THE ITO, WARD-8(4),, AHMEDABAD vs. VISHAL PLASTOMERS PVT. LTD.,, AHMEDABAD

The assessee filed appeal against the order to the Ld. CIT(A), who partly allowed the assessees appeal, confirming the disallowance of bad debts, the addition made u/s 41(1) of the Act and the disallowance of legal and professional fees paid by the assessee while deleting the rest of the additions/disallowances. Aggrieved by the same both the assessee and the revenue have come up in appeal before us.

The grounds raised by the asssesee read as under:-

Both the lower authorities erred in holding that appellant derived benefit/advantage on account of arbitration award from the outstanding liabilities by analysing details of other income ignoring the accounts of the parties submitted to substantiate receipt from them offered in computation of total income in earlier years. Ld. CIT (A) ought to have deleted disallowance.

Confirming levy of interest u/s 234A/234B/234C & 234D is not justified. 7. Initiation of penalty u/s 271(1)(c) of the Act is not justified.”

The order of the Assessing Officer reveals the facts relating to the issue as the assessee having made claims of bad debts during the impugned year amounting in all to Rs.17,58,42,082/-. During assessment proceedings the assessee was asked to justify its claim in accordance with the provision of section 36(1)(vii) of the Act r.w.s. 36(2) of the Act, as to whether the bad debt related to amount treated as income in any of the preceding years. In response to the same the assessee submitted details of bad-debts, from which the AO noted that part of the bad debts written off, represented loans and advances i.e. they were not taken into consideration in computing the income of the assessee in any of the years. The assessee was asked accordingly to justify the claim of bad debts in terms of the provision of section 36(2) of the Act, which allowed claims of bad debts only if they represented income accounted for by the assessee. The assessee in response submitted that the loan and advance written off represented amounts given to various parties for procurement of goods and services and since the transaction could not be completed due to various reasons and & 1782/Ahd/2014 [Vishal Plastomers Pvt. Ltd.] A.Y. 2009-10 - 5 – circumstances beyond control of the parties, and the amount having become irrecoverable, the said advances were written off. He also contended that certain loans and advances represented expenses of legal and professional expenses, consultancy etc. which by oversight had been debited to bad debts account and therefore assessee contended that the amount representing these loans and advance claimed as bad debts expenses were otherwise allowable as business expense u/s. 37 of the Act. The AO however did not agree with the contention of the assessee and went on to disallow all loans and advances claimed as bad debts by the assessee which amounted in all to Rs.3,90,76,843/- on the ground that the assessee had failed to fulfill the conditions of section 36(2) of the Act, and these amounts did not represent any income accounted for by the assessee which had subsequently turned bad for recovery.

Before the Ld. CIT(A) the assessee reiterated the contentions made before the A.O., that these amounts claimed as bad debts were allowable u/s 37 of the Act as business loss. But the Ld. CIT(A) rejected the assessee’s contention and confirmed the order of the A.O., upholding his reasoning that the assessees claim u/s 36(1)(vii) of the Act, was not allowable since the assessee had failed to comply with the conditions stipulated u/s 36(2) of the Act. The findings of the Ld. CIT(A) are at page 30-31 in para 5.3 of his Order reads as under:-

Before us, Ld. Counsel for the assessee contended that out of the total claim of bad-debt disallowed amounting to Rs.3.90 Crores, Rs.1.95 Crores represented bad debts occurring on account of trading in precious metal by the assessee. In this regard he first drew our attention to paper book at page 20, which was the audited annual accounts of the assessee for the impugned year and contained details of traded goods by the asesssee during the impugned year. From the same Ld. Counsel for the assessee pointed out that assessee traded in precious metal purchasing 737 kgs. of the same during the year amounting to Rs.100,53,51,036/-. Thereafter, he drew our attention to the details of bad debts claim not allowed to the assessee placed at page-51 of the paper book. From the same he pointed out Rs.1.95 Crores represented the balance of Pujan Impex written off. Our attention was drawn on the paper book at page no. 78, which is the copy of the account of Pujan Impex for the impugned year. From the same it was pointed out that while the same showed an opening credit balance of Rs.2.64 Crores, the assessee during the impugned year had sold precious metal to it being gold, amounting in all to Rs.4.60 Crores, resulting in a debit balance in the account of Pujan Impex of Rs.1.95 Crores, which was thereafter shown as written off during the year. The Ld. Counsel for the assesse therefore contended that out of bad debt claim disallowed by the AO, Rs.1.95 Crores represented income accounted for by & 1782/Ahd/2014 [Vishal Plastomers Pvt. Ltd.] A.Y. 2009-10 - 9 – the assessee during the impugned year itself. That therefore, the necessary conditions of section 36(2) of the Act, was clearly fulfilled in the case of this balance was written-off by the assessee of Rs. 1.95 Cr and disallowance of the same therefore for non-fulfillment of conditions specified u/s 36(2) of the Act was grossly unjustified and against law.

