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This appeal by the Revenue is directed against the order dated 29.08.2014 passed by the Commissioner of Income Tax (Appeals)-XII, Kolkata for the assessment year 2011-12.
The issue raised in grounds no. 1 relates to deletion by the Ld. CIT(A) of the addition of Rs. 10,85,214/- made by the AO on account of commission expenses relating to assessment year 2010-11. M/s Associated Pigments Ltd. 1
The assessee in the present case is company which is engaged in the business of manufacturer of lead, lead oxides and allied products & trading of lead/lead alloy. The return of income for the year under consideration was filed by it on 26.09.2011 declaring total income of Rs. 14,99,20,648/-. In the profit and loss account filed along with said return a sum of Rs. 26,61,183/- was debited by the assessee on account of commission and salary to the Directors. On verification, it was found by the AO during the course of assessment proceedings, that the said amount was claimed a sum of Rs. 10,85,214/- paid by the assessee company to its Managing Director on account of commission for the financial year 2009-10 relevant to assessment year 2010-11. It was seen that the assessee has followed a mercantile system of accounting, AO held that the said expenditure pertaining to earlier year could not be allowed in the year under consideration. He accordingly disallowed the claim of the assessee on account of commission to the Directors to the extent of Rs. 10,85,214/-.
3.1. The disallowance made by the AO on account of commission paid to Directors was challenged by the assessee in the appeal filed before the Ld. CIT(A). After considering the submission made by the assessee as well as material available on record. The Ld. CIT(A) deleted the said disallowance for the following reasons given in paragraph no. 5.2.3 of his impugned order.
“5.2.3. I have carefully considered the facts of the case, the finding of the Assessing Officer and the submissions put forth on behalf of the appellant. Accrued but undischarged liability must be allowed under mercantile system of accounting. In Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53 (SC), the Hon'ble Apex Court held that "in the case of an assessee maintaining his accounts on mercantile system, a liability already accrued, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of his business, regard' being had to be the accepted principles of M/s Associated Pigments Ltd. 2 commercial practice and accountancy. It is not as if such deduction is permissible only in case of amounts actually expended or paid. Just as actual receipts as well as those accrued due are brought in for income- tax assessment, so also liabilities accrued due would be taken into account while working out the profits and gains of the business". In view of the ratio laid down by the Apex Court, the action of the Assessing Officer in allowing the expenditure to the extent of Rs.15,17,059/- for the financial year 2010-11 relevant for the present assessment year is justified. However, in y view, the disallowance as made by him in respect of the commission @1 %,on the profits relatable to financial year 2009-10, but credited/paid during the financial year relevant for the assessment year 2011-12 does not appear to be justified. The issue raised by the Assessing Officer is as to how deduction in respect of an expenditure, which ought to have been credited/paid in the preceding financial year could be credited/paid during the subsequent financial year when the assessee followed mercantile system of accounting. The answer is that the liability of an earlier year, which was crystallized during the year, cannot be ignored straight away. In Saurashtra Cement & Chemical Industries Ltd. Vs. CIT [1995] 80 Taxman 61/213 ITR 523 (Guj), it has been held that “if any liability, though relating to the earlier year, depends upon making a demand its acceptance by the assessee and such liability has been actually claimed and paid in the later previous years, it cannot be disallowed as deduction merely on the basis that the accounts are maintained on mercantile basis and that it related to a transaction of the earlier year”. In another case of CIT vs. Phalton Sugar Works Ltd. [1986] 162 ITR 622 (Bom), the Hon’ble Bombay High Court held that “where a liability arising out of a contractual obligation is disputed, the assessee is entitled, in the assessment year relevant to the previous year in which the dispute is finally adjudicated upon or settled, to claim a deduction in that behalf. In view of the facts of the case, and the principle of law laid down in the cases cited supra, I am of the considered view that the Assessing Officer was not justified in making the impugned disallowance. His apprehension that the claim of expenditure relating to two different assessment years in a single assessment year when receipts are accounted for in different assessment years on the basis of real income theory in mercantile system of accounting is not based on correct principle of law. Further, on the same analogy, his observation that section 115JB would be applicable in respect of the prior period expenses is unfounded. Having regard to the facts and circumstances, the disallowance of Rs. 10,85,214/- is hereby deleted. This ground of appeal is accordingly allowed.”
