DCIT, CENTRAL CIRCLE-7(2), , MUMBAI vs. MAN INDUSTRIES (INDIA) LIMITED, MUMBAI

PER SHRI ANIKESH BANERJEE, JUDICIAL MEMBER: The instant appeal of the revenue filed against the order of the Ld. Commissioner of Income Tax-(Appeals)-49 [for brevity “Ld. CIT(A)”], order passed under Section 250 of the Income Tax Act, 1961 (for brevity ‘the Act’), for Assessment Year 2021-22, date of order 04.02.2025. The impugned order emanated from the order of the Ld. Assistant Commissioner of Income Tax-C.C.

7(2) Mumbai (for brevity ‘Ld. AO’), order passed under Section 143(3) of the Act, date of order 30.12.2022.

Ground No. 1-Disallowance of depreciation:-

“7.1. Addition of Rs 50,69,699/- has been made on account of disallowance of depreciation claimed on the portion of Withholding Tax Capitalised by the appellant. The relevant extract of the assessment order is as under:-

“ 4. Disallowance of depreciation claimed.

4.1 It was seen that the assessee-company has claimed revenue expenses of Rs.100,78,62,838/- on account of premium on redemption of Foreign Currency Convertible Bond (FCCB) during the F.Y. 2012-13. It is also seen that the Total Expenses on account of premium paid on FCCB is total Rs.124,45,40,752/- out of which Rs.23,66,77,914/- was capitalized and 15% depreciation thereon was claimed. Accordingly, after perusal of the Offering Circular, dated 22.05.2007, from the assessment records of A.Y. 2013-14, it is seen that there is a clause with respect to the taxation. As per page no. 17, page no. 65 of the said Offering Circular, it is seen that the company was supposed to withhold the required tax on the premium paid. The para 9 of page no. 65 clearly mentions that the company will bear the withholding tax only, if it exceeds 10%, that means the liability of withholding or deduction of tax upto 10% was not with the company. The bond holders were supposed to bear such withholding or deduction in respect of principal or any such additional withholding or deduction upto 10% in respect of premium. In view of this, it was seen that the company has owned up the 10% liability of bond holders which is contradictory to the Offering Circular.

4.2 Further, the company has claimed expense on account of depreciation @15% after capitalizing this 10% WHT amounting to Rs.12,40,33,655/- during the F.Y. 2012-13. In view of the above, the assessee-company was asked to explain as to why the depreciation @15% amounting to Rs. 50,69,699/- claimed during the relevant assessment year, should not be disallowed and added back to its Total Income. In response to the same, the company submitted its reply , the relevant part of which is reproduced below.

“The Company had claimed the depreciation on the portion of Withholding Tax Capitalised in the following manner and had claimed depreciation of Rs. 50,69,699/- during the A.Y. 2021-22. The yearwise claim for the same is stated as under:

A.Y. Opening WDV Depreciation @ 15% Closing WDV 2013-14 12,40,33,655 1,86,05,048 10,54,28,607 2014-15 10,54,28,607 1,58,14,291 8,96,14,316 2015-16 8,96,14,316 1,34,42,147 7,61,72,168 2016-17 7,61,72,168 1,14,25,825 6,47,46,343 2017-18 6,47,46,343 97,11,951 5,50,34,391 2018-19 5,50,34,391 82,55,159 4,67,79,232 2019-20 4,67,79,232 70,16,885 3,97,62,347 2020-21 3,97,62,347 59,64,352 3,37,97,995 2021-22 3,37,97,995 50,69,699 2,87,28,296

Further, the Company would like to inform your good self that Income Tax Appellate Tribunal, Mumbai, in Company’s own case, upholding the order of Commissioner of Income tax (Appeal) in its order no. ITA no.1490/MUM/2021. 1491/MUM/2021 And 456/MUM/2022 dated 28.10.2022 had held the aforesaid in the favor of the Company.”

4.3 The submission of the assessee company has been carefully perused and the same is found to be not acceptable. As per the offering document of FCCB, following facts emanates:

4.4 Further, as per the clause 9 of the ‘Terms and Conditions of the Bonds’ on page on 65 of the offering circular dated 22.05.2007, the facts regarding withholding of tax are again made clear and the clause 9 is reproduced as under for ready reference.

“9.1 All payments of principal and premium made by the Issuer will be made free from any restriction or condition and be made without deduction or withholding for or an account of any present or future taxes, duties, assessments or government charges of whatever nature imposed or levied by or on behalf of India or any authority thereof or therein having power to tax, unless deduction or withholding of such taxes, duties assessments or governmental charges is compelled by law.

