The Commissioner Of Income-Tax-Ichandigarh v. M/S. Punjab State Warehousing Corporation, Chandigarh

IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ----- Income-tax Appeal No. 275 of 2010Date of decision: 30.7.2010 The Commissioner of Income-tax-IChandigarh. --- Appellant Versus M/s. Punjab State Warehousing Corporation, Chandigarh --- Respondent --- CORAM: HON’BLE MR. JUSTICE ADARSH KUMAR GOEL HON’BLE MR. JUSTICE AJAY KUMAR MITTAL --- PRESENT:Ms. Urvashi Dhugga, Standing Counsel for the appellant-Revenue. --- AJAY KUMAR MITTAL, J. This order will dispose of two appeals, i.e. Income-taxAppeal Nos. 275 and 277 of 2010 as they arise out of the same order,dated 23.9.2009, of the Income Tax Appellate Tribunal, ChandigarhBench, ‘B’ Chandigarh (for short “the Tribunal”), whereby the appealof the revenue was dismissed and the cross-objections preferred bythe assessee had been allowed. Firstly, referring to Income-tax Appeal No. 275, it may be noticed that the Revenue has approached this Court under Section260-A of the Income-tax Act, 1961 (in short “the Act’) and has prayedthat the following substantial questions of law arise in this appeal forthe consideration of this Court, from the above order of the Tribunal passed on 23.9.2009, in Income-tax Appeal No. 301/Chandi/2009 for the assessment year 2006-07: “1- Whether on the facts and in the circumstances of thecase the Hon’ble ITAT was right in law in allowing relief tothe assessee on the basis of the material which was notproduced before the A.O.?” 2- Whether on the facts and in the circumstances of thecase the Hon’ble ITAT was right in law in allowing relief tothe assessee without appreciating the fact that the amountwas due from the employees who were still in service withthe assessee?” In Income-tax Appeal No. 277 of 2010, filed by the Revenue-appellant, it is averred that the following substantial questionof law arises in this appeal for determination of this Court: “Whether on the facts and in the circumstances of thecase the Hon’ble ITAT was right in law in allowing relief tothe assessee without appreciating the fact that the liabilitywas required to be ascertained in view of provision ofSection 41(1)(a) of the Income Tax Act?.” Briefly stated, the facts of the case are that the assessee, i.e. the respondent-Corporation is engaged in activities of storage ofagricultural produce, fertilizer etc. and, procurement of food grains inthe State of Punjab. Besides, the assessee also possesses twofreight stations and three in-land container depots. During the courseof assessment proceedings for the assessment year 2006-07, it cameto be noticed by the Income-tax Department that the assessee haddebited certain amounts, viz. Rs. 27,67,30,505/- and Rs. 18,58,74,901/- under the heads “Recoverable from Miller-Written off”and “Recoverable from Employees-Written off” in the profit and lossaccount. The assessing officer, thus, vide order dated 16.12.2008,made the additions of the aforesaid amounts. The assessing officer,while doing so, observed with regard to the first amount indicatedabove that “these debts cannot be written off in the profit & lossaccount and these were recoverable.” In respect of the secondamount, it was observed that as per the report of the Auditors,recovery was being made from employees from their salaries andsince the amount was being recovered from the employees, the natureof debt was recoverable and the same could not be written off.Besides this, a sum of Rs. 3,55,00,000/- was also added to theincome of the assessee-Corporation on account of interest accrued onloan to CONWARE and Punjab Government which was not included inthe profit and loss account. The assessee challenged the additions made by theassessing officer before the Commissioner of Income-tax (Appeals) [inshort “the CIT (A)”]. The CIT(A) partly accepted the appeal of theassessee and deleted the additions of Rs. 27,67,30,505/- and 18,58,74,901/- but rejected the appeal regarding deduction of Rs.3,55,00,000/-, vide order dated 27.1.2009. The appeal at the instanceof the Revenue before the Tribunal challenging the order of the CIT(A) met with failure and was consequently, dismissed and cross-objections of the assessee allowed vide order dated 23.9.2009 whichis now the subject-matter of appeal in this Court. We have heard learned counsel for the appellant and haveperused the record. The Tribunal upheld the claim of the assessee with respectto Rs. 27,67,30,505/- after considering that the deductions which wereclaimed on account of outstanding debts were not possible to recoverfrom the debtors. The Tribunal further noted that whether a debt hadbecome bad debt or not in the books of account of an assessee, is tobe seen from business and commercial expediency and it should notbe whimsical or arbitrary. Accordingly, the Tribunal held that