General Capital and Holding Company Pvt. Ltd Vs. ITO (ITAT Ahmedabad)
Assessee has advanced the sum in question of Rs. 60 lacs and Rs. 40 lacs to M/s. Bhagyam Industries Pvt. Ltd. and M/s. Dolphin Metal (India) Ltd. totaling to Rs. 1 crore through banking channel in its ordinary course of business in lieu of charging interest and non recovery thereof for almost three years formed sufficient reason to write them off as sundry balances as revenue loss to be adjusted against its income of the impugned assessment year. The assessee’s second substantive ground is accordingly accepted.
FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-
This assessee’s appeal for assessment year 2012-13 arises against the CIT(A)-2, Ahmedabad’s order dated 08.02.2016, in case no. CIT(A)- 2/52 1/Wd.2(1)(1)/14-15, affirming Assessing Officer’s action disallowing its Section 80G deduction claim of Rs. 11,11,111/-, sundry balance written off amounting to Rs. 1,00,00,000/- as well as partly confirming Section 36(1)(iii) interest dis allowance of Rs. 10,22,586/- to the extent of Rs. 2,22,586/-; respectively, in proceedings u/s. 143(3) of the Income Tax Act, 1961; in short “the Act”.
2. We come to the first issue of Section 80G dis allowance of Rs. 11,11,111/-. There is no dispute that the payee herein is “Shankersingh Vaghela Bapu Charitable Trust” enjoys a valid registration u/s. 80G of the Act since 18.07.2008. The CIT, Gandhinagar’s approval order dated 18.07.2008 to this effect forms page 3 of the paper book. Relevant bank statement at page no.1 of the paper book reveals that the assessee/payer had actually paid the sum in question to the above payee on 08.2008. The payee trust thereafter issued its donation acceptance receipt on 14.08.2011 (page 2) acknowledging cheque no. 208216 qua the relevant amount. The assessee had been showing the above sum as a credit entry in payee’s ledger account throughout the intervening period. It chose to write off the same as a donation in the relevant previous year (page 5) after taking it as opening balance on 01.04.2011. The Assessing Officer first of all observed in para 3.1.1 of the assessment order dated 05.02.2015 that the assessee had placed on record payee’s registration only without its acceptance receipt. He then concluded that assessee’s books stated the amount in question as opening balance which meant that the same was not paid during the relevant previous year as per Section 80G(1) & (2) of the Act. All this reasoning lead to the impugned dis allowance being made in assessee’s hands.
3. The CIT(A) upholds Assessing Officer’s action disallowing the above 80G claim as follows:
“2.4. Decision:
I have carefully considered the facts of the case, the assessment order and the written submission of the appellant. The AO has made the dis allowance of claim of donation amounting of Rs. 11,11,111/- paid to Shankarsinh Vaghela Bapu Charitable Trust for the reason that the appellant has filed the copy of the approval granted by the CIT u/s. 80G of the IT Act to the said trust but no receipt for payment of donation has been filed before him. The AO also observed that as per the provisions of section 80G(1)and (2) it clearly provides that the deduction u/s. 80G is allowable only in respect of any sum paid during the year under consideration.
2.5. On the other side, the appellant claimed that initially in the year 2008 the appellant has extended the loan to the aforesaid trust with the object to help the trust. However subsequently in the year under consideration the appellant claimed to have donated the above loan to the trust on 14,08.2011. It also submitted copy of receipt issued by the said trust in respect of the donation made along with approval obtained u/s. 80G of IT Act.
2.6. Having considered the facts and submissions it is noticed that the appellant has given the loan of Rs. 11,11,111/- to the aforesaid trust on 14.08.2008 and the same was converted in the year under consideration on 14.08.2011 into the donation. Thus in the year under consideration in fact, the transaction was the conversion of the loan into the donation which in accordance with the provisions of 80G of IT Act is not the deductible expenditure. The condition for the deduction u/s. 80G is that the donation should be paid in the year under consideration which is not the case of the appellant. As per the appellant, it was the loan given to the trust on 14.08.2008, Even it was not in the nature of the payment as donation in the year 2008. It was the after thought of the appellant to convert the said loan into the donation. Thus the condition does not get fulfilled. Moreover as per the explanation (5) to section 80G of IT Act it has been provided that no deduction shall be allowed under the section in respect of any donation unless such donation is of sum of money. Here in the instant case, the donation was stated to be in the form of book entry only by converting the loan into donation. Thus there was no such donation of any money involved in the year under consideration. In other words, the appellant have waived the right to recover the lendings to the trust in the year under consideration, and this right to waive the right cannot be said to be the donation given by the appellant.
