AI Drafter 
TaxTMI 
TaxTMI 
2016 (8) TMI 209
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....se are that assessee being a limited company engaged in the manufacturing of Transmission Towers, Infrastructure and Real estate, filed its return of income for Asst. Year 2008-09 on 30.09.2008 declaring total income at Rs. 144.81 crores. The case was selected for scrutiny assessment. During the course of assessment proceedings ld. Assessing Officer observed that a sum of Rs. 45,74,134/- has been debited to profit and loss account on account of balance written off, which included credit balance of insurance claim at Rs. 6,32,035/-. Accordingly total debit balances written off was Rs. 52,06,169/- and after subtracting the insurance claim receivable as income at Rs. 6,32,035/-, the net balances written off shown in the profit and loss account was at Rs. 45,74,134; which mostly related to irrecoverable advances given to job work contractor for supply of material and labour. The Assessing Officer was of the view that these irrecoverable advances are in nature of capital loss and cannot be allowed as business expenditure. Accordingly after disallowing balances written off expenditure of Rs. 45,74,134/- income was assessed at Rs. 145.27 crores. 3. Aggrieved, assessee went in appeal be....
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....d written off in the books of accounts. 3.3. It may be mentioned that the AO has disallowed the claim of bad debts on the basis-of the judgment of honourable Kolkata.High Court in the case of Hasimara industries Ltd 184 ITR 174. It would be.necessary to reproduce the relevant observation of the honourable High Court as under: "[1990] 184 ITR 174 (Cal.) High Court of Calcutta Hasimara Industries Ltd. vs. CIT Satish Chandra C.J. and Suhas Chandra Sen, J. Income-tax Reference No.683 of 1979 August 29, 1986 Judgment Suhas Chandra Sen, J.-The following question of law has been referred by the Tribunal under section 256(2) of the Income-tax Act, 1961: "Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in disallowing the loss of irrecoverable advance of Rs. twenty lakhs in computing the assessee's profits on the ground that the .amount was spent by Saksaria Cotton Mills Ltd. on the modernisation and improvement of the machinery?" The facts of the case are set out in detail in the judgment that has been delivered in the assessee's own case being Income-tax Reference No. 100 of 1....
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....ls Limited at the expiry of the leave and licence agreement on June 30, 1966. The Tribunal has found that with effect from July 1, 1966, Saksaria Cotton Mills Limited had its own business but suffered loss on account of labour trouble. Ultimately, the-mill was closed down on October 18, 1967, and the company went into liquidation on March 12, 1969. In the assessee-company's accounting year which ended on March 31, 1968, the assessee claimed the advance of Rs. 20,00,000 as a deduction on the ground that it had become irrecoverable on account of the incapacity of Saksaria Cotton Mills Limited to repay the loan. The Income-tax Officer disallowed the claim on the ground that the amount of Rs. 20,00,000 represented money advanced to Saksaria Cotton Mills Limited for modernisation of its factory. The said amount was not taken into consideration .in computing the income of the assessee in any assessment year. It also did not represent the money lent in the ordinary course of business. The Income-tax Officer observed that even otherwise the sum was not allowable because it had not become a bad debt in the relevant year of account. The assessee had made no effort....
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....vance would be a capital loss unless the loan was made by a money-lender for whom money was his stock-in-trade. Any loss of capital would be on capital account. In the case of a banking or money-lending'business, money is treated as stock- in-trade: Arunachalam Chettiar( Rm. Ar. Ar. Rm.) v. C/r[1936] 4 ITR 173 at p. 183 (PC): Although.the assessee did some money-lending business, this amount of Rs. 20,00,000 was not.lent to Saksa'ri'a' 'Cotton Mills Limned simply for the purpose of earning interest. Under clause 13 of the agreement, the assessee could install new plant and machinery and remove the same after the expiry of the agreement. If the assessee so desired, Saksaria Cotton Mills Limited, at its absolute discretion, could install new plant, machinery and equipment or unit "on such terms as may be agreed at that time". There is no finding of the Tribuhal as to whether the assessee requested Saksaria Cotton Mills Limited to install new plant, machinery and equipment and, if so, the terms on which Saksaria Cotton Mills Limited agreed to install new plant, machinery, equipment, etc. The finding of the Tribunal is that the money was given by-way of adv....
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.... carrying on-of the business of an assessee must be allowed as business loss. This line of decisions was reviewed by the Supreme Court in the case of Ramchandar Shivnarayan v. CIT [1978] 111 ITR 263. If money is embezzled by employees or if money kept by bank or the money-lender as stock-in-trade is stolen or if money is handled in the course of business and is lost on any account, such loss may be shown on revenue account. In such cases, it may not be very relevant to find out whether the money was being held as stock-in- trade of the company or not. But in this case money has been advanced by way of transfer of capital and it has not been possible to recover the loan. For claiming an irrecoverable loan as business loss, it must be established that the loan was not given on capital account. There are some cases where deduction was allowed where money was lent in the usual course of business by managing agencies to managed companies. But those cases are of no relevance for the purpose of the instant case. Here, the assessee-company was: .not managing Saksaria Cotton Mills Limited. It had merely taken the-mills of the company on lease or on leave and licence agreement. The ....
