Itxa/1881/2017 Of Pr. Commissioner Of Income Tax - 2 v. Mahindra Engineering And Chemical Products Ltd

Digitallysigned byPURTIPURTIPRASADPRASADPARABPARABDate:2021.11.1514:35:45+0530 IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO. 1881 OF 2017 Pr. Commissioner of Income Tax – 2Aayakar Bhavan, M.K. Road,Mumbai – 400 020. V/s.Mahindra Engineering and ChemicalProducts Ltd.Gateway Building, Appollo Bunder,Mumbai – 400 001. ….Appellant ….Respondent Mr. Suresh Kumar for Appellant.Mr. Sanjiv M. Shah for Respondent. ----- ----- CORAM : K.R. SHRIRAM & AMIT B. BORKAR, JJ. DATED : 27[th] OCTOBER 2021 ORAL JUDGMENT : (PER : K.R. SHRIRAM, J.) 1.Respondent had filed the return of income on 27[th] October,2005 declaring total income of Rs.8,88,82,290/-. The Assessment Orderunder Section 143 (3) of the Income Tax Act, 1961 (the Act) was passed on19[th] December, 2007 wherein the income was assessed at Rs.14,51,98,159/-.In the Assessment Order, the Assessing Officer had disallowed the intereston deposit written off of Rs.15,73,952/- and deduction of principal amountof deposit of Rs. 4,35,00,000/- written off. 2.As a background to this dis-allowance, respondent had placeddeposits aggregating to Rs. 4,35,00,000/- in financial year 2000-01 with Mahindra Construction Company Ltd., (MCCL) a sister concern ofrespondent. For the Assessment Year 2005-06, respondent based on aninterim assessment of the financial condition of MCCL had provided for totaloutstanding of Rs.4,50,73,952/- (Principal amount of deposit ofRs.4,35,00,000/-) and interest accrued upto 31[st] March, 2001 ofRs.15,73,952/- to be written off. According to the Assessing Officer therewas no logical explanation nor any basis for waiving of accrued interest andthe principle amount lent was not used for business purpose and respondentwas also not in the business of lending money and therefore the claim fordeduction under Section 37 of the Act and deductionof written off underSection 36 (1) (vii) cannot be allowed. 3.Aggrieved by this order, respondent filed an appeal before theCommissioner of Income Tax (Appeals) (CIT) (A). By an order dated 16[th]December, 2010 CIT (A) upheld the decision of the Assessing Officer.Impugning this order of CIT (A), respondent filed an appeal before theIncome Tax Appellate Tribunal (ITAT). The ITAT by an order dated 30[th]June, 2016 allowed the appeal relying on the decision of this court in thecase of The Commissioner of Income Tax-V, Pune vs.Pudumjee Pulp & PaperMills Limited[1]. The ITAT set aside the order of CIT (A) on the issue ofdeduction for principle amount of Rs. 4,35,00,000/- and directed theAssessing Officer to approve the appropriate relief. Unhappy with this order 1. ITA No.1590 of 2013 dated 5[th] August, 2015. of the ITAT, appellant has preferred this appeal under Section 260 A of the Act and has proposed for determination the following substantial questions of law. QUESTION OF LAW 1.“Whether on the facts and in the circumstances of the case and inlaw, the ITAT erred in allowing Rs.4,35 Crores of pure loan as Bad debton the basis of judgment of the Hon’ble Bombay HC given in the casePudumjee Pulp and Paper Mills Ltd. without appreciating that the saidjudgment was rendered on a different set of facts wherein the amountwritten off consisted of capital loan and interest in an integral mannerand thus condition prescribed in Section 36(2) got fulfilled?”. 2.“Whether on the facts and in the circumstances of the case and inlaw, the ITAT erred in allowing the capital loan of Rs.4.35 Crores asintegral to interest separately assessed on accrual basis, to erroneouslyapply the law laid by Hon’ble Bombay HC in the case of udumjee Pulpand Paper Mills Ltd. and Shreyas S. Mokharia?”. 1.“Whether on the facts and in the circumstances of the case and inlaw, the ITAT erred in allowing Rs.4,35 Crores of pure loan as Bad debton the basis of judgment of the Hon’ble Bombay HC given in the casePudumjee Pulp and Paper Mills Ltd. without appreciating that the saidjudgment was rendered on a different set of facts wherein the amountwritten off consisted of capital loan and interest in an integral mannerand thus condition prescribed in Section 36(2) got fulfilled?”. 2.“Whether on the facts and in the circumstances of the case and inlaw, the ITAT erred in allowing the capital loan of Rs.4.35 Crores asintegral to interest separately assessed on accrual basis, to erroneouslyapply the law laid by Hon’ble Bombay HC in the case of udumjee Pulpand Paper Mills Ltd. and Shreyas S. Mokharia?”. 3.