DIC INDIA LTD,KOLKATA vs. DCIT, CIRCLE-10(1), KOLKATA, KOLKATA

This is an appeal by the Assessee against the order dated 31.01.2017 of D.C.I.T.,Circle-10 (1), Kolkata passed u/s 144C r.w.s. 143(3) of the Income Tax Act, 1961 (Act.) for A.Y.2012-13.

Ground no.1 and 2 raised by the assessee reads as follows :- “1. For that on the facts and in the circumstances of the case and in law, the Hon'ble DRP was unjustified in upholding the disallowance of bad debts to the extent of Rs.3,34,330/-. 2. For that on the facts and in the circumstances of the case and in law, the Hon'ble DRP as well as the Id. AO failed to appreciate that the sale tax component of Rs.3,34,330/- inter alia included in the sundry debtors written off to the P&L A/c, was in the nature of 'trade debt' and hence allowable as deduction from the profits of the business. “ 3. The Assessee is a company engaged in the business of manufacturing, trading and selling of printing ink, industrial adhesives and other allied products. While computing income from business, the assessee claimed deduction of a sum of Rs.1,45,55,609/- on account of bad debts. It is not in dispute that bad debts were D.I.C.India Ltd. A.Yr.2012-13 written off in the books of accounts of the assessee and that the Assessee was entitled to claim deduction in respect of bad debts written off u/s 36(1) (vii) of the Act. The dispute raised by the AO was that the bad debts written off comprised of component of sales tax of Rs.3,34,330/-. The AO was of the view that the sales tax component of the bad debts written off cannot be allowed as deduction as bad debts written off because it was not a debt arising from the trading transaction between the Assessee and its customer. Rather it was a liability of the customer to pay sales tax to the Government. According to the AO the sales tax component should not be allowed as deduction because the sales tax component was not credited as part of the sales when sale was recorded by the assessee in his books of accounts. The AO also was of the view that sales tax could be allowed as deduction only on payment basis in view of the provision of section 43B of the Act. For the above reasons the AO disallowed the claim of deduction on account of bad debts to the extent of Rs.3,34,330/- .

On objection by the assessee on the aforesaid addition before Disputes resolution Panel (DRP), the DRP confirmed the order of the AO. Hence the assessee raised ground no. 1 and 2 before the tribunal.

The ld. Counsel for the assessee submitted before us that sales tax is part of the trading or business receipts of the assessee and in this regard drew our attention to the decision of the Hon’ble Supreme court in the case of Chowringhee Sales Bureau P. Ltd. vs CIT 87 ITR 542 (SC). It was held by the Hon’ble Supreme Court that sales tax collected is part of the trading receipt of an assessee. The ld. Counsel also brought to our notice that sales tax charged in the invoice is routed through profit and loss account and therefore a trade receipt and writing off such amount should be considered as in the nature of bad debts written off. The ld. DR submitted that the same cannot be considered as bad debt written off because the liability in respect of the sum of Rs.3,34,330/- on account of sales tax cannot be regarded as debt of the assessee as it 2

We have given a very careful consideration to the rival submissions. It is an admitted position that the trading receipts of the assessee recorded in the books of accounts also includes a sum of Rs.3,34,330/- on account of sales tax. The assessee cannot claim deduction of the aforesaid sum without payment in view of the provision of section 43B of the Act. If the assessee had made the payment of sales tax then the debtor of the assessee has to pay back the said amount to the assessee and therefore it will assume the character of a debt in the hands of the assessee. If ultimately the customer does not pay this amount to the assessee, it has to be regarded as bad debt written off and allowed as deduction u/s 36(1)(vii) of the Act. In any event the deduction has to be allowed u/s 28 of the Act as a loss incidental to the business. We therefore direct the claim of the assessee to be allowed.

The assessee paid a sum of Rs.2,14,29,108/- to the holding company DIC Asia Pacific PTE Ltd., Singapore and Royalty of Rs.7,03,28,595/- to another holding company DIC Corporation, Japan. The total royalty paid by the assessee was therefore Rs.9,17,57,703/-. According to the AO by paying the aforesaid royalty the assessee 3

