INTERGARDEN INDIA PRIVATE LIMITED ,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-11(3), BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH : BANGALORE

BEFORE SHRI ARUN KUMAR GARODIA, ACCOUNTANT MEMBER AND SHRI LALIET KUMAR, JUDICIAL MEMBER

ITA No. 2199/Bang/2017 Assessment Year : 2010-11 M/s. Intergarden (India) Private Limited, The Deputy No. 447, Sri Sai Heights, Commissioner of 17th Cross, 17th Main, vs. Income Tax, 4th Sector, HSR Layout, Circle 11 (3), Bangalore, Bangalore. Karnataka – 560 102. PAN: AAACI7692H APPELLANT RESPONDENT

Appellant by : Shri Veenu Aggarwal, CA Respondent by : Shri Muzaffar Hussain, CIT (DR)

Date of hearing : 26.02.2019 Date of Pronouncement : 15.03.2019

O R D E R Per Shri A.K. Garodia, Accountant Member This appeal is filed by the assessee and the same is directed against the order of ld. CIT(A)-3, Bangalore dated 18.09.2017 for Assessment Year 2010-11.

ITA No. 2199/Bang/2017 Page 2 of 15 1.1 Ld. Ld. CIT (A) has failed to appreciate and verify the details submitted by the Appellant and has erred in law as well as on facts while mentioning that the Appellant has not provided any det, showing that the bad debts were offered as income in earlier years. 1.2 Ld. CIT (A) erred in law as well on facts in making the impugned disallowance without providing an opportunity to the Appellant to substantiate its claim. Hence, Appeal. 2. Disallowance of Inventory Written off - Rs.8,86,987 That on the facts and circumstances of the case, ld. CIT (A) has erred both in law as well as on facts in disallowing inventory written off of Rs.8,86,987 claimed u/s.28(i) of the Act, stating that the Appellant has claimed double deduction of said amount. 2.1 Ld. CIT (A) has failed to appreciate the submission of the Appellant and has erred in law by not providing an opportunity to Appellant before making the impugned disallowance. Hence, Appeal. 3. Disallowance of Other Advances written off - Rs.58,13,739 That on the facts and circumstances of the case, Id. CIT (A) has erred both in law as well as on facts in disallowing Other Advances written off Rs.58,13,739. 3.1. Ld. CIT (A) has erred in law as well as on facts in making the impugned disallowance applying section 36(1)(vii) read with section 36(2) of the Act and has failed to appreciate the fact that the write-offs were in nature of business loss allowable under section 28(i) read with section 37 of the Act. Hence, Appeal. 4. Farmer Advances written off - Rs.1,83,11,101 That on the facts and circumstances of the case, Id. CIT (A) has erred both in law as well as on facts in disallowing Farmer advances written off of Rs.1,83,11,101. 4.1. Ld. CIT (A) has erred in law as well as on facts in making the impugned disallowance applying section 36(1)(vii) read with section 36(2) of the Act and has failed to appreciate the fact that such advances were inextensible linked to the business of the Appellant, hence the write-offs of such advances were in nature of business loss allowable under section 28(i) read with section 37 of the Act. Hence, Appeal. 5. Doubtful Farmer Advances written off (earlier years) - Rs.4,06,46,761 That on the facts and circumstances of the case, Id. CIT (A) has erred

