITA No. 14 ITA No. 6879/M/08 Triumph International Finance India Ltd.
AY . 2004-05 1389/Mum/2008 for the AY 2002-03 has dismissed the appeal of the revenue and held that bad debts claimed by the assessee are allowable inasmuch as the assessees are share brokers and amounts receivable by them from their clients against transaction of purchase of shares on their behalf constitute bad debt which is trading debt and that when the amount of brokerage/commission income from such transaction have been taken into account in computation of income of the assessee of the relevant previous year or any earlier year, it satisfies the conditions stipulated in section 36(2)(i) and the assessee is entitled to deduction under section 36(1)(ii) by relying on the decision of the Special Bench of the Tribunal in the case of CIT Vs Shri Shreyas S Morarkhia (ITA No. 3374/Mum/2004). The said decision has also been upheld by the jurisdictional High Court in 342 ITR 285. Also, similar view has been taken by the ITAT in the assessee's own case in ITA No. 2783/Mum/2008 for the AY 2004-05. It is relevant to state that section 36(1)(vii) read with section 36(2) does not bar the allowability of written off of balances of associate concerns if the other condition of the provisions are satisfied.
3.3.1 The submission of the Ld.AR that the bad debts involved is the debt arose in the normal course of business operations and the same to be allowed as bad debt at par with the others. On considering the Ld.AR's submission, the assessee in our opinion is entitled to the relief of third party bad debts in view of the cited decisions above and therefore, the same are allowed. Regarding the bad debt involving an sister/associate concern, i.e. Triumph Securities the perusal of the order reveals that there is no finding of the facts that the assessee incurred the bad debt in the normal course of the business or otherwise a suspicious transaction. Regarding the allowability of other claim of bad debt provision of Rs.97,27,368/-, it is submitted that the said amount is not strictly a provision created in this year. Perusal of the order of the Ld.CIT(A) is found that the same is not a speaking order on this issue. In view of that matter, we set aside these issues i.e. bad debt of Rs. 1,42,56,769/- and other bad debt of Rs.97,27,368/- to the files of the AO for 15 ITA No. 6879/M/08 Triumph International Finance India Ltd.
AY . 2004-05 fresh examination. Needless to further emphasis that the assessee to be given proper opportunity of being heard. Accordingly, this ground of appeal is partly allowed.
4. Ground no. 2 relates to the disallowance made by the AO and the same confirmed by the Ld.CIT(A) a sum of Rs.15,25,996/- being written off of sundry advances on the basis that the same is capital loss and not on account of any trading activities.
4.1 Briefly stated, the assessee had, in the computation of total income reduced an amount of Rs.15,25,996/- given as loan/advances to franchisees for their business, on becoming irrecoverable, written off the same as bad loan. However, in the assessment completed, the AO disallowed the claim of the assessee as the same is a capital loss and not on account of any trading activity. On appeal the Ld.CIT(A) confirmed the disallowance made by the AO. Aggrieved by the impugned decision, the assessee has raised this ground in the appeal before us.
4.2 Before us, the Ld. AR has stated that the assessee company has written off loans aggregating to Rs.1,16,90,091/- during the year being Rs.1,01,64,095/- to profit and loss account and Rs.15,25,996/- against the provision for doubtful loans made in A.Y. 2002-03. The provision made in A.Y. 2002-03 has not been claimed in A.Y. 2002-03. The same is claimed as a deduction during the year under consideration on the final written off of the amount. Out of which loans amounting to Rs.1,07,33,858/- have been given to franchisees of the company located in various cities of India for their working capital requirement. The advances have been made to fund the operations of the franchisees and to incur expenses for their establishment such as setting up of V-SAT terminals, registration with the Exchanges, registration with the SEBI, advertising, registration of sub brokers etc. However, since these franchisees could not be made operational, the advances given to them could not be recovered and hence written off. When the AO has allowed a written off of Rs.1,01,64,099/- on a similar count, he ought to have allowed the impugned written off also by following the rule of 16 ITA No. 6879/M/08 Triumph International Finance India Ltd.
