The Commissioner Of Income Tax,Chennai v. M/S.wallace Sports And Research Foundation

CORAM THE HONOURABLE MR.JUSTICE T.S.SIVAGNANAMandTHE HONOURABLE MRS.JUSTICE R.N.MANJULA The Commissioner of Income Tax,Chennai. ...Appellant Vs. M/s.Wallace Sports and Research Foundation,No.713, Mount Road,Chennai – 600 006.PAN: ...Respondent APPEAL under Section 260A of the Income Tax Act, 1961against the order dated 16.10.2017 passed by the Income TaxAppellate Tribunal, Madras 'C' Bench, Chennai made inI.T.A.No.1304/Mds/2016 for the assessment year 2012-13, againstthe order passed by the learned Commissioner of Income Tax(Appeals)-4, dated 01.02.2016 in ITA.No.112/2014-15/A.Y.2012-13CIT(A)-4 for the assessment order dated 24.02.2015 for theAssessment year 2012-13 passed by the Assistant Commissioner ofIncome Tax, Non Corporate Circle -3, Chennai. For Appellant: Ms.R.Hemalatha Senior Standing CounselFor Respondent : Mr.Anand Sashidharan Judgment was delivered by T.S.SIVAGNANAM,J This appeal has been filed by the assessee under Section260A of the Income Tax Act, 1961 ('the Act' for brevity)challengingtheorderdated16.10.2017 madeinI.T.A.No.1304/Mds/2016 on the file of the Income Tax AppellateTribunal, Chennai, 'C' Bench ('the Tribunal' for brevity) forthe assessment year 2012-13. 2.The appeal was admitted on 04.03.2020 on the followingsubstantial questions of law: “1.Whether the Tribunal was right in deletingthe addition of Rs.5 Crores made by the AssessingOfficer as disallowance of bad debts u/s.36[1][vii]read with Section 36[2] holding even though said https://hcservices.ecourts.gov.in/hcservices/ sum was not a bad debt but was allowable asdeduction on loss suffered in the course of itsbusiness of real estate without appreciating thefact that the amount represented only a interestfree loan obtained by Sandhya Mulchandani forpurchase of her house property and therefore, theloan given was no incidental to its business ofreal estate? 2.Whether the Tribunal was right in notconsidering the fact that the condition imposed asper Sec.36[2][i] for claiming the bad debts was notsatisfied in the case of Assessee firm asMs.Sandhya Mulchandani in her letter dated29.07.2009 had confirmed that the loan was tofinance to her and in another letter dated24.02.2014 addressed to the Assessing Officer hasconfirmed that she would repay the amount to theAssessee? 3.Whether the reasoning and finding of theTribunal perverse holding that the Assessee was inthe business of real estate and there is a impliedinference that the assessee's expectation is toparticipate in the gain arising out of purchase andsale of immovable property especially when byletter dated 27.09.2009 Ms.Sandhya Mulchandani hasclearly stated that it was an unsecured interestfree loan for the purchase of residential propertyby her and not for the purpose of assessee's realestate business? 3.We have heard Ms.R.Hemalatha, learned Senior StandingCounselappearingfortheappellant/revenueandMr.Anand Sashidharan, learned counsel appearing for therespondent/assessee. 4.The assessee had filed their return of income for theassessment year under consideration, 2012-13 on 30.09.2012admitting a total income of Rs.27,37,490/-. The said return wasprocessed under Section 143(1) of the Act. Subsequently, thecase for selected for scrutiny and notice under Section 143(2)was issued on 12.08.2013 and notice under Section 142(1) wasissued on 14.02.2014. During the course of assessment, theAssessing Officer pointed out that in the profit and lossaccount, the assessee has returned a sum of Rs.5 Crores and thesame was claimed as expenditure under the head “bad debtswritten off” and details were called for. The assesseesubmitted that it was unrecovered and unsecured loan of Rs.5 https://hcservices.ecourts.gov.in/hcservices/ https://hcservices.ecourts.gov.in/hcservices/ Crores given to Ms.Sandhya Mulchandani in the Financial Year2009-10. The Assessing Officer noticed that the said person hastaken interest free loan of Rs.5 Crores to purchase aresidential property at Delhi and she has not repaid the sameand she intends to repay it as per the letter. Further theAssessing Officer found that the transaction has taken place inthe year 2009-10 and the assessee has claimed the said amount asbad debts in the written off income filed for 2012-13 and onverification of the profit and loss account, for the earlieryears, the said amount of Rs.5 Crores was not taken into accountwhile computing the income of the assessee in the previous yearand even as per Form 3CD, the assessee has not mentionedanything about the money lending business. Therefore, theAssessing Officer called upon the assessee to explain as to theallowability of the amount of Rs.5 Crores paid as unsecuredamount to the said person. Reply was submitted and the same wasrejected on the ground that the assessee has not fulfilled theconditions prescribed under Section 36[2] of the Act. Aftermaking other disallowances, the Assessing Officer had assessedthe total income of Rs.55,24,674/-. The assessee preferred anappeal before the Commissioner of Income Tax [Appeals][hereinafter referred to as “CIT(A)”] which was dismissed byorder dated 01.02.2016. Aggrieved by the same, the assesseepreferred appeal before the Tribunal which has been allowed.The revenue is before us questioning the correctness of theTribunal and seeking for an answer to the substantial questionsof law framed for consideration. 