The Commissioner of Income-tax, Delhi-IV v. Escotrac Finance and Investments Ltd
[Citation -2017-LL-0719-8]

Citation 2017-LL-0719-8
Appellant Name The Commissioner of Income-tax, Delhi-IV
Respondent Name Escotrac Finance and Investments Ltd.
Court HIGH COURT OF DELHI AT NEW DELHI
Relevant Act Income-tax
Date of Order 19/07/2017
Assessment Year 1993-94
Judgment View Judgment
Keyword Tags profit and loss account • speculation loss • doubtful debt • bad debt
Bot Summary: The Assessee gave a further elaborate explanation that the Assessee along with another group company Escorts Holdings Limited advanced a sum of Rs.3.01 crore to the aforementioned broker for investment in badla transactions. The balance sum of Rs. 86,37, 109 was written off as bad debt in the books of the Assessee as well as EHL. The Assessee s share of these bad debts worked out to Rs.71,82,012. The Assessee informed the AO that the apprehension about the loss arising out of the transaction of being speculative in nature was misplaced since the Assessee had advanced money to be invested in badla transactions and the money was repayable by way of cheques. The Assessee maintained that by no stretch of imagination, it can be said that the loss arising for non-payment of money due to the assessee can be in the nature of speculative loss. The above explanation was not accepted by the AO. It was pertinently pointed out by the AO in the assessment order that the shortfall perceived by the Assessee has not found mention in the MOA, so it did not assume the colour of debt owed by the broker to the Assessee. While Mr. Mehta did not deny that the Assessee had initially taken the stand that the said amount could not be a speculative loss, since it was the Revenue s suggestion that it could be, the Assessee was prepared to accept it. In the considered view of the Court, the ITAT appears to have misconstrued the nature of the transaction involving the Assessee and the broker Kamlesh Kamal Co. It also overlooked the basic fact that the Assessee was a finance and investment company.


IN HIGH COURT OF DELHI AT NEW DELHI ITA 215/2005 COMMISSIONER OF INCOME TAX DELHI-IV ..... Appellant Through: Ms. Vibhooti Malhotra, Advocate. versus ESCOTRAC FINANCE AND INVESTMENTS LTD. ..... Respondent Through: Mr. Simran Mehta & Ms. Swati R.K., Advocates. CORAM: JUSTICE S.MURALIDHAR JUSTICE PRATHIBA M. SINGH ORDER 19.07.2017 Dr. S. Muralidhar, J.: 1. This is appeal by Revenue under Section 260A of Income Tax Act, 1961 ( Act ) against order dated 31st March, 2003 passed by Income Tax Appellate Tribunal ( ITAT ) in ITA No.453/Del/1997 for Assessment Year ( AY ) 1993-94. 2. By order dated 10th November, 2006 while admitting appeal, following substantial question of law was framed: Whether order of ITAT is perverse, inasmuch as having rejected assessee's claim of debt, ITAT ought to have dismissed assessee's appeal and not remanded matter to AO for re-computation of same as speculative loss? ITA 215/2005 Page 1 of 9 3. facts leading to present appeal are that Respondent/Assessee is engaged in business of finance and investment. Assessee filed its return of income for AY in question on 31st December, 1993 declaring income of Rs.93,38,110. Assessee reduced its profits by writing off sum of Rs.71.82 lakh in profit and loss account claiming it to be bad debt. 4. During course of assessment proceedings, AO called upon Assessee to clarify aforementioned claim for bad debt. Assessee submitted detailed reply dated 27 th October, 1995. Assessee explained that out of sum of Rs.151.82 lakh due from broker, Kamlesh Kamal & Co. aforementioned sum of Rs.71.82 lakh had been written off. Assessee stated that it had advanced money to broker for purchase of shares, which unfortunately were not purchased by broker. broker was unable to repay money advanced. It was stated that Memorandum of Agreement ( MOA ) had been entered into with broker and that balance amount of Rs.80 lakh due from M/s. Kamlesh Kamal & Company is included in sundry debtors and is grouped in Schedule E on page 42 of printed accounts. 5. AO, however, was of view that amount cannot be treated as bad debt since (i) there is no specific waiver of any liability (ii) No debt as such has arisen at all or been recognised as such (iii) M/s. Kamlesh Kamal have undertaken to pay sums due to you and for balance have undertaken to furnish you with shares (iv) At best shortfall between sums given by you and payments agreed to be made ITA 215/2005 Page 2 of 9 to you can be considered as cost of shares to you and (v) Any loss arising, if at all, out of above transaction can only be speculative in nature. 