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IN THE INCOME TAX APPELLATE TRIBUNAL
"A" BENCH, MUMBAI
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BEFORE SHRI P.M. JAGTAP, ACCOUNTANT MEMBER AND
SHRI AMIT SHUKLA, JUDICIAL MEMBER
. / ITA no. 2873 and 2874/Mum./2011
( / Assessment Years : 200304 and 200506)
A.T.E. Enterprises Pvt. Ltd.
(Now known as ATE Private Limited) ....................... /
43, Dr. V.B. Gandhi Marg
Appellant
Fort, Mumbai 400 021
v/s
Dy. Commissioner of Income Tax ................... /
Range2(1), Aayakar Bhavan
Respondent
101, M.K. Marg, Mumbai 400 020
./ Permanent Account Number AAACA4481G
/ Revenue by : Mr. Nitesh Joshi
/ Assessee by : Mr. Mohit Jain
/ /
Date of Hearing 08.08.2012 Date of Order 07.09.2012
/ ORDER
, /
PER AMIT SHUKLA, J.M.
The present appeals preferred by the assessee, are directed
against the impugned separate order dated 14th February 2011, for
assessment year 200304 and order dated 10th February 2011, for
assessment year 200506, passed by the learned Commissioner (Appeals)
ATE Enterprises P. Ltd.
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IV, Mumbai, for the quantum of assessment passed under section 143(3) of
the Income Tax Act, 1961 (for short "the Act"). These appeals pertain to
same assessee though involving different issues, were heard together.
Therefore, as matter of convenience, both these appeals are being disposed
off by way of this consolidated order.
We first proceed to adjudicate the appeal in ITA no.2873/Mum./2011,
for assessment year 2003-04. The sole ground raised by the assessee,
reads as follows:
"1. The learned CIT(A) has erred in disallowing nonrecoverable
balance written off of ` 14,35,644 being expenses incurred on behalf
of the principal on the ground that the appellant is not obliged to incur
these expenses and that it follows cash system of accounting. On the
basis of the facts and circumstances of the case, nonrecoverable
balance written off of ` 14,35,644 out to be allowed either as bad debt
under section 36(1)(vii) or as business expenses under section 37 of
the Act."
2. Briefly stated the facts of the case are that during the course of
assessment proceedings, the Assessing Officer noted that in the Profit & Loss
Account, the assessee has debited a sum of ` 15,79,917, on account of non-
recoverable balance written-off. Since the assessee was following the
method of "Cash System Accounting", wherein the income is recognized
upon "Receipt Basis" and expenditure is debited as and when paid, therefore,
there was no question of sundry debtors and sundry creditors were written-
off. Accordingly, a show cause notice was issued as to why such a claim
should not be disallowed. The assessee submitted that insofar as the amount
of ` 1,44,273, out of ` 15,79,997, was concerned, the same was the income
of an earlier year which has been accounted for by the assessee in this year
and since the income has not been received, the same is claimed as bad
debt. For the balance amount, it was submitted that the same represents the
expenditure incurred by it in the earlier years on behalf of one of its
associated concern M/s. Motex Engineering Co. P. Ltd., on account of
exhibition and since it has not received the amount, the same has been
claimed as bad debt now. The Assessing Officer did not accept the assessee's
ATE Enterprises P. Ltd.
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contention primarily on the ground that the assessee has chosen the method
of "Cash System Accounting", consistently for several years, therefore, there
was no question of allowing the bad debt. However, with regard to payment
on behalf of its associate concern, the same is also not the expenditure of
assessee's business, therefore, he disallowed the entire claim of ` 15,79,917.
