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Income Tax Appellate Tribunal, DELHI BENCH ‘G’ : NEW DELHI
Before: SHRI R.K.PANDA & SHRI KULDIP SINGH
PER KULDIP SINGH, JUDICIAL MEMBER :
The appellant M/s. Triune Energy P. Ltd., New Delhi (hereinafter referred to as 'the assessee’) by filing the aforesaid appeal sought to set aside the impugned order dated 18/11/2016 passed by Ld. Commissioner of Income Tax(Appeals)-9, New Delhi qua the Assessment Year 2012-13 on the grounds inter alia that :
1. “That the learned Commissioner of Income Tax (Appeals) has erred both in law and on facts in sustaining a disallowance of Rs. 27,99,953/- representing bad debts written-off and debited under the head provision for liquidated damages in the financial statement in the instant year. 1.1 That the finding of the learned Commissioner of Income Tax (Appeals) that claim of the bad debts u/s 36(l)(vii) read with section 36(2) of the Act is an afterthought is based on misconception of facts and provision of law and therefore untenable. 1.2 That furthermore, even the conclusion that appellant has not fulfilled the condition stated in the provisions of section u/s 36(l)(vii) read with section 36(2) of the Act is misconceived and untenable; apart from being vague and not appreciating the facts and evidence on record. 1.3 That even otherwise the learned Commissioner of Income Tax (Appeals) ought to held that provision for liquidated damages is an eligible expenditure incurred wholly and exclusively for the puipose of the business of the appellant company and therefore allowable as such. 1.4 That also the conclusion that the appellant had failed to demonstrate the liability pertains to the year under consideration is not based on correct appreciation of provisions of law and facts of the appellant company; in as much as the same represented debt receivable and written-off in the instant year and thus eligible for deduction u/s 36(1) read with section 36(2) of the Act.
2. That the learned Commissioner of Income Tax (Appeals) has erred both in law and on facts in upholding the addition of Rs. 34,22,140/- being alleged deemed dividend brought to tax by invoking section 2(22)(e) of the Act.
2.1 That the learned Commissioner of Income Tax (Appeals) has failed to appreciate that statutory pre-conditions provided in section 2(22)(e) of the Act were not satisfied and therefore addition made and upheld is illegal and untenable. 2.2 That the learned Commissioner of Income Tax (Appeals) has failed to appreciate that sale of plant and machinery for consideration on deferred basis does not constitute 'loan' or 'advance' and as such section 2(22)(e) was perse wholly inapplicable. 2.3 That even otherwise since there is no actual payment, section 2(22)(e) was inapplicable and therefore invocation of section 2(22)(e) is wholly misconceived. 2.4 That furthermore the learned Commissioner of Income Tax (Appeals) has failed to appreciate that even otherwise without prejudice, no addition was warranted in the hand of the appellant on account of alleged deemed dividend u/s 2(22)(e) of the Act and as such addition sustained is perse misplaced and untenable. It is therefore, prayed that it be held that, addition/disallowance sustained are not in accordance with law and therefore may kindly be deleted and appeal of the appellant company be allowed.
2. Briefly stated the facts necessary for adjudication of the controversy at hand are: the assessee was into the business of design, engineering and consultancy services during the year under assessment. The AO noticed from schedule 23 of operating and other expenses that provision for liquidated damages of Rs. 27,99,953/- have been claimed as expense. Declining the contention raised by the assessee AO proceeded to make disallowance of Rs. 27,99,953/- on the ground that the liability in respect of this expenditure has not crystallized during the year under assessment.
3. AO further noticed from the assessment proceedings of Triune Project Pvt. Ltd. (TPPL) that they have received an amount of Rs. 34,22,140/- from the assessee. Noticing that Shri Binoy Jacob was having substantial interest both in TPPL and the assessee company, the amount of Rs. 34,22,140/- is treated as deemed dividend u/s 2(22)(e) of the Act and thereby made disallowance of Rs. 34,22,140/-.
4. The assessee carried the matter before Ld. CIT(A) who has confirmed the disallowance by partly allowing the appeal. Feeling aggrieved the assessee has come up before the Tribunal by way of filing the present appeal.
We have heard the ld. DR, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.
GROUND No. 1 6. First question raised by assessee is that Ld. CIT(A) has erred in confirming the disallowance of Rs. 27,99,953/- representing bad debts written off and debited under the head provision for liquidated damages in the financial statement of the year under assessment.