9.2 In the event that any such withholding or deduction in respect of principal or any such additional withholding or deduction in excess of 10.00 per cent (plus applicable surcharge on such tax payable and education cess as applicable on such tax) in respect of premium is required to be made, the Issuer will pay such additional amounts as will result in the receipt by the Bondholders of the amounts which would otherwise have been receivable had no such additional amount shall be payable in respect of any bond:

9.2.1 to a holder (or to a third party on behalf of a holder) who is subject to such taxes, duties, assessments or governmental charges in respect of such Bond by reason of his having some connection with India otherwise than merely by holding the Bond or by the receipt of amounts in respect of the Bond or where the withholding or deduction could be avoided by the holder making a declaration of non-residence or other similar claim for exemption to the appropriate authority which such holder is legally capable and competent of making but fails to do so:

9.2.2 (in the case of a payment of principal and premium) if the Certificate in respect of such bonds is surrendered more than 30 days after the Relevant Dated except to the extent that the holder would have been entitled to such additional amount on surrendering the relevant Certificate for payment on the last day of such period of 30 days: or

9.2.3 where such withholding or deduction is imposed on a payment to an individual and is required to be made pursuant to European Council Directive 2003/48/EC or any other Directive implementing the conclusions of the ECOFIN Council Meeting of 26-27 November 2006 on the taxation of savings income or any law implementing or complying with, or introduced in order to conform to, such directive; or

9.2.4 Presented for payment by or on behalf of a holder who would have been able to avoid such withholding or deduction by presenting the relevant Bond to another Agent in a member state of the European Union. 9.3 References in these Conditions to principle and premium shall be deemed also to refer to any additional amount which may be payable under this condition or any undertaking or covenant given in addition thereto or in substitution therefore pursuant to the Trust Deed.”

4.5 In view of the above facts, it is clearly observed that the WHT of 10% was to be paid by the bond holders and not by the assessee-company. The WHT liability in excess of 10% was only to be paid by the assessee-company. But the company had owned up the first 10% of WHT and the same was claimed as expenditure during F.Y. 2012-13. The total expenditure allowable to the MIIL is Rs.112 crores including WHT but in actual MIIL claimed Rs.124 crores (approx). As per the contract/agreement/arrangement between the company and the bond holder, the assessee company was supposed to deduct the tax at 10% and make the remaining payment to the bond holders. In actual, the company paid approximately Rs.112 crores to the bond holders which are in excess of the actual liability as per the contract.

4.6 Accordingly, the capitalized premium claimed as capital expense by the company is not an allowable expense and the same was an extra contractual liability paid by the assessee company. The submission made by the assessee and the case laws relied upon, are of no relevance as the facts of the case are purely different. The submission of the assessee has focus on ‘whether the grossing up or net-off tax’ is allowable or not as per section 195A ‘in general’. The grossing up or net-off tax is surely allowable under 195A but only when it is in the agreement or contract between the company and the bond holder. The Offering Circular should clearly mention about the own-up of tax liability or net-off tax, and then only the section 195A is applicable. The plain reading of section 195A of the Act is as under:

Section 195A “[in a case other than that or referred to in sub-section 1A of section 192, where under an agreement] or other arrangement, the tax chargeable on any income referred to in the foregoing provisions of this chapter is to be borne by the person by whom the income is payable, then, for the purpose of deduction of tax, under those provisions, such income shall be increased to such amount as would, after deduction of tax thereon as the rates in force for the financial year in which such income is payable, be equal to the net amount payable under such agreement or arrangements”.

4.7 The section 195A itself starts “where under an agreement or other arrangement” and the section ends with “amount payable under such agreement or arrangement”. It clearly indicates that for section 195A there should be an agreement or there should be an arrangement which express that the WHT is to be borne by the company or payer. In the instant case, the clause 9 of the offer document clearly mentions that the company will bear WHT or deduction of tax only in the case of ‘excess of 10%’. Hence, the issue here is not at all legal but clearly on the facts basis. The agreement/arrangement between the MIIL and the bond holder does not permit in the first instance the owning up of WHT by the company and the same was to be deducted from the total premium of amount Rs.112 crores.

4.8 As per the agreement, the 10% WHT was to be deducted from the premium payable to the bond holders but the company paid whole of the amount to the bond holders which is clearly inconsistent with the agreement between two. The 10% WHT was to be paid by the Bond holders but instead the MIIL has paid the same after grossing up of WHT. Accordingly, the excess premium paid by the MIIL to the tune of Rs. 12,40,33,655/- is not allowed to MIIL. This excess premium was claimed as capital expenditure by the company and depreciation was debited at 15% and remaining amount was carried forward as WDV for the next year. It is seen that the depreciation claimed by the assessee company in this regard is Rs.50,69,699/- for the year under consideration.

