9911796707
TMI Blog1988 (10) TMI 71X X X X Extracts X X X X X X X X Extracts X X X X ..... riod relevant for the assessment year under consideration the debit balance due from the aforesaid company was Rs. 18,04,110. Interest of Rs. 4,12,998 was shown due from the aforesaid company as on the aforesaid date. Of this amount, Rs. 1,45,350 represented interest charged against the said party in respect of the accounting period corresponding to asst. yr. 1977-78. After excluding the aforesaid sum of Rs. 1,45,350 from the sum of Rs. 4,12,998, the interest shown as due from the aforesaid company by the assessee bank in respect of the accounting period under consideration was Rs. 2,67,648. There were other debts also which in the opinion of the assessee Bank were sticky advances as the recovery of the principal was doubtful. Interest on the aforesaid amounts was nevertheless accruing and to the extent of Rs. 9,77,106 interest was taken as having accrued during the accounting period under consideration. Both the aforesaid sums were taken by the assessee directly to the balance sheet and were not declared as part of the assessee's income. The ITO added the aforesaid amounts to the assessee's total income as, in his opinion, the interest in question had accrued and arisen to the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... averi vs. K.K. Sen, AAC (1965) 56 ITR 198 (SC). 2. K.P. Varghese vs. ITO (1981) 24 CTR (SC) 358 : (1981) 131 ITR 597 (SC). 3. CIT vs. Punalur Paper Mills Ltd. (1987) 64 CTR (Ker) 211 : (1988) 170 ITR 37 (Ker). (Reliance is placed on the above for this year also). The Tribunal's attention was also invited by the learned counsel for the assessee to the circular of the CBDT of 1984 and it was urged on its basis that we should direct the ITO that he should give relief to the assessee as indicated in the said circular. 7. On behalf of the Revenue, the above submissions were opposed and it was pointed out that the aforesaid judgment of the Hon'ble Supreme Court squarely applied to the facts of the present case and even the assessee had made no attempt at distinguishing the facts. This being so, the Tribunal had no option in the matter but to follow the ratio of the judgment of the Hon'ble Supreme Court which was directly on the issue. 8. After considering the above submissions, the Tribunal gave the following finding: "33. We have gone through the judgment of the Hon'ble Supreme Court in the case of State Bank of Travancore (1986) 50 CTR (SC) 290 : (1986) 158 ITR 102 (SC). We are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Hon'ble Supreme Court once again. We are of the opinion that it would not be correct to take a sentence here or a sentence there out of the aforesaid judgment of the Hon'ble Supreme Court and to draw the ratio of the aforesaid judgment on their basis. Their Lordships have amply made it clear in their observations at pages 138 and 139 that the circulars of the CBDT of 1952, and 1973 were "executive in character" and could not, therefore, "alter the provisions of the Act". They further observed approving the contention of the standing counsel for the Revenue that "the circulars cannot detract from the Act". These observations are coming in the specific context of sticky loans and interest accruing and arising therefrom and, therefore, it would be wrong to ignore the observations of their Lordships on the basis of some of the judgments of the Hon'ble Supreme Court which have been duly taken note of by their Lordships while delivering the above judgment and which are otherwise rendered in different context with regard to the circulars which were not executive in nature. We are, therefore, unable to accept the assessee's submissions that the present judgment of the Hon'ble Supre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e aforesaid amount has been confirmed by the learned CIT(A) for identical reason. At the time of hearing of the appeal, it was pointed out to us by the learned counsel for the assessee that the aforesaid amount was offered for taxation by the assessee in the immediately following assessment year when the bonus was disbursed and the aforesaid excess was found resulting therefrom. There was, therefore, no justification to add the said amount here for the rates of taxation of the company were the same in respect of both the assessment years. Alternatively it was urged by the assessee's learned counsel that we should delete the addition from the assessment of asst. yr. 1979-80 in case we uphold the disallowance here for otherwise it would amount to double assessment of the said sum. It is pointed out that the assessee had not challenged the addition of the aforesaid amount in the immediately following assessment year because the addition had been offered by itself and, therefore, unless the Tribunal considered the two assessments together and gave the relief in respect of asst. yr. 1979-80, the assessee would become a victim of over taxation. It was, therefore, prayed by the assessee t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the correctness of the said addition on the ground that securities are business assets of the assessee and, therefore, it is wrong to hold that it is capital expenditure. Undoubtedly, it is part of the cost of the securities purchased, but to say that the cost of the securities is capital in nature would be incorrect, because the securities, being assessee's stock-in-trade, anything paid by way of its cost would be Revenue expenditure. 