IN INCOME TAX APPELLATE TRIBUNAL KOLKATA BENCH KOLKATA Before Shri Waseem Ahmed, Accountant Member and Shri S.S.Viswanethra Ravi, Judicial Member ITA No.830 & 923/Kol/2012 Assessment Years:2005-06 Delite Properties Pvt. Ltd. DCIT, Circle-7, Circular Court, 9 th Floor, Kolkata, P-7, /V/s. 8, AJC Bose Road, Chowringhee Square, 5 t h Kolkata-700 017 Floor, Room No. 15, [PAN No.AABCD 0241 J] Kolkata-69 DCIT, Circle-7, P-7, M/s Delite properties Chowringhee Square, 5 th Pvt. Ltd., Circular Floor, Room No.15, V/s. Court, 9 th Floor, 8 AJC Kolkata-700 069 Bose Road, Kol-17 Appellant .. Respondent By assessee Shri D.S.Damle, FCA By Respondent Shri Sallong Yaden, Addl. CIT-DR Date of Hearing 01-08-2016 Date of Pronouncement 21-09-2016 ORDER PER Waseem Ahmed, Accountant Member:- These are cross-appeals by assessee and Revenue against common order of Commissioner of Income Tax (Appeals)-XXIV, Kolkata dated 18.03.2012. Assessment was framed by DCIT, Circle-7, Kolkata u/s 143(3) of Income Tax Act, 1961 (hereinafter referred to as Act ) vide his order dated 31.12.2007 for assessment year 2005-06. ITA No.830 & 923/Kol/2012 A.Y. 2005-06 Delite Properties Pvt. Ltd. vs. DCIT Cir-7, Kol. Page 2 Shri D.S. Damle, Ld. Authorized Representative appeared on behalf of assessee and Shri Sallong Yaden, Ld. Departmental Representative appeared on behalf of Revenue. ITA No.830 & 923/Kol/2012. 2. facts in brief as culled out from order of lower authorities and other documents are that various companies were amalgamated with assessee with effect from 1st April 2004 which was approved by Hon ble Jurisdictional High Court vide its order dated 7th September 2005. assessee for year under consideration filed its return of income on 31st October 2005 showing total income of Rs.1,03,402/- comprising of business income only. Thereafter case was selected for scrutiny and accordingly notice issued u/s 143(2) r.w.s. 142(1)of Act were issued upon assessee. assessment was framed under section 143(3) of Act at total income of Rs 2,77,88,569/- by disallowing advances written off for Rs 2,76,85,167/- only. This amount of advances were pertaining to one of transferor/ amalgamating company i.e. Delite Spinning Mills Pvt. Ltd which was in business of buying yarn/ cotton and getting it is processed from outside on job work basis. 3. assessee used to get its processing work done on job work basis through some spinning Mills located at Bhagalpur. These spinning mills were having sufficient machineries for doing such processing job. Accordingly assessee used to supply yarn/ cotton to such mills for job work. assessee simultaneously used to provide advance to these mills for their electricity bills and labour expenses. As per arrangement assessee kept paying advances to these spinning Mills to get job work done on goods supplied to them. assessee sometime in year 2000 could not provide advances of these spinning Mills due to its poor financial condition. As result, these advances became irrecoverable and accordingly assessee at time of amalgamation has written off such advances in its books of accounts by debiting profit & loss account. details of advances stand as under : 1) Bhagalpaur Co-op Spinning Mills Ltd. Rs.2,07,57,716.10 ITA No.830 & 923/Kol/2012 A.Y. 2005-06 Delite Properties Pvt. Ltd. vs. DCIT Cir-7, Kol. Page 3 2) Pandual Co-op Spg. Miills Ltd. Rs. 56,49,842.38 3) Economic Transport Organization Rs. 1,42,532.00 4) Industrial Cotton Yarn Project Rs. 11,35,076.22 Rs.2,76,85,166.70 However AO during assessment proceedings observed that:- 1) assessee failed to furnish copy of arrangement with spinning mills with regard to advances paid to them for payment of their bills and labour expenses. 2) assessee has not taken any legal action against spinning Mills to recover advances. 3) In scheme of amalgamation there was no clause for writing off such advances in books of accounts. In view of above AO has disallowed claim of assessee for writing off these advances and added to total income of assessee. 