1 IN HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS 9TH DAY OF JUNE 2020 PRESENT HON BLE MR. JUSTICE ALOK ARADHE AND HON BLE MR. JUSTICE HEMANT CHANDANGOUDAR I.T.A. NO.134 OF 2011 BETWEEN 1. COMMISSIONER OF INCOME TAX LTU JSS TOWERS BSK III STAGE BANGALORE 2. ASST. COMMISSIONER OF INCOME TAX CENTRAL CIRCLE-19 NEW DELHI. APPELLANTS (BY SRI K V ARAVIND, ADV.) AND M/S.ABB LTD (SUCCESSOR OF ABB INSTRUMENTATION LTD) KHANIJA BHAVAN, RACE COURSE ROAD II FLOOR, EAST WING BANGALORE-560017. RESPONDENT (BY SRIV VINAY GIRI, ADV.) 2 THIS ITA IS FILED UNDER SEC.260-A OF I.T ACT, 1961 ARISING OUT OF ORDER DATED 26-11-2010 PASSED IN ITA NO.158/BANG/2010, FOR ASSESSMENT YEAR 2001-2002, PRAYING TO: I. FORMULATE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN, II. ALLOW APPEAL AND SET ASIDE ORDERS PASSED BY ITAT, BANGALORE IN ITA NO.158/BANG/2010 DATED 26-11-2010 AND CONFIRM ORDER OF APPELLATE COMMISSIONER CONFIRMING ORDER PASSED BY ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-19, NEW DELHI, IN INTEREST OF JUSTICE AND EQUITY. --- THIS ITA COMING ON FOR ADMISSION, THIS DAY, ALOK ARADHE J., DELIVERED FOLLOWING: JUDGMENT This appeal under Section 260A of Income Tax Act, 1961 (hereinafter referred to as Act , for short) has been filed by revenue. subject matter of appeal pertains to Assessment year 2001-02. appeal was admitted on following substantial questions of law: a) Whether on facts and in circumstances of case and law finding of Tribunal that investment 3 made by assessee in sum of Rs.3,50,81,381/- in Gujarat Instruments Ltd., sister concern for purchase of equity shares which into liquidation can be written off as bad debt despite same is treated as dead loss, is justified and whether it is contrary to law? (b) Whether finding recorded by tribunal that investment made by assessee to tune of Rs.32,25,000/-, for diminution in value of investment in Gujarat Instruments Ltd., is permissible under Section 46(2) of Act as capital loss in view of decision in CIT VS. JAI KRISHNA, 231 ITR 108 is perverse? 2. Facts leading to filing of this appeal briefly stated are that assessee is engaged in business of manufacture of field instrumentation. assessee filed return declaring loss of Rs.7,40,96,877/- on 29.10.2001, which was processed under Section 143(1) of Act on 4 22.03.2002. Thereafter, notice under Section 143(2) of Act as well as questionnaire dated 26.12.2003 along with notices under Section 143(2) and 142(1) were issued. assessing officer by order dated 18.03.2004 inter alia held that assessee is promoter of M/s Gujarat Instruments Ltd., and is associate Company. It was further held that assessee had not furnished any details of investment / finance provided to M/s Gujarat Instruments Ltd., from time to time and has also not explained circumstances, which led to liquidation of said company and how funds provided by assessee were utilized. It was also held that no details have been furnished by assessee of its business interest in M/s Gujarat Instruments Ltd., therefore, loss suffered by assessee to tune of Rs.3,50,81,381/- has to be treated in nature of capital loss. assessing 5 officer also disallowed sum of Rs.32,25,000/- i.e., provision made for diminution in value of investment in M/s Gujarat Instruments Ltd., on ground that no particulars were furnished. 3. Being aggrieved, assessee filed appeal. Commissioner of Income Tax (Appeals) by order dated 23.11.2009 upheld disallowance in respect of writing off debts. It was further held that investment made for equity shares of M/s Gujarat Instruments Ltd., cannot be written off as revenue loss and same is dead loss and therefore, is not allowable. Being aggrieved, revenue as well as assessee preferred appeals. tribunal vide order dated 26.10.2010 inter alia held that writing off bad debt as irrecoverable in accounts of assessee is sufficient in view of law laid down by Supreme Court in T.R.F LTD. VS. 6 CIT , 323 ITR 397 and assessee was entitled to write off amount of Rs.3,50,81,381/- as bad debt. It was also held that aforesaid amount should be treated as capital loss under Section 46(2) of Act in view of decision in case of CIT VS. JAI KRISHNA , 231 ITR 108 (GUJ). Being aggrieved, revenue is in appeal before us. 4. Learned counsel for revenue while inviting our attention to order of assessment has pointed out that assessing officer has not adhered to manner of requirement of writing off bad debt. It is also urged that tribunal has also failed to examine whether writing off of debt has taken place in manner laid down by Supreme Court and therefore, matter should have been remitted to assessing officer without recording finding that assessee is entitled to avail 7 benefit of capital loss. In support of aforesaid submissions, reliance has been placed on decisions of Supreme Court in T.R.F LTD. VS. COMMISSINER OF INCOME TAX , 323 ITR 397 and VIJAYA BANK VS. COMMISSIONER OF INCOME TAX & ANR. , 323 ITR 166. It is also submitted that any loss incurred in setting up of business / company of sister concern is capital