Income Tax Appellate Tribunal - Delhi
Acit, New Delhi vs M/S. Osn Infrastructure & Projects Pvt. ... on 20 April, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "E" NEW DELHI
BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER
AND
SHRI O.P.KANT, ACCOUNTANT MEMBER
ITA No.346/Del/2015
(ASSESSMENT YEAR: 2012-13)
ACIT, vs OSN Infrastructure & Projects Pvt.ltd.,
Central Circle-7, WZ-520, Palam Vihar,
New Delhi New Delhi-110045.
PAN-AABCO2979E
(Appellant) (Respondent)
Appellant by Ms. Shefali Swaroop, CIT DR
Respondent by Sh. V.K.Aggarwal, AR &
Ms. Shweta Bansal, CA
Date of Hearing 17.04.2018
Date of Pronouncement 20.04.2018
ORDER
PER BHAVNESH SAINI, JUDICIAL MEMBER
This appeal by the Revenue has been directed against the order of Ld.CIT(A)-1, New Delhi dated 03.11.2014 for AY 2012-13, challenging the order of Ld.CIT(A) in deleting the addition of Rs.14,49,33,613/- on account of "Excessive Business Expenditure Claimed".
2. Briefly stated facts of the case are that the assessee company was incorporated on 29.04.2010 and was engaged in the business of development of infrastructure including construction as well as trading in real estate assets especially land. The return of income was filed declaring income of Rs.11,28,32,682/-.
3. On perusal of the audited financial results of the assessee company, it was seen that the assessee company has written off amounts of following ITA No.346/Del/2015 parties aggregating to Rs.14,49,33,613/- and has claimed the same as deductible revenue expenditure :-
S.No. Name of the Party Amount (Rs.)
1. M/s Salasar Corporation 4,49,33,613/-
2. M/s Sumit Trading Co. 5,00,00,000/-
3. Shree Ganpati trading Co. 5,00,00,000/-
Total 14,49,33,613/-
4. On being confronted, the assessee explained that the said amounts have been written off as the same has become irrecoverable. It was further explained that the assessee company given advance amounting to Rs.21.40 crores to the parties out of which only a sum of Rs.6,90,66,387/- could be agreed to be recovered. The said funds were given by the assessee company to the various parties in order to buy land, being its stock-in-trade. However, the said parties failed to provide the requisite land and even denied refunding the amounts given to them by the assessee company. Despite prolonged persuasion and efforts to recover the same by the assessee company, no significant results could be achieved and out of the total amount given to said parties aggregating to Rs.21,40,00,000/- only a sum of Rs.6,90,66,387/- could be recovered. Copies of the correspondence exchanged by the assessee company alongwith legal notices issued and Deed of Settlement etc. entered were also furnished by the assessee in this regard.
5. The AO asked the assessee as to why the amounts written off should not be disallowed. The assessee filed a reply before the AO which is reproduced as under:-
Page | 2 ITA No.346/Del/2015 "In reply to your query regarding justification for writing off advances given to various agents for purchase of land being stock in trade of the company, under instructions of the assessee, it is stated that the said amounts were given by the assessee company as advances for purchasing its stock in trade. No capital assets were purported to be acquired through payment of such advances. The impugned business advances, which were given to such parties, partake the character of advances for acquiring trading assets which were likely to be sold in the normal course of business of the assessee company. The funds for acquiring trading assets in the form of advances to the relevant parties were given under agreements which are enclosed herewith. A perusal of the said agreements unimpeachably reveal that the impugned payments were given to the said parties for acquiring trading assets and the failure on the part of the said parties either to refund the amount or provide the relevant stock resulted in writing off the said payments as business losses in the profit and loss account of the assessee company for the relevant period under consideration. Though, the assessee company made all possible efforts to recover the said advances through persuasive as well as coercive measures, yet nothing could be recovered from them. Necessary evidences in this regard are enclosed.