AY . 2004-05 consistency. Also, the Ld. AR has relied on the decision of the High Court of Madras in the case of CIT Vs. Brilliant Tutorials (P) Ltd. [292 ITR 399] in support of the claim of the assessee.
4.2.1 On the other hand, the Ld. Counsel for the Revenue has advanced the arguments to the effect that in the normal course of business it is only the franchisees give the advances instead the franchisees receives the loan from the parent company. There are also no confirmations from the franchisees as regards the alleged transaction. Hence the AO and the Ld.CIT(A) have correctly disallowed the claim of the assessee.
4.3 We have heard the rival submissions on this ground and perused the material on record. However, perusal of the order of the AO does not indicate that the debt in question is the loans given by the assessee to the franchisees are with the condition of repayment of otherwise. In that sense, the Ld.CIT(A)'s inference that the said impugned amount falls under capital field is premature. As regards the contention of the Ld.AR based on the decision of the High Court of Madras in CIT Vs. Brilliant Tutorials (P) Ltd., it has been held in the said case that the assessee having written off the dues from its franchisees after the latter closed down their business in the wake of sleep fall in the receipts, the claim for deduction under section 36(i)(vii) is allowable. The relevant head notes of the decision are extracted hereunder:
"Business expenditure- Bad debt- Closure of business of franchisees- Following steep fall in the receipts of the assessee's franchisees, a commercial decision was taken by them to close down the business and the dues from the franchisees were written off- There is nothing for the Revenue to suspect the motive of the assessee in writing off the debt- Question as to whether a debt has become bad or doubtful is a factual one- Honest judgment made at the time when the assessee wrote off the debt, in the light of the events leading to that stage, could not be found fault with- Claim for deduction under s. 36(1)(vii) could not be rejected."
The above decision is applicable only when the assessee proves that there is/are dues from the franchisees which have become irrecoverable, whereas, 17 ITA No. 6879/M/08 Triumph International Finance India Ltd.
AY . 2004-05 in the instant case, since the said element is not established, we are of the view that the decision of the High Court of Madras is not applicable. While we admit the contention of the assessee that it is an admitted fact that the advances to the franchisees are through banking channels and these loans are doubtful is not the case of the AO or the Ld.CIT (A) and therefore, the confirmations of the franchisees cannot be insisted at this state of second appeal after more than 10 years especially in the wake of the fact that the assessee and the franchisees have no transactions post 31.03.2001, we direct the AO to give a finding based on facts after examining the relevant records of the transaction of the assessee with the franchisees by giving a reasonable opportunity to the assessee to produce the relevant records. Accordingly, this ground is allowed for statistical purpose.
5. Ground no. 3 relates to the disallowance of Rs.1,85,498/- made by the AO and the same confirmed by the Ld. CIT(A) on account of decrease in valuation of stock.
5.1 Briefly stated, the assessee in the P & L Account had reduced an amount of Rs.1,07,98,248/- on account of decrease in valuation of stock. In that, the assessee had reduced the value of 671 shares of Reliance Industries Ltd to zero as the shares were physically lost. However, in the assessment completed, the AO disallowed the impugned loss amounting to Rs.1,85,498/- and added the same to the total income as the assessee could have obtained duplicate records if the shares were lost. On appeal, the Ld.CIT(A) upheld the decision of the AO. Aggrieved by the impugned decision, the assessee has raised this ground in the appeal before us.
5.2 Before us, the Ld. AR has stated that the shares of Reliance Industries Ltd have been purchased before 31.03.2001 and 671 shares have been lost being in physical form and thus the amount of Rs.1,85,498/- has been written off during the year under consideration. The Ld.AR has relied on the decisions in the cases of CIT Vs. N.A.S.A. Annamalai Chettiar, [86 ITR 607 (SC)], Pohoomal Bros Vs. CIT [34 ITR 64 (Bom)] and CIT Vs. Dempo & Co (P) Ltd 18 ITA No. 6879/M/08 Triumph International Finance India Ltd.
