Camphor & Allied Products Ltd.,, Baroda v. The ACIT., Circle-1(1), Baroda

ITA 548/AHD/2007 | 2002-2003
Pronouncement Date: 18-02-2010 | Result: Partly Allowed

Appeal Details

RSA Number 54820514 RSA 2007
Assessee PAN AAACC9211E
Bench Ahmedabad
Appeal Number ITA 548/AHD/2007
Duration Of Justice 3 year(s) 13 day(s)
Appellant Camphor & Allied Products Ltd.,, Baroda
Respondent The ACIT., Circle-1(1), Baroda
Appeal Type Income Tax Appeal
Pronouncement Date 18-02-2010
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted D
Tribunal Order Date 18-02-2010
Date Of Final Hearing 02-02-2010
Next Hearing Date 02-02-2010
Assessment Year 2002-2003
Appeal Filed On 05-02-2007
Judgment Text
1 ITA NO. 481 & 548/AHD/2 007 IN THE INCOME TAX APPELLATE TRIBUNAL : D BENCH : A HMEDABAD (BEFORE HONBLE SHRI T.K. SHARMA J.M. & HONBLE SH RI D.C. AGRAWAL A.M.) I.T.A. NO. 481/AHD./2007 ASSESSMENT YEAR : 2002-2003 ASSISTANT COMMISSIONER OF INCOME TAX -VS.- CAM PHOR & ALLIED PRODUCTS LTD. BARODA CIRCLE-1(1) BARODA (PAN : AAACC 9211 E) (APPELLANT) (R ESPONDENT) & I.T.A. NO. 548/AHD/2007 ASSESSMENT YEAR : 2002-2003 CAMPHOR & ALLIED PRODUCTS LTD. BARODA VS.- ASSIS TANT COMMISSIONER OF INCOME TAX CIRCLE-1(1) BARODA. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI C.N. SHAH DEPARTMENT BY : SHRI C.K. MISHRA SR. D. R. O R D E R PER SHRI T.K. SHARMA JUDICIAL MEMBER : THIS CROSS APPEAL IS AGAINST THE ORDER DATED 14.11 .2006 OF LEARNED COMMISSIONER OF INCOME TAX(APPEALS)-I BARODA FOR THE ASSESSMENT YE AR 2002-03. 2. BOTH THESE APPEALS WERE HEARD TOGETHER ON THE SA ME DATE ARGUED BY COMMON LD. REPRESENTATIVE THEREFORE FOR THE SAKE OF CONVENIE NCE WE DECIDE TO DISPOSE OF BOTH THE APPEALS BY THIS COMMON ORDER. 3. WE NOW FIRST TAKE UP THE REVENUES APPEAL I.E. I TA NO. 481/AHD/2007 WHEREIN THE REVENUE HAS RAISED THE FOLLOWING GROUNDS :- 1(A). ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE C.I.T.(A) ERRED IN DIRECTING TO EXCLUDE SALES TAX O F RS.84 48 833/- FROM THE TOTAL TURNOVER FOR THE PURPOSE OF COMPUTING DEDUCTI ON U/S.80HHC BY IGNORING THE RATIO LAID DOWN BY THE SUPREME COURT I N THE CASE OF CHOWRINGHEE SALES BUREAU P LTD VS CIT 87 ITR 542 ( SC) AND SINCLAIR MURRAY & CO P. LTD- VS CIT 97 ITR 615 (SC) HOLDING THAT THE COLLECTION OF SALES TAX FORMS PAN: OF TRADING RECEIPTS AND HENCE TOTAL TURNOVER. 2 ITA NO. 481 & 548/AHD/2 007 1(B) THE CIT(A) ALSO FAILED TO TAKE NOTE OF THE DEFINITION OF TOTAL TURNOVER IN CLAUSE (BA) OF THE EXPLANATION BELOW SECTION 80H HC EXCLUDING ONLY FREIGHT & INSURANCE UP TO THE CUSTOMS STATION LEAV ING THE CONCEPT OF TOTAL TURNOVER TO BE UNDERSTOOD AS IN COMMON COMMERCIAL P ARLANCE. 1(C) THE CIT(A) FAILED TO TAKE NOTE OF THE MANDA TE OF SECTION 145A{B) INSERTED W.E.F. 1.4.1999 GOVERNING THE COMPUTATION OF PROFITS HAVING INESCAPABLE BEARING ON THE COMPUTATION OF DEDUCTION U/S.80HHC WHICH IS MADE BY APPORTIONING THE SAME PROFITS IN THE RATIO OF EXPORT TURNOVER TO TOTAL TURNOVER. 2(A) ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE AND IN LAW THE CIT(A) ERRED IN HOLDING THAT 90% OF THE ROYALTY OF RS.16 510/- WAS NOT TO BE EXCLUDED FROM THE PROFITS OF THE BUSINESS UNDER CLAUSE (BAA) OF THE EXPLANATION BELOW SECTION 80HHC IN COMPUTING DEDUCT ION UNDER THIS PROVISION. 2(B) THE CIT(A) ERRED IN NOT APPRECIATING THAT T HE EXPRESSION 'ANY OTHER RECEIPT OF A SIMILAR NATURE' IN THE AFORESAID EXPLA NATION (BAA) READ WITH THE EXPRESSION 'DERIVED FROM USED IN SECTION 80HHC (1) EXCLUDES ALL THOSE RECEIPTS WHICH DO NOT FORM PART OF OR DO NOT FLOW FROM 'TURNOVER' SO AS TO AVOID DISTORTION IN THE APPORTIONMENT OF PROFITS IN THE RATIO OF EXPORT TURNOVER TO TOTAL TURNOVER UNDER SECTION 80HHC(3). 