COMMI. OF IT-II, CHD vs. M/S PB AGRO FOODGRAINS CORP LTD CHD

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ITA/146/2011HC Punjab & HaryanaPHHC01095461201118 September 2014Bench: MR. JUSTICE SURINDER GUPTA,MR. JUSTICE ASHUTOSH MOHUNTA5 pages
AI SummaryDismissed

What did the High Court hold?

The High Court held that the Tribunal's approach was not erroneous. The Court found substance in the assessee's submission that the FCI had refused to release payment for gunny bags, which the assessee had written off as irrecoverable in its books. The Tribunal had correctly concluded that the amount was in the nature of bad debts under Section 36(1)(vii) of the Act and that the conditions were met. The Tribunal's reasoning, supported by the Supreme Court's decision in TRF Limited, was that it is sufficient for a bad debt to be written off as irrecoverable in the assessee's accounts to justify the claim under Section 36(1)(vii). The Tribunal also noted that the debt ought to have formed part of income declared in an earlier year, as per Section 36(2). The Court rejected the Revenue's argument that the nomenclature 'Prior Period Expenses' negated the write-off, emphasizing that the focus is on the act of writing off the debt as irrecoverable in the accounts, not the terminology used for the account head. Therefore, the appeal was dismissed, with the substantial question of law answered against the Revenue.

What were the facts?

The Revenue appealed to the High Court under Section 260A of the Income Tax Act, 1961, against an order of the Income Tax Appellate Tribunal (ITAT) dated September 29, 2010. The ITAT had allowed the assessee's appeal for assessment years 2006-07, concerning a disallowance of prior period expenses amounting to ₹28,14,733/-. The Assessing Officer (AO) had disallowed these expenses, which related to short recoveries from the Food Corporation of India (FCI) on account of the sale of gunny bags of wheat (₹10,63,469/-) and paddy (₹17,51,264/-). The Commissioner of Income Tax (Appeals) [CIT(A)] had upheld this addition. The assessee, a Punjab Government undertaking, had debited these amounts as prior period expenses, which the AO considered should have been written back. The ITAT, however, allowed the assessee's claim.

What were the issues?

1. Whether, in the facts and circumstances of the case and in law, the ITAT was justified in allowing the appeal of the assessee on account of disallowance of prior period expenses amounting to ₹28,14,733/-? (Question of law) Assessee's Contention: The assessee argued that the amounts written off represented irrecoverable debts. The Tribunal found that the amounts were in the nature of bad debts under Section 36(1)(vii) of the Act and that the conditions prescribed thereunder were complied with. The Tribunal relied on the Supreme Court's decision in TRF Limited, stating that it is sufficient for the debt to be written off as irrecoverable in the assessee's accounts, and not necessary to prove it has actually become irrecoverable. Revenue's Contention: The Revenue contended that the short recovery from FCI on account of the sale of gunny bags could not be allowed in the current assessment year. The Revenue further argued that debiting the Profit and Loss account under the head 'Prior Period Expenses' does not amount to a write-off for the purposes of Section 36(1)(vii) of the Act.

Which sections of the Income-tax Act were involved?

Section 260A,Section 36(1)(vii),Section 36(2)

AI-generated summary — verify with the full judgment below

ITA No.146 of 2011(O&M) 1 IN THE HIGH COURT OF PUNJAB AND HARYANA AT

CHANDIGARH ITA No.146 of 2011 (O&M) Date of decision: 18.9.2014 Commissioner of Income Tax II, Chandigarh ……Appellant Vs. M/s Punjab Agro Foodgrains Corporation Limited …..Respondent CORAM: HON’BLE MR. JUSTICE AJAY KUMAR MITTAL HON’BLE MR. JUSTICE FATEH DEEP SINGH Present: Ms. Urvashi Dhugga, Advocate for the appellant.

Mr. Maninder Arora, Advocate for the respondent. Ajay Kumar Mittal,J. 1. This appeal has been preferred by the revenue under Section 260A of the Income Tax Act, 1961 (in short, “the Act”) against the order dated 29.9.2010, Annexure A.3 passed by the Income Tax Appellate Tribunal, Chandigarh Bench 'A' (in short, “the Tribunal”) in ITA No.220/Chandi/2010 for the assessment years 2006-07, claiming following substantial question of law:- “Whether in the facts and circumstances of the case and in law the ITAT was justified in allowing the appeal of the assessee on account of disallowance of prior period expenses amounting to ` 28,14,733/-?” 2. A few facts relevant for the decision of the controversy involved as narrated in the appeal may be noticed. The assessee is a Punjab GURBAX SINGH 2014.11.04 17:51 I attest to the accuracy and integrity of this document High Court Chandigarh