16. On behalf of the Revenue, the above submission is opposed and reliance is placed on the order of the learned CIT (A). 17. After giving careful consideration to the rival submissions and the facts of the case, we feel that this issue needs to be re-examined with a view to determine as to whether the securities which have been purchased during the accounting period by paying the interest accrued till the date of purchase were held by the Bank in its investment portfolio or whether they were its stock-in-trade. If the securities were the assessee's stock-in-trade, the expenditure incurred on its purchase would be a business expenditure and in that case, the interest paid will have to be allowed under the head 'business' as an item of expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one more ground for disposal in the assessee's appeal, namely, that dealing with the assessee's claim for bad debts to the extent of Rs. 3,21,000. This said claim is in respect of the following parties: 1. M/s Electrical Machine Corpn. Rs. 50,000 2. Gopal Iron & Steel Corpn. Rs. 17,000 3. Raj Kumar Ashok Kumar Rs. 13,000 4. E.M.C. Works Ltd. Rs. 2,25,000 5. Alpine Sales Corpn. Rs. 16,000 . Rs. 3,21,000 The relevant facts of each debt may be noted to appreciate the reasons for disallowance of the aforesaid claim of the assessee: (i) M/s Electrical Machine Corpn. The aforesaid debtor is a firm consisting of four partners namely Smt. Satyawati, Smt. Kaushalaya Devi, Sri S.K. Malhotra and Sri R.D. Dhawan. The said party was sanctioned cash credit facilities etc. by theKanpurmain branch of the assessee Bank. The said party had offered by way of security fixed assets of the value of Rs. 4.58 lacs standing in the name of one of the partners namely Smt.Satyawati besides the stocks of the firm were also pledged to the Bank. According to the assessee, "The shop of the above party at the Mall, Kanpour has been closed and is sealed by Government Departments against certain due ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eds had been adjusted against the amount outstanding. After disposing off the stocks in question, nothing remained with the assessee by way of security against the said firm. The amount outstanding as in April, 1977 was Rs. 57,216. It was, according to the assessee wholly irrecoverable. It put in a claim for reimbursement to the extent of 75per cent to the Credit Guarantee Organisation of Reserve Bank ofIndiaand the remaining amount of 25 per cent was treated by the firm as bad debt and the amount in question was written off against the profits of the year under consideration. According to the assessee, "the firm did not have any means from which dues could be recovered and business itself ceased to be ending thereby any chance of earning profits to enable the borrower to pay the bank dues". It was in the setting of these facts that the debt was written off this year and it is claimed that the assessee's claim may be accepted. 26. The aforesaid claim was rejected by the ITO by pointing out that the assessee's claim with Credit Guarantee Organisation had not yet been settled and that unless that was settled, the quantum of the bad debt could not be ascertained. 27. The assessee ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee has rightly written off the bad debt in the present case. The loan in this case was given against the security of the stock. All that was pledged with the assessee has already been sold it to recover its loans. A major part of the loan has already been recovered including interests. Only Rs. 13,000 remained because the goods did not fetch as much value as was their face value because of deterioration in quality on account of long storage. There is no other security with the assessee to press its recovery. In these circumstances, the Bank rightly came to the conclusion that the debt was bad and should be written off. We, accordingly, allow the assessee's claim on this account. (iv) E.M. C. Works Ltd. 32. The relevant facts pertaining to this debt have been given by the assessee in its paper book at page 26. It appears that on 8th March, 1976 the Bank had granted cash credit limits, etc., to the aforesaid party to the extent of Rs. 70,60,000 against hypothecation and pledge of raw materials, generating set, plant and machinery, equitable mortgage of factory land plot and building etc. The company had already become sick in 1975 when the aforesaid facilities were granted to it b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Reserve Bank of India and as such the assessee's claim for partial write off should have been accepted. On behalf of the Revenue, reliance is placed on the orders of the authorities below. 