2.7. Further in the appellate proceeding the appellant has submitted copy of the receipt datedl4.08.2011 in respect of the donation issued by the trust which has not been produced before the AO in the assessment proceedings. Thus the receipt was an additional evidence filed first time before this office for consideration without making any written request for admission of the additional evidence under rule 46A of IT Act. Hence, in absence of the procedure followed by the appellant in this regard and without knowing the good and sufficient reasons for not producing this evidence in the assessment proceedings the additional evidence submitted is not accepted and hence the same is rejected.
2.8. In view of the aforesaid discussion, the dis allowance of the deduction made by the AO is found correct and justified and hence the same is confirmed.”
4. Heard rival contentions. Relevant records perused. Learned Authorized Representative and learned Departmental Representative strongly reiterate assessee’s and Revenue’s respective stands against and in support of the impugned dis allowance. Both parties agree that the relevant basic conditions to be satisfied in a Section 80G deduction claim are that it must pertain to an actual sum of money than in kind, it is to be paid to a recognized specified institution through banking channel followed by a necessary payment receipt issued from the donee’s end. Learned Departmental Representative submits that the assessee has actually paid the amount in question way back in financial year 2008-09. It thereafter treated the said amount as loans and advances till the relevant previous year wherein it chose to write off the above amount in dispute as a donation. The donee trust has also issued corresponding receipt in relevant previous year only on 14.08.2011.
5. Learned Departmental Representative’s case accordingly is that the CIT(A)’s order extracted herein above has not admitted the above donation receipt since not accompanying the relevant Rule 46A additional evidence application as per Income Tax Rules. We do not find it as convincing argument on Revenue’s part. The fact remains that the assessee admittedly filed the above donation receipt as a proof of payment along with registration certificate during lower appellate proceedings. It pleaded therein that the assessing authority had not granted it sufficient time to produce the same on record. The CIT(A)’s above extracted finding nowhere specifically rebut relevancy or genuineness thereof as he has proceeded to adopt a hypertechnical approach by simply brushing aside both the necessary documents without even a proper factual verification. We conclude that learned CIT(A) has preferred technical over substantive justice in order to reject assessee’s donation claim without even examining the issue as to whether the Assessing Officer had afforded sufficient opportunity to the assessee or not. We therefore take the above document(s) pertaining to the assessee’s payee trust as part of records in this backdrop of facts.
6. Coming to merits, we find that this is not the Revenue’s case that the donation trust is not an approved institution or it has not issued the corresponding acceptance receipt. There is further no quarrel on basic facts inter alia the assessee having actually transferred the money to donee trust through banking channel only on 14.08.2008. Its books recognized the said amount on asset side till the relevant previous year wherein it decided to forgo its loan right by way of donating the amount in question to the donee in lieu of the corresponding acceptance receipt. We are of the opinion that both the lower authorities have erred in law as well as on facts in this peculiar circumstances to interpret the relevant statutory provision Section 80G of the Act in an unsustainable manner which tantamounts to denying the necessary relief in both assessment years i.e. the year of actual payment as well as that of getting the necessary donation receipt. In our considered opinion, the purpose of using the crucial expression “in relevant previous year” in statute is to ensure actual payment on or before the relevant previous year rather than altogether rejecting a case alike the instant facts only. We therefore accept assessee’s first substantive ground to delete the impugned Section 80G dis allowance of Rs. 11,11,111/- under challenge.
