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Income Tax Appellate Tribunal, MUMBAI BENCH “SMC”, MUMBAI
Before: SHRI G.S. PANNU
The captioned appeal by the assessee is directed against the order of CIT(A)-20, Mumbai dated 27.01.2016, pertaining to the Assessment Year 2011-12, which in turn has arisen from the order passed by the Assessing Officer, Mumbai dated 27.03.2014 under section 143(3) of the Income Tax Act, 1961 (in short ‘the Act’).
In this appeal, assessee has raised various Grounds of appeal which I shall deal in seriatim. The appellant before me is a company incorporated under the provisions of the Companies Act, 1956 and,
2 M/s. Merisant India Pvt. Ltd. inter-alia, engaged in the business of trading and distribution of consumer food products and low calorie sweetner.
Insofar as the first dispute is concerned, the same arises from the action of income-tax authorities in denying the assessee’s claim for deduction of Rs.43,590/- as bad debts u/s 36(1)(vii) of the Act on the ground that it was a Provision for doubtful debts only.
At the time of hearing, the learned representative for the assessee pointed out that in the Profit & Loss Account assessee has debited a sum of Rs.43,590/- under the head ‘Provision for doubtful debts’ and that similar amount has been reduced from the amount of sundry debtors on the debit side of the Balance-sheet and, therefore, such action is to be understood as actual write-off of bad debts. In support of said proposition, reliance was placed on the judgments of Hon'ble Supreme Court in the case of TRF Limited Vs. CIT, 323 ITR 397 (SC) and Vijaya Bank vs. CIT, 323 ITR 166 (SC).
On the other hand, the ld. DR reiterated the stand of the lower authorities that the claim was based on a mere Provision for doubtful debts and was not an actual write-off of bad debts, which was a requirement of Sec. 36(1)(vii) of the Act.
I have carefully considered the rival submissions. Ostensibly, Sec. 36(1)(vii) of the Act dealing with allowance of bad debts written-off by assessee requires that the relevant debt ought to have been actually written-off in the account books. In the present case, the Assessing
3 M/s. Merisant India Pvt. Ltd.
Officer as well as the CIT(A) noted that the claim was a mere Provision for doubtful debts, which did not amount to actual write-off of the same. So however, before the Tribunal assessee has made out a case that apart from debiting Provision for bad and doubtful debts in the Profit & Loss Account, correspondingly the said provision has been reduced from the amount of sundry debtors in the Balance-sheet and consequently, at the end of the year the figure of debtors stated on the asset side of the Balance-sheet is net of the impugned Provision and, therefore, the said action would be taken as an actual write-off for the purposes of Sec. 36(1)(vii) of the Act. Undoubtedly, the proposition being canvassed by the assessee is expressly supported by the judgments of the Hon'ble Supreme Court in the case of TRF Limited and Vijaya Bank (supra), but I find that the said plea has not been raised before the lower authorities. The lower authorities have proceeded on the basis that the claim was based on a mere Provision and not actual write-off. For the said purpose, I deem it fit and proper to direct the Assessing Officer to verify the fact-situation sought to be canvassed by assessee and thereafter decide the issue afresh keeping in mind the ratio of the judgments of the Hon'ble Supreme Court in the case of TRF Limited and Vijaya Bank (supra). Needless to say, the Assessing Officer shall allow the assessee a reasonable opportunity of being heard before adjudicating afresh on this aspect, as per law. Thus, on this aspect, assessee succeeds for statistical purposes.
The next issue is with regard to disallowance of Rs.4,50,683/- made by Assessing Officer on the ground that the requisite tax was not 4 M/s. Merisant India Pvt. Ltd.
deducted at source and hence the amount was disallowable in terms of Sec. 40(a)(ia) of the Act.
The relevant discussion in the orders of the authorities below reveal that the assessee was found to have debited an expense of Rs.4,50,683/- under the head ‘advertisement expenses’. The said amount was explained as having been paid to one, M/s. Qualicare Pharmaceuticals Ltd. who was supplier of packing products. Assessee explained that there were instances where some of the products supplied were not as per the specified standards or that due to change in government policies, packaged product could not be used. It was explained that such events led to modification or alteration in the packaging of products and, therefore, certain extra costs were paid to the supplier who did not bear such costs. Since the impugned expenditure was an additional cost, same was claimed as part of manufacturing expenses arising because of modification and thus, as per assessee, tax was not required to be deducted at source. The Assessing Officer as well as the CIT(A) had come to a finding that the expenditure was in the nature of processing charges claimed by M/s. Qualicare Pharmaceuticals Ltd. who had undertaken work for the assessee and, therefore, tax was liable to be deducted u/s 194C of the Act. In the absence of the tax having being deducted, the expenditure has since been disallowed u/s 40(a)(ia) of the Act.
