PRAG C.BOGHANI,KOLKATA vs. I.T.O WD - 35(1),KOLKATA, KOLKATA

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ITA 929/KOL/2013Status: DisposedITAT Kolkata13 May 2016AY 2008-098 pages
AI SummaryPartly Allowed

What did the Tribunal hold?

The Tribunal held that advances made in the normal course of business which could not be recovered, either in cash or kind, were allowable as a deduction upon write-off. The efforts to recover these advances were in vain, making the write-off acceptable.

What were the facts?

The assessee claimed a deduction for bad debts and advances amounting to Rs. 4,89,356/-. The Assessing Officer disallowed this claim, stating the assessee failed to establish how these debts became bad. This disallowance was upheld by the CIT(A).

What were the issues?

Whether advances made in the normal course of business, which become irrecoverable, are allowable as a deduction as bad debts or business loss.

Which sections of the Income-tax Act were involved?

Section 28,Section 36(1)(vii)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, “B” BENCH: KOLKATA

Before: Shri N. V. Vasudevan, JM & Shri M. Balaganesh, AM]

Hearing: 10.05.2016Pronounced: 13.05.2016

Per Shri Balaganesh, AM: This appeal by assessee is arising out of order of CIT(A)-XX, Kolkata vide Appeal No. 242/CIT(A)-XX/Wd-35(1)/2010-11/Kol dated 15.02.2013. Assessment was framed by ITO, Wd-35(1)/ Kolkata u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) for Assessment Year 2008-09 vide his order dated 27.12.2010. 2. The first issue to be decided in this appeal is as to whether the Ld. AO is justified in disallowing a sum of Rs.4,89,356/- towards bad debts and advances in the facts and circumstances of the case.

3.

Brief facts of this issue are that the assessee is engaged in the business of import of timber and PVC flex and selling them. The assessee made certain advance payments in the normal course of his business to various suppliers and C&F Agents and could not receive the materials and services in full, from the said parties and accordingly, chose to write off those bad advances and claimed the same as deduction in the return of income. Before the Ld. AO the assessee provided the breakup of his claim of bad debts and advances of Rs.4,89,356/- as below: “JAF FZE (Dubai) Rs. 1,32,040/- O. V. IMPEX (Delhi) Rs. 2,08,505/- Shroff Shipping Agency Pvt. Ltd. Rs. 35,468/- Total advance for materials and services : Rs. 3,76,013/- + Bajaj Glass Centre (Bad debts written off) Rs. 1,13,343/- Total : Rs. 4,89,356/-”

The Ld. AO observed that assessee could not establish as to how the aforesaid debts and advances had become bad. Hence, he proceeded to disallow the entire claim of Rs.4,89,356/- in the assessment which was upheld by the ld. CIT(A) on first appeal. Aggrieved, assessee is in appeal before us on the following grounds:

“1. For that the learned Commissioner of Income-tax (Appeals) erred in law in upholding the disallowance of bad debts amounting to Rs.4,89,356/- claimed by the appellant u/s. 36(l)(vii) of the said Act on misconception of facts as well as law and without taking into consideration of the fact that the debts were written off as irrecoverable in the books and reflected to profit and loss accounts.

2.

For that in view of the fact that a part of the debts arisen out of incident to the trade which caused reduction of circulating fund became bad and was not receivable, the claim of the appellant as bad debt out of such sum ought to have been allowed by the learned Commissioner of Income-tax (Appeals) in consideration of the arguments adduced to him.”

4.

