Kolhapur v. Ghatge Patil Transports Ltd

K.J. IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO.1356 OF 2008 The CIT-II, "Aayakar Bhavan, ) 31/C-2, E-Ward, Tarabai Park, ) Kolhapur-416003. )..Appellant Versus Ghatge Patil Transports Ltd., ) 517, E, PUne Bangalore Road, ) Kolhapur )..Respondent ---- Mr.Vimal Gupta with Mr.P.S.Sahadevan for the appellant. Mr.S.N.Inamdar with Mr.A.K.Jasani for the respondent. ---- Coram : F.I.Rebello & R.S.Mohite,JJ Date : 27.2.2009. P.C. 1. The substantial questions of law as raised in this appeal are as under :- (A) Whether on the facts and in the circumstances of the case and in law, the Hon’ble ITAT is right in holding the actionable claim be trading loss and allowing the assessee’s claim of "Actionable Claims" u/s.36(2) of the I.T.Act, at the appellate stage though it was not claimed in the original return of income and the same was also beyond the preview of the section 36(2) of the Act ? (B) Whether on the facts and in the circumstances of the case and in law, the Hon’ble ITAT was justified in not appreciating the fact that the bad debts claimed was neither bad nor written off as irrecoverable u/s.36(1)(vii) of the Act, but it was nothing but adjustment between the assessee and its sister concern and the same was debited in P & L account as short receipts of actionable claim ? : 2 : (C) Whether on the facts and in the circumstances of the case, the Hon’ble Tribunal was justified in not appreciating the fact that the entire actionable claim which includes Rs.1,02,57,687/- was sold by GPI Ltd., to Shri J.B.Patil, the Chairman of Ghatge Patil Industries Ltd., (Creditor) at Rs.39 lakhs and that Shri J.B.Patil realized the entire amount including Rs.1,02,57,687/- from M/s.Ghatge Patil Industries Ltd. i.e. the creditor company, as this clearly shows that there was no bad debts ? 2. The brief facts of the case were as follows :- (a) That two different families with surnames Ghatge & Patil were jointly running several businesses since 1940. Several new companies and firms were commenced by this group and by the year 1989 there existed eight companies and nine partnership firms under their joint control. The assessee M/s.Ghatge Patil Transport Ltd., was the flag-ship company of this group. (b) In the year 1987 differences of opinion arose between two families and consequently the business of the group sufferred. The families decided to go their separate ways by dividing the existing concerns. On 4.11.1989 an agreement containing the broad parameters of division was entered into between the two families and ultimately after incorporating amendments suggested, by a further agreement dated 5.2.1990, termed as "The final proposal" the divisions of the various concerns was agreed upon. Under clause-3(c) of this agreement : 3 : out of the 2 groups which were prepared the Patil’s were given first option to chose the group that they would like to take over. The Patils exercised this option on 7.2.1990 and opted for group "B" which consisted of some of the concerns the main one amongst which was Ghatge-Patil Industries Ltd., Consequently remaining concerns compromising group "A" went to the Ghatge family. (c) After chosing the group, each family took charge of the management of the respective companies and firms. As stated earlier group "B" which was taken over by the Patil family inter alia had one of its main component the Ghatge-Patil Industries Limited (hereinafter referred to as "GPI"). This company had become a sick industrial unit and a scheme for its rehabilitation had been approved by the BIFR and was under implementation with ICICI as the lead would like to take over. The Patils exercised this option on 7.2.1990 and opted for group "B" which consisted of some of the concerns the main one amongst which was Ghatge-Patil Industries Ltd., Consequently remaining concerns compromising group "A" went to the Ghatge family. (c) After chosing the group, each family took charge of the management of the respective companies and firms. As stated earlier group "B" which was taken over by the Patil family inter alia had one of its main component the Ghatge-Patil Industries Limited (hereinafter referred to as "GPI"). This company had become a sick industrial unit and a scheme for its rehabilitation had been approved by the BIFR and was under implementation with ICICI as the lead institution. Since 1985 the assessee company had been providing transportation to GPI and on this account, GPI owed the assessee company an amount of Rs.119.52 lakhs. Under the final proposal as contained in the agreement dated 5.2.1990, it was contemplated that the assessee would provide funds amounting to Rs.275 lakhs including the amount of Rs.158.82 lakhs being the existing dues from GPI to the assessee company. Of these dues Rs.119.52 lakhs were transportation charges due from GPI to the assessee company and amount of Rs.39.30 lakhs were : 4 : old advances made by the assessee company to GPI. A further additional amount of Rs.116.18 lakhs was also payable by the assessee to GPI. Of this Rs.116.18 lakhs, from 9.4.1990 to 11.8.1990, an amount of Rs.50 lakhs was paid by