7. The assessee’s next substantive ground seeks to reverse both the lower authorities’ action in disallowing its claim of sundry balances write off amounting to Rs. 1,00,00,000/- in case of M/s. Bhagyam Industries Pvt. Ltd. and M/s. Dolphin Metal (India) Ltd. involving sums of Rs. 60lacs and Rs. 40lacs; respectively. Its further alternative plea is that the above sundry balances be considered as allowable either u/s.36(1)(vii) as bad debts or u/s.37 of the Act. We notice in this backdrop that the CIT(A)’s detailed discussion takes into account the relevant finding in assessment as well as assessee’s submissions as under:
“3. The second ground of appeal is as under:-
“The learned assessing officer has erred in law and on facts in making dis allowance of Rs. 1,00,00,000/- being sundry balance written off. In this regard your appellant would like to state that the Ld. AO has not appreciated the explanations / submissions made during the course of assessment proceedings. Yours appellant states that amount of Rs. 1,00,00,0007- being advance were made in ordinary course of business and thus appellant prays before our honor to kindly delete the dis allowance of Rs. 1,00,00,000/- being sundry balance written off. Without prejudice to above, your appellant would like to pay before your honour that sundry balance v/ritten off amounting to Rs. 1,00,00,000/- should either be allowed u/s. 37 or 36(1) (vii) of the Act.”
3.1 Assessing Officer’s findings:-
The relevant extracts from the assessment order are reproduced here under.-
“3.2. In respect of the balance amount of Rs. 1,00,00,000/- under the head sundry balances written off, it was stated by the assessee in its written submissions dated 03.12.2014, 13.01.2015 and 27.01.2015 that the same pertained to advances given to Bhagyam Industries P. Ltd. Rs. 60,00,000/- in June 2009 and Dolphin Metal (India) Ltd. Rs. 40,00,000/- in April 2010 and no money could be recovered since giving of such advances and hence, the amounts were written off as non-recoverable, Assessee has further contended that the advances were given in Course of company’s business of lending money and also filed copy of the Memorandum of Association as well as the loan agreements with the concerned parties along with copy of cheque issued by Dolphin Metal (India) Ltd. obtained as an indemnity against future losses. In its’ letter dated 27.01.2015, it was stated by assessee that giving loans and advances was principal object of the company’s business. It was further contended that the advance made to Bhagyam Industries Pvt Ltd & Dolphin Metal (I) ltd. were in ordinary Course of assessee company’s business and that the advance were made through Manish Shah director of Gyscoal Alloys Ltd. (an associate company in which directors of assessee company are also directors) who was expected to pursue the repayment in case of default or delay, however, Shri Manish Shah expired on 21.08.2014 after suffering from cancer and hence, the company could not pursue the recovery. In respect of Dolphin Metal (I) Ltd since there were no assets left with the company after paying secured debtors of bank on sale of assets and hence, there was no alternative but to write off the amount as non-recoverable. In respect of Bhagyam Industries, the where about could not be located and hence, the amount was written off as non-recoverable and since the advances Were entirely genuine, the same were required to be allowed as written off against company’s business income.
3.2.1. The replies and contentions of the assessee company are considered and not found to be acceptable on account of following:
(i) It is seen that assessee company has failed to prove that the amounts claimed to have been advanced by it to the two parties namely Dolphin Metal (I) Ltd. & Bhagyam Industries had actually been advanced by assessee company and the amounts were in the nature of loans and advances made in ordinary course of assessee company’s business.
(ii) It is pertinent to mention here that it is an admitted fact that where-abouts of the loanee namely M/s. Bhagyam Industries or Bhagyam Industries P. are not traceable anywhere in any. database of sales tax department or the MCA site. Further, assessee company’s loan agreement shows that no individual is identified as signatory to the same & it appears that not even cheque was obtained from the said party as a security indemnity.
(iii) It is seen that there was default in respect of both these advances as soon as the loans were claimed to have been granted to theses parties since assessee Company never received any money including interest income from these parties, which shows that the amounts even if paid by assessee company to these parties, were not in the nature of loans and advances made in ordinary course of assessee ‘s business of financing. It is also evident that there was no due diligence carried out by the assessee company, prior to granting of loan and advances to thee parties, nor any security /undertaking/pledge of any assets was made by assessee against the loans and advances granted to these parties. In fact, in absence of traceability of one of the parties Bhagyam Industries on any database shows that the amounts even if advanced were not in ordinary course of Assessee Company’s business.
(iv) On perusal of the loan agreements entered into with the loanee by Assessee Company, it is seen that the same are very cursory and neither notarized nor registered documents. Further, even the stamp paper used for agreement with Bhagyam Industries is dated 09.07.2009 whereas the loan agreement is pre- dated to 06.06.2009.
