Income Tax Appellate Tribunal - Kolkata
Britannia Industries Limited, Kolkata vs Department Of Income Tax
आयकर अपीलीय अधीकरण, Ûयायपीठ - " सी ", कोलकाता,
IN THE INCOME TAX APPELLATE TRIBUNAL "C" BENCH : KOLKATA
(सम¢)
सम¢) माननीय़
माननीय़ ौी जी.
जी.डȣ.
डȣ. अमबाल,
अमबाल, उपाÚय¢ एवं माननीय़
माननीय़ ौी डȣ.
डȣ.के. ×यागी,
×यागी, Ûयायीक सदःय
[Before Hon'ble Shri G. D. Agrawal, VP & Hon'ble Sri D. K. Tyagi, JM]
आयकर अपील संÉया / ITA No. 1789/Kol/2008
िनधॉरण वषॅ/Assessment Year : 2003-04
Assistant Commissioner of Income-tax, -Vs- Britannia Industries Ltd.
Circle-7, Kolkata. (PA No. AABCB 2066 P)
(अपीलाथȸ/APPELLANT ) (ू×यथȸ/RESPONDENT)
For the Appellant: ौी/Shri B. N. Verma
For the Respondent: ौी/ Shri D. S. Damle
आदे श/ORDER
Per D. K. Tyagi, JM (ौी डȣ.
डȣ. के. ×यागी, ×यागी Ûयायीक सदःय) This appeal preferred by the revenue is directed against the order of the Ld. CIT(A), Kolkata dated 02.06.2008 for the assessment years 2003-04 on the following grounds :
"1. That the Ld. CIT (A) erred in holding that the expenses of Rs.28,21,321 on share buy back are revenue expenses and hence allowable.
2. That the Ld. CIT (A) was not justified in his allowing of depreciation of Rs.15,75,868 on assets used in R&D
3. That the Ld. CIT (A) erred in holding the penal payments of Rs.5,36,769 made at the check posts as allowable expenses.
4. That the write off of bad debts of Rs.104,63,615 did not qualify as arising from the regular business of the assessee and hence should not have been allowed by the Ld. CIT(A).
5. Disallowance of loss of Rs. 1,08,30,324 by the A.0. was on sound judgement and Ld. CIT (A) erred in holding it otherwise.
6. Club subscription fees of Rs. 7380 paid for the director 's individual membership was not an allowable expenditure and Ld. CIT (A) was not right in allowing it."
2. The revenue appeal is delayed by eight days and a condonation petition has been filed and is placed on record. After bearing both the sides and perusing the condonation petition, we condone the delay of eight days and the appeal has been taken up for hearing.
23. Ground no. 1 relates to deletion of disallowance of Rs.28,21,321/- being expenditure on share buyback expenses. Briefly stated facts of the case are that the assessee company incurred a sum of Rs.28,21,321/- as capital expenditure for Buy Back of Shares and claimed as revenue expenses. Before the AO, the assessee company submitted that "The share Buy Back Expenses have been debited to Profit &. Loss Account included in Miscellaneous Expenses. The Expenses incurred during the course of business of company and allowable as an expenditure with provision of Section 37(1) of Income-tax Act". The AO, therefore, observed that the said explanation of assessee do not constitute any force as the increased or decreased of share capital of company is a life long benefit of company. When the increase of share capital of company is a capital expenditure as the benefit derived long term benefit. Similarly when the company offered for buy back of share for reduction of share capital for distribution of more income to the members of company in future it also a capital expenditure. There was no increase in profitability of business by reduction of share capital. But oOr buy back of its own share the company is offering more distribution of profit amongst members in future. So, According to the AO, the expenditure incurred of Rs.28,21,321/- for buy back of its own share is not a revenue expenditure but capital expenditure. Therefore, the sum of Rs.28,21,321/- claimed by assessee company as revenue expenditure has been disallowed by the AO and added back to the income of assessee company. In appeal, the Ld. CIT(A) deleted the disallowance as made by the AO. Aggrieved by the said order, now the revenue is in appeal before us.
4. At the time of hearing before us the Ld. D.R. relied on the order of the AO and prayed before the bench to confirm the same.
5. On the other hand, the Ld. Counsel for the assessee while reiterating his same submissions as submitted before the Ld. CIT(A) relied on his order and submitted that the AO was wrong in disallowing the sum of Rs.28,21,321/- being share buyback expenses on the ground that the same is capital in nature. He also submitted that the share buyback expenses have been included in Misc. Expenses and debited to the P & L Account. The expenses were incurred in the course of business of the assessee and are allowable as business expenditure in accordance with the provisions of section 37(1) of the I. T. Act. He also relied on his submissions as submitted before the Ld. CIT(A), 3 which has been reproduced by the Ld. CIT(A) in his order from pages 6 to 8. He lastly concluded that the order of the Ld. CIT(A) in this regard may be upheld.