4.9 In view of the discussion made in the preceding paragraphs, the depreciation claimed by the assessee company amounting to Rs. 50,69,699 is to be disallowed. Further, the assessee company has stated that this issue was decided in favour of the assessee in an ITAT order pertaining to an earlier year. In this regard, it is important to mention here the department has not accepted this decision of Hon’ble ITAT and has filed further appeal to Hon’ble Bombay High Court. Accordingly, Rs. 50,69,699 is disallowed and added back to the total income of the assessee for the relevant assessment year. Penalty proceedings are initiated separately under section 270A of the Act for underreporting in consequence of misreporting.

(Disallowance- Rs. 50,69,699/-)

7.1.1. Following submission was made in appellate proceedings-

The appellant is a public limited company and is engaged in the business of manufacturing and export of Large Diameter Carbon Steel Line Pipes for various high pressure transmission application for Gas, Crude Oil, Petrochemical Product and Portable Water. The appellant filed its return of income for the previous year relevant to the impugned assessment year on 01.03.2022 declaring total income of Rs.146,44,27,980/- and bonk profit at Rs. Nil. The copy of the acknowledgment of filing return of income and computation of total income for the 10 A.Y. 2021-22 is enclosed as 'Annexure - 2' (Refer page nos. 21 to 23 of paper book). The Balance Sheet and Profit & Loss Accounts as on 31.03.2021 is enclosed as 'Annexure -3. (Refer page nos. 24 to 79 of The paper book).

4.In response to the above queries, the appellant submitted that it has claimed depreciation on withholding taxes capitalised in the following manner. During the year under consideration i.e. 2021-22, the appellant has claimed depreciation of Rs.50,69,699/-. The year wise claim of depreciation is as under:

A.Y. Opening WDV Depreciation Closing WDV 2013-14 12,40,33,655 1,86,05,048 10,54,28,607 2014-15 10,54,28,607 1,58,14,291 8,96,14,316 2015-16 8,96,14,316 1,34,42,147 7,61,72,168 2016-17 7,61,72,168 1,14,25,825 6,47,46,343 2017-18 6,47,46,343 97,11,951 5,50,34,391 2018-19 5,50,34,391 82,55,159 4,67,79,232 2019-20 4,67,79,232 70,16,885 3,97,62,347 2020-21 3,97,62,347 59,64,352 3,37,97,995 2021-22 3,37,97,995 50,69,699 2,87,28,296

5.The appellant further submitted that in the similar manner the depreciation was disallowed by the learned A.0. in A.Y. 2013-14 which was challenged by the Revenue before the Hon'ble Tribunal. The Hon'ble Tribunal dismissed the appeal of the revenue in ITA No.7530/Mum/2019 vide order dated 25.11.2021. The learned A.0 also disallowed the claim of depreciation in the A.Y. 2014-15, 2015-16 and 2017-18 which was confirmed by the CIT(A). The appeals for these assessment years were travelled to the Hon'ble Tribunal and the Hon'ble Tribunal allowed the same in ITA No. 1490/Mum/2021, ITA No. 149/Mum/2021 and ITA No. 456/Mum/2022 vide order dated 28.10.2022. The ITAT order for the A,Y. 2013-14 is enclosed as "Annexure - 4' (Refer page nos. 80 to 167 of paper book) and the ITAT order for the A.Y. 2014-15, 2015-16 and 2017-18 is enclosed as 'Annexure5.(Refer page nos. 168 to 178 of paper book)

6.The learned AO., without appreciating the facts and circumstances of the case, disallowed the claim of depreciation of Rs.50,69,699/- on WDV of capitalised withholding taxes, The said disallowance has been challenged in the present appeal.

Submission

7.The Appellant submits that the appellant has withheld the taxes at the rate of 10% which is amounting to Rs.12,40,33,655/- on the premium of Rs.124,45,40,7527- paid on redemption of FCCB. In the normal course, the payer generally deducts the amount of TDS and credits the net amount to the payee's account. The TDS amount would be remitted to the credit of the payee, who can adjust the same against his tax liability. In the present case, since the appellant has borne the TDS deductible on the amount of premium payable on FCCD, the same would become additional cost to the appellant. Hence, it will go to increase the premium payable on FCCB. The appellant has capitalized a portion of premium amount, which included the above said Rs.12,40,33,655/-, amount of The amount was capitalized by the appellant in the year relevant to A.Y 2013-14 and also claimed depreciation thereon, which was disallowed by the learned A.O. in A.Y 2013-14. The learned CITIA), however. deleted the disallowance. Belns aggrieved with the order passed by learned CIT(A), the revenue preferred an appeal before Hon'ble Tribunal. The Hon'ble Tribunal dismissed the appeal of the revenue held that the appellant is entitled to claim depreciation on the capitalised withholding taxes.