Regarding the sum of ` 1,44,273, the same is not disputed before us. With
regard to the claim of bad debt / business expenses, incurred on behalf of
the principal, it was stated by the assessee that it has entered into a joint
venture agreement with A MonfortsTextilemaschine GMBH & Co. (Monforts)
vide agreement dated 6th July 1996. Pursuant to the said agreement a
Company called Motex Engg. Co. Pvt. Ltd. (Motex) was formed in which
assessee was holding 49% of the shares and balance 51% was held by
Monforts. The assessee is selling agent for various companies including
Motex. It had participated in exhibition organized by ITME in the year 2000. It
was normal business practice of the assessee to incur expenses at
exhibitions on behalf of principals and recover the same from those
principals whose machinery were exhibited at the exhibitions. The assessee
also exhibited the machines of Motex at the exhibition along with machines
of other manufacturers for which it was acting as a selling agent. It recovered
the pro rata exhibition expenses from all the manufacturers except from
Motex, because of its financial conditions Motex. Thus, Motex could not
contribute its share of exhibition expenses incurred by the assessee on its
behalf. Moreover, due to heavy financial losses, the above joint venture
agreement was also terminated during the year under consideration, as
Motex did not have any commercial future and Its net worth was virtually
eroded. Accordingly the assessee wrote off the amount irrecoverable against
the exhibition expenses. It was submitted that the assessee had incurred
expenses on behalf of Motex in the ordinary course of business and the same
had to be written off on account of commercial expediency. Therefore, the
write off by the assessee was incidental to the business of the assessee
company. In this connection it relied on the decision of CIT v/s Inden Biselers
(181 ITR 69)(Mad.) wherein it has been held that non recovery of advances is
a trading loss if it arose directly from the carrying on of the business and is
allowable as trading loss being incidental to the business of the assessee. In
ATE Enterprises P. Ltd.
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view of the above, since the write off was dictated by commercial
consideration, the same may kindly be allowed as expenses incidental to the
business u/s. 37(1) of the Act. The Assessing Officer, however, rejected the
same and disallowed he entire amount.
3. The Commissioner (Appeals) too rejected the contentions of the
assessee and held that insofar as the assessee's claim of bad debt is
concerned, the same is not allowable. With regard to the allowability of
business loss under section 37(1), he held that the assessee was not obliged
to incur these expenses on behalf of the principal as there was no written
agreement. Writing of such expenses incurred on behalf of the principal is
not allowable as business loss as there was no such compulsion. Moreover,
the assessee is following method of "Cash System Accounting" and loss has
not been incurred in this year, therefore, the same cannot be allowed in this
year.
4. Before us, the learned Counsel for the assessee submitted that the
assessee is a selling agent to many parties, including Motex Engineering Co.
P. Ltd. As A normal business practice adopted by the assessee, it has to
incur expenditure on behalf of the principal whose machinery it exhibited in
the exhibition. Thereafter, the assessee used to recover the expenditure
from the said principals. The total expenditure incurred by the assessee
during the exhibition of ITME-2000, the assessee has incurred expenditure
for several parties / principals out of which one of them was Motex
Engineering Co. P. Ltd. The assessee could recover the expenditure in most
of the cases, however, in the case of Motex Engineering Co. P. Ltd., the
assessee could not recover the exhibition expenditure on its behalf due to
serious financial condition and heavy loss. In fact, due to these heavy losses,
joint venture agreement was also terminated during the year and the net
worth of Motex Engineering Co. P. Ltd. was virtually eroded. It was under
these circumstances, the assessee had no option but to write-off the amount
as irrecoverable or it should be allowed as business loss. He relied upon the
judgment of Hon'ble Supreme Court in Essen Private Ltd. v/s CIT, [1967] 65
ITR 625 (SC).
ATE Enterprises P. Ltd.
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5. On the other hand, the learned Departmental Representative relying
upon the decision of the Commissioner (Appeals), submitted that under the
method of "Cash System Accounting", neither earlier year's loss can be
allowed in this year nor it can be allowed as bad debt. Hence, the findings
give by the Commissioner (Appeals) as well as by the Assessing Officer
should be upheld.
6. We have heard the rival contentions, carefully considered the orders of
the Commissioner (Appeals) as well as of the Assessing Officer and the
material available on record. There is no dispute that the assessee had
incurred the expenditure on account of exhibition on behalf of various
principals including that of Motex Engineering Co. P. Ltd. The issue for our
adjudication is, whether such non-recovery of expenditure from Motex
Engineering Co. P. Ltd., can be claimed as a loss or expenditure in this year.
It is also admitted fact that the assessee is following the method of "Cash
System of Accounting" since last several years. Therefore, in such
circumstances, such an expenditure cannot be allowed as bad debt under
section 36(1)(vii) r/w section 36(2). Now, coming to the issue as to whether
such a claim can be allowed as a business loss or not.
