Krishnavtar J Kabra 3, Rajesh Apartment, Behind Nav Gujarat College, Ashram Road Ahmadabad-380014. V/s. ITO, Central Ward 1(1), Ahmedabad.
December, 12th 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD "A" BENCH AHMADABAD
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Before Shri D.K.Tyagi, Judicial Member and
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Shri T.R. Meena, Accountant Member
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ITA No. 2400/Ahd/2010
Assessm ent Year :2004-05
Krishnavtar J Kabra V/s . ITO,
3, Rajesh Apartm ent, Central W ard 1(1),
Behind Nav Gujarat College, Ahmedabad.
PAN No. AGDPK5563D
(Appellant) .. (Respondent)
Shri Sakar Sharma, A.R.
× /By Respondent Shri O. P. Bhateja, Sr. D.R.
/Date of Hearing
/Date of Pronouncement 05.12.2013
PER : Shri T.R.Meena, Accountant Member
This is an appeal at the behest of the assessee which has emanated
from the order of CIT(A)-I, Ahmedabad, dated 17.05.2010 for assessment
year 2004-05. The effective grounds of appeal are as under:
"1. Ld. CIT(A) erred on facts an din law in confirming disallowance of
bad debts of Rs.267745/-.
2. Ld. CIT(A) erred on facts and in law in confirming disallowance of
Rs.280629/- being interest paid to Kotak Mahindra Investments
Ltd. on loan granted for subscribing shares of Patni Computers.
3. Ld. CIT(A) erred on facts in law in confirming disallowance of
Rs.8000/- related to Daxaben Sunilbhai Patel."
I T A No . 2 40 0 /A h d/ 1 0 A. Y. 04- 0 5 Page 2
2. The first ground of appeal is against confirming the disallowance of bad
debt of Rs.2,67,745/-. The A.O. observed that the assessee had debited bad
debts to the tune of Rs.2,67,748/- in p&l account under head `Administrative &
Selling Expenses. The details of bad debts were called for. The assessee
had filed the same vide letter dated 17.11.2006. On verification of details of
bad debts, which was found by the A.O. that the assessee had claimed bad
debts in case of eleven parties for total value of Rs.3,48,810/-. The assessee
had, thereafter, credited an amount of Rs.81,062/- received from debtors
during the year. The net amount of Rs.2,67,748/- had been debited to the p&l
account. On this issue, the A.O. gave reasonable opportunity of being heard,
which was replied by the assessee. After considering the assessee's reply,
the A.O. held that the assessee had to restrict the claim of bad debt to those
debts that had become a worthless debt. The facts were that the assessee
had received payments during the accounting year for the period 01.04.2003
to 31.03.2004 clearly showed that the debt was not worthless. The assessee
for his convenience may decide that the debt was bad and it was not
worthwhile to pursue the debtor. He did not accept the assessee's decision
on becoming debt as bad. The assessee's attitude in treating the debtors as
well as creditors were found casual. As per Section 36(1)(vii), the assessee
had to demonstrate honestly that bad debt had become bad. The assessee
was obtaining unsecured loan every year and divert the funds to the interest
free advances to his own group concerns or at his convenience. No income
from interest bearing fund was shown in the previous year. The proprietor's
I T A No . 2 40 0 /A h d/ 1 0 A. Y. 04- 0 5 Page 3
capital was also in debit balance for A.Y. 2003-04. Above all, the bad debt
claimed pertained to a proprietary business which was closed by him in F.Y.
2001-02. The assessee was very much silent about the income part and
claim expenses at his convenience bringing the taxing amount to nil.
Alternatively, the assessee had written off debt, income which was not offered
for taxation in the previous year i.e. pre-condition for writing to bad debt.
Further, status of the following debtors/persons is as under:
1. V. K. Moondra, C.A. is assessee's own present Tax Auditor
2. Pushpaben Kabra is own family member
3. Soni Saheb no identity of the person or account is given
4. Debenture redemption account - no identity
As discussed above, it is very much clear and lead to the conclusion that the
judgment of the assessee is not an honest one and was taken for his
convenience. The department does not insist on demonstrative or infallible
proof for claiming bad debts. However, the assessee cannot claim bad debts
on loans and advances or for that matter as accounts shown as creditors as
per provisions of section 36(2)(i). Similarly, even the liberal interpretation of
bad debts claim would not permit the taxing authorities to allow the claim of
debts which are in the process of recovery as can be seen in chart shown in
para 4. As per the provision of section 36(1)(vii), since the said section refers
to bad debts and the onus to prove that the debts is bad still lies the
assessee. The amended provision of bad debts allows the assessee liberal
view to claim bad debts in a particular year. However, there has to be a debt
which is bad to claim such deduction. In this case, the assessee for his
I T A No . 2 40 0 /A h d/ 1 0 A. Y. 04- 0 5 Page 4
convenience has decided that the debt is not worthwhile to pursue. Even after
the amendment with effect from 01/04/1989, it is necessary on the part of the
assessee to establish that the debt actually 'bad' as held by Honorable ITAT
in the case of India Thermit Corporation Ltd. (56 ITD 307) (Delhi). Therefore,
considering the entire facts and circumstances of the case, the claim of bad
debt by the assessee is not bonafide and hence the bad debt claim of Rs.
