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Income Tax Appellate Tribunal, “F” BENCH, MUMBAI
This appeal by the Revenue is arising out of the order of Commissioner of Income Tax (Appeals)-4, Mumbai [in short CIT(A)], in appeal No. CAS-4/TFR/115/2014-15 dated 10.02.2016. The Assessment was framed by the DCIT, Circle-1 Surat (in short ‘DCIT’/ AO) for the A.Y. 2011-12 vide order dated 19.03.2014 under section 143(3) of the Income Tax Act, 1961 (hereinafter ‘the Act’).
The first issue in this appeal of Revenue is against the order of CIT(A) allowing Attimari Coolie Expenses of ₹ 21,35,504/- out of the total expenses claimed by assessee at ₹ 28,47,339/-. For this Revenue has raised the following ground No. 1: -
1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in allowing Rs. 21,35,504/- out of Rs. 28,47,339/- of Attimari Coolie Expenses claimed to have incurred by the assesse. Since the said expenditure have not been incurred under any statutory, judicial, commercial or administrative obligation and therefore not permissible as deduction, the same is required to be disallowed in full."”
Briefly stated facts are that the assessee company is engaged in the business of mechanical engineering & construction contract during the year under consideration. The AO noticed during the course of assessment proceedings that it has claimed Attimari Coolie Expenses of ₹ 28,47,339/-. The assessee was asked to explained these expenses with evidences. The assessee stated that it has incurred specific expenses with headload workers and construction workers from the unorganized sectors. It was explained that Attimari Coolie Expenses were incurred due to government patronage in union control in the state of Kerala and assessee has no alternative other than to pay these expenses in the system established. Since the assessee could not produce any evidence and could not explain the business connection with these expenses, the AO disallowed the entire Attimari Coolie Expenses. Aggrieved assessee preferred the appeal before CIT(A).
4. The CIT(A) restricted the disallowance at 25% of the expenses and deleted the balance by following the decision of Hon’ble Gujarat High Court in the case of G.G. Joshi vs CIT (1994) 209 ITR 324 (Guj) by observing in Para 8.2 as under: - “8.2 I have gone through the facts of the case, the assessment order and the submissions. The appellant enclosed date-wise details of payments with photo copies of claimed bills and vouchers. It is noticed the payment for the labour work have been shown made to various claimed workers' unions, rather than payment being made directly to the labourers or contractors etc. The following pertinent observations are culled out from them:
1) The claimed bills from the workers' unions have neither address nor phone number on them. Therefore, they are not verifiable.
2) All payments are shown in cash, even one of them is not by cheque.
Now going by the judgment of Hon'ble Gujarat High Court in the case of Joshi v CIT (209 ITR 324) wherein the High Court has observed that observed that in order to be entitled to deduction of payments made to persons whose names are not disclosed, the assessee has to: a) Establish the practice prevailing in That line of business for making such payments: b) To adduce satisfactory evidence to establish The payments: and C) To satisfy the authorities that the payments were made for the purpose of business.
The appellant may have sufficiently established the practice prevailing but the payments have not been established nor the extent of the requirement or purpose for business. Looking to the entirety of the facts, I restrict the disallowance to 25% of the expenses. Therefore, the disallowance of Rs.28,47,339/- is upheld to the extent of Rs. 7,11,835/- and the remaining disallowance is directed to be deleted."
The learned Sr. Departmental Representative, relied on the assessment order. On the other hand, the learned Counsel for the assessee filed copy of CIT(A) order for AY 2009-10 and 2010-11, wherein similar disallowance deleted by CIT(A). In AY 2009-10, the CIT(A) in appeal No CAS-I/231/11-12 vide order dated 08.03.2013 deleted the addition by observing in Para 7.4 and 7.5 as under: - “7.4 From a perusal of bills, it is noticed that the entire payment to workers’ associations has been made in cash. Moreover, on certain dates, the payment to a particular association exceeds ₹ 20,000/- (supra). The issue involved is whether the Union can be treated as agent of laborers. It is true that an Union or Association represents its members, but in order to constitute agency, the principal should be bound by every action of its agent. The appellant ahs not been able to establish this requirement, in respect of the Union/ Association to whom payments have been made. Therefore, the appellant’s contention is not accepted and it is held that rule 6DD (k) is not applicable in the case of appellant.
7.5 Moreover, considering the fact that the entire expenditure has been made in cash, the genuineness of expenditure cannot be verified. However, except the above mentioned payment of ₹ 1,16,433/- remaining did not exceed ₹ 20,000/-. Therefore, considering the nature of payment, AO’s argument, and the appellant’s submission, it is considered reasonable and fair, if the disallowance made is restricted to 25% of the addition made. Consequently, the addition made of ₹ 4,73,245/- is reduced to ₹ 1,18,311/-. No separate addition is being made under section 40A(3) of the Act as the addition has been sustained under section 37(1) of the IT Act."
It was stated by the Ld Counsel that no appeal was preferred by revenue against the deletion of disallowance of Attimari Coolie Expenses and for consistency also he argued that the deletion is bad.
Now, before us, the assessee filed ledger account of Attimari Coolie Expenses and also vouchers for payment of such charges on sample basis which are enclosed at pages 5 to 163 of the assessee’s paper book. We find that similar disallowance in earlier years have not been challenged by Revenue, deleted by CIT(A). Going by the decision of Hon’ble Gujarat High Court in the case of G.G. Joshi (supra), and findings of CIT(A), we find no infirmity in the order of CIT(A). Hence, this issue of Revenue’s appeal is dismissed.
