Gujarat High Court
The Principal Commissioner Of Income ... vs Shreno Limited on 21 January, 2021
Author: J.B.Pardiwala
Bench: J.B.Pardiwala, Ilesh J. Vora
C/TAXAP/302/2020 ORDER
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/TAX APPEAL NO. 302 of 2020
With
R/TAX APPEAL NO. 311 of 2020
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THE PRINCIPAL COMMISSIONER OF INCOME TAX2, VADODARA
Versus
SHRENO LIMITED
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Appearance:
MR.VARUN K.PATEL(3802) for the Appellant(s) No. 1
MR B S SOPARKAR(6851) for the Opponent(s) No. 1
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CORAM: HONOURABLE MR. JUSTICE J.B.PARDIWALA
and
HONOURABLE MR. JUSTICE ILESH J. VORA
Date : 21/01/2021
ORAL ORDER
(PER : HONOURABLE MR. JUSTICE J.B.PARDIWALA)
1. As the proposed questions of law in both the tax appeals are by and large common and the assessee is also the same, those were taken up for hearing analogously and are being disposed of by this common order.
Tax Appeal No.302 of 2020
2. This tax appeal under Section 260A of the Income Tax Act, 1961 ( for short "the Act, 1961"') is at the instance of the Revenue and is directed against the order passed by the Income Tax Appellate Tribunal dated 18th December, 2019 in the ITA No.675/Ahd/2016 for the A.Y.22012-13.
3. The Revenue has proposed the following three questions Page 1 of 8 Downloaded on : Mon Jun 14 20:53:38 IST 2021 C/TAXAP/302/2020 ORDER of law for the consideration of this Court;
"(A) Whether on the facts and in the circumstances of the case, the learned ITAT has erred in law and on facts in not upholding the entire addition of Rs.97,57,920/-
made by the Assessing Officer under Section 14A of the Income Tax Act, 1961 r.w. Rule 8D of the Income Tax Rules, 1962?
(B) Whether on the facts and in the circumstances of the case, the learned ITAT has erred in law and on facts in deleting the addition in the book profit u/s.115JB of the Income Tax Act, 1961 made by the Assessing Officer on account of disallowance u/s.14A of the Income Tax Act, 1961?
(C ) Whether on the facts and in the circumstances of the case, the learned ITAT has erred in law and on facts in not upholding the disallowance of bad debt claim of Rs.1,71,90,000/- made by the Assessing Officer and confirmed by the Commissioner of Income Tax(A)?"
4. We have heard Mr. Varun Patel, the learned senior standing counsel appearing for the Revenue and Mr. B.S. Soparkar, the learned counsel appearing for the respondent- assessee on caveat.
5. The first question pertains to the decision of the Tribunal to delete the disallowance of a sum of Rs.97,57,920/- made by the Assessing Officer and confirmed by the Commissioner of Income Tax (Appeals) under Section 14A of the Act, 1961 read with Rule 8D of the Rules, 1962. The second question is whether the disallowance under Section 14A of the Act can be made while computing book profit of a Company under Section 115JB of the Act.
6. The first two questions, as proposed by the Revenue, are no longer res integra in view of the decision in the case of Page 2 of 8 Downloaded on : Mon Jun 14 20:53:38 IST 2021 C/TAXAP/302/2020 ORDER Deputy Commissioner of Income Tax vs. Vasco Sales & Marketing Corporation, reported in 66 taxmann.com 366. This judgement refers to and rely upon the Supreme Court decision in the case of S.A. Builder Ltd. vs. Commissioner of Income Tax (A), Chandigarh, reported in 288 ITR 1. In view of the settled position of law, the disallowance under Section 14A would not be permissible . We do not find that the Tribunal has committed any error.
7. In view of the aforesaid conclusion, the second question would become academic in nature.
8. We now come to the third question as proposed by the Revenue.
9. Mr. Patel, the learned senior standing counsel appearing for the Revenue pressed hard to admit this appeal so far as the question No.3, i.e, the 2(C) is concerned. According to Mr. Patel, the ITAT could be said to have committed an error in law and also on facts in not upholding the disallowance of bad debt claim of Rs.1,71,90,900/- made by the Assessing Officer and confirmed by the Commissioner of Income Tax (A). According to Mr. Patel, the Tribunal failed to appreciate an important question of fact that the subsidiary was neither the customer nor the sundry debtor of the assessee. It is argued that the reliance placed by the Tribunal on the decision of the Supreme Court in the case of TRF Ltd 230 CTR 14 (SC) is completely misplaced. He pointed out that in the case on hand, the concerned amount is in the form of interest bearing advances provided to the subsidiary namely Quick Flight Ltd. (QFL).