6. Before AO, Assessee gave further elaborate explanation that Assessee along with another group company Escorts Holdings Limited ( EHL ) advanced sum of Rs.3.01 crore to aforementioned broker for investment in badla transactions. Some portion of money was utilised by broker for investment in badla transactions and part was returned. It was stated that as of 30 th September, 1992 outstanding amount owed by broker was Rs.2,86,99,698. Assessee volunteered that income generated on account of badla transactions has been duly included in income from badla transactions as shown in Profit and Loss account on page 39 of printed accounts. 7. Assessee further explained that cheques issued by broker towards repayment of aforementioned sum were dishonoured. It was noticed that broker had applied to Delhi Stock Exchange to resign from membership and transfer ticket to some other person. This led to Assessee, along with EHL, filing petition before this Court seeking injunction on sale of stock exchange ticket by broker. 8. During pendency of said petition, broker is stated to have approached Assessee for out-of-court settlement. This led to signing of MOA whereby it was agreed by broker that ITA 215/2005 Page 3 of 9 following sums would be paid to Assessee: i. Rs.65,00,000 within 7 days of signing of agreement. ii. Rs.60,00,000 on or before 31.03.93. iii. Rs.20,00,000 in 4 equal instalments of Rs.5,00,000 each payable on or before 30th June, 1993, 30th September, 1993, 31st December, 1993 and 31st March, 1994. 9. In addition broker agreed to transfer shares worth Rs.55,62,589 as mentioned in Annexure B to MOA to Assessee. It appears that thereafter sum of Rs.65 lakh was received by broker and credited to broker s account. balance of Rs.80 lakh was retained in broker s account and included in sundry debtors. It was explained that of total outstanding amount of Rs.2,86,99,698, Rs.1.45 crore was agreed to be paid by broker by cheques and Rs.55,62,589 by way of shares to be transferred by broker. balance sum of Rs. 86,37, 109 was written off as bad debt in books of Assessee as well as EHL. Assessee s share of these bad debts worked out to Rs.71,82,012. 10. Assessee informed AO that apprehension about loss arising out of transaction of being speculative in nature was misplaced since Assessee had advanced money to be invested in badla transactions and money was repayable by way of cheques. Assessee maintained that by no stretch of imagination, it can be said that loss arising for non-payment of money due to assessee can be in nature of speculative loss. ITA 215/2005 Page 4 of 9 11. As regards observations of AO that money advanced to broker had not been taken into account in computing income of previous year in which amount of such debt was written off, it was contended by Assessee that badla income earned had been duly included in P&L account. Assessee pointed out that Kamlesh Kamal & Co. had filed copy of account before AO which showed that they are committed to pay amount due to Assessee Company. It was pointed out that balance amount of Rs.80 lakh due under MOA had not been paid by broker and therefore, Assessee had filed suit for recovery of said sum together with interest. 12. above explanation was not accepted by AO. It was pertinently pointed out by AO in assessment order that shortfall perceived by Assessee has not found mention in MOA, so it did not assume colour of debt owed by broker to Assessee. amount which is not owed cannot crystallise in shape of debt, in first place and therefore cannot become bad debt. amount that Assessee calls irrecoverable is not seen to be recoverable at all in first place. What was not recoverable was therefore never debt. It may be cost of shares purchased, speculation loss of Assessee or may assume any other form. Consequently aforementioned sum was disallowed and added back to income of Assessee. 13. Commissioner of Income Tax (Appeals) [ CIT (A) ] by ITA 215/2005 Page 5 of 9 order dated 29th November, 1996 confirmed order of AO and dismissed Assessee s appeal. 