Undisputedly nature of the amount due which becomes unrecoverable from the customers against various jobs performed by the assessee in the course of business of the assessee is not in dispute. It is pleaded case of the assessee before the Ld. CIT(A) that amount of Rs.6,32,230/- on account of liquidated damages was short paid by the Indian Oil Corporation in 2009 qua which dispute was raised with the customer and remained unrecoverable as the project was going on. In AY 2012-13, the year under assessment the assessee written off the sum being time barred. Similarly amount of Rs. 21,53,250/- was short paid by Oil Indian Ltd. and same was shown as unrecoverable in its books pending adjudication by the committee set up to examine the same. On pronouncement the decision of the committee in 2012-13 rejecting the assessee’s claim, the amount of Rs. 21,53,250/- was written off as irrecoverable. Similarly amount of Rs. 14,500/- was written off by the assessee on account of short payment by HPCL during the year under assessment as same was irrecoverable and as no ongoing project could be used to recover the amount.
The Ld. AR for the assessee contended that the Ld. CIT(A) has not examined aforesaid facts rather rejecting the claim on the grounds inter alia that claim of bad debts u/s 36(1)(vii) and 36(2) of the Act is an afterthought as no such claim was made before the Assessing Officer; that the claim of the assessee qua payment of liquidated damages is the nature of penalty which is not allowable expenses and the assessee has not fulfilled the condition laid down u/s 36.
We are of the considered view that when nature of the amount due has not been disputed by the revenue authorities being irrecoverable from the customers against various jobs carried out by the assessee in the course of business nor disputed the explanation given by the assessee before the Ld. CIT(A), aforesaid deductions is eligible for claim during the year under assessment.
Hon’ble Apex Court in case cited as T.R.F. Ltd. vs. CIT reported in 323 ITR 397, set at rest the controversy at hand by laying down the following ratio :-
After 1st April, 1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. However, in the present case, the Assessing Officer has not examined whether the debt has, in fact, been written off in accounts of the assessee. When bad debt occurs, the bad debt account is debited and the customer’s account is credited, thus, closing the account of the customer. In the case of Companies, the provision is deducted from Sundry Debtors.
Furthermore Ld. AR for the assessee drew our attention toward Circular dated 30.05.2016 issued by CBDT to clarify as to how the issue of allowability of bad debt that are written off as a unrecoverable in the accounts of the assessee is to be decided which is extracted as under :-
Proposals have been received by the Central Board of Direct Taxes regarding filing of appeals/pursuing litigation on the issue of allowability of bad debt that are written off as irrecoverable in the accounts of the assessee. The dispute relates to cases involving failure on the part of assessee to establish that the debt is irrecoverable.
Direct Tax Laws (Amendment) Act, 1987 amended the 2. provisions of sections 36(l)(vii) and 36(2) of the Income Tax Act 1961, (hereafter referred to as the Act) to rationalize the provisions regarding allowability of bad debt with effect from the 1st April, 1989.
The legislative intention behind the amendment was to eliminate litigation on the issue of the allowability of the bad debt by doing away with the requirement for the assessee to establish that the debt, has in fact, become irrecoverable. However, despite the amendment, disputes on the issue of allowability continue, mostly for the reason that the debt has not been established to be irrecoverable. The Hon'ble Supreme Court in the case of TRF Ltd. In CA Nos. 5292 to 5294 of 2003 vide judgment dated 9-2-2010-, has stated that the position of law is well settled. "After 1- 4-1989, for allowing deduction for the amount of any bad debt or part thereof under section 36(1) (vii) of the Act, it is not necessary for assessee to establish that the debt, in fact has become irrecoverable; it is enough if bad debt is written off as irrecoverable in the books of account of assessee. "
In view of the above, claim for any debt or part thereof in any previous year, shall be admissible under section 36(l)(vii) of the Act, if it is written off as irrecoverable in the books of account of the assessee for that previous year and it fulfills the conditions stipulated in sub-section (2) of sub-section 36(2) of the Act.
5. Accordingly, no appeals may henceforth be filed on this ground and appeals already filed, if any, on this issue before various Courts/Tribunals may be withdrawn/not pressed upon.
This may be brought to the notice of all concerned.”
So far as question of treating the claim of payment of liquidated damages in the nature of penalty is concerned, when aforesaid damages are undisputedly business expenditure incurred on account of contractual default, the contractual liability cannot be treated as a penal liability.
