Income Tax Appellate Tribunal - Kolkata
Arco Impex Ltd, Kolkata vs Department Of Income Tax
आयकर अपीलीय अधीकरण, सी",
सी कोलकाता
अधीकरण, Ûयायपीठ - "सी
IN THE INCOME TAX APPELLATE TRIBUNAL "C" BENCH : KOLKATA
सम¢ ौी एन.
[सम¢ एन. ǒवजयकुमारन,
मारन, Ûयायीक सदःय एवं ौी सी.
सी.डȣ.
डȣ.राव,
राव, लेखा सदःय ]
[Before Shri N. Vijaya Kumaran, JM & Shri C. D. Rao, A.M.]
आयकर अपील संÉया / I.T.A No. 956/Kol/2009
िनधॉरण वषॅ/Assessment Year : 2002-03
Asstt. Commissioner of Income Tax -vs.- M/s. Arco Impex Limited
Circle-4, Kolkata. Kolkata [PAN : AADCA 7286 Q]
अपीलाथȸ /Appellant]]
[अपीलाथȸ ू×यथȸ/
ू×यथȸ/Respondent]]
[ू×यथȸ
अपीलाथȸ/
अपीलाथȸ For the Appellant : Shri A. K. Singh
ू×यथȸ/
ू×यथȸ For the Respondent : Shri D. S. Damle
सुनवाई कȧ तारȣख/Date
तारȣख of Hearing : 10.01.2012
घोषणा कȧ तारȣख/Date
तारȣख of Pronouncement : 03/02/2012
[[
आदे श/ORDER
ौी एन.
एन. ǒवजय कुमारन, Ûयायीक सदःय Per N. Vijaya Kumaran, J. M. This appeal by the Department is directed against order of Ld. CIT(A)-IV, Kolkata dated 20.02.2009 for assessment year 2002-03. The grounds of appeal is as under :-
1. The Ld. CIT(A) has erred in deleting the addition of Rs.17,16,467/- as bad debt written off without appreciating the facts that section 36(i)(vii) read with section 36(2) require that the debt has actually become bad.
2. That on the facts of the case and in law Ld CITA(A) has erred in deleting the addition of accrued interest of Rs.95,58,000/- without appreciating the facts that the assessee was not NBFC and interest on loans given to sister concerns out of interest bearing fund accrued year after year.
3. That the Ld. CIT(A) has erred in considering the assessee as NBFC when RBI has rejected the claim and directed to wind up its business while giving relief on account of addition of accrued interest of Rs.95,58,000/-.
4. That the Ld. CIT(A) has erred in accepting the status of the assessee as NBFC and deleting the addition of Rs.5,66,700/- as NPA.2
[ITA No. 956/Kol/2009-A-NVK]
5. That Ld. CIT(A) has erred in holding that explanation below Section 73 of the I.T.Act, 1961 is not applicable although the assessee is neither banking company nor a NBFC and its business cannot be treated as business of granting loan/advance when transaction of the company is limited within the group companies.
6. The Ld. CIT(A) has erred is not considering the case for disallowance of expenses u/s. 14A of the I.T. Act. 1961 as per Rule 8D of the I.T. Rules, 1962 in view of the decision of Daga Capital Management Ltd of ITAT, Mumbai, Special Bench (2008-379-ITAT) when the power of CIT(A) is coterminous with power of the A.O.
7. The appellant crave for leave to add, alter, modify or delete any of the grounds of appeal before or at the time of hearing.
2. The first ground is on the deletion of addition of Rs.17,16,467/- as bad debt written off under section 36(1)(vii) read with Section 36(2) of the Income Tax Act.
3. The facts relevant are that the assessee claimed deduction of bad debt written off in respect 6 parties. It was also explained before the Assessing Officer that the amounts written off represent interest which was earlier credited to the profit & loss account and to that extent, assessee filed appeal before the Assessing Officer. Therefore, it was claimed that assessee fulfilled the condition that amount written off stand fulfilled. However, Assessing Officer was of the view that to allow bad debt the same should have been actually become bad. It is not any debt but only bad debt alone is to be allowed. On appeal to the Ld. CIT(A), Ld. CIT(A) found that after 01.04.1989 it was necessary for the assessee to write off the bad debt alone to claim as bed debts. It should be conscious and honest decision on the part of the assessee treat the debt as bad debt and irrecoverable and once it is written off that honest decision, it is allowed as bad debt. Further proposition before the I.T.A.T. relied on the decision of Special Bench in the case of DCIT vs. Oman International Bank SAOG [2006] 100 ITD 285 (Mum.) (SB).