“Whether on the facts and in the circumstances of the case and inlaw, the ITAT erred in holding the giving loan of Rs.4.35 Crores as done inordinary course of business to improve the business health of the assesseecompany when it is an admitted fact that the said loan to the groupcompany was initially given for 30 days to help them tide over someliquidity problem facted by the said Mahindra Construction Company Ltd.which were never recovered, which fact stand even admitted in its letter dated 24.03.2011 submitted to AO in AY 2002-03 in response to notice of penalty u/s 271(1)(e), thereby rendering the judgment of ITAT erroneousin holding the said loan as given in ordinary course of business?”. 4.In fact, ITAT had allowed respondent’s appeal even with regard to the addition of Rs.15,73,952/- whereby respondents had impugned the action of the Assessing Officer in bringing to tax interest income ofRs.15,73,952/-. Appellant has not proposed any substantial question of law for determination, the findings of ITAT on this interest component. 5.Mr. Suresh Kumar justified the cause of the Assessing Officer aswell as CIT (A) by submitting that respondent could not be said to be in the business of banking or money lending and therefore the principle amountof deposit/advances to MCCL could not be claimed as deduction underSection 36 (1) (vii) of the Act on account of condition placed in condition36 (2) of the Act. Mr. Suresh Kumar also submitted that the deposit is morein the nature of investment and therefore its non-recovery at best canbe treated as capital loss. 6.Per contra, Mr. Shah submitted that the amount ofRs.4,35,00,000/- written off in the books of accounts as not recoverable beallowed as deduction as a bad debt. Mr. Shah pointed out that respondentfulfills the requirements of Section 36 (1) (vii) read with Section 36 (2) (1)of the Act. Mr. Shah submitted that amount has been written off asirrecoverable in the books of accounts and this is also confirmed by the factthat the interest income for Assessment Year 2001-02 of Rs.15,73,952/- wasoffered and assessed to tax as part of business income and therefore, it wasto be understood that the impugned deposits/advances made to MCCL werein the ordinary course of business. 7.Factually, it is not disputed that respondent had made deposits/advances with MCCL in the previous year 2000-01, corresponding to theAssessment Year 2001-02 amounting to Rs. 4,35,00,000/-. The interestaccrued on such deposits for the Assessment Year 2001-02 amounted toRs.15,73,952/- and that was offered to tax in the said Assessment Year. 7.Factually, it is not disputed that respondent had made deposits/advances with MCCL in the previous year 2000-01, corresponding to theAssessment Year 2001-02 amounting to Rs. 4,35,00,000/-. The interestaccrued on such deposits for the Assessment Year 2001-02 amounted toRs.15,73,952/- and that was offered to tax in the said Assessment Year. Subsequently, respondent has not accountedfor any interestincome on the ground that the aggregate of the principal amount as well asinterest accrued to the Assessment Year 2001-02 was doubtful of recovery.It is also not a dispute that upto the Assessment Year 2004-05, the AssessingOfficer has accepted that the financial condition of MCCL was poor andtherefore no interest income can be said to have accrued for the purpose oftaxation. For the Assessment Year in question, i.e., 2005-06 respondent’sclaim that the principal amount of Rs. 4,35,00,000/- be considered as baddebt which has been rejected by the tax authorities, primarily on the groundthat respondent was not engaged in any business of money lending and thatnon-recovery was a capital loss. 8.We have also considered the judgment of Division Bench of thiscourt in Pudumjee Pulp and Paper Mills Limited (Supra) which has beenrelied upon by ITAT where similar situation had prevailed. In that case theassessee had made inter-corporate deposit with another concern and insome of the years interest was offered to tax. Subsequently, part of the debtwas sought to be written off and claimed as bad debts within the meaningof Section 36 (1) (vii) read with Section 36 (2) of the Act. The claim wasrevised by the tax authority primarily on the ground that the conditions ofSection 36 (1) (vii) read with Section 36 (2) of the Act were not applicablein as much as the assessee was not carrying on business of money lendingand that the principal amount claimed as bad debts was not in fact offered to tax either in the relevant Assessment Year or in the earlier AssessmentYear. The Division Bench after considering the submissions observed thateven if one of the conditions of Section 36 (2) (i) of the Act is satisfied thenthe bad debts claimed under Section 36 (1) (vii) of the Act has to beallowed. The Division Bench had also followed another decision of thiscourt in Commissioner of Income Tax vs. Shreyas S. Morakhia[2]. ParagraphNos.7 to 13 of Pudumjee Pulp and Paper Mills Limited (Supra) reads asunder : 7.Mr. Tejveer Singh, learned Counsel appearing for the Appellantsubmits that the activity of the Respondent-Assessee is of carrying