14. By impugned order, ITAT while disposing of appeal of Assessee was of view that Assessee was engaged in speculative transaction. It held that investment made with broker was in speculative business and loss suffered on account thereof was speculative loss which can only be set off against speculative income. It was concluded that since in AY in question Assessee had earned certain speculative income against which set off of speculative loss should be allowed to Assessee matter should be restored to file of AO to re-compute speculative loss after allowing set off of speculative income and to carry forward loss, if any, as per law. 15. grievance of Revenue, as articulated by Ms. Vibhooti Malhotra, learned counsel appearing on its behalf, is that ITAT was in error in proceeding on basis that above sum claimed by Assessee as bad debt was its speculative loss. She submitted that once AO found on facts that case of Assessee that sum written off was bad debt was unsustainable in law, matter should have ended there. There was no question of treating said amount as Assessee s speculative loss, particularly when that was not even Assessee s case. She submitted that unless said sum constituted income of Assessee in earlier previous year question of writing it off as bad debt in AY in question did not arise. mere failure to recover sum from broker which was given as ITA 215/2005 Page 6 of 9 advance for badla transactions could, at best, be business loss but would not be bad debt. She referred to decisions in A.V. Thomas & Company Limited v. Commissioner of Income Tax (1963) 48 ITR 67 (SC) and Commissioner of Income Tax v. Abdullabhai Abdulkadar (1961) 41 ITR 545 (SC). 16. Replying to above submissions, Mr. Simran Mehta, learned counsel appearing for Assessee, submitted that it was AO s own suggestion that if amount was not bad debt, it could be speculative loss. While Mr. Mehta did not deny that Assessee had initially taken stand that said amount could not be speculative loss, since it was Revenue s suggestion that it could be, Assessee was prepared to accept it. Therefore, submission to that effect was put forth before ITAT, which was accepted by it, that such speculative loss should be set off against speculative income of Assessee. He accordingly submitted that impugned order ITAT did not call for interference. 17. In considered view of Court, ITAT appears to have misconstrued nature of transaction involving Assessee and broker Kamlesh Kamal & Co. It also overlooked basic fact that Assessee was finance and investment company. This is evident from its observation in impugned order that: Since assessee himself was not engaged in dealing of shares, it cannot be said to have been engaged in trading of shares. This was plainly contrary to factual position. Thirdly, it was not Assessee s case to begin with before AO, that amount written off by it was speculative ITA 215/2005 Page 7 of 9 loss . 18. AO s analysis of what really transaction was, was based on correct understanding of legal position emanating from Section 36 (1) (vii) of Act. This corresponds to Section 2(10)(xi) of Income Tax Act, 1922, which was interpreted by Supreme Court in A.V. Thomas & Company Limited v. Commissioner of Income Tax (supra). There, Court explained that debt means something more than mere advance. It means something which is related to business or results from it. To be claimable as bad or doubtful debt it must first be shown as proper debt. 19. Revenue is right in contention that what was not shown to be part of income of Assessee for earlier previous year could not possibly be written off as debt in year in question. failure by broker to return aforementioned sum was at highest business loss and nothing more. It was not even Assessee s case that it was speculative loss. observations of AO have been taken out of context. It was observed by AO, in process of negativing claim of Assessee that it was bad debt, that it may be cost of shares purchased, speculation loss of Assessee or may assume any other form. This could not be construed as AO holding it to be speculative loss. 20. Consequently question framed is answered in affirmative, i.e., in favour of Revenue and against Assessee. ITA 215/2005 Page 8 of 9 21. appeal is accordingly allowed. impugned order dated 31st March, 2003 is accordingly set aside. S. MURALIDHAR, J. PRATHIBA M. SINGH, J. JULY 19, 2017 b nesh ITA 215/2005 Page 9 of 9 Commissioner of Income-tax, Delhi-IV v. Escotrac Finance and Investments Ltd
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