AVERY INDIA LTD.,HARYANA vs. D.C.I.T, CIR- 1, KOLKATA, KOLKATA

This appeal of the assessee arises out of the order of the Learned CIT(A) in Appeal No. 85/CIT/(A)-XX/Circle-1/2011-12/Kol dated 16-01-2013 for the Asst Year 2006-07 passed against the order of assessment framed by the Learned AO u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’).

2.1. The brief facts of this issue is that the assessee is engaged in the manufacturing, trading & servicing of weighing machines, testing machines and fuel dispensing pumps. It was observed by the Learned AO during the course of assessment proceedings that the assessee had included a sum of Rs. 13,73,258/- in the administrative and other expenses on account of advances written off. The assessee was asked to furnish the details of the same by the Learned AO which were duly submitted by the assessee vide letters dated 16.10.2009 and 4.12.2009. The assessee pleaded before the Learned AO that the advances were in the nature of trading advances, earnest money deposit, tender deposit and were purely on revenue account and were made long back and all the efforts taken by the management to recover the same were in vain. Hence the management thought it prudent to write off the same in the books as irrecoverable advances. The assessee claimed deduction for the same u/s 28 read with section 37(1) of the Act as it was incurred wholly and exclusively for the purpose of business of the assessee. The Learned AO sought to disallow the same by placing reliance on the order of his predecessor for the Asst Years 2004-05 & 2005-06 wherein similar disallowances were made on the pretext that no income was offered by the assessee in respect of such advances in the earlier years, which was also upheld by the Learned CITA on first appeal. Aggrieved, the assessee is in appeal before us on the following grounds:- “1.0 That on the facts and in the circumstances of the case, the ld.CIT(Appeals) erred in confirming the disallowance of Rs.13,73,258/- made by the Assessing Officer on account of advances written off. 1.1 That on the facts and in the circumstances of the case, the ld.CIT(Appeals) as well as the assessing officer erred in not appreciating the fact that the claim for advances written off was allowable u/s. 28 read with section 37(1) of the Act.”

2.2. The Learned AR reiterated the submissions made before the lower authorities. In response to this, the Learned DR vehemently supported the orders of the lower authorities.

2.3. We find that the assessee had made following advances in the earlier years which were written off during the assessment year under appeal after treating it as irrecoverable as a measure of prudence:- In any event, it is humbly submitted that advances were made in the normal course of the existing business being in the nature of earnest money deposits, tender deposits, security deposits and civil advances and were purely on revenue account. Summary of the advances written off is mentioned hereunder:- Name of Party Amount Submission Advances to Civil Contractor [Neither completed work nor given the bills to adjust As regard civil advances, it is humbly submitted that the Ajay Sharma 43,234 appellant is inter-alia engaged in the provision of after sales Dinesh Engineering 85,000 85,000 services being in the nature of installation of weigh bridges at the customer sites towards which it seeks support from the M.P Singh 255,851 contractors on a regular basis. Towards execution of such Nanda Engineering 302,881 contracts entered into with the contractors’s, the appellant Niru Prasadr 51,702 usually pays a certain sum of the contracted value in advance. Due to delay in finalization of the site on which the Pratihar Construction 43,600 weigh bridge sold by the assessee was to be installed, Raj Kumar Rai 68,000 the contractor in the process did not refund the advance received from the appellant. The said loss Tarun Construction 136,000 being wholly incurred for the purpose of business is an Binod Bhatt 138,000 allowable deduction u/s. 28, Sub-Total[A] 11,24,268 Earnest Money deposits & Tender deposits [ Deposited but not refunded] In respect of Earnest money deposits and tender deposits Central warehouse 100,000 written off it is humbly submitted that the appellant Corporation executes orders in bulk towards which it had UP Co Op 75,000 applied to tenders floated by the customers, Sugar Factory essentially Government parties. The payments represent amount paid as deposits with tenders which Food Corporation 45,080 were refundable if the job is not awarded and Of India adjustable. However, since the same were neither Bharat Cooking 6,021 refunded nor adjusted since long time the assessee considered it as prudent to write off the amount. Coal Ltd Reliance in this regard is placed on the Sub-Total ( C ) 2,26,101 following judgements:- M/s. Pyoginam –vs- Add.CIT (2010 130 TTJ 7 (Del) CIT-vs- Sugar Dealers (1975) 100 ITR 424(All) Thackers H.P & Co –vs- CIT (1982) 134 ITR 21(MP) Narandas Mathuradas and Co –vs- CIT (1959) 35 ITR 461 (Bom) Dheerajlal Raghav & Co. ITO (1978) 5 TTJ 557 (Cuttack) Rent Deposit [ deposited but not refundable while vacating the flat The rent deposits were made in Rent Deposit 2,000 respect of flat taken on lease by the Sub-Total[D] 2,000 company for use by its employees. The said flat was vacated by the company’s employee long back; however, in spite of repeated efforts the company could not recover the said refundable security deposits and hence decided to write off the same in books of account Electricity Deposits [ Deposited for electricity but adjusted with bills] Patna Electricity 2,537 Electricity deposits were given to Patna Electricity Authority in order to have regular supply of electricity for smooth running of business. In spite of repeated efforts the company could not recover the said refundable security deposits and hence decided to write off the same in books of account Sub-Total [E] 2,537 Others ECL 2,500 Company c;losed, therefore, no chance to recover the advance Advance to Suppliers/ 15,853 Parties Sub-Total [F] 18,353 Total 13,73,258 [A+B+C=D+E=F= 2.3.1. We hold that section 28 of the Act provides that any income by way of profits and gains of any business carried on by an assessee are taxable under the head ‘profits and gains of business or profession’. In computing the net profit, the expenses incurred in connection with the business is required to be deducted from the income earned by the said business. We hold that in order to claim deduction for an expense u/s 28 of the Act, the pre-condition is to establish that advances were made for the purpose of an assessee’s business. Admittedly, it is not the case of the revenue in the facts before us that the advances were not made in the course of its business by the assessee. Moreover, from the details of the said advances which were subjected to write off, it could be seen that the entire advances were only meant for the purpose of business. We find that the assessee is not engaged in the business of loans and advances and these advances were not made to parties with a view to earn interest income out of such advances. The business nexus of these advances have been proved beyond doubt. Moreover, we also find that the revenue had not brought any material on record to prove that in the years in which these advances were given, the same were meant for non-business purposes and finding in this regard that there were disallowance of interest, if any, on the pretext that borrowed funds were diverted for non-business purposes. Moreover, we are also in agreement with the argument of the Learned AR that the revenue did not bring any material on record disputing the recoverability of the aforesaid advances.

