SELLA SYNERGY INDIA PRIVATE LIMITED,CHENNAI vs. DCIT, CHENNAI

O R D E R

PER DUVVURU RL REDDY, JUDICIAL MEMBER:

2.1 The facts of the case are that during the relevant assessment year, the assessee has provided an amount of ₹.5,98,014/- towards service tax liability on management fee. The said sum includes an amount of ₹. 5,56,400/- pertaining to service tax liability for the assessment year 2008-09. The Assessing Officer had disallowed the same on the reason that this amount is not relating to the assessment year under consideration and it is an eligible deduction in that earlier assessment year. Since the assessee is following mercantile system of accounting and the said impugned service tax not relating to the current assessment year, the same was disallowed by the Assessing Officer.

2.2 Against the order of the Assessing Officer, the assessee is in appeal before us.

2.3 We have heard both sides, perused the materials on record and gone through the orders of authorities below. The ld. AR has submitted that in view of the proviso to section 43B of the Act that said amount of service tax has to be allowed on actual payment basis, though, it was not relating to the assessment year under consideration. Contrary to this, the ld. DR has submitted that to say that the expenditure is covered by proviso to section 43B of the Act and for allowing deduction on payment basis, there should be a claim of such expenditure on accrued basis by the assessee. Since the assessee has not made provision in the books of account of the assessee in any assessment year, the said expenditure cannot be allowed. In our opinion, the argument of the ld. DR is devoid of merits. The submission of the assessee is that the service tax is to pay as and when claimed it on actual payment basis. In the present case, the assessee has stated to be quantified the liability in the assessment year under consideration. If it is paid within the due date, the payment of the same is to be allowed in terms of section 43B of the Act. The assessee, who follows mercantile system of accounting, is entitled to deduct the service from the profit and loss account if the collection of service tax was shown as receipt in the profit and loss account. In other words, if the collection of the service tax and payment of service tax shown separately and routed through the balance sheet, then, the said service tax is not a deduction while computing the business income of the assessee. In other words, it is a liability to be shown in the balance sheet. While computing the profit and gains of the assessee whether the assessee is entitled to particular deduction or not will depend on the provisions of law relating thereto and not on the view of the assessee, which may take off its right nor can the existence or absence of entry in its books of account the decisive or conclusive in the matter. Since the assessee is following mercantile system of accounting, the assessee is fully justified in claiming the deduction towards service tax, which was not paid in the financial year relevant to the assessment year. This is supported by the following judgements:

Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC) CIT v. Kalinga Tubes Ltd. [1996] 218 ITR 164 Kalpetta Estates Ltd. v. CAIT [1996] 220 ITR 546 (Ker.) Haji Lal Mohd. Biri Works v. CIT [1997] 224 ITR 591 2.4 Further, we make it clear that from the language of section 43B, it is clear that it opens with a non obstante clause which means that it controls the operation of other provisions of the Act and irrespective of the other provisions, section 43B of the Act will have overriding effect. Keeping this in mind if one examines the language of section, it clearly brings out the intention of the legislature that the deduction in respect of any tax or duty under any law would be allowed in computing the income under section 28 of the Act of that previous year in which such sum is actually paid by the assessee. The intention is made more specific by providing that it would be so irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by the assessee. This clearly makes out that even if the mercantile method of accounting is employed and the liability to pay might have accrued which would give the assessee a right to obtain deduction, but in view of specific language of section, the assessee would not be entitled to get deduction merely on accrual of the liability to pay the tax or duty, but would be so entitled to get deduction only on actual payment of tax or duty. The legislature has also taken care by providing Explanation that the assessee shall not be entitled to any deduction under section 43B of the Act in respect of such sum in computing the income of the previous year in which such sum is actually paid by him in case a deduction in respect of any such sum was allowed in the previous year. It is, therefore, clear that the assessee shall not be entitled to get the benefit twice, i.e. at the time when the liability arises and also at the time when the actual payment is made. In view of the specific language of the section that deduction of the amount as mentioned in cls. (a) and (b) would be allowed in the previous year in which such sum is paid, there is no scope of any doubt that such sum can be allowed by way of deduction while computing the income in the previous year in which such sum is actually paid by the assessee. It is not the contention of the Revenue that any sum payable under cl. (a) of section 43B of the Act was at any time claimed by way of deduction in any previous year prior to 1983. Under the mercantile method of accounting, the moment the liability is incurred it would be admissible deduction. What section 43B of the Act states is that irrespective of the fact that the liability is already incurred, that would be admissible deduction only when the actual amount in that regard is paid. In view of the above settled legal position under the provisions of section 43B of the Act, order of the lower authorities declining claim of deduction under section 43B of the Act was devoid of any merit. Therefore, the AO is directed to allow deduction under the provisions of section 43B of the Act on account of service tax liability which was undisputedly paid during the year under consideration. Accordingly, we are inclined to allow the claim of the assessee.