2,67,748/- is hereby disallowed. Penalty u/s. 271(1)(c) is initiated separately.
3. Being aggrieved by the order of the A.O., the assessee carried the
matter before the CIT(A) who had confirmed the addition by observing as
"6. I have considered the submissions of the appellant. At the
outset, it is relevant to mentioned that these debts of Rs.2,67,745/-
relates to business of sub-broking of share-business in the name
and style of M/s. K.K, Investment, of which the appellant was
proprietor. Thereafter, M/s. K.K. Investment was closed down. It is
therefore, apparent that the bad debts claim of Rs.2,67,745/- relates
to the sub-broking business of earlier years. In the year under
consideration, such business activities have already been closed
down. Besides, the amounts written off relates to the parties, who
have transacted with the appellant in earlier years, when the sub-
broking business in the name of M/s. K.K. Investment was
operational. The debit balance written off relates to those
transactions, wherein the appellant has claimed to have incurred the
liabilities on behalf of its clients. It is, therefore, apparent that such
liabilities mostly relates to capital expenditure. The appellant's
earning of sub-brokerage commission from such transactions shall
be very nominal. In other words, the debit balance claimed to be
written off relates to capital expenditure. Such capital expenditure,
I T A No . 2 40 0 /A h d/ 1 0 A. Y. 04- 0 5 Page 5
which might have been written off in the accounts, could not be
allowed as deduction u/s.36(1)(vii) r.w.s. 36(2) of the I.T. Act. In
view of above, the addition of Rs.2,67,745/- is considered
justified and the same is confirmed."
4. Now the assessee is before us. Ld. Counsel for the assessee
contended that ld. CIT(A) held that liability is for capital expenditure. The
appellant's earning of sub-brokerage commission from such transaction shall
be very nominal. In other words, the debit balance claimed to be written off
capital expenditure which are not allowable u/s.36(1)(vii) r.w.s. 36(2) of the IT
Act. The A.O. disallowed the bad debt on account of not establishing the debt
became bad. It is squarely covered by Hon'ble Supreme Court's decision in
case of TRF Ltd. vs. CIT 323 ITR 397 (SC), wherein controversy as to
whether assessee is required to prove that amount written off has become
bad or not has been settled in favour of the assessee. The issue as to
whether amount written off from such activities being unrealizable is entitled
deduction has been settled in favour of the assessee by the decision of
Hon'ble ITAT, Mumbai Bench in case of Angel Capital & Debt Market Ltd. vs.
ACIT 118 TTJ (Mumbai) 35. Identical view is also taken by the Hon'ble ITAT,
Mumbai Bench in the case of India Infoline Securities P Ltd. vs. ACIT 25 SOT
123 (Mum). Alternatively, he claimed business loss. At the outset, ld. Sr.
D.R. relied upon the order of the CIT(A).
5. We have heard the rival submissions, perused the material on record
and gone through the case laws cited by the ld. A.R. It is fact that the
assessee proprietary business had been closed down in A.Y. 01-02 and bad
I T A No . 2 40 0 /A h d/ 1 0 A. Y. 04- 0 5 Page 6
debts were claimed in A.Y. 04-05. It is not clear from the order of the A.O.
whether the assessee wrote off these amounts in the accounts or not.
Further, the assessee has not proved that whatever bad debts claimed were
shown in the income of the assessee of the closed business. It is further not
examined by the A.O. that both the business are interlacing or inter connected
with present business as per paper book filed by the assessee, page no.1,
these are small amounts in the name of various names. The assessee also
had shown the recovery from the debtors in this account and net has been
debited in the p&l account. The assessee has debited these bad debts in the
administrative and selling expenses. Accordingly, we direct the A.O. to
examine these entries from the books of account and also relation with
present business to closed business. Accordingly, we set aside this ground of
6. Ground nos.2 & 3 are against confirming the disallowance of
Rs.2,80,629/- being interest paid to Kotak Mahindra Investments Ltd. on loan
granted for subscribing shares of Patni Computers and confirming
disallowance of Rs.8000/- related to Daxaben Sunilbhai Patel. The A.O.
