The Pr. Commissioner Of Income Tax-4 v. Industrial Finance Corporation Of India Ltd

$~4 *IN THE HIGH COURT OF DELHI AT NEW DELHI +ITA 170/2017 & CM No.7386/2017 THE PR. COMMISSIONER OF INCOME TAX-4..... AppellantThrough:Mr. Puneet Rai for Mr. Ruchir Bhatia,Advocate. Versus INDUSTRIAL FINANCE CORPORATION OF INDIA LTD. ..... Respondent Through:Ms. Kavita Jha and Ms. ShivaniKhandekar, Advocates. CORAM: HON'BLE MR. JUSTICE S. RAVINDRA BHATHON'BLE MR. JUSTICE NAJMI WAZIRIO R D E R%15.03.2017 1.The question of law urged in this appeal against the order of theIncome Tax Appellate Tribunal (ITAT) is:- “Whethertheinvestmentwriteofftothetuneof`2,56,35,395/-, could be characterised on the Revenue sideor did it fall in the Capital side as loss?” 2.The assessee, a statutory Corporation created in 1948 and restructuredin 1993, is engaged in financing companies and ventures. It lent financesthrough rupee loans, foreign currency loans, under writin, direct subscription(of equity), issuing guarantees and equipment leasing services to variousborrowers. These fall under the outgoings given to its clients/borrowers andare broadly shown as “investments as assistance” to industrial concerns inthe form of equity shares, preference shares, convertible debentures andITA 170/2017Page 1 of 4 non-convertible debentures. This is in accordance with the provisions of theCompanies Act.The assessee also separately maintains an investmentportfolio in respect of 17 of its financial assistance transactions; the assesseereported losses which it sought to write off as bad debts.The AssessingOfficer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)],rejected the assessee’s contentions. 3.The ITAT upon appeal accepted the assessee’s plea, inter alia findingas follows:- “9. The statutory provision in relation to allowance of baddebt are not exhausted there is a very thin line betweenallowance of bad debt as well as allowance of business lossarising during the course of carrying on of the business. Incertain circumstances, it may happen that debt gets bad itcan also be successfully claim as a trading loss. Therecannot be a presumption in the matter and it is for theassessee to establish its claim. Naturally, the claim oftrading loss and claim of bad debts are saddled withdifferent conditions. The claim of the assessee is also testedfor its allowance as trading loss. According to the provisionof Section 28 of the lncome Tax Act profits and gains of thebusiness or profession, which was carried on by theassessee at any time during the previous year, is chargeableto tax under the head "Profit and Gains of the Business orProfession. Such profit and gains can only be arrived afteraccounting for the loss coo. The loss of the equity shareswhich is in the form of financial assistance given to thedifferent borrowers in the form of financial assistance, asequity participation is loss arising from the business of theassessee. Therefore, if such loss is suffered during the yearthan same is allowable as deduction to the appellant whilecomputing its business income. All these losses have beendemonstrated by the appellant by showing various notes and committee meetings that such losses have been determinedand accepted in the current year. The reliance placed by theappellant on circular dated 24.11.1965 issued by CBDT onthe basis of law laid by Hon'ble Supreme Court in case ofBadridas Daga Vs. CIT 34 ITR 10 and associated BankingCorporation of India Ltd. Vs. CIT 56 ITR 1 wherein case ofembezzlement it is stated that the loss should be allowed asdeduction in the year in which it is discovered. Therefore, inthe year in which the loss is discovered and determined bythe assessee same should be allowable in that year.According to the various notes, the losses have beendiscovered and determined during the year and therefore,same is allowable to the assessee during this year. Theretention of accounts @ Rs. 1 is only for the purposes ofcontrol over such investments for management decision andit do not serve any other purposes. Therefore, suchaccounting treatment does not go against the claim of theassessee. In view of this, alternatively also we are of theview that write off investment is also business loss sufferedby the assessee during the course of its business and as itdiscovered and determined during the year same isallowable to the assessee during the year. In the result, wereverse the finding of Id CIT (A) in confirming thedisallowance of Rs. 256353951- on account of investmentwritten off.” 4.As is evident, the ITAT relied upon the judgment of Badridas DagaVs. Commissioner of Income Tax [1958] 34 ITR 10, where the SupremeCourt stressed that: “........when a claim is made for a deduction for which thereis no specific provision in Section 10(2), whether it isadmissible or not, will depend on whether, having regard toaccepted practice and trading principles, it can be said to arise out of the carrying on of the business and to beincidental to it. If that is established, then the deductionmust be allowed, provided of course there is no prohibitionagainst it, express or implied, in the Act............... .......At the same time, it should be emphasised that the lossfor which a deduction could be made under Section10(1) must be one that springs directly from the carrying onof the business and is incidental to it and not any losssustained by the assessee, even if it has some connectionwith his business.....” 5.Applying to the facts of the present case, the above decision instructsthat where monies were advanced through the mechanism of equityparticipation, the intention of the lender – in the present case, the assessee,was to derive income rather than to increase its investment on the capitalside.Such being the case, if there were profits, with the assessee/lenderfrom the investment, it would properly lie in the Revenue side of incomeand conversely, if there were losses – as in the present case – it properlywould have fallen, as was correctly claimed, as bad debts in the presentinstance. 6.For the above reasons, this Court is of the opinion that no substantialquestion of law arises. The application alongwith pending application isconsequently dismissed. S. RAVINDRA BHAT, J. MARCH 15, 2017sb NAJMI WAZIRI, J. ITA 170/2017