4. The Ld. Departmental Representative before us contended that first the status of assessee regarding Non Banking Financial Company is to be decided and then the Department will decide the subsequent issue and in this case the order of the Assessing Officer is to be restored by reversing the decision of Ld. CIT(A).
5. Ld. Counsel for the assessee submitted that Special Bench decision of I.T.A.T. as relied 3 [ITA No. 956/Kol/2009-A-NVK] before the Ld. CIT(A) in the case of Oman International Bank SAOG(supra) and the recent decision of Hon'ble Supreme Court in the case of TRF Limited vs. CIT [2010] 323 ITR 397 (SC) settle the issue. Hence, Ld. Counsel for the assessee submitted that the order of Ld. CIT(A) is to be confirmed in view of the recent decision of Hon'ble Supreme Court in the TRF Limited (supra).
6. We have considered the rival submissions and perused the material available on record including the precedents. The assessment order involved is 2002-03, previous year ended is 31.03.2002. After 01.04.1989 i.e. Section 36(i)(vii) had a radical change. It is the duty of the assessee to taken an honest decision in the nature of the debt. Once assessee took the honest decision that the debt become irrecoverable, based on that assessee wrote it off in the books i.e. sufficient compliance for the purpose of claim of bad debt deduction. The decision of Hon'ble Supreme Court in the case of Vijaya Bank vs. CIT [2010] 323 ITR 166 (SC) also laid down the same ratio which will support the argument of Ld. Counsel. Respectfully following the decision of Hon'ble Supreme Court in the case of Vijaya Bank (supra) and the decision of I.T.A.T., Special Bench in the case of Oman International Bank SAOG (supra), we have no hesitation in confirming the order of the Ld. CIT(A) on the issue of bad debt claim.
7. Coming to ground No.2 & 3, it is deletion of addition of Rs.95,58,000/- on notional interest. Ld. CIT-DR submitted that reference to Para 3.3 at page 9 of the order of Ld. CIT(A) wherein it was observed that in the notes on accounts for the year ended 31.03.2002, it has been stated that the assessee made an application for registration as non-banking finance company (NBFC) and the same is pending before Reserve Bank of India and that is the decision that the status of the assessee can not be taken as Non-Banking Finance Institution. Hence, RBI direction need not be followed including the prudential norms and guidelines which would apply in the case of NBFC. Therefore, the inclusion of notional interest on non-performing assets (NPA) made by the Assessing Officer is justified, is the argument of Ld. CIT-DR.
8. On the other hand, Ld. Counsel for the assessee submitted that the Assessing Officer never went to challenge the status of the assessee i.e. N.B.F.C. but the Assessing Officer rejected the submissions of the assessee that in view of the guidelines of the RBI, interest accrued thereon does not accrue on NPAs and that these debts have been taken to NPA. It was submitted on behalf of the assessee before, therefore, interest can not be attributed on account of these loans. However, 4 [ITA No. 956/Kol/2009-A-NVK] Assessing Officer was of the view that assessee is following mercantile system of accounting which always involve tax liability. The fact that such income was not realized subsequently is of difference matter altogether. Therefore, Assessing Officer found that assessee is liable to include income on these loans since assessee follows mercantile system of accounting and accordingly notional interest @ 18% per annum which is to the tune of Rs.95,85,000/- were added as income of the assessee. Aggrieved on this, on appeal to the Ld. CIT(A), Ld. Counsel found that in assessee's own case in the immediately preceding year i.e assessment year 2001-02, I.T.A.T., "E" Bench Kolkata in ITA No.1080/Kol/2005 vide order dated 243.08.2005 held that the allowability of provisions of NPA made as per R.B.I. guidelines were accepted by the Tribunal by answering that the assessee was NBFC and was guided by the RBI guidelines and direction.
9. Before us also, Ld. Departmental Representative relied the assessment order and vehemently argued that unless the assessee is a NBFC and has stated earlier that the assessee has made an application for registration as NBFC and the same is ending with R.B.I. When such is the position, assessee can not be taken as NBFC which was guided by RBI guidelines and prudential norms. Ld. Departmental Representative, therefore, submitted that the issue will go back to the file of the Assessing Officer for verification that NBFC was done.
