Hotel Rugby Ltd, Mumbai vs Department Of Income Tax

आयकर अपील सं./I.T.A. No. 991/Mum/2011 ( नधा रण वष / Assessment Year: 2007-08) Dy. CIT-1(1), Hotel Rugby Ltd.

Room No. 579, Aayakar Bhavan, बनाम/ 6, Stadium House, 81/83, Veer Mumbai-400 020 Vs. Nariman Road, Churchgate, Mumbai-400 020

थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. AAACH 1088 G (अपीलाथ$ /Appellant) : (%&यथ$ / Respondent)

अपीलाथ$ क' ओर से / Appellant by : Shri Jeetendra Kumar

%&यथ$ क' ओर से/Respondent by : Shri Nishit Gandhi

सनु वाई क' तार.ख / : 09.03.2015 Date of Hearing घोषणा क' तार.ख / : 18 .03.2015 Date of Pronouncement

आदे श / O R D E R Per Sanjay Arora, A. M.:

This is an Appeal by the Revenue directed against the Order by the Commissioner of Income Tax (Appeals)-1, Mumbai ('CIT(A)' for short) dated 09.09.2010, allowing the Assessee's appeal contesting its assessment u/s.143(3) of the Income Tax Act, 1961 ('the Act' hereinafter) for the assessment year (A.Y.) 2007-08 vide order dated 31.12.2009.

2. The brief facts of the case are that the assessee was during the course of the assessment proceedings under the Act observed to have claimed bad debts written off in the sum of Rs.45,00,626/-, i.e., u/s.36(1)(vii), in the computation of its business income 2 ITA No. 991/Mum/2011 (A.Y. 2007-08) Dy. CIT vs. Hotel Rugby Ltd.

u/s.28 of the Act. The details thereof, however, revealed the same to include three sums, aggregating to Rs.23.26 lacs, which were in fact deposits, as under:

a) NCPA deposit Rs.4,00,000 b) Jai Thackers Developers Rs.17,22,100 c) Thacker caterers Rs.2,04,089 Rs.23,26,189

The same being not in the nature of trade debts nor satisfying the essential condition of section 36(2)(i), stipulating that the debt written off has been taken into account in computing the assessee's income for the year of write off or an earlier year, the assessee's claim was to that extent disallowed by the Assessing Officer (A.O.), further relying on the decisions in the case of A. V. Thomas and Co. Ltd. vs. CIT [1963] 48 ITR 67 (SC); CIT vs. Somasundaram Mills Ltd. [1964] 51 ITR 650 (Mad); Madan Gopal Bagla vs. CIT [1956] 30 ITR 174 (SC); and Indian Aluminium Co. Ltd. vs. CIT [1971] 79 ITR 514 (SC), also reproducing there-from.

In appeal, the ld. CIT(A) was of the view that all these amounts had been paid by the assessee-company during the course of its regular business and, accordingly, would, on being irrecoverable, constitute business expenditure, deductible u/s.37(1), i.e., even if the assessee's claim fails u/s.36(1)(vii). The assessee having thus found favour with the first appellate authority, the Revenue is in appeal before us.

3. We have heard the parties, and perused the material on record. 3.1 Our first observation in the matter is that even though the disallowance impugned before, and the relief allowed by, the first appellate authority is for a total of Rs.23.26 lacs, as detailed above, the Revenue assails the disallowance only to the extent of Rs.22.22 lacs, i.e., pertaining to the first two debtors supra. Our second observation is that while the assessee claims the impugned debts as bad debts, deductible u/s.36(1)(vii), the ld. CIT(A) considered and allowed the assessee's claim as a trading loss, i.e., u/s.28(i) of the Act. Judicial proprietary, therefore, demanded that he allow opportunity for the consideration of the same by the assessing authority. If the assessee is not, as indeed it ought to be, precluded from raising an alternate claim, before an appellate authority, and 3 ITA No. 991/Mum/2011 (A.Y. 2007-08) Dy. CIT vs. Hotel Rugby Ltd.

neither it, whose purview is to enable determination of the correct tax liability by causing assessment of the correct assessable income under the Act, from examining the same, in all fairness the matter should be examined by the assessing authority as well. Reference in this context may be made to the decision by the apex court in the case of Kapurchand Shrimal vs. CIT [1981] 131 ITR 451 (SC). The law in fact specifically provides for the same per section 250(4) of the Act.