ITA No. 2199/Bang/2017 Page 3 of 15 both in law as well as on facts in disallowing doubtful farmer advances written off of Rs.4,06,46,761. 5.1. Ld. CIT (A) has erred in law as well as on facts in making the impugned disallowance applying section 36(1)(vii) read with section 36(2) of the Act and has failed to appreciate the fact that such advances were inextensible linked to the business of the Appellant, hence the write-offs of such advances were in nature of business loss allowable under section 28(i) read with section 37 of the Act. Hence, Appeal. 6. Additional Grounds of Appeal before CIT (A) not admitted: 6.1. Doubtful debts written off - Rs.2,47,12,162 That on the facts and circumstances of the case, ld. CIT (A) has erred both in law as well as on facts by not admitting the additional ground of appeal for allowing doubtful debts written off of Rs.2,47,12,162. 6.1.1. Ld. CIT (A) failed to appreciate that the appellate proceedings were continuation of assessment proceedings and therefore Id. CIT (A) ought to have admitted the additional ground of appeal under section 250(5) of the Act, following principal of natural justice, though the additional ground was not raised while filing appeal before Id. CIT(A). 6.1.2. Ld. CIT (A) has failed to appreciate that the details of doubtful debts and the submission of the Appellant for the same were on record and accordingly, Id. CIT (A) has erred in law as well as on facts in mentioning that the additional ground of appeal is not based on any material already available on record. 6.1.3. Without prejudice to the impugned action of ld. CIT (A) for not admitting the additional ground of appeal, ld. CIT (A) erred in appreciating that the amount of Rs.2,47,12,162 was actual bad debts written off and not provision for doubtful debts, which is an allowable expense under section 36(1)(vii) of the Act. Hence, Appeal. 6.2. Doubtful Farmer Advances - Rs.33,28,259 That on the facts and circumstances of the case, ld. CIT (A) has erred both in law as well as on facts by not admitting the additional ground of appeal for allowing doubtful farmer advances of Rs.33,28,259 loss under section 28(i) of the Act read with section 37 of the Act. 6.2.1. Ld. CIT (A) failed to appreciate that the appellate proceedings were continuation of assessment proceedings and therefore ld. CIT (A) ought to have admitted the additional ground of appeal under section 250(5) of the Act, following principal of natural justice, though the additional ground was not raised while filing appeal before Id. CIT(A).

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6.2.2 Ld. CIT (A) has failed to appreciate that the details of doubtful farmer advances and the submission of the Appellant for the same were on record and accordingly, ld. CIT (A) has erred in law as well as on facts in mentioning that the additional ground of appeal is not based on any material already available on record. 6.2.3. Without prejudice to the impugned action of ld. CIT(A) of not admitting the additional ground of appeal, Id. CIT (A) has failed to appreciate that such advances were inextensible linked to the business of the assessee, hence amount of Rs.33,28,259 is actual write-off of advances and not provision, which is allowable as business loss under section 28(i) read with section 37 of the Act. Hence, Appeal. 7. That on the facts and under the circumstances of the case, the Id. AO has erred both on the law as well as facts in initiating penalty proceeding under section 271(1)(c) of the Act. 8. The appellant craves leave to add, alter, delete, rectify and modify any of the grounds of appeals before or at the time of hearing the appeal.” 3. Regarding ground no. 1 of assessee’s appeal, it was submitted by ld. AR of assessee that this issue was decided by CIT(A) as per para 4.10 of his order on page no. 8. He pointed out that as per this para of the order of CIT(A), this is the observation of the ld. CIT(A) that the assessee was required to show that the amounts in question were related to its sales or other receipts which formed part of the assessee’s profit and loss account for any earlier previous year or present year. It means that it was shown as revenue receipt in the profit and loss account and thus taken into account by the assessee in computing income of respective year. But this is the finding of CIT(A) that no such details were produced before the AO. He submitted that this is correct that such details were not produced before the AO but he pointed out that the same were produced before CIT(A). It was submitted that in this regard, assessee has also raised additional ground. This additional ground is as under. “A. On the fact and circumstances of the case and in law, ld. CIT(A) has erred in law and on facts by making the disallowances without taking into consideration and acknowledging the additional evidences submitted by the appellant.”

ITA No. 2199/Bang/2017 Page 5 of 15 4. Thereafter he submitted that on page no. 37 of paper book is the details of bad debts written off claimed by the assessee at Rs. 91,48,436/-. He pointed out that this amount includes the outstanding from 8 parties which includes M/s. Calypso Foods Pvt Ltd of Rs. 27,77,771/-. He submitted ledger copy of this party from Financial Year 2005-06 to Financial Year 2009-10 as available on pages 38 to 40 of paper book. He pointed out that on page no. 38 of the paper book is the ledger copy for Financial Year 2005-06 and as per the same, the account of this party is debited on account of various sales invoices leaving closing debit balance of Rs. 29,88,903/- as on 31.03.2006. Thereafter he pointed out that on page no. 39 is the ledger copy for next year i.e. Financial Year 2006-07. He pointed out that in this year i.e. Financial Year 2006-07, against the opening balance of Rs. 29,88,903/-, there is receipt of Rs. 2,11,132/- and the closing balance as on 31.03.2007 is Rs. 27,77,771/- and this amount was written off in the present year i.e. Financial Year 2009- 10 as per page no. 40 of paper book. He submitted that from these facts, it is clear that the assessee has brought evidence on record in support of his contention that the amount in question was written off and it was taken into income for Financial Year 2005-06. Hence the requirements of section 36(1)(vii) and section 36(2) of IT Act are complied with. Thereafter, he submitted that similar is the case in respect of other seven parties whose copies of ledger accounts are available on pages 41 to 68 of paper book. He submitted that these documents were produced before ld. CIT(A) and request was made before him to admit the same as additional evidence before deciding the appeal. But ld. CIT(A) as not taken note of these documents. He submitted that under these facts, the matter may be restored back to the file of CIT(A) for fresh decision after considering these documents. The ld. DR of revenue supported the order of CIT(A).