observed that the assessee had debited in p&l account miscellaneous share
investment expense of Rs.2,88,525/-. The A.O. gave reasonable opportunity
of being heard on this issue. After considering assessee's reply, it was held
that the assessee had claimed Rs.8000/- in the name of Daxaben Sunilbhai
Patel who has no connection with the business of assessee. No proof of
expenses in this regard was filed. The balance amount of Rs.2,80,525/-
related to the interest paid to Kotak Mahindra Investments Ltd. for a period
I T A No . 2 40 0 /A h d/ 1 0 A. Y. 04- 0 5 Page 7
from 06.02.2004 to 23.02.2004 for a loan amount of Rs.3,10,50,000/-. On
verification of the account, it was further noticed by the A.O. that this loan was
not utilized by the assessee for the purpose of business except Rs.8,74,000/-
invested in purchase of 3800 shares of Patni Computers. Therefore, the A.O.
allowed interest on Rs.8,74,000/- which comes to Rs.7,896/- and remaining
amount of Rs.2,80,629/- was added back.
7. Being aggrieved by the order of the A.O., the assessee carried the
matter before the CIT(A) who had confirmed the addition by observing as
9. I have considered the submissions of the appellant. As per
appellant's own submission, the amount of Rs.3,10,50,000/- were
borrowed for making investments in shares of Patni Computers by
way of share application for 1,50,000 shares but finally allotted 3,800
shares only. It is, therefore, apparent that the amount of
Rs.3,10,50,000/- could not be termed as borrowed "for the purpose
of business" and therefore, the interest claimed on such borrowings
could not be allowed as deduction u/s.36(1)(iii) of the I.T. Act. The
investment made in shares may also yield tax free dividend income.
In such situations interest payment made for purchase of shares for
earning dividend income would not be allowed deduction u/s.14A of
the I.T. Act. Similarly, if the investment in shares have been made to
earn long term / short term capital gain, then also, the interest would
not quality for deduction u/s. 36(1)(iii) of the I.T. Act. In view of
above, the Assessing Officer's action is considered justified
and addition of Rs.2,80,629/- is confirmed."
8. Now the assessee is before us. Ld. Counsel for the assessee
contended that the appellant is engaged in the activities of trading in shares
I T A No . 2 40 0 /A h d/ 1 0 A. Y. 04- 0 5 Page 8
income of which is assessed as `business income'. During the year under
consideration, appellant borrowed funds from Kotak Mahindra Investments
Ltd. to the tune of Rs.3,10,50,000/- to subscribed 1,50,000 shares of Patni
Computers in the IPO. Against the share application of 1,50,000 shares,
appellant was allotted 3,800 shares which were sold and loss arising there
from was offered under the head `busienss income' and was assessed as
such. The appellant has also drawn our attention on page no.23 to
demonstrate that assessee had applied 1,50,000 shares of Patni Computers
through Kotak Mahindra Investments Ltd. The Kotak Mahindra Investments
Ltd has charged interest from 06.02.2004 to 23.02.2004 at Rs.2,14,373/- and
service charges at Rs.77,625/- and demat Trf charges for Rs.437/-. The
assessee was allotted only 3800 shares. The net of the interest earned on
margin given to the Kotak Mahindra Investments Ltd. and interest paid on the
loan amount was claimed as deduction in the p&l account against business
income from share trading activity at Rs.2,88,525/-. Shares of the Patni
Computers were held as stock in trade is evident from the summary of the
opening stock, purchase, sale and closing stock. Therefore, it is allowable
expenses. The assessee has debited Rs.8000/- in the name of Daxaben
Sunilbhai Patel, which was included in account of the miscellaneous shares
and investments ltd. actually it was bad debt. As per assessee's argument, it
was possible settled and deducted against towards the dividend. The ld.
CIT(A) had not given any finding on this issue. But, there being a small
amount which is not pressed. At the outset, ld. Sr. D.R. supported the order
of the CIT(A).
I T A No . 2 40 0 /A h d/ 1 0 A. Y. 04- 0 5 Page 9
9. We have heard the rival submissions and perused the material on
record. As per audit report, the assessee is in investment and share trading.
The assessee has shown investment in Schedule-E of closing stock of
Rs.15,09,100/- and closing stock of trading Rs.58,69,811/-. The assessee
has included purchase and sale of Patni shares in trading and adjusted the
sale of loss in trading and debited in the p&l account at Rs.47,052/- in toto.
Therefore, it is an expenditure and allowable u/s. 36(1)(iii) of the IT Act.
Therefore, addition to the extent of Rs.8,000/- is confirmed and remaining
addition of Rs.2,72,629/- is deleted.
10. In the result, the assessee's appeal is partly allowed.
This Order pronounced in open Court on 05.12.2013
(D.K.Tyagi) (T.R. Meena)
Judicial Member Accountant Member
/ Copy of Order Forwarded to:-
1. / Appellant
2. × / Respondent
3. / Concerned CIT
4. - / CIT (A)
5. , , / DR, ITAT, Ahmedabad
6. [ / Guard file.
By order/ ,