We have heard rival submissions and perused the material available on record including the paper book filed by the assessee. We find that the breakup of the claim of bad debts and advances is enclosed in pages 27 and 28 of the paper book together with supporting evidences from pages 29 to 36 of the paper book. From the same it could be safely concluded that in respect of first three parties as stated supra, the assessee had paid trade advances to various suppliers and service providers during the normal course of his business which could not be received back either in cash or in kind by supply of materials in full and hence, the same are allowable as deduction u/s. 28 of the Act on write off of the same. We find that the efforts taken by the assessee to recover the same were in vain and hence, the argument of the Ld. AR that the assessee had no other option but to write off the same as bad advances in the return of income is to be accepted. We also place reliance on the following decisions in support of our conclusion: i) CIT Vs. Mysore Sugar Co. reported in (1962) 46 ITR 649 (SC) - In this case, the facts before the Hon’ble Apex Court and decision rendered thereon is given below:- Facts: “The assessee was a sugar company. The assessee purchased sugarcane from the sugarcane growers and crushed them in its factory to prepare sugar. As a part of its business operations. It entered into agreements with the sugarcane growers, and advanced them sugarcane seedlings, fertilizers and also cash. The sugarcane growers entered into a written agreement by which they agreed to sell sugarcane exclusively to the assessee at current market rates and to have the advances adjusted towards the price of sugarcane, agreeing to pay interest in the meantime. For this purpose, an account of each sugarcane growers was opened by the assessee-company. A crop of sugarcane took about 18 months to mature, and these agreements took place at the harvest season each year, in preparation for the next crop.

In the year 1948-49, due to drought, the assessee company could not work its sugar mills and the sugarcane growers could not grow or deliver the sugarcane. The advances made in 1948-49 thus remained unrecovered, because they could only be recovered by the supply of sugarcane to the assessee-company. The Mysore Government realising the hardship appointed a Committee to investigate the matter and to make a report and recommendations. The Committee recommended that the assessee-company should ex gratia forgo some of its dues, and in the year of account ending 30-6-1952, the company waived its rights in respect of Rs.2,87,422. The company claimed this as a deduction under section 10(2)(xv) of 1922 Act. The ITO declined to make the deduction, because, in his opinion, this was neither a trade debt nor even a bad debt but an ex gratia payment almost like a gift. An appeal to the AAC also failed. The Appellate Tribunal upheld the disallowance. On reference the High Court held that the expenditure was not in the nature of a capital expenditure, and was deductible as a revenue expenditure.

Held: To find out whether an expenditure is on the capital account or on revenue, one must consider the expenditure in relation to the business. Since all payments reduce capital in the ultimate analysis, one is opt to consider a loss as amounting to a loss of business. But this is not true of all losses, because losses in the running of the business cannot be said to be of capital. The questions to consider in this connection are: for what purpose was the money laid out? Was it to acquire an asset of an enduring nature for the benefit of the business, or was it an outgoing in the doing of the business? If money be lost in the first circumstances, it is a loss of capital, but if lost in the second circumstance, it is a revenue loss. In the first, it bears the character of an investment, but in the second, to use a commonly understood phrase, it bears the character of current expenses.

In instant case the amount was an advance against price of one crop. The Oppigedars were to get the assistance not as an investment by the assessee-company in its agriculture, but only as an advance payment of price. The amount, so far as the assessee-company was concerned, represented the current expenditure towards the purchase of sugarcane, and it made no difference that the sugarcane thus purchased was grown by the Oppigedars with the seedlings, fertilizer and money taken on account from the assessee-company. In so far as the assessee-company was concerned, it was doing no more than making a forward arrangement for the next year’s crop and paying an amount in advance out of the price, so that the growing of the crop might not suffer due to want of funds in the hands of the growers. There was hardly any element of investment which contemplated more than payment of advance price. The resulting loss to the assessee-company was just as much a loss on the revenue side as would have been, if it had paid for the ready crop which was not delivered.

Hence, the decision of the High Court was right.

The appeal was dismissed”.