6. We have heard the rival submissions and perused the material available on record. We find that the Ld. CIT(A) while deleting the addition of Rs.28,21,321/- had passed a very well reasoned order and for the sake of brevity, we reproduce the relevant portion of his order as under :
"13. I have considered the submissions of the A/R, perused the relevant provisions of the Companies Act and the decision on which the reliance was placed. In the impugned order the A.O. disallowed share buyback expenses because in his opinion buyback of shares resulted in permanent reduction in share capital. According to A.O. the same considerations should be applied in deciding the character of expenditure in case of increase and reduction in the share capital. In my opinion the A.O.'s proposition is not supported by the decision of the Supreme Court in the case of Punjab State Industrial Development Corporation Ltd (225 ITR 792). In this judgment the Supreme Court admitted that increase of share capital may certainly help the company in increasing its profit earning but because the benefit derived is of long term and enduring nature and there being permanent expansion of the capital base which results in capital in follow; the expenditure is capital in nature.
In the case of buyback of shares however there is no permanent change in the capital structure of the company. The company buys back its outstanding stock from the existing share holders and such purchase is effected out of company's free reserves which are otherwise capable of being freely distributable to the shareholders by way of dividend or can be used for declaration of bonus shares.
14. On comparing provisions of Sec 77A and Sec 81 of the Act it is found that many conditions for issue of bonus share are parameteria with provisions relating to buyback of shares. In both the cases i.e. buyback of shares and issue of bonus shares, the company can use its free reserves and share premium. In both the cases the company utilizes its existing reserves for enhancing the share holder's investment value. The decisions regarding issue of bonus share or buyback of shares are taken by the directors on business consideration. No benefit of enduring nature is derived by the company. In buyback of shares there is temporary reduction in the capital base because prohibition on issue of shares of that kind is for temporary period of 24 months. The Supreme Court in the case of CIT Vs. General Insurance Corporation (286 ITR 232) has held that expenditure on bonus share is not a capital expenditure as there is no increase in the capital base of the company because existing free reserves of the company are utilized for issue of bonus shares.
15. Applying the ratio laid down in this decision I find that existing free reserves and share premium account are used for buyback of shares which does not result in permanent reduction of the share capital and no benefit of enduring nature is derived. In the appellant's case the buyback of shares was effected by utilizing its free reserves. In my considered opinion therefore the expenditure incurred on buyback of shares was not a capital expenditure as there was neither permanent change in the capital structure of the company nor benefit of enduring nature was received by the appellant. The A.O. is therefore directed to deleted the disallowance of Rs.28,21,321/-"4
In view of the above and in the absence of any contrary material brought on record by the revenue at the time of hearing before us, we do not find any infirmity in the order of the Ld. CIT(A) and therefore, the same is hereby upheld. This ground of revenue is dismissed.
7. In Ground No. 2, the revenue has agitated against the action of the Ld. CIT(A) in allowing of depreciation of Rs.15,75,868/-. At the time of assessment proceedings the AO on perusal of Tax Audit Report noted that the assessee had claimed revenue expenditure on scientific research amounting to Rs.1,67,68,747/-, which, inter alia, included Rs.15,75,868/- being depreciation on R&D assets calculated as per provisions of the Companies Act. The AO held that since the assessee was always allowed deduction for capital expenditure towards purchase of R&D assets u/s. 35, the assessee could not be allowed deduction once again in respect of depreciation of these assets as and by way of revenue expenditure. In appeal, the Ld. CIT(A) respectfully following the decision of the ITAT, Kolkata "E" Bench vide order dated 9.9.2005 in ITA No. 363/Kol/2005 deleted the disallowance of Rs.15,85,785/-. Aggrieved by the said order, now the revenue is in appeal before us.
8. At the time of hearing before us, the Ld. DR relied on the order of the AO and submitted that the action of the AO in making the disallowance of Rs.15,75,868/- on account of depreciation on assets used in R&D was justified since the assessee was always allowed deduction for capital expenditure towards purchase of R&D assets u/s. 35, therefore, the assessee could not be allowed deduction once again in respect of depreciation. Of these assets as and by way of revenue expenditure. He lastly prayed before the bench to set aside the order of the Ld. CIT(A) and restore that of the AO.
9. On the other hand, the Ld. Counsel for the assessee relied on the order of the Ld. CIT(A) and urged before the bench to confirm his action since he deleted the disallowance of Rs.15,85,785/- by following the order of the ITAT "E" Bench, Kolkata dated 9.9.2005 in ITA No. 363/K/2005.