"13. We notice that the tax authorities have taken the view that, as per the agreement entered by the assessee with the FCCB holders, it is liable to bear the TDS liability in excess of 10%. In the instant case, the TDS Iiability was only 10% and hence there was no contractual obligation for the assessee to bear the withholding tax (TDS liability). Accordingly, the tax authorities have taken the view that the capitalized value of withholding tax borne by the assessee is not eligible for depreciation.

7.1.2 Decision –

This issue is covered in the favour of the appellant by the decision of Hon’ble ITAT Mumbai for the AY 2013-14. Based on the decision of the Hon’ble ITAT, relief has been granted to the appellant for the AYs 2014-15, AY 2015-16 and AY 2017-18. Applying the decision of Hon’ble ITAT, For this year too, it is held that the appellant is eligible for the depreciation as claimed. The AO is directed to delete the addition of Rs 50,69,699/-“

“9. We heard the rival contentions and perused the record. The facts relevant to the issue are that the assessee has borne the TDS payable on the FCCB premium paid by the assessee. The withholding tax liability so borne by the assessee was Rs.12.40 crores. In the normal course, the TDS amount would be reduced from the amount payable to the payee and the net amount alone will be paid to him. The TDS amount will be remitted to the credit of the payee, who can adjust the same against his tax liability. In the instant case, since the assessee has borne the TDS deductible on the amount of premium payable on FCCD, the same would become additional cost to the assessee. Hence it will go to increase the premium payable on FCCB. The assessee has capitalized a portion of premium amount, which included the above said amount of Rs.12.40 crores. The amount was capitalized by the assessee in the year relevant to AY 2013-14 and it also claimed depreciation thereon, which was disallowed by the assessing officer in AY 2013-14. The Ld CIT(A), however, deleted the disallowance and hence the revenue filed appeal before the Tribunal in that year. As stated by Ld A.R, the ITAT has confirmed the order passed by Ld CIT(A), vide its order dated 25.11.2021 passed in ITA No.7530/Mum/2019, with the following observations:- “98. The issue raised in the 6th ground of appeal is against the deletion of addition of Rs.1,68,96,638/- by CIT(A) as made by the AO on account of Depreciation of claimed on account of premium. 99. During the course of Assessment Proceeding the A.O. observed that the assessee has made excess payment to the bond holder to the extent of Rs.12,40,33,655/- and accordingly deprecation on capitalized premium amounting to Rs.1,68,96,338/- was claimed by the assesse. The AO during the assessment proceedings noted that depreciation on the excess payment made to FCCB holders can not be allowed and added the same to the income of the assessee.

101.1 We note that the case of the assesse is squarely covered by the decisions in the case of Commissioner of Income Tax V. Standard Polygraph Machines (P) Ltd. (2002) 124 taxman 669 (Madras High Court) and ACIT 2(1) V. M/s. BOB Card Ltd. ITA No. 7660/Mum/2011 - Tribunal, Mumbai wherein the issue has been decided in favour of the assesse. We therefore respectfully following the ratio laid down in the above decision uphold the order of ld. CIT(A) by dismissing the ground no.6 of the Revenue's appeal.” Thus, we notice that the claim of depreciation has been allowed in the first year of claim. 10. Under these facts, it is contention of the assessee that the AO could not have disallowed in the subsequent years, since the depreciation has been allowed in the first year. We notice that the above said proposition of the assessee finds support from the decision rendered by Ahmedabad bench of ITAT in the case of Bodal Chemicals Ltd (supra), wherein it was held that the revenue, once allowed the deduction for the depreciation claimed by the assessee, then it is debarred to reject the claim of the assessee in the subsequent year on the WDV carried forward from the earlier assessment year. Though the AO had disallowed the claim of depreciation made in AY 2013-14, being the first year of claim, the same was deleted by Ld CIT(A) and the ITAT. As such the claim of depreciation made in the first year has been allowed. Hence, there is merit in the above said contention of the assessee.

Ground-2, Interest paid on TDS of Rs. 3,16,708/- 6. The Ld. DR argued and contended that that assessee paid interest which is in penal nature. So, the disallowance amount to Rs. 3,16,708/- related interest paid on TDS is justifiable.

The observation of the CIT(A) contended in following paragraphs are reproduced as below:-

“7.2. Disallowance of Interest on TDS

In the year under consideration, the Appellant has claimed expenses on of Rs 3,16,708/- in the nature of as interest on TDS. AO has held that the said amount does not assume the character of business expenditure as per section 36 of the Act and it is neither an expenditure wholly and exclusively incurred for the purpose of business and therefore the same is not an allowable expense as per the provisions of Income tax Act, 1961. Said amount was added to the income. Relevant extract of the order is reproduced as under

“5.1 During the course of assessment proceedings, it was seen that assessee had claimed an expense of Rs. 3,16,708/- in the nature of interest on TDS. In this regard, a notice u/s. 142(1) was issued to the assessee on 02.12.2022 requesting to explain why the expense claimed in respect of interest on TDS amounting to Rs. 3,16,708/- should not be disallowed. The asssessee vide letter dated 08.12.2022 submitted its reply and the same is reproduced below.