Page 3 of 8 Downloaded on : Mon Jun 14 20:53:38 IST 2021C/TAXAP/302/2020 ORDER According to him, in the instant case, the QFL is not a customer of the assessee company and the advances rendered to the subsidiary company QFL is not related with the day to day business of the assessee as the assessee company is not in the lending business.
10. On the other hand, Mr. Soparkar, the learned counsel appearing for the Revenue would submit that no error, not to speak of any error of law, could be said to have been committed by the Tribunal so far as the disallowance of bad debt claim of Rs.1,71,90,000/- is concerned. He would submit that if an assessee adopts the mercantile system of accounting, and in his accounts, he shows a particular income as accruing, whether that amount is really accrued or not is liable to bring the said income to tax. He would argue that undoubtedly the accounts of the assessee should reflect true and correct statement of affairs. However, merely because the said amount accrued was not realized immediately, cannot be a ground to avoid the payment of tax. But if in his account it is clearly stated that though a particular income is due to him, but it is not possible to recover the same, then it cannot be said to have been accrued and the said amount cannot be brought to tax. In this regard, Mr. Soparkar, seeks to place reliance on a decision of the Madras High Court in the case of Commissioner of Income Tax vs. Tiruchirapalli District Central Co-operative Bank Ltd., (2020) 275 taxmann.com 628 (Mad).
11. The CIT(A) has observed as under;
"5.2 I have carefully considered the facts on records and submissions of the Ld. Authorized Representative.Page 4 of 8 Downloaded on : Mon Jun 14 20:53:38 IST 2021
C/TAXAP/302/2020 ORDER Undisputedly, Quick Flight Ltd. is a 100% subsidiary of the appellant company and during the year under consideration, the appellant has advanced a further sum of Rs.306.32 lacs and written off bad debts of Rs.170.91 lacs. Up to A.Y. 2011-12, the appellant was showing interest income on the loans and advances given to Quick Flight Ltd., but during the year under consideration although it has advanced further loan, but has not charged any interest . Instead of charging interest, it has claimed bad debts of Rs.170.91 lacs on the ground that the same was part of unpaid interest of earlier years. Although the bad debts are allowable at the time of written off as per the provisions of section 36(1)(vii) r.w.s. 36(2) and the ratio laid down by Hon'ble Supreme Court in the case of TRF Limited, 230 CTR 14, but in the case of appellant, the same cannot be allowed because the transactions of loan and interest get merged and hence it cannot be said that the appellant has written off only the interest and not the principal amount. Moreover, it is not a prudent transaction particularly when the appellant has advanced a sum of Rs.306.32 lacs during the year under consideration and written off the sum of Rs.170.91. There is another angle of this transaction that the appellant has claimed that the bad debts written off was shown as income u/s.41(1) in the case of Quick Flight Ltd., but on perusal of the records of Quick Flight Ltd., it is noticed that no taxes thereon are paid because of heavy losses in the case of Quick Flight Ltd. In this manner, the appellant has created camouflaged transactions in order to avoid the tax liability and hence the transaction does not fall in the four corners of legitimate tax planning. This view gets support from the ratio laid down in the case of CIT vs. Getxo Smithline Asia Pvt. Ltd. (2010) 236 CTR 113 (SC) because the transaction between the sister concern in the case of appellant was not revenue neutral. Accordingly, the disallowance of Rs.170.91 lacs being the bad debts pertaining to Quick Flight Ltd. Is confirmed for the above reasons as also reasons recorded by the Assessing Officer.
5.2.1 On perusal of the details furnished, it is noticed that the Assessing Officer has considered entire bad debts of Rs.171.90 lacs pertaining to Quick Flight Ltd., but in fact a sum of Rs.0.69 lacs was not pertaining to it. During the course of assessment proceedings, the appellant has Page 5 of 8 Downloaded on : Mon Jun 14 20:53:38 IST 2021 C/TAXAP/302/2020 ORDER submitted that bad debts of Rs.0.69 lacs was pertaining to Aschin Finance & Leasing Pvt. Ltd. for goods sold in earlier years and offered as income. However, during appellate proceedings, it is claimed to be pertaining to Ashok Sales Agency for sales made in A.Y.2009-10. In view of contradictory stand, outright relief cannot be allowed. However, if debt was shown as income in earlier years and amount is written off, the same is squarely covered by the decision of Hon'ble Supreme Court in the case of TRF Limited 230 CTR 14. Hence the appellant is entitled to claim bad debts of Rs.0.69 lacs. The Assessing Officer is accordingly directed to allow the relief to this extent after necessary verification. Thus, appellant partly succeeds in respect of Ground No.7."