In such a situation, adopting a prudent approach, the assessee company has written off such advances as deductible business expenditure in its profits and loss account. The following judicial pronouncements support the legal stand of the assessee in this regard.
In Ramchandar Shivnarayan v. CIT (1978) 111 ITR 263, the Hon'ble Supreme Court summed up the principles in the following words at page 269 of the report:
"The principle applicable in India is more or less the same. If there is a direct and proximate nexus between the business operation and the loss or it is incidental to it, then the loss is deductible, as, without the business operation and doing all that is incidental to it, Page | 3 ITA No.346/Del/2015 no profit can be earned. It is in that sense that from a commercial standard such a loss is considered to be a trading one and becomes deductible from the total income, although, in terms neither in the 1922 Act nor in the 1961Act .... "
In the case of CIT v. Mysore Sugar Co. Ltd., (1962) 46 ITR 649 (SC), the assessee was a manufacturer of sugar and used to advance seedlings, fertilizers and money to sugarcane growers under an agreement by which the growers agreed to sell the next crop of the sugarcane grown by them exclusively to the assessee at current market rates and to have the advances adjusted towards the price of the sugarcane to be delivered to the company. In the year under consideration owing to drought, the sugarcane growers could not grow sugarcane and the advances remained unrecovered. A Government Committee recommended that the assessee should ex gratia forego some of its dues. The assessee, accordingly, waived its rights in respect of Rs. 2,87,422/- and claimed the said amount as a deduction under section 10(2)(xi) and 10(2)(xv) of the Indian I T. Act 1922. The question was whether the said amount which was given up represented a loss of capital or was revenue expenditure. The Supreme Court held that there was no element of a capital investment in making the advances and the loss incurred by the assessee was, therefore, a loss on the revenue side and was deductible.
In Chenab Forest Co. v. CIT (1974) 96 ITR 568 (J&KK) a forest contractor advanced money to sub-contractor for cutting and moving the trees. But the forest contract was not renewed. Accordingly, portion of the advances became irrecoverable. It was clear that to carry on the business, it was essential that advances should be made. Without these advances, the forest lessee might not be able to carry on the business. The advances during the ordinary course of business would have been adjusted and recouped if the lease were renewed. Since there was no renewal, the non- recoverability was a result of the circumstances. Therefore, it was held Page | 4 ITA No.346/Del/2015 that the assessee was entitled to deduction of irrecoverable advances under section 37.
In CIT v. IndenBiselers, (1990) 181 ITR 69 (Mad) it was observed that transport of iron ore was absolutely necessary for the business of the assessee and in order to maintain regular supply, the assessee advanced money to the transport corporation. However, owing to the default committed by the transport corporation a large sum remained payable to the assessee even after adjusting freight charges. The advances did not result in making a capital asset. Therefore, it was held that the amount claimed by the assessee was only a trading loss and the loss was incidental to the business of the assessee. Hence, the assessee's claim for treating the said amount as a revenue deduction for the purpose of determining its total income was held justified.
In T. J. Lalvani v. CIT, (1970) 78 ITR 176 (80m) it was held that the financing by the assessee of another person's business and of all its import of goods on his license was an activity of the assessee in the course of his business and the loss arising on the loan, therefore, was a loss, which had occurred in connection with the business of the assessee and was incidental to it and was, therefore, claimable by the assessee as a trading loss.
In CIT vs Globe Theaters Ltd (1950) 8 ITR 403 (cal) the assessee, who was an exhibitor of cinema films, advance money to a company for constructing a cinema house. The said advance was made on the understanding that the company would lease out the cinema house to the assessee. When the financial position of the company became unsatisfactory and the cinema house was never built, the assessee wrote off the amount and claimed it as a bad debt. The sum appeared to have been paid as an advance payment of rent under the lease which was to come into existence. The amount was, therefore, held as allowable as a deduction.
