Income Tax Appellate Tribunal - Bangalore
The Commercial Corporation Of India ... vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL,
BANGALORE BENCH 'B'
BEFORE DR. O.K NARAYANAN, VICE PRESIDENT AND
SMT. P MADHAVI DEVI, JUDICIAL MEMBER
ITA Nos.97 to 99 /Bang/2008
(Asst. Year - 2001-02, 2003-04 & 2004-05)
M/s The Commercial Corporation of India,
Tile Factory Road,
Manipal. . Appellant
Vs.
The Asst. Commissioner of Income-tax,
Circle-1
Udupi. . Respondent
Appellant by : Shri Parthasarathi and
Shri D Vinay, Advocates
Respondent by : Shri Ajeet Kumar, Jt. Commissioner of Income-tax
ORDER
PER DR. O.K NARAYANAN, VICE PRESIDENT These three appeals are filed by the assessee. The relevant assessment years are 2001-02, 2003-04 and 2004-05. These appeals are directed against the orders passed by the CIT(A), Mangalore on 29.10.2007 and 29.11.2007. The appeals arise out of the assessments completed u/s 143(3) of the Income-tax Act 1961.
ITA Nos.97 to 99/B/08 2
2. First, we will consider the appeal filed for the assessment year 2001-02.
(i) The first ground is general in nature, which does not call for specific adjudication.
(ii) The second ground is that the CIT(A) has erred in upholding the disallowance of loss in share trading amounting to Rs.70,83,845/- that the CIT(A) has also erred in holding that the share holding by the assessee as investment has changed to stock-in-trade with a view to reduce the tax liability.
(iii) The main business of the assessee company is conducting government lotteries. The business of share trading was reflected in the Memorandum of Association only as an incidental object. The assessee company has decided to deal in share trading in 1993. But, there was no such trading for the period 1993 to 1998. The assessee had purchased shares of Maharashtra Apex Corporation during the previous year relevant to the assessment years 1999-2000, 2000-01 and 2001-02. The assessee had also purchased certain shares of M/s Manipal Motors Pvt., Manipal Medi Records Pvt. Ltd., Kurlon Ltd., ITA Nos.97 to 99/B/08 3 Jitendra Hajivandas Ltd. etc. But in spite of these purchases, there were no corresponding sales in the period. There was only a single transaction of sale in the previous year relevant to the assessment year 2003-04. The shares purchased by the assessee company in fact related to group concerns. The assessee has not gone for purchase and sale of shares of other companies in the market. The shares are initially shown as investment in the accounts of the assessee company and only later on, assessee converted the investment to stock-in-trade during the previous year relevant to the assessment year under appeal.
The conduct of the assessee and the chronology of the events clearly make out a case that the assessee was converting investment into stock-in-trade by passing journal entries for the purpose of reducing its taxable income. Therefore, as rightly held by the lower authorities, the conversion cannot be held to be genuine. In such circumstances, the disallowance confirmed by the lower authorities has to be upheld.
(iv) The third ground raised by the assessee is that the CIT(A) has grossly erred in upholding the disallowance of expenditure at Rs.21,56,116/- incurred in respect of online lottery business.
ITA Nos.97 to 99/B/08 4
(v) It is the case of the assessee that the lower authorities have erred in treating the said expenditure as capital in nature. This ground does not come out of the orders of the lower authorities. It is accordingly rejected.
(vi)The next ground raised by the assessee is that the CIT(A) has erred in allowing only Rs.20,000/- and upholding Rs.1,60,904/- being pooja expenses disallowed by the assessing authority.
(vii) Apart from normal expenditure, all other pooja expenses are to be held as personal expenses in nature. Therefore, the order of the CIT(A) is in order.
(viii) The grounds regarding levy of interest are only consequential in nature.
3. The appeal filed by the assessee for the assessment year 2001- 02 is not successful.
4. Next, we will consider the appeal filed for the assessment year 2003-04.
ITA Nos.97 to 99/B/08 5
(i) The first ground is that the CIT(A) has grossly erred in upholding the addition of Rs.58,809/- as interest on refund of income- tax.
(ii) There is no merit in the contention of the assessee. The interest is in the nature of income. It has been rightly treated so. This ground is rejected.
(iii) The second ground is that the CIT(A) has erred in upholding the disallowance of Rs.2,50,000/- written off as bad debts.
(iv) This amount was in fact paid by the assessee as Earnest Money Deposit with Punjab Government to participate in the tender invited for conducting online lottery. The assessee was not successful in the auction. But, Earnest Money Deposit was not returned by the Punjab Government. Therefore, the assessee wrote off the amount as bad debts. The lower authorities argued that a debt due from the Government cannot be held to be bad debt. We find it is only a theoretical proposition. The experience is that it is very difficult to get refund from the Government. The assessee has waited for a ITA Nos.97 to 99/B/08 6 reasonable time. Therefore, there is justification in writing off the amount as bad debts. As and when the assessee receives the money from the Government, if the assessee is so lucky, the amount can be offered as its income. Therefore, in the light of the judgment of Hon'ble Supreme Court in the case of Southern Technologies Ltd., Vs. JCIT, 320 ITR 577, we accept the contention of the assessee and direct the Assessing Officer to give deduction for the amount of bad debts written off by the assessee. This ground is decided in favour of the assessee.