Before me, the learned representative for the assessee has reiterated the submissions put forth before the lower authorities, which I have already noted in the earlier paras and are not being repeated for 5 M/s. Merisant India Pvt. Ltd.
the sake of brevity. Apart therefrom, the learned representative pointed out that the disallowance u/s 40(a)(ia) of the Act is also not merited considering the insertion of second proviso to Sec. 40(a)(ia) of the Act by Finance Act, 2012 whereby it was provided that the disallowance u/s 40(a)(ia) of the Act would not be made if the assessee was not deemed to be an assessee in default under the first proviso to Sec. 201(1) of the Act. The learned representative pointed out that the said proviso is applicable even for the instant assessment year and for that matter referred to the decision of Pune Bench of Tribunal in the case of ACIT vs. Bhavook Chandraprakash Tripathi in dated 18.3.2015 wherein following the decision of Cochin Bench of Tribunal in the case of Antony D. Mundackal vs. ACIT in ITA No. 38/Coch/2013 dated 29.11.2013, the matter has been remanded back for consideration even in an assessment year which was prior to 1.4.2013.
On the other hand, the ld. DR has supported the orders of authorities below.
Having considered the rival stands, I find that there is no cogent reasoning with the appellant to show that the lower authorities have erred in treating the impugned sum as being paid to M/s. Qualicare Pharmaceuticals Ltd. as processing charges subject to deduction of tax at source u/s 194C of the Act. Therefore, insofar as the action of Assessing Officer invoking Sec. 40(a)(ia) of the Act is concerned, the same is upheld in-principle. So however, the case made out is that the second proviso to Sec. 40(a)(ia) of the Act inserted by the Finance Act,
6 M/s. Merisant India Pvt. Ltd.
2012 w.e.f. 1.4.2013 be understood as retrospective in nature, which has been introduced to eliminate unintended consequences which may cause hardship to the tax-payer. On this aspect, I find that the coordinate Benches at Pune and Cochin in the case of Bhavook Chandraprakash Tripathi and Antony D. Mundackal (supra) respectively deemed it fit to restore the matter back to the file of Assessing Officer as such pleas were raised for the first time before the Tribunal. Even in the instant case also, the said plea has been raised for the first time before the Tribunal and, therefore, it would be fair and proper that the correctness or otherwise of the contentions raised by the assessee is examined by the lower authorities. Therefore, the matter is restored back to the file of Assessing Officer for adjudicating assessee’s plea of application of second proviso to Sec. 40(a)(ia) of the Act for the purpose of examining the efficacy of disallowance made u/s 40(a)(ia) of the Act qua the amount of Rs.4,50,683/-. Needless to say, the Assessing Officer shall allow the assessee a reasonable opportunity of being heard before adjudicating afresh on this aspect, as per law. Thus, on this aspect, assessee succeeds partly for statistical purposes.
The next Ground of appeal is with regard to disallowance of Rs.5,47,845/- made by income-tax authorities out of foreign travel expenses. In this context, the relevant facts are that the total travelling expenses claimed by assessee are Rs.16,23,829/- out of which a sum of Rs.5,47,845/- was claimed on account of foreign travel. The Assessing Officer has noted that assessee has not furnished any supporting details of foreign travel, i.e. air tickets, name of hotel, places visited, date of visit, stay period, name of the parties, etc. Accordingly, the expenses
7 M/s. Merisant India Pvt. Ltd. claimed on foreign travel amounting to Rs.5,47,845/- was disallowed. Before the CIT(A), assessee pointed out that it has group companies based in various countries and, therefore, assessee company’s personnel were required to travel abroad at regular intervals. It was explained that the foreign travel was also undertaken for business promotion and exploration of new markets. It was also explained that as against the total sales of Rs.9,44,86,282/-, the total travelling expenses claimed at Rs.16,23,829/- was extremely reasonable as assessee was indeed a marketing concern. The CIT(A) considered the said submissions but found that in the absence of any supporting details of foreign travel, the disallowance was liable to be affirmed.
Against the aforesaid decision of CIT(A), the learned representative for the assessee pointed out that the relevant details of foreign travel could not be furnished by assessee as at the relevant point of time the Head office was being re-located from Mumbai to Delhi and thereafter it has been shifted to Kolkata. Due to the aforesaid, the details called for could not be adequately provided, but he referred to page 44 of Paper Book wherein a comparative chart of travelling expenditure incurred for various assessment years has been tabulated. It has been pointed out that the expenditure claimed is quite reasonable and is not abnormal considering the level of expenditure in the two preceding as well as succeeding two assessment years. It was, therefore, contended that the disallowance made by lower authorities, in any case, is excessive.
8 M/s. Merisant India Pvt. Ltd.
On the other hand, the ld. DR appearing for the Revenue supported the disallowance by pointing out that the same was due to lack of furnishing of details.
Having considered the rival stands, I find that the lack of evidence with regard to foreign travel expenditure of Rs.5,47,845/- is clearly emerging and, therefore, the income-tax authorities had no choice but to make the disallowance. So however, at the same time it has also to be understood that having regard to the business exigencies explained and the past history, incurrence of expenditure on foreign travel cannot be brushed-aside altogether. Therefore, considering the entirety of facts and circumstances, I deem it fit and proper to hold that on account of lack of details, the disallowance to the extent of 50% of expenses be retained so as to cover the leakage of revenue, if any. Thus, on this aspect, assessee partly succeeds.
