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Income Tax Appellate Tribunal, “G” BENCH, MUMBAI
Before: SHRI PAWAN SINGH & SHRI RAMIT KOCHAR
O R D E R
PER RAMIT KOCHAR, Accountant Member:
This appeal, filed by assessee, being is directed against appellate order dated 03.11.2017, passed by learned Commissioner of Income Tax (Appeals)-6, Mumbai (hereinafter called “the CIT(A)”) in appeal no. CIT(A)-6/IT-159/113/2016-17, for assessment year 2014-15, the appellate proceedings had arisen before learned CIT(A) from assessment order dated 30.11.2016 passed by learned Assessing Officer (hereinafter called “the AO”) u/s 143(3) of the Income-tax Act, 1961 (hereinafter called “the Act”) for AY 2014-15.
The grounds of appeal
raised by assessee in memo of appeal filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called “the tribunal”) read as under:- “1. The Ld CIT (A) is erred in confirming bad debts disallowance of Rs. 22,36,082/- of the Assessee Company, which was in due course of business of the Assessee.
2. The Ld CIT (A) is also erred in not following the decision of Bombay High Court in the case of CIT V Shreyas S morakhia, which is similar in the Assessee's case.
3. The Appellant prays to delete the addition made on above account.
4. The Appellant craves leave to add, alter, delete or modify any of the above ground/s of appeal.”
3. The brief facts of the case are that the assessee is Custom House Agent, Clearing & Forwarding Agent, Transport and Labour Contractor. 3.2 The short question in this appeal has arisen with respect to disallowance of bad debt of Rs. 22,36,082/- claimed by assessee which stood debited by assessee in its books of accounts and in P&L Account filed with Revenue. 3.3 During the course of assessment proceedings conducted by the AO u/s 143(3) read with Section 143(2) of the 1961 Act, the AO asked assessee to furnish details of these bad debts and justify its claim of deduction of these expenses. In opinion of the AO , the assessee is declaring only agency commission income and these amounts were incurred by assessee on behalf of the client while carrying on the business which does not constitute assessee’s trading receipts or income of the C&F which was also not routed through P&L Account. The assessee furnished details of bad debts on account of various parties and made submissions before the AO. The AO was of the view that assessee is into clearing and forwarding services and is offering 2 | P a g e only agency fee as its income. The AO observed that only other expenditure incurred was on reimbursements basis. The AO observed that these bad debts claimed were not offered as income in previous years. The AO observed that in case of PDS International ( A/c Eli Lilly & Company (India) Private Limited) , the assessee has claimed bad debts in the same year itself. The AO also observed that the assessee has claimed discounts given in preceding previous years as bad debts which is evident from ledger itself. The AO observed that the assessee has claimed discounts given in preceding years as bad debts. The AO observed that the assessee is regularly claiming discounts as expenses in its books of accounts and debiting it in P&L Account. It was observed by AO that in such line of business, there are always disputes with respect to certain reimbursable expenses between the client and C&F Agent as the client do not acknowledge these reimbursement expenses which is later claimed discounts by C&F agent in its books of accounts. The AO observed that for claiming bad debt , there has to be right to receive the amount which is precondition which is not met in this case. The AO observed that claiming of bad debt is not an empty formality. The AO relied upon decision of ITAT, Bangalore in the case of Embassy Classic Private Limited v. DCIT in 2010-TIOL-591. The AO was also of the view that the assessee has a continuing dealing with many of these client’s which is continuing even after claim of write off of Bad Debts in its books of accounts. The AO observed that no prudent businessmen will continue to work with the client with whom the assessee has bad debt. The AO also observed that the assessee has claimed service tax paid as a bad debt and it is settled position of law that taxes cannot be claimed as bad debts. The AO distinguished the case law relied upon by the assessee and observed that in the instant case even the invoices are not acknowledged by clients. The AO observed that these are discounts given by assessee which is now written off as bad debts. The AO observed that the assessee never got the right to receive the said amount as the client PDS International( A/c Eli Lilly & Company (India) Private Limited) had never accepted this amount as their liability and since the debt was never created so there is no question of write off bad debt. Thus, the AO disallowed the claim of write off of bad debt of Rs.22,36,082/- ,vide assessment order dated 30.11.2016 passed by the AO u/s 143(3) of the 1961 Act.