9.1 However, objecting to the argument of Ld. CIT-DR, Ld Counsel submitted that immediately preceding year the Tribunal has accepted that assessee was a NBFC and was guided by the RBIT guidelines and directions. Further, Ld. Counsel for the assessee would refer to the RBI letter dated 04.01.2005 whereby the RBI in Para 3 of its letter permitted the assessee as "you should, however, note that your company still continues to be governed by the relevant provisions of the RBI Act, 1934 and various directions/instructions issued by RBI from time to time and the entire amount of public deposits, if any, held by your company is fully repaid with interest." Hence as per Ld. Counsel the prudential norms of RBI has to be followed by the assessee. Further, Ld. Counsel submitted that inclusion of notional interest on NPAs as income of the assessee can not be taken for consideration before the Tribunal in the case of Hilltop Holdings India Ltd. in ITA No.318/Kol/2006 dated 10.08.2007 and the Kolkata Tribunal upheld the decision of the Ld. CIT(A) who deleted the addition of notional interest on NPAs made by the Assessing Officer in the assessment. While arriving at the decision, Tribunal relied the decision in the case of Brabourne Investments Ltd. in ITA No.379/Kol/2006 dated 05.01.2007. The Department went in 5 [ITA No. 956/Kol/2009-A-NVK] appeal before the Jurisdictional High Court and the Jurisdictional High Court dismissed the appeals holding that no substantial question of law are involved. Ld. Counsel for the assessee, therefore, submitted that NBFC status issue is only of academic and the assessee still has to continue to follow the prudential norms of RBI. Further, the Hon'ble Jurisdictional High Court in the case of Brabourne Investments Ltd. in ITA No.333 of 2007, while answering the specific substantial question of law on the provisions for NPA though assessee company was not recognized by the RBI, the Hon'ble Calcutta High Court has answered the question in favour of the assessee and against Revenue by dismissing the 260A appeal of the Department. Therefore, Ld. Counsel submitted that now the issue is covered by cantena of decisions and Ld. Counsel further relied on the decision of Hon'ble Supreme Court in the case of Southern Technologies Ltd. vs. JCIT [2010] 320 ITR 577 (SC) and the decision of Hon'ble Delhi High Court in the case of CIT vs. Vasisth Chay Vyapar Ltd. & others [2011] 330 ITR 440 (Delhi).
10. We have considered the rival submissions and perused the material available on record including the precedents. The Assessing Officer was of the view that assessee is following mercantile system of accounting. The interest income notionally accrued on the non-performing asset has to be taken as income by the assessee though it was not realized during the year. The assessee is a NBFC has already been decided by the Tribunal in assessee's own case in the immediately preceding year 2001-102. Therefore, the assessee-company is to follow the prudential norms and guidelines issued by R.B.I. Therefore, Assessing Officer's view that it was not open to the assessee to decide not to account for the interest on loans. The prudential guidelines issued by RBI are to be taken into consideration in assessing the total income and further no interest on NPAs could be included in the total income. During the relevant year, assessee carried on NBFC activities and the income from business was assessed. The assessee has paid interest tax for the assessment year 2000-01 vide assessment order dated 14.03.2003, the copy is available in assessee's paper book at page 55. Therefore, the prudential accounting norms issued by the RBI were still applicable. As per the said norms, assessee could not recognize interest loans classified as NPA. Therefore, we are of the opinion that the method of accounting is not the sole determining factor. The Income-tax recognizes two methods of accounting i.e. cash and mercantile but both accounting subject matter of assessment is the real income. The method of accounting only prescribes the time for recording an entry in the books of account relating to an income. The 6 [ITA No. 956/Kol/2009-A-NVK] accounting principles, however, have to be applied to commercial realities and, therefore, ifno income arises in reality then no addition is permissible. The directions and instructions issued by R.B.I. introducing prudential accounting norms binding on the assessee. Furthermore, assessee is consistently following the directions of RBI prudential norms and, therefore, assessee could not recognize the interest on loans considered as NA. Therefore, we are of the view that no addition of interest was permissible only because assessee is following mercantile system of accounting as the prudential norms of the RBI and no income in real terms was carried addition was not permissible. Hence, we agree with the findings of the Ld. CIT(A). Therefore, ground Nos.2 & 3 of the Department fails.