36. In our opinion, there is merit in the orders of the authorities below. No event has taken place during the accounting period under consideration which might have prompted the assessee to write off bad debt during this year. In fact the assessee's application of sanction to file suit against the company in question was lying before the Hon'ble High Court at the end of the present accounting period and the company had every intention to file a suit against the debtor during the said previous year. The sanction to file suit was given in 1979 and the advice of the legal adviser relied upon by the assessee's learned counsel was tendered after the aforesaid sanction had been received from the Hon'ble High Court of Allahabad. The event in question namely the advice of the legal adviser took place in 1979 i.e., two years after the end of the previous year under consideration. That event cannot, therefore be taken note of with a view to find out as to whether the assessee's hopes of recovery had e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... debt has become bad and as such assessee's claim is disallowed. It is not understood why assessee is claiming bad debt in instalment, if the debt was really become bad." The learned CIT(A) has sustained the above finding of the ITO. 38. Against the above findings, the present appeal has been filed by the assessee and, reliance is placed on the submissions made by the assessee before the authorities below. It is in addition pointed out that the Tribunal had allowed the assessee's claim the bad debt against for aforesaid party to the extent of Rs. 14,634 vide paragraph 23 of its order in respect of asst. yr. 1977-78 referred to above and that the financial condition of the debtor remaining the same as considered by the Tribunal in that year, the bad debt for this year should also be allowed. On behalf of the Revenue, reliance is placed on the orders of the authorities below. 39. In our opinion, there is merit in the assessee's submission. The Tribunal has accepted the debt against Alpine Sales Corporation,Ghaziabad, vide their order referred to above as bad. The debtor's condition continues to be the same and, therefore the write off of Rs. 16,000 against the said debtor this year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ining amount namely Rs. 57,204 was written off on the ground that the assessee held no collateral securities against the aforesaid loan and that the parties condition had determined. The ITO rejected the claim by pointing out that as late as 1982, the assessee had recovered Rs. 1000 from the said party and that this went to show that the assessee had not lost all hopes of recovery of the debt in question from the said party in 1978; and that it was continuing its efforts to recover the amounts in question. According to him, therefore, the claim was premature. The above finding has been confirmed by the learned CIT(A). 48. The assessee challenges the correctness of the above finding and it is urged that merely because the assessee had not filed any suit against the party for recovery of the loan in question, the claim of the assessee could not be rejected. No suit had been filed because there was no chance of recovery and there was no point in wasting good money after bad money. That in 1982, Rs. 1000 had been recovered would also not change the character of the assessee's claim because the recovery was of very petty amount and it did not show that the assessee in fact had no hope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the aforesaid debt as bad. The orders of the authorities below were entirely correct and, accordingly, the disallowance stands upheld. Nizamuddin & Co. 51. The assessee's claim for write off of the bad debt under this head was for Rs. 2,73,054. The learned CIT (A) has rejected the claim of the assessee by pointing out, inter alia, as below: "In the case of Nizamuddin & Co. a suit was filed by the appellant for realisation of a sum of Rs. 2,73,054 on5th March, 1979. Decision is still pending. The account further shows recovery made from this party till April, 1978. Therefore, I hold that the claim cannot be considered in this year." 52. The facts stated as above have not been shown to us to be wrong by the learned counsel for the assessee. In view of this, we are of the opinion that the finding as given by the learned CIT (A) appears to be entirely in order and accordingly, we uphold the disallowance. Ashok Electric Co. 53. The claim for write off in respect of this account is for Rs. 40,231. This claim has been rejected by the learned CIT (A) by observing as follows: "In the case of Ashok Electric Co. it is seen that similar recoveries were made from time to time during th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g