IN THE INCOME TAX APPELLATE TRIBUNAL,

MUMBAI BENCH I,MUMBAI

BEFORE SHRI  B.R. MITTAL (JM) SHRI N.K. BILLAIYA (AM)

       I.T.A. No.                  Asst. Year.

6495/Mum/2010              2005-06

6496/Mum/2010              2004-05

                                    6497/Mum/2010             2006-07

O  R  D  E  R

PER B.R. MITTAL, JM :

          The assessee has filed these three appeals relating to assessment years 2004-05 to 2006-07 against the separate orders of the ld. CIT(A)-5, Mumbai, all

dated 08-07-2010.

2.       Since most of the grounds and the facts in all these appeals are identical, we have heard all these appeals together and dispose them of by this consolidated order for the sake of convenience and brevity.

3.       Firstly, we take up the appeal for the assessment year 2004-05, being ITA No.6496/Mum/2010, for our consideration.

4.       The assessee company is engaged in the business of manufacture of crystal items and chemicals.  The assessee company was registered as a sick industrial company in terms of sec. 3(i)(o) of the Sick Industrial Companies (Special Provisions) Act, 1985, in the year 2004. For the assessment year 2004-05, the assessee company filed the return on 01-11-2004 declaring loss of Rs.13,07,13,760/-. The AO made the assessment vide order dated 15-12-2006 u/s. 143(3) of the Act at a loss of Rs.5,34,87,152/-.

5.       In the appeal filed, the Ist ground relates to disallowance of bad debt of Rs.6,32,41,821/-.

6.       The AO has stated that the assessee debited a sum of Rs.6,32,41,821/- as bad debt to its P & L account.  During the course of assessment proceedings, the assessee submitted a list of parties who were appearing in the books of the assessee as sundry  debtors  which have been written off by the assessee as not recoverable. He has stated that the assessee was asked to justify the claim of bad debt, but despite sufficient opportunities given, the assessee did not justify its decision to write off the said amount during the year under review. The AO stated that in order to take advantage of the provisions of sec. 36(1)(vii), the assessee, having regard to the facts and circumstances of the case, makes a bona fide assessment to the effect that the realization of the debt is not possible. He has stated that the assessee is required to show that on the facts and circumstances pertaining to a particular debt, it  has taken  a honest judgment that the said debt has become a bad debt and if it  could show that that it had taken an honest judgment, the same would establish that the debt in question is a bad debt. Therefore, the burden is on the assessee to show that it had no reasonable expectation of  recovering it at the time it wrote off  that there was no ray of  hope on which it could rely for recovering the amount from the debtor. The AO has stated that mere writing off  these  debts as bad debts is premature and accordingly he disallowed the claim of the assessee and added back to the total income of the assessee. It is relevant to state that the AO  has stated that the decision of ITAT, Mumbai Special Bench,  in the case of DCIT vs. Oman International Bank  (100 ITR 285) (SB), which is decided against the department, is not accepted  by the department and appeal to the High Court has been filed by the department. Being aggrieved, the assessee filed first appeal before the appellate authority.

7.       The assessee filed an application under rule 46A for submitting fresh evidences, inter alia, in respect of bad debts in the form of ledger copies, confirmations and also details of investment with a request to admit the same. The ld. CIT(A)  has asked for  comments of the AO. The AO,        in his remand report dated   13-04-2010, stated that all such details should have been furnished during the assessment proceedings, though only some of them were produced. The ld. CIT(A), after considering the comments of  the AO and explanation given by the assessee that the assessee company was a BIFR company and due to lull in the activities, the details could not be gathered and produced before the AO, had  held that the assessee had not been able to satisfy the requirements of  Rule 46A and accordingly did not consider the fresh evidences proposed to be filed by the assessee.

8.       In respect of the claim of the assessee as bad debt, the ld. CIT(A) has stated that the reasons for writing off the said amount as bad debt were not furnished by the assessee before the AO who disallowed the same by stating that the writing off was premature. He has further stated that the assessee had also not brought on record to demonstrate that it fulfilled the conditions laid down in sec. 36(2) as well. Thus, the genuineness of the write off is not established. Accordingly, the ld. CIT(A) has upheld the action of the AO in disallowing the deduction claimed by the assessee as bad debt. Hence, the assessee is in further appeal before the Tribunal.