7. For claiming a loss, it is essential that the same should be on revenue
account and must have been incurred during the course of carrying on
business or profession during the year. Such a loss is allowable while
computing the income under section 28. In the present case, the incurring of
expenditure by the assessee on behalf of its principal was part of its business
practice which it has been following regularly, therefore, at the time of
incurrence, it was in the course of its business activities only. This loss has
been incurred only in a particular case when the assessee could not recover
the pro-rata exhibition expenses from one party and later on when it was
found that recovery of such expenses would be very difficult, the assessee
claimed it as a bad debt which in fact, should have been claimed as loss
because it was a kind of a business / trading liability incurred by the
assessee as a businessman during the course of its business.
ATE Enterprises P. Ltd.
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8. Now, coming to the issue whether such a loss can be allowed when the
assessee is following the method of "Cash System of Accounting", and such a
loss has arisen on account of expenditures which were incurred in the earlier
years. In our considered opinion, once the assessee has incurred expenditure
on behalf of its principal and after making its efforts could not recover the
said expenditure, this will result into a loss only and such a loss can be
claimed in the year when the assessee was quite ascertained that the same
could not be recovered. The party herein this case from whom the amount
has to be recovered was in financial stringency and so much so that the joint
venture agreement through which the said company (Motex) was formed got
terminated in this year. It was due to this reason that the assessee can be
said to have incurred the loss in this year only. Even when the assessee is
following the method of "Cash System of Accounting", such a loss which is
on account of trading or business cannot be disallowed. Such a loss cannot
be treated as a business expenditure in the present year for the reason that
the assessee is mainly carrying out agency business for various machinery
component and accessories from which it gets certain percentage of income
and any expenditure relating to agency business can be claimed in relation
to such income. For claiming such expenses, the year of incurring of
expenses is important in the method of "Cash System Accounting". However,
the aforesatated loss was due to peculiar circumstances that the assessee
who had incurred expenditure on behalf of some other person as per its
trade / business practice and the same could not be recovered even after a
lot of persuasion and, therefore, such a loss which has been recognized in
this year due to above facts, has to be allowed as a business loss. Thus, the
amount of ` 14,35,644, though cannot be allowed as bad debt written-off
but can definitely be allowed as a business loss. Consequently, we set aside
the impugned order passed by the Commissioner (Appeals) and allow the
ground raised by the assessee is treated as allowed.
9.
9. In the result, assessee's appeal is allowed.
ATE Enterprises P. Ltd.
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We now proceed to disposes off the appeal in ITA no.2874/Mum./
2011, for assessment year 200506, on the following grounds:-
"1. Learned CIT (A) has erred in confirming the action of the
Assessing Officer in computing the capital gains in respect of property
situated at Maker Chamber-IV, Nariman Point, Mumbai (the property)
by adopting sale consideration at Rs. 5,40,99,000/- u/s.50C being
value adopted by the Stamp Duty Authority (SDA) as against actual
sale consideration of Rs. 4,30,00,000/- adopted by the appellant.. On
the facts and circumstances of the case and in law, the Learned CIT
(A) ought to have upheld the contention of the appellant that the
actual sale consideration of Rs.4,30,00,000/- adopted by the appellant
and duly supported by the report of a recognised valuer ought to be
taken as sale consideration for the purpose of computation of capital
gain.
2. Learned CIT (A) has erred in dismissing the ground relating to
the Assessing Officer adding an amount of Rs.13,80,000/- to the
income of the appellant u/s 68, on the presumption that the same is
infructuous. On facts and circumstances of the case, the ground not
becoming infructuous, the Learned CIT(A) ought have decided the
ground in appeal on the basis of facts and submissions made and
ought to have deleted the addition of ` 13,80,000, made under section
68 of the Act."
10. Briefly stated, the facts relevant for the issue in ground no.1, are that
the assessee has sold a premises number 46 and 47 of Maker Chambers, 6,
Nariman Point, Mumbai, at 4,30,00,000, on 8th March 2005. The said
property was acquired in assessment year 1984-85 for a sum of ` 6,99,178.