With respect to the remaining amount written off. Ld. Counsel for the assessee reiterated the contention made before the lower authorities that the same represented advances made during the course of business which were written off as irrecoverable, and therefore allowable as business loss u/s 37(1) of the Act. Reliance was placed on the following judicial decisions in support of its contentions:

Ld. DR on the other hand relied on the order of the authorities below.

We have heard both parties, have gone through the orders of authorities below and have considered the documents and the case laws to which our attention was drawn during the course of hearing.

Before us Ld. Counsel for the assessee has fairly demonstrated that out of the total amount of Rs.3.90 Crores so disallowed, an amount of Rs.1.95 Crore fulfilled the conditions specified u/s 36(2) of the Act. He has demonstrated from the various document filed in the paper book that the amount of Rs. 1.95 crores, being the debit balance of one Pujan Impex, represented debts on account of sale of precious metals to the said party which was written off during the year. From the ledger account of the said party the assessee has fairly demonstrated having accounted for the sales made to the said party during the year. Thus, the assessee has sufficiently demonstrated Rs. 1.95 Crores pertaining to M/s Pujan Impex claimed as bad debts, representing income duly accounted for by the assessee. The Ld. DR was unable to controvert the factual contention of the Ld. Counsel for the assessee. In the light of the same, we have no hesitation in holding that the assessee claim of bad debts amount to Rs. 1.95 Crores was in accordance with law and allowable to the assessee.

As for the remaining amount we have noted that the disallowance has been made by the CIT(A)/AO in complete disregard to the assessees contention before it. As is evident from the orders of the authorities below, the assessee had repeatedly stated the remaining amount to represent advances made during the course of carrying out business. The assessee had clearly & 1782/Ahd/2014 [Vishal Plastomers Pvt. Ltd.] A.Y. 2009-10 - 11 – stated so before the AO which is evident from the para 5.2 of the order as under:-

Even before the Ld. CIT(A) the assessee had reiterated these contentions which are noted in the finding of CIT(A) reproduced above in our order. But despite so, both the revenue authorities have failed to consider the plea of the assessee and adjudicated the allowability of claim of the bad debts in terms of the provisions of section 36(1)(vii) r.w.s. 36(2) of the Act. The Ld. Counsel for the assessee has drawn our attention to various judicial decisions holding that business advances written off during the year are allowable u/s & 1782/Ahd/2014 [Vishal Plastomers Pvt. Ltd.] A.Y. 2009-10 - 12 – 37(1) of the Act. In the light of the same since the authorities below have failed to consider the plead of the assessee despite all facts in relation to the same being brought to their notice, we agree with the assessee that the remaining claim of bad debts of approximately Rs.2 crores disallowed u/s 36(1)(vii) of the Act is allowable to the assessee u/s 37(1) of the Act.

Ground of appeal no. 1 and 2 is accordingly allowed.

Brief facts relating to the issue are that during assessment proceedings the AO noted credit balances outstanding in the books of the assessee from the past three years amounting to Rs.6,06,53,992/- on account of which the assesee failed to submit any confirmation of the balances. Accordingly, he treated the liability represented by these credit balances to have ceased to exist and added the same to the income of the assessee u/s 41(1) of the Act. Further, the AO noted that in the case of Suzlon Energy Ltd., Suzlon Green Power Pvt. Ltd. certain amounts to have been waived by settlement on account of arbitration order, amounting to Rs. 1,59,44,864/-. This amount was treated as liability ceasing to exist and subjected to tax u/s 41(1) of the Act. Thus, in all a total addition of Rs. 7,65,98,856/- (60653992+15944864/-) was made to the income of the assessee u/s 41(1) of the Act.

