IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH “E”
Before Shri N.V. Vasudevan (JM) & Shri B.Ramakotaiah (AM)
I.T.A.No. 5727/Mum/2006 (Assessment year : 2003-04)
M/s. Sanjay Trade Corporation
407, Adamji Building
Narsi Natha Street
Masjid Bunder
Mumbai-400 009.
Vs.
APPELLANT
Addl. CIT Range 13(3)
Mumbai.
RESPONDENT
I.T.A.No. 5250/Mum/2006 (Assessment year : 2003-04)
DCIT Range 13(3)
Room No. 427, 4th Floor
Aayakar Bhavan
M.K. Road
Mumbai-400 020.
Vs.
APPELLANT
M/s. Sanjay Trade Corporation
407, Adamji Building
Narsi Natha Street
Masjid Bunder
Mumbai-400 009.
RESPONDENT
PAN/GIR No. : AAAFS4078E
Assessee by : Shri H.S.Parikh
Department by : Shri D. Songate
ORDER
PER N.V. VASUDEVAN, JM :This is an appeal by the assessee against the order dated
10.7.2006 of learned CIT(A)-XIII, Mumbai relating to A.Y. 2003-04.
2.
Ground No. 1 raised by the assessee reads as follows :Addition on account of interest free loans and advances Rs.
86,80,915/- :
1.1
1.2
Learned CIT(A) erred in confirming the addition of Rs.
86,80,915/- on account of interest free loans and advances
without considering the facts and circumstances.
Your appellant submits that your appellant has given the
full explanation regarding non-charging of interest on the
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M/s. Sanjay Trade Corporation
advances made to various parties. The Assessing Officer
ought to have accepted the contention of your appellant
regarding non-charging of interest and ought not to have
added the sum of Rs. 86,80,915/-.
3.
The assessee is a partnership firm. It is engaged in the business of
dealing in import licenses. It is also an importer of various commodities.
On perusal of the profit and loss account the AO noticed that the
assessee had debited a sum of Rs. 86,80,915/- as interest payment. The
balance sheet revealed that the assessee has advanced the following
interest free loans to its sister concern/ex-partners.
S.No.
1
2
3
4
Name of the concern
World Wide Commodities Pvt. Ltd.
Priya Blue Ind. Pvt. Ltd.
Sanjay Sales Corporation
Sanjay Mehta (Ex-partner)
Sum advances (Rs.)
6,77,03,541/1,33,29,027
17,34,939/63,09,174
The Assessing Officer was of the view that since funds which were
borrowed on which interest was paid and claimed as deduction while
computing income have been diverted as interest free loans of sister
concern/ex-partners and therefore proportionate interest expenses will
have been disallowed. The Assessing Officer was of the view that the
deduction on account of interest paid in respect of capital borrowed for
the purpose of business or profession alone cannot be allowed as a
deduction u/s. 36(1)(iii) of the Act. Since, the borrowed funds were not
used the purpose of business or profession; but were given as interest
free loans to sister concern/ex-partners, the Assessing Officer was of the
view that the proportionate interest will have to be disallowed. The plea
of the assessee before the Assessing Officer on this aspect was that
interest free loans given to Word Wide Commodities Pvt. Ltd. and Priya
Blue Ind. Pvt. Ltd. even if charged could not be recovered because of loss
and discontinuance of business. The Assessing Officer was of the view
that funds borrowed were not utilized for the purpose of assessee’s
business, he therefore held as follows :-
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M/s. Sanjay Trade Corporation
“Therefore, considering the above discussion, the material on
record and the totality of the circumstances of the case,
proportionate interest (calculated @ 12% of the outstanding
balance) on the above advances needs to be disallowed from the
interest paid by the assessee. This comes to Rs. 1,06,89,202/.Since, the assessee has debited only an interest of Rs.
86,80,915/- which is less than the disallowable interest, whole of
the interest payment of Rs. 86,80,915/- is being disallowed and
added back to the total income of the assessee. For the reasons
discussed supra, I am satisfied that the assessee has furnished
inaccurate particulars of his income and therefore, penalty
proceedings u/s. 271(1)(c) is being initiated against the assessee.