2(C) THE C.I.T.(A) ERRED IN ASSUMING THAT IF AN IN COME IS BUSINESS INCOME IT IS NOT LIABLE TO BE EXCLUDED UNDER EXPLA NATION (BAA) WITHOUT APPRECIATING THAT THE EXPLANATION EXCLUDES ONLY SUC H INCOMES AS ARE ASSESSABLE UNDER THE HEAD 'PROFITS AND GAINS OF BUS INESS OR PROFESSION' BUT DO NOT FORM PART OF TURNOVER I.E. THE SALE OF GOOD S IN WHICH THE ASSESSEE DEALS AS EXPORTER. 2(D). THE CIT(A) FAILED TO TAKE NOTE OF THE FOLLOWI NG DECISIONS IN FAVOUR OF REVENUE DIRECTLY ON THE ISSUE AT HAND: I) ALEMBIC CHEMICAL WORKS LTD. VS DCIT 26S I TR 47 (GUJ) II) CIT VS K K DOSHI & CO. 245 ITR 849 (BOM) RELYING ON CIT VS STRLING FOODS 237 ITR 579 (SC); IIJ) CIT VS KANTILAL CHHOTALAL 246 ITR 439 ( BOM) 3(A) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW THE CIT(A) ERRED IN ALLOWING SET OFF OF MODVAT CREDIT O F RS.4 25 280/- AVAILABLE ON PURCHASE OF CAPITAL GOODS I.E. PLANT AND MACHIN ERY AGAINST THE EXCISE DUTY COLLECTED ON THE SALE OF FINISHED GOODS IN STO CK SO AS NOT TO OFFER THE SAME AS REVENUE RECEIPT. 3 ITA NO. 481 & 548/AHD/2 007 3(B) THE CIT(A) ERRED IN DECIDING THE MATTER AGA INST REVENUE WITHOUT GIVING ANY REASONS OR BASIS BY SOLELY RELYING ON HI S PREDECESSOR'S ORDER FOR EARLIER YEARS AND BY DISREGARDING THE MANDATE OF SE CTION 145A INSERTED W.E F. 1-4-1999 PROVIDING FOR INCLUSION OF ANY TAX DUTY CESS OR FEE IN THE SALE OF GOODS. 4 ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE AND IN LAW THE CIT(A) ERRED IN DELETING THE DISALLOWANCE OF RS.46 100/- (41 000 + 5100) BEING THE CONTRIBUTION TO CAMPHOR OFFICERS AND WORK ERS CLUB AND THE EMPLOYEES' COOPERATIVE STORE IN CONTRAVENTION OF TH E EXPRESS RESTRICTION IMPOSED BY SECTION 40A(9) OF THE ACT. 4. WE HAVE HEARD BOTH THE SIDES. THE CONTROVERSY IN VOLVED IN GROUND NO. 1(A) TO 1(C) IS WHETHER SALES TAX CAN FORM PART OF TOTAL TURNOVER U NDER SECTION 80HHC(3) OF THE INCOME TAX ACT 1961. AT THE TIME OF HEARING BEFORE US BOTH SIDES CONCEDED THAT THE CONTROVERSY INVOLVED IN THIS GROUND OF APPEAL IS COVERED IN FAVOUR OF THE ASSESS EE BY THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS.- LAXMI MACHINE WORKS REPORTED IN 290 ITR 667 (SC). IN THIS JUDGMENT IT HAS BEEN HELD THAT EXCISE DUTY AND SAL ES TAX CANNOT FORM PART OF THE TOTAL TURNOVER UNDER SECTION 80HHC(3) OF THE INCOME TAX ACT 1961. WE THEREFORE RESPECTFULLY FOLLOWING THE JUDGMENT OF THE HON'BLE APEX COURT IN THE CASE OF L AXMI MACHINE WORKS (SUPRA) DECLINE TO INTERFERE. GROUND NO. 1(A) TO 1(C) IS REJECTED. 5. THE CONTROVERSY INVOLVED IN GROUND NO.2(A) TO 2( D) OF THIS APPEAL IS COVERED AGAINST THE ASSESSEE BY THE DECISION OF THE HON'BLE ITAT C B ENCH AHMEDABAD IN ASSESSEES OWN CASE IN ITA NOS. 1731-1735/AHD/2001 FOR THE ASSESSMENT YEAR S 1992-93 TO 1997-98 & ITA NOS. 3740- 3741/AHD/2003 FOR THE ASSESSMENT YEAR 2000-01 AND 2 001-02. AT THE TIME OF HEARING OF THIS APPEAL BOTH SIDES CONCEDED THAT THE CONTROVERSY IN VOLVED IN THIS GROUND OF APPEAL IS WELL COVERED IN FAVOUR OF REVENUE BY THE DECISION DATED 16.05.2008 OF THE HON'BLE ITAT C BENCH AHMEDABAD IN ASSESSEES OWN CASE IN ITA NOS. 1731-1 735/AHD/2001 FOR THE ASSESSMENT YEARS 1992-93 TO 1997-98 & ITA NOS. 3740-3741/AHD/2003 FO R THE ASSESSMENT YEAR 2000-01 AND 2001-02. IN THAT DECISION THE HON'BLE TRIBUNAL HAS FOLLOWED THE DECISION OF THE HON'BLE APEX COURT IN THE CASE OF CIT VS.