9.       On behalf of the assessee, the ld. AR submitted that the assessee enclosed the details of  bad debts written off, and  referred to page 10 of the paper book. He submitted that it contains  details of  the list of bad debts written off and from which it could be revealed that few parties are those from whom the balance amounts on account of sale were not recoverable. He further  submitted that the assessee had a division which had been acting as a full-fledged money changer  approved by RBI and subsequently the  assessee surrendered the licence. He submitted that  amount was also recoverable from some of the parties in respect of the assessees business of foreign exchange. The ld. AR referred to page 9 of the paper book, which is a copy of Schedule-P and forming part of P & L account, and stated that the assessee has written off sundry balance of Rs.6,32,41,821.67. The ld. AR submitted that after the amendment with effect from 01-04-1989, it is not necessary for the assessee to establish that a debt had become bad in the relevant previous year for  claiming deduction u/s. 36(1)(vii) and mere writing off the debt  in books of account would  be  substantial compliance of the same. To substantiate his submission, the ld. AR referred to the decision of ITAT in the case of  Oman International Bank (supra). He submitted that the claim of the assessee of bad debt should be accepted.

10.     On the other hand, the ld. DR submitted that the assessee had not filed any details as to whether the conditions laid down u/s. 36(2) were fulfilled or not.

Therefore, the assessee was not able to establish the genuineness of the debt which the assessee has claimed to be written off in the assessment year under consideration. She submitted that the assessee could not establish with any documentary evidence as to whether the said amount, which the assessee has claimed to be bad debt written off,  had been offered for taxation in the preceding assessment year.  In reply,  the ld. AR submitted that the assessee filed additional evidences before the ld. CIT(A) in the form of ledger copies in respect of the bad debt claim but the ld. CIT(A) refused to accept the same. He further submitted that if the matter is restored to the AO, the assessee will furnish the requisite details before him. He further submitted that at the relevant time the assessee was a BIFR company and, therefore, the details could not be produced before the AO, and after the BIFR approved the scheme, the assessee company has been revived recently.

11.     We have carefully considered the submissions of  the ld. representatives of the parties and the orders of the  authorities below. We agree with the ld. AR that after the amendment in sec. 36(1)(vii)  w.e.f. 01-04-1989,  it is not obligatory on the part of the assessee to prove that the debt written  off is indeed   a bad debt for purposes of allowance u/s. 36(1)(vii) of the Act. However, it is also a fact that the assessee has to establish that it fulfils the conditions laid down u/s. 36(2) of the I.T. Act. We observe that the assessee has not been able to demonstrate that it fulfils the conditions laid down in sec. 36(2) of the Act and the ld. AR has stated that the requisite documents could not be filed during the assessment proceedings   as the assessee company at the relevant time was a BIFR company and its proposal to revive was pending before BIFR. In the interest of  justice, we agree with the ld. AR  to restore this matter to the file of AO. Hence, we restore this issue to the file of AO with a direction that he will decide the same afresh after considering such evidences as may be filed by the assessee before him and after giving due opportunity of  being heard to the assessee as per law. Therefore, ground no. I taken by the assessee is allowed for statistical purposes.

12.     In ground no. II, the assessee has disputed the order of ld. CIT(A) in confirming the disallowance of share issue expenses of Rs.2,49,477/-.

13.     At the time of hearing, the ld. AR submitted that the above ground is not pressed for. In view of the above submission of the ld. AR, ground no. II of appeal is dismissed as not pressed.

14.     In ground no. III, the assessee has disputed the order of ld. CIT(A) in confirming the disallowance of Rs.1,36,86,720/- being rebates claimed by the assessee. The AO has stated that the assessee debited a sum of Rs.1,36,86,720/- to the P & L account under the head Rebate and Claims. He has stated that during the course of assessment proceedings the assessee was asked to justify the same and the assessee filed the details. The AO  observed that the entire rebates and claims are given to only one party, namely, Shreeji S.M. & T. Pvt. Ltd. The AO has stated that despite sufficient opportunity given to the assessee, no justification for the rebates to one and the only party could be submitted by the assessee. Therefore, the AO did not treat the said expenditure of Rs.1,36,86,720/- as related to the business of the assessee and disallowed the same. Being aggrieved, the assessee filed appeal before the first appellate authority.