Page | 5 ITA No.346/Del/2015 In case of CIT v. Anjani Kumar Co. Ltd., (2003) 259 ITR 114 (Raj) the Assessing Officer noticed that a sum of Rs. 52,489 was written off on account of advance made to the agriculturist for purchase of agricultural land. The intention of the assessee, of course, was to acquire the land to set up a boiler factory, but ultimately that did not materialize. The agriculturist refused to refund the amount. The assessee filed a civil a suit in the court, where the assessee lost its claim. Then the assessee had written off that amount in the books of account and claimed deduction on the incurred amount as revenue loss. The Assessing Officer rejected his claim. According to the Assessing Officer when the amount was advanced for acquiring the capital asset, the written off amount could not be allowed as deduction in the income of the assessee. The High Court held that, in the instant case, the new project had never matured. The expenditure incurred by the assessee had, therefore, to be written off. The efforts to make a new project by the same management in relation to the same business would certainly come within the test of identity laid down by the Supreme Court and since no benefit of enduring nature resulted to the assessee, the expenditure in question could not be treated to be of capital nature.
In Pioneer Consolidated Co. of India Ltd. v. CIT, (1972) 85 ITR 410 (All) an assessee-agent failed to collect certain amounts for its principal but paid the said amounts to the principal out of its own funds. It was held that the assessee was entitled to claim such amounts as business expenditure, notwithstanding the fact that the assessee did not take any legal action against the debtors of the principal and permitted the claims to become barred by time because that had nothing to do with the nature of the expenditure by the assessee.
In view of the above, no adverse cognizance should be taken against the assessee and the entire expenditure as claimed should be allowed.. "
Page | 6 ITA No.346/Del/2015
6. The AO issued notice u/s 133(6) of the Income tax Act, 1961 (in short "Act") to the above parties which were served upon them but no compliance has been made. The AO, therefore, treated the said parties either non-existing or in genuine. The explanation of the assessee was not found acceptable and it was held that the amount cannot be allowed deduction as business expenditure. The AO accordingly made addition of Rs.14,49,33,613/-.
7. The assessee challenged the addition before Ld.CIT(A). The written submissions of the assessee are reproduced in the appellate order in which the assessee reiterated the same facts as were submitted before the AO. It was also submitted that the assessee entered into agreement with the three parties for purchasing land being stock-in-trade ultimately agreements were terminated and only part amount was recovered. The settlement deeds were signed. The payments were given through banking channel only through HDFC Bank, source of which was also explained. The assessee filed copies of account with HDFC Bank, ledger account of all the three parties.
8. Ld.CIT(A) considering explanation of the assessee held that the expenditure is allowable as business loss/expenses and deleted the entire addition. His findings in para 6.1 to 8 of the order are reproduced as under:-
6.1. "I have considered the assessment order, the submissions made, the documents filed and also the assessment records (called from the AO). The relevant documents filed before me were also filed before the AO. Facts are that the appellant company is involved in the business of land acquisition and consolidation on behalf of, and also undertaking construction activities, mainly for its principal M/s Educomp Infrastructure and School Management Ltd. (EISM) of the Educomp group. During the year and a Page | 7 ITA No.346/Del/2015 year earlier, the appellant company also helped M/s Edusmart Services Pvt. Ltd. (ESS), another company of the Educomp group, in recovery of debt from various trade debtors through the process of debt syndication involving 6 intermediary parties/agents. During the search and surveys conducted on the Educomp group, in which the appellant was also covered, evidence was gathered that the appellant was involved in generation of cash through over-invoicing of works /purchases, as also generation of unaccounted income from the loan syndication business conducted for and on behalf of the Educomp group. When confronted with the evidence collected, director of the appellant company admitted to having earned unaccounted income of Rs.75 crore in two years, out of which income of Rs.59.25 crore was admitted as undisclosed income of the appellant company in AY s 2011-12 and 2012-13 (current AY). The amount of Rs.33.60 crore was offered to tax by the appellant in AY 2011-12 and has been taxed as such. In the current AY (2012-13) the appellant has offered the remaining amount ofRs.25.65 crore to tax. However, in the current A Y, the appellant has also claimed loss in the land acquisition and consolidation business amounting to Rs.14,49,33,613/-, being amounts remaining irrecoverable from three parties, M/s Salasar Corporation, M/s Shri Ganpati Trading Company and M/s Sumit Trading Company, with whom the appellant company had entered into deeds of settlement on 21.03.2012. The agreements for engaging these entities as agents for land consolidation were entered into by the appellant earlier on 17.09.2010, 10.09.2010 and 09.09.2010 respectively. The fact that the deeds of settlement were entered after the date of search perhaps cast a suspicion on the claim. The claim was disallowed as the said 3 parties did not respond to letters issued u/s 133(6) by the revenue, and the claim of loss was held to be excessive. Appellant's case is that it was never confronted with the fact that the parties had not responded and, thus, not allowed necessary opportunity despite having filed all documents and evidence which have never been doubted. It is rejection of the claim of loss without Page | 8 ITA No.346/Del/2015 proper opportunity which has been disputed by the appellant in this appeal.