ITA No. 2199/Bang/2017 Page 6 of 15 91,48,436/-, the basic requirement to claim the same as bad debts was that the appellant was required to show that the amounts related to its sales or other receipts, which formed part of the appellant's profit and loss account for any earlier previous year or the year under consideration i.e. the same was shown as revenue receipt in any of its P&L account and thus taken into account by the appellant in computing income of that year. However, no such details were produced before the AO. The appellant only produced the breakup of these debts. The AO has also noted that the appellant has failed to show that the amounts were actually written off in the books of accounts. In absence of same it cannot be ascertained as to whether these debts satisfy the conditions laid down in section 36(1)(vii) and section 36(2) of the Act. So this ground of appeal of the appellant is dismissed.” 6. From the above para reproduced from the order of CIT(A), it is seen that this is the basis of the order of CIT(A) that assessee has not brought evidence on record to establish that the debt in question was actually written off and the same was considered as income in anyone of the present or earlier years. As per pages 37 to 68 of paper book, it is seen that assessee has submitted ledger copy of 8 parties from whom these amounts was receivable as debts for earlier years to show that these amounts were debited on account of sales and for the present year, to establish that the debts in question was actually written off in the books of account. Since these documents were not examined by CIT(A), we feel it proper to restore back the matter to the file of CIT(A) for fresh decision after considering and examining these documents which were submitted by assessee before him by way of additional evidence. In view of this decision, no adjudication on merit is called for at the present stage. Ground no. 1 is allowed for statistical purposes.

ITA No. 2199/Bang/2017 Page 7 of 15 materials and stores are valued at cost on the basis of FIFO method, finished goods are stated at cost or net realizable value whichever is lower. He submitted that hence, only finished goods are stated at cost or net realizable value whichever is lower and the remaining items such as raw materials, processing materials, packing materials and stores are valued at cost and therefore, this observation of CIT(A) is not correct. At this juncture, the bench pointed out in addition to this that the valuation of other items except finished goods are at cost, the assessee has to show list of inventories which is considered by assessee as closing stock as on 31.03.2010 as to whether these items of stock for which the assessee is claiming write off is included or not. He submitted that these details are not readily available and hence, the matter may be restored back to the file of AO/CIT(A) to decide the issue afresh. He pointed out that the details of assessee’s claim in respect of write off of stock is available on page no. 69 of paper book and this does not include any item of finished goods. The ld. DR of revenue supported the orders of authorities below.

ITA No. 2199/Bang/2017 Page 8 of 15 examining the factual aspect. If required the CIT(A) can obtain remand report from the AO. After obtaining the factual details in this regard, the ld. CIT(A) should pass necessary order as per law after providing adequate opportunity of being heard to both sides. Ground no. 2 is also allowed for statistical purposes.

ITA No. 2199/Bang/2017 Page 9 of 15 10. We have considered the rival submissions. First of all, we reproduce para nos. 4.6 to 4.9 of the order of CIT(A) for ready reference. These paras are as under. “4.6 The breakup of remaining amount disallowed by the AO is as follows: 1) Bad debts :Rs. 91,48,436/- 2) Farmers advances written off : Rs.1,83,11,101/- 3) Inventory written off : Rs. 8,86,9871- 4) Other advance written off : Rs. 58,13339/- Total :Rs.3,41,60,263/- Provision for doubtful farmer advances of earlier years :Rs.4,06,46361/- Total :Rs.7,48,07,024/- 4.7 Now, as regards allowability of the above amounts, it is noticed that following amounts are the 'advances' written off by the appellant and claimed as bad debts during the year consideration. 1) Farmers advances written off : Rs.1,83,11,101/- 2) Other advance written off : Rs. 58,13,739/- 3) Provision for doubtful farmer advances of earlier years :Rs. 4,06,46,761/- Total :Rs. 6,47,71,601/- 4.8 The appellant has stated that the farmers are given advances as they are very poor and lack availability funds required for production of vegetables, which are used as basic raw material by the appellant. The appellant submitted that the advances given are adjusted against the purchases of agriculture produce from these farmers. However, in many cases such advances cannot be adjusted and thus become unrealisable. These advances are thus claimed as bad debt in the books of account. The submissions of the appellant have duly been considered. In this regard, it is important to look into the provision of section 36 of the Act. The same are reproduced as follows: "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: 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