The next issue in this appeal of Revenue is against the order of CIT(A) deleting the disallowance of bad debts claimed by assessee. For this Revenue has raised the following round No. 2:-
On the facts and in the circumstances of the case and in law, the l.d. CIT(A) has erred in allowing the claim of bad debts of Rs. 1,25,68,662/- made by the assessee in the return of income which was disallowed by the AO in the assessment order. The same is required to be disallowed in full.
Briefly stated facts are that the AO noticed from the verification of profit and loss account “schedule K of general and administrative expenses” that it has debited an amount of Rs. 1,25,68,662/- on account of Sundry Debtors written off. The following are bad debts claimed and the reasons for write off: -
The AO require the assessee to explain and furnish the details in whose name the sundry balances have been written off with reason thereof. The assessee filed details of debt not recoverable. It was also claimed by the assessee that these debts have already been declared as income in earlier years. The assessee also explained that the invoices were offered as incomes when the same were raised. However, subsequent when the Directors formed the opinion that the amounts had become irrecoverable the same was written off as bad debts in assessee company's books of accounts. Further, Ld counsel explained that it is the normal practice in this line of business, that a specified percentage of the running bill is hold as retention by the client and will be released to the assessee company after the guarantee period. In few of the cases the same is not released due to some technical and/or other reasons and has to be written off in the books of account as are not recoverable from the clients. But the AO was not convinced and he disallowed the claim of bad debt of ₹ 1,25,68,662/-. Aggrieved, assessee preferred the appeal before CIT(A).
The CIT(A) allowed the claim of the assessee by observing in Para 9.2 of his appellate order as under: - “9.2 I have gone through the facts of the case, the assessment order and the contentions and submissions of the appellant. The AO has not allowed the deduction mainly on the ground that the appellant has foiled to establish that the debts' which were written off were genuine debt in the first place. It is not the case that the amounts were not taken to the profit and loss account. Once the business credits another party for a good or service; and shows it as revenue receipt it becomes a debt which is eligible for consideration u/s. 36(1)(vii) of the Act, once it is written off in the books. It is not a case where the writing off is proved to be mala fide.
Further, as submitted by the appellant, the issue of write off bad debts was one of the issues for AY 2010-11 before the CIT(A). The learned CIT(A) vide order dated 23 June 2014 (para 2, page 2-11) relying on the decision of the Hon'ble Supreme Court in the case of IRE Ltd. v CIT (supra) has allowed the claim of the appellant of bad debts.
I agree that if the write off is not mala fide; only two conditions are required to be satisfied by an assessee to claim bad debt as per provisions of section 36(1) (vii) of the Act. Firstly, the amount should be written off as irrecoverable in the accounts of the assessee for the previous year and secondly, the amount which is sought to be written off should have been taken into account as income of the assessee in the previous year relevant to the assessment year or in the earlier previous years. In the case of the appellant, while explaining each and every debt, it has shown that the debts have been written off in its books of account during the year and were shown as income in the earlier year/s. The objections raised by AO that debtor companies have not claimed these amounts in their books of account or they have rejected the claims of appellant or TDS is not made on these amounts or these amounts have been claimed excessively or otherwise, is of any relevance as discussed earlier. Since these debts have been written off in the books of appellant in the year under consideration and have already been credited as income in the preceding year/s, same are allowable as expenditure under section 36(l) (vii) of the Act.
The ground of appeal is therefore, allowed."
Aggrieved, now Revenue is in appeal before Tribunal.
We have heard the rival contentions and gone through the facts and circumstances of the case. We find from the facts of the case that in construction business a specified percentage of the running bill is hold as retention by the client and released after the guarantee period. In few of the cases the same is not released due to some technical and/or other reasons. The assessee in the present case has explained the same and written off the same in the books of account as are not recoverable from the clients. In such circumstances, we have gone through the decision of Hon’ble Supreme Court in the case of TRF Ltd. Vs. CIT (2010) 323 ITR 397 (SC) and noted that even after 01-04-1989, it is not necessary for assessee to establish that has become irrecoverable. Once the bad debts or part thereof has been written off in the books of accounts of the assessee, that is enough for claiming deduction as bad debt. Hon’ble Supreme Court has held in Para 3 and 4 as under:-
“3. For the sake of clarity, we re-produce herein below provisions of Section 36(1)(vii) of the Act, both prior to 1st April, 1989 and post-1st April, 1989.
"Pre-1st April, 1989:
Other deductions.
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-- (i) to (vi) xxxx xxxx xxxx (vii) subject to the provisions of sub-section (2), the amount of any debt, or part thereof, which is established to have become a bad debt in the previous year.
Post-1st April, 1989:
Other deductions.
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-- (i) to (vi) xxxx xxxx xxxx (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."
This position in law is well-settled. After 1st April, 1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. However, in the present case, the Assessing Officer has not examined whether the debt has, in fact, been written off in accounts of the assessee. When bad debt occurs, the bad debt account is debited and the customer's account is credited, thus, closing the account of the customer. In the case of Companies, the provision is deducted from Sundry Debtors. As stated above, the Assessing Officer has not examined whether, in fact, the bad debt or part thereof is written off in the accounts of the assessee. This exercise has not been undertaken by the Assessing Officer. Hence, the matter is remitted to the Assessing Officer for de novo consideration of the above-mentioned aspect only and that too only to the extent of the write off."
In the present case before us the assessee is actually write off the bad debts and that fact is not under dispute. This fact is clear from schedule ‘k’ of general and administrative expenses of P & L account, wherein the assessee has debited the amount of ₹ 1,25,68,662/- on account of sundry debtors written off. This fact is acknowledged by the AO in his assessment order. Once, this is a fact the debts claimed by assessee are allowable. The CIT(A) has rightly allow the claim of the assessee and we confirm the same. This issue of Revenue’s appeal is dismissed.
In the result, the appeal of the Revenue is dismissed.