AO must make a reference to Valuation Officer in terms of S. 50C(2) if assessee objectes to stamp duty valuation

IN THE ITAT MUMBAI BENCH ‘A’

A.T.E. Enterprises (P.) Ltd.

versus

Deputy Commissioner of Income-tax

IT APPEAL Nos. 2873 & 2874 (MUM.) OF 2011

[ASSESSMENT YEARS 2003-04 & 2005-06]

SEPTEMBER 7, 2012

ORDER

Amit Shukla, Judicial Member  

The present appeals preferred by the assessee, are directed against the impugned separate order dated 14th February 2011, for assessment year 2003-04 and order dated 10th February 2011, for assessment year 2005-06, passed by the learned Commissioner (Appeals)-IV, Mumbai, for the quantum of assessment passed under section 143(3) of the Income Tax Act, 1961 (for short “the Act”). These appeals pertain to same assessee though involving different issues, were heard together. Therefore, as matter of convenience, both these appeals are being disposed off by way of this consolidated order.

We first proceed to adjudicate the appeal in ITA no. 2873/Mum./2011, for assessment year 2003-04. The sole ground raised by the assessee, reads as follows:-

“1. The learned CIT(A) has erred in disallowing non-recoverable balance written off of Rs. 14,35,644 being expenses incurred on behalf of the principal on the ground that the appellant is not obliged to incur these expenses and that it follows cash system of accounting. On the basis of the facts and circumstances of the case, non-recoverable balance written off of Rs.14,35,644 out to be allowed either as bad debt under section 36(1)(vii) or as business expenses under section 37 of the Act.”

2. Briefly stated the facts of the case are that during the course of assessment proceedings, the Assessing Officer noted that in the Profit & Loss Account, the assessee has debited a sum of Rs. 15,79,917, on account of non-recoverable balance written-off. Since the assessee was following the method of “Cash System Accounting”, wherein the income is recognized upon “Receipt Basis” and expenditure is debited as and when paid, therefore, there was no question of sundry debtors and sundry creditors were written-off. Accordingly, a show cause notice was issued as to why such a claim should not be disallowed. The assessee submitted that insofar as the amount of Rs. 1,44,273, out of Rs. 15,79,997, was concerned, the same was the income of an earlier year which has been accounted for by the assessee in this year and since the income has not been received, the same is claimed as bad debt. For the balance amount, it was submitted that the same represents the expenditure incurred by it in the earlier years on behalf of one of its associated concern M/s. Motex Engineering Co. P. Ltd., on account of exhibition and since it has not received the amount, the same has been claimed as bad debt now. The Assessing Officer did not accept the assessee’s contention primarily on the ground that the assessee has chosen the method of “Cash System Accounting”, consistently for several years, therefore, there was no question of allowing the bad debt. However, with regard to payment on behalf of its associate concern, the same is also not the expenditure of assessee’s business, therefore, he disallowed the entire claim of Rs. 15,79,917. Regarding the sum of Rs. 1,44,273, the same is not disputed before us. With regard to the claim of bad debt/business expenses, incurred on behalf of the principal, it was stated by the assessee that it has entered into a joint venture agreement with A MonfortsTextilemaschine GMBH & Co. (Monforts) vide agreement dated 6th July 1996. Pursuant to the said agreement a Company called Motex Engg. Co. Pvt. Ltd. (Motex) was formed in which assessee was holding 49% of the shares and balance 51% was held by Monforts. The assessee is selling agent for various companies including Motex. It had participated in exhibition organized by ITME in the year 2000. It was normal business practice of the assessee to incur expenses at exhibitions on behalf of principals and recover the same from those principals whose machinery were exhibited at the exhibitions. The assessee also exhibited the machines of Motex at the exhibition along with machines of other manufacturers for which it was acting as a selling agent. It recovered the pro rata exhibition expenses from all the manufacturers except from Motex, because of its financial conditions Motex. Thus, Motex could not contribute its share of exhibition expenses incurred by the assessee on its behalf. Moreover, due to heavy financial losses, the above joint venture agreement was also terminated during the year under consideration, as Motex did not have any commercial future and Its net worth was virtually eroded. Accordingly the assessee wrote off the amount irrecoverable against the exhibition expenses. It was submitted that the assessee had incurred expenses on behalf of Motex in the ordinary course of business and the same had to be written off on account of commercial expediency. Therefore, the write off by the assessee was incidental to the business of the assessee company. In this connection it relied on the decision of CIT v. Inden Biselers [1990] 181 ITR 69 wherein it has been held that non recovery of advances is a trading loss if it arose directly from the carrying on of the business and is allowable as trading loss being incidental to the business of the assessee. In view of the above, since the write off was dictated by commercial consideration, the same may kindly be allowed as expenses incidental to the business u/s. 37(1) of the Act. The Assessing Officer, however, rejected the same and disallowed he entire amount.