11. Coming to the four ground, Assessing Officer taken this as "income from other sources" to the tune of Rs.5,66,700/- whereas the Ld. CIT(A) accepted the status as NBFC. He has not deleted the addition as urged in the ground but he changed the head of income as "business income"
instead of "income from other sources". To that extent ground is mis-conceived as held that it has been decided in the preceding years that the assessee-company is NBFC and nothing contrary has been brought on record and assessee-company has paid tax for the assessment year 2001-01. We have no hesitation in confirming the order of Ld. CIT(A) who has not deleted the addition but only converted the head "from other sources of income" to "business income" Further, the decision of I.T.A.T., Kolkata Benches in the case of Brabourne Investments Limited vide ITA No.2249/Kol/2003 dated 12.07.2005 held that interest income is to be assessed as "business income" not from "other sources". We have no hesitation in confirming the order of the Ld. CIT(A) who changed the income under the correct head "business" and not "income from other sources. This ground also revenue fails.
12. Coming to ground No.5, which is on the applicability of Explanation to Section 73 runs as under :-
"Where any part of the business of a company ([other than a company whose gross total income consists mainly of income which is chargeable under the heads "Interest on securities", "Income from house property", "Capital gains"
and "Income from other sources"] or a company the principal business of which is the business of banking or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which consists of the purchase and sale of such shares."
7[ITA No. 956/Kol/2009-A-NVK] The assessee explained that Explanation to Section 73 was not invocable in view of the fact that actual delivery of shares had taken place. Further explained that the company escapes from the provisions in view of the fact that the primary business of the assessee is granting of loans and advances as established apparent from deployment of capital. In the share trading, the deployment is Rs.7,35,50,312/- whereas in other income it is Rs.1,23,77,322/-. However, the Assessing Officer rejected the submissions of the assessee. Assessing Officer was of the view that major portion of the capital has been deployed for the purpose of granting loans and advances was not found acceptable to the Assessing Officer in view of the fact that the deployment of capital is a dynamic phenomenon and changes with every transaction and is accordingly, not detrimental at any point of time. Assessing Officer went further even for the sake of arguments that if it is accepted that capital deployment is to be computed at the end of financial year. The same can not be accepted in view of the fact that the funds can flow at the out of the business of the assessee throughout the year. That the net result of inflow and outflow of funds is much less than the amount the assessee has deployed for the purpose of share trading. Therefore, Assessing Officer was of the view that assessee was hit under Explanation to Section 73. Therefore, he has not allowed the speculation loss. On appeal to the Ld. CIT(A) it is contended that during the previous year assessee did not carry out any transaction by purchase of and sale of shares. The assessee further submitted before the Ld. CIT(A) that the principle business of the assessee-company was granting of loans and advances and as such, assessee-company failed in the excluded category of cess in terms of provision of Section 73 of Income Tax Act. The loss in share dealing was dealt in the return of income in terms of Sections 70 to 72. Upon application of provisions of Section 72, the entire business loss remaining after set off under section 71 against income under the head "other sources" was carried forward to the next year and there remaine nothing to be done in the next year. In other ways, unabsorbed business so determined and carried forward if the Assessing Officer wrongly invoked the provisions of Section 73 and treated the loss being loss for holding on to the stock of shares as speculation loss. Ld. CIT(A) assimilated the submissions of the assessee and he found that Assessing Officer at first treated the loss in the business of purchase and sale of shares as speculation loss by applying Section 73 . To the aforesaid loss Assessing Officer has added the entire claim of interest paid and compute loss in share business. Having done that the Assessing Officer discussed other components in profit and loss account and treated the following and other income. At this junction, we at the cost of repetition want to mention the same facts as 8 [ITA No. 956/Kol/2009-A-NVK] we have discussed vide ground No.4. The tabled income is like this :-
Dividend Income Rs. 3,78,496/-
Interest Income Rs.18,74,126/-
Provision for NPA written back Rs. 5,66,700/-
Notional Interest Rs.95,58,000/-
Total : Rs.1,23,77,322/-
Assessing Officer treated the interest income stating that the interest income is "income from other sources" which we already disagree and confirmed the order of Ld. CIT(A) while we deciding ground No.4 of the appeal in view of the decision I.T.A.T., Kolkata Benches in the case of Brabourne Investments Ltd. in ITA No.2249/Kol/2003 dated 12.07.2005 (cited supra).