4. Aggrieved assessee preferred appeal to ld. CIT(A) who found that following amounts were written off by assessee for year under consideration. i) Advances to contract processors / Manufacturers (i.e. Co-op Mills) Rs.2,04,39,222/- ii) Amounts on account of sales to Co-op. Mills Rs. 56,10,934/- ii) Interest bearing loans to Co-op Mills Rs. 16,35,010/- Total amounts written off Rs.2,76,85,166/- In view of above ld CIT(A) found that advances of Rs.2,04,39,222/- were given to Spinning Mills in course of business of assessee. Similarly amount of Rs.56,10,934/- is representing on account of sales made to Spinning Mills. Accordingly ld CIT(A) deleted addition made by AO for these amounts. ITA No.830 & 923/Kol/2012 A.Y. 2005-06 Delite Properties Pvt. Ltd. vs. DCIT Cir-7, Kol. Page 4 However, amount of Rs.16,35,010/- is representing interest bearing loan given to Spinning Mills which was confirm by ld CIT(A). relevant extract of ld. CIT(A) order is reproduced below:- It has been explained that provisions of Section 36(1)(vii) read with Section 36(2) are applicable to amount of Rs.56,10,934/- written off as said amount relates to sales made to co-operative mills. decisions of Hon'ble ITAT, Kolkata in case of ACIT, Cir-7, Kolkata vs. Britania Industries Ltd in ITA No. 1708 (Kol) of 2008 for AY 2004-05 is squarely applicable to instant case. Respectfully relying on above decision of Hon'ble ITAT, Kolkata and also considering acts of case as discussed above, I am of opinion that advances of rs.2,04,39,222/- were written off in course of business of appellant company. Accordingly, assessing officer is directed to delete (i) addition of Rs.2,04,39,222/- on account of advances written off and (ii) addition of Rs.56,10,934/- on account of amount written off in respect to sales. written off is confirmed. Thus appellant gets relief of Rs.2,60,50,156/- (Rs.2,76,85,166/- - Rs.16,35,010/-). These grounds of appeal are partly allowed. Being aggrieved by this order of ld CIT(A) both Revenue and assessee are in appeal before us. 5. assessee is in appeal against order of ld CIT(A) for sustaining addition of Rs.16,35,010/- representing interest-bearing loan given to Spinning Mills. Similarly Revenue is in appeal against order of ld CIT(A) for deletion of advances of Rs.2,04,39,222/- and debtors amount of Rs.56,10,934/- only. assessee has raised following grounds of appeal:- 1) For that on facts and in circumstances of case, CIT(A) was unjustified in law and on facts in upholding disallowance of Rs.16,35,010/- being debt written off; due from co-operative Mill. 2) For that on facts and in circumstances of case, CIT(A) failed to appreciate that since interest bearing loan was granted by assessee in course of and in connection with carrying on appellant s business, said irrecoverable loan; written off was allowable as business loss . 3)For that on facts and in circumstances of case, AO be directed to allow deduction for write off of interest bearing loan to co-operative mill; amounting to Rs.16,35,010/- as business loss in computing income under head profits & gains of business. ITA No.830 & 923/Kol/2012 A.Y. 2005-06 Delite Properties Pvt. Ltd. vs. DCIT Cir-7, Kol. Page 5 4) For that on facts and in circumstances of case, CIT(A) wrongly dismissed appellant s claim for exclusion of Rs.2,64,54,856/- from total income on ground that liability written back had arisen in normal course of business and therefore chargeable as income for AY 2005-06. 5) For that on facts and in circumstances of case, authorities below failed to appreciate that liability written back inter alia included principal amount due to Punjab National Bank amounting to Rs.2,64,54,856/- and said amount not having been received by assessee in course of its business sand said amount being in nature of principal debt amount on which assessee had liability to pay interest, waiver of principal debt did not represent income earned by assessee in course of its business. 6) For that on facts and in circumstances of case, authorities below be directed to exclude from total income liability written back amounting to rs.2,64,54,856/- since no deduction in respect of such liability was allowed and liability written back did not represent trading liability of appellant. 7) For that appellant craves leave to submit additional grounds and/or amend or alter grounds already taken either at time of hearing of appeal or before. Revenue has raised following ground of appeal:- 1) That on facts and in circumstances of case Ld. CIT(A) erred in allowing claim of expenditure to tune of Rs.2,04,39,222/- on account of irrecoverable balances written off; without appreciating fact that such balances were not clearly revue in nature. 