“The company humbly states that the company has deducted TDS on account of the party and deposited the same to the treasury of the government. Interest paid on account of delay in the payment of TDS by the company should not be treated as interest on income tax. Therefore, we request your learned self not to disallow Rs. 3,16,708/- on account of interest on TDS.”

5.2 The reply of the assessee is carefully perused and is found not acceptable. Interest on late payment of TDS does not assume the character of business expenditure as per section 36 of the Act. Further, interest on late deposit of TDS is neither an expenditure wholly and exclusively incurred for the purpose of business and therefore the same is not an allowable expense as per the provisions of Income tax Act, 1961. Thus, an amount of Rs. 3,16,708/- is disallowed and added back to the total income for the year under consideration. Penalty proceedings are initiated separately under section 270A of the Act for underreporting in consequence of misreporting.

7.2.1. Before me, the appellant has submitted as under-

“11.The appellant states that the interest of Rs.3,16,708/- pertains to TDS payments for the month of June-2020 across all units, the payment of which is due on 07.07.2020. The appellant further states the above- mentioned payment of TDS was done after the due date on 24.07.2020 along-with interest on late payment.

12.The appellant strongly objects to the said contentions of the learned A.0. and submits that the interest paid on account of delayed payment of TDS relates to the expenses which are claimed in the Profit and Loss Account and the TDS deducted on the said expenses were duly deposited to the Government's account. The said interest paid on late payment of TDS is compensatory in nature and the same is not penal in nature. Hence, the same is allowed under section 37(1) of the Act.

"7. We have heard the rival contentions of both the parties and perused the material available on record. In the instant case, AO has disallowed the interest expenses incurred by the assessee on account of late deposit of service tax and TDS after having reliance on the judgment of Hon'ble Supreme Court in the case of Bharat Commerce Industries Ltd. v. CIT (1998) (supra). The relevant extract of the judgment reads as under :

FACTS: During the year under consideration, the assessee failed to pay advance tax equivalent to 75 per cent of estimated tax. The Assessing Officer r levied\section 215 as well as under section 139. The assessee claimed that were payable were delayed, the assessee's financial resources increased available for purposes. Hence, the interest which was paid Government was interest on capitol that would be borrowed by the assessee otherwise. Hence, the allowed as amounts should be deduction. The High Court affirmed the view. On appeal to the Supreme Court:

HELD : When interest is paid for committing a default in respect of a statutory liability of advance tax, the amount paid and the expenditure incurred in that connection is in no way connected with preserving or promoting the business of the assessee. This is not expenditure which is incurred and which has to be taken into account before the profits of the business are calculated. The liability in the case of payment of income-tax and interest for delayed payment of income-tax or advance tax arises on the computation of the profits and gains of business. The tax which is payable is on the assessee's income after the income is determined. This cannot, therefore, be considered as an expenditure for the purpose of earning any income or profits. Interest which is paid for delayed payment of advance tax on such income cannot be considered as expenditure wholly and exclusively for the purpose of business. Under the Act, the payment of such interest is inextricably connected with the assessee's tax liability. If income-tax itself is not permissible deduction under section 37, any interest payable for default committed by the assessee in discharging his statutory objection under the Act, which is calculated with reference to the tax on income, cannot be allowed as a deduction. Therefore, it was to be held that deduction of interest levied under sections 139 and 215 would not be allowable under section 37.

In the above judgment, the claim of the assessee for interest expenses was denied as it defaulted to make the payment of advance tax as per the provisions of the Act. The advance tax is nothing but income tax only which the assessee has to pay on his income. ln the instant case the default relates to the delay in the payment of advance tax and consequently interest was charged on the delayed payment of advance tax. In the above judgment the Hon'ble Apex Court held that as Income-tax paid by the assessee is not allowable deduction and therefore interest emanating from the delayed payment of income tax (advance tax) is also not allowable deduction. However the facts of the instant case before us are distinguishable as in the case before us the interest was paid for delayed payment of service tax & TDS. The interest for the delay in making the payment of service tax & TDS is compensatory in nature. As such the interest on delayed payment is not in the nature of penalty in the instant case on hand. The issue of delay in the payment of service tax is directly covered by Court in the Case the judgment of Hon'ble Apex of Lachmandas Mathura Vs CIT reported in 254 ITR 799 in favour of assessee. The relevant extract of the judgement is reproduced below:

"The High Court has proceeded on the basis that the interest on arrears, of sales tax is penal in nature and has rejected the Contention of the assessee that it is Compensatory in nature.