The Ld. CIT(A) deleted the addition made of Rs.6.06 Crores on account of credits found to be outstanding for more than three years, while he confirmed the addition made on account of waiver of certain amounts by & 1782/Ahd/2014 [Vishal Plastomers Pvt. Ltd.] A.Y. 2009-10 - 13 – settlement / arbitration order by Suzlon Green Power Pvt. Ltd. and Suzlon Energy Ltd, amounting to Rs 1.54 Crores

The asessee has challenged the confirmation of addition to the tune of Rs. 1.54 crores while the Revenue in its appeal has challenged the order of the Ld. CIT(A) deleting the addition made u/s 41(1) of the Act, to the tune of Rs. 6.06 Crore.

In the assessses appeal we shall be dealing with the confirmation of addition u/s 41(1) of the Act to the tune of Rs. 1.54 Crores.

The Ld. Counsel for the assessee contended that the waiver of liability as per the terms of settlement with Suzlon had been explained both to the A.O. and Ld. CIT(A) as duly accounted for in the books of the assessee. In this regard he drew our attention to para 8.9 of the A.O.’s order, wherein these facts were pointed out.

He further drew our attention to the explanation given to the Ld. CIT(A) at page 21 of his order as under:

Before us Ld. Counsel for the assessee pointed out that the fact of the matter was that assessee had purchased Wind Mill from Suzlon but the performance of the same was not satisfactory on account of the short generation of electricity. The assessee therefore he contended had debited Suzlon on account of short generation of electricity over the preceding assessment years and credited income, from F.Y. 2004-05 upto the F.Y. 2008- 09 pertaining to the assessment year impugned before i.e. A.Y. 2009-10, resulting in a debit balance of Rs.1,60,44,864/- outstanding in the account of Suzlon Energy Ltd. This ultimately was settled by arbitration, on account of which the amount of deposit of Suzlon of Rs. 83,00,000/- retained by the assessee was directed by the arbitral award to be not returned and to be set off against the amount payable by Suzlon. Suzlon was further directed to issue a cheque of Rs. 1 Lakh in full and final settlement. Thus the arbitral award settled the claim of Rs. 1.60 Crore outstanding in the name of Suzlon in the books of assessee at Rs.84,00,000/-. The assessee pointed out that there was & 1782/Ahd/2014 [Vishal Plastomers Pvt. Ltd.] A.Y. 2009-10 - 15 – another claim payable by the assessee to Suzlon amounting to Rs.11,77,862/- which was also written off against the dues of Suzlon and net remaining of Rs. 58,39,002/-was the loss suffered by the assessee, which the assesse reduced from its income in the impugned assessment year. All these facts were demonstrated to us from the copy of ledger account of Suzlon placed before us at paper book page no. 83 to 92. Ld. Counsel for the assesse therefore contended that whatever was waived by the assessee was not any credit balance of Suzlon, but in fact, was debit balance and the arbitral award alongwith its consequences, duly accounted for in the books of the assessee. That the Revenue authorities had misunderstood the transactions recorded in the ledger account of Suzlon.

The Ld. DR was unable to controvert the factual contention of the Ld. Counsel for the assessee, though he relied heavily on the order of the authorities below.

We have heard the rival contention and have also carefully gone through the documents to which our attention was drawn.

We find merit in the contention of Ld. Counsel for the assessee that there is no case at all on facts to make addition of Rs. 1.60 Crores on account of alleged waiver of liability of Suzlon by the assessee. The Ld. Counsel for the assessee has clearly demonstrated from the ledger account of the Suzlon that the amount waived by settlement / arbitration was in fact the debit balance of Suzlon and not a credit balance representing any liability. It has been demonstrated that the assessee had accounted income in its books of accounts which was outstanding for recovery as debit balance and the same being & 1782/Ahd/2014 [Vishal Plastomers Pvt. Ltd.] A.Y. 2009-10 - 16 – contested by the other party was ultimately settled by way of arbitration, the assessee being awarded recovery of the part of the amount outstanding while the balance was written off as its business loss. All these facts are clearly coming out from the ledger account of Suzlon which we have noted was filed by the assessee to the revenue authorities below. It is not the case of the revenue at all that the amount waived by the assessee by way of settlement / arbitration represented a credit balance. The assessment order records the fact that the A.O. noted the fact of waiver by way of settlement, from the accounts of Suzlon. There is no fact recorded of this representing any credit balance, nor has the Ld. DR been able to demonstrate to us. In the light of the same we completely agree with the Counsel for the assessee that the addition made u/s 41(1) of the Act of Rs. 1.60 Crores as cessation of liability on account of amounts written-off in the accounts of Suzlon is grossly unjustified, based on incorrect appreciation of facts and we direct the same to be deleted.