We have heard the arguments on both the sides and also perused the relevant material available on record. The Ld. DR has contended that the commission amount in question was paid by the company to its Managing Director in the earlier year and the same therefore, was not allowable as deduction in the year under consideration as the assessee company following the mercantile system of accounting. He has contended that the said amount therefore was rightly disallowed by the AO and the Ld. CIT(A) is not justified in deleting the said disallowance. The Ld. Counsel for the assessee on the other hand has strongly supported the impugned order of the Ld. CIT(A) giving relief to the assessee on this issue. He has contended that the commission was payable by the assessee company to its Managing Director @ 1% of the profits of the concerned financial year. He has contended that since the profit of the financial year 2009-10 was determined
M/s Associated Pigments Ltd. 3 only in the financial year 2010-11 after finalizing the account, the allowability on account of commission was crystallized only in the financial year 2010-11 relevant to assessment year 2011-12. We find merit in this contention of the ld. Counsel for the Assessee. Since, the commission to the Managing Director was payable by the assessee company on the profits and the profits for the financial year 2009-10 was determined only in the year under consideration after finalizing the account. The allowability on account of commission was crystallized in the year under consideration and the Ld. CIT(A) in our opinion was fully justified in allowing the same. We do not find any infirmity in the order of Ld. CIT(A) on the issue and upholding the same. We dismiss the ground no.1 of the Revenue appeal.
Ground no. 2 raised by the Revenue relates to deletion by the Ld. CIT(A) of the addition of Rs. 28,76,896/- made by the AO by way of disallowance made u/s 40(a)(ia) of the Act on account of payments made to foreign shipping lines without deduction of tax at source.
5.1. During the year under consideration, the total amount of Rs. 28,76,896/- was paid by the assessee company on account of ocean freight to the different shipping lines without deduction of tax at source. According to the AO, the agents of the said foreign shipping lines were its dependent agents and the foreign shipping lines thus having agency PEs in India, the assessee was liable to deduct tax at source from the payments made to them on account of ocean freight. He therefore, disallowed the ocean freight of Rs. 28,76,896/- paid by the assessee to the foreign shipping lines u/s 40(a)(ia) of the Act for non-deduction of tax at source. M/s Associated Pigments Ltd. 4 5.2. The disallowance made by the AO u/s 40(a)(ia) of the Act was challenged by the assessee in appeal filed before the Ld. CIT(A) and after considering the submission made by the assessee as well as the material available on record, the Ld. CIT(A) deleted the said disallowance for the following reasons given in paragraph no. 5.3.3 of his impugned order.
“5.3.3. I have carefully considered the facts of the case and the submissions of the AR. I am inclined to accept the submissions of the appellant. In the case of shipping business of non-residents, the provisions of section 172 are to apply, notwithstanding anything contained in other provisions of the Act. Therefore, in such cases, the provisions of sections 194C and 195 relating to deduction at source are not applicable. The recovery of tax is to be regulated, for a voyage undertaken from any part in India by a ship, under the provisions of sections 172. There would be cases where payments are made to shipping agents of non-resident ship-owners of charters for carriage of passengers etc., shipped at a port in India. Since, the agent acts on behalf of the non-resident ship owner or charterer, he steps into shoes of the principal. Accordingly, the provisions of section 172 shall apply and those of sections 194C and 195 will not apply as per Circular No. 723 dated 19.09.1995. In view of the express provisions of section 172 and the CBDT’s Circular cited supra, the Assessing Officer was not justified in holding the appellant as in default in making TDS from ocean freight payments and making disallowance of Rs. 28,76,896/- under sec. 40(a)(ia) of the Act. The disallowance being unjustified is hereby deleted. This grounds of appeal is allowed.”
We have heard arguments on both the sides and also perused the material available on record. As clarified by the CBDT vide its circular No. 723 dated 19.09.1995 (copy at page no. 11 of the paper book), the provisions of section 172 are applicable in the case of Foreign Shipping Companies notwithstanding anything contained in the other provisions of the Act and therefore, the provision of Section 194C and 195 relating to tax deduction at source are not applicable in such cases. As further clarified by the CBDT, where payments are made to shipping agents of non-resident shipping owners for carriage of passengers etc. shipped at a port in India, the agents step into the shoes of the principal and accordingly the provision of section 172 shall apply and not the provisions of Section 194 and 195. The issue in the present case relating to the disallowance u/s 40(a)(ia) thus is squarely covered by the CBDT Circular No. 723 dated 19.09.1995 and M/s Associated Pigments Ltd. 5 even the Ld. DR has not been able to dispute this position. We therefore, find no infirmity in the impugned order of the Ld. CIT(A) deleting the disallowance made by the AO u/s 40(a)(ia) by relying on the said circular issued by the CBDT and upholding the same, we dismiss the ground no. 2 of the Revenue appeal.
The issue raised in ground no.3 relates to the deletion by the Ld. CIT(A) of the addition of Rs. 73,66,430/- made by the AO on account of bad debts written off.