In taking the said view the High Court has placed reliance on its Full Bench's decision in Saraya Sugar Mills (P.) Ltd. v. CIT [1979] 116 TTR 387 (All). The learned counsel appearing for the appellant-assessee states that the said judgment of the Full Bench has been reversed by the larger Bench of the High Court in TriveniEngg. Works Ltd. v. CIT [1983] 144 ITR 732 (All,) (FB) wherein it has been held that interest on arrears of tax is compensatory in nature and not penal. This question has also been considered by this Court in Civil Appeal No. 830 of 1979 titled Saraya Sugar Mills (P.) Ltd. v. CIT decided on 29-2 1996. In that view of the matter, the appeal is allowed and question Nos. 1 and 2 are answered in favour of the assessee and against the revenue."

In view of the above judgment, there remains no doubt that the interest expense on the delayed payment of service tax is allowable deduction.

The above principles can be applied to the interest expenses levied on account of delayed payment of TDS as it relates to the expenses claimed by the assessee which are subject to the TDS provisions. The assessee claims the specified expenses of certain amount in its profit & loss account and thereafter the assessee payment to the party deducts certain percentage as specified under the Act as and pays to the Government Exchequer. The TDS amount of TDS represents the amount of income tax of the party on whose behalf the payment was deducted & paid to Government Exchequer. Thus the TDS amount does not represent the tax of assessee but it is the tax of the party which the has been paid by the assessee. Thus any delay in the payment of TDS by the assessee cannot be linked to the assessee and income tax of consequently the principles laid down by the in the case of Bharat Commerce Hon'ble Apex Court Industries Ltd. v. CIT (1998) reported in n 733 cannot be applied to the case on hand,

14.The Appellant also relies on the decision of Hon’ble Mumbai ITAT in the case of Resolve Salvage & Fire India (P.) Ltd. vs. DCIT [2022] 195 ITD 266 (Mumbai -Trib.) wherein [18-04- 2022) wherein the Hon'ble ITAT has taken similar view and confirmed the by the Hon'ble principle laid down ITAT, Mumbai in the above decision.

Copy of decisions of Mumbai ITAT in the case of STUP Consultants (P.) Ltd. (supra) and the decision of Resolve Salvage & Fire India (P.) Ltd. (Supra) 'are Annexure '6' and. annexed herewith as (Refer pages 179 to 187 of paper book).

In view of the above submission, the disallowance of appellant requests your honour to kindly delete the interest of Rs.3,16,708/- made by the learned A0.

7.2.2. Decision Appellant has relied on number of judicial pronouncements, wherein it is held that the interest on TDS is not penal in nature but compensatory in nature and is an allowable expenditure. Considering the same, I hold that the interest on TDS is an allowable expenditure. AO is directed to delete the addition of Rs 3,16,708/-“

Ground Nos- 3,4 & 5, Bad Debt written off 8. The Ld. DR argued and contended that write off advance amount to Rs. 16cr is adjustment of accommodation entry. The Ld. CIT(A) has erred to delete the additions. The ld. AR stands in favour of the impugned assessment order. The relevant observation of the Ld. AO in impugned assessment order is reproduced as below:-

“6.9 Therefore, such expenses claimed as the bad debts written off in connection to loans and advances given to bogus companies remains unexplained and is deemed to be income of the assessee company for the year under consideration.

6.10 Further, the assessee vide letter dated 29.12.2022 raised contention that in the statement recorded on oath of Shri Rajesh Mehta dated 08.11.2019, nowhere the name of the assessee company is mentioned and thus the advances to Rajesh Mehta entities by the assessee company are not bogus in nature. This contention of the assessee company is not acceptable as in the statement of Shri Rajesh Mehta, in response to Q no 9 and Q No 10, he had accepted that the companies Basant Marketing Limited and Artlink Vintrade Private Limited were not doing any genuine business and were existing only on paper.

6.11 Therefore, on the basis of the above discussion, such unexplained expenses are hereby treated as the income of the assessee as per provisions of section 69C of the Act and is added to the total income of the assessee for the year under consideration. Penalty proceedings are initiated separately under section 271AAC of the Act.

[Addition: Rs 16,00,00,000] 22 6.12 Further, on the basis of discussion made in paragraph 6.5, 6.6 and 6.7 of this order, the expense claimed by the assessee company as bad debts written off in connection to the loans and advances to Glowing star Trading Private Limited amounting to Rs 4,50,00,000 is hereby disallowed under section 37 of the Act and is added back to the total income of the assessee for the year under consideration. Penalty proceedings are initiated separately under section 270A of the Act for underreporting in consequence of misreporting.

