AVISTA CORPORATE FINANCE ADVISORY P.LTD MUMBAI vs ITO 3(1)(1) MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH ‘A’ BENCH BEFORE SHRI B.R.MITTAL(JUDICIAL MEMBER) AND SHRI B.RAMOKOTAIAH (ACCOUNTANT MEMBER) ITA No.3078/Mum/2011 Assessment Year: 2004-05 Avista Corporate Finance Advisory Pvt ltd., 706, Maker Chambers-V, Nariman Point, Mumbai-400 021 PA No.AACCC 0111B ITO 3(1)(10, Aayakar Bhavan, M.K.

Road, Mumbai. (Appellant) Vs. (Respondent) Appellant by : Shri Niraj Sheth Respondent by: Ms Neeraja Pradhan Date of hearing: 30.8.2012 Date of pronouncement: 26 .9.2012 ORDER Per B.R.Mittal, JM: The assessee has filed this appeal for assessment year 2004-05 against order dated 9.2.2011 of ld CIT(A)-7, Mumbai on following grounds: “1.

That on the facts and circumstances of the case and in law, ld CIT(A) has erred in confirming the disallowance made by AO in respect of irrecoverable advances of Rs.5,677,904 made to CFL in the course of its business.

2.

That on the facts and circumstances of the case and in law, ld CIT(A) has erred in sustaining the levy of interest under section 234C of the I.T.Act, 1961.” 2.

In respect of ground No.1 of appeal, relevant facts are that assessee is engaged in the business of providing corporate finance advisory services basically related to preparation of presentational material including information memorandums/placement documents, structuring of projects and liasioning with institutions/investors/banks with a view to help companies/clients raise necessary resources for their business/expansion needs.

The assessee filed return of income declaring total loss of Rs.14,53,436.

ITA No.3078/Mum/2011 Assessment Year: 2004-05 2 Assessee declared income at Rs42,24,550 as per provisions of section 115JB of the I.T.Act.

Assessee claimed deduction of irrecoverable advances written off of Rs.56,77,904 in the computation of income filed alongwith the return of income.

Assessee stated that it entered into a Memorandum of Undertaking (MOU) with M/s.

Credential Finance Ltd. nance Ltd. (CFL) to source mandates and transactions for the company in consideration of fees/brokerage as CFL had good contacts with various mid & small size corporates.

Assessee Company stated that it was making on account payments to CFL for its continued services and the brokerage was adjusted against this advance.

It is stated that at the end of financial year 2001-02, there was an advance with CFL of Rs.56,77,903.

A winding up petition was filed during the financial year 2002-03 against CFL due to liquidity problems and the Hon’ble High Court appointed an Official Liquidator.

Since the advances were not recovered, the same were written off and claimed as deduction.

The AO considered the submissions of assessee and stated that assessee has claimed deduction of advances written off.

He stated that as per provisions of section 36(1)(vii) r.w.

S.

36(2), the deduction for written off of bad debts could be allowed only if the debt had been taken into account while computing the income of the assessee in any earlier year.

Further, the advances/loans can be allowed to be written off in cases of assesses who are involved/engaged in the business of banking or money lending.

AO stated that neither the said amount claimed to be written off as bad debt had been taken into in computing the income of the assessee in earlier year nor assessee is in the business of banking or money lending.

Hence, claim of the assessee does not fall within the ambit of provisions of section 36(1)(vii) r.w. s 36(2) of the Act.

AO further stated that there is no evidence on record to make such advances given to CFL was incidental to business.

AO has stated that CFL was more or less involved in fund raising by bill discounting.

Assessee has not given any advance for this purpose but for canvassing business transactions on brokerage or fees basis.

Hence, said advance cannot be said to have been given to CFL in the normal course of business activity. activity.

AO after considering cases cited by assessee before him held that the impugned amount of Rs.56,77,903 is purely on capital account and not allowable as a revenue loss or expenditure.

Accordingly, claim of the assessee of Rs.56,77,903 was disallowed by the AO.

Being aggrieved, assessee filed appeal before ld CIT(A).

ITA No.3078/Mum/2011 Assessment Year: 2004-05 3 3.

Ld CIT(A) has confirmed the action of AO.

He has stated that the appointment of Official Liquidator for CFL does not make any difference as it only confirms the plea of the assessee that the amount is not recoverable.

The said amount is not a genuine allowable business loss to the assessee.

He has further stated that it cannot be considered as normal business practice to give advance for brokerage.

A business entity gives brokerage on earning an income through a broker and the brokerage is given after earning such income.

Ld CIT(A) has held that advance was not part of regular business activity of the assessee.

Hence, assessee is in further appeal before the Tribunal.

4.

At the time of hearing, ld A.R. made his submissions on the lines of submissions made before the authorities below.

He submitted that assessee got business through CFL and referred pages 166 to 168 of PB.

He submitted that in the financial year 2000- 2001 relevant to A.Y.

2001-02, assessee paid brokerages of Rs.55,70,231 to CFL.

In the financial year 2001-02, relevant to assessment year 2002-03, assessee paid brokerage of Rs.9,11,200.

He submitted that assessee made advance in financial year 2001-02 to CFL of Rs.56,77,903 over and above brokerage of Rs.55,70,231 paid to CFL.

He submitted that the said advance could not be recovered as the Official Liquidator was appointed on 7.3.2003.

Ld A.R. submitted that the advance was given in the normal course of business activity to CFL.

Hence, non-recovery of the said advance is normal business loss to the assessee and same should be allowed as deduction. deduction.

To substantiate his submission, he relied on the following decisions: i) CIT vs Crescent Films (P) Ltd., 248 ITR 670(Mad); ii) CIT vs.

F.M.Chinoy & Co.