of the authorities below. Accordingly, the addition stands confirmed. Syndicate Motors (P) Ltd. 57. A sum of Rs. 11,49,097 was due from the aforesaid debtor as on31st Dec., 1978out of it a sum of Rs. 1 lac has been written off by the assessee during the accounting period under consideration. No particular reason for such partial write off have been given. The ITO rejected the assessee's claim by pointing out that "a suit was instituted in March, 1979, i.e., after the close of the relevant accounting period. Therefore, it cannot be said that the assessee considered the debt as bad during the current accounting year. Besides, two immovable properties bearing No. 191 and 192 at Andheri,Bombayhad been offered as security. No steps were taken to realise the huge debt by disposing off the huge properties in question. The debt, therefore cannot be allowed". The learned CIT (A) has confirmed the above approach of the ITO. 58. The facts stated as above have not been disputed by the assessee learned counsel. This being so, we are inclined to accept the findings of the authorities below on this point. No event took place during the accounting period under consideration which might have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ff only Rs. 52,000 and that too in the accounting period under consideration; when no event had taken place, which might have extinguished the assessee's hopes. 62. The facts as above have not been denied by the assessee. This being so, the action of the authorities below in prima facie correct. There was a total debt of Rs. 12,83,595 and a suit for the recovery of it was pending in the Court. There could, therefore be no justification whatsoever for writing off only Rs. 52,000 out of the aforesaid claim in respect of the accounting period under consideration. Then very considerable recovery has taken place in 1981. The claim for bad debt, if at all, in the present case would arise in future and not in the year under consideration. The assessee may make a claim in an appropriate year in future. For this year, the claim is not justified at all. The same, accordingly, stands rejected. Rajmani Pandey 63. The claim of bad debt in respect of the above party is of Rs. 10,000. It has been rejected by the ITO on similar ground as indicated above, namely, that the assessee had filed a suit against the aforesaid debtor and the decision in the suit had not been rendered. Therefore, accord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be granted to the assessee in respect of the asst. yr. 1979-80 by directing that the aforesaid amount be excluded from the assessee's total income. We had accepted this request of the assessee as mentioned above. In conformity with it, we direct that the aforesaid amount of Rs. 63,089 be excluded from the assessee's total income for assessment year under consideration. This amount has already been directed to be assessed in respect of asst. yr. 1978-79. 66. In view of the discussion as above, we allow the assessee's appeal in part. ITA No. 45 67. Ground No. 1 & 2 in the departmental appeal read as below: "1. That the learned CIT (A) has erred in law and on facts in setting aside the assessment on the point of interest on sticky accounts and directing that the position regarding interest of Rs. 5,27,907 should be re-examined on the basis of his appellate order for the asst. yr. 1976-77 which order has not been accepted by the Department. 2. That the learned CIT(A) did not appreciate the fact that the assessee was maintaining its books of accounts on mercantile system and hence interest was chargeable on all debts unless they were written off as Bad Debts." These points stand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s below: "5. That the learned CIT (A) erred in law and in facts in deleting the addition of Rs. 1,83,299 representing the disallowance of the loss incurred by the assessee company on sale of stocks and shares. The learned CIT (A) completely ignored the factual position brought on record that the assessee company had never been a dealer in shares and stocks in the past, that the business of the assessee company had never been to purchase and sell shares and stocks and that such shares were shown in the balance sheet of the assessee company as investment and not as stock-in-trade. He also ignored the decision in CIT vs. Patnaik & Co. (1979) 117 ITR 388 (Ori) and in Industrial Development and Investment Co. vs. CIT (1971) 82 ITR 642 (Bom). The finding of the CIT from which the aforesaid ground arises has been given in paragraph. 12. The said observations read as below: "12. Another objection is with respect to disallowance of Rs. 1,83,299 on account of loss on sale of stocks and investments. This point was considered by me in the case of the appellant in 1967-68. For reasons mentioned in the said order, I hold that claim for deduction of loss is admissible. Therefore, the appellant ..... 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