- K. RAVINDRANATHAN NA IR REPORTED IN (2007) 295 ITR 228 (SC) AND HELD THAT 90% OF THE ROYALTY INCOME SHOULD BE EXCLU DED FROM THE TOTAL INCOME UNDER CLAUSE (BAA) TO SECTION 80HHC OF THE INCOME TAX ACT 1961. WE T HEREFORE SET ASIDE THIS ISSUE TO THE FILE OF A.O. AND DIRECT TO RE-COMPUTE THE DEDUCTION IN TERM S OF RATIO LAID DOWN BY THE HON'BLE APEX 4 ITA NO. 481 & 548/AHD/2 007 COURT IN THE CASE OF K. RAVINDRANATHAN NAIR (SUPRA) . THE A.O. WILL INCLUDE THE ROYALTY INCOME AND DIFFERENCE OF EXCHANGE RATE VARIATION AND ALSO INCLUDE 90% UNDER CLAUSE (BAA) TO SECTION 80HHC OF THE INCOME TAX ACT 1961. THE A.O. WILL RE COMPUTE THE DEDUCTION UNDER SECTION 80HHC ACCORDINGLY. RESULTANTLY THIS GROUND OF APP EAL IS ALLOWED FOR STATISTICAL PURPOSES. 6. THE CONTROVERSY INVOLVED IN GROUND NO.3(A) & 3(D ) AND 4 OF THIS APPEAL IS COVERED AGAINST THE DEPARTMENT BY THE DECISION DATED 16.05. 2008 OF THE HON'BLE ITAT C BENCH AHMEDABAD IN ASSESSEES OWN CASE IN ITA NOS. 1731-1 735/AHD/2001 FOR THE ASSESSMENT YEARS 1992-93 TO 1997-98 & ITA NOS. 3740-3741/AHD/2003 FO R THE ASSESSMENT YEAR 2000-01 AND 2001-02. AT THE TIME OF HEARING OF THIS APPEAL BOT H SIDES CONCEDED THAT THE CONTROVERSY INVOLVED IN THESE GROUNDS OF APPEAL IS WELL COVERED IN FAVOU R OF ASSESSEE BY THE DECISION OF THE HON'BLE ITAT C BENCH AHMEDABAD IN ASSESSEES OWN CASE I N ITA NOS. 1731-1735/AHD/2001 FOR THE ASSESSMENT YEARS 1992-93 TO 1997-98 & ITA NOS. 3740 -3741/AHD/2003 FOR THE ASSESSMENT YEAR 2000-01 AND 2001-02. 7. WE HAVE HEARD BOTH THE SIDES AND PERUSED THE ORD ERS OF AUTHORITIES BELOW AS WELL AS THE DECISION OF ITAT C BENCH AHMEDABAD IN ITA NOS. 1731-1735/AHD/2001 FOR THE ASSESSMENT YEARS 1992-93 TO 1997-98 & ITA NOS. 3740-3741/AHD/2 003 FOR THE ASSESSMENT YEAR 2000-01 AND 2001-02. WE RESPECTFULLY FOLLOWING THE SAME REJ ECT THE GROUNDS NO. 3(A) & 3(B) AND 4 FILED BY THE REVENUE. 8. WITH REGARD TO CONTROVERSY INVOLVED IN GROUND NO . 4 BOTH THE SIDES CONCEDED THAT THIS ISSUE IS SQUARELY COVERED BY THE DECISION DATED 09. 07.2003 OF THIS TRIBUNAL IN ASSESSEES OWN CASE IN ITA NOS. 1457 & 1458/AHD/2001 FOR THE ASSES SMENT YEAR 1991-92 & 1992-93. THE RELEVANT DISCUSSION IS CONTAINED IN PARA 8 ON PAGES 33 & 34 OF THE PAPER BOOK. WE THEREFORE RESPECTFULLY FOLLOWING THE SAME INCLINED TO UPHOLD THE ORDER OF LEARNED COMMISSIONER OF INCOME TAX(APPEALS) DELETING THE DISALLOWANCE OF RS .46 100/- BEING THE CONTRIBUTION TO CAMPHOR OFFICERS AND WORKERS CLUB AND THE EMPLOYEES COOPERATIVE STORE. THIS GROUND OF APPEAL IS REJECTED. 9. IN THE RESULT THE APPEAL OF THE REVENUE IS PART LY ALLOWED. 5 ITA NO. 481 & 548/AHD/2 007 10. WE NOW TAKE UP THE ASSESSEES APPEAL I.E. ITA NO. 548/AHD/2007 WHEREIN THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS :- (1) (A) ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS)-1 BARODA ERRED IN DISALLOWING BAD DEBTS AGGREGATING TO RS.87 03 275/- WRITTEN OFF ON ACCOUNT OF IRRECOVERABLE LOSSES FROM MULBERRY INVESTMENT & TRA DING CO. LTD. (B) THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) HAS ERRED IN APPLYING SECTION 72A(5)(C) FOR CONFIRMING THE DISAL LOWANCE OF BAD DEBTS AGGREGATING TO RS.87 03 275/-. 2. THE LD. C.I.T.