The learned CIT(A) also held against the assessee in first appeal filed by the assessee, by holding that these bad debts are on account of various reimbursements claimed from its clients which were not accepted by clients and further this entire claim of bad debts is only for the short period of three months of the financial year viz. from 01.04.2013 to 03.06.2013 and these expenses were also incurred in earlier year’s also which is now claimed as bad debts. The learned CIT(A) distinguished the judgment of Hon’ble Bombay High Court in the case of CIT v. Shri Shreyas S. Morakhia in of 2011 , judgement dated 28.02.2012 as that case pertained to share broker wherein share brokerage as well consideration for purchase of shares constitute part of same debt arising from same transaction and has to be compulsorily incurred through share broker as it is routed through stock exchange, while in the case the assessee who is CHA Agent, it is not necessary/obligatory on part of assessee to incur these expenses . Thus, learned CIT(A) also disallowed the claim of the assessee for bad debts written off to the tune of Rs. 22,36,082/- , vide appellate order dated 30.11.2016 passed by learned CIT(A). 5.Assessee being aggrieved by an appellate order dated 30.11.2016 passed by learned CIT(A) has filed an second appeal with tribunal. The learned counsel for the assessee at the outset submitted that the issue is covered by judgment of Hon’ble Bombay High Court in the case of Shri Shreyas S Morakhia(supra). The said judgment is placed in paper book at page 61-78. The assessee also relied upon CBDT circular number 12/2016 dated 30.05.2016 , which is placed in paper book at page 59-60. It was submitted that the assessee is CHA/C&F agent. The learned counsel for assessee submitted that gross commission earned was Rs. 3.17 crores during the year under consideration. It is claimed that the bad debts are only to the tune of Rs.22.36 lacs. The assessee claimed that disallowances were made u/s 36(2)(i) of the 1961 Act as in the opinion of authorities below such debt were never taken into account while computing income of the assessee for earlier years or for the year under consideration. The learned DR drew our attention to orders passed by authorities below and prayed that the additions be confirmed. The learned DR drew our attention to ledger account of PDS International ( A/c Eli Lilly & Company (India) Private Limited) and submitted that bad debts are written off regularly and still dealings with this party is continuing. The ledger account of PDS International ( A/c Eli Lilly & Company (India) Private Limited) is placed in paper book at page 46.
We have heard both the parties and considered the material on record including cited case laws. We have observed that the assessee is Clearing House Agent and Clearing and Forwarding agent who is dealing on behalf of several clients for which assessee is entitled for agency commission as its income in its normal course of business. The assessee as per trade practices has to necessarily incur certain expenses on behalf of the client for clearing and forwarding of shipments in order to complete its contractual obligations with its clients such as loading and unloading, payments of various levies, duties and taxes in the course of clearing shipments , wharf charges etc. on behalf of clients which is a normal practice of this trade for which invoices are raised by assessee for reimbursement of these expenses incurred on behalf of the client as well for agency commission income to which the assessee is entitled as an income for rendering of its services . In this case it is observed that within a short span of time between 01.04.2013 to 03.06.2013 , the assessee has claimed these bad debts which are infact expenses incurred by assessee which are claimed to be incurred on behalf of the client but not accepted by client . Now to allow these expenses as deduction from income which are infact expenses although claimed to be incurred by the assessee for its clients but are not accepted by client and on rejection these expenses entered into P & L Account and are claimed as deduction against income of the assessee. Under these circumstances, it becomes essential for the assessee to produce the details of these expenses which are claimed to be incurred by the assessee on behalf of the client but were rejected by clients and to show that these were genuine and bonafide expenses incurred by assesssee on behalf of the client by assessee in normal course of its business in discharge of its duties/obligations as CHS / C& F agent for which reimbursements were claimed but rejected by client and then to explain and justify why these expenses which were claimed to be incurred by assessee on behalf of its clients in normal course of its business in discharge of its contractual obligations with its client could not be recovered from its client PDS International( A/c Eli Lilly & Company (India) Private Limited) etc. . These are factual aspects which need to be verified by the AO including genuineness of these expenses as well as reasons for non payment of these expenses by clients. So far as write off of service tax is considered, again the assessee has to present complete details before the AO as to non claiming of the credit of these service tax under Cenvat Credit Rules , so that there is no double deduction of service tax once as write off as bad debts and secondly by way of claiming Cenvat Credit in the return of Service Tax filed with Service Tax Department. We clarify that if service tax was paid on behalf of the client as part of expenses incurred on behalf of the client for which reimbursement was claimed but rejected by the client , these expenses shall be allowed as deduction provided it is held by AO after verification in set aside proceedings that these are otherwise genuine expenses incurred by the assessee in the normal course of its business as CHS/C&F agent.Thus we set aside the appellate order of learned CIT(A) and remit the matter back to the file of the AO for framing denovo assessment in accordance with our directions as are contained in this appellate order. Needless to say that the AO shall provide proper and adequate opportunity of being heard in accordance with principles of natural justice in accordance with law. The evidences/explanations furnished by the assessee in denovo assessment proceedings shall be admitted by the AO which shall be adjudicated on merits in accordance with law. We order accordingly.
In the result, appeal of the assessee in AY 2014-15 is allowed for statistical purposes.