While examining the claim of the assessee for deduction on account of bad debts written off amounting to Rs. 73,66,430/-, it was noted by the AO that the decision to write off the relevant debt as bad was taken on 12.04.2011 i.e. not in the year under consideration. Although it was submitted on behalf of the assessee company that the relevant bad debts were written off in its books of accounts for the year under consideration, the AO held that it was a back dated entry made by the assessee company in its books of accounts and the actual decision to write off the bad debts having been taken only in the previous relevant Assessment year 2012-13 the assessee was not entitled for deduction u/s 36(1)(vii) in the year under consideration. Accordingly, he disallowed the claim of the assessee for bad debts written off.
8.1. The disallowance made by the AO on account of bad debts written off were challenged by the assessee in the appeal filed before the Ld. CIT(A) M/s Associated Pigments Ltd. 6 and after considering the submissions made by the assessee as well as material available on record, the Ld. CIT(A) deleted the said disallowance for the following reasons given in paragraph 5.4.3 of his impugned order.
“5.4.3. I have carefully considered the facts of the case, the findings of the Assessing Officer and the submissions put forth on behalf of the appellant. The AO has based his findings on the note put up to the Managing Director of the Accounts Department on 09.04.2011 by the Senior Accounts Manager and the approval of the Managing Director on the note is dated 12.04.2011. 1 do not find any merit in these findings. Firstly, because the subject of the note is 11 Bad Debt to be written off in March. 2011". This means there was a proposal with the Accounts Department of the Company to write off the bad debits as on 31.03.2011 for which ex-facto approval was sought and obtained in the second week of April, 2911, after the close of the financial year. Secondly, had there been no approval end the adjustment entries appeared in the books of account as on 31st March for the write of the bad debts, there could have been genuine doubt that the bad debts were not written off in the books of account during the financial year relevant for assessment year 2011-1 2. For and from A. Yr. 1989- 90, the conditions requisite for allowance of a debit as bad debt are:-
I. it must be a proper debt, or a part thereof
II. of a revenue nature contradistinguished from capital nature,
III. which has been written off as irrecoverable in the accounts of the assessee for the previous year;
IV. (a) which 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 (b) which represents money lent in the ordinary course of the business of banking or money lending which is carried on by the assessee.
It is not the case of the Assessing Officer that the appellant company has not fulfilled the conditions precedent for write off of the debts as being bad. As already mentioned, the case of the Assessing Officer is that the accounts were not prepared in accordance with the provisions of the Company Act and that the write off of the debts was not possible during the F.Y. 2010-11. Now, it is only in those cases where the Department records a finding that the 'method adopted by the assessee results in distortion of profits that the Department can insist on substitution of the existing method: CIT v. Bilahari Investment' P. Ltd [2008] 299 ITR 1. In cases where the Department wants to tax an assessee on the ground of liability arising in a particular year, it should always ascertain the method of accounting followed by the assessee in the past and whether the change in the method of accounting was warranted on the ground that profit being under-estimated under the impugned method of accounting. If the Assessing Officer comes to the conclusion that there is under-estimation of profits, he must give facts and figures in that regard to demonstrate that the impugned method of accounting adopted by the assessee results in under- estimation of profits and is therefore rejected. Otherwise the presumption would be that the entire exercise is revenue neutral as held in CIT v. Realest Builders and Services Ltd. [2008] 307 ITR 202. In the case of CIT v. Woodward Governor India P. Ltd [2009] 312 ITR 202, it has been held that under the mercantile system of accounting, what is due is brought into credit before it is actually received; it brings into debit an expenditure for which a legal liability has been incurred before it is actually disbursed. In the appellant company’s case, there is no finding of the Assessing Officer that there has been any under-estimate of profits during the year and that there has been any change in the method of accounting which affected the profits of the financial year relevant for the assessment year under consideration.! It is well-settled that as the Assessing Officer examines the accounts of an assessee, he has considered the following questions:-
(1) Whether the assessee has regularly employed a method of accounting? (2) Even if regular adoption of a method of accounting is there, whether the annual profits can properly be deduced from the method employed?
(3) Whether the accounts are correctly maintained?
