DCIT, CHENNAI vs. AMBADI ENTERPRISES LTD., CHENNAI

आदेश / O R D E R PER G. PAVAN KUMAR, JUDICIAL MEMBER:

ITA No.1161/Mds/2016. :- 2 -: passed u/s.143(3) r.w.s. 92CA and 250 of the Income Tax Act, 1961 (herein after referred to as ‘the Act’).

The Revenue has raised the following grounds of appeal:- 2.

‘’2.1 The learned CIT(A) erred in directing the Assessing Officer to delete the disallowance made on Advances written off to the tune of ₹.1,36,67,972/- in respect of two parties viz., Universal Product & Allied P Ltd & J.J. Fashions holding that the transactions fall under business expediency. 2.2 The ld. CIT(A) failed to appreciate the detailed reasoning given by the Assessing Officer in his remand report stating that the elaborate discussion on the agreement between the impugned parties reveal that the transactions cannot be allowed as revenue expenditure. 2.3 The learned CIT(A) ought to have appreciated the fact that the assessee advanced the said amount to the parties not in the regular course of business and more in the nature of money lending and therefore the loss arising there from was a capital loss and not admissible to be allowed as a revenue expenditure. 2.4 The learned CIT(A) failed to note that the assessee had advanced ₹1,31,53,000/- to J.J. Fashions calculating interest at 11% p.a. which is in the nature of money lending and not allowable as revenue expenditure’’.

ITA No.1161/Mds/2016. :- 3 -: on 30.09.2010 admitting Nil income and Return of income was processed u/s.143(1) of the Act. Subsequently, the case was selected for scrutiny under CASS and notice u/s.143 (2) of the Act was issued.

In compliance to notices, the ld. Authorised Representative for assessee appeared from time to time and submitted details. The ld. Assessing Officer found that the assessee entered into international transactions and the matter was referred to the Transfer Pricing Officer (TPO) and the ld. TPO vide order dated 09.01.2014 held that the international transactions entered by the company are within the Arm’s Length Price (ALP) and no adjustment is required. The ld. Assessing Officer on perusal of profit and loss account found that the assessee has written off Bad Debts of �4,27,75,243/-. The ld. Authorised Representative filed detailed note on Bad debts and transactions entered explained that the company has a merchandise division and advanced money to third parties during the period from 1998 to 2004 for export of goods and since there is no recovery of amounts till the year 2007, the company has decided to write off the advances as not recoverable. The ld. Assessing Officer after perusing the information is of the opinion that the assessee company is not in money lending business and the assessee has not recognized income on advances to third parties in the Books, and the assessee is in Merchandise

ITA No.1161/Mds/2016. :- 4 -: business and there was no necessity to finance the third parties and the income of the assessee is recognized by margin fixed and not out of income of advances. The assessee has claimed benefit related to increase in export turnover by way of duty exemptions and duty entitlement in earlier years and subsequently, the assessee writing off advances in earlier years in order to reduce taxable income of the current year is not acceptable. Further, the assessee company has instituted the legal proceedings and written off of advances as Bad debts �4,27,75,243/- disallowed alongwith other disallowances and assessed the income and passed order u/s.143(3) r.w.s.92A of the Act dated 28.03.2014. Aggrieved by the order, the assessee filed an appeal before Commissioner of Income Tax (Appeals).

In the appellate proceedings, the ld. Authorised 4.

Representative of the assessee argued the grounds and reiterated the submissions made before ld. Assessing Officer. The Commissioner of Income Tax (Appeals) considered the findings of the ld. Assessing Officer and submissions and the materials filed during the course of hearing. On the disputed issue of written off of advances, the ld. Commissioner of Income Tax (Appeals) in his order dealt exhaustively at page 3 were the assessee has written off the advances of earlier assessment years. The ld. Authorised Representative explained the ITA No.1161/Mds/2016. :- 5 -: working and nature of export of merchandise division and the system of commercial transactions and also furnished Details of persons to whom the advances were made and explained point wise observed at page 3 to 5 of the ld. Commissioner of Income Tax (Appeals) order and also legal proceedings were initiated against the parties and the reasons of written off of advances of earlier years.

Further, when the amount is recovered the same shall be offered to tax and advances provided in the course of business and same is admissible for deduction and relied on the judicial decisions and the assessee’s own case in dated 21.05.2013 were it was held that the advances written off can be allowed as deduction were the same was in the course of assessee business and the matter was remitted to the Commissioner of Income Tax (Appeals) to take into consideration the relevant materials evidence. The present ld. Commissioner of Income Tax (Appeals) perused the financial statements and disallowance by the ld. Assessing Officer and written submissions with evidence filed by the assessee. The ld. Commissioner of Income Tax (Appeals) has called for remand report from the ld. Assessing Officer under Rule 46A of the Act. Upon receipt of remand report, the ld. Commissioner of Income Tax (Appeals) found the observations of the Business entities M/s.