AY . 2004-05 [206 ITR 291]. On the other hand, the counsel for the Revenue has relied on the decisions of the AO and the Ld.CIT (A).
5.3 We have heard both the parties on this ground and perused the material on record. It is not disputed that the assessee has not produced any evidence either before the AO or before the Ld.CIT(A) as to the physical loss of the shares. Also, we find merit in the reasoning of the Ld.CIT(A) that if the shares are lost, the assessee could have obtained duplicate for the same. It is pertinent to state that the cases relied on by the Ld.AR are not applicable to the facts of the present case as the first two decisions are pertaining to the damage to the property due to war & the non-use of the office space due to the occupation of Japanese during the war respectively. The third decision relied on by the Ld.AR is also out of the context of the facts of the present case. In view of that matter, we do not find any infirmity in the decision of the Ld.CIT(A) on this count and the same is upheld. Thus Ground no.3 is dismissed.
6. Ground no.4 relates to the disallowance regarding the adjustment (reduction) of a sum of Rs.6,07,078/- from prior period income as the assessee is following mercantile system of accounting.
6.1 Briefly stated, in Annexure 'J' to the statement of account accompanying the return of income, the assessee had shown a prior period income of Rs.13,98,128/-. The assessee had debited the expenses amounting to Rs.6,07,078/- after crediting prior period actual income of Rs.19,37,832/- from interest on FD. In the assessment completed, the AO disallowed the impugned expense of Rs.6,07,078/- on the reason that the assessee was following mercantile system of accounting whereas, the assessee, claiming of such expenses would amount to following cash system which was not the method followed by the assessee. On appeal, the Ld. CIT(A) confirmed the disallowance as there was no nexus in terms of section 57 of the Income Tax Act to show that the expenditure was incurred for earning the interest 19 ITA No. 6879/M/08 Triumph International Finance India Ltd.
AY . 2004-05 income. Aggrieved by the impugned decision, the assessee has raised this ground in the appeal before us.
6.2 Before us, the Ld.AR of the assessee has stated that the expenditure of Rs.6,07,078/- comprises of three components namely, reversal of FD interest of Rs.5,55,150/-. Printing and stationary of Rs.2,623/- and income tax penalty of Rs.48,305/-. The amount of Rs.5,55,150/- has to be allowed as expenditure, in as much as the same is reversal on fixed deposit with Global Trust Bank (GTB), offered for tax in earlier years and the same netted off against the interest income of prior period. The Ld.CIT(A) ought to have allowed the assessee's claim of reduction of income on fixed deposit in as much as the same is withdrawn by the bank. On the other hand, the counsel for the Revenue has relied on the order the Ld.CIT(A).
6.3 We have heard both the parties on this issue and perused the material on record. As per the accounting policy, it is for the assessee to demonstrate that the liability has been incurred in the year under consideration. The Ld.AR's argument that the prior period expenses to be allowed as set off against the prior period income, in our view, is not legally tenable. Also, as there is no material placed on record to show that there is any nexus that the expenses claimed are incurred for earning of the interest income in terms of section 57 of the Act, we do not find any justifiable reason to interfere with the findings of the Ld.CIT(A) on this count and the same is hereby upheld. Accordingly, Ground no. 4 is dismissed.
7. Ground no.5 relates to the direction given by the Ld.CIT(A) to the AO to tax the interest income of Rs.19,37,832/- as income from other sources.
7.1 Briefly stated, the assessee in the return of income had shown Rs.19,37,832/- as interest on fixed deposit as business income. On appeal before the first appellate authority, the Ld.CIT(A) directed the AO to tax the said income separately under the head ' income from other sources' as there was nothing to show that the income from FDRs were having any nexus with 20 ITA No. 6879/M/08 Triumph International Finance India Ltd.
AY . 2004-05 the business carried on by the assessee. Aggrieved by the impugned decision, the assessee has raised this ground in the appeal before us.