ii) Decision of Hon’ble Bombay High Court in the case of Harshad J. Choksi Vs. CIT reported in (2012) 25 Taxman.com 567 (Bom) - In this case the question raised before the Hon’ble Bombay High Court and the decision rendered thereon is reproduced below:- “Questions: • Whether if an amount is held to be not deductible as a bad debt in view of non- compliance of the condition precedent as provided under section 36(2), could the same be considered as an allowable business loss? • Whether, therefore, the amount of Rs. 44.98 lakhs could be considered as an allowable business loss? Held: • Section 28 imposes a charge on the profits or gains of business or profession. The expression 'Profits and gains of business or profession' is to be understood in its ordinary commercial meaning and the same does not mean total receipts. What has to brought to tax is the net amount earned by carrying on a profession or a business which necessarily requires deducting expenses and losses incurred in carrying on business or profession. The Supreme Court in the case of Badridas Daga v. CIT [1958] 34 ITR 10 has held that in assessing the amount of profits and gains liable to tax, one must necessarily have regard to the accepted commercial practice that deduction of such expenses and losses is to be allowed, if it arises in carrying on business and is incidental to it. [Para 10] • On the basis of the aforesaid decision, it can be concluded that even if the deduction is not allowable as bad debts, the Tribunal ought to have considered the assessee's claim for deduction as business loss. This is particularly so, as there is no bar in claiming a loss as a business loss, if the same is incidental to carrying on of a business. The fact that condition of bad debts were not satisfied by the assessee would not prevent him from claiming deduction as a business loss incurred in the course of carrying on business as share broker. [Para 11] • In fact, the Bombay High Court in the case of CIT v. R.B. Rungta & Co. [1963] 50 ITR 233 upheld the finding of the Tribunal that the loss could be allowed on general principles governing computation of profits under section 10 of the Indian Income-tax Act, 1922, which is similar/identical to section 28 of the 1961 Act. The revenue in that case urged that the assessee having claimed deduction as a bad debt the benefit of the general principle of law that all expenditure incurred in carrying on the business must be deducted to arrive at a profit cannot be extended. This submission was negatived by the Court and it was held that even where the debt is not held to be allowable as bad debts yet the same would be allowable as a deduction as a revenue loss in computing profits of the business under section 10(1) of the Indian Income-tax Act, 1922. [Para 12] • Therefore, the amount of Rs. 44.98 lakhs, which was held to be not deductible as bad debts in view of the provisions of section 36(2), could be considered as an allowable business loss. [Para 13]

Respectfully following the aforesaid decision and in view of the aforesaid findings, we have no hesitation in directing the Ld. AO to allow the claim of deduction towards bad advances in respect of first three parties mentioned supra.

5.

Apropos, the claim of bad debts in respect of debts due from Bajaj Glass Centre amounting to Rs.1,13,343/-, we find that assessee had actually sold materials worth Rs.4,13,343/- vide Bill No. PE/0607/0032 dated 13.07.2006 and had received only Rs. 3 lacs against the same and the party had withheld the balance due to inferior quality of material supplied. Under these circumstances, the assessee chose to write off the balance sum of Rs.1,13,343/- in his books as irrecoverable and claimed the same as bad debt in the return of income. It is not in dispute that the assessee had duly offered the sale made to said party as income in the return of income of earlier year. We find that assessee is duly entitled for the same as deduction u/s. 36(1)(vii) of the Act read with section 36(2) of the Act. Accordingly, ground nos. 1 and 2 raised by assessee are allowed.

6.

The next issue to be decided in this appeal is as to whether the AO is justified in disallowing the C&F charges of Rs.9,23,328/- by invoking the provisions of section 40(a)(ia) of the Act read with section 194C of the Act in the facts and circumstances of the case.

7.

Brief facts of this issue are that the assessee is engaged in the business of import of timber and PVC Flex and selling them. For the purpose of his business, the assessee had to engage the services of Dura International Services as his clearing agent. The said C&F Agent incurred expenses on behalf of the assessee while clearing the goods for which bills were raised on the assessee and the said C&F Agent also raised separate bills for his service charges on the assessee. The Ld. AO observed that since both the services were rendered by the same party tax has to be deducted u/s. 194C of the Act on the gross amount paid to the said C&F Agent by the assessee. Accordingly, he observed that the assessee has to deduct tax at source even on the reimbursement portion paid to the said C&F Agent and made disallowance u/s. 40(a)(ia) of the Act, which was upheld by the Ld. CIT(A). Aggrieved, the assessee is in appeal before us on the following ground:

“3. For that the Ld. CIT(A) was not justified in confirming the disallowance of Rs.9,23,328/- being the expenditure incurred by the appellant and the payment made to the clearing agent as reimbursement of expenses which were disallowed by the Ld. AO in application of the provisions of sections 40(a)(ia) and 194C of the said Act wrongfully and incorrectly.”

8.