ITA No.146 of 2011(O&M) 2 Government undertaking engaged in the business of contract farming, procurement of foodgrains, marketing and export etc. During the course of assessment proceedings, the Assessing Officer noticed that the assessee had debited prior period expenses to the extent of ` 30,27,495/- which did not relate to the year under consideration. These expenses were required to be written back while computing the income for the year under consideration. However, the assessee had not done the same. After considering the reply of the assessee, the Assessing Officer vide order dated 26.12.2008, Annexure A.1 disallowed expenses of ` 28,14,733/- being prior period expenses i.e. ` 10,63,469/- on account of sale of gunny bags of wheat and ` 17,51,264/- on account of sale of gunny bags of paddy. Aggrieved by the order, the assessee filed appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. Vide order dated 16.11.2009, Annexure A.2, the CIT(A) partly allowed the appeal. However, the addition of ` 28,14,733/- on account of prior period expenses was upheld. The assessee filed further appeal before the Tribunal. Vide order dated 29.9.2010, Annexure A.3, the Tribunal allowed the appeal. Hence the instant appeal by the revenue. 3. We have heard learned counsel for the parties and perused the record. 4. According to the learned counsel for the revenue, the amount of short recovery of earlier year amounting to ` 10,63,469/- and ` 17,51,264/- from Food Corporation of India on account of sale of gunny bags carrying wheat and paddy respectively could not be allowed in the current assessment year. The aforesaid contention was controverted by the learned counsel for the assessee. 5. We find substance in the submission of learned counsel for the GURBAX SINGH 2014.11.04 17:51 I attest to the accuracy and integrity of this document High Court Chandigarh

ITA No.146 of 2011(O&M) 3 respondent-assessee. The FCI had refused to release the payment to the assessee in respect of gunny bags which was written off by the assessee as irrecoverable in its books of account in the year under consideration and therefore, the assessee was entitled for deduction of the said amount. The Tribunal had come to the conclusion that the amount was in the nature of bad debts under Section 36(1)(vii) of the Act and the conditions prescribed thereunder stood complied with. The Tribunal while accepting the claim of the assessee had noticed as under:- “6. We have considered the rival submissions carefully. From a perusal of the orders of the lower authorities and material on record, it is evident that the claim in question, which is debited in the Profit and Loss Account under the head 'Prior Period Expenses' is on account of short recoveries made from FCI. In an earlier year of 2004-05, assessee made sales to FCI and FCI was shown as a 'debtor'. The amounts short received from FCI have been written off during the year by way of debit to Profit and Loss Account under the head 'Prior Period expenses'. As per assessee, it tantamounts to be an irrecoverable debt written off in the books of account. The Hon'ble Supreme Court of India in the case of TRF Limited (supra) in the context of Section 36(1) (vii), as amended w.e.f 1.4.1989 has observed that it is not necessary for the assessee to establish that the debt, infact has become irrecoverable. It is enough that the bad debt is written off as irrecoverable in the accounts of the assessee to justify the claim under section 36(1)(vii) of the Act. Applying that ratio to the facts of the present case, it is evident that a part of the debt due from FCI has been written off as irrecoverable by way of debit to the Profit and Loss Account. Further, it also satisfies the relevant condition prescribed in section 36(2) of the Act that such debt ought to have formed a part of the income declared in an earlier year. The copies of bills and vouchers placed in the paper book at pages 12-42 GURBAX SINGH 2014.11.04 17:51 I attest to the accuracy and integrity of this document High Court Chandigarh

ITA No.146 of 2011(O&M) 4 clearly evidence the fact that the debts in question are on account of sale of gunny bags to FCI in the earlier financial year of 2004-05. Infact, such a fact position has been specifically pleased before the lower authorities and the same has not been refuted at any stage. Considering the said aspects, we find that the plea of the assessee for dis-allowability of such claim in terms of Section 36(1)(vii) read with Section 36(2) of the Act is on sound footing. 7. On this aspect, learned DR contended that the debit to the Profit and Loss account under the head 'Prior Period Expenses' cannot tantamount to write off as understood for the purposes of Section 36(1)(vii) of the Act and therefore, the plea of the assessee is not tenable. We have carefully examined the contention raised by the learned DR and find no force in the same. Section 36(1)(vii) of the Act provides for deduction, in computing the income of an amount of any bad debt or part thereof, which is 'written of as irrecoverable in the accounts of the assessee for the previous year.” Further, in the explanation below section 36(1)(vii), it is provided that any bad debt or part thereof written off as irrecoverable in the accounts of the assessee shall not include any provision for and doubtful debts made in the accounts of the assessee. A reading of the said provision clearly brings out the intention of the legislature to allow deduction wherever an amount of any bad debt is written off as irrecoverable in the accounts of the assessee. In this case, it is evident that the debt due from FCI has been written off in the books of account. Merely because the debit in the Profit and Loss Account is made under the head 'Prior Period expenses' would not distract from the fact that the debt has been written off as irrecoverable in the accounts of the assessee. Then emphasis in Section 36(1)(vii) is on writing off the debit in the accounts of the assessee and not on terminology nomenclature of the account head debited in the Profit and Loss account. Therefore, in our view, the objection of the learned DR does not impinge on plea of the assessee of having written off the GURBAX SINGH 2014.11.04 17:51 I attest to the accuracy and integrity of this document High Court Chandigarh

ITA No.146 of 2011(O&M) 5 said amount as irrecoverable within the meaning of section 36 (1)(vii) of the Act. Therefore, having regard to the facts and material on record, we find the claim of the assessee for deduction of the impugned sum while computing its income for the year under consideration is tenable. Accordingly, we set aside the order of the CIT (Appeals) and direct the Assessing Officer to delete the addition.” 6. We do not find any error in the approach adopted by the Tribunal. The substantial question of law is answered against the revenue. Consequently, the appeal stands dismissed. (Ajay Kumar Mittal) Judge September 18, 2014 (Fateh Deep Singh) 'gs' Judge

GURBAX SINGH 2014.11.04 17:51 I attest to the accuracy and integrity of this document High Court Chandigarh

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