15.     During the course of hearing, it was submitted on behalf of the assessee before the ld. CIT(A) that the assessee granted  rebates to the above party due to defect in goods which could not be replaced due to closure of business of the assessee as it had no other option but to grant the said rebates. It was contended that rebate was a business expediency and is allowable as business expenditure.

16.     The ld. CIT(A) has stated that the reply of the assessee before him is too general to be accepted considering the enormity of the amount involved. He has stated that the assessee has to prove to the satisfaction that there was business urgency in respect of the party concerned with necessary evidences, past records, similar allowance to others, relationship of the assessee, basis for working out the quantum of rebate, etc.  Since the onus u/s. 37 is entirely on the assessee, non-furnishing of such details does not prove the business expediency. Accordingly, the ld. CIT(A) confirmed the action of the AO. Hence, the assessee is in further appeal before the Tribunal.

17.     During the course of hearing, the ld. AR referred to page 49 of the paper book, which is a copy of the letter dated 27-02-2010 addressed to M/s.Shreeji S.M. & T. Pvt. Ltd., stating that the assessee company debited to rebates & claims Rs.1,36,86,720/- receivable from the said party against breakages, damaged goods and rate differences etc. in respect of sales made in earlier years. In the said letter, there is signature stated to be of the Director of the said party confirming the contents of the letter. The ld. AR referred to page 9 of the paper book and stated that a sum of Rs.1,36,86,720/- was debited in the P & L account under the head Rebates & Claims. The ld. AR referred to page 57 of the paper book and submitted that the total outstanding receivable for more than six months is shown in Schedule-H at  Rs.18,62,64,534/- and out of which the rebate was given. He further submitted that the said amount was receivable prior to assessment year 2000-01. He submitted that the rebate was given due to business expediency and, therefore, the same is to be allowed u/s. 37(1) of the Act.

18.     On the other hand, the ld. DR supported the orders of the authorities below and submitted that the said letter  at page 49 of the paper book is dated 27-02-2010 which is an afterthought to justify the claim. The ld. DR submitted that there is no material indicating that there was any defect in the goods or there was any dispute between the parties for which the said rebate of  Rs.1,36,86,720/- was given  by the assessee to only one party. The ld. DR further submitted that there is no other correspondence placed on record to support the stand of the assessee.

19.     We have carefully considered the submissions of the ld. representatives of the parties and the orders of the authorities below. We find substance in the submissions of the ld. DR that there is no document placed on record to justify that the assessee has granted rebate of the substantial amount of Rs.1,36,86,720/- to M/s. Shreeji S.M. & T. Pvt. Ltd. on account of defect in the goods, damage of the goods or breakage of the goods. No details have been filed by the assessee as to when the supply was made to the above party and how much amount was due from it. Moreover, at the time of hearing of the appeal for the assessment year 2006-07, we observe from page 17 of the paper book filed for the said assessment year that M/s. Shreeji S.M. & T. Pvt. Ltd. had pledged shares to the assessee of  I.A. & I.C. Pvt. Ltd. and of Shah Pratap Industries Pvt. Ltd. and the shares pledged were invoked by the assessee against receivable and the amount shown respectively is of Rs.11,12,75,000/- and Rs.60,00,000/-. The ld. AR was confronted with respect to the said details but he could not offer any explanation as to when the shares were pledged by M/s. Shreeji S.M. & T. Pvt. Ltd. and why the said shares pledged with the assessee were not invoked when the said party failed to make payment to the assessee instead of giving the rebate of Rs.1,36,86,720/-. The ld. AR also could not place on record any other correspondence  that the said rebate was given by the assessee due to commercial expediency of the business  of the assessee. Therefore, we agree with the ld. CIT(A) that the assessee has failed to discharge the onus that the said rebate  was due to business expediency of the assessee.  Hence, we do not find any reason to interfere with the order of the ld. CIT(A). Therefore, we uphold the order of ld. CIT(A) and reject ground no.III taken by the assessee.