10. After hearing the rival submissions and carefully perusing the material available on record, we find that on identical issue, the Coordinate Bench of this Tribunal by its order dated 9.9.2005 in ITA No. 363/K/2005 for AY 2000-01 in assessee's own case upheld the order of the Ld. CIT(A) in deleting the disallowance of book depreciation on R&D assets. The Ld. CIT(A) in the instant case has also deleted the disallowance by 5 following the aforesaid order dated 9.9.2005 (cited supra). In this view of the matter and finding no other contrary material brought on record by the revenue authorities, we do not find any infirmity in the action of the Ld. CIT(A) in deleting the disallowance of Rs.15,85,785/- and the same is hereby upheld. This ground of appeal of the revenue is also dismissed.
11. In Ground No. 3, the revenue has agitated against the action of the Ld. CIT(A) in allowing payment of Rs.5,36,769/- made at the check posts. According to the AO, the payment was not permissible because the payments represented penalties paid at check posts for infraction of law. In appeal, the Ld. CIT(A) deleted the addition. Aggrieved by the said order, now the revenue is in appeal before us.
12. At the time of hearing before us, the Ld. DR. relied on the order of the AO and submitted that since the payment made at check post was in the nature of penalty for infraction of law, the same was lawfully disallowed by the AO and he urged before the Bench to set aside the action of the Ld. CIT(A) and restore that of the AO.
13. On the other hand, the Ld. Counsel for the assessee while reiterating his same submissions as submitted before the lower authorities relied on the order of the Ld. CIT(A) and urged before the bench to confirm his action. He also contended that the AO made the disallowance by holding that the payment was not permissible because the payments represented penalties paid at check post for infraction of law. In this regard he submitted that the expenses were incurred in the course of transportation of goods as reimbursements to the transporters to defray the charges levied at check posts for deficiencies in the interstate entry forms. These levies are later reimbursed when the transporter wins the case at appellate level on correct of the deficiencies in the forms. Hence they are not statutory payments by the assessee but the reimbursement of expenses to transporters. The reimbursements were not for the violation of any law but are merely payments for non compliance with procedural matters. He also placed reliance on the following decisions :
i) Prakash Cotton Mills P. Ltd. V. CIT (201 ITR 684) (SC),
ii) Swadeshi Cotton Mills Co. Ltd. Vs. CIT (233 ITR 199 )(SC),
iii) Mahalakshmi Sugar Mills Co. Vs. CIT (123 ITR 429) (SC),
iv) CIT Vs. Luxmi Devi Sugar Mills P. Ltd. (188 ITR 41 )(SC),
v) CIT Vs. Mysore Electrical Industries Ltd. (196 ITR 884) (Kar) and
vi) CIT Vs. Chemical Constructions (243 ITR 858)(Mad).
He lastly urged before the bench to confirm the action of the Ld. CIT(A) in this regard.
614. After hearing the rival submissions, perusing the material available on record and the case laws cited by the Ld. Counsel, we find that the AO made the disallowance by stating that the payment made at check post was in the nature of penalty for infraction of law, and hence, the same was disallowable. The Ld. CIT(A) deleted the addition by stating that the payments made at different check posts by the transporters were compensatory in nature to avoid delays in delivery of goods and not for infraction of law. He, therefore, applying the ratio laid down in the various judicial decisions cited before him deleted the addition. For the sake of brevity, we reproduce the relevant portion of his order as under :
"I have considered submissions of the A/R and perused details of payments made. As per regulations of the local authorities the transporters are required to produce numerous documents before the Octroi authorities when the truck passes through the check post. Each local authority has its own set of rules regarding documentation and the truck drivers being semi literate, the deficiencies can be found in the documents. Having regard to the lengthy procedures delays occur on many occasions and to avoid delays in transportation of goods transporter is required to deposit amounts on account of deficiency in documentations. The payments made at local check posts are therefore more compensatory in nature and not penal in character. The payments are not made for infraction of legal provision but are for regularizing the procedural deficiencies. In my considered opinion the payments made at different check posts by transporters were compensatory in nature to avoid delays in delivery of goods and not for infraction of law. Applying the ratio laid down in the judicial decisions cited before me I hold that the disallowance of Rs.5,36,769/- was not justified and the same is accordingly deleted."
In this view of the matter and also in the absence of any contrary material brought on record by the revenue authorities at the time of hearing before us, we do not find any infirmity in the order of the Ld. CIT(A) and the same is hereby upheld. This ground of appeal of the revenue is also dismissed.