3.2 The assessee has before us relied on some case law. The law in the matter is legion, and the assessee can, likewise, do so before the assessing authority as well. In fact, a perusal of the said decisions reveals the hon'ble courts to have arrived at their respective decisions qua the loss being a trading loss, with reference to the facts of the case, i.e., the surrounding facts and circumstances under which the loss under reference in each case arises. The order of the ld. CIT(A) is also deficient on this score; it bearing no findings of fact, viz. when, as well as the purpose for which the advance/deposit/s - which is, save one instance, not in a round figure, was given; the other terms and conditions thereof as well as of the contract in pursuance of which it was given; the reason for non-payment or recalcitrance on the part of the debtor; his solvency status; the fate of the legal claim, if any, pressed by the assessee; the version of the corresponding party, etc. with a view to determine the facts of the case, the onus to establish which is only on the assessee in-as-much as it is only its' claim. He has merely allowed the assessee's claim based on its' contentions, citing the decision by the apex court in the case of TRF Ltd. vs. CIT [2010] 323 ITR 397 (SC), which is with reference to section 36(1)(vii), even as the assessee's case does not fall under the said provision in-as-much as the impugned debts are admittedly deposits/advances, claimed to be given in the regular course of business, so that the condition of section 36(2), to which the claim u/s.36(1)(vii) is subject, is not met.

The second aspect of the matter which we seek to emphasize is that, i.e., quite distinct from a claim for bad debt u/s.36(1)(vii), where the irrecoverability of a debt is mandated by law on its' write off in the books of account of its business or profession by 4 ITA No. 991/Mum/2011 (A.Y. 2007-08) Dy. CIT vs. Hotel Rugby Ltd.

an assessee, settling also the issue as to the time of it becoming bad (for recovery), a trading or business loss cannot be said to have been arisen merely on the write off of the corresponding debt. Entries in the books of account do not by themselves create/generate income or give rise to expenditure, but only record the same, so that the entry/s is to be examined with reference to the underlying facts and circumstances, which the accounts are supposed to reflect, representing a true statement thereof. We may though hasten to add that to the extent the write off represents the judgment of the assessee, as a businessman, i.e., as to the debt becoming bad, and thus of the loss in its' respect having been incurred, the same is to be respected, and is a prima facie proof of it becoming bad. However, neither the decision of its' write off nor the timing thereof can be held as conclusive against the assessing authority, who is empowered in law to verify the assessee's claim, i.e., the facts and circumstances, of course from a businessman's point of view, on the basis of the material and evidences led by the assessee, of the loss having arisen in the regular course of its business during the relevant previous year.

4. In view of the foregoing, we restore the matter back to the file of the ld. CIT(A) for the purpose, i.e., to allow an opportunity to the assessing authority u/s.250(4) of the Act to examine the assessee's claim for its deductibility as a trading/business loss u/s.28(i) of the Act. We decide accordingly.

5. In the result, the Revenue's appeal allowed for statistical purposes.

प3रणामतः नधा63रती क' अपील सां7यक'य उ9े:य के लए वीकृत क' जाती है ।

Order pronounced in the open court on March 18 , 2015

Sd/- Sd/-

(Joginder Singh) (Sanjay Arora)

या यक सद य / Judicial Member लेखा सद य / Accountant Member मुंबई Mumbai; >दनांक Dated :18.03.2015 व. न.स./Roshani, Sr. PS 5 ITA No. 991/Mum/2011 (A.Y. 2007-08) Dy. CIT vs. Hotel Rugby Ltd.

आदे श क" # त%ल&प अ'े&षत/Copy of the Order forwarded to :

1. अपीलाथ$ / The Appellant

2. %&यथ$ / The Respondent

3. आयकर आयु?त(अपील) / The CIT(A)

4. आयकर आयु?त / CIT - concerned

5. Bवभागीय % त न ध, आयकर अपील.य अ धकरण, मुंबई / DR, ITAT, Mumbai

6. गाड6 फाईल / Guard File आदे शानस ु ार/ BY ORDER,

उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील य अ धकरण, मंब ु ई / ITAT, Mumbai