(A) ERRED IN NOT CONSIDERING RESEA RCH FEES OF RS.71 31 560/- BEING SPONSORED RESEARCH FEES RECEIV ED FROM CHIRON CORPORATION JAPAN AS PER THE AGREEMENT FOR PROVID ING TECHNICAL STAFF FOR CARRYING OUT RESEARCH WORK AS BUSINESS INCOME U NDER SECTION 80HHC. 11. BRIEF FACTS RELATING TO CONTROVERSY INVOLVED IN GROUND NO. 1 ARE THAT THE ASSESSEE HAD WRITTEN OFF RS.87 03 275/- ON ACCOUNT OF IRRECOVERA BLE LOANS. IN THE ASSESSMENT ORDER THE ASSESSING OFFICER OBSERVED THAT DURING THE ASSESSME NT YEAR UNDER CONSIDERATION AMALGAMATION BETWEEN THE ASSESSEE COMPANY AND ITS WHOLLY OWNED S UBSIDIARY COMPANY NAMELY M/S. MULBERRY INVESTMENT & TRADING CO. LTD. (HEREIN AFTER MITCL) TOOK PLACE. AFTER THE AMALGAMATION THE AMALGAMATED COMPANY I.E. THE ASSESSEE-COMPANY WROT E OFF THE LOANS EXTENDED BY MITCL CLAIMING THE SAME AS BAD DEBTS. IN CONNECTION WITH THIS THE ASSESSING OFFICER IN THE ASSESSMENT ORDER MADE THE FOLLOWING OBSERVATIONS :- (A) THE APPELLANT PROMOTED MITCL WITH ITS ENTIRE SH ARE CAPITAL OWNED BY THE APPELLANT COMPANY WITH THE OBJECT OF INVESTMENT AND FINANCING AND THEREFORE REGISTERED IT WITH THE RBI AS A NON-BANKING FINANCE COMPANY. (B) DURING THE YEAR THE AMALGAMATION TOOK PLACE WI TH THE SCHEME OF AMALGAMATION APPROVED BY THE HON'BLE GUJARAT HIGH C OURT VIDE ORDER DATED 10.07.2002 AND BY HON'BLE MUMBAI HIGH COURT VIDE OR DER DATED 25.07.2002. (C) MITCL AS INVESTING AND FINANCING COMPANY HAD GI VEN LOANS BILLS RECEIVABLES AND HAD MADE INVESTMENT ON WHICH INTEREST WAS RECEI VED WHICH WAS OFFERED AS BUSINESS INCOME. SOME LOANS GIVEN IN EARLIER YEARS HAD BECOME STICKY AND WERE UNRECOVERABLE INCLUDING THE INTEREST ON SUCH LOANS. 6 ITA NO. 481 & 548/AHD/2 007 (D) THE FOLLOWING AMOUNTS BECAME DOUBTFUL OF RECOVE RY IN THE HANDS OF MITCL ALONGWITH THE INTEREST RECEIVABLE : UNSECURED LOANS RS.40 79 185/- BILLS RECEIVABLES RS.38 05 951/- INTEREST RECEIVABLE RS. 5 20 548/- INVESTMENT RS. 3 08 000/- TOTAL RS.87 13 684/- (E) AFTER THE AMALGAMATION THE APPELLANT COMPANY W ROTE OFF THE ABOVE AMOUNTS CLAIMING THE SAME AS BAD DEBTS. ON QUESTIONING THE APPELLANT SUBMITTED BEFORE THE ASSESSING OFFICER THAT AS A PART OF ITS FINANCING BUSINESS MITCL HAD SHOWN THE INTEREST RECEIVED OR RECEIVABLE FOR TAXATION AS BUSINESS INCOME IN ITS A SSESSMENT. IT WAS ALSO SUBMITTED THAT IF AMALGAMATION HAD NOT TAKEN PLACE THEN MITCL WOULD HAVE BEEN ENTITLED TO THE CLAIM OF AFOREMENTIONED AMOUNTS AS ALLOWABLE DE DUCTION U/S.36(1)(III) OF THE ACT AS IRRECOVERABLE LOANS IN THE CASE OF A BANKING / MONEY LENDING COMPANY. THE APPELLANT RELIED UPON THE DECISION OF THE SC IN THE CASE OF CIT VS.- VIRBHADRA RAO K. KOTESWAR RAO CO. 155 ITR 152. 12. IN THE IMPUGNED ORDER THE A.O. ALSO OBSERVED T HAT IF MITCL HAD WRITTEN OFF THESE AMOUNTS PRIOR TO AMALGAMATION ITS CAPITAL WORTH WO ULD HAVE GONE DOWN AND THE AMALGAMATED COMPANY WOULD NOT HAVE HA THE BENEFIT OF SETTING OF F THE LOSS SO INCURRED BY MITCL IN VIEW OF LEGAL RESTRICTION PLACED BY THE EXPRESS PROVISIONS OF SEC. 72A OF THE ACT WHICH PROVIDED THAT THE SET OFF OF BROUGHT FORWARD LOSSES WAS AVAILABLE ONL Y TO THE INDUSTRIAL UNDERTAKINGS WHICH U/S. 72A(7) MEANT THE UNDERTAKINGS ENGAGED IN THE MANUFA CTURING OR PROCESSING OF GOODS COMPUTER SOFTWARE GENERATION OR DISTRIBUTION OF ELECTRICITY OR ANY OTHER FORM OF POWER. MOREOVER ONLY SPECIFIED BANKS ARE COVERED U/S. 72(1) OF THE ACT A ND OTHER BANKING/ INVESTMENT COMPANIES HAVE NOT BEEN MENTIONED IN THIS SECTION. FROM THIS THE ASSESSING OFFICER OBSERVED THAT THE APPELLANT COMPANY WAS AWARE THAT THE LOSES AS CARRIED FORWARD BY MITCL WOULD NEVER BE AVAILABLE FOR SET OFF AGAINST ITS PROFITS AFTER AMALGAMATION BY VIRTU E OF SEC. 72A(1) OF THE ACT. THE ASSESSING OFFICER OBSERVED THAT IT WAS FOR THIS REASON THAT M ITCL DID NOT WRITE OFF ITS BAD DEBTS BEFORE THE