Identical issue has been decided by Hon’ble Punjab and Haryana High Court in case of CIT vs. S.A.Builders (P) Ltd. by returning following findings :-
5. While considering a similar issue, Hon'ble the Supreme Court in Prakash Cotton Mills' case (supra) held that deduction is to be allowed where the amount is wholly compensatory in nature and where the amount is composite which contains elements of compensation and penalty then it is only the compensatory part which is allowable as a deduction and not the penal part. This Court in Murari Lal Ahuja's case (177 ITR 228 (P&H) held that where an assessee, engaged in the business of sale of cotton, having failed to fulfil the contract for supply of cotton to certain mills, settled the deal by paying a sum as compensation, the amount of compensation paid by the assessee was held to be an allowable deduction. Similar view was expressed by a Division Bench of this Court in Indo Asian Switch- Gears' case (supra) where the amount of penalty paid by the assessee therein to Punjab State Electricity Board on account of late delivery of goods was held not to be on account of infringement of law but breach of a contractual obligation and, accordingly, deductible as business expense.
Hon’ble Supreme Court in case of Prakash Cotton Mills Ltd.
vs. CIT 201 ITR 684 (SC) also decided the issue as to when the amount paid by assessee as interest or damages or penalty could be regarded as compensatory in character as would entitle such assessee to claim it as an allowable expenditure u/s 37(1) of the Act by returning following findings :-
“The decision of this court in Mahalakshmi Sugar Mills Co. ( 1980 ) 123 Itr 429 and the decision of the Division Bench of the Andhra Pradesh High Court in Hyderabad Allwyn Metal Works Ltd. ( 1988 ) 172 Itr 113 with the views of which we are in complete agreement, are, in our opinion, decisions which settle the law on the question as to when an amount paid by an assessee as interest or damages or penalty could be regarded as compensatory (reparatory) in character as would entitle such assessee to claim it as an allowable expenditure under section 37(1) of the Income-tax Act. Therefore, whenever any statutory impost paid by an assessee by way of damages or penalty or interest is claimed as an allowable expenditure under section 37(1) of the Income-tax Act, the assessing authority is required to examine the scheme of the provisions of the relevant statute providing for payment of such impost notwithstanding the nomenclature of the impost as given by the statute, to find whether it is compensatory or penal in nature. The authority has to allow deduction under section 37(1) of the Income-tax Act, wherever such examination reveals the concerned impost to be purely compensatory in nature. Wherever such impost is found to be of a composite nature, that is, partly of compensatory nature and partly of penal nature, the authorities are obligated to bifurcate the two components of the impost and give deduction to that component which is compensatory in nature and refuse to give deduction to that component which is penal in nature. The facts of the case under our consideration disclose that the Income tax Officer and the appellate authorities have refused to allow the claims made by the assessee under section 37(1) of the Income-tax Act, without any examination of the Scheme of the provisions of the Bombay Sales Tax Act, to find whether impost of the interest paid by the assessee for delayed payment of sales tax was compensatory in nature as would entitle it for deduction under section 37(1) of the Income-tax Act. The same is the position as regards the impost of damages paid by the assessee under the Employees' State Insurance Act, 1948, for delayed payment of contribution thereunder. Hence, we consider it necessary to remit the question to the concerned Tribunal for deciding the assessee's claims for deduction of interest and damages under section 37(1) of the Income-tax Act. The first question is answered accordingly.”
So in view of what has been discussed above and following the decision rendered by Hon’ble Supreme Court and Hon’ble High Court, we are of the considered view that when the damages paid by the assessee are business expenditure incurred on account of contractual liability the same cannot be treated as penal liability as has been held by Ld. CIT(A). Moreover, once it has come on record that the amount in question is irrecoverable from the customer and has been written off in the books of accounts during the year under assessment the amount is eligible for deduction u/s 36(1)(vii) of the Act as claimed by the assessee. Consequently addition made by the AO and sustained by the Ld. CIT(A) is order to be deleted.