12. As against the above, the Tribunal has held as under:-
"19. As observed earlier, the assessee has subsidiary company viz. Quick Flight Ltd. It had advanced ICDs to its subsidiary company. During the accounting year, it has advanced a further sum of Rs.306.20 laksh. It had written off bad debts of Rs.171.91 lakhs. According to the assessee upto the Asstt .Year 2011-12, the assessee was showing interest income on the loans and advances given to QFL. It had earned interest income of Rs.738 lakhs during the F.Y.2008-09 to 2010-11, and its income was offered in the respective years. However, net worth of QFL was eroded, and hence balance interest outstanding in the books of accounts at Rs.170.91 lakhs has been written off during the year under consideration as irrecoverable. The stand of the assessee was rejected by the ld. Revenue authorities on the ground that since it has advanced fresh loans during the year, therefore, it cannot be said that recovery of interest has become bad. The second reason given by the ld. CIT(A) is that though the liability of QFL were ceased qua the payment of interest expenditure, but actually that concern did not suffer tax on cessation of these liability, because that concern was showing huge loss. In other words, according to the ld. CIT(A) taxes in actuality were not paid by the QFL on cessation of this liability.
20. With the assistance of the ld. representatives, we have gone through the record carefully. While allowing the claim of the assessee that no interest income ought to be assumed on such advances, and notional interest Page 6 of 8 Downloaded on : Mon Jun 14 20:53:38 IST 2021 C/TAXAP/302/2020 ORDER income is not assessable in the hands of the assessee, or in other words, interest expenses incurred by the assessee on the borrowed funds could not be ITA No.675, 688/Ahd/2016 ITA No.622 and 623/Ahd/2018 15 disallowed to the extent the assessee failed to recover interest income from subsidiary.
21. Dealing with this issue, the ld. CIT(A)has held that it was a genuine business transaction. The assessee has made huge advance of Rs.22 corres. It has share capital of Rs.2 crores in this concern, and everything will be at risk if subsidiary is not being revived. Thus, genuineness of the advancement in the shape of ICDs was not in doubt. These were for the purpose of business. The assessee has shown the interest income of Rs.738 lakhs from F.Y.2008- 09 to F.Y.2010-11. This amount was offered for taxation. If some balance outstanding remains, and written off in the accounts, then it is not for the Revenue to verify the genuineness or to ask the assessee to show whether debts have actually been become bad or not. The moment debts have been written off in the books, it is to be allowed without expecting the assessee to demonstrate whether debts have actually become bad or not. A reliance can be made to the decision of Hon'ble Supreme Court in the case of TRF Ltd. 230 CTR 14 (SC). It is altogether irrelevant, whether QFL actually paid tax or not. If a liability has ceased, then it will be added back in the taxable income of the QFL. Now, if that concern was suffering huge loss, then that cannot be the reason to disallow claim of the assessee. If this type of logic is being accepted, then every business organization was required to show profit only. This is a misplaced notion at the end of the ld. CIT(A) for rejecting the claim of the assessee. We allow this ground of appeal, and delete disallowance of bad debts. In the other words, claim of bad debt at Rs.170.91 lakhs is allowed. "
13. We are in agreement with the view taken by the Tribunal, referred to above. The findings recorded by the Tribunal, referred to above, are fortified by the Madras High Court decision referred to above in the case of Tiruchirapalli District Central Cooperative Bank Ltd. (supra).
Page 7 of 8 Downloaded on : Mon Jun 14 20:53:38 IST 2021C/TAXAP/302/2020 ORDER
14. In the overall view of the matter, we are convinced that none of the three questions as proposed could be termed as the substantial questions of law for the purpose of Section 260A of the Act, 1961. In the result, this appeal fails and is hereby dismissed.
15. In view of the aforesaid, the connected appeal also fails and is hereby dismissed.
(J. B. PARDIWALA, J) (ILESH J. VORA,J) Vahid Page 8 of 8 Downloaded on : Mon Jun 14 20:53:38 IST 2021