M/s Associated Pigments Ltd. 7
(4) Whether the accounts maintained are complete in the sense that there is no significant omission therein? There is no categorical finding of the Assessing Officer in negative on any of the four questions except that the write off of the debt was not possible during F.y. 2010-11 and therefore, the amount of Rs. 73,66,430/- is nothing but provision for diminution in the value of assets for the F.Y. 2010-11 (as at 31.03.2011). The accounts are duly audited both under the Companies Act and under the provisions of sec.44AB of the IT Ac. The auditors have not pointed out any lapses to warrant any adverse finding that the subsequent approval to write off entries is a result of change of method of accounting, or with a view to reduce the profits or the value of assets for that matter. The facts of the cases relied upon by the Assessing Officer are not squarely applicable to the facts of the appellant’s case. In the case of CIT vs. Herdilla Chemicals Ltd. reported in 225 ITR 532, the conclusion to which the Hon’ble Court reached is that the “Assessee cannot claim deduction of the value of asset written off on the ground on the ground that it has become absolute so long as the asset has not been disposed off. In this case, the approval accorded is for write off as on 31.03.2011. There is no material brought on record to indicate that the bad debts were not written off in the books as write off was effected in the subsequent financial year. Even if it is assumed to be so, the same is revenue neutral. Therefore, having regard to the facts and circumstances of the case, I am of the view that the Assessing Officer was not justified in disallowing the amount of Rs. 73,66,430/- holding that the bad debts to the tune of Rs. 73,66,430/- were not written off in the books as on 31.03.2011. The disallowance is hereby deleted. This grounds of appeal is accordingly allowed.”
We have heard the arguments on both the sides and also perused the material available on record. The Ld. DR has contended that the disallowance to write off the relevant bad debt having been taken by the management of the assessee company only after the end of the year under consideration, it is not understandable how the entry to write off the bad debts was made in its books of accounts for the previous year. He had contended that the said entry made by the assessee company was clearly a back dated entry and its claim for bad debts written off was rightly disallowed by the AO. However as submitted by the ld. counsel for the assessee there was a proposal to write off the relevant bad debts in the month of March, 2011 itself and approval for the same was sought and obtained in the month of April, 2011 after closing of the financial year. Moreover, the fact that remains to be seen is that the relevant bad debts were written off by the assessee company in its books of accounts of the year under consideration and his position was not disputed by the AO although the relevant entry was done by him as a back dated entry. As per the relevant provisions contended section 36(1)(vii) the condition stipulated for the allowability of deduction on account of bad debts written off is that the relevant bad debts
M/s Associated Pigments Ltd. 8 should be written off as irrecoverable in the account of the assessee for the previous year and in our opinion, this condition having been fulfilled by the assessee company, it was entitled for deduction on account of bad debts written off as rightly held by the Ld. CIT(A). We therefore, find no infirmity in the order of Ld. CIT(A) giving relief to the assessee on this issue and upheld the same. We dismiss the ground no. 3 of the revenue appeal.
The issue raised in ground no. 4 related to deletion by the Ld. CIT(A) of the addition of Rs. 71,24,741/- made by the AO on account of disallowance of assessee’s claim made during the assessment proceedings without filing revised return.
10.1. In the return of income originally filed the allowability return back during the year under consideration amounting to Rs. 71,24,741/-was offered to tax by the assessee company u/s 41(1) of the Act. After taking notice that the said amount debited to the profit and loss account was not claimed as deduction in the computation of total income for the relevant assessment year i.e. 2009-10, a claim was made by the assessee vide its letter dated 26.02.2014 filed before the AO during the course of assessment proceedings for deduction of its total income by the said amount of Rs. 71,24,741/-, although the AO found the said claim made by the assessee to be correct on merit, he did not entertain the claim of the assessee as the same was not made by filing a revised return of income. For this conclusion, the AO relied on the decision of Hon’ble Supreme Court in the case of Goetz (India) Limited vs. CIT reported in (2006) 284 ITR 323(SC). On appeal, the Ld. CIT(A) however entertained and allowed the said claim of the assessee by relying on the observation made by the Hon'ble M/s Associated Pigments Ltd. 9 Supreme Court in the case of Goetz (India) Limited itself clarifying that the decision rendered by the Lordship in the said case was limited to the power of the AO and it did not impeach on the powers of the appellate authority. In our opinion, the position of law as explained and clarified by the Hon'ble Supreme Court in the case of Goetz (India) Limited is clear that the appellate authorities such as the Ld. CIT(A) is sufficiently empowered to entertain and consider the new claim made by the assessee on merits even without there being any revised return filed by the assessee making such claim. At the time of hearing before us the Ld. DR has also not disputed on this position. He has not raised any arguments on merit on this issue. As the AO himself in the assessment order had accepted the claim of the assessee on merit and the same was disallowed by him only for want of revised return. We therefore, find no infirmity in the impugned order of the Ld. CIT(A) giving relief to the assessee on this issue and upholding the same. We dismiss the ground no. 4 of the revenue appeal.
In the result, the appeal filed by the revenue is dismissed.
Order pronounced in the open Court on 03-01-2018.