15. In Ground No. 4, the revenue has agitated against the action of the Ld. CIT(A) in allowing write off of bad debuts of Rs.1,04,63,615/-. In the assessment order the A.O. noted that the assessee claimed deduction for Rs.1,04,63,615/- which represented write off in respect of loan advanced to M/s. Marvel Agrex Limited (Marvel).The A.O. required the assessee to furnish its explanation in support of the claim of write off. After examining the assessee's explanation and details furnished; the A.O. found that assesee had advanced Rs. 2 crores to Marvel by way of loan for purchase of plant and equipments. The loan was repayable along with interest in monthly instalments. According to A.O. assessee was a manufacturing company and not a finance company and therefore loan advanced was not income of its manufacturing business and could not be treated as trade advance, From the judgment decree obtained by assessee on 09.06.1994 it was clear that the amount was advanced by way of loan and decree was for the principal and interest. The A.O. further noted that though assessee filed 7 execution petition for recovery of principal and interest, no interest was offered for tax as no interest was actually received and was assessed to tax. The A.O. further noted that the assessee assigned its rights in the decree passed by the Court; to M/s. Shubhamangal Traders Pvt. Ltd and received Rs. 35 lacs which was much lesser amount; after long battle of about ten years and claimed business loss. With reference to these facts the A.O. concluded that it was clear that the assessee had advanced loan which was not in the course of business nor loan advanced was taken into account, in computing income in the earlier years and therefore the assessee's claim did not satisfy conditions of sec. 36(1)(vii) read with Sec. 36(2). He, therefore, disallowed the assessee's claim for amount written off. In appeal, the Ld. CIT(A) directed the AO to delete the disallowance of Rs,.1,04,63,615/-. Aggrieved by the said order, now the revenue is in appeal before us.
16. At the time of hearing before us, the Ld. DR relied on the order of the AO and prayed before the bench to confirm his action. He also contended that the AO has rightly came to the conclusion that it was clear that the assessee had advanced loan which was not in the course of business nor loan advanced was taken into account, in computing income in the earlier years and therefore the assessee's claim did not satisfy conditions of Sec. 36(1)(vii) read with Sec. 36(2). He lastly urged before the bench to set aside the order of the Ld. CIT(A) and restore that of the AO.
17. On the other hand, the Ld. Counsel for the assessee while reiterating his same submissions as submitted before the lower authorities further submitted that the AO disallowed a sum of Rs.1,04,63,615/- being write off advance made to Marvel Agrex Ltd. on the basis that the amount was a loan and not advanced in the course of business of the assessee and hence the write off is not allowable as a deduction. It was submitted on behalf of the assessee that Marvel was a supplier of the assesee's erstwhile soya division. The assessee had entered into an agreement dated 22.11.1991 with Marvel for using the facilities of Marvel to process soya beans into soya meal. Clause 4 of the agreement provides that the assesee shall grant an advance of Rs.25 lakh to Marvel. Thereafter, the assessee and Marvel entered into another agreement dated 2nd December 2001 which provided for advancing of a loan of Rs. 2 crore by the Assessee to Marvel. The recitals to the agreement clearly indicate that the loan is for the purchase of plant and equipment for a solvent extraction plant of soya beans and is linked to the 8 initial agreement between the parties for processing of soya beans. He, therefore, contended that the above documents clearly bring out the fact that the advance was during the course of the business of the assessee and was in respect of its erstwhile soya division. He also contended that Clause 2 of the agreement dated 2nd December 2001 clearly indicates that the said amount was to be repaid in monthly instalments by way of recovery from the processing charges payable by the assessee to Marvel. The above arrangement clearly indicates the intention of the parties that the amount of Rs. 2 crore was a temporary loan advance granted during the course of business of the assessee due to business exigencies. In other words, the loan advance of Rs. 2 crore which was to be recovered by the assessee from Marvel against processing charges was nothing but payment of advance price. In support of his submissions, he placed reliance on the following case laws :
i) CIT v. Mysore Sugar Limited (46 ITR 649) (SC), ii) Indoor Maiwa United Limited v. State of Madhya Pradesh (55 ITR 736) (SC), iii) CIT v. Jwalaprasada Radha Kishan (107 ITR 540) (All). iv) CIT v. Inden Biselers (181 ITR 69) (Mad).
In view of the above submissions, he contended that it will be appreciated that the write off of loan advanced to Marvel is allowable as a deduction. He also contended that moreover, vide Dee of Assignment dated 15th October, 2002, due to the assessee was transferred to Shubhamangal Traders Pvt. Ltd. for a consideration of Rs. 35 lakhs pursuant to which rights, benefits and all advantages available to the assessee under the decree dated 7th September, 1994 were transferred to Shubhjamangal. In other words, he contended that any recovery from Marvel would be receivable by Shubhamangal and the assessee has no further interest in the matter. In such circumstances, the loss suffered by the assessee has crystalised. In the light of the above submissions he submitted that the write off of loan advance to Marvel is allowable as a deduction. The Ld. CIT(A) has rightly accepted the claim of the assessee and allowed the same.