6.2 The details of payments made I recovered to I from the three parties are as under:
M/s Salasar Corporation, Sirsa PAYMENTS RECEIPTS Date Amount Date Amount (Rs.) 14.09.2010 (Rs.) 05.05.2011 30000000 2500000 16.09.2010 50000000 09.05.2011 7250000 23.09.2010 25000000 10.05.2011 15400000 24.09.2010 9000000 11.05.2011 16000000 12.05.2011 17500000 23.05.2011 1747887 02.06.2011 1400000 03.06.2011 2050000 06.06.2011 1000000 07.06.2011 2300000
09.06.2011 918500 03.08.2011 1000000 TOTAL 114000000 TOTAL 69066387 Balance written off 44933613 M/s Shri Ganpati Trading Company, Sirsa PAYMENTS RECEIPTS Date Amount (Rs.) Date Amount (Rs.) 09.09.2010 50000000 TOTAL 50000000 TOTAL 0 Balance written off 50000000 M/s Sumit Trading, PAYMENTS Sirsa RECEIPTS Date Amount (Rs.) Date Amount (Rs.) 21.09.2010 25000000 22.11.2010 25000000 TOTAL 50000000 TOTAL 0 Balance written off 50000000 6.3 The amounts were paid to the three parties from the HDFC Bank account of the appellant and amounts returned by M/s Salasar Corporation was from its Axis Bank account. I find that the appellant made these payments from an amount of Rs.50 crore received from EISM on 06.09.2010 and also appellant's own funds and amounts realized on sale of Birla Sun Life Mutual Funds owned by the appellant. The land acquisition account of EISM has been squared up in the books of the Page | 9 ITA No.346/Del/2015 appellant by adjustment of Rs.42,50,00,000/- and Rs.50,92,84,600/- (totaling Rs.93,42,84,600/-) transferred by journal entry and debited on 30.03.2011 in the name of one 'Babu Lal', and also against payments for construction activities and service tax account of EISM. The balances in these two accounts as on 31.03.2012 amounting to Rs.6,99,32,078/- (land acquisition account) and Rs.5,97,900/- (construction activities and service tax account), totaling Rs.7,05,29,978/-, have been converted to unsecured loan from EISM, which is duly reflected in the appellant's balance sheet. Thus, except for this amount of unsecured loan, there is nothing to be paid by the appellant to EISM as on 3l.03.2012. In the books of the appellant, amounts paid to the three parties are not credited to the account of EISM, implying that these amounts have not been charged to EISM but remained the risk and responsibility of the appellant company. I further find that the appellant company or its directors are not directly or indirectly related to or linked with the entities of the Educomp group. Their relationship is purely business-based.