AMALGAMATION ALTHOUGH THE LOAN HAD BEEN GIVEN LONG BACK AGO AND EVEN THE INTEREST WAS NOT BEING RECEIVED. FROM THIS THE ASSESSING OFFICER OB SERVED THAT THE WRITING OFF OF LOANS BY MITCL WOULD HAVE RESULTED IN A CAPITAL LOSS TO THE APPELLANT COMPANY SINCE THE VALUE OF THE INVESTMENT WOULD HAVE BEEN DIMINISHED. THE ASSESSIN G OFFICER FURTHER OBSERVED THAT THE SEQUENCE OF EVENTS ARE BEYOND THE AMBIT OF TAX PLAN NING AND INDEED FALL UNDER THE CATEGORY OF COLORABLE DEVICE. SHE PLACED RELIANCE ON THE DECI SION OF THE APEX COURT IN THE CASE OF 7 ITA NO. 481 & 548/AHD/2 007 MCDOWELL & CO. 154 ITR. UNDER THE CIRCUMSTANCES TH E ASSESSING OFFICER DISALLOWED THE CLAIM OF THE BAD DEBTS IN THE HANDS OF THE APPELLANT COMP ANY. 13. ON APPEAL BEFORE THE LEARNED COMMISSIONER OF IN COME TAX(APPEALS) THE ASSESSEE CONTENDED THAT THE A.O. DOUBTED THE BONAFIDES OF TH E AMALGAMATION BETWEEN THE TWO COMPANIES. HE ERRED IN APPLYING THE RATIO OF THE MCDOWELL CASE TO DISALLOW THE CLAIM OF BAD DEBTS. IT WAS ALSO SUBMITTED THAT THE VALUATION OF THE DEBTS AT F ACE VALUE HAD BEEN APPROVED IN THE AMALGAMATION SCHEME WHICH WAS FILED BOTH BEFORE THE HON'BLE GUJARAT HIGH COURT AND THE HON'BLE MUMBAI HIGH COURT AND ONCE THE VALUATION HA D BEEN VETTED BY THE TWO HON'BLE HIGH COURTS THE QUESTION OF ASSESSEE RESORTING TO A COL ORABLE DEVICE WAS TOTALLY OUT OF CONTEXT AND CONTRARY TO THE WELL ESTABLISHED PRINCIPLES LAID DO WN BY THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS.- V.A. RAMAN & CO. (1968) 67 ITR 11 (SC). R ELIANCE WAS ALSO PLACED ON THE LATTER JUDGMENT OF THE HON'BLE SUPREME COURT IN THE CASE O F UOI VS.- AZADI BACHAO ANDOLAN & ANOTHER [263 ITR 706] WHEREIN MCDOWELL ANGLE HAS B EEN EXHAUSTIVELY EXPLAINED. RELIANCE WAS ALSO PLACED ON THE JUDGMENT OF THE HON'BLE GUJARAT HIGH COURT IN THE CASE OF BANYAN & BARRY VS.- CIT (1996) 222 ITR 831 850. 14. WITH REGARD TO REFERENCE TO SECTION 72A OF THE INCOME TAX ACT BY THE ASSESSING OFFICER IT WAS CONTENDED THAT THE SAID SECTION APPLIES TO C ARRY FORWARD AND SET OFF OF ACCUMULATED LOSS AND UNABSORBED DEPRECIATION ALLOWANCE IN AMALGAMATE D LOSS AND UNABSORBED DEPRECIATION ALLOWANCE IN A CASE OF AMALGAMATION OR DE-MERGER. B Y WRITING OFF THE AMOUNT OF RS.87 03 375/- TO THE PROFIT & LOSS A/C. THE ASSESSEE-COMPANY IS NOT TRYING TO SET OFF CARRIED FORWARD LOSS OR UNABSORBED DEPRECIATION AND THEREFORE SECTION 72A HAS NO APPLICATION TO THE ASSESSEES CASE. 15. AFTER CONSIDERING THE AFORESAID SUBMISSIONS IN THE IMPUGNED ORDER THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) UPHELD THE ACTI ON OF ASSESSING OFFICER FOR THE DETAILED REASONS GIVEN IN PARA 6 WHICH ARE AS UNDER :- 6. I HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS. I HAVE PERUSED THE ORDER OF THE CIT(A) BARODA DATED 23-3-2001 AND THE OTHER CASE LAW RELIED UPON BY THE APPELLANT. THE FACTS IN THIS ISSUE ARE RECAPITU LATED BRIEFLY AS UNDER :- (I) M/S. MULBERRY INVESTMENT & TRADING CO. LTD (MITCL) A WHOLLY OWNED SUBSIDIARY OF THE APPELLANT COMPANY WAS ESTABLISHED AS AN INVESTING AND NON BANKING FINANCE COMPANY AND 8 ITA NO. 481 & 548/AHD/2 007 DURING THE COURSE OF ITS BUSINESS IT GAVE LOANS BI LLS RECEIVABLE ETC. AMOUNTING TO RS. 87 13 684/- WHICH BECAME STICKY AN D MITCL WAS NOT ABLE TO RECOVER EITHER THE LOAN OR THE INTEREST ON SUCH LOANS. (II) MITCL DID NOT CLAIM THESE DEBTS AS BAD DEB TS. (III) DURING THE ASSESSMENT YEAR 2002-03 AMALGA MATION TOOK PLACE BETWEEN THE APPELLANT COMPANY AND MITCL; THE SCHEME OF AMALGAMATION