GROUND NO. 2
AO made addition of Rs. 34,22,140/- on account of deemed dividend so as to tax the same u/s 2(22)(e) of the Act which has been sustained by Ld. CIT(A). Undisputedly Shri Binoy Jacob was the common Director having substantial interest both in assessee company as well as in TPPL. The Ld. AR for the assessee contended that the amount of Rs. 34,22,140/- was paid to TPPL by the assessee company not as a loan but being the sale proceeds of plant and machinery sold by TPPL to the assessee company. Ld. AR for the assessee further contended that he has made due disclosure of this information in Clause (d) of point no. 37 under the head related party disclosure of the audited financial statement for the period 2011-12 which are available at page 19 to 20 of the paper book, which is extracted as under for ready perusal :-
Sr. No. Particulars Amount Page no of paper book 1 Purchase of fixed 36,12,751 20 asset from Triune Projects Pvt. Ltd. 2 Expenses incurred by 2,71,286 20 Triune Projects Pvt. Ltd. on behalf of assessee Total-(A) 38,84,037 3 Sale of fixed Assets 4,39,967 20 to Triune Projects Pvt. Ltd. 4 Expenses incurred by 21,929 20 assessee on behalf of Triune Projects Pvt. Ltd. Total-(B) 4,61,896 Amount payable by assessee to 34,22,141 Triune Projects (P) Ltd.
Ld. AR for the assessee also relied upon Circular No. 19/2017 dated 12.06.2017 issued by CBDT. Ld. DR for the revenue on the other hand relied upon the order passed by Ld. CIT(A).
When it is categoric case of assessee company that TPPL as a group company had installed plant and machinery which has been rented out to the assessee who has been paying rent including the rent for plant and machinery in the preceding years and then assessee purchase the plant and machinery from TPPL at its book value the same cannot be treated as a loan, rather it is a commercial transaction between the assessee company and TPPL which does not fall within the ambit of Section 2(22)(e) of the Act. This issue has been clarified by the CBDT vide Circular No. 19/2017 dated 12.06.2017 extracted as under :-
“i) CIRCULAR NO. 19/2017 DATED 12.6.2017 issued by CENTRAL BOARD OF DIRECT TAXES N Section 2(22) clause (e) of the Income-tax Act, 196) (the Act) provides that "dividend" includes any payment by a company, not being a company in which the public are substantially interested, of any sum by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits holding not less than ten per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits.
The Board has observed that some Courts in the recent past have held that trade advances in the nature of commercial transactions would not fall within the ambit of the provisions of section 2(22) (e) of the Act. Such views have attained finality. 2.1 Some illustrations/examples of trade advances/commercial transactions held to be not covered under section 2(22) (e) of the Act are as follows:
i. Advances were made by a company to a sister concern and adjusted against the dues for job work done by the sister concern. It was held that , amounts advanced for business transactions do not to fall within the definition of deemed dividend under section 2(22) (e) of the Act. (CIT v. Creative Dyeing & Printing Pvt. Ltd.1, Delhi High Court), i) Advance was made by a company to its shareholder to install plant and machinery at the shareholder’s premises to enable him to do job work for the company so that the company could fulfil an export order. It was held that as the assessee proved business expediency, the advance was not covered by section 2(22)(e) of the Act. ii) A floating security deposit was given by a company to its sister concern against the use of electricity generators belonging to the sister concern. The company utilised gas available to it from GAIL to generate electricity and supplied it to the sister concern at concessional rates. It was held that the security deposit made by the company to its sister concern was a business transaction arising in the normal course of business between two concerns and the transaction did not attract section 2(22) (e) of the Act. (CIT, Agra v. Atul Engineering Udyog, Allahabad High Court) 3. In view of the above it is, a settled position that trade advances, which are in the nature of commercial transactions would not fall within the ambit of the word 'advance' in section 2(22)(e) of the Act. Accordingly, henceforth, appeals may not be filed on this ground by Officers of the Department and those already filed, in Courts/Tribunals may be withdrawn/not pressed upon. 4.The above may be brought to the notice of all concerned.”
In view of the facts brought on record by the assessee company before AO as well as the ld. CIT(A) that amount of Rs. 34,22,140/- paid by assessee company to TPPL was on account of sale of plant and machinery and not on account of loan and in view of CBDT Circular No. 19/2017 of 12.06.2017 the same is a commercial transactions and provisions contained u/s 2(22)(e) are not attracted.
So, we are of the considered view that tax, if any, is to be paid on this amount by the shareholder as the amount is not advance but a business transaction being sale proceeds of the sale of plant and machinery by TPPL to the assessee company. Consequently addition made by AO and sustained by Ld. CIT(A) is order to be deleted. So ground no. 2 is determined in favour of the assessee.
In view of what has been discussed above we are of the considered view that Ld. CIT(A) erred in sustaining the addition made by AO which has been ordered to be deleted. Consequently appeal filed by the assessee is hereby allowed.
Order pronounced in open court on this 17th December, 2019.