6. Before us ld. AR has filed paper book which is running from pages 1 to 108 and submitted that advances and loan amount was given to spinning mills in course of business and therefore it should be allowed. interest earned on loan amount was offered as business income and same was accepted. assessee drew our attention on pages 26 to 75 of paper book where request and other correspondence with spinning mills were placed. On other ld. DR submitted that assessee kept paying advances in instant case even there was disturbance in business of spinning mills. ITA No.830 & 923/Kol/2012 A.Y. 2005-06 Delite Properties Pvt. Ltd. vs. DCIT Cir-7, Kol. Page 6 assessee was aware that there is situation of lock out in spinning mills but still it paid advances. Therefore it cannot be said that assessee has given advances and loan in course of business. 7. We have heard both parties and perused materials available on record. From foregoing discussion we find that that assessee has not taken any action for recovery of advances given to spinning mills and such advances was not appearing in scheme of amalgamation. Similarly assessee failed to provide any written arrangement for giving such advances. Therefore AO has made addition. However learned CIT(A) found that advances were given in course of business for Rs.2,04,39,222/- and deserves to be allowed for computing business profit as it is current account transactions. But ld. CIT(A) sustained in addition for loan given to spinning middle for Rs.16,35,010/- as it is capital account transaction. Now following issues arise before us for consideration. 1. Whether amount of advances given in course of business is allowable expenses while computing business profit. 2. Whether amount of loan given in course of business is allowable expenses while computing business profit. Now we first take up Revenue appeal 923/Kol/2012. 8. From above facts we find that there is no doubt that advance was given by assessee in course of its business and this fact has not been doubted by lower authorities. assessee was in practice of giving advances to spinning mills for their electricity dues and labour expenses. purpose of assessee for giving such advances is to get its work done through these spinning mills. So it is inferred that advances were provided in course of business of assessee. Therefore we are inclined to concur with view of learned CIT(A). In this connection we rely in case of CIT Vs. Mysore Sugar Company Limited. 46 ITR 649 where Hon ble Apex Court has held as under : amount advanced was towards price of one crop. sugarcane growers received money not as investment but only as advance ITA No.830 & 923/Kol/2012 A.Y. 2005-06 Delite Properties Pvt. Ltd. vs. DCIT Cir-7, Kol. Page 7 payment of price. amounts represented current expenditure. It made no difference that sugarcane procured by assessee was grown with seedlings, fertiliser and money taken on account from assessee-company. assessee-company in advancing was only entering into forehand arrangement to ensure smooth supply of canes and that crop does not suffer due to want of funds. resultant loss was revenue loss. English Crown Spelter Co. Ltd. vs. Baker (1908) 5 Tax Cases 324, Charles Marsden & Sons Ltd. vs. IRC (1919) 12 Tax Cases 217 and Reid's Brewery Co. Ltd. vs. Male (1891) 3 Tax Cases 279 applied; Judgment of Mysore High Court in ITRC No. 2 of 1955 dt. 7th Sept., 1959 affirmed. Loss on account of failure of crops of sugarcane growers to whom assessee advanced money, seedlings and fertilizers to be adjusted against supply of sugarcane is revenue loss for assessee, sugar manufacturer From above, we find that advance was provided on principal of commercial expediency and for purpose of business. It is settled proposition of law that in what manner assessee should conduct his business is that left to discretion of assessee and assessing officer cannot sit in arm chair of businessman to decide what should have been income earned. Therefore in our considered view we do not find any interfere in order of ld. CIT(A). Hence ground of appeal of Revenue is dismissed. 9. Now coming to 2nd question where assessee is in appeal before us against order of ld CIT(A) for sustaining addition of Rs. 16,35,010/-. In this case, we find that assessee has given loan to same spinning mills to which advances were also provided in course of business. However, we find that loan given is representing transaction on capital account and this is not business of assessee to provide loan on interest of basis. However, ld. AR before us argued that even single transaction can be regarded as business transaction and income earned from such transaction was also shown as business income. From facts, we find that loan was given to same mills to which advances were provided and such advances have been held by us as in course of business. Therefore color of transaction should not be changed on basis of nomenclature of similar