Addition of Rs. 86,80,915/-.”
4.
On appeal by the assessee, the learned CIT(A) confirmed the order
of the Assessing Officer giving rise to Ground No. 1 by the assessee
before the Tribunal.
5.
We have heard the rival submissions. The learned counsel for the
assessee submitted before us that funds were given to the sister concern
purely out of commercial expediency. It was also submitted by him that
the assessee had sufficient interest free funds; and therefore, it cannot
be said that borrowed funds were utilized for giving interest free loans. In
this regard, learned counsel for the assessee relied on the decision of
Hon'ble Bombay High Court in the case of Reliance Power Utility, 312
ITR. With regard to commercial expediency of the loan, learned counsel
for the assessee relied on the decision of Hon'ble Supreme Court in the
case of S.A. Builders Ltd. Vs. CIT, 288 ITR 1 (SC). In this regard, learned
counsel for the assessee has filed before us copy of balance sheet and
profit and loss account and wanted to substantiate availability of interest
free funds and also demonstrate commercial expediency in giving interest
free loans to sister concern. We are of the view that these issues were not
raised by the assessee either before the Assessing Officer or before
learned CIT(A). It is not clear as to what is the nature of business that
sister concerns of the assessee were engaged in. Even availability of
surplus funds for giving interest free loan has not been examined. With
a view to give the assessee an opportunity to prove his case, we set aside
the order of learned CIT(A) and remand the issue to the Assessing Officer
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M/s. Sanjay Trade Corporation
for fresh consideration. The Assessing Officer will consider if the interest
free loan is given out of commercial expediency and also verify if there
were enough interest free surplus funds. The assessee will establish both
the aforesaid aspects and the Assessing Officer will examine the claim of
the assessee in accordance with law.
6.
Ground No. 2 raised by the assessee reads as follows :Addition on account of traveling expenses : Rs. 8,73,192/2.1
The learned CIT(A) erred in confirming the addition of Rs.
8,73,192/- on account of traveling expenses.
2.2
Your appellant submits that your appellant has given the
satisfactory explanation as to the expenditure incurred on
foreign traveling expenses of Umesh Mehta and Jitendra
Shah. The Assessing Officer ought not to have disallowed
the sum of Rs. 8,73,192/- out of total expenses of Rs.
11,17,061/- in view of the explanation given by your
appellant.
7.
The assessee had claimed traveling expenses of Rs. 11,17,061/-.
Out of the aforesaid expenses, sum of Rs. 8,73,192/- represented foreign
traveling expenses in connection with travel of one Mr. Umesh Mehta, a
partner and Mr. Jintendra Shah. Both of them had traveled to USA. It
was the claim of the assessee that Jintendra Shah is ship breaking
broker for many years and he visited various parts in USA on behalf of
the firm for development of business. It was claimed by the assessee that
he was associated with the assessee for the past two and three years and
had introduced many overseas companies (clients) to the assessee like
M/s. SMV International, New York. The assessee however did not
produce any evidence to substantiate the fact that both the aforesaid
traveling expenses were in connection with business of the assessee. In
these circumstances, the Assessing Officer disallowed the claim for
deduction of the aforesaid sum.
On appeal by the assessee, learned
CIT(A) confirmed the order of the Assessing Officer.
8.
Before us, learned counsel for the assessee reiterated the
submissions made by the Assessing Officer. He has not filed any
evidence to show that foreign traveling expenses were incurred in
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M/s. Sanjay Trade Corporation
connection with the business of the assessee.
As rightly held by the
Assessing Officer explanation and justification given by the assessee is
very vague and it cannot be accepted in the absence of any reliable
evidence.
The burden lies on the assessee to establish that expenses
claimed as deduction is wholly and exclusively incurred for the purpose
of business of the Assessee.
In these circumstances, we confirm the
order of the learned CIT(A) and dismiss ground No. 2 raised by the
assessee.
9.
Ground No. 3 raised by the assessee reads as follows :Addition on account of bad debts Rs. 16,44,563/- :
3.1.
10.
Learned CIT(A) erred in confirming the addition made by
the Assessing Officer on account of bad debts of Rs.