On objection by the Assessee before the DRP, the DRP confirmed the order of the AO. At the time of hearing the ld. Counsel for the assessee brought to our notice that in A.Y.2010-11 similar royalty payment made by the assessee under the very same agreement to the very same parties was allowed as deduction by the AO in the order of assessment. The CIT passed an order u/s 263 of the Act holding that the payments were capital in nature as the assessee acquired intangible rights of technology know-how brand name etc. Therefore the only capitalized value of the intangible right should be allowed as deduction and the entire sum should not be allowed as deduction as it was a capital expenditure in nature. Order u/s 263 of the Act was the subject matter of challenge by the assessee before ITAT in ITA No.126/Kol/2017. This tribunal by its order dated 05.04.2017 quashed the order u/s 263 of the Act taking a view that the expenditure in question was a revenue expenditure. The following were the conclusions of the tribunal : “9. We have heard the rival submissions and perused the materials available on record including the paper book filed by the assessee. We find Coates of India Limited was the erstwhile name of DIC India Limited (assessee herein) . We find from the technical collaboration agreement entered into between assessee and DIC Corporation, Japan on 5.12.2000 that assessee is engaged in the business of manufacturing of printing inks and allied products in India in its various factories located at Calcutta, Delhi, Mumbai, Chennai, Noida and Ahmedabad. The assessee was desirous of upgrading its overall technology and introduction of new technology for manufacturing printing inks and allied products of all types viz., 4

The conclusions of the tribunal on the allowability of the aforesaid expenses as a revenue expenditure are contained in paragraph 9.3 to 9.7. The tribunal relied on the decision of the Hon’ble ITAT in the case of Bata India Ltd. In to 1828/Kol/2012 order dated 23.05.2013 which was confirmed by the Hon’ble Calcutta High Court in GA No.3482 of 2013 dated 18.08.2014. The tribunal examined the terms of the license under the agreement between the parties which are the same in the present AY also. The tribunal in the case of Bata India Ltd. Took the following view :- “18. We have heard the rival submissions. A perusal of the agreement in respect of the technical know-how and the manufacturing process clearly shows that the assesse has derived no enduring benefit nor has assessee obtained any capital asset on the basis of the payment of the royalty as per the agreement, The technical know-how trade marks denies drawings. notes etc. in respect of the agreement for which the assessee has paid the royalty belongs to the licensor being M/s. 8

The tribunal also placed reliance on the decision of the Hon’ble Calcutta High Court in the case of Timken India Ltd. (2014) 51 Taxman 184 (Cal) in which the Hon’ble Calcutta High Court took the following view :- “10. We have considered the rival submissions of the learned advocates for the parties. The submissions advanced by Ms. Gutgutia are no doubt meritorious and certainly represent one way of looking at the things. Sight cannot however be lost of the fact that the payment made by the assessee is on account of license fee. By making such payment, the assessee has got a permission la use the technology, The money paid is irrecoverable. In case the business of the assessee for some reason or the other is stopped, no benefit from such payment is likely to accrue to the assessee. The license is not transferable. Therefore. it cannot he said with any amount of certainty that there has been an accretion to the capital asset of the assessee. In case, the assessee continues to do business and continues la exploit the technology for the agreed period of time, the assessee will be entitled to take the benefit thereof. But in case it does not do so, the payment made is irrecoverable. It is in this sense that the matter was looked into by the High Court of Madras and was endorsed by the apex Court in the case of IAEC (Pumps) Ltd. (supra). The point as a matter of fact is covered by the aforesaid judgment. Nothing really is left for us to do in the matter.

The revenue had placed reliance on the decision of the Hon’ble Madras High Court in the case of CIT vs Southern Switchgear Ltd reported in 148 ITR 273 (Mds). That was distinguished by the tribunal in the following words : “We find that the decision of the Hon 'ble Madras High Court in the case of CIT vs Southern Switchgear Ltd reported in (1984) 14'8 ITR 273 (Mad) does not come to the rescue of the revenue as in that case, it was categorically found that in addition to the acquisition of technical knowledge, the assessee company got an exclusive right to manufacture and sell its articles without any objection from anyone 9

In view of the aforesaid decision on the same facts, we are of the view that the claim for deduction as made by the assessee ought to have been allowed by the revenue authorities.

The ld. DR submitted that the order of the tribunal relied upon by the ld. Counsel needs a re-look because the decision of the Hon’ble Madras High Court in the case of CIT vs Southern Switchgear Ltd had not been appreciated. He further submitted that a new advantage and acquisition of capital asset by the assessee existed in the present case. The assessee had enduring benefit and has functionally gained advantage and these facts ought to have prompted the tribunal to come to a conclusion that expenditure in question was capital in nature.