For claiming index cost and other expenses, the assessee has offered `
1,54,35,156, for taxation as long term capital gains. Though, as per the
agreement dated 4th March 2005, the property was sold for ` 4,30,00,000,
however, the stamp valuation authority for the purpose of stamp duty has
taken the value of the property at ` 5,40,99,000. The Assessing Officer
observed that the assessee could not adduce any evidence on record to show
that the value adopted by the stamp duty authority of ` 5,40,99,000, is more
than the fair market value of the property. Therefore, in view of the
provisions of section 50C, he took the sale consideration at ` 5,40,99,000,
instead of ` 4,30,00,000. Accordingly, he computed the taxable long term
capital gains as under:-
ATE Enterprises P. Ltd.
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1) Value as per stamp duty ` 5,40,99,000
authority
Less: a) Index Cost ` 26,84,844
b) Selling Exp. ` 4,30,000
c) Investment ` 47,52,000 ` 78,66,844
Capital Gain on Maker VI ` 4,62,32,156
Property
II) Capital gain on ` 47,09,835
Mahalaxmi Premise
Total Capital Gain ` 5,09,41,991
Less: Capital Gain offered on ` 1,76,61,161
above property
` 3,32,80,830
11. Before the Commissioner (Appeals), the assessee submitted that the
assessee has duly objected to the valuation made by the stamp duty
authority and has also produced valuation report from a registered valuer
which has not been taken into consideration and, therefore, the Assessing
Officer was obliged under the law to make a reference to the valuation
officer to ascertain the correct fair market value. In support of this
contention, various decisions were relied upon which has been incorporated
in Para-12 of the appellate order. The Commissioner (Appeals) did not
accept the assessee's contention and dismiss the assessee's ground on the
following observation and holding as under:-
"13. I do not agree with the submissions of the authorised
representative. I find that provisions of section 50C are mandatory as
the word used in section 50C is "shall" which means the valuation
made by the stamp duty authority is binding on the A.O. Although
there is a provision that the A.O. may refer the matter to valuation
officer if the assessee objects to the valuation made by the stamp duty
authority still he has to accept the valuation made by the stamp duty
authority in view of the binding nature of provision of section 50C.
According, I hold that A.O. is justified in computing the capital gain on
the basis of valuation made by the stamp duty authority. The case
laws relied by the assessee are distinguishable on facts. This ground of
appeal is dismissed."
ATE Enterprises P. Ltd.
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12. Thus, the Commissioner (Appeals), though agreed that the Assessing
Officer may refer the matter to the valuation officer if the assessee objects
to the valuation made by the stamp duty authority, still the Assessing Officer
has to accept valuation made by the stamp duty authority as per the
provisions of section 50C of the Act, which is binding.
13. Before us, the learned Counsel for the assessee submitted that the
observations made by the Commissioner (Appeals) is wholly erroneous as
once the assessee has objected to the value adopted by the stamp valuation
authority, the Assessing Officer has to make a reference to the valuation
officer to get the fair market value.
14. On the other hand, the learned Departmental Representative relied on
the findings given by the Commissioner (Appeals).
15. After hearing the rival contentions of the parties and on perusal of the
orders of the authorities below and the material available on record, we find
that the assessee has objected to the valuation adopted by the stamp
valuation authority and has also filed the valuation report by an Approved
Valuer in support of the actual fair market value. The provisions of clause (a)
of sub-section (2) of section 50C, provides that where the assessee claims
before the Assessing Officer that the value adopted or assessed by the
stamp valuation authority under sub-section (1) exceeds the fair market
value of the property as on the date of transfer, the Assessing Officer may
refer the valuation of the capital asset to a valuation officer and once such a
reference is made, the Assessing Officer is bound by such a valuation in
terms of provisions of section 16A(1). The words "may refer", appearing in
sub-section (2), does not entail the discretion upon the Assessing Officer,
because once the assessee has challenged the fair market value adopted by
the stamp valuation authority as per the conditions enumerated in clauses
(a) and (b) of sub-section (2) whichever is applicable, the Assessing Officer
has to determine the valuation of the capital asset and this can only be done
after making a reference to the Valuation Officer. Thus, the Assessing Officer
was obliged to make a reference in the manner provided in sub-section (2)
ATE Enterprises P. Ltd.
