DCIT, NEW DELHI vs. M/S. MENARINI RAUNAQ PHARMA LTD., NEW DELHI

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ITA 2944/DEL/2014Status: DisposedITAT Delhi28 February 2019AY 2005-068 pages

In favour of the assessee: the Revenue's appeal was dismissed. From the AI summary of this appeal.

AI SummaryDismissed

What did the Tribunal hold?

The Tribunal upheld the CIT(A)'s decision, finding that the assessee had provided sufficient evidence for the sales returns and that the sales tax paid on these returns was a legitimate business loss. The foreign exchange loss was also allowed based on Supreme Court precedent.

What were the facts?

The Assessing Officer (AO) disallowed sales returns of Rs. 6,11,59,512/-, sales tax paid on these returns amounting to Rs. 40,88,589/-, and foreign exchange loss of Rs. 66,55,166/-. The assessee claimed the sales returns were due to fictitious sales by executives and subsequent recovery of goods. The CIT(A) deleted these additions.

What were the issues?

Whether sales returns were genuine and supported by evidence, and whether foreign exchange losses on foreign currency loans are allowable.

Which sections of the Income-tax Act were involved?

Section 68

AI-generated summary — verify with the full judgment below

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Income Tax Appellate Tribunal, DELHI BENCH ‘E’ : NEW DELHI

Before: SHRI KULDIP SINGH & SHRI M.L.MEENA

For Respondent: Ms. Rinku Singh, Sr. DR
Hearing: 06.02.2019

PER KULDIP SINGH, JUDICIAL MEMBER : The appellant Dy. Commissioner of Income Tax, New Delhi (hereinafter referred to as 'the revenue') by filing the aforesaid appeal, sought to set aside the impugned order dated 12/02/2014 passed by Ld. Commissioner of Income Tax(Appeals)-IX, New Delhi qua the Assessment Year 2005-06 on the grounds inter alia that :

1.

“1. Whether in the fact and circumstances of the case & in law, the Ld. CIT(A) erred in deleting the disallowance of Rs. 6,11,59,512/- made by the AO on account of bogus ‘Sales Return’ after grossly ignoring the fact that assessee has failed to prove the genuineness of its claim? 2. Whether in the fact and circumstances of the case & in law, the Ld. CIT(A) erred in deleting the addition of sales tax paid on ‘Sales Return’ by the AO by ignoring the fact that the same could be allowed for the year in which sale has been actually made/booked by the assessee? 3. Whether in the fact and circumstances of the case & in law, the Ld. CIT(A) erred in deleting the foreign exchange loss of Rs. 66,56,166/- by6 entirely relying on the submission of the assessee and completely ignoring the reasons given by the assessing Officer? 4. That the order of the Ld. CIT(A) is erroneous and is not tenable on facts and in law.

5. That the grounds of appeal

are without prejudice to each other.

6. That the appellant craves leave to add, alter, amend or forgo any ground(s) of the appeal raised above at the time of the hearing.”

2. Briefly stated that facts necessary for adjudication of the controversy at hand are : Assessee is into the business of manufacturing of medicines having licensing agreement and trading of Pharmaceutical product. AO noticed that the assessee has reduced sales during the year under assessment by showing sales return of the amount of Rs. 6,11,59,512/-. Declining the contention raised by the assessee that reduced sales is on account of medicine not sold and having been returned back reached the conclusion that the assessee has tried to reduce the sales by not making corresponding addition in the closing stock and thereby made an addition of Rs. 6,11,59,512/-.

3. Assessee also debited amount of sale tax on sales return amounting to Rs. 40,88,589/- to the P & L Account which has also been added to the taxable income of the assessee by the AO on the ground that the same shall be allowed as reduction in the year goods are sold of. AO also made addition of Rs. 66,55,166/- debited by the assessee to the P & L Account on account of foreign exchange loss by the treating the sum as notional loss.

4. Assessee carried the matter before the Ld. CIT(A) by way of filing the appeal who has deleted addition by partly allowing the appeal.

Feeling aggrieved the revenue has come up before the Tribunal.

5.

Ground no. 1

It is the case of the assessee that sales executives in order to earn the incentives have shown fictitious sales which came to the notice of the company when receivables has piled up and the assessee has not received any payment. Alleged fictitious sales were noticed for the period of April, 2004 to July 2004. Then the assessee has recovered goods worth Rs. 6,11,59,512/- lying with the transporters.

6.

Undisputedly auditors have not made any comment on the appropriateness of the sales because the return sale was not included in the closing inventory. It is also not in dispute that during the assessment proceedings the assessee had furnished party wise details from which unsold goods were returned back along with copy of sales return invoices on sample basis. The Ld. CIT(A) brought on record the fact that the assessee has not been provided an opportunity to explain the party wise details of returned goods for which he has fix the date of hearing as 06.12.2007 but proceeded to frame the assessment on 29.11.2007.

However, during the appellate proceeding the Ld. CIT(A) called the remand report.

7.

The Ld. CIT(A) on the basis of remand report and rejoinder filed by the assessee has rightly reached the conclusion that the sale return for a period of 4 months from April, 2004 to July, 2004 has been duly supported with evidence that it occurred due to malpractices carried out by the sales representatives and missing items have been recovered from the transporter. Moreover it was not case of the AO that sales and sale returns are not supported by actual physical stock or there was an unaccounted cash receipt in the hands of the assessee for the unaccounted sale.

8.

Moreover the assessee has submitted party wise details of “sales return” during financial year 2004-05 and details of valuation of sellable goods out of returned goods included in the closing stock as on 31st March, 2005 which has been duly examined by Ld. CIT(A). Assessee has duly proved before the CIT(A) that out of total quantity of the sale return during the year under assessment approximately 40.3% quantity of such stock was resold and approximately 22.4% of quantity was included in the closing stock being sellable goods in the subsequent years and remaining quantity of approximately 37.3% was claimed as expired / damaged stock which was not included while computing the value of the closing stock as on 31st March, 2005.

9.

So when sale returns has been duly proved with physical stock available with the assessee, the Ld. CIT(A) has rightly decided the issue in favour of the assessee that the same cannot be added as unexplained income. So we find no illegality or perversity on the findings of facts returned by Ld. CIT(A), hence, ground no. 1 is determined against the revenue. 10. Ground no. 2

Ld. CIT(A) deleted the addition of Rs. 40,88,589/- made by the AO on account of sale tax return. In the remand report AO stated that since the sale have actually not been made the liability of sale tax and the claim of same is not allowable. However, it is the case of the assessee that at the time of making the sale the assessee has debited the account of party with value of sales and sale tax, thus, the assessee has made payment of sales tax to the Government. However, when the goods were recovered by the assessee, the sales tax paid by the assessee was never recovered and the assessee has written of the amount of sales tax as bad debt. When the factum of sales return has been proved in favour of the assessee and payment of sale tax by the assessee on the said fictitious sales is not disputed, the Ld. CIT(A) has rightly allowed the sale tax paid on sales return as business loss. So we find no illegality or perversity in the findings returned by Ld. CIT(A), hence, ground no. 2 is determined against the assessee.

10.

Ground no. 3

AO disallowed foreign exchange fluctuation loss of Rs. 66,55,166/- on the ground that the loss on exchange loss is only notional loss and is not a real loss. However, Ld. CIT(A) deleted the addition by Ld. CIT(A) by relying upon decision rendered by Hon’ble Supreme Court of India in case cited as CIT vs. Woodward Governor India Pvt. Ltd. (2009) 312 ITR 254 (SC). It is case of the assessee that it had taken a foreign currency loan of EUR 1,500,000 during FY 2002-03 and other loan of EUR 700,000 during FY 2003-04 from its parent Berlin Chemie AG, Germany for working capital requirement and the foreign exchange loss is on account of reinstatement of revenue items at the balance sheet date.

When the factum of availing of the aforesaid loan is not disputed by the revenue then why the loss on account of exchange differences on revenue items arising on foreign currency transactions has to be treated as income / expenses during the year under consideration. So, Ld. CIT(A) has rightly deleted the addition on account of foreign exchange loss by following the decision rendered by Hon’ble Supreme Court in CIT vs. Woodward Governor India Pvt. Ltd. case. So, ground no. 3 is determined against the revenue. Ground no. 4, 5 and 6 are general in nature, hence, need no 11. specific findings.

12.

In view of what has been discussed above, present appeal filed by the revenue is hereby dismissed.

Order pronounced in open court on this 28th February, 2019.

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