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....nd licence agreement with cotton mill 'S' which was under liquidation. The assessee- company paid an advance of Rs. 20 lakhs to 'S' for modernisation of its machinery. After expiry of the period of-agreement as 'S' was unable to repay the. advance and the advance became irrecoverable, the assessee-company claimed the amount as business loss. The Assessing Officer disallowed the claim. On appeal, the AAC reversed- the order of the Assessing Officer and allowed the claim as revenue expenditure. On the revenue's appeal, the Tribunal disallowed the claim holding the amount as capital loss. On reference, the High Court affirmed the findings of the Tribunal. On appeal to Supreme Court: HELD It was clear from the findings recorded by the Tribunal and the High Court that the assessee's business was manufacture and sale of tea and was not engaged in cotton manufacturing business at all; that while it .intended to enter into cotton manufacturing purposes, did not set up a cotton mill, but obtained operating rights from another compay under the leave and licence agreement for the purpose of acquiring the profit-making apparatus ....
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....rty was changed the company could not file the suit for recovery of- material and to search from all over the country it was quite impossible. Hence the amount has been written off and debited to the profit and loss account. Similarly in respect of the write off of the amount of Rs. 23,13,118/-from Sangam Constructions it was stated that the job work was placed to this party with material and against this order the appellant company had given advance to this party and also supplied the material. The party could not compete the work in time which 'was got Completed from another- party and the charges were debited to the party account. However this party also absconded from the site by leaving behind the labours and could not be contacted again by the appellant. Therefore the balance amount was written off and debited to the profit and loss account of the appellant. In both the cases since the amounts were written off by the appellant from the parties to whom the appellant has given job work and these parties either could not complete the job work or did not issue the Bill of the completed job work by them or both. In my opinion, the advances has been given by the appellant for t....
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.... it as a business loss instead of capital loss. We observe that assessee has claimed Rs. 45,74,134,/- as balances written off for expenses which comprises of debit balances of Rs, 52,06,169/- and credit balance of Rs. 6,32,035/- net effect of the same comes to Rs. 45,74,134/-. In the list of debit balance written off most of the balances were below Rs. 1 lacs in respect of various parties totals to Rs. 3,61,448/- which have been confirmed by ld. CIT(A) as business expenditure. We also find that Revenue has been unable to controvert the claim of assessee for writing off of the balances of these parties. Accordingly, we confirm the action of ld. CIT(A) relating to this deletion of disallowance of Rs. 3,61,448/-. Relating to petty advances. 8. Further we observe that main debit balances which are the subject matter of dispute before us relates to following :- 1. Export Benefit (DEPB) 149833 + 745138 2. Esbee Electricals 172402 3. Parikaj Singh 325200 4. R.P.Construction 1139020 5. Sangam Constructions 2313118 9. We observe that except the debit balances written off relating to export benefit (DEPB) of Rs. 8,94,971/-, the remaining amounts relate to advances given ....
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....mad of Nasik in the books of the assessee-firm was settled and there was no outstanding which had been carried to the sarafi account of the said party. These facts, however, in our opinion, are not sufficient to necessarily reach the conclusion as has been done by the Tribunal that the lending was not a part of the general commission agency business. The general lien granted, inter alia, to the factors who are the commission agents for sale of goods under s. 171 and of agents under s. 221 of the Indian Contract Act extends to the general balance of account of their principal which would, therefore, necessarily include the advances made apart from strictly in the course of the business as factors or commission agents for purchase and supply of goods. It is a matter of surprise how the Tribunal lost sight of the finding made by the ITO that in the course of the business of commission agency, the assessee-firm had advanced money to the constituents who where required to pay interest on such advances. It is no doubt true that the ITO has found that these advances were made to the constituents against the goods received from them for sale on commission basis, but that observation of the....
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....ion agents. In our opinion, therefore, the Tribunal was not justified on the facts and in the circumstances of the case to hold that the advance to M/s. Mohmad Peer Mohmad of Nasik was not in the ordinary course of business of the assessee-firm and merely incidental to it. As held by this court in CIT v. Equitorial Pvt. Ltd. [1974] Taxation 37(s)-82, the debt owed by M/s. Mohmad Peer Mohmad of Nasik was one which sprang directly from the business of the assessee and was allowable as a bad debt, and, consequently, therefore, a trading loss under section 28(1). It is no doubt true that every loss is not so deductible unless it is incurred in carrying out the operation of the business, [vide CIT v. Nainital Bank Ltd. [1965] 55 ITR 707 (SC)]. In that view of the matter, therefore, for the reasons stated in this order, we are of the opinion that the said loss being a bad debt is allowable as trading loss under s. 28 of the I.T. Act, 1961, and, therefore, for the reasons stated hereinabove, the answer to the question referred to us is in the affirmative, that is, in favour of the assessee and against the revenue. 8 The question referred to us at the behest of the assessee, there....