kind of transaction. Therefore we are inclined to reverse order of authorities below. In this connection we rely in case of CIT ITA No.830 & 923/Kol/2012 A.Y. 2005-06 Delite Properties Pvt. Ltd. vs. DCIT Cir-7, Kol. Page 8 Vs. Ramaniyam Homes (P) Ltd. [2016] 68 taxmann.com 289 (Madras) where Hon ble HIGH COURT OF MADRAS has held as under : 39. Therefore, it is not actual receipt of money, but receipt of benefit or perquisite, which has monetary value, whether such benefit or perquisite is convertible into money or not, which is covered by Section 28(iv). Say for instance, gift voucher is issued, enabling holder of voucher to have dinner in restaurant, it is benefit of perquisite, which has monetary value. If holder of voucher is entitled to transfer it to someone else for monetary consideration, it becomes perquisite convertible into money. But, irrespective of whether it is convertible into money or not, it should have monetary value so as to attract Section 28(iv). monetary transaction, in true sense of term, can also have value. Any number of instances where monetary transaction confers benefit or perquisite that would have value, can be conceived of. There may be cases where incentive is granted by supplier, waiving portion of sale price or granting rebate or discount of portion of price to be paid, when payments scheduled over period of time, are made promptly. It is needless to point out that in such cases, prompt payment of money itself brings forth benefit in form of incentive or rebate or discount in price of product. We do not know why it should not happen in case of waiver of part of loan. Therefore, finding recorded in paragraph 27.1 of decision in Iskraemeco Regent Ltd. (supra) that Section 28(iv) has no application to any transaction, which involves money, is sweeping statement and may not stand in light of express language of Section 28(iv). In our considered view, waiver of portion of loan would certainly tantamount to value of benefit. This benefit may not arise from "the business" of assessee. But, it certainly arises from "business". absence of prefix "the" to word "business" makes world of difference. 40. We shall now turn our attention to distinction sought to be made between waiver of portion of loan taken for purpose of acquiring capital assets on one hand and waiver of portion of loan taken for purpose of trading activities on other hand. 41. It appears that in so far as accounting practices are concerned, no such distinction exists. Irrespective of purpose for which, loan is availed by assessee, amount of loan is always treated as liability and it gets reflected in balance sheet as such. When repayment is made in monthly, quarterly, half yearly or yearly installments, installment is divided into two components, one relating to interest and another relating to portion of principal. To extent of principal repaid, liability as reflected in balance sheet gets reduced. interest paid on principal amount of loan, will be allowed as deduction, in computing income under head "profits and gains of business or profession", as per provisions of Act. ITA No.830 & 923/Kol/2012 A.Y. 2005-06 Delite Properties Pvt. Ltd. vs. DCIT Cir-7, Kol. Page 9 42. But, Section 36(1)(iii) makes distinction. amount of interest paid in respect of capital borrowed for purpose of business or profession is allowed as deduction under Section 36(1)(iii), in computing income referred to in Section 28. But, proviso there under states that any amount of interest paid in respect of capital borrowed for acquisition of asset for extension of existing business or profession, whether capitalized in books of account or not for any period beginning from date on which capital was borrowed for acquisition of asset, till date on which such asset was put to use, shall not be allowed as deduction. 43. Therefore, it is clear that moment asset is put to use, then interest paid in respect of capital borrowed for acquiring asset, could be allowed as deduction. When loan amount borrowed for acquiring asset gets wiped off by repayment, two entries are made in books of account, one in profit and loss account where payments are entered and another in balance sheet where amount of unrepaid loan is reflected on side of liability. But, when portion of loan is reduced, not by repayment, but by lender writing it off (either under one time settlement scheme or otherwise), only one entry gets into books, as natural entry. double entry system of accounting will not permit of one entry. Therefore, when portion of loan is waived, total amount of loan shown on liabilities side of balance sheet is reduced and amount shown as Capital Reserve is increased to extent of waiver. Alternatively, amount representing waived portion of loan is shown as capital receipt in profit and loss account itself. These aspects have not been taken note of in Iskraemeco Regent Ltd.