onmanufacturing and sale of paper. Consequently, the Respondent-Assesseecannot be said to be engaged in the activity of the money lending or business of banking Consequently, deduction of baddebts is hit by Section 36(2)(i) of the Act. Thus, the impugned order callsfor interference. debts is hit by Section 36(2)(i) of the Act. Thus, the impugned order calls 8.Mr. Murlidahran, learned Counsel appearing for the Respondent-Assessee points out that the issue arising in the present facts is covered infavour of the Respondent-Assessee by the decision of this Court in CITv/s. Shreyas S. Morakhia. It is further submitted that the Respondent-Assessee is entitled to the benefit of Section 36(2)(i) of the Act – on theground that the interest income was offered to tax earlier and that theAssessee was engaged in the business of lending money. In the aboveview, it is submitted that the order of the Tribunal calls for nointerference. 9.The CIT(A) as well the Tribunal have considered Sections 36(1)(vii) and 36 (2)(i) of the Act which for the purpose of convenience arereproduced hereunder and read thus: “Section 36 : Section (1) The deductions provided for in the following clausesshall be allowed in respect of the matters dealt with therein, incomputing the income referred to in section 28 - (i) to (vi) .… .... .... .... (vii) subject to the provisions of sub-section (2), the amount of any baddebts or part thereof which is written off as irrecoverable in the accountsof the assessee for the previous year; 9.The CIT(A) as well the Tribunal have considered Sections 36(1)(vii) and 36 (2)(i) of the Act which for the purpose of convenience arereproduced hereunder and read thus: “Section 36 : Section (1) The deductions provided for in the following clausesshall be allowed in respect of the matters dealt with therein, incomputing the income referred to in section 28 - (i) to (vi) .… .... .... .... (vii) subject to the provisions of sub-section (2), the amount of any baddebts or part thereof which is written off as irrecoverable in the accountsof the assessee for the previous year; debts or part thereof which is written off as irrecoverable in the accounts Provided that in the case of an assessee to which clause (viia)applies, the amount of the deduction relating to any such debt or partthereof shall be limited to the amount by which such debt or part thereofexceeds the credit balance in the provision for bad and doubtful debts 2. (2012) 342 ITR 285 (Bom) account made under that clause, Explanation – For the purposes of this clause, any bad debt or partthereof written off as irrecoverable in the accounts of the assessee shallnot include any provision for bad and doubtful debts made in theaccounts of the assessee. (viii) to (xvii).... .... .... ....(2) In making any deduction for a bad debt or part thereof, thefollowing provisions shall apply - (i)no such deduction shall be allowed unless such debt or part thereofhas been taken into account in computing the income of the assessee ofthe previous year in which the amount of such debt or part thereof iswritten off or of an earlier previous year, or represents money lent in theordinary course of the business of banking or money-lending which iscarried on by the assessee.” 10. So far as Section 36(1)(vii) of the Act is concerned, it is a settledposition in law that after 1 st April, 1989, it is not necessary that the debtitself must be proved to be irrecoverable. The only requirement is that theamounts claimed as bad debts should be written off as irrecoverable inthe account of the Assessee (see TKF Ltd. v/s. CIT – 323 ITR 397). Thesatisfaction of the above provision is not disputed by the Revenue. Thehub of the controversy is whether the requirement of Section 36(2)(i) ofthe Act is satisfied. 11. It is noticed that Section 36(2)(i) of the Act allows deduction onaccount of satisfaction of any of one of the two conditions as under:- (a) bad debts or part thereof taken into account in computing theincome of the assessee for an earlier Assessment Year before such debt orpart thereof is written off; or (b) the debt represents money lent in the ordinary course of business ofbanking or money-lending which is carried on by the assessee. Therefore, even if one of the two conditions of Section 36(2) (i) ofthe Act is satisfied, then bad debts claimed under Section 36(1)(vii) ofthe Act has to be allowed. 11. It is noticed that Section 36(2)(i) of the Act allows deduction onaccount of satisfaction of any of one of the two conditions as under:- (a) bad debts or part thereof taken into account in computing theincome of the assessee for an earlier Assessment Year before such debt orpart thereof is written off; or (b) the debt represents money lent in the ordinary course of business ofbanking or money-lending which is carried on by the assessee. Therefore, even if one of the two conditions of Section 36(2) (i) ofthe Act is satisfied, then bad debts claimed under Section 36(1)(vii) ofthe Act has to be allowed. 