(v) The third ground is that the CIT(A) has erred in upholding the addition of Rs.8,57,110/- being expenses incurred by the Director of the assessee company towards foreign travel. It is stated by the assessee that the foreign travel was undertaken in connection with the business of online lottery. There is no material on record to show the nexus between the foreign tour of the Director and the online lottery business of the assessee. Therefore, the disallowance is justified. This ground is rejected.
(iv) The fourth ground is that the CIT(A) has erred in confirming the disallowance of Rs.16,33,853/- made by the assessing ITA Nos.97 to 99/B/08 7 authority as valuation loss of the closing stock of shares. This ground is rejected in the light of the findings recorded for the assessment year 2001-02.
(v) The next issue is regarding levy of interest, which is only consequential.
5. The appeal filed by the assessee for the assessment year 2003- 04 is partly successful.
6. Next, we will consider the appeal filed for the assessment year 2004-05.
(i) The first ground is regarding the disallowance of pooja expenses. This ground is rejected, as held in the assessment year 2003-04.
(ii) The second ground is that the CIT(A) has erred in confirming the addition of Rs.4,06,902/- incurred in donating an ambulance van. According to the assessee van is running with the advertisement of assessee's lottery scheme and, therefore, it promotes ITA Nos.97 to 99/B/08 8 the business of the assessee. In fact, the ambulance was donated by the assessee to a scheme promulgated through the Government in the Office of the Chief Minister. The business of the assessee is carrying on Government lotteries. Therefore, there is a high amount of functional relationship with the assessee and State Government. Therefore, when the Government requests the assessee to provide an ambulance for the benefit of the public at large, the assessee cannot decline the request as such. Therefore, it is to be seen that the purchase and donation of the ambulance were made in the course of carrying on of assessee's business. Moreover, the ambulance van displayed the advertisement of the assessee. Therefore, we find that this is business expenditure. This amount is allowed. The assessing authority is directed to give deduction for amount of Rs.4,06,902/-
(iii) The third issue is that the CIT(A) has grossly erred in confirming the disallowance of Rs.1,05,039/- towards personal use of telephone.
(iv) This issue has been discussed by the assessing authority in his order. The assessee company has not maintained meticulous details regarding the use of telephones and the corresponding charges.
ITA Nos.97 to 99/B/08 9 So, it is necessary to disallow a reasonable amount of expenditure on the ground of personal use. Therefore, such disallowance is justified. The quantum of disallowance in the present case is reasonable. We find that the lower authority has rightly disallowed the amount. This ground fails.
(v) The fourth ground raised by the assessee is that the CIT(A) has erred in confirming the addition of Rs.4,07,755/- being expenditure incurred by the assessee on its ATM leasing project on the ground that the assesse had not commenced its leasing business. The assessee had thought of entering into the business of leasing ATM machines. In fact, the assessee had purchased certain machines. But thereafter, the business did not run well. The assessee could not lease out the ATM machines. The new business was thus, frustrated. The expenses incurred by the assessee in that respect has been claimed as business expenditure by the assessee. It is to be seen that the assessee has not claimed the cost of ATM machines as expenditure. The assessee has claimed only the related expenses. The assessee is already in the business. Therefore, such expenses incurred in furthering the business activities of the assessee is revenue in nature and to be treated as expenditure incurred in the course of carrying on ITA Nos.97 to 99/B/08 10 of the business. This ground is allowed and the assessing authority is directed to given the deduction for the sum of Rs.4,07,755/-.
(vi) The next ground raised by the assessee is that the CIT(A) has erred in upholding the addition of Rs.70,83,845/- as closing stock valuation loss. This issue has already been decided against the assessee in the appeal filed for the earlier assessment years. This ground fails.
(vii) The sixth ground raised by the assessee is against the disallowance of Rs.1,25,000/- incurred by the assessee towards software development. This expenditure of Rs.1,25,000/- was incurred by the assessee not for installing a new software system. The expenditure was incurred for updating the system. Therefore, it is revenue in nature. The assessing authority is directed to give deduction for the said amount of Rs.1,25,000/-. This ground is allowed.
(viii) The last ground raised by the assessee is regarding the issue of interest. It is only consequential.
ITA Nos.97 to 99/B/08 11
6. The appeal filed by the assessee for the assessment year 2004- 05 is partly successful
7. In result, the appeal filed by the assessee for the assessment year 2001-02 is dismissed and the appeals filed for the assessment years 2003-04 and 2004-05 are partly allowed.
Order pronounced on Wednesday the 4th day of August, 2010, at Bangalore.
Sd/- Sd/-
(P MADHAVI DEVI) (DR. O.K NARAYANAN)
JUDICIAL MEMBER VICE PRESIDENT
Vms.
Copy to :
1. The Assessee
2. The Revenue
3.The CIT concerned.
4.The CIT(A) concerned.
5.DR
6.GF
7..GF, ITAT, New Delhi. By order
Asst. Registrar, ITAT, Bangalore.