expenditure and therefore, same has to be treated as capital loss. It is also pointed out that assessee had failed to explain commercial expediency. It is also urged that bad debt should occur during course of business to claim benefit under Section 36 of Act. It is also submitted that even though tribunal remanded matter to assessing officer, yet it erred in recording finding that assessee is entitled to capital loss on ground that assessee had invested in equity 8 shares, even though, neither nature of investment was disclosed nor any particulars were furnished. It is further submitted that tribunal should not have remitted matter to assessing officer by holding that assessee is entitled to avail of benefit of capital loss. 5. Learned counsel for assessee submitted that burden to prove that debt is bad debt has been removed with effect from 01.04.1989. It is further submitted it is sufficient if debt is be written off as bad debt in accounts of assessee. It is further submitted that assessing officer s remand report was called for and after 01.04.1989, there was no need to establish aspect of irrecoverability of debt after 01.04.1989. It is also pointed out that decision rendered in T.R.F supra was accepted by 9 department and Circular No.12/2016 dated 30.05.2016 was issued and it has been clarified that after 01.05.1989, for allowing deduction for amount of any bad debt or part thereof under Section 36(1)(vii) of Act, it is not necessary for assessee to establish that debt in fact had become irrecoverable and it is enough even though if bad debt is written off as irrecoverable in books of account of assessee. It is also submitted that decision rendered by Supreme Court in T.R.F supra was subsequently explained in VIJAYA BANK supra. While inviting attention of this court to order passed by Commissioner of Income Tax (Appeals), it is pointed out that assessee had advanced sum of Rs.2,21,29,761/- as loan and advances and had further advanced sum of Rs.1,29,51,620/- to sundry debtors. It was also pointed out that assessing officer had 10 accepted that investment made by assessee in sister concern is by way of equity shares and day to day business activity cannot be treated to be capital in nature as appellant had made supplies to its sister concern. It is further submitted that amount of Rs.2.2 Crores advanced by assessee to its sister concern should have treated as business loss. In support of aforesaid submissions, reliance has been placed on decisions in cases of BADRIDAS DAGA VS. CIT , (1958) 46 ITR 10 (SC), CIT VS. MYSORE SUGAR CO. LTD. , (1962) 46 ITR 649 (SC), S.A.BUILDERS LTD. VS. CIT , (2007) 158 TAXMAN 74 (SC), T.R.F. LTD. VS. CIT , (2010) 190 TAXMAN 391 (SC), HARSHAD J.CHOKSI VS. CIT , (2012) 25 TAXMANN.COM 567 (BOM.), CIT VS. JAYKRISHNA HARIVALLABHDAS (1998) 231 108 (GUJ.). It is also urged that tribunal has 11 rightly treated loss as capital loss by placing reliance in case of CIT VS. JAI KRISHNA supra. 6. By way of rejoinder, learned counsel for revenue submitted that manner of writing off debt has not been examined by assessing officer as well as Commissioner of Income Tax (Appeals) and tribunal. It is also pointed out that decision in T.R.F supra on which reliance has been placed has been rendered subsequently and Circular has been issued by Central Board of Direct Taxes subsequent to passing of impugned order. It is also pointed out that business relations are not established and fact that loss incurred by assessee has been incurred during course of business has also not been proved. 12 7. We have considered submissions made on both sides and have perused record. Section 36(1) (vii) of Act post 01.04.1999 is reproduced below for facility of reference: 36. Other deductions : (1) deductions provided for in following clauses shall be allowed in respect of matters dealt with therein, in computing income referred to in S.28- (i) to (vi) (vii) subject to provisions of sub-s,(2), amount of any bad debt or part thereof which is written off as irrecoverable in accounts of assessee for previous year. 8. Supreme Court taking note of aforesaid provision held that after 01.04.1989 it is not necessary for assessee to establish that 13 debt in fact had become irrecoverable and it is enough if bad debt is written off as irrecoverable in accounts of assessee. On basis of aforesaid decision, Central Board of Direct Taxes has issued Circular No.12/2016 dated 30.05.2016, by which it has been clarified that claim for any debt or part thereof in any previous year shall be admissible under Section 36(1)(vii) of Act if it is written off as irrecoverable in books of account of assessee for that previous year and it fulfills condition stipulated in Section 36(2) of Act. Undoubtedly, judgment rendered by Supreme Court and Circular have been issued subsequent to orders passed in instant case. However, fact remains that Supreme Court has interpreted provision of law, which was incorporated by Legislature with effect from 01.04.1989, therefore, such interpretation would 14 relate back to date when such provision came into existence. 