16,44,563/- being the amount irrecoverable from various
parties and your appellant had given the explanation as to
why the amount has been written off as bad debts.
The assessee had written off a sum of Rs. 16,44,563/- as bad
debts. The Assessing Officer after elaborate discussion held that the
assessee had failed to establish that the debts which were written off as
bad have in fact become bad and irrecoverable. On appeal by the
assessee, learned CIT(A) confirmed the order of the Assessing Officer for
the reasons given in para No. 8.3 as follows :“The appellant’s contention before me is as given to the Assessing
Officer. The appellant has cited case laws as given before the
Assessing Officer. The appellant contended that it made supplied
to M/s. Ispat Profile India Ltd., Pune and got paid for the
consignment. But, on the second consignment worth Rs.
26,76,500/-, it received payment to the extent of Rs. 15,48,457/only and did not receive the payment of Rs. 11,28,043/-. The
party had since closed down its activities. The company has been
locked out and has gone bankrupt. As there is no hope of getting
any payment, the appellant wrote off the amount. On this fact, the
appellant satisfies one part of requirement of section 36(2) of the
I.T. Act. The reason cited by the appellant is sufficient to treat the
debt as bad. It is because the issue of recovery has to be seen from
assessees’ point of view. But, the appellant has to fulfill another
requirement of the section i.e. the amount should have been
shown as income in some assessment year. The appellant was
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M/s. Sanjay Trade Corporation
asked to file details on this. The appellant only filed dates of bills
of high seas purchases and sales. The appellant did not give any
details to show whether the sales shown were part of income
disclosed earlier or not. This is because the appellant is an
indenting agent. Since, the appellant did not file any details as to
when this amount was shown as income and since the same was
also not filed before the Assessing Officer who have given the same
as a reason for disallowing the claim of bad debt cannot be
entertained. Regarding other parties, the appellant also did not
give any details as to which year the amount which were written
off as bad debts were shown as income. No such details were also
filed before the Assessing Officer. As the appellant did not give any
proof that it fulfills the second condition of section 36(2) of the I.T.
Act. I confirm the action of the Assessing Officer of disallowing the
claim of bad debt”.
11.
Aggrieved by the order of learned CIT(A), the assessee has raised
Ground No. 3 before the Tribunal.
12.
On the issue as to whether the assessee can be allowed a
deduction on account of bad debts by merely writing off as bad debts in
the books of account or as to whether the assessee has to prove that the
debts has become bad has now been decided by Hon'ble Supreme Court
in the case of T.R.F. Ltd. Vs. CIT, 323 ITR 397 (SC). The Hon'ble
Supreme Court has held that after amendment of section 36(1)(vii) of the
Act w.e.f. 1.4.1989 in order to obtain a deduction in relation to bad
debts, it is not necessary for the assessee to establish that the debts in
fact has become irrecoverable and that it is enough if the bad debts is
written of as irrecoverable in the accounts of the assessee. In view of the
above, claim of the assessee should be accepted. However, we find that
learned CIT(A) has held that amounts written off as bad debts was not
offered as income in the previous year or earlier previous year. This also
one of the conditions to be fulfilled as laid down in section 36(2) of the
Act. However, we find that the Assessing Officer in the order of
assessment has not made the disallowance on this ground. In these
circumstances, we set aside the order of learned CIT(A) and remand the
issue to the Assessing Officer for fresh consideration to verify and
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M/s. Sanjay Trade Corporation
examine regarding satisfaction of condition mentioned in section 36(2) of
the Act.
13.
In the result, appeal of the assessee is partly allowed for statistical
purposes.
Order was pronounced on 13th Day of August, 2010.
Sd/(B. RAMAKOTAIAH)
ACCOUNTANT MEMBER
Sd/(N.V. VASUDEVAN)
JUDICIAL MEMBER
Dated : 13th August, 2010
Copy to : 1.
2.
3.
4.
5.
6.
The Assessee
The Respondent
The CIT(A)-concerned.
The CIT, concerned.
The DR concerned, Mumbai
Guard File
BY ORDER
True copy
ASSTT. REGISTRAR, ITAT, MUMBAI
PS