[Disallowance: Rs 4,50,00,000]”

“7.3.3 I have considered the discussion made in the assessment order and submissions made by the appellant. The reasons for not allowing the claim of bad debts, as per the assessment order can be summarised as under

7.3.4. The issues to be decided in the appeal are

7.3.5. The bad debts written off are allowed to be claimed as expenditure u/s 36(1)( vii) rws 36(2), which are reproduced below:

“36(1)(vii)

subject to the provisions of sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year:

Provided that in the case of an assessee to which clause (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause:

Provided further that where the amount of such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof becomes irrecoverable or of an earlier previous year on the basis of income computation and disclosure standards notified under sub-section (2) of section 145 without recording the same in the accounts, then, such debt or part thereof shall be allowed in the previous year in which such debt or part thereof becomes irrecoverable and it shall be deemed that such debt or part thereof has been written off as irrecoverable in the accounts for the purposes of this clause.

Explanation 1.—For the purposes of this clause, any bad debt or part thereof written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee.

Explanation 2.—For the removal of doubts, it is hereby clarified that for the purposes of the proviso to clause (vii)of this sub-section and clause (v)of sub-section (2), the account referred to therein shall be only one account in respect of provision for bad and doubtful debts under clause (viia) and such account shall relate to all types of advances, including advances made by rural branches;

36(2)

“ In making any deduction for a bad debt or part thereof, the following provisions shall apply—

(i) no such deduction shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year, or represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee;

(ii) if the amount ultimately recovered on any such debt or part of debt is less than the difference between the debt or part and the amount so deducted, the deficiency shall be deductible in the previous year in which the ultimate recovery is made;

(iii) any such debt or part of debt may be deducted if it has already been written off as irrecoverable in the accounts of an earlier previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year), but the Assessing Officer had not allowed it to be deducted on the ground that it had not been established to have become a bad debt in that year;

(iv) where any such debt or part of debt is written off as irrecoverable in the accounts of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year) and the Assessing Officer is satisfied that such debt or part became a bad debt in any earlier previous year not falling beyond a period of four previous years immediately preceding the previous year in which such debt or part is written off, the provisions of sub-section (6) of section 155 shall apply;

(v) where such debt or part of debt relates to advances made by an assessee to which clause (viia) of sub-section (1) applies, no such deduction shall be allowed unless the assessee has debited the amount of such debt or part of debt in that previous year to the provision for bad and doubtful debts account made under that clause.

The bad debts can be allowed as expenditure only if the said amount has been taken into account in computing the income of the earlier years. The amounts advanced to the three concerns are stated to be trade advances made for purchase of raw material. They are not in the nature of sundry debtors and therefore are not covered under the provisions of section 36(1)(vii) and 36(2) of the Act. I agree with the AO that these amounts cannot be treated as bad debts u/s 36(1)(vii) of the Act. The Appellant has cited several judicial pronouncements, wherein it is held that if trade advances, given in normal course of business, become irrecoverable, then they can be allowed as deduction u/s 37(1) r.w.s 28 of the Act. In the present case, as stated by the appellant, the trade advances were made for the purchase of raw material. However, neither the raw material was supplied nor was the amount refunded back. Therefore, the amounts were written off as bad debts. While these amounts do not qualify as bad debts u/s 36 of the Act, in light of the decisions of various Courts/ Tribunals, these amounts can be treated as a business loss to be allowed as deduction u/s 37 r.w.s 28 of the Act. Considering the discussion above, the trade advance of Rs 4,50,00,000/- given to M/s Glowing star Trading Pvt. ltd can be allowed as deduction u/s 37 r.w.s 28 of the Act.

7.3.6. In case of other two concerns, i.e., M/s Basant Marketing and M/s Artlink Vintrade Pvt. Ltd., there is an added dimension that the two concerns are said to be bogus concerns created on paper for the purpose of providing accommodation entries. Therefore, the bad debts claimed on these two advances have been disallowed as unexplained expenditure by invoking the provisions of section 69C of the Act. For the sake of reference, the Section 69C of the Act is reproduced as under:

“69C Where any financial year an assessee has incurred any expenditure and he offers no explanation about the source of such expenditure or part thereof, or explanation, if any, offered by him is not, in the opinion of the [Assessing] Officer satisfactory, the amount covered by such expenditure or part thereof as the case may be, may be deemed to be the income of the assessee for such financial year"