20.     Now, we take up the appeal filed by the assessee for the assessment year 2005-06, being ITA No.6495/Mum/2010.

21.     In ground no. I of the appeal, the assessee has disputed the order of ld. CIT(A) in upholding the disallowance of  Rs.8,71,97,435/- on account of interest to financial institution u/s. 43B of the Act.

22.     The relevant facts are that the AO, while making the assessment u/s. 143(3) of the Act dated 10-12-2007, made disallowance of Rs.11,83,26,280/- u/s.43B of the I.T. Act. Subsequently, the assessee filed an application u/s. 154 of the Act stating that the disallowance u/s.43B has been wrongly made as items relating to disallowance of interest have been wrongly clubbed by the Auditor and the correct figure of disallowance is Rs.6,11,02,968/-. The AO, while rectifying the assessment u/s. 154 of the Act vide his order dated 14-05-2008, stated that the assessees contention is not accepted fully and the disallowance u/s. 43B is restricted to Rs.8,71,97,435/- as per the details submitted by the assessee during the course of assessment proceedings. Accordingly, the AO restricted the disallowance u/s. 43B of the Act to Rs.8,71,97,435/- as against Rs.6,11,02,968/- contended by the assessee. Being aggrieved, the assessee filed appeal before the first appellate authority.

23.     The ld. CIT(A) has confirmed the action of the AO stating that the fresh certificate given by the Auditor restricting the disallowance to Rs.6,11,02,968/- is not supported by the evidence on record and, therefore, confirmed the action of the AO in making the disallowance of Rs.8,71,97,435/-. Hence, the assessee is in appeal before the Tribunal.

24.     During the course of  hearing, the ld. AR referred to pages 11 & 12 of the paper book and  submitted that in the original Form there was a mistake due to oversight and the same was realized during the assessment proceedings and, therefore ,the disallowance to be made u/s. 43B is Rs.6,11,02,968/-. However, during the course of  hearing, the ld. AR admitted that in the P & L account the amount debited is Rs.8,71,97,435/-. Further, the ld. AR was requested as to whether there was any documentary evidence which could be filed that the interest due to financial institution was Rs.6,11,02,968/- which should be considered u/s. 43B of the Act, the ld. AR fairly conceded that there is no such document available with the assessee. In view of the above facts on record, we do not find any reason to interfere with the orders of the authorities below. Hence, ground nos.1 & 2 of Part I of the appeal of the assessee are rejected.

25.     In ground nos.3 to 5 of Part II of the appeal, the assessee has disputed the order of ld. CIT(A) in confirming the disallowance of bad debt of Rs.23,99,64,072/-.

26.     The ld. representatives of  both the parties conceded that the facts and the reasons for disallowance are similar to the assessment year 2004-05 which we have discussed in  paragraphs   6 to 11   hereinabove and requested that the matter  could be restored to the AO for his fresh consideration after giving due opportunity of  being heard to the assessee and after considering such evidences as may be filed before him. We, for the reasons mentioned hereinabove in paragraph 11, restore ground nos. 3 to 5 of Part II to the file of AO with a direction to re-decide the issue of bad debt as per law after giving  due opportunity to the assessee and after considering such evidences as may be placed before him. Hence, ground nos. 3 to 5 of Part II of the appeal are allowed for statistical purposes.

27.     In ground nos.6 & 7 of Part III of the appeal, the assessee has disputed the order of ld. CIT(A) to restore the matter to the file of AO to compute the quantum of disallowance by applying the provisions of sec. 14A of the Act in accordance with Rule 8D of the I.T. Rules.

28.     The relevant facts are that the AO disallowed a sum of Rs.25,72,976/- out of  interest on the ground that the assessee used borrowed funds for the purpose of making investment whose income is exempt u/s. 10 of the I.T. Act. The assessee filed appeal before the first appellate authority.

29.     The ld. CIT(A) has stated that the disallowance has to be worked out for the exempt income as per the provisions of sec. 14A read with Rule 8D  rather than on proportionate basis. Accordingly, the ld. CIT(A) has directed the AO to work out the actual quantum of disallowance as per the formula under Rule 8D. Hence, the assessee is in further appeal before us.

