PRIME BOND INDUSTRIES,MUMBAI vs. ADDL. CIT - 31(2), MUMBAI

The singular issue in this appeal is with regard to an addition of Rs.22,94,805/- made by the Assessing Officer, which has since been affirmed by the CIT(A).

In brief, the relevant facts are that the appellant is a partnership firm engaged in the business of manufacture and trading of Aluminium composite sheets. In the course of assessment proceedings, the Assessing Officer noticed that assessee had, inter-alia, written-off bad debts of Rs.22,94,805/- in relation to two parties detailed as (i) M/s. Deepmala Infrastructure Pvt. Ltd. – Rs.22,02,451/-; and, (ii) M/s. Dest Buildwell Products Pvt. Ltd. – Rs.92,354/-. On being asked to explain, assessee pointed out that the sale effected to M/s. Deepmala Infrastructure Pvt. Ltd. was offered to tax in the earlier assessment year of 2011-12 and as regards M/s. Dest Buildwell Products Pvt. Ltd., it was explained that assessee had made sale to the tune of Rs.1,77,844/- to the said concern in the instant year itself, but the balance payment of Rs.92,354/- was not received and hence the aforesaid amount was claimed as bad debt. With regard to M/s. Deepmala Infrastructure Pvt. Ltd., assessee also explained that the said concern had placed an order for supply of Aluminium sheets, but later on the buyer claimed that the material was not as per the specification and the same was rejected. Since assessee did not receive any payment against the sale, the entire amount of Rs.22,02,451/- was claimed as bad debt. The Assessing Officer made inquiries from the two concerns u/s 133(6) of the Act. In the case of M/s. Deepmala Infrastructure Pvt. Ltd., the said concern confirmed that the supply made by the assessee was rejected by it and it was further confirmed that there was no question of making any payment to the assessee on this count. With regard to M/s. Dest Buildwell Products Pvt. Ltd., the Assessing Officer found that the said party stated that it had made purchases of only Rs.85,490/- as against the sales of Rs.1,77,844/- claimed by the assessee. Based on the replies obtained from the two parties, assessee was asked to state the position about recording of ‘sales return’ in the books of account. In the absence of any satisfactory explanation on this count, the Assessing Officer inferred that the “goods returned” were not entered by the assessee in its account books and, therefore according to him, the claim of bad debts was not justified. The Assessing Officer accordingly disallowed the claim of bad debts of Rs.22,94,805/-.

Before the CIT(A), assessee reiterated its plea that payment has not been received from the two concerns and the corresponding amounts were already credited as sales and, therefore, the impugned sums ought to have been allowed as bad debts. The CIT(A) disagreed with the assessee. With regard to M/s. Deepmala Infrastructure Pvt. Ltd., the CIT(A) accepted the plea of assessee for write-off of bad debt of Rs.22,02,451/- with respect to the sales made; so however, he directed the Assessing Officer to add an equal amount to the income of the assessee as ‘undisclosed sales’. The CIT(A) took note of the fact that the goods rejected by the buyer were not taken by the assessee in its stock and that the same have been sold outside the account books. Insofar as the claim with respect to M/s. Dest Buildwell Products Pvt. Ltd. was concerned, the CIT(A) noted that the reply received from the party did not substantiate assessee’s plea of bad debt in respect of its sales. On this aspect, he upheld the addition of Rs.92,354/-. In this manner, not being satisfied with the order of the CIT(A), assessee is in further appeal before us.

Before us, the learned representative for the assessee has assailed the decision of CIT(A). The learned representative pointed out that though M/s. Deepmala Infrastructure Pvt. Ltd. rejected the goods supplied by the assessee, but such goods have not been received back by the assessee at all. It was, therefore, the plea of the assessee that the addition sustained by CIT(A) is on a wrong footing and is on mere presumptions. The learned representative referred to the communication of M/s. Deepmala Infrastructure Pvt. Ltd. dated 24.06.2016 in this regard, a copy of which has been placed in the Paper Book. The learned representative pointed out that the said communication was in response to a letter written by the assessee on 03.06.2016 wherein assessee communicated to the said concern that the rejected goods were not received back. A copy of such communication is placed at page 28 of the Paper Book. The learned representative explained that the aforesaid material was not before the lower authorities, but it clearly shows that the goods have indeed not been received back by the assessee. On this aspect, our attention has also been invited to the communication of M/s. Deepmala Infrastructure Pvt. Ltd. dated 10.02.2015, a copy of which is placed at pages 15 and 16 of the Paper Book, which is addressed to the Assessing Officer in response to the summons issued u/s 133(6) of the Act. An alternate plea was also made by the assessee to the effect that if it is held that the buyer had indeed returned the goods, then, the entire amount of sales should not be treated as income and only the cost portion of the goods should be assessed.

On this aspect, the ld. DR has primarily reiterated the reasoning adopted by the lower authorities, which we have already noted in sufficient detail in the earlier paras and is not being repeated for the sake of brevity.

Having considered the rival stands, we find that so far as the initial claim of assessee for bad debt of Rs.22,02,451/- in respect of sales to M/s. Deepmala Infrastructure Pvt. Ltd. is concerned, the same has been accepted by the CIT(A) and Revenue is not in appeal. Simultaneously, the CIT(A) upheld the addition of like amount on the ground that the good rejected by the buyer were received back by the assessee and the same have been sold outside the books of account, since no ‘sales return’ has been accounted for by the assessee. That the goods rejected by the buyer have been received back by the assessee is a natural corollary to rejection of material by the buyer. Thus, to this extent, we uphold the decision of CIT(A). It is also clear from the order of the authorities below that assessee has not been able to substantiate as to whether it has accounted for such ‘goods returned’ in its account books or not? So however, the addition that is permissible under these circumstances is only the cost portion of the goods which have been returned, which according to the assessee is around 60% of the impugned sum. The reasoning advanced by the CIT(A) that the assessee would have effected sales outside the books of account is on mere surmise and cannot be sustained. Therefore, we deem it fit and proper to direct the Assessing Officer to scale down the addition to the cost portion of the goods, which as per assessee itself is around 60%, and the balance of the addition be deleted.

Insofar as the amount of Rs.92,354/- with respect to M/s. Dest Buildwell Products Pvt. Ltd. is concerned, the same, in our view, has been rightly upheld by the CIT(A) as the other concern has not even confirmed the transaction of sale as depicted by the assessee.

In the result, appeal of the assessee is partly allowed.