Ltd., 74 ITR 780(Bom); iii) CIT vs.

M/s.

DCM Shriram Consolidated Ltd(2012-TIOL-577-HC-DEL-IT.

Ld A.R. submitted that the sum written off be allowed as business loss to the assessee.

5.

On the other hand, ld D.R. supported the orders of authorities below.

He submitted that assessee claimed the said amount as bad debt but conditions laid down under section 36(2) of the Act are not satisfied.

She further submitted that the amount written off cannot be allowed as business loss because assessee has not given advance ITA No.3078/Mum/2011 Assessment Year: 2004-05 4 in its normal activity of business.

She submitted that assessee is not in the money lending business.

She submitted that orders of authorities below be confirmed and cases cited by ld A.R. are not applicable to the facts of the case.

6.

We have considered submissions of ld representatives of parties and orders of authorities below.

We have also gone through the cases cited by ld A.R. it is a fact that assessee is engaged in the business of providing corporate finance advisory services basically related to preparation of presentational material including information memorandums/placement documents, structuring of projects and liasioning with institutions/investors/banks with a view to help companies/clients raise necessary resources for their business/expansion needs.

Assessee stated that it entered into a MOU with CFL as CFL had good contacts to introduce clients to the assessee.

We observe that assessee entered into an understanding in the financial year 2000-2001.

It is observed that assessee paid brokerage to CFL of Rs.55,77,231.

It is the first year of the said MOU entered into by the assessee with CFL.

Ld A.R. submitted that it gave advance of Rs.56,77,903 to CFL in financial year 2001-02 over and above brokerage of Rs. age of Rs.9,22,200 for the business received.

No documents have been placed on record that the said advance of Rs.56,77,903 was given by the assessee to CFL in the ordinary course of its business activity or it was just an accommodation provided by the assessee to CFL.

We observe that the Official Liquidator was appointed on 7.3.2002 in a winding petition No.265/1997.

Hence, the year in which assessee entered into MOU with CFL and/or the year in which said advance of Rs.56,77,903 was given to CFL; CFL was in financial problem and was facing winding up proceedings before the Hon’ble High Court.

The above facts clearly establish that the said advance was given by the assessee to CFL not in the ordinary course of its business but as an accommodation advance to CFL.

No documents have been placed on record for giving such advance to CFL particularly when assessee has paid brokerage of Rs.9,11,200 to CFL separately for the business it received from CFL.

Considering the facts, we are of the considered view that the said advance was given by the assessee to CFL not in the ordinary course of its business but as an accommodation for the reasons not substantiated by any documentary evidence on record, particularly when CFL was facing winding proceedings before the Hon’ble High Court.

The case relied upon by ld A.R. of Hon’ble Madras High Court in the case of CIT vs Crescent Films (P) Ltd (supra) is not relevant to the case before us.

We ITA No.3078/Mum/2011 Assessment Year: 2004-05 5 observe that in the said case, the money was lent by the assessee to a film producer to enable him to complete the film.

The money was lent by an arrangement.

In that case, it was held that it was a trading loss and assessee was entitled to deduction u/s.37 of the I.T.Act.

In the case before us, no facts have been brought on record that assessee advanced a sum of Rs.56,77,903 to CFL in connection with any business benefit to the assessee which became irrecoverable.

7. erable.

7.

Similarly the case of Hon’ble Bombay High Court in the case of F.M.Chinoy & Co.

Ltd (supra) is not applicable as in that case, assessee was carrying on business to act as managing agents to various companies.

The assessee was appointed by an agreement as managing agents of a company for a period of 20 years and pursuant to this agreement, assessee made advance of money to the said company from time to time.

Assessee also stood guarantor for certain loans advanced by banks to the said company.

The said company became in financial difficulty and ultimately went into liquidation and the assessee written off the amount in their books of account.

In that context, it was held that assessee company incurred loss in the course of its business and the loss was deductible.

In the case before us, it is not the case that assessee company gave advance to CFL for the purpose of any business activity as no documents have been placed on record.

We have held that assessee had given advance to CFL just to accommodate CFL and hence, written off cannot be said to be a business loss to the assessee which could be allowed u/s.37 and/or 28 of the Act.

8.

Similarly the case of Hon’ble Delhi High Court in the case of M/s.

DCM Shriram Consolidated Ltd (supra) is not applicable to the facts of the case as in that case assessee made advance to supplier of raw materials for uninterrupted supply.

Assessee failed to recover the advance given and in that context, it was held that the said amount was a business loss which was allowable u/s.28 of the Act.

9.

In view of above, we hold that ld CIT(A) has rightly held that the claim of the assessee to write off the advance of Rs.56,77,903 made to CFL is not allowable as deduction either under section 36(1)(vii) or u/s.37 or u/s 28 of the Act.

Hence, we uphold the order of ld CIT(A) by rejecting ground No.1 taken by assessee.

ITA No.3078/Mum/2011 Assessment Year: 2004-05 6 10.

In respect of Ground No.

Ground No.2 of appeal, no submissions were made by ld A.R.

Hence, Ground No.2 of appeal is rejected.

11.

In the result, appeal filed by assessee is dismissed.

Pronounced in the open court on 26th September, 2012 Sd/- (B.RAMAKOTAIAH) Accountant Member Sd/- (B.R.

MITTAL) Judicial Member Mumbai, Dated 26th September, 2012 Parida Copy to: 1.

The appellant 2.

The respondent 3.

Commissioner of Income Tax (Appeals)7,, Mumbai 4.

Commissioner of Income Tax, 3 , Mumbai 5.

Departmental Representative, Bench ‘A’ Mumbai //TRUE COPY// BY ORDER ASSTT.

REGISTRAR, ITAT, MUMBAI