ACIT CEN CIR 21, MUMBAI vs. J.E. EXPORTS, MUMBAI

1. "Whether On the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting disallowance of bad debts of Rs.2,18,42,542/- made by the Assessing Officer when the assessee has already considered the same for claiming exemption u/s.10A and therefore this would lead to double benefit and undue enrichment being given to the assessee? ." 2. "Whether On the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting disallowance of bad debts when the said bad debts never suffered taxation as envisaged in section 36(2)(1) of the IT Act ?" 3 The Appellant craves to leave to add, to amend and / or to alter any of the grounds of appeal, if need be.

Rival contentions have been heard and record perused. Facts in brief are that the assessee had debited a sum of Rs.2,18,42,542/- towards Bad Debts written off. The details of Bad Debts written off are shown as hereunder :- Party Name Address Amount Year of Sale Kozan Foreign Trade Co. Ltd. Turkey 16,800 31.03.2006 Centre jewellery U.K. 15,048 31.03.2006 Tiendas Orp Sep Spain 16,851 31.03.2007 Angel Cubillio Roy Spain 1,21,296 31.03.2006 Moksh Hong Kong 16,915 31.03.2007 OTC International USA 2,21,61,154 31.03.2008 Total 2,23,48,064 Less : Credits written off (5,05,522) Total (Net) 2,18,42,542 It was submitted by the assessee before the AO that out of the above M/s OTC International has filed petition for bankruptcy in their country. The assessee also submitted ledger account copies of the said parties since the date of sale. After considering the details, the AO refused to allow the claim of bad debits stating that the assessee had already claimed benefit of exemption under section 10A in the respective assessment years and therefore if the claim is now allowed it will amount to double benefit by claiming write off of the said debts against the taxable income. On the basis of the above reasoning, the AO declined to allow the claim of write off of bad debts.

By the impugned order, the CIT(A) allowed assessee’s claim after having following observations :- “6.2 I have carefully considered the matter. The Assessing Officer has declined to allow the claim stating that if the claim is allowed it will amount to double benefit. However, there is no dispute that the said debts have become bad and written off in the accounts. In other words, it is agreed that the conditions as stipulated in section 3 36(1)(vii) for claim of deduction of Bad Debts is satisfied. In the said view of the matter, I am unable to agree to the view held by the Assessing 'Officer that since it is eligible for exemption under s. 10A, the write off claim is not allowable. The provision of section 10A has been enacted to provide deduction with respect to profits of an undertaking which are set up in SEEPZ whereas the provision of section 36 is available to all assessees carrying on business or profession. The two section are different in operation. The provisions of section 10A provide the methodology for working out the profit with respect to the profits of the undertaking whereas the provisions of section 36 are introduced for arriving at the profits of an undertaking. Further, since the appellant is following the Mercantile System of Accounting, the sales are effected on credit and recovery is made subsequently. Since the sales are effected on credit basis, due to business exigencies, there is a 'possibility that some balances may not be recoverable: When such balances become bad and they are finally written off, it becomes eligible for deduction under s. 36(1)(vii). The sales which had been earlier made, and which is now been claimed as a Bad Debt has been offered for the purpose of taxation and considered for claiming exemption under s. 10A. Both the provisions/sections inherently differ from each other While the provisions of section 10A are for the benefit of entities doing business in/from SEEPZ, the provisions of section 36(l)(vii) are general provisions and not confined to a particular class or section of business. In the said view of the matter, it is held that the appellant is eligible for the claim under s. 36( l)(vii) or the Act. This ground is allowed.

In the result, the appeal is allowed in part.”

Ld. DR relied on the order of AO and contended that allowing assessee’s claim of bad debts amounts to double deduction.

On the other hand, ld. AR relied on order of Tribunal in the case of M/s Canbara Industries, ITA No.2359/Ahd/2009, dated 16-10-2009 for the assessment year 2006-07, wherein the bench held as under:- “7. Further, we are of the considered view that if legislature confers double benefit to the assessee then it cannot be denied by the Assessing Officer. In a case, where returned income is loss or below taxable limit, and no tax is paid by the assessee, but in subsequent year, if debt becomes bad which is taken into account while computing income of an earlier year where no tax is payable, then a bad debt cannot be disallowed merely on the ground that no tax is payable in an earlier year. The reasoning given by the Assessing Officer is fallacious and is rightly not accepted by the ld. Commissioner of Income Tax (Appeals).

As a result, we do not find any merit in the appeal filed by the Revenue the same is dismissed.”