9. In backdrop of aforesaid well settled legal position, facts of case in hand may be examined. From perusal of order dated 18.03.2004 passed by assessing officer, it is evident that assessing officer has not examined fact whether or not assessee has entered amount of Rs.35,081,381/- as written off as bad debt. In appeal, remand report was called for by Commissioner of Income Tax (Appeals) and assessing officer has submitted following report, which is reproduced in para 25.3 of order passed by Commissioner of Income Tax (Appeals): Ground No.12 & 13:- This ground relates to disallowance of RS.3,50,81,381/- on account of written 15 off due from M/s Gujarat Instruments Ltd. And Rs.32,25.000/- on account of diminution in value of investment in M/s Gujarat Instruments Ltd. In it s submission filed before your honor, assessee has submitted that appellant had made certain investments by acquiring equity shares of company known as Gujarat Instruments Ltd.. appellant was due sum of Rs.1,29,51,620/- towards unpaid price for instrument supplied by appellate to company. appellant had from time to time made advances to this company to enable it to meet certain expenditure incurred by it on its day to day business activities. During year appellant wrote off amount of Rs.3,50,81,381/- representing advances and dues from said company as well as made provision for diminution in value of its investments in said company in sum of Rs.32,25,000/-. Assessee further 16 submitted that in any event sum of Rs.1,29,51,620/- being bad debts on account of supply made can never be regarded as on capital account. Perusal of above submission reveals that assessee had given advances to M/s Gujarat Instruments Ltd. To meet certain expenditure incurred by it on its day to day business activities, which have certainty capital nature. With regard to claim of bad debts of RS.1,29,51,620/-, it is seen that assessee has failed to substantiate its claim that is on account of supply made and fulfilled conditions laid down in Section 36(1)(vii) for allowing as bad debts. Assessee has not made any fresh submission on addition of Rs.32,25,000/-, In view of above facts and circumstances, I am of opinion that assessing officer has rightly disallowed Rs.3,50,81,381/- on account of written off due from M/s Gujarat Instruments Ltd. And Rs.32,25,000/- on account of diminution in value of 17 investment in M/s Gujarat Instruments Ltd . 11. Thus, from order passed by Commissioner of Income Tax (Appeals) also it is evident that he has not recorded specific finding that assessee had written off debt in books of account. However, tribunal in para 15 (vii) has held as under: (vii) assessee had taken view that loans, advances and sundry debtors amounting to Rs.3.50 Crores due from its associate company GIL- which had gone in liquidation and there was no trace of recovering same, management took view to write off said sum in its ledger of accounts during he previous year relevant to Assessment year under dispute where ruling of Hon ble Apex Court in case of T.R.F. Ltd. Vs. 18 CIT reported in (2010) 323 ITR 397 (SC) comes to its rescue. Hon ble judiciary had, in its wisdom, ruled that in order to obtain deduction in relation to bad debts, it sinot necessary for assessee to establish that debt, in fact, has become irrecoverable; it is enough, if bad debt is written off as irrecoverable in accounts of assessee. assessee had precisely in its books of account written of as irrecoverable. 12. Thus, from perusal of aforesaid paragraph also it is evident that tribunal also has not recorded specific finding by assigning reasons that in books of account debts have been written off. Only in single sentence, it is stated that assessee had in its books of account written off its debt as irrecoverable. 19 14. issue with regard to loss of shares in company, which went under liquidation was considered by Gujarat High Court in CIT VS. JAI KRISHNA supra and it was held that person who gets nothing on account of liquidation of company and suffers loss, his loss has to be treated as capital loss by virtue of Section 46(2) of Act. tribunal has followed aforesaid decision and has held that assessee is entitled to benefit under Section 46(2) of Act in respect of amount of Rs.32,25,000/- for diminution of value of investment made in Gujarat Instruments Ltd. We concur with view taken by Gujarat High court. 13. In view of preceding analysis, impugned order passed by Income Tax Appellate Tribunal is modified and finding that assessee is entitled to benefit of capital loss is 20 set aside. matter is remitted to assessing officer who shall decide same in light of law laid down by Supreme Court in case of T.R.F supra. In result, both substantial questions of law are answered accordingly. In result, appeal is disposed of. Sd/- JUDGE Sd/- JUDGE ss Commissioner of Income-tax LTU, Bangalore / Asst. Commissioner of Income-tax Central Circle-19, New Delhi v. ABB Ltd. (Successor of ABB Instrumentation Ltd.)