the assessee to GPI towards debenture application money but the balance amount of Rs.66.18 lakhs became the subject matter of a dispute which came to be ultimately resolved through mediation which resulted in an MOU dated 28.12.1993. As per this MOU the further amount of Rs.66.18 lakhs was paid by the assessee to GPI on 21.1.1994. (d) In the aforesaid background the total amount of Rs.275 lakhs was shown in the balance-sheet of the assessee company for the Assessment Year 1994-95 as follows :- Rs.in Lakhs a. Sundry Debtors 119.52 b. Loans and Advance A/c. 39.30 c. Debenture Application Money A/c. 50.00 ----------- Total 208.82 d. Additional Advance 66.18 ------------- Total 275.00 -------------- : 5 : (e) Under the MOU dated 28.12.1993 this amount of Rs.275 lakhs which was termed as "actionable claims" was purchased by the Patil group for the sum of Rs.39 lakhs and this amount of Rs.39 lakhs was appropriated proportionately by the assessee company and the balance amount was written off by the assessee company. In its books of account the total loss written off was shown as under :- ----------------------------------------------------------- Sr. Particulars Balance Amount Loss written No. Received off ----------------------------------------------------------- 1. Sundry Debtors 1,19,52,470 16,94,783 1,02,57,687 2. Old Advances 39,30,000 5,57,249 33,72,751 3. Debentures Applications money 50,00,000 7,08,968 42,91,032 4. Additional Advance 66,18,000 9,39,000 56,79,000 Total 2,75,00,470 39,00,000 2,36,00,470 Less : sundry credit balance 4,772 ------------- Total Loss written off 2,35,95,698 -------------- (f) Further as per clause-3 of the final proposal dated 5.2.1990 the equity shares of Rs.100/- each of GPI held by the assessee were to be transferred to the Patil group @ Rs.15 per share. On this account assessee incurred loss of Rs.7,10,910/-. : 6 : (g) Taking into account the aforesaid factual position, for the A.Y. 1994-95 the assessee company claimed a deduction for the loss of Rs.2,43,06,608/- but this deduction was disallowed by the A.O. on 3. Debentures Applications money 50,00,000 7,08,968 42,91,032 4. Additional Advance 66,18,000 9,39,000 56,79,000 Total 2,75,00,470 39,00,000 2,36,00,470 Less : sundry credit balance 4,772 ------------- Total Loss written off 2,35,95,698 -------------- (f) Further as per clause-3 of the final proposal dated 5.2.1990 the equity shares of Rs.100/- each of GPI held by the assessee were to be transferred to the Patil group @ Rs.15 per share. On this account assessee incurred loss of Rs.7,10,910/-. : 6 : (g) Taking into account the aforesaid factual position, for the A.Y. 1994-95 the assessee company claimed a deduction for the loss of Rs.2,43,06,608/- but this deduction was disallowed by the A.O. on the ground that this was not a revenue expenditure incurred by the assessee for the purpose of its business and as the claim did not fall within the ambit of section 36(1)(vii) of the Income Tax Act 1961. (h) Being aggrieved, the assessee filed an appeal before CIT(A) and vide his order dated 20.4.1998 the CIT(A) inter alia allowed a deduction of Rs.1,02,57,687/- being the erstwhile but now written off debt payable by GPI to the assessee company as deduction on account of bad debts and/or trading loss. The deduction on account of trading loss was allowed under Section 28 of the Income Tax Act and in the alternatively the deduction in lieu of bad debts was allowed under Section 36(2)(vii). There were certain other findings with which we are not concerned in the present appeal as there is no grievance regarding the same. (i) Revenue preferred an appeal before ITAT and by the impugned judgment and order passed by the ITAT on 27.3.2008, ITAT observed that the claim of Rs.1,02,57,687 was allowable under Section 36(1) : 7 : (vii). Since they agreed with the CIT(A) on this aspect, ITAT did not consider it necessary to go into the question as to whether it would also be allowable as trading loss. Consequently ITAT dismissed the appeal. It is in such circumstances, that the present appeal has been filed by the revenue in this Court. 3. On perusal of the aforesaid factual matrix, it is clear that the amount which was due from GPI to the assessee company was in lieu of transportation charges which was clearly a business activities. The amount was thus clearly a debt owing to the assessee company. The record indicates that this debt had accumulated from the year 1985 onwards. The record further indicates that collection of the amount by the assessee company was frozen by ICICI which was the lead financial institution of GPI in the BIFR proceedings and for this reason the same was not recoverable. In the circumstances, in the previous year the assessee had written off this amount. The record does not indicate that the writing off the amount was not bonafide. In our view, this being the only requirement for claiming the dedction under Section 36(1) (vii), CIT(A) and ITAT cannot be faulted in their findings. Consequently, substantial questions of law as raised would not arise and the appeal is summarily dismissed. : 8 : (R.S.Mohite,J) (F.I.Rebello,J)