WAS APPROVED BY THE HON'BLE GUJARAT HI GH COURT AND MUMBAI HIGH COURT (IV) AFTER THE AMALGAMATION IN THE VERY FIRST YEAR THE AMALGAMATED COMPANY I.E. THE APPELLANT COMPANY WROTE OFF THE ABOVE LOANS ETC. AND CLAIMED AS BAD DEBTS THE ASS ESSING OFFICER THOUGHT THAT IT WAS NOT A SIMPLE CASE OF WRITE OFF OF BAD DEBTS. THERE WAS MORE THAN WHAT MET THE EYE AND THAT IT WAS AN A RRANGEMENT TO REDUCE THE PROFITS IN THE HANDS OF THE APPELLANT CO MPANY FOR THE FOLLOWING REASONS; (A) THAT MITCL AVOIDED TO WRITE OFF THE LOANS E TC. DESCRIBED AS IRRECOVERABLE IN ITS HANDS BEFORE THE AMALGAMATION BECAUSE THAT WOUL D HAVE LOWERED ITS CAPITAL WORTH (B) THAT IF MITCL HAD WRITTEN IT OFF AS BAD DEB TS IT WOULD HAVE FORMED A PART OF ITS LOSS BUT THE APPELLANT COMPANY COULD NOT HAVE A VAILED THE BENEFIT OF CARRY FORWARD AND SET OFF OF THIS LOSS UNDER SECTION 72A( 5)(C) OF THE ACT BECAUSE OF MITCL BEING A NON BANKING FINANCE COMPANY. (C) THAT PRECISELY FOR THESE REASONS THE LOANS WERE WRITTEN OFF IN THE VERY FIRST YEAR AFTER AMALGAMATION BY THE APPELLANT COM PANY THEREBY REDUCING ITS PROFIT TO THE EXTENT OF RS.87 03 275/-. (D) THAT THIS 'COLORABLE DEVICE' ENSURE D ALL BENEFIT TO THE APPELLANT. THEREFORE THE FACTS OF THIS CASE BECAME DISTINGUISHABLE FROM THAT OF CIT VS. T. VEERBHADRA RAO K. KOTESWAR RAO CO. ( SUPRA). APPLYING THE RATIO OF THE SUPREME COURT DECISION IN THE CASE OF ME.DOWELL (154 ITR) THE ASSESSING OFFICER LIFTED THE VEIL OF SECRECY AND DI SALLOWED THE BAD DEBTS. THE APPELLANT HAS RELIED UPON THE DECISION OF THE SUPRE ME COURT IN THE CASE OF CIT V. T. VEERBHADRA RAO (SUPRA) AND PATNA HIGH COURT DECISIO N IN THE CASE OF SITAPORE SUGAR WORKS LTD. V. CIT 25 ITR 548 (PAT) AND DEONIT I PRASADSINGH V. CIT 15 ITR 165 (PAT). APART FROM THIS THE APPELLANT HAS SUBMI TTED THAT: (I) THE SCHEME OF AMALGAMATION HAD BEEN VETTED BY THE HIGH COURT OF GUJARAT AND HIGH COURT OF MUMBAI WHERE VARIOUS GOVERNMENT A UTHORITIES HAD A RIGHT TO RAISE ANY OBJECTION. HOWEVER NO OBJECTIONS WERE RA ISED BY ANY ANYBODY INCLUDING THE INCOME-TAX DEPARTMENT. (II) SUCH A SCHEME OF AMALGAMATION VETTED FRY THE TWO HIGH COURTS CANNOT BE CONSIDERED TO BE A SHAM TRANSACTION/ COLORA BLE DEVICE. 9 ITA NO. 481 & 548/AHD/2 007 (III) THE APPELLANT BY WRITING OFF THE SAID AMOU NT TO THE P & L ACCOUNT WAS NOT TRYING TO SET OFF THE CARRY FORWARD LOSS OR UNABSO RBED DEPRECIATION AND THEREFORE SECTION 72A HAD NO APPLICATION TO THE APPELLANT'S C ASE. IT WOULD BE SEEN FROM ABOVE THAT THE APPELLANT HAS NOT EFFECTIVELY REBUTTED THE ARGUMENT OF THE ASSESSING OFFICER REGARDING THE PRO VISIONS OF SECTION 72A(5)(C) OF THE ACT. THE APPELLANT HAS SIMPLY STATED THAT BY WRITING OFF THE BAD DEBT IT WAS NOT SETTING OFF ANY CARRY FORWARD LOSS OR UNABSORBED DEPRECIATION- IN FACT T HIS IS NOT THE POINT MADE FRY THE ASSESSING OFFICER WHO ACTUALLY STATED THAT IF MITCL HAD WRI TTEN THE SAID AMOUNT OFF AS A DAD DEBT THE APPELLANT COMPANY WOULD NOT HAVE BEEN ABLE TO HAVE THE BENEFIT OF SET OFF OF THE CARRY FORWARD LOSS BECAUSE OF THE RESTRICTION PLACED U/S. 72A(5)( C) THE APPELLANT HAS SKIRTED THE ISSUE. FURTHER IT IS UNDENIABLE THAT BY WRITING OFF THE L OANS AND INTEREST ETC AS BAD DEBTS IN THE VERY FIRST YEAR AFTER THE AMALGAMATION THE APPELLANT'S PROFITS HAVE BEEN REDUCED TO THAT EXTENT. THE APPELLANT HAS ALSO NOT REFUTED THAT THE WRITE OFF O F THESE AMOUNTS IN THE HANDS OF MITCL WOULD HAVE RESULTED IN LOWERING THE CAPITAL WORTH OF MITC L. IT IS ALSO OBSERVED THAT THE ASSESSING OFFICER