18. After hearing the rival submissions, perusing the material available on record and the case laws cited by the ld. Counsel for the assessee, we find that the AO disallowed a sum of Rs.1,04,63,615/- being write off advance made to Marvel Agrex Ltd. on the basis that the amount was a loan and not advanced in the course of business of the assessee and hence the write off is not allowable as a deduction. While accepting the 9 assessee's claim and also in deleting the disallowance of Rs.1,04,63,615/-, the Ld. CIT(A) passed a very well reasoned order, and for the sake of convenience, we reproduce the relevant portion of his order as under :
"20. After due consideration of the submissions and the documentary evidences submitted by the appellant I find force in the appellant's claim. The appellant carried on business of export of manufactured and traded goods. In the course of this business; appellant had secured orders for export of soya bean meal. The appellant was not manufacturing the said product on its own for which it had export orders. The appellant therefore entered into an arrangement with Marvel for sourcing of soya bean meal on exclusive basis. Marvel was putting up soya solvent extraction plant at Mahipur Road, Dist. Ratlam, Madhya Pradesh. The terms & conditions evidencing the arrangement with Marvel were recorded in the agreement dated 22.11.91. As per clause 4 of that agreement, appellant paid advance of Rs. 25 lacs carrying interest equal to rate of interest, which appellant was paying on its bank over draft. The agreement provided that interest would be recovered from Marvel on quarterly basis out of the processing charges payable by the appellant. By another agreement dated 02.12.1991 the appellant agreed to advance Rs. 2 crores to enable Marvel to purchase plant and equipment for it's solvent extraction plant. To secure the said loan Marvel created charge on assets of its solvent extraction plant in favour of the appellant.
21. According to A.O. the appellant was in the business of manufacturing and not in the business of financing and therefore loan granted to Marvel could not be considered to have been advanced in the course of appellant's business. However, having regard to the facts and documents on record I do not find force in this finding. Merely because assessee was not in the business of financing or money lending; that fact alone does not lead to conclusion that moneys were not advanced in the course of or for the purpose of assessee's business. The expression "for the purpose of business" is much wider in its connotation and sweep which is not confined only to earning of income. In the course of carrying on business an assessee has to take commercial decisions having regard to commercial necessities, commercial exigencies & expediency. The appellant in the present is widely held company having established credentials & was a major exporter of goods. Considering its export performance the appellant was granted "Star Trading House" status by the Ministry of Commerce, Govt. of India. The appellant had secured export orders for soya bean meal. To cater and meet the export order for soya bean meal appellant entered into an arrangement with Marvel for contract manufacturing on exclusive basis. It appeals to reason that having regard to this factual background the appellant assisted Marvel in its efforts of setting up soya extraction plant because the appellant was interested to develop a Secure Source for supply of processed Soya bean meal products on long term basis so that appellant could meet its export commitments. The arrangement with Marvel therefore appeared to have been made in the course of appellant's ordinary course of business. Having regard to the totality of the facts of the case therefore I have no hesitation in holding that the loan was advanced to Marvel in the course of & for the purpose of appellant's business because main intent and purpose of the arrangement with Marvel was to establish secured source for supply of soya bean meal.
22. Though the appellant was not in the business of granting of loans, the loan advanced to Marvel was in the course of appellant's business and therefore it was a trade loan or advance. The facts on record indicate that Marvel defaulted in paying interest and repaying the principal which forced the appellant to take legal recourse.10
The appellant filed a suit against Marvel in the Court of City Civil Judge at Bangalore who passed a decree in favour of the appellant on 07.09.1994 directing Marvel to pay sum of Rs.1,50,16,195/- inclusive of interest of Rs.22,70,620/-. Though decree was passed in the appellant's favour on 07.09.1994, appellant could not secure its execution. The A/R explained that the appellant could not take steps for execution of the decree & recover the decretal amount because Marvel was declared as a sick company by BIFR and therefore appellant lost all hopes of recovery of the decretal amount through legal process. In this background the appellant assigned the decretal amount to M/s. Shubhamangal Traders Pvt. Ltd for Rs. 35 lacs and received the said sum in full and final settlement of all dues & accordingly wrote off Rs.104,63,615/- which was the balance outstanding amount.