ITA No. 2199/Bang/2017 Page 10 of 15 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: Explanation -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; -------------------------------------------- -------------------------------------------- (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 moneylending 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; (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 oldie 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 fora" 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 10 advances made by an assessee to which clause (viia) of sub-section (7) 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. 4.9 As per Section 36(2)(i), deduction under Section 36(1)(vii) can be allowed only in relation to such debts, which have become bad and which had been taken into account in computing the income of the

ITA No. 2199/Bang/2017 Page 11 of 15 assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year. Only exception to this is that if money is lent in the ordinary course of business of banking or money lending, which is carried on by the assessee. In the case under consideration, the appellant is not in the business of banking or money lending. The amounts of advances given to the farmers never formed part of its income in any earlier previous year or the year under consideration. So, these advances have never been taken into account by the appellant in computing income of any earlier year or the year consideration. Similarly other advances written off relate to 'VAT written off’, which have never been taken into account by the appellant in computing income of any earlier year or the year consideration. Considering above, these advances do not satisfy the condition laid down in section 36(2)(i) of the Act for being eligible to be claimed as bad debt. Considering above, the action of the AO in disallowing the same is upheld, although for reasons other than that stated by the AO in his order. The grounds of appeal of the appellant related to these are thus dismissed.” 11. From the above paras of the order of CIT(A), it is seen that the basis of confirmation of disallowance of CIT(A) is this that the deduction claimed by assessee is not allowable in respect of provisions of section 36(1)(vii) and section 36(2) of IT Act. In this regard, we are not in agreement with the ld. CIT(A) because for deciding the issue in respect of business loss, being advances written off, these sections i.e. 36(1)(vii) and 36(2) are not applicable. This is true that the claim regarding advances written off has to be decided as allowability of business loss. But in this regard, the assessee has to establish that the advances in question have actually become bad and irrecoverable in the present year. As per various pages of the paper book pointed out before us, the assessee has submitted the details of such advances and the general reasons due to which such advances made become bad and irrecoverable. For ready reference, we reproduce the submissions of the assessee before CIT(A) from pages 21 to 23 of the paper book. The same are as under.

Ground No. 7 1. Farmer Advances write off: (In respect of S. No. ' B' and 'C' as shown in aforesaid table) B. Write off farmer's advance for the current year 1,83,11,101

ITA No. 2199/Bang/2017 Page 12 of 15 C. Farmers' advances for earlier years : A.Y. 2005-06 Rs. 9,88,207 A.Y. 2006-07 Rs. 10,00,000 A.Y. 2007-08 Rs. 94,95,179 A.Y. 2008-09 Rs. 57,28,841 A.Y. 2009-10 Rs. 2,34,34,534 4,06,46,761 Total Farmer advance written off-claimed 5,89,57,862

1.1. Organisation - not owner driven/managed organisation: Ours is a professional managed company and its key-personnel were functioning from the office situated in Delhi, while operational Management staff were functioning in the field through its office stationed in Bangalore. This has resulted in loosing necessary control for its day to day operation. 1.2. Farmer Position: The appellate company is engaged in the production of Gherkins for which special quality and of different size of cucumbers (i.e. Gherkins) etc. are used as basic raw material. Supply of this basic raw material (Gherkins) is sourced from farmers only. The farmers are not only lacking necessary knowledge for ours' kind of vegetable. product meant for international market but they are poor to afford the required cost to procure qualitative seeds, pesticides, fertilizers etc which can yield suitable crop as per specific requirement for export. Having this kind of social, educational and economic obscured position, the appellant company provided all those economically marginalised-placed villagers with the quality seeds, pesticide, fertilizers etc as an advance for necessary adjustment against supply of agricultural product at the end of crop season cycle. (i) Natural calamities: Besides chronicle poverty amongst the farmers another adversity is the natural calamities. Due to attack of insects/ virus, crops are failed or remain unfit for the human consumption particularly in the international market. That apart, erratic rainfall, periodically general draught condition makes all those marginalised poor farmers in a starving-line just for giving back money or money's worth of agricultural product against the advance received earlier. (ii) Fragmentation of Land as against dependence of large number of farmer who are poor: Other factor is the size of land holding which is very small and it is subject to fragmentation, as against dependence of vast population, this