HAS NO WHERE QUESTIONED THE SCHEME OF AMALG AMATION AS APPROVED BY THE TWO HIGH COURTS BUT HAS ONLY LOOKED INTO THE IMPLICATIONS O F THE AMALGAMATION FROM SINE INCOME-TAX POINT OF VIEW IT IS THE ASSESSING OFFICER WHO IN THE TOTALITY OF THE CIRCUMSTANCES HAS EXAMINED THE IMPLICATIONS OF THE AMALGAMATION AND RAISED SOM E PERTINENT ISSUES WHICH NEED TO BE ADDRESSED BY THE APPELLANT. IN THE LIGHT OF THESE F ACTS IT IS OBSERVED THAT THE APPELLANT HAS FAILED TO SATISFACTORILY MEET THE ISSUES RAISED BY THE ASSESSING OFFICER. IT IS FURTHER OBSERVED THAT FOR THE REASONS ASCRIBED BY THE ASSESSING OFFI CER THE FACTS OF THE APPELLANT'S CASE THOUGH APPARENTLY SEEN TO BE COVERED BY THE DECISION OF TH E HON'BLE SUPREME COURT IN THE CASE OF T. VEERBHADRA RAO (SUPRA) MOVE AWAY FROM THE APPLICAT ION OF THE SAID JUDGMENT- IT IS HELD THAT UNDER THE GIVEN CIRCUMSTANCES THE RATIO OF THE SUP REME COURT JUDGMENT AND OTHER TWO CASES RELIED UPON BY THE APPELLANT IS NOT APPLICABLE TO T HE FACT OF THE APPELLANT'S CASE. UNDER THE CIRCUMSTANCES IT IS HELD THAT THE BAD DEBTS HAVE B EEN RIGHTLY DISALLOWED BY THE ASSESSING OFFICER AND THE DISALLOWANCE IS CONFIRMED. 16. AGGRIEVED BY THIS ORDER OF LEARNED COMMISSIONER OF INCOME TAX(APPEALS) THE ASSESSEE IS IN APPEAL BEFORE US. 17. AT THE TIME OF HEARING SHRI C.N. SHAH LD. COUN SEL OF THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW. ON T HE OTHER HAND SHRI C.K. MISHRA SR. D.R. APPEARING FOR THE REVENUE SUPPORTED THE ORDER OF LE ARNED COMMISSIONER OF INCOME TAX(APPEALS). 18. WE HAVE GIVEN OUR CAREFUL CONSIDERATION TO THE RIVAL SUBMISSIONS MADE BEFORE US AND HAVE PERUSED THE ORDERS OF AUTHORITIES BELOW. IN OU R OPINION THE CRUCIAL QUESTION OF CONSIDERATION IS THAT IF MULBERRY INVESTMENT & TRADING CO. LTD. H AS MERGED WITH THE ASSESSEE-COMPANY WHETHER THE SAID COMPANY WOULD HAVE BEEN ENTITLED T O CLAIM THE AFORESAID ITEMS AS ALLOWABLE 10 ITA NO. 481 & 548/AHD/2 007 DEDUCTION WHILE COMPUTING THE TAXABLE PROFITS. SECT ION 36(1)(VII) GRANTS AN ALLOWANCE IN RESPECT OF BAD DEBTS OF A BUSINESS PROFESSION OR VOCATION AND IN RESPECT OF IRRECOVERABLE LOANS IN THE CASE OF BANKING OR MONEY LENDING BUSINESS. ADMITTEDLY T HE ASSESSEE BEING IN BANKING OR MONEY LENDING BUSINESS IS ENTITLED TO ALLOWANCE IN RESPEC T OF IRRECOVERABLE LOANS ADVANCED IN THE ORDINARY COURSE OF BUSINESS REGARDLESS OF THE METH OD OF ACCOUNTING EMPLOYED. THE REASON IS THAT MONEY IS THE STOCK-IN-TRADE OR THE CIRCULATING CAPI TAL OF A BANKER OR MONEYLENDER. THE LOSS OF STOCK-IN-TRADE IS ALWAYS A TRADING LOSS IRRESPECTIV E OF THE METHOD OF ACCOUNTING EMPLOYED. AFTER THE AMALGAMATION THE NATURE OF THE DEBT REMAINING THE SAME. IT WOULD BE OPEN FOR THE ASSESSEE TO WRITE OFF THE SAME TO THE PROFIT AND LOSS ACCOUNT A ND CLAIM IT AS ALLOWABLE DEDUCTION UNDER SECTION 36(1)(VII) WHILE COMPUTING THE TAXABLE PROF ITS FOR THE RELEVANT ASSESSMENT YEAR. IN OUR HUMBLE OPINION THE TREATMENT GIVEN TO THE LOANS AN D ADVANCES BY THE SUBSIDIARY COMPANY PRIOR TO AMALGAMATION WOULD BE A RELEVANT CONSIDERATION A ND SINCE THE INTEREST INCOME ITSELF HAS BEEN TAXED AS BUSINESS INCOME IN THE EARLIER YEARS THE ASSESSEE WOULD BE ENTITLED TO CLAIM THE SAID AMOUNT. 19. THE HON'BLE SUPREME COURT IN THE CASE OF CIT V S.