7.2 Before us, the Ld.CIT(A) has stated the case of the assessee is squarely covered in its favour in the identical set of facts by the decisions of the ITAT in the cases of NH Securities Ltd, ITA No. 6312/M/09 for the A.Y. 2006-07, Classic Shares and Stock Broking Services Ltd, ITA No 191 & 1135/M/2008 for the AYs 2002-03 & 2003-04 and V N Parekh Securities Pvt Ltd, ITA Nos 6876, 7047 & 7048/M/2007 for the AYs 2002-03, 2003-04 & 2004-05.
7.2.1 On the other hand, the Ld. Counsel for the Revenue has relied on the decisions in the cases of Allied Construction [105 ITO 1(DEL)], South Indian Shipping Corporation [240 ITR 24 (Mad)] & Dr. V.P. Gopinathan [248 ITR 449(SC)] and contended that the impugned income has to be assessed under the head 'income from other sources' as rightly directed by the Ld.CIT(A).
7.3 We have heard both the parties on this ground and perused the material on record. It is pertinent to mention that in the case of NH Securities, the Tribunal noted that the FDRS have been placed with the banks for issue of bank guarantees, with stock exchange in connection with the business of the assessee for arriving at a decision that the interest from FDRs pledged in connection with business has to be treated as business income. However, in the present case of the assessee, there is nothing to show that the FDRs are kept for the purpose of the business of the assessee and hence we are of the opinion that the facts of the case in NH Securities is not identical to the facts in the present case of the assessee. Similarly, in other cases relied by the Ld.AR, a clear findings are there as regards the nature of investment and the purposes thereon. As regards the cases relied on by the Ld.Counsel for the Revenue, there have been clear findings by the competent authorities as to the nature/sourse/purpose of the impugned investment like surplus funds from the business, term deposits etc and hence has been treated as income from other sources as these investments are not connected 21 ITA No. 6879/M/08 Triumph International Finance India Ltd.
AY . 2004-05 with the business activity. In the result, neither the assessee nor the Revenue is in a position to establish whether the FDRs with the bank is kept for the business purpose or not. In view of that matter, we are of the opinion that the Ld.CIT(A) is not justified in simply directing the AO to assessee the impugned receipt is to be taxed under the head 'income from other sources' without verifying the nature of the FDRs, source of investment and the purpose for which the FDRs are kept in the bank. As the orders of the lower authorities do not contain any relevant facts as to the nature/source/purpose of the impugned investment, we are of the view that it would meet the ends of justice if this issue is remanded back to the AO to verify the nature of the FDRs, source of investment and the purpose for which the FDRs are kept in the bank after giving reasonable opportunity to the assessee to defend the case thereafter accordingly tax the impugned receipt under the relevant head of income. We direct and order accordingly. Ground no. 5 is treated as allowed for statistical purpose.
8. Ground no, 6 relates to the disallowance made by the AO and the same confirmed by the Ld.CIT(A) under section 43B being delayed payment to ESIC for the month of March 2004 beyond the due date. Aggrieved by the decision of the Ld.CIT(A), the assessee has raised this ground in the appeal before us.
8.1 Before us, the Ld. AR has stated that though the payments have been made beyond the due dates, the same have been paid before filing the return of income and the same are allowable in view of the Supreme Court decision in the case of Alom Extrusions [319 ITR 306(SC)] and Vinay Cements [213 CTR (SC) 268]. On the other hand, the counsel for the Revenue has relied on the orders of the AO and Ld.CIT(A) .
8.2 We have heard both the parties on this ground and perused the material on record. It is not disputed that the assessee has paid a sum of Rs.2,058/- to the ESIC for the month of March 2004 before filing the return of income. It is a settled principle of law that in so far as the Income Tax Act is concerned, the assessee can get the benefit if the actual payment is made 22 ITA No. 6879/M/08 Triumph International Finance India Ltd.
AY . 2004-05 before the return is filed as per the principle laid down by the Apex Court in Vinay Cement case. In view of that matter, we delete the impugned addition of Rs.2,058/- made on account of delayed payment to the ESIC. Ground no. 6 is thereby allowed.
9. Ground no. 7 relates to the disallowance of Rs.2000/- on account of donation which is not pressed by the Ld.AR and hence requires no adjudication.