23. In my opinion the amount written off was allowable as business loss/expenditure because after the assignment of debt the appellant permanently lost its right to receive any further sums from Marvel. The appellant had advanced loan to Marvel in the course of its business and for business considerations. The loan debtor defaulted on repaying principal and ultimately loan amount became irrecoverable despite appellant obtaining decree from Civil Court in Bangalore. The loss was thus incurred by the appellant in the course of business and therefore it was fully allowable. Ratio laid down in the decisions in the cases of CIT Vs. Mysore Sugar Limited (46 ITR 649); Indoor Mlwa United Limited Vs. State of Madhya Pradesh (55 ITR 736); CIT Vs. Jwalaprasada Radha Kishan (107 ITR 540) and CIT vs. Inden Biselers (181 ITR 69) support appellant's claim. Apart from the above decisions, appellant's claim also appeared to be supported by recent decisions rendered by Delhi, Madhya Pradesh and Calcutta High Courts as well. The Delhi High Court in the case of CIT vs. Goyal M. G. Gases Ltd (163 Taxman 541 ) considered a similar claim for write off. In this case the assessee had granted bill discounting facilities to M/s Kedia Castle from whom Rs.4.24 crores was outstanding On failure of the debtor to repay the debt the assessee filed winding up petition against the debtor in the Calcutta High Court. While winding up proceedings were pending; debtor was declared as sick company by BIFR and therefore the assessee considered the debt as irrecoverable and wrote off the sum in its books. The assessee's claim for bad debts was disallowed by A.O. on the ground that such claim was not permissible because conditions of Sec 36(1) (vii) read with Sec 36(2) were not fulfilled. The CIT(A) and the Tribunal allowed the claim and on further appeal the Delhi High Court held that since the debtor was declared sick company by BIFR; the debt had become irrecoverable and therefore the assessee's claim for bad debt was rightly allowed. A similar question was considered by the Madhya Pradesh High Court in the case of Mrs. Geeta Sanohi vs. CIT ( 277 ITR 388) . In this case the assessee claimed deduction as bad debt for Rs.3,51,178/- which assessee had loaned to a company. After paying interest for some years, the debtor defaulted in payment of interest and repayment of principal. The debtor company was declared as sick company by BIFR and ultimately the company was ordered to be wound up and the assessee claimed the outstanding loan amount was bad debt. On appeal by the assessee the High Court held that when the debt amount was written off as bad debt and order of BIFR proved that the amount in question was due from sick company which was written off in the books, the assessee was entitled for deduction in the previous year in which debt was written off.
24. Applying the ratio laid down in these decisions I find that in the present case also despite obtaining decree from the Civil Court in 1994 the appellant was unable to secure its execution and did not recover any sums from Marvel because of debtor was declared as sick company by BIFR. Even though the decree was issued by the Court in 11 1994 the appellant could not obtain any payment from Marvel for 8 years because no legal proceedings were possible after the debtor was declared sick by BIFR. Considering the difficulties involved in recovery of decretal amount, the assessee ultimately assigned its rights in the decree in favour of Shubhamangal Traders Pvt. Ltd. and obtained Rs. 35 lacs in full and final settlement. On amounts advanced to Marvel and therefore the loss was rightly written off by the appellant as bad debt in F.Y.2002-03 because the deed of assignment was executed in October 2002. The jurisdictional Calcutta High Court in the case of Ashoka Marketing Ltd vs. CIT (253 ITR 355) similarly allowed a claim for bad debts on assignment of a loan. In that case the assessee had granted loan of Rs. 4 lacs to a company bearing interest. Upon inability of the debtor to repay loan and accrued interest, assessee assigned the loan to another company in full and final settlement and claimed Rs.2,15,751/- as bad debt which was disallowed by A.O. and Tribunal. On appeal, the High Court held that loss incurred upon assignment of loan to third party was allowable as revenue deduction. The ratio laid down in this decision is squarely applicable in the present case because facts of the assessee's case appeared to be parameteria. Considering the totality of the facts of the case therefore I hold that the assessee was entitled for deduction of Rs.1,04,63,615/- which was the debt written off in the appellant's book. The A.O. is accordingly directed to delete the disallowance of Rs.1,04,63,615/-."
We find that the Ld. CIT(A) by relying on the decision of jurisdictional High Court in the case of Ashoka Marketing Ltd. (supra) directed the AO to delete the disallowance on account of bad debt written off. In view of the above and in the absence of any controverting material brought on record by the revenue authorities at the time of hearing before us, we do not find any infirmity in the order of the Ld. CIT(A) and the same is hereby upheld. Before we depart, it is pertinent to note that at the time of hearing, the Ld. Counsel for the assessee placed reliance on a note available at paper book pages 9 to 12 according to which the deduction claimed was Rs.69,63,614.55 and not Rs.1,04,63,614/-, which was not disputed by the Ld. DR. Therefore, the AO is directed to take the figure of Rs.69,63,614.55 instead of Rs.1,04,63,615/-. This ground of appeal of the revenue is also dismissed.