6.4 The facts of the case are not in dispute. From the above facts, it cannot be concluded that claim of the appellant is incorrect. The only dispute is whether the loss claimed by the appellant company in writing off the amounts due from the land consolidators is an allowable business loss I expense. I have carefully considered the matter. There is no evidence to establish that the amounts written off have been received back in any form by the appellant or its principals. The amounts have actually been written off by way of valid deeds of settlement which are legally enforceable documents. Even if it is assumed that the amounts written off are some sort of compensation paid to some parties through the appellant company, it would still be expenditure in the hands of the appellant company or its principals. I hold accordingly.
6.5 Since the amounts have been written off after executing valid deeds of settlement, legally enforceable documents, the appellant has given up the Page | 10 ITA No.346/Del/2015 claim on these amounts. Thus, these amounts partake the character of income in the hands of those persons. I find that no effort has been made to bring to tax the amounts written off as income in the hands of the persons to whom the money was advanced. I, accordingly, direct the AO to furnish the relevant information and documents to the assessing officers of M/s Sumit Trading Company, M/s Salasar Corporation and M/s Shree Ganpati Trading Company to initiate necessary action to tax these amounts in their hands in accordance with the law. In case it is found that this money was transferred back by these parties to the appellant or its principals in any form, the amounts so transferred shall be taxable as income of the appellant company or its principals, as the case may be. I also direct the AO to examine the matter relating to adjustment of Rs.93,42,84,600/- by way journal entry on 30.03.2011 debited to Babu Lal during the assessment proceedings for the next A Y 20l3-14.
6.6. I also find that the initial submissions of the appellant based on the assumption that the amount written off was against monies advanced for acquiring land as stock-in-trade is incorrect to the extent that the appellant is not involved in the business of purchase and sale of land but only acquired and consolidates land on behalf of its principals in the Educomp group.
7. In view of the above, I the addition I disallowance of Rs.14,49,33,613/- is deleted, and the AO is directed to comply with directions contained in Para-6.4 above.
8. The appeal is allowed."
9. Ld.DR relied upon the order of the AO. Ld. DR submitted that these parties are not existing and are not genuine. The identity of the parties has not been proved by the assessee. Since genuineness of the parties is not proved, therefore, business loss should not have been allowed. On the other hand, Ld. Counsel for the assessee reiterated the submissions made before the Page | 11 ITA No.346/Del/2015 authorities below and referred to Paper Book page 7 to 30 which are Agreement with all three parties to whom advances have been given for business purposes; Paper Book page 31 to 39 are copies of the Deed of Settlement with three parties; Paper Book page 40 to 50 are correspondences with three parties for recovery of the amount in question. Ld. Counsel for the assessee submitted that it was a business loss which have been correctly allowed as deduction by Ld.CIT(A). He has also submitted that merely because the parties did not respond to the notice issued by the AO u/s 133(6) of the Income Tax Act, 1961, it cannot be taken that said transaction was not genuine. He has relied upon various decisions:-
[i] CIT vs Rose Services Apartment (India) Pvt.Ltd. (2010) 326 ITR 100 (Del.) [ii] DCIT vs Embroynic Properties (P.) Ltd. in ITA No.115/Del/2013 dated 28.02.2017 [iii] Mohan Meakin Ltd. vs CIT [2012] 348 ITR 109 (Del.) [iv] CIT vs GP International Ltd. 325 ITR 25 (P&H)
10. We have considered rival submissions. It is not in dispute that the assessee company is engaged in the business of development of infrastructure including construction as well as trading in real estate assets especially land.