10. Ground no. 8 relates to disallowance on electrical fittings restricted by the AO to 15% amounting to Rs.10,637/-.
10.1 Briefly stated, the assessee in the return of income had claimed depreciation on electricity fittings @ 25%. However, the AO restricted the same to 15% in view of the amendment to IT Rules with effect from AY 2003-04. The difference @ 10% amounts to Rs.10,637/- was added back to the total income of the assessee. On confirming the same by the Ld.CIT(A), the assessee has raised this ground in the appeal before us.
10.2 Before us, the Ld. Authorised Representative has relied on the order of the ITAT in the assessee's own case in ITA No. 76/Mum/2009 for the AY 2005-06. On the other hand, the Ld. Counsel for the Revenue has relied on the orders of the AO and Ld.CIT(A).
10.3 We have heard both the parties and perused the material on record. It is pertinent to extract the findings of the ITAT in the said case relied by the Ld. AR which reads as follows:
"The same arguments that were advanced before CIT(A) were reiterated before us. The learned Departmental Representative relied on the order of the AO. We have considered the rival submissions. In our view the submissions made on behalf of the assessee is acceptable. The electrical installation once they form part of the block of assets, plant and machinery prior to A.Y. 2003-04, depreciation has to be allowed n the written down value of the block. We are of the view that once a particular depreciable asset enters the block it losses its identity and it is not possible to apply the new rates of depreciation on the written down value of the electrical installation by carving out its WDV from the block of assets, plant and machinery. We, therefore, 23 ITA No. 6879/M/08 Triumph International Finance India Ltd.
AY . 2004-05 agree with the submissions of the assessee and direct the AO to allow depreciation as claimed by the assessee".
Since no difference in facts has been brought on record, we, following the said decision, direct the AO to allow the depreciation as claimed by the assessee. Accordingly, Ground no. 8 is allowed.
11. Ground no. 9(b) relates to the direction given by the Ld.CIT(A) to tax interest on fixed deposits Rs.1,95,74,632/- and miscellaneous income Rs.3,01,450/- under the head 'income from other sources'. Aggrieved by the impugned direction, the assessee has raised this ground in the appeal before us.
11.1 Before us the Ld.AR and the Ld.Counsel for the Revenue have placed the same arguments that they have placed on ground no 5 of the appeal which are stated in para 7.1 & 7.2 above and hence need not be reproduced again.
11.2 We have heard the rival submissions and perused the material on record. Following the same reasoning given in para 7.3 in the similar set of facts, we are of the view that it would meet the ends of justice if this issue is remanded back to the AO to verify the nature of the investment, source of investment and the purpose for which the investments are made after giving reasonable opportunity to the assessee to defend the case thereafter accordingly tax the impugned receipt under the relevant head of income. We direct and order accordingly. Ground no. 6 is treated as allowed for statistical purpose.
12. Ground No. 9 (c) relates to the direction given by the Ld.CIT(A) to the AO to tax the dividend income of Rs.10,799/-.
12.1 At the outset, it is pertinent to mention that the dividend income is exempt under the provisions of Section 10(34) of the Income Tax Act and the LD.CIT(A) has not given any reason why this obviously exempt income is to be taxed in the hands of the assessee. Hence, we set aside the direction given by the Ld.CIT(A) to tax the same and this ground is allowed.
24 ITA No. 6879/M/08Triumph International Finance India Ltd.
AY . 2004-05
13. Ground No.10 relates to charging interest under section 234B of the Act, which is consequential and pre mature in nature and hence we are not adjudicating the same.
14. In the result, the appeal filed by the assessee is partly allowed.
Order pronounced in the open court on this 19th day of April 2013.
-Sd- -Sd-
(D. KARUNAKARA RAO) (Dr. S.T.M. PAVALAN)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Mumbai, Dated: 19.04.2013
*Srivastava
Copy to: The Appellant
The Respondent
The CIT, Concerned, Mumbai
The CIT(A) Concerned, Mumbai
The DR " I " Bench
True Copy
By Order
Dy/Asstt. Registrar, ITAT, Mumbai.