(supra) 44. In view of above, questions of law are liable to be answered in favour of Revenue/appellant. Accordingly, they are answered in favour of appellant/Revenue and appeal filed by Revenue is allowed. No costs. In above case waiver of loan has been held as business income of assessee. Following same analogy, we find that loan given in course of business is business transaction and therefore it should be allowed for deduction while computing business income of assessee. Hence issue raised by assessee is allowed. 10. second issue raised by assessee in inter-connected ground no. 4 to 6 is that ld. CIT(A) erred in holding that loan liability written back has arisen in normal course of business and therefore chargeable to tax as income. ITA No.830 & 923/Kol/2012 A.Y. 2005-06 Delite Properties Pvt. Ltd. vs. DCIT Cir-7, Kol. Page 10 assessee was having amount of loan outstanding for Rs. 10,80,69,408/- due to Punjab National Bank. assessee during year got same settled from bank for Rs. 4.50 crores and balance amount for Rs. 6,30,69,408/- was written back in books of accounts which was comprising of principal amount of Rs.2,64,54,856/- only and unpaid interest amount of Rs.3,66,14,552/- only. assessee offered entire written off amount as business income for year under consideration. However assessee raised issue 1st time before learned CIT(A) that it has shown principal amount of loan for Rs. 2,64,54,856.00 from bank which was written in year under consideration has been shown as business income of due to inadvertent mistake. As such principal amount written off is not income of assessee. assessee before ld. CIT(A) has prayed for not to include said amount as business income by way of raising additional grounds of appeal. However ld. CIT(A) dismissed grounds of appeal of assessee by observing as under :- 4. Additional Grounds No. 1&2: In these additional grounds of appeal, appellant has claimed for deduction of Rs.2,64,54,856/- on account of Liabilities no longer required written back . I have carefully considered above two additional grounds of appeal. In P/L A/c, appellant has credited amount of Rs.2,64,54,856/- as liabilities written back . remission of liability for Rs.2,64,54,856/- has arisen during normal course of business of appellant company. Moreover, said amount has not been claimed as deduction by appellant either in its return of income or during assessment proceedings before Assessing Officer. appellant has not claimed deduction for said amount of Rs.2,04,54,856/- by filing revised return of income. I find that appellant company has correctly credited above sum of Rs.2,64,54,856/- as liabilities written back in its P & L A/c and remission of sad liabilities has arisen in its normal course of business. Accordingly, I hold that it has been correctly assessed as income In hand of appellant on basis of its return of income. These two additional grounds of appeal are dismissed. Being aggrieved by this order of ld CIT(A) assessee came in second appeal before us. 11. At outset we find that we have decided similar issue in Para-9 of this order by holding that loan was given to mills in course of business and in event of writing off same in books as irrecoverable is allowable for ITA No.830 & 923/Kol/2012 A.Y. 2005-06 Delite Properties Pvt. Ltd. vs. DCIT Cir-7, Kol. Page 11 deduction. While holding so, we have relied in case of CIT Vs. Ramaniyam Homes (P) Ltd. (Supra). Accordingly in our considered view same ratio is also applicable in instant issue. Therefore we do not find any reason to interfere in order of ld. CIT(A). Hence ground of appeal of assessee is dismissed. 12. In result, appeal of Revenue stands dismissed and that of assessee is partly allowed. Order pronounced in open court on 21/09/2016 Sd/- Sd/- (S.S.Viswanethra Ravi) (Waseem Ahmed) Judicial Member Accountant Member Dkp - 21/09/2016 Kolkata Copy of Order Forwarded to:- 1. Assessee-Delite Properties Pvt. Ltd. Circular Court, 9th Floor, 8, AJC Bose Road, Kolkata-17 2. Revenue-DCIT, Circle-7, P-7, Chowringhee Square, 5th Floor, Room No. 15, Kolkata-700 069 3. Concerned CIT 4. - CIT (A) 5. DR, ITAT, Kolkata 6. Guard file. By order//True Copy// Delite Properties Pvt. Ltd. v. DCIT, Circle-7, Kolkata