ITA No. 2199/Bang/2017 Page 13 of 15 alone, besides other factors result-in disguised unemployment and low productivity of labour. Land fragmentation is a major threat to efficient production system due to the fact that continuous subdivision of farms would lead to small sized land holdings that always cause major hindrance for economical operation. In short, small land holder-farmers constitute 97% of farming population. Illiteracy, socio-economic backwardness, inadequate and inefficient finance are the contributory factors for per capita farming production vis. a vis. commercial supply. 1.3. Ineffective contribution: Operational Managers, who are employed in the organisation came from metropolitan/urban cities and rarely they are having any experience in rural agricultural environment. As a result, they were having very little interest/involvement with farmers. 1.4. Administrative/Leadership changes: Moreover, process for change of leadership at a very senior level position beginning from early 2009, several employee including Managing Director, Chief Financial Officer and others who were driving force of operation had have direct impact in the functioning of the organisation. All these factors put together, it was a herculeous task for our urban people to have hand to hand contact with each of the farmers who constitute large number of Gherkins producers living in several villages, talukas, and district in the State of Karnataka or Tamil Nadu mainly. This alone contributes unrealisable sum of money given earlier to them as an advance. Such advance as given essentially for the purpose operation of business being business loss Rs.5,89,57,862 was written off and claimed for the purpose of tax assessment. In short, above said amount as found due from very large number of farmers cannot be said to be not related to primary purpose for business operation. At the same time, it is not advisable from the point of view of any prudent business man, under the stated circumstances, to initiate any legal steps for recovery. Under the circumstances, the above said amount disputed in this appeal for the purpose of determination of tax liability on income, may please be held as admissible business loss as appearing in the order also as under :

ITA No. 2199/Bang/2017 Page 14 of 15 Current Earlier Years Total Year Write off of Farmer's 1,83,11,101 3,82,61,163 5,65,72,264 Refer Page advances No. 58 to 416 Refer Page Bad debts write off Nil 23,60,598 23,60,598 No.417 Total Write off 1,83,11,101 4,06,46,861 5,89,57,862

a. Unrealised balances Rs.4,06,46,761/- relating to earlier years: Without prejudice to the above, your honour will no doubt appreciate that law is not logic, yet law is based on economic reality i.e. factual position. Therefore, Rs. 4,06,46,761/- pertains to earlier years as shown hereinbefore should be held as allowable as the said amount was not allowed in earlier years. For instances, reference is drawn at Page No. 418 to 422, wherein your goodself shall find that Rs.2,34,34,534/- appearing as Provision for Farmer Advance in audited P&L accounts for AY 200910 (Refer Page No.431), was included in assessed 'total incomes' in AY 2009-10, hence, the same is claimed in this year appeal i.e. AY 2010-11. 12. In addition to this, our attention was drawn to pages 70 to 72 of paper book which contains year wise details of advances written off, the details of doubtful advances written off, breakup of advances written off etc. and on pages 72 to 427 of paper book is the party wise list of farmers advances written off with farmers ID, Name, Crop cycle ID, Area of land and the amount in dispute. This was the main submission of ld. AR of assessee that for each farmer, the amount in question is very small ranging from minimum Rs. 5.25/- on page no. 130 to maximum of Rs. 63,188.19/- on page no. 88 of the paper book. It was his submission that for such small amount there cannot be any evidence and therefore, writing off by the assessee should be considered enough to accept that the debts in question has become bad and irrecoverable.

ITA No. 2199/Bang/2017 Page 15 of 15 the cases but there was amount of more than Rs. 10,000/- also in many cases and there also, it was not shown that any step was taken by assessee for recovery of amount in question. Under these facts, it cannot be accepted that the debts in question has become bad and irrecoverable and that too in the present year. In the absence of any evidence on these two aspects that the advances in question has become bad and irrecoverable in the present year, the claim of the assessee for allowing this amount as business loss is not acceptable. Accordingly these three grounds i.e. 3 to 5 are rejected.

Sd/- Sd/- (LALIET KUMAR) (ARUN KUMAR GARODIA) Judicial Member Accountant Member Bangalore, Dated, the 15th March, 2019. /MS/ Copy to: 1. Appellant 4. CIT(A) 2. Respondent 5. DR, ITAT, Bangalore 3. CIT 6. Guard file By order

Assistant Registrar, Income Tax Appellate Tribunal, Bangalore.