3. The Commissioner (Appeals) too rejected the contentions of the assessee and held that insofar as the assessee’s claim of bad debt is concerned, the same is not allowable. With regard to the allow ability of business loss under section 37(1), he held that the assessee was not obliged to incur these expenses on behalf of the principal as there was no written agreement. Writing of such expenses incurred on behalf of the principal is not allowable as business loss as there was no such compulsion. Moreover, the assessee is following method of “Cash System Accounting” and loss has not been incurred in this year, therefore, the same cannot be allowed in this year.

4. Before us, the learned Counsel for the assessee submitted that the assessee is a selling agent to many parties, including Motex Engineering Co. P. Ltd. As A normal business practice adopted by the assessee, it has to incur expenditure on behalf of the principal whose machinery it exhibited in the exhibition. Thereafter, the assessee used to recover the expenditure from the said principals. The total expenditure incurred by the assessee during the exhibition of ITME-2000, the assessee has incurred expenditure for several parties/principals out of which one of them was Motex Engineering Co. P. Ltd. The assessee could recover the expenditure in most of the cases, however, in the case of Motex Engineering Co. P. Ltd., the assessee could not recover the exhibition expenditure on its behalf due to serious financial condition and heavy loss. In fact, due to these heavy losses, joint venture agreement was also terminated during the year and the net worth of Motex Engineering Co. P. Ltd. was virtually eroded. It was under these circumstances, the assessee had no option but to write-off the amount as irrecoverable or it should be allowed as business loss. He relied upon the judgment of Hon’ble Supreme Court in Essen (P.) Ltd. v. CIT [1967] 65 ITR 625.

5. On the other hand, the learned Departmental Representative relying upon the decision of the Commissioner (Appeals), submitted that under the method of “Cash System Accounting”, neither earlier year’s loss can be allowed in this year nor it can be allowed as bad debt. Hence, the findings give by the Commissioner (Appeals) as well as by the Assessing Officer should be upheld.

6. We have heard the rival contentions, carefully considered the orders of the Commissioner (Appeals) as well as of the Assessing Officer and the material available on record. There is no dispute that the assessee had incurred the expenditure on account of exhibition on behalf of various principals including that of Motex Engineering Co. P. Ltd. The issue for our adjudication is, whether such non-recovery of expenditure from Motex Engineering Co. P. Ltd., can be claimed as a loss or expenditure in this year. It is also admitted fact that the assessee is following the method of “Cash System of Accounting” since last several years. Therefore, in such circumstances, such an expenditure cannot be allowed as bad debt under section 36(1)(vii) r/w section 36(2). Now, coming to the issue as to whether such a claim can be allowed as a business loss or not.

7. For claiming a loss, it is essential that the same should be on revenue account and must have been incurred during the course of carrying on business or profession during the year. Such a loss is allowable while computing the income under section 28. In the present case, the incurring of expenditure by the assessee on behalf of its principal was part of its business practice which it has been following regularly, therefore, at the time of incurrence, it was in the course of its business activities only. This loss has been incurred only in a particular case when the assessee could not recover the pro-rata exhibition expenses from one party and later on when it was found that recovery of such expenses would be very difficult, the assessee claimed it as a bad debt which in fact, should have been claimed as loss because it was a kind of a business/trading liability incurred by the assessee as a businessman during the course of its business.

8. Now, coming to the issue whether such a loss can be allowed when the assessee is following the method of “Cash System of Accounting”,and such a loss has arisen on account of expenditures which were incurred in the earlier years. In our considered opinion, once the assessee has incurred expenditure on behalf of its principal and after making its efforts could not recover the said expenditure, this will result into a loss only and such a loss can be claimed in the year when the assessee was quite ascertained that the same could not be recovered. The party herein this case from whom the amount has to be recovered was in financial stringency and so much so that the joint venture agreement through which the said company (Motex) was formed got terminated in this year. It was due to this reason that the assessee can be said to have incurred the loss in this year only. Even when the assessee is following the method of “Cash System of Accounting”,such a loss which is on account of trading or business cannot be disallowed. Such a loss cannot be treated as a business expenditure in the present year for the reason that the assessee is mainly carrying out agency business for various machinery component and accessories from which it gets certain percentage of income and any expenditure relating to agency business can be claimed in relation to such income. For claiming such expenses, the year of incurring of expenses is important in the method of “Cash System Accounting”. However, the aforesatated loss was due to peculiar circumstances that the assessee who had incurred expenditure on behalf of some other person as per its trade/business practice and the same could not be recovered even after a lot of persuasion and, therefore, such a loss which has been recognized in this year due to above facts, has to be allowed as a business loss. Thus, the amount of Rs. 14,35,644, though cannot be allowed as bad debt written-off but can definitely be allowed as a business loss. Consequently, we set aside the impugned order passed by the Commissioner (Appeals) and allow the ground raised by the assessee is treated as allowed.