We have heard rival submissions and perused the material available on record. We find that the Ld. AR drew our attention to page 37 of the paper book, which contains the details of entire reimbursement of expenses together with its supporting bills placed at paged 38 to 83 of the paper book. The Ld. DR argued that it is not clear from the bills as to what is the element of service charges raised by the C&F Agent and accordingly, he prayed for setting aside of the issue for verification by the Learned AO and also fairly agreed that no TDS would be applicable on the reimbursement portion. The Ld. AR argued that no profit element was loaded by the C&F Agent while seeking reimbursement of expenses and placed reliance on the Circular No. 715 dated 08.08.1995 and decisions of coordinate bench in Ahmedabad tribunal in ITA No. 562/Ahd/2011 dated 30.01.2015 and decision of the Kolkata Tribunal in ITA No. 654/Kol/2010 dated 19.10.2012. We find that from the perusal of the bills submitted by the assessee in his paper book and from the perusal of the orders of the lower authorities, there is no clear finding given with regard to the fact as to whether profit element has been loaded by C&F Agent in his bills seeking reimbursement of expenses. We find that this finding is very crucial to decide the impugned issue before us. We hold that no tax needs to be deducted u/s. 194C of the Act for the reimbursement portion. In the facts and circumstances of the case, we deem it fit and appropriate in the interest of justice and fair play to set aside this issue to the file of the Ld. AO to give a clear finding from the verification of the bills as to whether any profit element is loaded by the C&F Agent while seeking reimbursement of expenses from the assessee. The assessee is also directed to adduce adequate cooperation and produce evidences in support of his contentions. Accordingly, ground no. 3 raised by assessee is allowed for statistical purposes.

9.

The next ground to be decided in this appeal is as to whether disallowance of sales promotion expenses in the sum of Rs.2,86,466/- could be made in the facts and circumstances of the case. During the course of assessment proceedings, the Ld. AO called for the details of sales promotion expenses and in response to that the assessee produced purchase bills of material purchased which were distributed to various customers for the purpose of increasing the turnover of the assessee. The Ld. AO, however, not convinced sought to disallow 10% of the total sales promotion expenses and made disallowance of Rs.2,86,466/- in the assessment on estimated basis which was upheld by the Ld. CIT(A) on first appeal. Aggrieved, assessee is in appeal before us on the following ground:

“4. For that having regard to the facts that the expenditure of Rs.2,86,466/- claimed by the appellant as sales promotion expenses for the purpose of business wholly and exclusively, the Ld. CIT(A) was wrong in confirming the disallowance of the same without taking into consideration of the arguments placed before him.”

10.

We have heard rival submissions and perused the material available on record. We find that the assessee had incurred this expenditure in the normal course of business towards sales promotion and he had also produced purchase bills for the material which were in turn gifted to various parties for increasing the turnover of the assessee. It is not in dispute that the turnover and net profit of the assessee during the year had increased substantially, which is evident from the chart reproduced hereinbelow:

Asst. Year Turnover Rs. Sales Promotion Expenses Gross Profit Net Profit Rs. Rs. Rs. 2008-09 4,12,87,062 28,64,661 1,07,24,064 10,46,120 2007-08 48,85,581 28,080 11,33,967 2,82,547 2006-07 34,64,170 NIL 8,36,261 2,59,186

11.

The Ld. DR argued that assessee had not proved the business nexus of incurring these expenses. We find that incurrence of these expenses by the assessee are in the normal course of business and adequate evidences were also submitted in this regard. In any case, there cannot be any addition made by the lower authorities on estimated basis without bringing any material on record for justifying the said addition. Accordingly, we allow the ground no. 4 raised by the assessee.

12.

Ground nos. 5 and 6 are not pressed by the Ld. AR at the time of hearing, the same is reckoned as a statement from the Bar. Hence Ground Nos. 5 & 6 raised by the assessee are dismissed as not pressed.

13.

In the result, appeal of assessee is partly allowed for statistical purpose.

14.

Order is pronounced in the open court on 13.05.2016 (N. V. Vasudevan) Accountant Member Dated : 13th May, 2016 Jd.(Sr.P.S.)

Copy of the order forwarded to:

APPELLANT – Shri Parag C. Boghani, C/o M/s. Parag Enterprise, 8,

1.

Amartolla Street, Kolkata-700 001. Respondent –ITO, Wd-35(1), Kolkata. 2 The CIT(A), Kolkata

3.4.

CIT , Kolkata

5.

DR, Kolkata Benches, Kolkata

/, By order,

Asstt.

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