Ground of appeal No.4 is accordingly allowed.

Ground of Appeal No. 5 relates to the disallowance of claim of legal and professional fees amounting to Rs.16,61,490/-

Ld. DR however relied on the order of authorities below

Having heard both the parties, it is an admitted fact that the legal and professional expenses of Rs. 16.61 lacs disallowed were in relation to a property sold by the assessee in the preceding year. Therefore, clearly the same is not allowable to the assessee in the impugned year as Revenue expense u/s 37(1) of the Act as claimed by the assessee. However noting the fact that the profit earned from the said property was returned to tax in the preceding year, the impugned expenses were liable to be set off against the same and surely therefore there is no loss to the Revenue if the expenses are allowed in the impugned year. The entire exercise therefore being a revenue neutral exercise, the AO is therefore directed to allow the claim of impugned legal & Professional expenses of Rs. 16,61,490/-

Ground of appeal No.5 is allowed.

In effect, appeal of the assessee is allowed.

The grounds of appeals raised by the Revenue read as under:-

GROUND NO.1 relates to the issue of disallowance made by AO u/s 40(a)(ia) of the Act amounting to Rs. 15,01,561/- which was deleted by the Ld. CIT(A).

The facts relating to the issue are that the A.O., on the basis of details available in the tax audit report, found that the assessee though deducted TDS out of professional fee, but the same was deposited beyond the due of deposit. Accordingly, he treated the asssesee as an assessee in default as per section 200(1) of the Act and made disallowance of such expenditure u/s 40(a)(ia) of the Act amounting to Rs.15,01,561/-. & 1782/Ahd/2014 [Vishal Plastomers Pvt. Ltd.] A.Y. 2009-10 - 19 – 41. Ld. CIT(A) deleted the disallowance noting the amendment made to section 40(a)(ia) of the Act, which warranted no disallowance of expenses if the TDS was paid before the due date of filing of return of income u/s 139(1) of the Act. The Ld. CIT(A) referred to the decision of the Hon’ble Calcutta High Court in the case of CIT vs Virgin Creations GA 3200/2011 and ITAT Ahmedabad order in the case of Alpha Projects Society Pvt. Ltd. vs DCIT in holding the amendment to section 40(a)(ia) of the Act to be curative and hence retrospective in operation and noting the fact in the case of the assessee that the TDS though deposited late had been deposited before the due date of filing of return of income u/s 139(1) of the Act, he directed the A.O. to delete the disallowance made u/s 40(a)(ia) of the Act.

Before us Ld. Counsel for the assessee pointed out that this proposition of law relied upon by the Ld.CIT(A) now stood affirmed and settled by the decision of Hon’ble Apex Court in the case of CIT Vs. Calcutta Export Company (2018) 93 taxmann.com 51 (SC) holding the amendment to section 40(a)(ia) by Finance Act, 2010 to the retrospective in nature. Copy of the order was placed before us.

Ld. DR was unable to point out any distinction on facts or law in the decision of the Hon’ble Apex Court .

In the light of the same we see no reason to interfere in the order of CIT(A), deleting the disallowance made u/s 40(a)(ia) of the Act of Rs. 15,01,561/- since admittedly it is in accordance with the proposition of law settled by the Hon’ble apex court in the case of Calcutta Exports(supra). Ground of Appeal No. 1 of the Revenue is dismissed.

In effect, the appeal of the Revenue is dismissed.

In the combined result, appeal filed by the Revenue is dismissed, whereas appeal filed by the assessee is allowed.