9. In the result, assessee’s appeal is allowed.

We now proceed to disposes off the appeal in ITA no. 2874/Mum./2011, for assessment year 2005-06, on the following grounds:-

“1. Learned CIT(A) has erred in confirming the action of the Assessing Officer in computing the capital gains in respect of property situated at Maker Chamber-IV, Nariman Point, Mumbai (the property) by adopting sale consideration at Rs. 5,40,99,000/- u/s. 50C being value adopted by the Stamp Duty Authority (SDA) as against actual sale consideration of Rs. 4,30,00,000/- adopted by the appellant.. On the facts and circumstances of the case and in law, the Learned CIT(A) ought to have upheld the contention of the appellant that the actual sale consideration of Rs. 4,30,00,000/- adopted by the appellant and duly supported by the report of a recognized valuer ought to be taken as sale consideration for the purpose of computation of capital gain.

2. Learned CIT(A) has erred in dismissing the ground relating to the Assessing Officer adding an amount of Rs. 13,80,000/- to the income of the appellant u/s 68, on the presumption that the same is infructuous. On facts and circumstances of the case, the ground not becoming infructuous, the Learned CIT(A) ought have decided the ground in appeal on the basis of facts and submissions made and ought to have deleted the addition of Rs. 13,80,000, made under section 68 of the Act.”

10. Briefly stated, the facts relevant for the issue in ground no.1, are that the assessee has sold a premises number 46 and 47 of Maker Chambers, 6, Nariman Point, Mumbai, at 4,30,00,000, on 8th March 2005. The said property was acquired in assessment year 1984-85 for a sum of Rs. 6,99,178. For claiming index cost and other expenses, the assessee has offered Rs. 1,54,35,156, for taxation as long term capital gains. Though, as per the agreement dated 4th March 2005, the property was sold for Rs. 4,30,00,000, however, the stamp valuation authority for the purpose of stamp duty has taken the value of the property at Rs. 5,40,99,000. The Assessing Officer observed that the assessee could not adduce any evidence on record to show that the value adopted by the stamp duty authority of Rs. 5,40,99,000, is more than the fair market value of the property. Therefore, in view of the provisions of section 50C, he took the sale consideration at Rs. 5,40,99,000, instead of Rs. 4,30,00,000. Accordingly, he computed the taxable long term capital gains as under:-

11. Before the Commissioner (Appeals), the assessee submitted that the assessee has duly objected to the valuation made by the stamp duty authority and has also produced valuation report from a registered valuer which has not been taken into consideration and, therefore, the Assessing Officer was obliged under the law to make a reference to the valuation officer to ascertain the correct fair market value. In support of this contention, various decisions were relied upon which has been incorporated in Para-12 of the appellate order. The Commissioner (Appeals) did not accept the assessee’s contention and dismiss the assessee’s ground on the following observation and holding as under:-

“13. I do not agree with the submissions of the authorized representative. I find that provisions of section 50C are mandatory as the word used in section 50C is “shall” which means the valuation made by the stamp duty authority is binding on the A.O. Although there is a provision that the A.O. may refer the matter to valuation officer if the assessee objects to the valuation made by the stamp duty authority still he has to accept the valuation made by the stamp duty authority in view of the binding nature of provision of section 50C. According, I hold that A.O. is justified in computing the capital gain on the basis of valuation made by the stamp duty authority. The case laws relied by the assessee are distinguishable on facts. This ground of appeal is dismissed.”

12. Thus, the Commissioner (Appeals), though agreed that the Assessing Officer may refer the matter to the valuation officer if the assessee objects to the valuation made by the stamp duty authority, still the Assessing Officer has to accept valuation made by the stamp duty authority as per the provisions of section 50C of the Act, which is binding.