Thus, the assessee is involved in the business of land acquisition and consolidation on behalf of, and also undertaking construction activities, mainly for its principal. The assessee claimed loss in land acquisition and consolidation business amounting to Rs.14,49,33,613/-, being amounts remaining irrecoverable from the three parties. The assessee entered into the Page | 12 ITA No.346/Del/2015 agreement for land consolidation with these three parties and made the advance for purchase of land i.e. stock-in-trade through banking channel. In all the agreements, PAN Nos. of the parties have been mentioned. Therefore, advances have been given by the assessee for business purposes. Ultimately, the parties could not provide the requisite land to the assessee and did not refund the amount in question. Only part amount has been recovered. The assessee made correspondence with all the three parties and ultimately Settlement Deed was executed and only part amount have been returned to the assessee. The remaining amount have been written off in the books of accounts as irrecoverable being business loss. The assessee produced sufficient evidences before the AO in support of the claim of business loss which have not been rebutted by the AO in any manner. Hon'ble Delhi High Court in the case of CIT vs Rose Services Apartment (India) Pvt.Ltd. (supra) held as under:-
"dismissing the appeal, (i) that the assessee was carrying on the business of real estate in view of the fact that purchased land and flat had been shown as stock-in-trade since the year of purchase. Furthermore, income had been assessed as profits from business. The Tribunal noted that not only expenses but also brought forward business losses had been allowed by the Assessing Officer.
(ii) That the Tribunal had correctly appreciated the issue with respect to loss incurred by the assessee on account of refund of advance by V as being in the nature of business loss. Since the entire facts, in respect of transactions were on record, the Tribunal was empowered to deal with the issue and determine whether the assessee was entitled to claim a loss, if at all, under one section or the other."
Page | 13 ITA No.346/Del/2015
11. ITAT, Delhi Bench in the case of DCIT vs Embroynic Properties (P.) Ltd.
(supra) following the same decision of the Delhi High Court (supra) held as under:-
10. "...............If the said amount was not being recovered and has been claimed as loss by the assessee in this year, i.e. when sale of land was made, then the same needs to be allowed as business loss because, it was incidental and linked to the purchase of stock-in-trade and was taken as part of the cost of the land in this year while determining the business income from the sale of land in this year. Accordingly, the observation and finding of the Ld.CIT(A)following the decision of Hon'ble Delhi High Court is affirmed and thus the revenue's appeal is dismissed."
12. The assessee proved that impugned amount was given to three companies in the course of the business for purchase of land i.e. stock-in-
trade. However, the said companies did not carry out their obligation and ultimately the assessee could not get the land as well as could not recover the amount in question from these parties. Therefore, it was written off in the books of accounts of the assessee as irrecoverable. This amount was paid during the course of business, therefore, it is allowable as business loss.
Hon'ble Supreme Court in the case of Badridas Daga vs CIT 34 ITR 10 (SC) and CIT vs Nainital Bank Ltd. 55 ITR 707 (SC) held that "as a result of misappropriation or loss of cash by the dacoity is admissible deduction". The decisions relied upon by the assessee before the authorities below squarely support the claim of the assessee of deduction of business loss. Considering the facts of the case and in the light of the decisions cited above, it is clear that loss is incidental to the business of the assessee which was written off in the Page | 14 ITA No.346/Del/2015 books of accounts is irrecoverable. The AO, however, draw adverse inference against the assessee because the notice issued by him u/s 133(6) of the Act to these three parties were not complied with. Hon'ble Punjab & Haryana High Court in the case of CIT vs GP International Ltd. (supra) held that "merely because some of the persons did not respond to the notice issued by the AO u/s 133(6) of the Act, it cannot be taken that the said transaction was not genuine."
13. In view of the above discussion, we are of the view that the claim of the assessee is genuine and correct. The assessee produced PAN No. of the parties and all evidences on record to prove identity of three parties and genuineness of the transactions, therefore, the deduction claimed as business loss suffered by the assessee out of the transaction for purchase of land is wholly justified.
Ld.CIT(A), therefore, correctly deleted the addition. We, therefore, do not find any infirmity in the order of Ld.CIT(A) in deleting the addition.
14. In the result, the appeal filed by the Revenue is dismissed.
Pronounced in the open court on 20.04.2018.
Sd/- Sd/-
(O.P.KANT) (BHAVNESH SAINI)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Date:- 20th April, 2018
*Amit Kumar*
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR
ITAT NEW DELHI
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