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of section 50C. In the present case, the assessee has objected to such
valuation adopted by the stamp valuation authority and has also filed the
copy of valuation report by an approved valuer. Therefore, the Assessing
Officer was required to make a reference to the valuation officer in terms of
sub-section (2) of section 50C. Accordingly, the matter is restored back to
the file of the Assessing Officer who shall make a reference to the Valuation
Officer and to get an estimate of fair market value for determining the
valuation of the asset which is the subject matter of sale. Consequently, we
set aside the impugned order passed by the Commissioner (Appeals) and
restore the matter to the file of the Assessing Officer. Accordingly, ground
no.1, is hereby treated as allowed for statistical purposes in accordance with
the aforestated directions given by us.
16. In ground no.2, the assessee has challenged the addition of `
13,18,00,000, under section 68 of the Act.
17. The Assessing Officer, in the course of assessment proceedings, noted
that the assessee had sold flat No.817, in Delhi for ` 13,80,000, and after
claiming indexed cost and selling expenses, has claimed long term capital
gain of ` 21,82,830. The Assessing Officer treated the said amount of `
13,18,000, as deemed income under section 68, which was credited in the
books of account on the ground that the assessee has failed to bring any
evidence on record that it was on account of sale of the said property.
18. Before the Commissioner (Appeals), the assessee vehemently objected
to such an addition on the ground that once the assessee has filed evidence
in the form of sale agreement for the sale of flat No.817, in Delhi, there was
no occasion to treat such an amount as unexplained cash credit within the
meaning of section 68. The Commissioner (Appeals) dismissed the
assessee's contention solely on the ground that in rectification proceedings
under section 154, this matter has been resolved at the level of the
Assessing Officer.
ATE Enterprises P. Ltd.
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19. Before us, the learned Counsel for the assessee submitted that the
Assessing Officer, under the provisions of section 154, has in fact rejected
the assessee's contention on the ground that this matter is sub-judice before
the Commissioner (Appeals) and rejected the assessee's petition for
rectification; vide order dated 31st March 2008.
20. On the other hand, the learned Departmental Representative relied on
the findings of the Commissioner (Appeals).
21. After hearing the rival contentions of the parties and on perusal of the
orders of the authorities below and the material available on record, we find
that the addition made by the Assessing Officer is wholly erroneous as the
assessee has filed a copy of sale agreements in respect of sale of flats
wherein it has been mentioned that the said property has been sold for a
total sale consideration of ` 13,80,000. Once the money has been received
by way of sale of a property duly mentioned in the sale agreement, it cannot
be held that the same remains unexplained. Even the Commissioner
(Appeals) has not cared to go through the order passed under section 154,
wherein the Assessing Officer has rejected this contention on the ground that
the matter is sub-judice before the Commissioner (Appeals). Consequently,
we do not find any merit in the findings given by the authorities below and
accordingly the addition made by the Assessing Officer stands deleted.
Ground no.2, is thus allowed.
22. /
21. In the result, assessee's appeal is partly allowed for statistical
purposes.
23. , . ITA no. 2873 and
2874/Mum./2011, 200304
ATE Enterprises P. Ltd.
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. ITA no. 2874/Mum./2011, 200506
22. To sum up, assessee's appeal in ITA no.2873/Mum./2011, for
assessment year 2003-04 is allowed and assessee's appeal in ITA no.
2874/Mum./2011, for assessment year 200506 is allowed for statistical
purposes.
7th September 2012
Order pronounced in the open Court on 7th September 2012
Sd/- Sd/-
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P.M. JAGTAP AMIT SHUKLA
ACCOUNTANT MEMBER JUDICIAL MEMBER
MUMBAI, DATED: 7th September 2012
/ Copy of the order forwarded to:
(1) / The Assessee;
(2) / The Revenue;
(3) () / The CIT(A);
(4) / The CIT, Mumbai City concerned;
(5) , , / The DR, ITAT, Mumbai;
(6) / Guard file.
/ True Copy
/ By Order
. / Pradeep J. Chowdhury
/ Sr. Private Secretary
/ / (Dy./Asstt. Registrar)
, / ITAT, Mumbai
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