2.3.2. We hold that the revenue cannot compel a businessman to maximize his revenue on each and every transaction. We find that the claim of deduction has been made by the assessee u/s 28 of the Act and not u/s 36(1)(vii) read with section 36(2) of the Act. We hold that as long as the advances were made for the purpose of business of the assessee and there is no contrary finding to that effect, it has to be allowed as a deduction on its write off in terms of section 28 of the Act.

2.3.3. We place reliance on the following decisions in this regard:-

A. Hon’ble Supreme Court in the case of Badridas Daga vs CIT reported in (1959) 34 ITR 10 (SC) , wherein it was held that :

“When a claim is made for a deduction for which there is no specific provision u/s. 10(2), whether it is admissible or not will depend on whether, having regard to accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business and be incidental to it. The loss for which a deduction is claimed must be one that springs directly from carrying on of the business and is incidental to it, and not any loss sustained by the assessee even it has some connection with his business. If that is established, then the deduction must be allowed, provided that there is no provision against it, expressed or implied, in the Act.”

B. Hon’ble Supreme Court in the case of CIT vs Abhdullabhai Abdullacadar reported in (1961) 41 ITR 545 (SC), wherein it was held that :

“In order that a loss might be deductible it must a loss in the business of the assessee and not a payment relating to the business of somebody else which under the provisions of the Act was deemed to be and became the liability of the assessee. Loss was allowable if it “sprang directly from and was incidental to”the business of the assessee.”

C. Hon’ble Supreme Court in the case of CIT vs Mysore Sugar Co. Ltd reported in (1962) 46 ITR 649 (SC) . 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”.

D. Hon’ble Bombay High Court in the case of Harshad J. Choksi vs CIT reported in (2012) 25 taxmann.com 567 (Bom) also supports the view of the assessee. 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] E. Hon’ble Calcutta High Court in the case of A.W.Figgis & Co (P) Ltd vs CIT reported in (2002) 254 ITR 63 (Cal), wherein the questions raised before their Lordships and their decision are as under:-

“1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the assessee’s claim was not allowable under s. 28 of the IT Act, 1961, being deductible business loss in the year under reference ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in rejecting the assessee’s claim for deduction of the sum of Rs. 1,76,751/- as a bad debt ?