12.1 Coming to invoking of Explanation to Section 73 for the purpose of arriving at decision, the facts relevant are that the Assessing Officer has stated in the assessment order that the assessee is in the business of purchase and sale of shares and even though no purchases or sales were made during the year. The loss sustained was due to fall in the valuation of closing stock. This loss is not different from any trading loss and is an integral part of purchase and sale of shares. However, the contention of the assessee is that since its principal business was of granting of loans and advances and will not hit under Explanation to Section 73 was not found acceptable to the Assessing Officer as we have already stated. Assessing Officer observed that its deployment of capital is dynamic and phenomenon. Ld. CIT(A) found that admittedly, assessee incurred loss of Rs.5,35,179/- in the business of purchase and sale of shares. Admittedly, in this year, there is no purchase or sale of shares, it is only a loss from share dealing. The Explanation to Section 73, it is evident that the same applies to a company whose part of business consists of purchase and sale of shares but there are also two exceptions provided for the application of explanation. Even the assessee falls in any of the exceptions as curved out in the explanation to Section 73, then the provisions of treating the loss in the business of purchase and sale of shares as loss in speculative business would not arise. The Explanation with regard to the second exception in which the assessee-company falls by the criteria that the principal business of which is the business of banking or granting of loans and advances. The principal business has not been defined. Therefore, it is to be added judged from the facts of each case. For the year ended the assessee was engaged in the business of non-banking 9 [ITA No. 956/Kol/2009-A-NVK] finance company including the business of granting of loans as well as investment in shares and securities. As per audit notes, the shares were held as investments and as its stock-in-trade. The assessee was also engaged in the business of granting loans. The funds deployed in the business of granting of loans were far in excess of funds deployed in the business of trading in shares. This finding of the Ld. CIT(A) clearly brought the assessee-company in the exception particularly second exception envisaged in the Explanation to Section 73. Therefore, assessee falls outside the Explanation to Section 73 consequently loss incurred in the business of purchase and sale of shares should have been treated as normal business loss and not as deemed speculation loss. As the Ld. CIT(A) went on the criteria of principal business of the assessee with relevant to the fact of the material available on record and came to the conclusion that the funds deployed in the business of granting of loans were far in excess of the funds deployed in the business of trading in shares and the principal business of the assessee was of that loans and advances. The assessee-company will not hit under the Explanation to Section 73. Therefore, loss in the business of purchase and sale of shares has to be taken as business loss. On the aforesaid reasoning, we confirm the order of the Ld. CIT(A). Hence, Department fails in ground No.5.
13. Coming to ground No.6 which is disallowance of expenses under section 14A by invoking Rule 8D.
14. After careful consideration of the rival submissions, there is no disallowance by the Assessing Officer under section 14A in the assessment order not it is the ground of the assessee before the Ld. CIT(A) and this ground No.6 is misconceived. However, Ld. Counsel for the assessee submitted that Rule 8D is not retrospective or prospective and the assessee already disallowed 1% on the exempted income. Hence, this ground would not survive.
15. After considering the rival submissions, we are of the view that this issue is not emanating out of the order of the authorities and the decision of I.T.A.T., Special Bench, Mumbai in the case of Daga Capital Management [2008-379-ITAT) has already been over ruled by the Hon'ble Calcutta High Court. This ground No.6 urged by the Department will not stand to test in the eye of law. This ground also fails.
10[ITA No. 956/Kol/2009-A-NVK]
16. Ground No.7 is general in nature and requires no adjudication, hence, dismissed.
17. In the result, appeal of the revenue is dismissed.
.
आदे श Ûयायालय मɅ सुनाया गया है Order pronounced in the Court on 03/02/2012.
Sd/- Sd/-
[सी.
सी.डȣ.
डȣ.राव,
राव, लेखा सदःय]
सदःय एन.
एन. ǒवजय कुमारन,
[एन मारन, Ûयायीक सदःय]
सदःय
[ C. D. Rao ] [ N. Vijaya Kumaran ]
Accountant Member Judicial Member
[तारȣख]
तारȣख Dated : 03-02- 2012.
आदे श कȧ ूितिलǒप अमेǒषत/Copy of the order forwarded to:
अपीलाथȸ /Appellant : A.C.I.T., Circle-4, P-7, Chowringhee Square, 8th floor,
1. Kolkata-700 069.
2. ू×यथȸ/ Respondent : M/s. Arco Impex Limited, 31, N. S. Road, Kolkata-700 001.
3. आयकर किमश-नर/ CIT-
4. आयकर किमशनर (अपील)/CIT(A)-
5. वभािगय ूितनीधी/DR, Kolkata Benches, Kolkata.
[स×याǒपत ूित/True Copy] आदे शानुसार/ By order, पंजीकार/Asstt Registrar *PP वǐरƵ िनǔज सिचव/Sr.PS]