ITA No.1161/Mds/2016. :- 6 -:

Universal Product and Allied P Ltd (UPA) �5,98,257/- were the assessee entered into export transactions in the nature of Indian White cane sugar and assessee company has advanced amount in the regular course of business. Similarly in the case of J.J. Fashions, the assessee has written off �1,30,69,715/- to purchase raw material for finished products for export obligation. The ld. Commissioner of Income Tax (Appeals) provided a copy of remand report to the assessee and the assessee has filed objections and comments party wise and similar issue was considered by Tribunal for assessment year 2008-2009. The ld. Commissioner of Income Tax (Appeals) based on the Remand report and submissions of ld. Authorised Representative has dealt exhaustively on the nature of advances from the assessment year 2003-04 to the present assessment year at page 8 to 12 of his order and confirmations were obtained and also details of legal proceedings and criminal proceedings initiated by the company and relied on judicial decisions in the case of Vijayakumar Mills Ltd vs. CIT 247 ITR 176 and concluded that the losses incurred by the assessee in the cases of M/s. JJ fashions and Universal Product and Allied P. Ltd are trading losses and are to be allowed as deduction and directed the ld. Assessing Officer to allow the claim and partly allowed the appeal. Aggrieved by the order of the ITA No.1161/Mds/2016. :- 7 -:

Commissioner of Income Tax (Appeals) the Revenue assailed an appeal before Tribunal.

Before us, the ld. Departmental Representative argued that 5. the Commissioner of Income Tax (Appeals) has erred in deleting the advances in respect of Universal Product & Allied P. Ltd and JJ Fashions of �1,36,67,972/- on the basis of commercial expediency and not considered the comments of the ld. Assessing Officer in remand report and ignored the facts that the parties to whom advances were provided are not in regular course of business and nature being money lending transactions. The ld. Commissioner of Income Tax (Appeals) erred in directing the ld. Assessing Officer for allowing the deduction is bad in law and prayed for setting aside order of ld. Commissioner of Income Tax (Appeals).

Contra, the ld. Authorised Representative relied on the 6. findings of the Commissioner of Income Tax (Appeals) order and opposed to the grounds.

We heard rival submissions, perused the material on record 7. and judicial decisions. The main crux of the disputed issue revolves around write off of Bad debts in the Books of Account. The assessee

ITA No.1161/Mds/2016. :- 8 -: has advanced monies to parties and same could not be recovered and was written off and the assessee company has initiated legal proceedings. The ld. Authorised Representative highlightened that the assessee has made provision for Bad Debts in the earlier years and made disallowance in computing total income from the assessment year 2003-2004. During the current financial year, the assessee has written off Bad Debts after the approval of the Board of Management of the company in respect of two parties and submitted journal entries passed for write off of Bad Debts and furnished Annual report of the company for the period 2008-09 and 2009-2010. The ld. Departmental Representative contention that the advances were not made in ordinary course of business and it is a transaction of money lending. But, the ld. Authorised Representative relied on the decision of Hon’ble Apex Court in the case of TRF Ltd. Vs. CIT (2010) 323 ITR and drew our attention to the page 25 of Annual report Profit and Loss Account Schedule 14 were the assessee has written off Bad Debts and entries are passed in the Books of Account and the assessee has written off amount from the Sundry Debtors and produced in hearing proceedings schedule of Advance written off in the Books of Account and the Annual report of financial year 2008-2009 were provision was disallowed in earlier year. The assessee following the decision of TRF

ITA No.1161/Mds/2016. :- 9 -:

(supra) held that after 01.04.1989, it is not necessary for the assessee to establish that the debt, in fact has become irrecoverable. It is enough if the Bad Debts is written off as irrecoverable in the accounts of the assessee. Since the assessee has written off the Bad Debts from the Books of account and corresponding effect was also given in Sundry Debtors if any recovery is made it shall be offered to tax. We are of the opinion that the Apex Court is clear in respect of ordinary business transactions of written off of Bad Debts. Since the assessee has filed Annual Report and statement of Bad debts written off and Details of provision for doubtful debts made of earlier years. Further, the ld. Departmental Representative objected to fresh evidence were the ld. Assessing Officer was deprived to examine. We are of the opinion that the ld. Assessing Officer should be provided with opportunity to verify the entries passed in the Books of account and also genuineness of evidence filed in the course of hearing before us.

Therefore considering apparent facts, material on record and judicial decision, we remit the disputed issue to the file of the ld. Assessing Officer to verify the evidence and whether the debt is written off in the assessee books of account and if it so allow the deduction as claimed by the assessee in accordance with the ratio laid down by the Hon’ble

ITA No.1161/Mds/2016. :- 10 -:

Apex Court in case of TRF Ltd (supra) and grounds of the Revenue is allowed for statistical purpose.

In the result, the appeal of the Revenue is allowed for 8. statistical purpose.

Order pronounced on Wednesday, the 20th day of July, 2016, at Chennai.