5.The Tribunal found that the assessee is engaged in thereal estate business other than motor racing, etc. and it istherefore clear that one of the activities of the assessee firmis real estate business. The Tribunal examined the transactionbetween the assessee and Ms.Sandhya Mulchandani and accepted thestand of the assessee that the assessee under bonafide beliefextended the loan of Rs.5 Crores and the same has becomeirrecoverable and therefore, the loan amount is written off asbad debts. The Tribunal pointed out that though in strictparlance the loss suffered by the assessee cannot be consideredas bad debts arising of trade debts, it is certainly a losssuffered by the assessee during the course of its business ofreal estate if such advance is not recoverable. Further theTribunal pointed out that there is no bar on the revenue toscrutinize the case of Ms.Sandhya Mulchandani and examine thepossibility whether the loan amount of Rs.5 Crores can betreated as income in her hands because the assessee had writtenoff the same in its books of accounts. The Tribunal afterreferring to the decision of the Hon'ble Supreme Court in thecase of TRF Limited vs. Commissioner of Income Tax [230 CTR 14]pointed out that it is not necessary to establish that the debtin fact has become irrecoverable. Thus, the Tribunal was of the view that loss written off by the assessee is genuine andhas to be set off from the profit earned by it and issueddirection to the Assessing Officer to grant deduction of Rs.5Crores being the loss suffered by the assessee is irrecoverableadvances with respect to real estate business and thereby deletethe addition. the view that loss written off by the assessee is genuine andhas to be set off from the profit earned by it and issueddirection to the Assessing Officer to grant deduction of Rs.5Crores being the loss suffered by the assessee is irrecoverableadvances with respect to real estate business and thereby deletethe addition. 6.The revenue is before us contending that Ms.SandhyaMulchandani in her letter has clearly stated that the loan givenwas interest free and unsecured loan and she would repay thesaid amount and therefore, the debt could not be a bad debt.Further the Tribunal failed to note that in the books ofaccounts of the assessee a sum of Rs.5 Crores has been enteredas unsecured loan only and not as advance given for purchase ofproperty. Further, the revenue seeks to dispute the the natureof business activity done by the assessee stating that they areinto the business of motor racing and rallying and not in thebusiness of money lending and therefore bad debts does notspring directly from the business of the assessee. On the abovegrounds, the learned senior standing counsel seeks for settingthe order of the Tribunal and answering the substantialquestions of law in favour of the revenue. 7.Per contra, Mr.Anand Sashidharan, learned counsel for therespondent placed on record an affidavit filed on behalf of therespondent/assessee sworn to by its partner dated 15.02.2021.On a perusal of the affidavit, it is seen that on account of thesubsequent development in the matter, there is no revenueapplication and therefore, the revenue at this point of timecannot seek for restore the order of the Assessing Officer dated24.02.2015. For better appreciation, the relevant paragraphs inthe affidavit are quoted herein below: “8.The Respondent received a Notice under subsection (6) of section 133 of the Income Tax Act,1961 bearing Notice No.ITBA/AST/S/133(6)/2019-20/1017470357(1) dated 20.08.2019 issued by theDeputy Commissioner of Income Tax, Circle 3(1) Delhiseeking information from the Respondent in the caseof Sandhya Mulchandani for Assessment Year 2012-2013. The respondent replied to this notice videtheir reply dated 26.08.2019 in terms of which theinformation sought for was furnished to the IncomeTax Department. Thereafter another notice underSection 133(6) of the Act dated 11.09.2019 wasissued to the respondent seeking furtherinformation. The respondent furnished theinformation sought for by their replyd ated14.09.2019. 9.In October 2019, Mrs.Sandhya Mulchandani,contacted the respondent and explained that she wasunable to repay the advance due to issues faced byher and offered to repay the amount advanced to her.The respondent gladly welcomed the offer. 10.In November 2019, a sum of rs.2,00,00,000/-(Rupees Two Crores) was repaid by Mrs.SandhyaMulchandani to the respondent and this sum wasoffered as income in the financial year 2019-2020under Section 41 of the Act. Subsequently, a sum ofRs.3,00,00,000/- (Rupees Three Crores) was repaid inthe Financial Year 2020-2021 and the same has beenoffered as income and advance tax has been paid onthe same. Therefore, the recovered amount formingpart of the amount written off has been offered asincome under Section 41 of the Act and there is norevenue implication. The Income Tax Department hastaken action in terms of the observations of theorder of the Hon'ble Tribunal and the lossesrecovered by the respondent have been offered totax. In the above circumstances, the Income TaxDepartment is estopped from seeking to disallow thelosses claimed by the respondent in the assessmentyear 2012-2013 while taxing the recovery of the samein the assessment year 2020-2021 and 2021-2022.” 8.In the light of the above submission made by the assesseeby way of a solemn affidavit sworn to its partner, the assesseeis right in contending that the revenue cannot seek to sustainthe order passed by the Assessing Officer and seek fordisallowance of the loss claimed by the respondent in theassessment for the year 2012-2013 while taxing the recovery ofthe same in the assessment year 2020-2021 and 2021-2022. Thus,in the light of the subsequent development, the order passed bythe CIT(A) requires to be sustained. 9.Accordingly, the appeal filed by the revenue isdismissed. However, the substantial questions of law are leftopen because this appeal has been dismissed on the ground ofsubsequent events which have taken place which has been placedon record in the form of an affidavit. No costs. Sd/- Assistant Registrar(CCC) //True Copy// Sub Assistant Registrar To 1.The Income Tax Appellate Tribunal, 'C' Bench, Chennai. 2.The Commissioner of Income Tax(Appeals)-4,Chennai. 3.The Assistant Commissioner of Income Tax,North Corporate Circle -3, Chennai. +1cc to M/s.Anand Sashidaran, Advocate SR.NO..12981+1cc to Mr.T.Ravi Kumar, Advocate SR.NO..13408 AKM/30.03.21/6P-6C/ TCA.No.471 of 201802.03.2021