3.1 The facts of the case are that the assessee claimed bad debts of ₹.17,98,677/- as written off. The Assessing Officer disallowed the same on the reason that it is an ineligible billing but not a bad debt. According to the Assessing Officer, the assessee has not fulfilled the conditions laid down under section 36(1)(vii) of the Act. Accordingly, he disallowed the claim of the assessee. On appeal, the ld. CIT(A) confirmed it. Before us, the ld. AR has submitted that during the assessment year 2009-10, the company has written off an amount of ₹.17,98,677/- as bad debts relating to prior periods. Point 9 of schedule 15 to notes to accounts forming part of the audited financial statements of the company provides that for the subject AY, the debt written off of ₹.17,98,677 pertains to billing made by the assessee during the preceding assessment years. In this regard, the assessee has submitted as under: • Out of the debts written off amounting to Rs.17,98,677, an amount of Rs.15,17,920 pertains to an invoice raised on December 31, 2007 amounting to € 33,044. The said invoice was realised only in part and the balance was not recoverable and therefore, was written off on October 1, 2008;

• The remaining amount of debts written off pertain to irrecoverable amounts which were identified during the reconciliation of debtors balance with their books of accounts. Since the amounts were not payable as per the debtors statements, the excess billed/ irrecoverable amounts were reversed The relevant extracts of the ledger accounts are attached as Annexure 4. Section 36(1)(vii) read with section 36(2) of the Act provides that no bad debt shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee in any of the previous years. As your good self would appreciate based on perusal of the accounts submitted, the amounts written off were already offered as income chargeable to tax in the preceding years. Therefore, the assessee clearly satisfies the conditions laid down in section 36(2)(i) of the Act and the debts written off should be allowed under section 36(1)(vii) of the Act. It is an established principle of law that the assessee is not required to establish that the debt written off has become bad. This view is upheld by the Honourable Supreme Court in the case of T.R.F. Ltd (2010), the jurisdictional Court in the case of Brilliant Tutorials (P) Ltd (2008) and various other Courts and Tribunals as relied upon by us in our earlier submissions dated June 10, 2014. Recently, the Mumbai Tribunal in the case of Cyanamid Agro Ltd (2014) has also affirmed this principle wherein it is held that "it becomes manifest that the deduction on account bad debt is to be allowed in the year in which the amount is written off in its books of account provided the conditions of section 36(2) are fulfilled. In the present case, it has not been accused by the authorities below that the assessee did not satisfy the conditions of section 36(2). Thus, in principle it is held that once the amount of debt is written off in the books of account, the condition of section 36(1)(vii) is fulfilled and the deduction has to follow, of course subject to the satisfaction of the conditions of sec. 36(2). There is no requirement to distinctly prove that the debt has, in fact, become irrecoverable as a pre-requisite condition for allowing of deduction. The relevant extract of the case law is attached as Annexure 5. Therefore, in view of the above, we request that the disallowance pertaining to bad debts amounting to Rs.17,98,677 may be kindly deleted.

3.2 We have heard both sides, perused the materials on record and gone through the orders of authorities below. Before us, the ld. AR has filed copy of the sales ledger account and also details of accounts to whom the sales was made and submitted that the said amount has already gone into the computation of income. As such, the provisions of section 36(1)(vii) of the Act has been fulfilled and it is to be allowed as bad debt. In our opinion, if the conditions laid down under section 36(1)(vii) of the Act, as laid down in the case of TRF Ltd. v. CIT in 323 ITR 397 (SC), the claim of the assessee has to be allowed. Being so, we remit the issue to the file of the Assessing Officer to examine the fulfillment of conditions laid down under section 36(1)(vii) of the Act. Thus, the ground raised by the assessee is remitted back to the Assessing Officer for fresh consideration.