Income tax Appeal No v. M/s. Punjab State Warehousing

PRESENT: Ms. Urvashi Dhugga, Standing Counsel for the appellant-Revenue. --- AJAY KUMAR MITTAL, J. This order will dispose of two appeals, i.e. Income-tax Appeal Nos. 275 and 277 of 2010 as they arise out of the same order, dated 23.9.2009, of the Income Tax Appellate Tribunal, Chandigarh Bench, ‘B’ Chandigarh (for short “the Tribunal”), whereby the appeal of the revenue was dismissed and the cross-objections preferred by the assessee had been allowed. Firstly, referring to Income-tax Appeal No. 275, it may be noticed that the Revenue has approached this Court under Section 260-A of the Income-tax Act, 1961 (in short “the Act’) and has prayed that the following substantial questions of law arise in this appeal for the consideration of this Court, from the above order of the Tribunal Income tax Appeal No - . 275 2010 passed on 23.9.2009, in Income-tax Appeal No. 301/Chandi/2009 for the assessment year 2006-07: 2 “1- Whether on the facts and in the circumstances of the case the Hon’ble ITAT was right in law in allowing relief to the assessee on the basis of the material which was not produced before the A.O.?” 2- Whether on the facts and in the circumstances of the case the Hon’ble ITAT was right in law in allowing relief to the assessee without appreciating the fact that the amount was due from the employees who were still in service with the assessee?” In Income-tax Appeal No. 277 of 2010, filed by the Revenue-appellant, it is averred that the following substantial question of law arises in this appeal for determination of this Court: “Whether on the facts and in the circumstances of the case the Hon’ble ITAT was right in law in allowing relief to the assessee without appreciating the fact that the liability was required to be ascertained in view of provision of Section 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 of agricultural produce, fertilizer etc. and, procurement of food grains in the State of Punjab. Besides, the assessee also possesses two freight stations and three in-land container depots. During the course of assessment proceedings for the assessment year 2006-07, it came to be noticed by the Income-tax Department that the assessee had debited certain amounts, viz. Rs. 27,67,30,505/- and Rs. Income tax Appeal No - . 275 2010 3 18,58,74,901/- under the heads “Recoverable from Miller-Written off” and “Recoverable from Employees-Written off” in the profit and loss account. 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 indicated above that “these debts cannot be written off in the profit & loss account and these were recoverable.” In respect of the second amount, it was observed that as per the report of the Auditors, recovery was being made from employees from their salaries and since the amount was being recovered from the employees, the nature of 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 the income of the assessee-Corporation on account of interest accrued on loan to CONWARE and Punjab Government which was not included in the profit and loss account. The assessee challenged the additions made by the assessing officer before the Commissioner of Income-tax (Appeals) [in short “the CIT (A)”]. The CIT(A) partly accepted the appeal of the assessee 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 instance of 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 which is now the subject-matter of appeal in this Court. We have heard learned counsel for the appellant and have perused the record. Income tax Appeal No - . 275 2010 4 The Tribunal upheld the claim of the assessee with respect to Rs. 27,67,30,505/- after considering that the deductions which were claimed on account of outstanding debts were not possible to recover from the debtors. The Tribunal further noted that whether a debt had become bad debt or not in the books of account of an assessee, is to be seen from business and commercial expediency and it should not be whimsical or arbitrary. Accordingly, the Tribunal held that the assessee had rightly claimed the amount as bad debts and the same was not based on any arbitrary or fanciful decision of the assessee. The deduction was thus, held allowable under Section 36(1) (vii) of the Act as permissible expenditure. The Tribunal while upholding the deletion of addition of Rs. 18,58,74,901/- which amount was written off as bad debts on account of non-recovery thereof from employees relating to damage to stock, shortage and defalcation in paddy, wheat and gunnies recorded that in case the assessee was able to make recoveries from the employees the same were taxable in terms of Section 41(1) of the Act. The expenditure was, thus, held to be deductible under Section 36(1) (vii) of the Act. Learned counsel for the revenue was unable to demonstrate that there was any error or perversity in the aforesaid findings recorded by the Tribunal. Moreover, the interest of the Revenue has been safe-guarded by the Tribunal, inasmuch as it has been ordered in plain words that as and when the debts which were recoverable from the debtors or the employees are recovered from them, the same would be exigible to tax under Section 41(1) of the Act. Income tax Appeal No - . 275 2010 5 The issue regarding accrual of interest on loans advanced to CONWARE and the Punjab Government, amounting to Rs. 3,50,00,000/- was adjudicated in favour of the assessee, by the Tribunal, 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 peculiar approach of the Assessing Officer. According to the Assessing Officer, the assessee had accounted for income on loan to CONWARE and Punjab Government in the immediately preceding assessment year of Rs. 3,50,00,000/- whereas the assess has not accounted for such income during the year. According to the Assessing Officer, the interest income to the extent of Rs. 3,50,00,000/- accrued to the assessee during the year also and hence the addition. At the same time, the principal amount due from CONWARE has been written off by the assessee as irrecoverable and the same has not been disputed by the Assessing Officer. Under such circumstances, the moot question is where the principal amount of loan itself has been held to be irrecoverable, can there be a situation where income can be said to have accrued to the assessee on such loan. The answer is obviously ‘No’. In this light, when the learned CIT DR was confronted during the course of the hearing, it was replied that with regard to acceptance of the claim of write-off of Income tax Appeal No - . 275 2010 6 the principal amount of loan, there is no discussion by the Assessing Officer in the assessment order and, therefore, it is a case where the Assessing Officer has overlooked such a situation. In our view, this plea of the learned CIT DR does not distract from the fact that there cannot be an accrual of income in the hands of the assessee with respect to the principal amount of loan which has been written off as irrecoverable. In any case, we may state here that if the approach as made out by the learned CIT DR is to be accepted, it only reflects the casual manner in which the issue has been appreciated by the Assessing Officer. At this juncture, we may also make an observation that the Assessing Officer has computed a sum of Rs. 3,50,00,000/- as income accrued with respect to the impugned loan. The basis adopted is the immediately preceding assessment year. Notably, in the immediately preceding assessment year, the sum of Rs. 3,50,00,000/- was provided by the assessee only for the 9 months ending on 31.12.2003 and no interest provision was made for the balance three months. Without appreciating the aforesaid, the Assessing Officer has made out a provision of Rs. 3,50,00,000/- for the complete 12 months during the year under consideration. Ostensibly, the Assessing Officer has mechanically made the addition without appreciating the facts in their proper perspective. For all the above reasons, we find no justification to uphold the addition. In fact, in the circumstances, the addition so Income tax Appeal No - . 275 2010 7 made would only be a hypothetical income distinct from real income which alone is required to be taxed. In this manner, we therefore, set aside the order of the CIT (Appeals) and direct the Assessing Officer to delete the impugned addition.” The Tribunal had concluded that where the principal amount of loan itself had been written off as irrecoverable, the question relating to accrual of interest thereon does not arise. No fault could 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 question of law arises in these appeals for consideration of this Court. The appeals are consequently dismissed. (AJAY KUMAR MITTAL) JUDGE (ADARSH KUMAR GOEL) JUDGE July 30, 2010 *rkmalik*