12. So far as first part of Section 36(2)(i) of the Act is concerned, i.e.(a) above, we find that the Respondent-Assesee had during the earlierAssessment Years offered to tax an amount of Rs.42.65 lakhs received asinterest on the deposit made with M/s. GSB Capital Market Ltd. TheAppellant had since Assessment Year 1998-99 claimed an amount ofRs.49.82 lakhs as doubtful debts from M/s. GSB Capital Market Ltd. Thisconsisted of the aggregate of principal and interest payable by M/s. GSBCapital Market Ltd. It was in the subject Assessment Year that asettlement was arrived at between the parties and the Respondent-Assessee received Rs.15 lakhs from M/s. GSB Capital Market Ltd. and thebalance amount of Rs.34.82 lakhs being non-recoverable was beingclaimed as bad debts by writing off the same in its books of account. Itwould thus be noticed the amount of Rs.34.82 lakhs which constitutespartly the principal amount of the inter-corporate deposits and partly theinterest which is unpaid on the principal debt. The Assessing Officer'scontention that amount of Rs.34.82 lakhs was not offered to tax earlierand, therefore, deduction under Section 36(2)(i) of the Act is notavailable, is no longer re-integra. This very issue came up for consideration before this Court in Shreyas S. Morakhia (supra) whereinthe assessee was a stock broker and engaged in the business of sale andpurchase of shares. The brokerage payable by the client was offered fortax. Subsequently, it was found that the principal amount which was tobe received from its clients would not be received. The assessee sought toclaim as bad debts not only the brokerage amounts not received but theaggregate of principal and brokerage amounts not received in respect ofthe shares transacted. This Court held that the debt comprises not onlythe brokerage which was offered to tax but also principal value of shareswhich was not received. Therefore, even if a part of debt is offered totax, Section 36(2)(i) of the Act, stands satisfied. The test under the firstpart of Section 36(2)(i) of the Act is that where the debt or a part thereofhas been taken into account for computing the profits for earlierAssessment Year, it would satisfy a claim to deduction under Section36(1)(vii) read with Section 36(2)(i) of the Act. In fact, the Revenue alsodoes not dispute the above provisions as no submission in that regardwere made during the course of hearing before us. 13. Therefore in view of the above self evident position in Section36(2)(i) of the Act as well as decision of this Court in Shreyas Morakhia(supra), no substantial question of law arises for our consideration. 9. In the case at hand, the fact that interest income of respondent for the Assessment Year 2001-02 relating to the deposit of Rs.4,35,00,000/-was indeed taxed as business income has not been disputed. Thus,advances of deposit is to be understood as having been done in the ordinarycourse of business. Therefore, one of the condition required under Section36 (2) (i) of the Act, i.e., bad debts or part thereof taken into account incomputing income of the assessee for an earlier Assessment Year before suchdebt or part thereof is written off is satisfied. 13. Therefore in view of the above self evident position in Section36(2)(i) of the Act as well as decision of this Court in Shreyas Morakhia(supra), no substantial question of law arises for our consideration. 9. In the case at hand, the fact that interest income of respondent for the Assessment Year 2001-02 relating to the deposit of Rs.4,35,00,000/-was indeed taxed as business income has not been disputed. Thus,advances of deposit is to be understood as having been done in the ordinarycourse of business. Therefore, one of the condition required under Section36 (2) (i) of the Act, i.e., bad debts or part thereof taken into account incomputing income of the assessee for an earlier Assessment Year before suchdebt or part thereof is written off is satisfied. 10.In our view, the Tribunal has not committed any perversity orapplied incorrect principles to the given facts and when the facts andcircumstances are properly analysed and correct test is applied to decide theissue at hand, then, we do not think that question as pressed raises any substantial question of law. The appeal is devoid of merits and it is dismissed with no order as to costs. 11.We will hasten to add that, we have not opined on the secondpart, i.e., whether or not the assessee is engaged in the business of moneylending or banking since we have confirmed that respondent is entitled todeduction on bad debts in view of first part of Section 36 (2) (i) of the Act. ( AMIT B. BORKAR, J.) (K.R. SHRIRAM, J.)