(v) Assessee company never deposited the cheque obtained from Dolphin Metal (I) Ltd. nor any legal proceedings initiated against the both the loanee parties despite having failed to recover even single rupee out of the money In fact, during the course of assessment proceedings in the case of Gopal Iron & Steels Co. (Gujarat) Ltd for the Assessment year relevant to previous year 2011-12 i.e. in subsequent to the year in which assessee claimed to have advanced the funds & became irrecoverable, it is seen that the said Dolphin Metal India Ltd had paid huge amounts of Rs. 90,38,062/- as rolling charges from April 2011 to March 2012 which proves that the debt could not have become bad at the time when assessee wrote off the amount claiming the same as irrecoverable. Hence, the claim in respect of the said party is found to be non-genuine.
3.2.3 In light of the above, it is factually evident that the amounts claimed as sundry balances written off on account of non-recoverable loans and advance made to Dolphin Metal (Industries) Ltd & Bhagyam Industries P Ltd were not made in ordinary course of assessee company’s business & hence, not allowable as deduction.
3.2.4 Notwithstanding the above, it is also pertinent to mention that assessee company’s non-recoverable loans & advances were in the nature of capital loss & hence, are not allowable as deduction against the assessee company’s revenue receipts & income taxable for the year under consideration. In this regard, reliance is placed on the following decisions:
(i) In the case of Vijaykumar Mills Ltd Vs CIT(Mad.) 247 ITR 176, it was held that if advance was not made for the purpose of the business, the same was not allowable as a deduction on its write off.
(ii) In the case of Datamatics Financial Services Ltd. Vs. DCIT 2011- TIOL-124 ITAT Mumbai, It was held that even if assessee advanced loans in the shape of ICDs and offered interest income on such deposits as business income & Memorandum of Association permitted assessee company to do business of financing of loans, the same were basically investments made by assessee out of surplus funds. Hence such deposits written off cannot be allowed as bad debt.
(iii) In the case of A. V. Thomas & Co. Ltd. Vs. CIT(SC) 48 ITR 67, the dis allowance in respect of claim for deduction on account of write off of outstanding debt was upheld on the ground that debt is an outstanding which if recovered would have swelled the profits and it is not money handed over to someone which that person has failed to return & hence, claim for write off in respect of such debt is not an allowable expenses.
(iv) In the case of Indian Aluminum Co. Ltd. Vs. CIT (SC) 79 ITR. 514 it was held that a business debt should spring from the carrying on of a business and should be incidental to it and cannot be just any loss sustained by the assessee even if has some connection with its business.
3.2.5 The facts of assessee’s case are squarely identical to the facts of the above cited decisions. Assessee company has failed the prove that the amounts were advanced in its regular course of business. Since, it failed the prove ever existence of a person/party to whom the amount was claimed to loans advanced and in respect of another through loan agreement produce, genuineness of the said agreement neither notarized nor registered, absence of any collateral securities, non-initiated any recovery proceedings against the said parties are circumstances loading to the conclusion that the amounts claimed for written off were not allowable as deduction against assessee’s total income for the year under consideration. In light of the above, the claim of assessee company for sundry balances written off on account of money advanced to Dolphin Metal (I) Ltd. Rs. 40,00,000,’- and Bhagyam Industries P. Ltd. Rs. 60,00,000/- are held to be not allowable as business deductions against the income from other sources. The entire claim of Rs. 1,00,00,000/- is hereby rejected and the amount is hereby added to the assessee ‘s total income.”
3.2. Appellant’s submission:-
The relevant extracts from the submission of the appellant are reproduced here under:-
2) “The Second ground of appeal is with regard to dis allowance of Rs. 1,00,00,000/- made by A. O. in respect of sundry balances written off during this year. It is submitted that the Appellant had advanced money of Rs. 60,00,000/- to Bhagyam Industries P. Ltd in June ,2009 and Rs. 40,00,000/- to Dolphin Metal (India) Ltd. in April, 2010 as advances in normal course of business. The copies of ledger account of both the parties from AY 2010-11 to AY 2012-13 along with bank statement highlighting entries of advances given are enclosed herewith on Page No. 4 to 9. Further the above advances given to both the parties were in the ordinary course of business to earn interest income, as the Appellant is engaged in money lending business, which can also be verified from the copy of Memorandum which is enclosed on Page No. 10 to 15. The Ld. A. O. has stated various objections on Page 4, Para 3.2.1 , which are not at all correct or relevant as under:
