DATA INFOSYS LIMITED,ALWAR vs. DCIT, ALWAR

आयकर अपीलीय अधिकरण] जयपुर न्यायपीठ] जयपुर IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR Jh dqy Hkkjr] U;kf;d lnL; ,oa Jh foØe flag ;kno] ys[kk lnL; ds le{k BEFORE: SHRI KUL BHARAT, JM & SHRI VIKRAM SINGH YADAV, AM vk;dj vihy la-@ITA No. 58/JP/2014 fu/kZkj.k o"kZ@Assessment Year :2008-2009 cuke M/s Data Infosys Ltd. DCIT (Hqrs.), Alwar Vs. Plot No.20,21,22, Old Industrial Area, Alwar (Raj.) LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AAACD 5376 M vihykFkhZ@Appellant izR;FkhZ@Respondent vk;dj vihy la-@ITA No. 137/JP/2014 fu/kZkj.k o"kZ@Assessment Year :2008-2009 cuke The ACIT, Circle-2, M/s Data Infosys Ltd. Vs. Alwar Plot No.20,21,22, Old Industrial Area, Alwar (Raj.) LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AAACD 5376 M vihykFkhZ@Appellant izR;FkhZ@Respondent

fu/kZkfjrh dh vksj ls@ Assessee by : Shri P.C. Parwal (C.A.) jktLo dh vksj ls@ Revenue by : Shri R.A.Verma (Addl. CIT) lquokbZ dh rkjh[k@ Date of Hearing : 07/03/2017 mn?kks"k.kk dh rkjh[k@Date of Pronouncement: 09/05/2017

vkns'k@ ORDER

PER: VIKRAM SINGH YADAV, A.M.

2 ITA No. 58 &137/JP/2014 M/s Data Infosys Ltd. vs.DCIT(Hqrs.), Alwar

These are cross appeals filed by the assessee and the Revenue

against the order passed by the ld CIT(A), Alwar dated 04.12.2013 for

A.Y. 2008-09. The effective grounds of appeal are as under:-

Ground of assessee’s appeal:-

“1. The Ld. CIT(A) has erred on facts and in law in confirming not allowing the business loss of Rs.66,91,250/- claimed on account of short/excess recovery, recovered by Axis Bank Ltd. and ICICI Bank Ltd.

“1. That the commissioner of Income Tax (Appeals), Alwar has erred in law as well as on the facts and circumstances of the case in deleting the addition of Rs.7,69,315/- made by AO on a/c of deferred revenue expenditure even when the claim was covered in terms of provisions of section 35D.

3 ITA No. 58 &137/JP/2014 M/s Data Infosys Ltd. vs.DCIT(Hqrs.), Alwar

Our Retail Banking Dept., in consultation with out Jaipur branch has brought the following to our information and issuing a legal notice for recovery of outstanding dues of Rs. 1.16 Crores, payable by your

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company to the bank. These amounts represent the dues of internet payment gateway transaction of your company.

You have represented to out bank that you are an IT Solutions provider to the M/s Rajasthan Tourism Development Corporation (RTDC). You have sought the Axis Bank’s internet payment Gateway facility to process transactions for/on behalf of RTDC. As per the letter dated 19.09.2003 given by our of M/s RTDC, you are authorized to act on RTDC’s behalf for internet based bookings of RTDC’s resorts and holiday packages through RTDC website. Thereafter, you were activated on the payment Gateway facility on 29 Dec. 2006 and accordingly an agreement date 11 Dec 2006 is signed to that effect by and between your company and the bank. The terms and conditions of the said agreement is binding on your company and enforceable in a court of law.

The details of financial transaction done by your company is as under. Your company have, till date, processed a total business volume of Rs. 47,663,725.00 through the Bank’s IPG.

The table below contains the summary of business settled by your company since inception till 14th June 2007. Month No. of Txns Amount, INR Jan-07 1,313 5,012,619.00 Feb-07 1,138 3,207,281.00 Mar-07 1,458 4,179,847.00 Apr-07 1,271 5,136,029.00 May-07 1,953 17,064,239.00 June-07 (1st to 14th ) 1,343 13,063,710.00 Total 8,476 47,663,725.00

The bank examining the details realized that the volumes coming in were abnormal. A large number of charge backs also started coming in for “Card Account Misuse” reason. As at 03 October 2007, a total of

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1,569 number of charge backs were received aggregating to an amount of about Rs. 1,81,84,405.51.

Thereupon the acquiring business with your company was suspended pending scrutiny, from 14th June 2007.

The IPG Agreement with our company Ltd. had been executed with the bank to allow the processing of transactions for an on behalf of RTDS (according to basic documentation given by your company at the time of applying for the IPG),

Our bank’s internal analysis and investigations at RB Dept. Revealed that without the Bank’s express consent, your company were also selling its own products i.e. internet Telephony cards through the IPG, though the Bank was led by our company into believing that the IPG would be used for making RTDC’s holiday resorts booking.

Apparently, customers of your company used many compromised credit card numbers to procure internet Telephony cards. These internet Telephony Cards procured through your company website were exhausted and the legitimate cardholders raised chargebacks/ disputes upon receiving their card statements, wherein they were billed for these wrongful transactions. It is also evident that your company did not take adequate precautions and efforts to ascertain the credentials and identity of their internet customers and were evidently interested only in mass marketing of these internet Telephony cards. Thus your company has aided and abetted these transactions through negligence and careless attitude. The Card numbers used by your company customers obviously belonged to other individuals. The respective Card issuing Banks approved these transactions. When these transactions were billed to the originals cardholders, they disputed the same as per the recourse available to them.

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It may be noted that in Card-Not-Present (CNP) scenario such as mail orders or internet transactions, mere approval of transactions by the issuing Bank does not constitute the acceptance of the same by the Cardholder. It is the merchant’s i.e., your company’s primary responsibility to ensure that they are dealing with genuine cardholder/s alone.

In the aforesaid facts and circumstances, it is contended that- a) The total business settled by our company since inception till 14 June’07: Rs. 4.76 Crores. b) The business by your company on behalf of RTDC is: Rs. 2.25 Crores approximately. c) Total amount suspected fraud is: Rs. 2.51 Crores (c=A-B above) d) Total chargeback received as at 03 October 2007: Rs. 1.83 Crores, e) Amount recovered so far by the Bank from your company: Rs. 66.91 Lakhs. f) Amount payable to the Bank from your company: Rs. 1.16 Crores.

As a result of this, our Bank through its various officials, repeatedly called upon you to regularize your account from time to time. However, in spite of the repeated request, your company failed and neglected to pay the amount overdue to the Bank, even though at every point you gave assurance and promises to do so. In view of the defaults and breach of contracts committed by your company, our Bank hereby demands the outstanding dues of Rs. 1.16 Crores payable by our company to the Bank.

By this notice, we hereby do and call upon you to pay forthwith pay an aggregate sum of Rs. 1.16 Crores with SEVEN DAYS from the date of receipt of this notice, falling which we shall be constrained to initiate necessary recovery/legal proceeding against your company, which will be entirely at your risks, costs and consequences, which please note.”

The assessee was specifically required to furnish the complete details of these transactions with Axis Bank and ICICI Bank and the working of

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short recovery of Rs. 54,74,250 as claimed. The assessee was also required to produce complete books of accounts for verification and state the present position of the legal dispute. Further, the assessee was required to explain as to whether any claim/suit was filed against RTDC or any other party. The assessee was also requested to prove the allowability of the claim. In this regard, the assessee has submitted a written reply on 29.12.2010 stating as under:

“The said claim of deduction of Rs. 54,74,250 is on account of the services rendered by the assessee company to the RTDC (Ranthambore National Park). In lieu of rendering the services the assessee company is getting the commission. The assessee company is collecting the booking amount from the customers whosoever intends to visit Ranthambore National Park and remitted it back to RTDC, since the Ranthambore National Park was under its aegis. All the above transaction is transacted through Axis bank and the customers are making the payments through credit cards. In the financial year 2007- 2008, due to Gurjar agitation and on account of Hon’ble Rajasthan High Court’s order, the movement of the visitors to Ranthambore National Park was suspended for a short while and the customers withdraw their money back from their credit card service bank and the credit card service bank recovered the amount from Axis bank and ICICI Bank. Both the bankers in turn debited the refund amount to the extent of available amount in the account of the assessee company. The assessee company, after deducting the commission earned of Rs. 12,17,000 on such services, a net amount of Rs. 54,74,250 has been claimed as deduction (Rs. 66,91,00-12,17,000). In support of the claim we are filing a copy of legal notice shedding the light on the recovery of amount by the bankers and the reply given by the company. The assessee company is having the regular business transaction with the RTDC and also with a fear of losing the business or chances of getting black list by them, the claim for the said recovery could not be made from them. The assessee company has lodged the claim and entangled on legal front with the bankers for the recovery of amount and

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whenever the said amount are recovered the same will be considered as an income.”

The AO considered the facts of the case mentioned in the legal notice of Axis Bank and also perused the reply of the assessee dated 23.11.2007 to the legal notice dated 08.11.2007 and stated that the said legal notice and reply shows that the assessee has not accepted the claims of Axis Bank in this regard. As per the assessee it has lodged the claim and entangled on legal front with the bankers for recovery of the amount. However no documentary evidence in this regard has been filed. The assessee has also not filed the complete details in this regard & has not disclosed full facts. After the query on the above points the assessee has also not produced the account books. Therefore, the facts are not fully crystallized and are not verifiable. The assessee was required to furnish present status of the assessee’s case. The necessary details were not produced. Looking to the facts of the case it cannot be said that the amount of Rs. 66,91,000 (Rs. 54,74,250+12,17,000=Rs. 66,91,250) claimed to have been recovered by the bank was crystallized. It is pertinent to mention here that the assessee has debited net amount of Rs. 54,74,250 in the P&L account and commission receipts of Rs. 12,17,000 in the trading account. It is evident that the assessee has prematurely claimed these expenses. Since the assessee failed to substantiate its claim, the expenses to the tune of Rs. 66,91,250 were disallowed and added to income of the assessee company. 2.1 On appeal, the Ld. CIT(A) confirmed the disallowance of Rs. 66,91,250 made by the AO and his relevant findings are as under:- “5.8 I have carefully considered the submissions made in this regard and find that this claim made by the Bank against the appellant has arisen due to the following reasons:

(a) The appellant carried out the business of sale of internet telephony cards, the activity for which it was not authorized to do so. As per the terms of the agreement, it was engaged to make bookings for and on behalf of RTDC.

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(b) The said activity becomes illegal, ultra-vires and as outside the purview of the scope of the contract entered into in this behalf.

5.9. In view of the above discussion, I uphold the action of the AO in making the disallowance under this head on account of the following reasons:

(i) The liability on account of claim made has not still crystallized and thus is at best only a contigent liability. The accounting principles mandate a disclosure with regard to the same in the books of account as per Schedule-VI of the companies Act is concerned. It has not been accepted by the appellant also and is being vehemently contested.

(ii) No deduction under the Income Tax Act is permissible as regards a contigent liability is concerned.

(iii) the amount payable by the appellant, if any is on account of contravention of contractual obligations and therefore is in the nature of a penal liability for which no deduction could be claimed under the provisions of the IT Act.

(iv) The said expenditure is also not allowable as a deduction u/s 37 of the IT Act. Further, I do not agree with the remand report of the AO wherein it is stated that as regards claimed made by the company for bad debts of commission income to the tune of Rs. 12,17,000/- may be allowed. On the other hand in the same remand report the AO has proposed for disallowance of Rs. 66,91,250. In response to the query in the course of appellate proceedings regarding the present status of the claim, it was informed that it is still pending before the Courts at the admission stage and has not been admitted till today.

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5.10. Considering the material available on record and reasons given above, I confirm the disallowance of Rs. 66,91,250 made by the AO under this head.”

2.2 During the course of hearing, the ld AR submitted that the issue which arise for consideration is whether the loss incurred by the assessee is on account of contravention of contractual obligation and thus a penal liability not allowable under the Act and whether the amount of Rs.66,91,250/- recovered by Axis Bank from the assessee is a crystallised liability or a contingent liability.

2.3 It was submitted that the assessee in course of its business has entered into Internet Gateway Merchant Agreement dt. 11.12.2006 with Axis Bank whereby the assessee was allowed to conduct buying and selling activities from its website and recover credit/debit cards payments for the same over the internet. Therefore, as per this agreement there was no restriction that assessee would only receive the payment of the customer is respect of transaction with RTDC. Therefore, finding of the Ld. CIT(A) that the assessee also carried out transaction of internet telephonic cards through this payment gateway and thus that the activity become illegal, ultra virus and outside the scope of the contract and is a penal liability is incorrect and on this account, the claim of deduction of the amount recovered by the bank cannot be disallowed.

It was further submitted that the another contention of the lower authorities that the claim of deduction made by the assessee on

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account of recovery of Rs.66,91,250/- by the bank is premature and contingent is also incorrect. This is because as per the legal notice dt. 08.11.2007 send by the bank, it demanded Rs.1.83 crores from the assessee and since Rs.66.91 lacs was already recovered, the legal notice was issued for Rs.1.16 crores. In course of appellate hearing, assessee filed order of Mumbai Debt Recovery Tribunal dt. 25.08.2009 whereby the assessee was held to be liable to make payment of Rs.1.22 crores to the bank. Thereafter, on Miscellaneous Application filed by the assessee, the order dt.25.08.2009 was recalled and vide order dt. 24.03.2010, assessee was required to deposit a sum of Rs.20 lacs on or before 31.03.2010. All these facts shows that as on 31.03.2008 the liability of the assessee was certain. As Rs.66.91 lacs is already recovered by the bank and the liability is certain ,though it disputed the further claim of Rs.1.16 crores made by the bank in the legal notice, the assessee as a matter of prudence rightly claimed the amount of Rs.66.91 lacs in the P&L A/c which is allowable as a business loss. The Supreme Court in case of Dr. T.A. Qureshi Vs. CIT 287 ITR 547 has held that business loss are allowable on ordinary commercial principles in computing profit and therefore the heroine seized and confisticated as a part of stock in trade of assessee has to be allowed as a business loss. Therefore, the findings of the CIT(A) that the claim is not crystallised and is a contingent liability is by drawing incorrect inference from the facts on record.

It was further submitted that otherwise also, assessee on such transaction has earned commission of Rs.12.17 lacs which is offered for tax. Therefore, if in course of such business, the bank has recovered

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Rs.66.91 lacs from the assessee, it is allowable as bad debt u/s 36(1)(vii), once the amount is written off in the books of accounts. For this reliance is placed on the decision of Bombay High Court in case of CIT Vs. Shreyas S. Morakhia 342 ITR 285 where assessee, a share broker, engaged in the transactions of sale & purchase of shares for his clients claimed deduction by way of bad debts u/s 36(1)(vii) r.w.s. 36(2) of IT Act in respect of amount which could not be recovered from its clients. The same was disallowed by the AO. It was held that deduction on account of bad debt can be allowed only where such debt or part thereof has been taken into account in computing the income of the assessee. In present case, the debt comprises, inter alia, of the value of the shares transacted & the brokerage payable by the client on whose behalf the transaction takes place. Since, the brokerage from the transaction of purchase of shares has been taxed in the hands of the assessee as business income, it is evident that within the meaning of sec. 36(2)(i), debt or part thereof has been taken into account in computing the income of the assessee & therefore assessee is entitled to deduction u/s 36(1)(vii).

2.4 The ld DR is heard who has relied on the order of the lower authorities.

2.5 We have heard the rival contentions and pursued the material available on record. There is a dispute which has arisen between the assessee company and Axis Bank in terms of compliance to the terms and conditions of Internet Gateway Merchant Agreement dated 11.12.2006. Axis Bank has issued a legal notice dated 8.11.2007 for recovery of Rs 1.16 crores and thereafter a petition has been filed

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before the Debt Recovery Tribunal for Rs 1.22 crores with interest, which is pending adjudication. In the said legal notice, Axis Bank has also stated that total chargeback received as at 3 October 1.83 crores (gross liability) and after adjusting Rs 66.91 lacs so far recovered by the bank from the assessee company, net liability of Rs 1.16 Crores was demanded. The assessee company has disputed the said net liability of Rs 1.16 Crores before the DRT. It has also filed a civil suit being No. 38 of 2008 (earlier no. 1049 of 2007) against the Axis Bank before the Civil Judge (Junior Division) of Jaipur City (East) for recovery of Rs 67.12 lacs which has already been recovered from assessee company by the bank. Though there is minor difference between the two amounts of Rs 67.12 lacs and Rs 66.91 lacs, it seems likely that it relates to the same amount of Rs 66.91 lacs which has been recovered by the bank from the assessee company as mentioned in the legal notice. Overall, the facts that have emerged are that the subject dispute has been pending adjudication before the Debt Recovery Tribunal as well as before the Civil Courts and the whole of the liability of the assessee company either towards Rs 66.91 lacs which has already been recovered or the balance sum of Rs 1.22 Crores has not accepted by the assessee company and has not attained finality.

2.6 In the above factual matrix, the issue before us relates to claim of Rs 66.91 lacs made by the assessee company as an allowable expenditure for tax purposes. The ld AR has contended that as on 31.03.2008 the liability of the assessee was certain. As Rs.66.91 lacs is already recovered by the bank and the liability is certain, though it disputed the further claim of Rs.1.16 crores made by the bank in the

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legal notice, the assessee as a matter of prudence rightly claimed the amount of Rs.66.91 lacs in the P&L A/c which is allowable as a business loss.

2.7 The law in this regard is well settled that for claiming an expenditure arising out of an contractual obligation, the liability to pay such sum should crystallised, in terms of the said contractual obligation, during the relevant period. In other words, there should be a liability existing during the relevant period and where the liability itself is in doubt or has not been accepted and challenged as in the instant case, and the outcome of which is uncertain, such liabilities cannot be subject matter of deduction. Merely putting aside the money or providing for the same in the financial statement or as in the instant case, mere recovery of the said money is not sufficient enough to claim the deduction. The fact remains that the assessee company has not accepted its liability at first place and the liability is not certain. The said non-acceptance of the liability is not just in respect of sum of Rs 1.22 Crores which is pending adjudication before the Debt Recovery Tribunal but also in respect of recovery of Rs 66.91 lacs which has been challenged by the assessee company in the Civil Court. Therefore, we are unable to agree to the contentions raised by the ld AR. At the same time, the assessee company would be at liberty to claim the said amount in the subsequent period once it has accepted its liability and the liability thus becomes certain though it has been recovered in the instant year.

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2.8 We now refer to the another contention of the ld AR that the assessee on such transactions has earned commission of Rs.12.17 lacs which is offered for tax. Therefore, if in course of such business transactions, the bank has recovered Rs.66.91 lacs from the assessee, it is allowable as bad debt u/s 36(1)(vii), once the amount is written off in the books of accounts. For this reliance is placed on the decision of Bombay High Court in case of CIT Vs. Shreyas S. Morakhia (supra).

2.9 Before the ld CIT(A), it was submitted by the assessee company that Rs 66.91 lacs represents the realisation of the proceeds from its activity whereupon the assessee company has earned the commission of Rs 12.17 lacs, thus the said recovered amount is in the nature of sales proceeds and written off amount is in the nature of bad debt. The AO in his remand report has agreed with the assessee’s contention to the extent of Rs 12.17 lacs and stated that this amount of Rs 12.17 lacs is on account of services rendered by the assessee company to the Axis Bank and has subsequently been written off in the books of accounts treating the same as bad debt and thus allowable u/s 36(1)(vii) of the Act. 2.10 To appreciate the contentions raised by the ld AR, it would be relevant to refer to the provisions of section 36(1)(vii) and section 36(2) of the Act which reads as under: 36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28:

(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:

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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;

(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;

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(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.”

2.11 On perusal of above provisions, what is required to be examined is firstly, there should be a debt due which has become bad. Secondly, the amount of such bad debt or part thereof is written off as irrecoverable in the accounts of the assessee for the previous year. Thirdly, 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.

2.12 In the context of the aforesaid third condition, the decision of the Hon’ble Bombay High Court in case of CIT Vs. Shreyas S. Morakhia (supra) 342 ITR 285 has been brought to the notice of the Bench. In that case, the facts of the case were that the assessee was a share

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broker. The assessee claimed a deduction of Rs. 28.24 lacs representing an amount due to him by his clients on account of transactions of shares effected by the assessee on their behalf. The assessee claimed that the amount had become irrecoverable. The amount was claimed as a deduction after having been written off as irrecoverable from the books of account. The Assessing Officer disallowed the deduction holding that the business in respect of which the debts had arisen had ceased to exist in the year under consideration and also on the ground that no action was taken against the clients to recover the amounts due from them. In appeal, the Commissioner (Appeals) held that though the assessee had sold the membership card of the Mumbai Stock Exchange, he continued to carry on broking business as a sub broker and hence the business of the assessee had not ceased to exist but continued during the year under consideration. The Commissioner held that the failure of the assessee to initiate recovery proceedings could not be a ground for denying a claim for bad debts under Section 36(1)(vii). The claim of the assessee was accordingly allowed. An appeal was filed by the Revenue before the Income Tax Appellate Tribunal; the contention of the Revenue being that since the assessee had credited only the amount of the brokerage to the profit and loss account, the amount of bad debts claimed was not taken into account in computing the total income of the relevant previous year or of any earlier previous year. Hence according to the Revenue the condition stipulated in Section 36(2) was not satisfied and the assessee was not entitled to claim a deduction in respect of the bad debts under Section 36(1)(vii).

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In the above factual matrix, the question of law referred for consideration before the Hon’ble High Court was as under: “Whether on the facts and circumstances of the case and in law, the assessee, who is a share broker, is entitled to deduction by way of bad debts under Section 36(1)(vii) read with Section 36(2) of the Income Tax Act, 1961 in respect of the amount which could not be recovered from its clients in respect of transactions effected by him on behalf of his clients apart from the commission earned by him.”

The Hon’ble High Court thereafter laid down the following legal proposition: “10. The requirement which has been imposed by Parliament in Section 36(2)(i) is that a deduction on account of a bad debt can be allowed only where 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 the debt is written off. The assessee is a stock broker who engages in transactions of sale and purchase of shares for his clients. The bill raised on the client reflects the rate, quantity and total value of the shares transacted as well as the brokerage, apart from the Security Transaction Tax and the service tax. The brokerage from the transaction of the purchase of shares has been taxed in the hands of the assessee as its business income. Once that is so, it is evident that within the meaning of Section 36(2)(i) the debt or part thereof has been taken into account in computing the income of the assessee. The debt comprises, inter alia, of the value of the shares transacted and the brokerage payable by the client on whose behalf the transaction takes place. The brokerage as well as the value of the shares constitute a part of the debt due to the assessee since both arise out of the same

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transaction. The test is whether the debt or part thereof has been taken into account in computing the income of the assessee. The answer to that test has to be in the affirmative. That being the position, the requirements of Section 36(2)(i) are duly fulfilled.”

“14. The value of the shares transacted by the assessee as a stock broker on behalf of its client is as much a part of the debt as is the brokerage which is charged by the assessee on the transaction. The brokerage having been credited to the profit and loss account of the assessee, it is evident that a part of the debt is taken into account in computing the income of the assessee. The fact that the liability to pay the brokerage may arise, as contended by the Revenue, at a point in time anterior to the liability to pay the value of the shares transacted would not make any material difference to the position. Both constitute a part of the debt which arises from the very same transaction involving the sale or as the case may be purchase of shares. Since both form a component part of the debt, the requirements of Section 36(2)(i) are fulfilled where a part thereof is taken into account in computing the income of the assessee.

Before concluding, we again take note of the fact that in paragraph 31 of its impugned decision the Tribunal has left the issue as regards the value of the shares which remain in the hands of the assessee which has to be adjusted against the amount receivable from the client to be determined before the regular Bench of the Tribunal following the view of the Special Bench. The view which has been taken by the Special Bench is, with respect, in accordance with law. We accordingly dispose

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of the appeal by answering the question of law as formulated in the affirmative and in favour of the assessee.”

2.13 In light of above legal framework, let’s examine the facts of the instant case. In the present case, there is finding of fact by the AO in his remand report that the amount of Rs 12.17 lacs is on account of services rendered by the assessee company to the Axis Bank and has subsequently been written off in the books of accounts treating the same as bad debt. The said amount of Rs 12.17 lacs is thus clearly a debt due from its customers and the fact that the same has been written off in the books of accounts is allowable u/s 36(1)(vii) of the Act and to this extent, we agree with the ld AR and the claim of the assessee company is hereby allowed.

2.14 As far as the remaining amount of Rs 54.74 lacs is concerned, as we have noted above, it was submitted by the assessee company before the ld CIT(A) that Rs 66.91 lacs (which includes Rs 54.74 lacs) represents the realisation of the proceeds from its activity whereupon the assessee company has earned the commission of Rs 12.17 lacs, thus the said recovered amount is in the nature of sales proceeds and written off amount is in the nature of bad debt. There is a difference between the amount in the nature of sale proceeds and the amount actually pertaining to sale proceeds. What is relevant to determine is that the amount should either relates to services rendered by the assessee company in form of commission or it should relates to amount which could not be recovered from its clients (being disputed by the latter) in respect of transactions effected by the assessee company on

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behalf of its clients and in relation to such transactions, the commission income has accrued to the assessee company. There has to be a linkage between the commission income taken to the profit/loss account and the amount of debt which is written off as irrecoverable and in that scenario, the test of whether the debt or part thereof has been taken into account in computing the income of the assessee can be said to have been satisfied. Therefore, it is not sufficient that in course of such business, where the bank has recovered certain amount from the assessee, it is allowable as bad debt u/s 36(1)(vii). The exact nature of recovery done by the banks is therefore to be examined. The recovery should relate to transaction undertaken by the assessee company on behalf of its clients and which is now been disputed and a charge back is claimed by the respective clients through the Bank. Further, in either case, the amount has to be written off as irrecoverable in the books of accounts of the assessee’s company. The treatment and entries passed in the books of accounts thus become equally relevant and it would be relevant to examine whether the assessee has debited the amount of doubtful debt to the profit/loss account and credits the sundry debtors account. There is no finding recorded by the AO or the ld CIT(A) in this regard. We accordingly set aside the matter to the file of the AO for the limited purposes of verifying the exact nature of Rs 54.74 lacs and the accounting treatment thereof in the books of accounts of the assessee company in light of above discussions. In the result, the ground no. 1 of the assessee company is allowed for statistical purposes.

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assessee company incurred an expenditure of Rs.15,99,923/- under the head “plant running & maintenance” expenses. The AO held that in AY 06-07, against expenditure of Rs.9,09,262/-, a disallowance of Rs.50,000/- was confirmed in the first appeal. Accordingly, he made disallowance of Rs.75,000/-. On appeal, the Ld. CIT(A) considering that in AY 2006-07, disallowance of Rs.50,000/- was confirmed out of disallowance of Rs.1,50,000/- (correct amount Rs.2 lacs) made by the AO, restricted the disallowance of Rs.75,000/- to Rs.25,000/-. Now, both the parties are in appeal before us against the order of the ld CIT(A).

3.1 During the course of hearing, the ld AR submitted that from the ledger account placed at PB 115-134, it can be noted that each and every expenditure claimed under this head is supported by proper details, bills and vouchers. No specific defect is pointed out in the expenses incurred by the assessee either by AO or by the CIT(A). The adhoc disallowance, without basis, is unjustified as held in the following cases:- - ACIT Vs. Ganpati Enterprises Ltd. 142 ITD 118 (Delhi)(Trib.) - CIT Vs. Oracle India (P) Ltd. 199 Taxman 181 (Del) (HC) (Mag.) - Arthur & Anderson & Co. Vs. ACIT 2010-TIOL-416-ITAT-Mum. - Seasons Catering Services (P) Ltd. Vs. DCIT 43 DTR 397 (Del) (Trib).

3.2 The ld DR is heard who has relied on the order of the lower authorities.

3.3 We have heard the rival contentions and pursued the material available on record. The disallowance is purely adhoc in nature without highlighting any specific defect or the fact that expenditure claimed is

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bogus is nature or has not been incurred for the purposes for business. There is no basis for adhoc disallowances in the eye of law. In the result, the disallowance made by the AO is deleted. The assessee’s ground no. 2 is allowed and the Revenue’s ground no. 2 is dismissed.

4.2. On appeal, the ld CIT(A) held that decision of purchase and sale of soyabean is taken by aditya’s. The aditya’s raise the sale invoice on the assessee on the date, when it decides to sale the same to some other person. Thereafter, sale invoice would be issued by the assessee in favour of the buyer and delivery of the same would be made by the aditya’s directly but it is strange that purchase invoice in the favour of assessee would be of the same date or a day before the sale by the assessee. It means that assessee has not made the purchases before

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the date of sale. It is only the aditya who remains the owner of the item till the date of sale by him to the assessee. Therefore, there cannot be any question of shortage in the hands of the assessee. Accordingly, the addition on account of shortage is confirmed. The relevant findings of the ld. CIT(A) are as under:-

“9.5. I have gone through the assessment order, remand report and submissions made by the AR and find that AO has made the disallowance of Rs.6,96,964 on account of shortage of Soyabean stock as a result of trading in the Soyabean. The appellant had produced stock register from this item, in the course of assessment proceeding, to substantiate the sale and purchase of Soyabean made in the course of this year. The AO while examining the stock register found that loss on account of shortage of stock of 46126 Kg of Soyabean has been claimed by the appellant. The detailed working for this has been produced in para 9.1 above. The AO has given a finding that stock shortage was claimed by the appellant only in the month of September 2007 and the main purpose of it has been to suppress the real profits made by the appellant in the trading of this item.

9.6. The appellant has filed elaborate submission stating that claim of loss is just 0.27% of the total quantity of Soyabean traded. It is also stated that these items are traded through the Adtiyas and the sale and purchase of Soyabean was made by them on behalf of the company. The appellant has further explained its position and the accounting treatment through its letter dated 19-12-2010 ( filed before the AO and has also been filed in the appellate proceeding ( reproduced above in para 9.2).

9.7. Before reaching any conclusion, a reading of the following submissions filed by the appellant is necessary:

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“Whenever the constituents finds the market conditions favorable to them, on their directions the adatiya’s raised the sale invoices upon its constituents, who in turn further sold them to their customers and ask the adatiya’s to deliver the goods directly to its customers. At the time of delivery of the goods by the adatiya’s, the adatiya’s raises the invoices at the prices prevailing at the time of its purchases in favour of its constituents and the constituents raises its sales invoices in favour of its customers. This is evident from the fact that on the same day of raising of the invoices of purchase and sales there are the price difference of Rupees 150 to 200 per qtl., which is possible only under the circumstances, when there is sufficient time lag between purchase and sale.”

9.8. A careful reading of the above, indicate that the decision for purchase and sale of Soyabean is taken by the Adatiyas depending upon the market conditions. This proposition is acceptable as a normal business practice. Adatiyas raised the sale invoices upon the assessee company on the date, when it decides to sale the same item to some other person. The sale invoice would be than issued by the appellant company in favour of the buyer of item and the delivery of the same would be made by the Adatiyas directly. However, what is strange in the above submission is that the purchase invoice of the item in favour of the appellant company would be of the same date or a day before to the sale of the same item by the appellant company. It means the appellant company have not purchased the item before the date of sale. It is only the Adatiya who remains the owner of the Soyabean item, till the date of sale by him in the name of appellant company. Thus, the question of shortage in the hands of the appellant company does not arise. Therefore, this claim of shortage of stock though appearing to be negligible in percentage terms as compared to the total volume of stock, is not allowable as loss. This fact is further substantiated by the copy of stock register which was examined by the AO and

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enclosed as an Annexure to the order of the A.O. I agree with the reasoning given by the AO that this amount has been debited in the month of September with a view to suppress the profit earned by the appellant.

9.9. In view of the above discussion, I confirm the disallowance of Rs. 6,96,964 made on account of shortage of Soyabean stock.”

4.3 During the course of hearing, the ld AR submitted that both the lower authorities have not properly appreciated the nature of the transaction. In the normal course of business, assessee give margin money to the aditya’s and direct him to purchase the goods on his behalf. The goods are purchased by the aditya’s and are kept in his godown. Thereafter, when the assessee sales the goods considering the market condition, it directs the aditya to deliver the goods to the customers. At this point of time, the aditya raises the purchases bills in the name of the assessee at the rate at which the goods was purchased by him and raises separate debit note by way of rate difference to cover his commission, interest cost, godown rent, labour charges and other expenses. The shortage is determined at the time when the entire goods so purchased are sold.

It was further submitted that the assessee has purchased soyabean through the aditya’s, M/s Mukesh Kumar Jain & Bros., M/s Mahaveer Trading Co., Surendra Trading Co. and M/s Julaniya Bros. during FY 2006-07 and 2007-08. During the year, assessee purchased 1,66,585.51 qtl. soyabean (PB 165-167) and sold 1,66,124.25 qtl. soyabean (PB 168-182). The entire purchases were sold. On such sale it was found that there is shortage of 461.26 qtl. This represents 0.27%

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of total quantity purchased. This shortage is not of one day but of the purchases made during the year but determined only when the entire goods were sold. Therefore, in the stock sheet which is compiled and submitted in course of assessment proceedings and made as Annexure A of the assessment order (DPB 70-75), no shortage is shown from April to August, 2007 but the shortage is shown between 01.09.2007 to 28.09.2007 at a fixed percentage of the receipt quantity so that the entire shortage of 461.26 qtl. is reflected in the month of September, 2007 by which the entire goods were sold. Thus, it is only the manner in which the shortage is shown in the stock register compiled and submitted before the AO and not that the shortage is only in respect of the receipt shown on that date.

It was further submitted that the Ld. CIT(A) has wrongly observed that the decision for purchase and sale of soyabean is taken by the aditya’s. All these decisions are taken by the assessee and the aditya’s only execute the same. The shortage in such huge quantity is inevitable. The Ld. CIT(A) has accepted that shortage in percentage terms in only negligible but still he confirmed the addition which is without appreciating the facts properly. Further there is neither any allegation nor any evidence that the shortage has been sold out of books of accounts.

4.4 The ld DR is heard who has relied on the order of the lower authorities.

4.5 We have heard the rival contentions and pursued the material available on record. The assessee has claimed shortage of 461.26 qtl. of

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soyabean stock valued at Rs 6,96,964. It is the assessee’s case that the aditya’s are purchasing and selling soyabean on behalf of the assessee. The soyabean stock was kept with aditya’s and the delivery of the same to the assessee’s customers were made directly from aditya’s premises/godown. In lieu of purchasing the goods, the aditya’s are charging the commission and other expenses like labour charges, godown rent, interest, etc. The adityas are investing their own money in the purchases with receipt of margin money of approx 20% to 25% from the assessee. Whenever, the assessee finds the market conditions favourable to them, on its direction the aditya’s raises the invoice on the assessee and assessee in turn raise the invoice on the customers to whom goods are sold and ask aditya’s to deliver the goods directly to the customers. At the time of delivery of goods by the adityas, the aditya’s raises the invoice on the assessee at the rate at which goods were purchased and the assessee raises its sales invoices in favour of its customers. This is evident from the fact that on the same day of raising of the invoices of purchases and sales, there is price difference of Rs.150 to 200 per qtl. which is possible only under circumstances when there is sufficient time lag between purchase and sale. We find force in the argument of the ld AR.

4.6 Per contra, the crux of the arguments of the Revenue is that the purchase invoice of the goods in favour of the appellant company is of the same date or a day before to the sale of the same item by the appellant company. It means the appellant company have not purchased the item before the date of sale. It is only the Aditya who remains the owner of the Soyabean item, till the date of sale by him in

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the name of appellant company. Thus, the question of shortage in the hands of the appellant company does not arise. Therefore, this claim of shortage of stock though appearing to be negligible in percentage terms as compared to the total volume of stock, is not allowable as loss.

4.7 In our view, merely the timing of the raising of the invoice is not sufficient to determine the ownership over the goods and what is relevant to determine is the exact nature of relationship between the assessee and its Adityas and whether the latter are acting on behalf of the former or on their own. Further, the goods are not transported to assessee’s company’s premises (which would require the ownership documents for carriage purposes) and are delivered directly to the customer’s from adityas. As noted above, the assessee has submitted that the Adityas are acting on its behalf as demonstrated through placing of margin money with them, giving them instructions to buy and deliver the goods directly to the customers and the fact that they charge commission and other expenses from the assessee company. These facts remain uncontroverted before us. In any case, the assessee company has disclosed profits on the sale of the soyabean in its books of accounts. The shortage of such stock would thus pertain to the assessee company and has been rightly claimed in its hands. In the result, the addition of Rs 6,96,964 on account of shortage of soyabean stock is deleted. The ground no. 3 of the assessee’s appeal is thus allowed.

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from Mahaveer Trading Co., Kota and Mukesh Kumar Jain & Bros., Kota that purchase of soyabean is made from these two concerns between 17.05.2007 to 01.09.2007 at a rate ranging from 1391.09 per qtl. to 1391.92 per qtl. but thereafter both the parties vide debit note dt. 31.12.2007 has increased the purchase rate to 1471.75 per qtl. and accordingly raised debit note of Rs.17,00,119/- and Rs.28,13,042/- respectively aggregating to Rs.45,13,161/-. No documentary evidence or acceptable reasons for increasing the cost of purchase after 4-5 months of purchase is furnished. Similar debit note of Rs.9,49,097/- is obtained from M/s Julaniya Bros. on account of labour charges. The assessee was required to produce the above parties for examination. Summons was also issued but neither the assessee produced them nor they attended for examination. Accordingly, the AO held that these debit notes are obtained to reduce the income with an intention to avoid proper incidence of tax and made addition of Rs.45,13,161/- and Rs.9,49,097/- on account of inflation of purchases.

5.1 In appellate proceedings, the Ld. CIT(A) called for a remand report. Thereafter, the AO considering the affidavit of Sh. Chandra Prakash Jain, Manager of M/s Sh. Mahaveer Trading Co. and M/s Mukesh Kumar Jain & Bros. send his remand report dt. 07.05.2012 to the CIT(A) where he observed that the affidavit and the copy of stock register do not support the assessee’s contention in the absence of books of accounts of the parties. The Ld. CIT(A) after considering the remand report and the explanation of the assessee observed that no evidence was produced by the assessee as to how and on what basis the rate difference/debit notes has been arrived at/ issued by the seller.

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Accordingly, he confirmed the addition made by the AO. The relevant findings of the ld. CIT(A) is as under:-

“10.5. I have gone through the assessment order as well as the submissions made by the AR and a copy of the same was also forwarded to the AO for furnishing a remand report. The AO has in the course of appellate proceedings also examined the additional evidence filed by the appellant and after giving an opportunity of being heard furnished a detailed remand report. A copy of the remand report and comments of the appellant thereon have been reproduced above. It may be relevant to note that AO had during the course of examination of the details with regard to the sale and purchase of Soyabean made by the assessee found that two debit notes from two parties have been booked in the books of accounts dated 31-12-2007 amounting to Rs.45,13,161. These two debit notes were stated to be on account of rate difference of purchase of Soyabean from Rs.1391 to Rs.1471.75 per quintal.

10.6. For the sake of brevity, the detailed arguments are not discussed here as these have been already reproduced above. It is surprising to note that the appellant has made purchases from two parties, who are part of the same group as the affidavit of an accountant who is common for both the firm was filed in the course of present proceedings. No evidence was produced before the AO or in the present proceedings as to how and on what basis this rate difference has been arrived at. It is strange to note that a party who has been purchasing Soyabean stock through the Adatiyas and booking the same in the books of accounts when the item is proposed to be sold by the Adatiyas could agree for the payment of rate difference and that too of about Rs.80 per quintal. The sale and purchase invoice are either on the same date or on consecutive dates. Thus, it leaves no scope for settlement of purchase price at a later date when the item has

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already been sold in the books of accounts. The only purpose which remains to adjust arbitrarily the purchase price at a later date and that too without any rational evidentiary basis could be to avoid the payment of taxes by suppression of real profits. The fact that these adjustments have already been made in the books of the seller at their end and sales tax has been paid thereon would carry little weight, when the very basis of carrying out the transaction with logical evidence is not proved. The appellant has also failed to file any corroborative evidence in support of the basis on which debit notes were issued by the seller. The appellant has failed to file any corroborative evidence in support of the rate mentioned earlier in the invoice or in support of the rate agreed upon later with the party.

10.7. In view of the above discussion, I hold that the AO was justified in making disallowance of Rs.45,13,161 on account of the debit notes issues for adjustment of purchase rates.

10.8 The AO also found during the course of examination of books and other records that a debit note of Rs.9,49,097 has been shown in the books on 03-11-2007. The appellant has stated that this debit note has been issued by the assessee in the name of M/s Julania Brothers, Kota on account of labour charges paid for packing Soyabean. The appellant has reiterated the submissions made above but failed to file any concrete evidence in support of the said transactions. Thus, I hold that the appellant has failed to discharge its duty to furnish credible evidence before the AO and also in the course of appellate proceedings and to prove that the said expenditure was incurred for the purposes of the business. Accordingly, I confirm the disallowance of Rs.9,49,097 made by the AO under this head.”

5.3 During the course of hearing, the ld AR submitted that the allegation of the lower authorities that assessee has accounted for the

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debit notes for rate difference/ labour charges to inflate the purchases and thereby to reduce the profit and that no evidence for the same is furnished is factually incorrect. This is because in course of remand proceedings, the assessee produced Sh. Chandra Prakash Jain, Manager of M/s Sh. Mahaveer Trading Co. and M/s Mukesh Kumar Jain & Bros. Kota along with stock register. The AO, however, did not record his statement. Accordingly, his affidavit was filed. In the affidavit, Sh. Chandra Prakash Jain at Para 8, 9 & 10 categorically stated as under:- ‘That at the time of sale, the bills were raised at the purchase price by us without including therein the godown rent, interest and other expenses inadvertently, which should have been included therein. That subsequently, on realising the above said mistake, debit notes were raised by both the above said parties upon Data Infosys Ltd. for a sum of Rs.17,00,119/- by M/s Mahaveer Trading Co. on 31.12.2007 and for Rs.28,13,042/- by M/s Mukesh Kumar Jain & Bros. on 31.12.2007. Copy enclosed. That the above said parties have deposited the VAT on the difference amount of the debit note and have included the above said amount in their income in books of accounts.’

It was submitted that this affidavit is not controverted. The AO simply stated that in the absence of books of accounts of the parties, the assessee’s contention is not supported by affidavit. However, the AO never required the assessee or Sh. Chandra Prakash Jain to produce the books of accounts of these parties. In any case, the copy of account of the assessee in the books of M/s Mukesh Kumar Jain & Bros. and M/s Sh. Mahaveer Trading Co. for FY 2007-08 and also 2006-07 was already

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filed before the AO in course of assessment proceedings from which it is evident that these parties have debited the assessee for the amount of debit note and booked the income. Similarly debit note issued by M/s Julaniya Bros. is in respect of the expenses incurred by them for storing the goods of the assessee on which tax is deducted at source. Therefore, the allegation of the lower authorities that the debit notes were accounted for to reduce the profit is arbitrary and without any basis.

It was further submitted that in respect of the observation of the CIT(A) that when the sale and purchase invoice are either on the same date or on consecutive dates, how the adityas could agree for the payment of rate difference of about Rs.80 per qtl. In making these observations, the Ld. CIT(A) has not appreciated the manner in which the accounting is made as explained in Ground No.3 above. In fact the aditya’s purchases the goods for the assessee from time to time as instructed to him, transport the same to their godown, unload it in the godown, store the same till the goods are sold and load and transport to the customers to whom the assessee sale the goods. All these expenses are initially borne by the aditya’s and against incurring such expenses they have raised the debit note subsequently. The assessee has not claimed any of these expenses in its books of accounts. Further, if the contention of the lower authorities is accepted then how the soyabean which is purchased on a particular date say for Rs.1,380 per qtl. can be sold on the same date at the rate of Rs.1,540 per qtl. This itself proves that purchases were made from time to time and the same was kept with aditya’s till it was subsequently sold to the customers for which

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expenditure is incurred by the aditya’s and for such expenses debit note is raised by them by way of rate difference/ labour charges.

It was further submitted that assessee has made the purchases from Mahaveer Trading Company, Kota and Mukesh Kumar Jain, Kota in earlier months for which bills were raised by them between 17.05.07 to 01.09.07 at the rate ranging from Rs.1,391.09 per qtl. to Rs.1,391.92 per qtl. and even after the debit note raised by the parties, the purchase rate works out to around Rs.1,472 per qtl. As against this, the rate prevailing in the month of May to August 2007 was Rs.1,545 per qtl. to Rs.1,549 per qtl. as evident from the market data obtained from the site, copy of which is enclosed. This shows that the allegation of the AO that assessee has obtained the debit note to inflate the purchases is without any basis and therefore, addition confirmed on account of inflated purchases to debit note needs to be deleted.

It was further submitted that it is a settled law that the burden to prove that what is apparent is not real is on the person who alleges so. In the present case it is the allegation of the department that assessee has inflated the purchases by obtaining debit notes. In such situation, the AO should bring material on record that on the date on which the purchases is recorded by assessee in the books of accounts/ the date on which aditya’s raised the bills on the assessee, the purchase price was lower than what is recorded in the books considering the debit note. No evidence in brought on record that even after such debit note the market is lower. Hence, the allegation of AO is without any basis. For this reliance is placed on the following cases:-

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CIT Vs. Bedi & Co. Pvt. Ltd. 230 ITR 580 (SC): It was held that the burden of showing that the apparent state of affairs was not the real one was very heavy on the department.

Daulat Ram Rawatmull 87 ITR 349 (SC): The fact that an assessee was unable to satisfy the authorities as to the source from which the depositor derived money cannot be used against assessee. The onus of proving that the apparent was not real is on the party who claims it to be so. From the simple fact that the explanation regarding the source of money furnished by A, in whose name the money is lying in deposit, has been found false, it would be a remote and far-fetched conclusion to hold that money belongs to B. There would be in such a case no direct nexus between the facts found and the conclusion drawn therefrom.

5.4 The ld DR is heard who has relied on the order of the lower authorities.

5.5 We have heard the rival contentions and pursued the material available on record. The AO had during the course of examination of the details with regard to the sale and purchase of Soyabean made by the assessee found that two debit notes from two parties have been booked in the books of accounts dated 31-12-2007 amounting to Rs.45,13,161. These two debit notes were stated to be on account of rate difference of purchase of Soyabean from Rs.1391 to Rs.1471.75 per quintal. In the remand proceedings, through the affidavit of Sh. Chandra Prakash Jain, the manager of the two parties who supplied the

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soyabean, it was submitted that “at the time of sale, the bills were raised at the purchase price without including therein the godown rent, interest and other expenses inadvertently, which should have been included therein. That subsequently, on realising the above said mistake, debit notes were raised by both the above said parties upon Data Infosys Ltd. for a sum of Rs.17,00,119/- by M/s Mahaveer Trading Co. on 31.12.2007 and for Rs.28,13,042/- by M/s Mukesh Kumar Jain & Bros. on 31.12.2007.” It was further submitted that the above said parties have deposited the VAT on the difference amount of the debit note and have included the above said amount in their income in books of accounts. It was further submitted that assessee has made the purchases from Mahaveer Trading Company, Kota and Mukesh Kumar Jain, Kota at the rate ranging from Rs.1,391.09 per qtl. to Rs.1,391.92 per qtl. and even after the debit note raised by the parties, the purchase rate works out to around Rs.1,472 per qtl. As against this, the rate prevailing in the month of May to August 2007 was Rs.1,545 per qtl. to Rs.1,549 per qtl. as evident from the market data. Based on the same, it was submitted that the allegation of the AO that assessee has obtained the debit note to inflate the purchases is without any basis.

5.6 The ld CIT(A) has however found the factual matrix relating to raising of the debit notes strange and noted that a party who has been purchasing Soyabean stock through the Adatiyas and booking the same in the books of accounts when the item is proposed to be sold by the Adatiya could agree for the payment of rate difference and that too of about Rs.80 per quintal at such a later date. The sale and purchase invoice are either on the same date or on consecutive dates. Thus, it

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leaves no scope for settlement of purchase price at a later date when the item has already been sold in the books of accounts.

5.7 As noted above, the assessee has submitted that the debit notes relates to the godown rent, interest and other expenses which are claimed as not raised earlier inadvertently by these two concerns and now being raised and accounted for in its books of accounts. It is further noted that the assessee has existing arrangement with two concerns for purchasing and sale of soyabean on its behalf and in such background, similar expenses have been claimed and paid by the assessee company in the past. Therefore, what is relevant to determine is whether there is any inconsistency in these expenses vis-a- vis expenses incurred in the past. There is no finding of the AO highlighting any such inconsistency in claim of such expenses.

5.8 Further, since the assessee is involved in trading of soyabean, it is expected that it will earn a decent margin on its sales. The assessee has tried to demonstrate before us that the purchase price after including the debit notes is less than the market price. It is further claimed that the sale price after considering these debit notes is also higher and there is enough margin that has been claimed and reported by the assessee. In this regard, in our view, earning decent margins is a subjective term and what would be relevant is to see how such margins are bench marked against the rates prevailing in the open market and then only such a contention can be accepted. What is therefore relevant to determine is the cost of purchase of soyabean after including these debit notes during the specified period, and the

40 ITA No. 58 &137/JP/2014 M/s Data Infosys Ltd. vs.DCIT(Hqrs.), Alwar

sale price of soyabean so purchased and sold ultimately and whether both the purchase and sale correspond to the rates prevailing in the open market during the relevant period. Further, since both the purchases and sales are accounted for almost on the same day as claimed by the assessee, we donot think it will raise substantial challenge to the assessee to correlate both the purchase and the sales and whether the same correspond to market rates during the specified period. Whether through such an exercise, it can be determined that the margins are reasonable vis-a-vis margins earned on the sales in the open market factoring in the seasonal market conditions, it would further prove the bonafide of these debit notes in the hands of the assessee company.

5.9 In the result, we deem it fit to set aside the matter to the file of the AO to carry out the necessary verification in light of above directions. In the result, both the grounds of the assessee are allowed for statistical purposes.

41 ITA No. 58 &137/JP/2014 M/s Data Infosys Ltd. vs.DCIT(Hqrs.), Alwar

6.1 The Ld. CIT(A) deleted the disallowance holding that issue stands covered by the order of his predecessor for AY 2006-07 and his findings are as under: “I have gone through the assessment order as well as the submissions made by the AR. The appellant has stated that this issue stands covered by the order of my ld. Predecessor in the case of the appellant for A.Y. 2006-07 in Appeal No. 302/2008-09 vide order dated 04-02-2010. Since there is no change in the facts of this case in the current year, the disallowance of Rupees 769315.00 deserves to be allowed.”

6.2. During the course of hearing, the ld AR submitted that in AY 2001-02, assessee incurred expenditure on advertisement, consultancy charges and foreign travelling expenses of Rs.45,89,096/- which instead of claiming in that year was deferred and only 1/10th of such expenses i.e. Rs.4,58,910/- was claimed in the P&L A/c. Again in AY 2002-03, assessee incurred expenditure on advertisement and consultancy of Rs.31,04,045/- which instead of claiming the expenditure in that year was deferred and only 1/10th of such expenses i.e. Rs.3,10,405/- was claimed in the P&L A/c. Accordingly, in all subsequent years, Rs.7,69,315/- (4,58,910+3,10,405) is claimed in the P&L A/c on deferred basis. These expenses are not of the nature falling under section 35D but assessee on the basis of its accounting policy deferred these expenditures and claimed 1/10th of these expenses each year. Therefore, the expenses of Rs.7,69,315/- claimed on deferred basis is rightly allowed by CIT(A).

It was further submitted that similar issue came up for consideration in AY 2006-07 where the CIT(A) allowed the claim in view of its decision in

42 ITA No. 58 &137/JP/2014 M/s Data Infosys Ltd. vs.DCIT(Hqrs.), Alwar AY 1998-99 where 1/5th of the expenditure on product development was allowed on deferred basis and the same is upheld by Hon’ble ITAT. However, in the appeal filed by the revenue against that order, the Hon’ble ITAT vide its order dt. 22.10.2010, in the absence of the order of ITAT for AY 1998-99 dt. 13.12.2002 restored the issue to the file of CIT(A).

It is submitted that similar issue came up for consideration in case of M/s Vijay Solvex Ltd. for AY 1995-96 where product development expenditure claimed on deferred basis over the period of 5 years was held allowable in view of the decision of Supreme Court in case of Madras Industrial Investment Corporation Ltd. Vs. CIT 225 ITR 802.

It is not in dispute that in all other years, the deferred revenue expenditure claimed by the assessee has been allowed and therefore in view of the decision in case of CIT Vs. Excel Industries Ltd. 358 ITR 295, the claim of the assessee is rightly allowed by CIT(A).

6.3 The ld. D/R has supported the order of the AO and also submitted that the department has not accepted the order of the ld CIT(A) for AY 2006-07 and the same has been challenged before the Hon’ble Tribunal.

6.4 We have heard the rival contentions and pursued the material available on record. The ld CIT(A) has relied on the order of his predecessor for AY 2006-07 in allowing the relief to the assessee which is stated to be challenged before the Tribunal. There is nothing on

43 ITA No. 58 &137/JP/2014 M/s Data Infosys Ltd. vs.DCIT(Hqrs.), Alwar

record to throw light on the status of the appeal filed before the Tribunal for AY 2006-07. We accordingly set aside the matter to the file of the AO to consider and decide the matter afresh. In the result, the ground of Revenue is allowed for statistical purposes.

7.1 On appeal, the Ld. CIT(A) considering the judicial decisions filed by the assessee and also CBDT Circular in form of Instruction No.1 of 2013 held that expenses should be allocated in the ratio of turnover

44 ITA No. 58 &137/JP/2014 M/s Data Infosys Ltd. vs.DCIT(Hqrs.), Alwar

from the export of software business to the total business turnover and on that basis the expenses allocated by the assessee is more in computing the profit from software export business. He therefore, deleted the addition and his findings are as under:-

“8.8 I have considered the detailed submissions made along with the judicial citations file by the appellant and also the CBDT’s Circular (FAQs) on this subject issued in the form of Instruction No.1 of 2013 (copy filed by the appellant). I agree with the contention of the appellant that the expenses could be allocated in the ratio of turnover from the export of software business to the total business turnover. The expenses allocated by the appellant against the turnover from the export of software business work out to be more than the allocation possible in the ratio of turnover. Thus, I do not find any merit in the arguments taken by the AO while making the disallowance and accordingly delete the addition of Rs.15,37,860/- made under this head”.

7.2. During the course of hearing, the ld AR submitted that assessee maintains separate ledger of software division which was submitted before the AO. The law does not envisage maintenance of separate books of accounts and the CBDT in Circular No.1/2013 dt. 17.01.2013 has also clarified that there is no requirement in law to maintain separate books of accounts in respect of eligible units for claiming tax benefit u/s 10A and therefore the same cannot be insisted upon. So far as allocation of expenses is concerned, the assessee has taken same on actual basis wherein certain expenses has been allocated at 100%, some expenses are allocated at more than 10%, some expenses are allocated lower than 10% and some expenses which has no relationship with the export of software are not allocated at all. On this basis,

45 ITA No. 58 &137/JP/2014 M/s Data Infosys Ltd. vs.DCIT(Hqrs.), Alwar

assessee allocated expenses of Rs.23,40,074/- for working out the profit from the business of export of software which is also certified by the Chartered Accountant in Form No.56F. No discrepancy is found by the AO in such allocation. Otherwise also, allocating 10% of the expenses as done by the AO is not correct in as much as the expenses needs to be allocated on the basis of total turnover to the turnover of the export of software. The ratio of export turnover to total turnover is 4.60% and on that basis allocable expenses would be Rs.17,94,354/- as against Rs.23,40,074/- already allocated by the assessee. In these circumstances, the Ld. CIT(A) has rightly deleted the disallowance of Rs.15,37,860/- made by the AO in the claim of deduction u/s 10A.

7.3 The ld. D/R has submitted that during the year under consideration the assessee has claimed exemption u/s 10A for Rs.1,07,32,784/- on profit of export of software. On perusal of statement of profits on Software business, it was found that the assessee has claimed total expenditure of Rs. 35,89,030/- to arrive at net profit of Rs. 1,08,92,154/-. While examining these expenses, it was found that the assessee has claimed expenditure under various head at the flat 10% of total expenses claimed in the P&L A/c and even some of the expenses debited in the P&L A/c has not been accounted for to arrive at the net profit from Software export business. During assessment proceeding, it was also noticed that the assessee has not maintained separate books of account for the software export business for which the assessee was entitled for deduction u/s 10A. The AO also observed that the assessee has shifted the expenses related to software export business in the business where no exemption is available with

46 ITA No. 58 &137/JP/2014 M/s Data Infosys Ltd. vs.DCIT(Hqrs.), Alwar

the intention to enhance the exempt income and reduce the taxable one. Therefore, the AO disallowed Rs. 15,37,860/- on account of excess exemption claimed u/s 10A.

7.4 We have heard the rival submissions and pursued the material available on record. There is no specific finding given by the AO as to why the the basis of allocation of expenses as has been done by the assessee company is not acceptable and what is the basis of allocating 10% of total expenses to software export division. Further, the ld CIT(A) has also applied the turnover ratio test and has found the expense allocation as done by the assessee as reasonable. In light of the same, we donot see any merit in disturbing the expense allocation as done by the assessee company. Hence, we confirm the order of the ld CIT(A) in this regard and the ground no. 3 of revenue’s appeal is dismissed.

8.1 Briefly the facts of the case are that the AO observed that assessee has purchased 1,46,260 bags of soyabean from 01.04.2007 to 13.09.2007. It is claimed by the assessee that soyabean is purchased from Kota, Bhawani Mandi & Ramganj Mandi for which bardana is supplied by the assessee. However, during the period 01.04.2007 to 13.09.2007, only 19,353 bags of bardana was purchased. Thereafter, 1,61,500 bags (71,000+53,000+37,500) was purchased between

47 ITA No. 58 &137/JP/2014 M/s Data Infosys Ltd. vs.DCIT(Hqrs.), Alwar

14.09.2007 to 18.09.2007 of which 90,500 bags were purchased from sister concern of the assessee M/s Vijay Solvex Ltd. No documentary evidence regarding transportation of bardana purchased from M/s Vijay Solvex Ltd. to Kota, Bhawani Mandi & Ramganj Mandi was filed. The assessee also did not produce the parties from whom bardana was purchased for examination. Therefore, the AO held that source of consumption of 1,26,907 bags of bardana (1,46,260-19,353) remains unexplained for which he made addition of Rs.20,25,856/-.

8.2. On appeal, the Ld. CIT(A) held that the quantum of purchase and sale of soyabean has not been doubted by the AO and therefore requirement of bardana for packing cannot be denied. The evidence furnished by the appellant is also not denied by the AO. He therefore, deleted the addition made by the AO and his findings are as under:-

“11.5 I have gone through the assessment order as well as the submissions made by the AR and find that AO had made the disallowance of Rs.20,25,856/- on account of purchase of Bardana. AO had made the addition on the ground that the appellant could not prove the purchases and did not produce the parties for verification of the same. The appellant has stated that at the time of purchase of Soybean, the Adatiyas had sent their own Bardana and subsequently the same was delivered back to them after purchasing the stock of bardana from M/s Vijay Solvex Ltd. The stock of bardana purchased by M/s Vijay Solvex Ltd. was lying at Kota and therefore, this stock was delivered to the Adatiyas. Therefore, no transportation is involved in

48 ITA No. 58 &137/JP/2014 M/s Data Infosys Ltd. vs.DCIT(Hqrs.), Alwar

this exercise. Copy of account and confirmation has been filed from the parties along-with evidence of payment made.

11.6. The evidence filed by the appellant was forwarded to the AO for examination and the AO in remand report has reiterated the submissions/reasoning given earlier in the order. It is stated that M/s Vijay Solvex Ltd. could not produce day to day stock register of bardana and also the consumption details of bardana could not be filed by the appellant.

11.7. It is seen from the above that the purchase and sale of Soybean has been made by the appellant from the Adatiyas at Kota. The requirement of Bardana for packing cannot be denied once the purchase and sale transactions are not doubted upon by the AO. Further, the quantum of sale and purchase of Soyabean has not been doubted by the AO. The evidence furnished by the appellant have not been denied by the AO.

11.8 Having considered the material available on record, I do not find any justification and accordingly delete the addition of Rs.20,25,856 made by the AO under this head.”

8.3. During the course of hearing, the ld AR submitted that at the time of purchase of soyabean, the aditya’s send the soyabean in their own bardana and subsequent thereto the assessee purchased the bardana from M/s Vijay Solvex Ltd. and delivered to aditya’s. M/s Vijay Solvex Ltd. has already purchased the bardana which was lying at Kota,

49 ITA No. 58 &137/JP/2014 M/s Data Infosys Ltd. vs.DCIT(Hqrs.), Alwar

Bhawani Mandi & Ramganj Mandi and out of the said bardana, assessee subsequently replaced the bardana in which soyabean is supplied by the aditya’s. In remand proceedings, assessee has submitted affidavit of Sh. Chandra Prakash Jain, Manager of Sh. Mahaveer Trading Co. and M/s Mukesh Kumar Jain & Bros. (PB 150-151) from whom the soyabean was purchased where he admitted that they sold the soyabean seed in the bardana lying with them which was subsequently received by them from the assessee. Assessee also filed confirmation from M/s Vijay Solvex Ltd. to this effect. Both the affidavit and the confirmation remained uncontroverted by the AO in the remand report. In these facts, the Ld. CIT(A) has rightly deleted the addition by holding that evidence furnished by the assessee has not been denied by the AO.

8.4 The ld. DR has argued the matter and relied upon the decision of the lower authorities.

8.5 We have heard the rival submissions and pursued the material available on record. The AO observed that the assessee has purchased 1,46,260 bags of soyabean from various parties from 1.4.2007 to 13.9.2007. And as on 13.9.2007, the assessee has in stock 19,353 bags of bardana (packing material). The question that arose for consideration was source of consumption of 126,907 bags (146,260 - 19353) of bardana from 1.4.2007 to 13.9.2007. It was also observed that there is a subsequent purchase of bardana from M/s Vijay Solvex of 90,500 bags and there is no evidence regarding transportation of such bardana from M/s Vijay Solvex to Bhawani Mandi, Ramganj Mandi and Kota. As noted by the ld CIT(A), there is no dispute regarding

50 ITA No. 58 &137/JP/2014 M/s Data Infosys Ltd. vs.DCIT(Hqrs.), Alwar

purchase and sale of 146,260 bags of soyabean which means that 146,260 nos. of bardana were consumed. Regarding the purchase of such bardana, the assessee has certain stock in hand and the balance was purchased from M/s Vijay Solvex and others. The modus operandi of utlisation of such bardana and replacement of the same with the bardana initially belonging to aditya’s has also been explained and in remand proceedings, assessee has submitted affidavit of Sh. Chandra Prakash Jain, Manager of Sh. Mahaveer Trading Co. and M/s Mukesh Kumar Jain & Bros. The stock of bardana purchased by M/s Vijay Solvex Ltd. was lying at Kota and therefore, this stock was delivered to the Adatiyas was also explained along with the confirmation from M/s Vijay Solvex Ltd. to this effect. In light of all these facts which have been duly considered by the ld CIT(A), we donot see any infirmity in his order on this account and the same is hereby confirmed. In the result, revenue’s ground no. 4 is dismissed.

In the result, the appeal of the assessee as well as the appeal of the revenue are partly allowed for statistical purposes.

Order pronounced in the open court on 09/05/2017 Sd/- Sd/- ¼dqy Hkkjr ½ ¼foØe flag ;kno½ (Kul Bharat) (Vikram Singh Yadav) U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member

Tk;iqj@Jaipur fnukad@Dated:- 09/05/2017. *Santosh. आदेश की प्रतिलिपि अग्रेf’ात@ब्वचल वf जीम वतकमत वितूंतकमक जवरू

51 ITA No. 58 &137/JP/2014 M/s Data Infosys Ltd. vs.DCIT(Hqrs.), Alwar vihykFkhZ@The Appellant- M/s Date Infosys Ltd. Plot No.20,21&22, 1. Old Industrial Area,Alwar (Raj.) izR;FkhZ@ The Respondent- DCIT/ACIT ,Cirle-2, Alwar. 2. 3. vk;dj vk;qDr@ CIT vk;dj vk;qDr@ CIT(A) 4. विभागीय प्रतिनिधि] आयकर अपीलीय अधिकरण] जयपुर@क्त्ए प्ज्Aज्ए Jंपचनत. 5. xkMZ QkbZy@ Guard File {ITA No. 58&137/JP/2014} 6. vkns'kkuqlkj@ By order,

सहायक पंजीकार@Aेेज. त्महपेजतंत