We have considered the rival submissions and we are of the view that the arguments put forth by the ld. DR have already been considered by the tribunal in the order cited in the earlier paragraphs. We are of the view that the facts and circumstances remain identical. There is no reason for taking a contrary view. We

Ground No.5 and 6 raised by the assessee reads as follows :- “5..For that on the facts and in the circumstances of the case and in law, the Id. AO acted in complete violation of the binding directions of the Hon'ble DRP by not allowing the claim of normal depreciation of Rs.21,829/- & additional depreciation of Rs·.1, 11 ,578/- u/s 32( 1 )(ii.) & 32( 1 )(iia) of the Act.

As far as ground no. 5 and 6 is concerned the DRP in this direction has observed as follows :- “Findings:- Ground no 13 was also carefully considered by us. The arguments were also taken into account by us. It was noted by us that additional depreciation was claimed by the A ‘multi gas detector mode! selection mode! -PGM-6228 & 12KL GO Storage Tank. The said object cannot be regarded by LIS as an office equipment or furniture, The AO shall verify from records whether additional depreciation is pressed against the above plant or against some office equipment. If it is in respect of the former the claim shall be allowed.

The ld. Counsel for the assessee brought to our notice that in the order passed by the AO giving effect to the directions of the DRP, he did not give effect to the D.I.C.India Ltd. A.Yr.2012-13 directions of the tribunal. The limited prayer of the ld. Counsel for the assessee is to direct the AO to follow the directions of the DRP and give effect to such directions.

We are of the view that it would be just and proper to direct the AO to comply with the directions of the DRP and before doing so afford opportunity of being heard to the assessee.

Ground No.7 raised by the assessee reads as follows :- “7. For that on the facts and in the circumstances of the case and in law, both the DRP as well as the AO erred on facts & in law in not allowing deduction in respect of sum of Rs.43,35,000/- actually paid towards leave encashment u/s 43B of the Act.”

The assessee made a claim before the AO for deduction of a sum of Rs.43,35,000/- u/s 43B of the Act towards leave encashment and retirement benefits that was actually paid during the relevant previous year in computing income of the assessee from business. The admitted factual position was that the assessee did not claim the aforesaid sum as deduction in the return of income. The AO therefore refused to entertain the claim of the assessee for deduction as above.

On objection by the Assessee before the DRP, the DRP confirmed the order of the AO with the following observations: “Findings - Ground no. 11 pertaining to omission to report to the tax auditor u/s 44AB, the fact of payment towards leave encashment and retirement benefits to its employees was carefully considered by us. The A' presented his claim before the AO who obviously relying M/s. Goetze (SC) denied the deduction to the A.' The arguments of the A' against the above were considered by us. The discovery of' the omission to claim the above amount was post audit. Since the tax audit did not cover this aspect, it is difficult for us to grant any benefit of this claim to the A' as the same would tantamount to accepting entries out of the pale of audit and thereby granting benefit to the A' on the basis of certain facts which were not placed before the tax auditor. Moreover whether omission was deliberate or unwilful, also D.I.C.India Ltd. A.Yr.2012-13 cannot be established now. For the above compelling reasons the objection is dismissed.”

Aggrieved by the order of DRP, the Assessee has raised Gr.No.7 before the Tribunal.

Before us, the ld. Counsel for the assessee submitted that the decision of the Hon’ble Supreme Court in the case of Goetze India Ltd., 284 ITR 323 (SC) wherein it was held that any claim made by the assessee which is not supported by a revised return filed u/s 139(5) of the Act could not be entertained by the AO, is applicable only to the power of the AO to entertain a new claim and is not applicable to the appellate authority under the Act. The DRP as a first appellate authority has the power to entertain a new claim even in the absence of a revised return of income. The Supreme Court in case of Goetze (India) Ltd. (supra) has clarified that "the decision was restricted to the power of the assessing authority to entertain a claim for deduction otherwise than by a revised return, and did not impinge on the power of the Appellate Tribunal under section 254 of the Income-tax Act, 1961”. This has been interpreted in several judicial pronouncements as applicable even to the first appellate authorities. The Hon’ble Delhi High Court in the case of Jai parabolic Springs 306 ITR 42 (Delhi) has held that the appellate authorities under the Act, were free to consider a claim made by an Assessee even in the absence of a revised return of income and that the requirement for filing a revised return of income as laid down by the Hon’ble Supreme Court in the case of Goetz India Ltd. (supra) is applicable only when a claim is made contrary to the return of income before the AO. The Hon’ble Delhi High Court in the case of Bharat Aluminium 163 Taxman 430J, has inter-alia ruled that assessee can file revised computation in the course of ongoing assessment proceedings under the Act, without making recourse to revised return, despite the fact that time limit for revising return under section 139(5) had expired. In the light of the aforesaid decisions, we are of the view that the DRP ought to have examined the claim of the Assessee. We 13

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