Held that :

“The loan was advanced in 1978. Assessee first time claimed the debt as a bad debt in the asst year 1980-81. The claim was rejected. Again assessee has claimed in the year under consideration 1982-83. That has also been rejected up till tribunal. It is also brought to our notice by counsel of the assessee that the loan has not been recovered so far. When the consideration in 1982-83 and as on date it is the same and the advance that is treated as loan has not been recovered till today, why that claims of the assessee as bad debt should not be allowed. We do not find any justification. If assessee knew it well that filing in the suit in anyway hold the assessee but rather burden the assessee with additional financial expenses. If assessee feels that in spite of the suit, the loan will not be recovered the filing of civil suit for recovery of debt is not necessary to claim the bad debt. Therefore, in this case the amount should be allowed as bad debt. As we allowed the amount of Rs. 1,76,751/- as bad debt, therefore, whether it is a business loss or not answer to this 1st question will be of academic interest. In the result, we answer the question no. 2 in the negative that is in favour of the assessee and against revenue.

2.3.4. In view of the aforesaid facts and circumstances and respectfully following the various judicial precedents relied upon hereinabove, we hold that the assessee is entitled to claim deduction towards write off of advances amounting to Rs. 13,73,258/- and we have no hesitation in directing the Learned AO to grant deduction towards the same. Accordingly, the ground nos.1 & 1.1 raised by the assessee in this regard are allowed.

2.1 That on the facts and in the circumstances of the case, the ld.CIT(Appeals) as well as the assessing officer erred in not appreciating that clause (f) of Section 43B providing for allowance of leave encashment on payment basis is arbitrary, unconscionable and de hors the Supreme Court decision in the case of Bharat Earth Movers, as held by the jurisdictional HC in the case of Exide Industries Limited (292 ITR 470)”

4.1. The Learned AR relied on the decision of the Jurisdictional High Court in the case of Exide Industries Ltd vs Union of India reported in 292 ITR 470 (Cal) wherein the provisions of section 43B (f) of the Act has been struck down as arbitrary. However he fairly conceded that the Hon’ble Apex Court though had stayed the operation of the judgement of Calcutta High Court initially but later, it had directed the assesses to comply with the provisions of section 43B(f) of the Act and pay taxes thereon but parallely claim deduction for leave encashment on provision basis, as an interim measure till the disposal of the civil appeal by the apex court. In response to this, the Learned DR vehemently supported the order of the lower authorities.

4.2. We have heard the rival submissions and we find that the issue under appeal is considered in the decision of the Jurisdictional High Court in the case of Exide Industries Ltd vs Union of India reported in 292 ITR 470 (Cal). We find that it is relevant to get into the operative portion of the said decision of the Calcutta High Court, wherein it was held that:-

“11. In this regard the observation of the apex Court in the case of Bharat Earth Movers (supra) is quoted below:

The law is settled: if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain....

Applying the above said settled principles to the facts of the case at hand we are satisfied that the provision made by the appellant company for meeting the liability incurred by it under the leave encashment scheme proportionate with the entitlement earned by employees of the company, inclusive of the officers and the staff, subject to the ceiling on accumulation as applicable on the relevant date, is entitled to deduction out of the gross receipts for the accounting year during which the provision is made for the liability. The liability is not a contingent liability. The High Court was not right in taking the view to the contrary.

It is observed that the revenue had preferred Special Leave Petition (SLP) before the Hon’ble Supreme Court against the judgement of Hon’ble Calcutta High Court. The Hon’ble Apex Court in SLP proceedings in CC 12060 / 2008 dated 8.9.2008 had held as under:-

“The petition was called on for hearing today. Upon hearing counsel the court made the following Order.

Issue Notice. In the meantime, there shall be stay of the impugned judgement, until further orders.”

Later the Hon’ble Supreme Court in CC 22889 / 2008 dated 8.5.2009 had held as under:-

“The petition was called on for hearing today. Upon hearing counsel the court made the following Order Delay condoned. Leave granted. Pending hearing and final disposal of the Civil appeal, Department is restrained from recovering penalty and interest which has accrued till date. It is made clear that as far as the outstanding interest demand as of date is concerned, it would be open to the department to recover that amount in case Civil Appeal of the department is allowed.

We further make it clear that the assessee would, during the pendency of this Civil Appeal , pay tax as if Section 43B(f) is on the statute book but at the same time it would be entitled to make a claim in its returns.”

Respectfully following the aforesaid judicial precedent relied upon, we deem it fit and appropriate , in the interest of justice and fair play, to set aside this issue to the file of the Learned AO to pass orders based on the outcome of the main appeal on merits by the Hon’ble Supreme Court as stated supra. Accordingly, the ground nos. 2 & 2.1 raised by the assessee are allowed for statistical purposes.

THIS ORDER IS PRONOUNCED IN OPEN COURT ON 27/ 11/2015