13. Before us, the learned Counsel for the assessee submitted that the observations made by the Commissioner (Appeals) is wholly erroneous as once the assessee has objected to the value adopted by the stamp valuation authority, the Assessing Officer has to make a reference to the valuation officer to get the fair market value.

14. On the other hand, the learned Departmental Representative relied on the findings given by the Commissioner (Appeals).

15. After hearing the rival contentions of the parties and on perusal of the orders of the authorities below and the material available on record, we find that the assessee has objected to the valuation adopted by the stamp valuation authority and has also filed the valuation report by an Approved Valuer in support of the actual fair market value. The provisions of clause (a) of sub-section (2) of section 50C, provides that where the assessee claims before the Assessing Officer that the value adopted or assessed by the stamp valuation authority under sub-section (1) exceeds the fair market value of the property as on the date of transfer, the Assessing Officer may refer the valuation of the capital asset to a valuation officer and once such a reference is made, the Assessing Officer is bound by such a valuation in terms of provisions of section 16A(1). The words “may refer”, appearing in sub-section (2), does not entail the discretion upon the Assessing Officer, because once the assessee has challenged the fair market value adopted by the stamp valuation authority as per the conditions enumerated in clauses (a) and (b) of sub-section (2) whichever is applicable, the Assessing Officer has to determine the valuation of the capital asset and this can only be done after making a reference to the Valuation Officer. Thus, the Assessing Officer was obliged to make a reference in the manner provided in sub-section (2) of section 50C. In the present case, the assessee has objected to such valuation adopted by the stamp valuation authority and has also filed the copy of valuation report by an approved valuer. Therefore, the Assessing Officer was required to make a reference to the valuation officer in terms of sub-section (2) of section 50C. Accordingly, the matter is restored back to the file of the Assessing Officer who shall make a reference to the Valuation Officer and to get an estimate of fair market value for determining the valuation of the asset which is the subject matter of sale. Consequently, we set aside the impugned order passed by the Commissioner (Appeals) and restore the matter to the file of the Assessing Officer. Accordingly, ground no.1, is hereby treated as allowed for statistical purposes in accordance with the aforestated directions given by us.

16. In ground no. 2, the assessee has challenged the addition of Rs. 13,18,00,000, under section 68 of the Act.

17. The Assessing Officer, in the course of assessment proceedings, noted that the assessee had sold flat No. 817, in Delhi for Rs. 13,80,000, and after claiming indexed cost and selling expenses, has claimed long term capital gain of Rs. 21,82,830. The Assessing Officer treated the said amount of Rs. 13,18,000, as deemed income under section 68, which was credited in the books of account on the ground that the assessee has failed to bring any evidence on record that it was on account of sale of the said property.

18. Before the Commissioner (Appeals), the assessee vehemently objected to such an addition on the ground that once the assessee has filed evidence in the form of sale agreement for the sale of flat No. 817, in Delhi, there was no occasion to treat such an amount as unexplained cash credit within the meaning of section 68. The Commissioner (Appeals) dismissed the assessee’s contention solely on the ground that in rectification proceedings under section 154, this matter has been resolved at the level of the Assessing Officer.

19. Before us, the learned Counsel for the assessee submitted that the Assessing Officer, under the provisions of section 154, has in fact rejected the assessee’s contention on the ground that this matter is sub-judice before the Commissioner (Appeals) and rejected the assessee’s petition for rectification; vide order dated 31st March 2008.

20. On the other hand, the learned Departmental Representative relied on the findings of the Commissioner (Appeals).

21. After hearing the rival contentions of the parties and on perusal of the orders of the authorities below and the material available on record, we find that the addition made by the Assessing Officer is wholly erroneous as the assessee has filed a copy of sale agreements in respect of sale of flats wherein it has been mentioned that the said property has been sold for a total sale consideration of Rs. 13,80,000. Once the money has been received by way of sale of a property duly mentioned in the sale agreement, it cannot be held that the same remains unexplained. Even the Commissioner (Appeals) has not cared to go through the order passed under section 154, wherein the Assessing Officer has rejected this contention on the ground that the matter is sub-judice before the Commissioner (Appeals). Consequently, we do not find any merit in the findings given by the authorities below and accordingly the addition made by the Assessing Officer stands deleted. Ground no.2, is thus allowed.

22. In the result, assessee’s appeal is partly allowed for statistical purposes.

23. To sum up, assessee’s appeal in ITA no. 2873/Mum./2011, for assessment year 2003-04 is allowed and assessee’s appeal in ITA no. 2874/Mum./2011, for assessment year 2005-06 is allowed for statistical purposes.