- VEERABHADRA RAO K. KOTESWARA RAO & CO. (155 ITR 152) HELD THAT IF A BUSINESS ALONG WITH ITS ASSETS AND LIABILITIES IS TRANSFERRED BY ONE OWNER TO ANOTHER A DEBT SO TRANSFERRED WOULD B E ENTITLED TO THE SAME TREATMENT IN THE HANDS OF THE SUCCESSOR. THE RECOVERY OF THE DEBT IS A RIG HT TRANSFERRED ALONG WITH THE NUMEROUS OTHER RIGHTS COMPRISING THE SUBJECT OF THE TRANSFER. IF T HE LAW PERMITS THE TRANSFER TO TREAT THE WHOLE OR PART OF THE DEBT AS IRRECOVERABLE AND TO CLAIM A DE DUCTION ON THAT ACCOUNT THE SAME RIGHT SHOULD BE RECOGNIZED IN THE TRANSFEREE. IT IS MERELY AN IN CIDENT FLOWING FROM THE TRANSFER OF THE BUSINESS TOGETHER WITH ITS ASSETS AND LIABILITIES FROM THE PREVIOUS OWNER TO THE TRANSFEREE. IT IS IMPLIED IN THE TRANSFER OF A BUSINESS BE REGARDED AS BELONGING TO THE NEW OWNER. 20. IN THE CASE BEFORE US THE ASSESSEE BECOMES THE OWNER OF THE ASSETS AND LIABILITIES OF THE SUBSIDIARY COMPANY I.E. MULBERRY INVESTMENTS & TRA DING CO. LTD. AND ACCORDINGLY THE RATIO OF THE JUDGMENT OF THE HON'BLE SUPREME COURT REFERRED TO ABOVE WOULD BE APPLICABLE AND THE ASSESSEE IS ENTITLED TO WRITE OFF THE PRINCIPAL AMO UNT AND ARREARS OF INTEREST AS IRRECOVERABLE WHILE COMPUTING THE TAXABLE PROFITS OF THE SAID MULBERRY INVESTMENTS & TRADING CO. LTD. 11 ITA NO. 481 & 548/AHD/2 007 21. KEEPING IN VIEW THE TOTALITY OF THE FACTS AND C IRCUMSTANCES OF THE CASE IN OUR OPINION BOTH THE DEPARTMENTAL AUTHORITIES BELOW CLEARLY ERR ED IN RELYING ON THE JUDGMENT OF THE HON'BLE SUPREME COURT IN THE CASE OF MCDOWELL & CO. (SUPRA) . THE ASSESSEE HAS FULFILLED ALL THE CONDITIONS LAID DOWN IN SECTION 36(1)(VII) THE BAD DEBTS WERE WRITTEN OFF IN THE BOOKS OF ACCOUNTS THE ASSESSEE IS NOT TRYING TO SET OFF CAR RY FORWARD LOSS OR UNABSORBED DEPRECIATION AND THEREFORE SECTION 72A HAS NO APPLICATION. IN VIEW OF THIS WE DIRECT THE A.O. TO ALLOW THE BAD DEBTS AMOUNTING TO RS.87 03 275/- WRITTEN OFF IN TH E BOOKS OF ACCOUNTS. RESULTANTLY THIS GROUND OF APPEAL IS ALLOWED. 22. THE FACTS RELATING TO CONTROVERSY INVOLVED IN G ROUND NO. 2 ARE THAT IN THE ASSESSMENT ORDER THE ASSESSING OFFICER TREATED THE ROYALTY AN D RESEARCH INCOME OF RS.71 31 560/- AS INCOME FROM OTHER SOURCES AND NOT ALLOWED DEDUCTION UNDER SECTION 80HHC OF THE INCOME TAX ACT. ON APPEAL IN THE IMPUGNED ORDER THE LEARNED COMMISSIO NER OF INCOME TAX(APPEALS) UPHELD THE ACTION OF A.O. BEING AGGRIEVED THE ASSESSEE IS IN APPEAL BEFORE US. 23. AT THE TIME OF HEARING BOTH THE SIDES CONCEDED THAT THE CONTROVERSY INVOLVED IN THIS GROUND OF APPEAL IS COVERED BY THE DECISION OF THIS TRIBUNAL IN ASSESSEES OWN CASE IN ITA NOS. 3740 & 3741/AHD/2003 FOR THE ASSESSMENT YEAR 2000-0 1 & 2001-02 RESPECTIVELY. IN THAT DECISION AFTER CONSIDERING THE JUDGMENT OF THE HON 'BLE SUPREME COURT IN THE CASE OF CIT VS.- K. RAVINDRANATHAN NAIR (2007) 295 ITR 228 (SC) THE MATTER IS SET ASIDE TO THE FILE OF ASSESSING OFFICER WITH THE DIRECTION TO RE-COMPUTE THE DEDUCT ION IN TERMS OF THE RATIO LAID DOWN BY THE HON'BLE APEX COURT. THE ASSESSING OFFICER WILL INCL UDE RESEARCH FEE AND ALSO EXCLUDE 90% UNDER CLAUSE (BAA) TO SECTION 80HHC OF THE INCOME T AX ACT 1961. ACCORDINGLY THE A.O. WILL RE-WORKOUT THE DEDUCTION UNDER SECTION 80HHC OF THE INCOME TAX ACT 1961. 24. IN THE RESULT THE APPEAL FILED BY THE REVENUE AS WELL AS THE APPEAL BY THE ASSESSEE BOTH ARE PARTLY ALLOWED. THE ORDER WAS PRONOUNCED IN THE COURT ON 18.02.201 0 SD/- SD/- (D.C. AGRAWAL) (T.K. SHARMA ) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 18/ 02 / 2010 12 ITA NO. 481 & 548/AHD/2 007 COPY OF THE ORDER IS FORWARDED TO : 1) THE ASSESSEE (2) THE DEPARTMENT. 3) CIT(A) CONCERNED (4) CIT CONCERNED (5) D.R. ITAT AHMEDABAD. TRUE COPY BY ORDER LAHA/SR.P.S. DEPUTY REGISTRAR ITAT AHMEDA BAD