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Income Tax Appellate Tribunal, MUMBAI “B” BENCH, MUMBAI
Before: SHRI SHAILENDRA KUMAR YADAV, JUDICIAL & SHRI RAJESH KUMAR.
अपीलाथ� क� ओर से/By Appellant : Shri Mayur Kisnadwala, A.R. ��यथ� क� ओर से/By Respondent : Shri Chandravijay, A.R. सुनवाई क� तार�ख/Date of Hearing : 18.08.2016 घोषणा क� तार�ख/Date of Pronouncement : 26.08.2016 ORDER PER SHAILENDRA KUMAR YADAV, J.M:
This appeal has been filed by assessee against the order of Commissioner of Income-Tax (Appeals)-27, Mumbai, dated 05.02.2010 for A.Y. 2005-06 on following grounds:
A.Y. 05-06 [Metro Motors Auto Division vs. ITO) Page 2
“1. On facts and circumstances of the case, the learned Commissioner of Income Tax (Appeal) ‘CIT(A)’ has erred in disallowance of business expenditure, being prior period expenses of Rs.9,71,793/- debited by the appellant firm in its P&L account.
2. On facts and circumstances of the case, the learned Commissioner of Income Tax (Appeal) ‘CIT(A)’ has erred in disallowance of business expenditure, being irrecoverable debts/advances written off of Rs.1,84,708 by the appellant firm in its P&L account.
3. On facts and circumstances of the case, the learned Commissioner of Income Tax (Appeal) ‘CIT(A)’ has erred in disallowance of the following business expenditure • Communication expenses Rs.76,000 (Approx) • Staff Welfare expenses Rs.51,000 • Office expenses Rs.45,000 • Miscellaneous expenditure Rs.59,000 • Travelling & Conveyance expenses Rs.50,000 • Selling expenses Rs.12,70,347
It is prayed that the learned CIT(A) be directed to allow the above expenses as a deduction.”
Assessee is a dealer of vehicles of Hindustan Motors Ltd. for sale, distribution and servicing of cars in Mumbai. The partners of firm are Bombay Metro Motors Ltd. and GMMCO Ltd., both companies incorporated under the Companies Act, 1956.
2.1 First issue is with regard to prior period expenses of Rs.9,71,793/-. In F.Y. 1998-99, in course of its trading business, assessee purchased motor cars worth Rs.1,94,35,846/- from Hindustan Motors (in short ‘HM’), an A.Y. 05-06 [Metro Motors Auto Division vs. ITO) Page 3 unrelated party. Assessee submitted “C” form under the Central Sales Tax (in short ‘CST’) Act to HM, HM collected CST @ 4% (in absence of such "C" form, the rate of tax is 14%) and sold the cars. In sales tax assessment of HM, the "C" forms furnished by assessee to HM were not accepted and consequently differential CST of 10% of sales values of cars was levied on HM of Rs.19,43,585/- (10% of Rs.1,94,35,846/-). Under the Sales tax Act, the dealer is merely supposed to collect the levy from purchaser and pay it to the Government. Accordingly, under the law, the entire differential of Rs. 19,43,585/- was the liability of assessee. However, consequent to the objection raised by assessee, after protracted negotiations, on compromise, it was decided and agreed during the impugned year that both the parties will bear differential tax equally; accordingly, HM raised a debit of Rs.9,71,793 (50% of Rs.19,43,585/-) during the impugned year, which was claimed as a deduction by assessee. Revenue authorities observed that this is a prior period expenses and that amount relating to F.Y. 1998-99 has not crystallised during the impugned year. As assessee followed mercantile system of accounting, this amount must have been already debited to profit and loss account in the previous year in which it was incurred i.e. F.Y. 1998-99. As the differential sales tax amount demand was on HM, assessee was not involved as it does not pertain to their sales tax assessment and they have voluntarily agreed to share the burden. In this regard, stand of assessee has been that Revenue authorities have not appreciated the ITA No.8000/Mum/11 A.Y. 05-06 [Metro Motors Auto Division vs. ITO) Page 4 facts of case; if the "C" forms furnished by assessee to HM were not accepted in sale tax assessment of HM, they were inclined to raise a debit on assessee for the entire amount of differential tax of Rs.19,43,585/- as HM was responsible for merely collecting the correct sales tax from the purchaser and paying it to the department. However, assessee disputed that the additional demand was not on account of any lapse from its side. Letters to that effect were exchanged and pursuant to negotiations between assessee and HM, vide letter dated 27.12.2004, assessee was successful in reducing its liability by 50% to Rs.9,71,793/-. These facts have not been disputed by the revenue authorities. As this liability was a contractual liability (on purchase of cars), under the mercantile system of accounting, a contractual liability can be said to have been properly accrued only when the dispute regarding liability is finally adjudicated, which in assessee’s case was during the year under consideration. As regards the year of accrual of liability, reliance was placed on the decision of Jiwanram Sheoduttrai vs. CIT [2006] 279 ITR 512 (Cal.). As regards the contention of the revenue authorities that such liability was voluntarily assumed by assessee, apart from the fact that by doing so, it has curtailed its losses, the courts have held that the revenue authorities have to look at the matter from the view point of a prudent businessman and not from its angle. Agreeing to the contention of assessee, we delete addition in question. A.Y. 05-06 [Metro Motors Auto Division vs. ITO) Page 5