30.     We have heard the ld. representatives of the parties and perused the orders of the authorities below. The Honble jurisdictional High Court has held in the case of  Godrej & Boyce Mfg. Ltd. vs. DCIT (2010) 328 ITR 81 (Bom) that Rule 8D is applicable from assessment year 2008-09 onwards and not for the earlier assessment year. Therefore, we hold that the ld. CIT(A) is not justified to direct the AO to make disallowance for the purposes of sec. 14A by applying Rule 8D of I.T. Rules as the said Rule is not applicable  to the assessment year 2005-06 in view of the decision of the Honble jurisdictional High Court (supra). Hence, we set aside the order of ld. CIT(A) and restore this issue to the  file of AO  with a direction to decide the same afresh on the basis of the documents as may be produced before him and after giving due opportunity to both the parties. Therefore, ground nos.6 & 7 of Part III of the appeal are allowed for statistical purposes.

31.     In ground nos.8 to 10 of Part IV of the appeal, the assessee has disputed the order of  ld. CIT(A) in upholding the disallowance of share issue expenses of Rs.2,35,698/-.

32.     At the time of hearing, the ld. AR submitted that the above grounds are not pressed for. Hence, ground nos. 8 to 10 of Part IV of the appeal are rejected.

33.     Now, we take up the appeal of the assessee for assessment year 2006-07, being ITA No.6497/Mum/2010.

34.     In ground nos.1 to 3 of  Part I of the appeal, the assessee has disputed the order of ld. CIT(A) in confirming the disallowance of bad debt of Rs.7,68,10,695/-.

35.     Similar issue came up for our consideration  for the assessment year 2004-05  in ITA No.6496/Mum/2010 hereinabove vide paragraphs 6 to 11.  Following our finding  in  paragraph 11 hereinabove, we  restore this  issue to the file of AO with a direction that he will decide the same afresh after considering such evidences as may be filed by the assessee before him and after giving due opportunity of being heard to the assessee as per law. Therefore, ground nos.1 to 3 of Part I taken by the assessee are allowed for statistical purposes.

36.     In Part II of the grounds of appeal, the assessee has disputed the order of ld. CIT(A) in upholding the disallowance of  Rs.10,48,482/- made by the AO for the exempt income by applying Rule 8D read with sec. 14A of the I.T. Act.

37.     The ld. AR submitted that the AO made disallowance of Rs.10,48,482/- by applying Rule 8D  for making disallowance u/s.14A of the Act and the ld. CIT(A) has confirmed the action of the AO. The ld. AR referred to the decision of the  Honble jurisdictional High Court in the case of Godrej & Boyce Mfg. Ltd. vs. DCIT (supra) and submitted that Rule 8D is applicable from assessment year 2008-09 onwards and not to the earlier assessment year. He submitted that the matter could be restored to the AO to decide the issue afresh as per law. The ld. DR has no objection to the submission of the ld. AR.

38.     We agree with the ld. AR that the Honble jurisdictional High Court in the case of Godrej & Boyce Mfg. Ltd. vs. DCIT (supra) has held that Rule 8D is not retrospective and is applicable from assessment year 2008-09 onwards. Since the AO has made disallowance by applying Rule 8D read with sec. 14 of the Act and which has been confirmed by the ld. CIT(A), we set aside the orders of the authorities below the restore the same to the file of AO to decide the same afresh as per law after giving due opportunity of  being heard to the assessee. Therefore, Part II of the grounds of appeal is allowed for statistical purposes.

39.     In the result, all the three appeals filed by the assessee for assessment years 2004-05 to 2006-07 are allowed in part.

            Order pronounced on the    13th  day of  June, 2012.

                   Sd/-                                                             Sd/-

        (N.K. BILLAIYA)                                              ( B.R. MITTAL)

  ACCOUNTANT  MEMBER                                     JUDICIAL  MEMBER

Mumbai:    13th  June, 2012.  

NG:

Copy to :

1. Assessee.

2. Department.

3 CIT(A)-5, Mumbai.

4 CIT-2,Mumbai.

5.DR,I Bench, Mumbai.

6.Master file.

 (TRUE COPY)    

                                                                       BY ORDER,

                                                       Asst. Registrar, ITAT, Mumbai.