19. In Ground No. 5, the revenue has agitated against the action of the Ld. CIT(A) in allowing Short term capital loss of Rs.1,08,30,324/-. At the time of assessment proceedings, the AO noted that the assessee purchased units of Kotak K- Bond Dividend Plan Units on 13.03.2002 and received dividend of Rs.1,08,30,324/-. These units were sold on 14.06.2002 and on sale the assessee suffered loss of Rs.1,13,82,671/-. According to A.O. as per Sec 94 (7) the assessee was entitled to claim capital loss of Rs.5,52,347/- only because the units were held only for period 13.03.2002 to 13.06.2002 and the assessee was not the owner of these units on 14.06.2003. The A.O. therefore disallowed the assessee's capital gain loss to the extent of Rs.1,08,30,324/-.. In appeal, the Ld. CIT(A) directed the AO to assess Short Term Capital Loss on sale of units at Rs.1,13,82,671/- as against Rs.5,52,347/- assessed in the assessment order. Aggrieved by the said order, now the revenue is in appeal before us.
20. At the time of hearing before us, the Ld. DR relied on the order of the AO and urged before the bench to confirm the same.
1221. On the other hand, the Ld. Counsel for the assessee while reiterating his same submissions as submitted before the lower authorities relied on the order of the Ld. CIT(A) and urged before the bench to confirm the same.
22. After hearing the rival submissions and perusing the material available on record we find that the AO disallowed short term capital loss of Rs.1,08,30,824/- claimed on sale of Kotak K. Bond Dividend Plan Units by applying the provisions of section 94(7) of the Act. But the Ld. CIT(A) had given relief to the assessee by observing as under :
"27. I have considered the submissions of the A/R and perused the reasons given by A.O. in support of the disallowance made. It appeared that the A.O. made the disallowance of part of the Short Term Capital loss by invoking Sec 94(7). Sec 94(7) is a deeming provision of the I.T. Act. It is a settled legal proposition that a deeming provision of the taxing statue should be strictly construed. Sec 94(7) disentitles an assessee to claim loss on sale of units to the extent of exempt income earned from the transactions involving purchase and sale of units conducted within specified time frame. In order to apply Sec 94(7) it is however incumbent on the A.O. to prove that the assessee sold the shares or units within 3 months after the date on which the dividend was declared. In the present case it is an admitted fact that the assessee purchased Kotak-K Bond Dividend Plan Units on 13.03.2002 and the record date for declaration of dividend was also 13.03.2002. It is also admitted fact that the assessee sold the said units on 14.06.2002 and therefore apparently the assessee did not fall within the mischief of Sec 94(7).
28. In the impugned order the A.O. disallowed the loss on the ground that the assessee was not the owner of these units on 14.06.2003 and the units were sold on 14.06.2002. I do not find that u/s 94(7) the appellant was required to hold the units for 15 months from the record date. Sec 94(7) can be invoked only if the units are transferred within a period of 3 months after such date. The words "within a period of three months after such date", used in Sec 94(7) are very significant and therefore it is necessary to find out whether in the present case the said condition was satisfied. In "law lexicon" the word "month" has been defined as follows:
"The term "month" whether employed in modern statue or contract and not appearing to have been used in different sense, denotes a period terminating with a date of a succeeding month numerically corresponding to the day of its beginning, less one. If there be no corresponding day of succeeding month it terminates with the last day thereof."
The Gujarat High Court in Mistri Bikhalal Bhowan Vs. Sunni Vora Mohammad Abdul and Others -- (AIR 1978 Gujarat 149 ) held that the term "month" means space of time between two days of two contiguous month. The Jurisdictional ITAT Kolkata Bench judicially interpreted the expression "within a period of 3 months after such date" used in Sec 94(7) in its decision in the case of ACIT vs. Shri R. K .Dokanla ( ITA No.1543/K/2007 dated 27.07.2007). In the said decision the ITAT after analyzing various decisions of the High Courts, various sections of I T Act and the provision of Sec 94(7) held as follows:
"In view of above decisions we are of the considered view that the word "month" for the purpose of Sec 94(7) means period starting from the day 13 subsequent to the "record date" and ending on one day preceding the corresponding day in next month. To give an example if the transaction has been done on 16.12.2003, the month would start from 17.12.2003 and end on 16. 01 2004. This would be one month. Similarly the second month would be from 17.01.2004 to 16.02.2004 and the third month from 17.02.2004 to 16.03.2004. Since the transaction in this case is beyond a period of 3 months the CIT(A) was perfectly justified in allowing the appeal. We find no reason to interfere with the order of CIT(A)."