In the present case, the appellant has paid the advances to the said two concerns for purchase of raw material and said payment has been recorded in its books. Appellant has submitted the copy of bank statement wherein the payment is reflected. The fact that payment was made is not under dispute. It can be said that the payment was made out of the disclosed sources. Since, the concerns did not supply the material and also did not refund the amount, the Appellant has written off the advances as bad debts. It is seen that the appellant has explained the source and purpose of payment of advance and provided the reasons for claiming the same as bad debts. In my view, the section 69C is not applicable in the case. I accept the contention of the appellant that the section 69C has been wrongly invoked by the AO. Nevertheless, even though the disallowance has been made by invoking incorrect section of the Act, the CIT(A) is well within his powers to examine, whether the disallowance could be made under any other section of the Act. I have examined the issue in the light of the finding that the said two parties are bogus concerns. AO has referred to the statement of Shri Rajesh Mehta dated 08.11.2019, recorded during the course of search proceedings in the case of One world Group, wherein he has admitted that the said two parties were paper concerns used to provide accommodation entries. According to the appellant, it had believed that the said two concerns were genuine concerns and had therefore, placed the order for purchase of raw material for which it had paid the advance of Rs 8 Crores each on 20.01.2018 (FY 2017-18). Appellant had received letter dated 11.02.2019 from M/s Basant Marketing Pvt ltd, wherein it is stated that said company was not in a position to repay the amount of Rs 8,00,00,000/- and therefore it had proposed to convert the credit balance of Rs 8,00,00,000/- into Optionally Convertible Zero-Coupon Premium Bond (OCZCB). Further, vide letter dated 22.03.2019, 8000 Optionally Convertible Zero- Coupon Premium bond were allotted against full settlement of the credit balance of Rs 8,00,00,000/-. Similar letter dated 28,03.2019 was received from M/s Artlink, proposing to convert the credit balance of Rs 8 Crores into. proposal for Optionally Convertible Zero- Coupon Premium Bond. Further, vide letter dated 30.03.2019, 8000 Optionally Convertible Zero-Coupon premium bond were allotted against full settlement of the credit balance of Rs 8,00,00,000/-. Appellant has submitted the copy of letter dated 26/6/2019, written to both the concerns, wherein it has denied giving of consent for conversion of an advances into OCZCB and has alleged that the act of issuing alleged certificate without consent is fraud, cheating and criminal breach of trust. The appellant had warned the concerns that serious action including launching of a criminal complaint would be taken against them. Appellant has asked the company to refund the entire amount of Rs.9,37,55,616/- (i.e., the advance paid of Rs.8,00,00,000/- plus interest at the rate of 12% i.e. Rs.1,37,55,616/-). When the efforts to recover the amount failed, the appellant had written off the amounts as bad debts in the year under consideration.

7.3.7. From the facts before me, I find that other than the statement of Shri Rajesh Mehta, there is no other evidence to suggest that the appellant had taken accommodation entry of trade advances from the said two concerns and that the amount so paid was received back by the appellant. There is nothing on record to show that any material with respect these transactions was found during the search on the one World group. Even the statement of Shri Rajesh Mehta does not specifically cover these transactions. The search action on the One World group took place on 08.11.2019. The correspondence between the appellant and the said two concerns regarding the refund of the money had taken place before 8/11/2019. Considering the overall facts and circumstances of the case, the contention of the appellant that it had paid the trade advance believing the parties to be genuine, appears to be acceptable. Therefore, the trade advances paid to these two concerns is treated at par with the Trade advance paid to M/s Glowing star Trading Pvt ltd. 7.3.8. Considering the overall facts and circumstances of the case, it is held that the Trade advances of Rs 20.50 Crores, were paid in the normal course of business and since they had become irrecoverable, can be allowed as business loss u/s 28 rws 37 of the Act.” 10. We have heard the rival submissions and perused the material available on record. The Revenue has challenged the relief granted by the Ld. CIT(A) in respect of depreciation of Rs.50,69,699/- on the WDV of capitalised withholding tax, interest of Rs.3,16,708/- on delayed payment of TDS, and trade advances aggregating to Rs.20.50 crore written off by the assessee.

Ground No. 1 raised by the Revenue is dismissed.

Accordingly, Ground No. 2 raised by the Revenue is dismissed. 29

Accordingly, Ground Nos. 3 to 5 raised by the revenue are dismissed.

Order pronounced in the open court on 21st day of August 2026 Sd/- Sd/- (BIJAYANANDA PRUSETH) (ANIKESH BANERJEE) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai,िदनांक/Dated: 21/08/2026 SAUMYA Sr.PS Copy of the Order forwarded to: 1. अपीलाथ�/The Appellant , 2. �ितवादी/ The Respondent. 3. आयकरआयु� CIT 4. िवभागीय�ितिनिध, आय.अपी.अिध., मुंबई/DR, ITAT, Mumbai 5. गाड�फाइल/Guard file. BY ORDER, //True Copy// (Asstt. Registrar), ITAT, MUMBAI