theassessee had rightly claimed the amount as bad debts and the samewas not based on any arbitrary or fanciful decision of the assessee.The deduction was thus, held allowable under Section 36(1) (vii) of theAct as permissible expenditure. The Tribunal while upholding thedeletion of addition of Rs. 18,58,74,901/- which amount was written offas bad debts on account of non-recovery thereof from employeesrelating to damage to stock, shortage and defalcation in paddy, wheatand gunnies recorded that in case the assessee was able to makerecoveries from the employees the same were taxable in terms ofSection 41(1) of the Act. The expenditure was, thus, held to bedeductible under Section 36(1) (vii) of the Act. Learned counsel for the revenue was unable todemonstrate that there was any error or perversity in the aforesaidfindings recorded by the Tribunal. Moreover, the interest of theRevenue has been safe-guarded by the Tribunal, inasmuch as it hasbeen ordered in plain words that as and when the debts which wererecoverable from the debtors or the employees are recovered fromthem, the same would be exigible to tax under Section 41(1) of theAct. The issue regarding accrual of interest on loansadvanced to CONWARE and the Punjab Government, amounting toRs. 3,50,00,000/- was adjudicated in favour of the assessee, by theTribunal, by relying upon its earlier order passed in ITA No.311/Chandi/2208 of the assessee, for the assessment year 2005-06,wherein it had been recorded as under: “We have considered the rival submissions carefully.Evidently, the impugned addition is based on a peculiarapproach of the Assessing Officer. According to theAssessing Officer, the assessee had accounted for incomeon loan to CONWARE and Punjab Government in theimmediately preceding assessment year of Rs.3,50,00,000/- whereas the assess has not accounted forsuch income during the year. According to the AssessingOfficer, the interest income to the extent of Rs.3,50,00,000/- accrued to the assessee during the year alsoand hence the addition. At the same time, the principalamount due from CONWARE has been written off by theassessee as irrecoverable and the same has not beendisputed by the Assessing Officer. Under suchcircumstances, the moot question is where the principalamount of loan itself has been held to be irrecoverable,can there be a situation where income can be said to haveaccrued to the assessee on such loan. The answer isobviously ‘No’. In this light, when the learned CIT DR wasconfronted during the course of the hearing, it was repliedthat with regard to acceptance of the claim of write-off of the principal amount of loan, there is no discussion by theAssessing Officer in the assessment order and, therefore,it is a case where the Assessing Officer has overlookedsuch a situation. In our view, this plea of the learned CITDR does not distract from the fact that there cannot be anaccrual of income in the hands of the assessee withrespect to the principal amount of loan which has beenwritten off as irrecoverable. In any case, we may state herethat if the approach as made out by the learned CIT DR isto be accepted, it only reflects the casual manner in whichthe issue has been appreciated by the Assessing Officer.At this juncture, we may also make an observation that theAssessing Officer has computed a sum of Rs.3,50,00,000/- as income accrued with respect to theimpugned loan. The basis adopted is the immediatelypreceding assessment year. Notably, in the immediatelypreceding assessment year, the sum of Rs. 3,50,00,000/-was provided by the assessee only for the 9 monthsending on 31.12.2003 and no interest provision was madefor the balance three months. Without appreciating theaforesaid, the Assessing Officer has made out a provisionof Rs. 3,50,00,000/- for the complete 12 months during theyear under consideration. Ostensibly, the AssessingOfficer has mechanically made the addition withoutappreciating the facts in their proper perspective. For allthe above reasons, we find no justification to uphold theaddition. In fact, in the circumstances, the addition so made would only be a hypothetical income distinct fromreal income which alone is required to be taxed. In thismanner, we therefore, set aside the order of the CIT(Appeals) and direct the Assessing Officer to delete theimpugned addition.” The Tribunal had concluded that where the principalamount of loan itself had been written off as irrecoverable, thequestion relating to accrual of interest thereon does not arise. No faultcould be pointed out in the approach of the Tribunal and the same is,therefore, affirmed. In view of the above, we find that no substantial questionof law arises in these appeals for consideration of this Court. Theappeals are consequently dismissed. (AJAY KUMAR MITTAL) JUDGE July 30, 2010*rkmalik* (ADARSH KUMAR GOEL) JUDGE