29. Applying the decision of the ITAT Kolkata to the facts of the present case I find that the "record date" for dividend declaration was 13.03.2002 and hence "such date"
contemplated in Sec 94(7) in the present case was 13.03.2002. The first "month"
therefore began on 14.03.2002 and ended on 13.04.2002. The second month commenced on 14.04.2002 and ended on 13.05.2002 and the third month commenced on 14.05.2002 and ended on 13.06.2002. By A.O.'s own admission the units were not sold on or before 13.06.2002 when the period of 3 months prescribed in Sec 94(7) ended. The sale was admittedly made on 14.06.2002 which was beyond the period of 3 months after the record date. I therefore hold that the A.O. was not justified in disallowing Short Term Capital loss of Rs.1,08,30,324/- because the assessee did not violate provisions of Sec 94(7). The A.O. is accordingly directed to assess Short Term Capital loss on sale of units at Rs.1,13,82,6711- as against Rs.5,52,347/- assessed in the impugned order."
The facts of this case were not disputed by the revenue authorities at the time of hearing and since the Ld. CIT(A) has given relief to the assessee by placing reliance on the decision of ITAT on similar facts, we do not find any infirmity in the order of the Ld. CIT(A) and the same is hereby upheld. This ground of appeal of the revenue is, therefore, dismissed.
23. In Ground No. 6, the revenue has agitated against the action of the Ld. CIT(A) in allowing club subscription fees of Rs.7380/- The AO disallowed the expenditure treating it to be expenditure not incidental to the assessee's business. In appeal, the Ld. CIT(A) held that the AO was not justified in disallowing club membership fee of Rs.7380/- and the disallowance is accordingly deleted. Aggrieved by the said order, the revenue is in appeal before us.
24. At the time of hearing before us, the Ld. DR relied on the order of the AO and on the other hand, the Ld. Counsel for the assessee relied on the order of the Ld. CIT(A).
25. After hearing the rival submissions and perusing the material available on record, we find that the AO disallowed the expenditure treating it to be not incidental to assessee's business. The Ld. CIT(A) in appeal deleted the said disallowance by observing as under :
"........ From the facts on record it was found that during the year the appellant paid club membership fee of Rs.2880/- for Shri S. K. Alagh, Managing Director and Rs.4500/- for membership of Shri S. K. Chakraborty, General Manager. In the course 14 of appeal for AY 2001-02 this issue was considered by me. It was gathered from the letter of appointment of Shri S. K. Alagh that he was entitled to claim membership fees of up to two clubs; as part of the perquisites. The terms of appointment of Sri S. K. Alagh, as MD were in conformity with provision of Schedule XIII to the Companies Act 1956 which permitted companies to provide perquisite to the working director; by way of membership fees of upto two clubs. Having regard to these facts therefore it was held by me in the appellant order for AY 2001-02 that the club membership fee paid pursuant to contract of employment was permissible as business expenditure. The Madras High Court in the case of CIT Vs. Sundaram Industries Ltd. (240 ITR 335) and Bombay High Court in the case of Otis Elevator Co. (India) Ltd. Vs. CIT (195 ITR 682) hafe held that club membership fees paid for membership of the directors and executives; is an allowable business expenditure. I therefore hold that the AO was not justified in disallowing club membership fee of Rs.7380/- and the disallowance is accordingly deleted."
In the absence of any controverting material brought on record by the Ld. DR at the time of hearing before us and also in view of the decision arrived at by the Ld. CIT(A) by relying on the judicial pronouncements, we do not find any necessity to interfere with the said order of the Ld. CIT(A) and the same is hereby upheld. This ground of the revenue is also dismissed.
26. In the result, the appeal of the revenue is dismissed Order is pronounced in the open Court on 31.8.10 Sd/- Sd/-
ौी जी.
जी.डȣ.
डȣ. अमबाल,
अमबाल, उपाÚय¢ डȣ.
डȣ. के. ×यागी,
×यागी, Ûयायीक सदःय
(G. D. Agrawal) (D. K. Tyagi)
Vice President Judicial Member
st
(तारȣख)
तारȣख) Dated :31 August, 2010 Pronounced by
Sd/- Sd/-
(BKH) (DKT)
AM JM
वǐरƵ िनǔज सिचव Jd.(Sr.P.S.)
आदे श कȧ ूितिलǒप अमेǒषतः- Copy of the order forwarded to:
1. अपीलाथȸ /Appellant - ACIT, Circle-7, Kolkata.
2. ू×यथȸ/M/s. Britannia Industries Ltd., 5/1A, Hungerford Street, Kolkata-17
3. आयकर किमशनर/The CIT, Kolkata
4. आयकर किमशनर (अपील)/The CIT(A), Kolkata
5. वभािगय ूितनीधी / DR, Kolkata Benches, Kolkata स×याǒपत ूित/True Copy, आदे शानुसार/ By order, उप पंजीकार/Deputy Registrar.