Next issue is with regard to disallowance of business expenditure being irrecoverable debts/advances written off of Rs.1,84,708/- by assessee firm in its P&L account. The facts of the case are that irrecoverable debts/receivables from debtors on account of rate differences/discounts were written off in P&L account during year under consideration. Assessing Officer stated that no steps were taken to recover the debts/receivables from the debtors. It was not established that the debts had become bad and there were existing transactions with those parties. It was not shown that such debts had been offered as income in the earlier years. In this regard, we find that Hon’ble Supreme Court in TRF Limited vs. CIT [2010] 323 ITR 397 (SC) has held that in order to obtain a deduction in relation to bad debts, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable and it is enough if debts is written off as irrecoverable in accounts by assessee. Nothing contrary was brought to our knowledge, so, following the decision of TRF Ltd. (supra), addition in question is directed to be deleted.
Next issue is with regard to various disallowances. The facts of the case are that assessee debited various expenses in its P&L account as detailed in a table attached to the written submission filed on behalf of assessee, which have been partially disallowed by Assessing Officer and CIT(A) gave part relief. The stand of assessee has been that incurrence of such expenses were not disputed. Only dispute is with regard to A.Y. 05-06 [Metro Motors Auto Division vs. ITO) Page 6 items of expenses at serial nos.1 to 5, element of personal use. As regards item no. 6, Assessing Officer admitted that assessee has filed all details. However, he stated that businessman are prudent and do the business for profit making and not for making losses. No businessman can tolerate losses and in such cases, it is better to close the business. Moreover, in their view, such discounts should be offered by the manufacturer and not the dealer-assessee. In this regard, stand of assessee has been that items of expenses at serial nos. 1 to 5, the accounts of assessee were audited under section 44AB of the Act and no adverse comments have been made by the auditor; all the details were submitted before Assessing Officer from which he has not found any errors/omissions and hence disallowances are not disallowed. Taking all facts and circumstances into consideration, partial disallowance made by CIT(A) without disputing the expenses in question, additions are not justified. Same is directed to be deleted. As regards item of expense at serial no. 6 being selling expenses in the nature of trade discount - accessories, trade discount - parts, rebate on Lancer cars and rebate on Pajero cars, we find that full details of such expenses were furnished before the Assessing Officer, in which he has not found any discrepancies. Revenue authorities have only grievance is that these expenses should not have been incurred by assessee as it was making losses and they suggested that instead of making such losses, assessee should have closed its business. The entire expenses are allowable and by making the disallowance, ITA No.8000/Mum/11 A.Y. 05-06 [Metro Motors Auto Division vs. ITO) Page 7 Assessing Officer was not justified in stepping into the shoes of business decisions of assessee. Only loss in the business cannot be the sound basis for making disallowance in question. So, same is directed to be deleted.
In the result, the appeal filed by assessee is allowed.
Pronounced in the open Court on this the 26th day of August, 2016.
Sd/- Sd/- (RAJESH KUMAR) (SHAILENDRA KUMAR YADAV) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai: Dated 26/08/2016 True Copy S.K.SINHA आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. राज�व / Revenue 2. आवेदक / Assessee 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त- अपील / CIT (A) 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, मुंबई / DR, ITAT, Mumbai 6. गाड� फाइल / Guard file. By order/आदेश से,
उप/सहायक पंजीकार, आयकर अपील�य अ�धकरण, मुंबई ।