The last Ground in this appeal relates to disallowance of Rs.28,55,000/- made by income-tax authorities on account of Provision for price rate difference.
In this context, the relevant facts are that assessee had debited a sum of Rs.73,82,534/- in its Profit & Loss Account under the head ‘price rate difference’. The Assessing Officer noted from the details of such expenses that two entries, namely Rs.13,90,000/- and Rs.14,65,000/- totalling to Rs.28,55,000/- were mere Provisions and, therefore, he disallowed the same. According to the Assessing Officer, such Provisions were contingent in nature and, therefore, could not be 9 M/s. Merisant India Pvt. Ltd.
allowed as deduction. The CIT(A) has also affirmed the stand of Assessing Officer, against which the assessee is in appeal before the Tribunal.
A perusal of the orders of authorities below reveal that the relevant facts in this context can be summarized as follows. In the Profit & Loss Account, assessee had credited sales to the extent of Rs.9,44,86,282/- after reducing price/rate difference of Rs.73,82,534/-. The said adjustment has been explained on account of repayment of price/rate difference arising in the course of carrying on business. It was explained that assessee had appointed J.L. Morison India Ltd. as distributors with authority to distribute/supply products to various parties across the country. It was explained that as per practice, assessee was printing the MRP on its products by including the element of VAT @ 12.5%. The products of assessee are sold in various states where the VAT rates may differ from the rate incorporated by the assessee in the printed MRP. Thus, wherever the rate of VAT was higher than the rate of VAT incorporated in the printed MRP, the retailer would claim it from the wholesaler, who in turn claimed it from the distributor, J.L. Morison India Ltd., and ultimately the said claim came to the assessee. The assessee pointed out that this was a regular business practice, which was being followed year after year and has been accepted by the Department in the past assessments. This difference is claimed as price/rate difference and the adjustment is made in the sales figure reported in the Profit & Loss Account. In the context of working of such price/rate difference at Rs.73,82,534/-, two entries of Rs.13,90,000/- and Rs.14,65,000/- were included as 10 M/s. Merisant India Pvt. Ltd.
Provisions because assessee estimated the same based on its experience in the earlier years. According to the assessee, the Provision was made as prudent business decision and that whenever there was any difference in respect of estimates and the actual incurrence, the excess or shortfall was made good in the subsequent year. At the time of hearing, the learned representative for the assessee pointed out that such methodology was being adopted in the earlier years as well as in the subsequent years where the same stood accepted by the Department even in assessments made u/s 143(3) of the Act. The learned representative further pointed out that the impugned claim was akin to Provision towards warranty on sale of products, which is not considered as a contingent liability and in support, reliance has been placed on the judgment of Hon'ble Karnataka High Court in the case of CIT vs. Motor Industries Co. Ltd., (2015) 231 Taxman 0539 (Karnataka) as well as the decision of Delhi Bench of Tribunal in the case of JCIT vs. Sony India (P) Ltd. in 966 & 5483/Del/2003 dated 10.5.2005. Reference has also been made to page 31 of the Paper Book wherein details of expenses on account of price rate difference of Rs.73,82,534/- has been placed.
On the other hand, the ld. DR appearing for the Revenue has reiterated the stand of lower authorities by pointing out that the claim was a mere Provision, which was a contingent liability and could not be allowed as deduction.
I have carefully considered the rival submissions. At the outset, it is seen that the claim in dispute has not been made by the assessee for 11 M/s. Merisant India Pvt. Ltd.
the first time in the current assessment year. In fact, in the Paper Book, assessee has placed copies of assessments finalised u/s 143(3) of the Act for Assessment Years 2009-10 as well as 2011-12, wherein no such disallowance has been made. Be that as it may, it is also evident that the methodology of working out the provision for price/rate difference has been adequately explained by the assessee and the same is being regularly employed in order to compute the profits of business. The details of such expenditure placed at page 31 of Paper Book also shows that in-principle, Assessing Officer does not dispute that such expenditure is allowable while computing profit and gains of business. The only point made out is that the Provision made of Rs.28,55,000/- is merely an estimate and thus, it is a contingent liability. In this context, I have perused the details of such Provision and find that the same is with regard to sales made by the distributor of assessee to CSD (Army canteen). It is seen that the rate difference has been agreed upon by the assessee’s distributor with the CSD (Army canteen) and, therefore, Provision has been made for the refund of excess sales proceeds collected from CSD (Army canteen). I find that so far as bona fides of the methodology and basis of making the Provision is concerned, same has not been doubted by either of the lower authorities. Considering the fact that the bona fides of the methodology has not been doubted and that same has been regularly employed and accepted by the Department for the purpose of computing business profits, there was no justification for the lower authorities for not accepting the same in the instant assessment year. Therefore, under these circumstances, I find no merit in upholding the stand of Revenue on this aspect.
12 M/s. Merisant India Pvt. Ltd.
Accordingly, order of CIT(A) is set-aside and Assessing Officer is directed to delete the addition. Thus, on this aspect, assessee succeeds.
In the result, appeal of the assessee is partly allowed.
Order pronounced in the open court on 13th January, 2017.