Gerb Vibration Control Systems P. Ltd., Bangalore V. DCIT, Bangalore

ITA 1051/BANG/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 63763 (ITAT-BANGALORE)
• Duration Of Justice: 11 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-11-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 25-10-2012
• Assessment Year: 2004-2005
• Appeal Filed On: 11-11-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A SUNDAR RAJAN
• Assessee Lawyers: G SARANGAN
• Keywords: Bad and doubtful debts
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRI BNAL BANGALORE BENCH C, BANGALORE BEFORE SMT. P. MADAHAVI DEVI, JUDICIAL MEMBER AND SHRI JASON P BOAZ, ACCOUNTANT MEMBER ITA NOS.1051 & 1052(BNG.)/2011 (ASSESSMENT YEARS : 2004-05 & 2007-08) M/S GERB VIBRATION CONTROL SYSTEMS PVT. LTD., THE DY. CIT, NO.27A, 2 ND PHASE, CENTRAL CIRLE-2(3), PEENYA IND. AREA, BANGAORE BANGALORE PAN NO.AAACG 5025C VS APPELLANT RESPON DENT ASSESSEE BY : SHRI G. SARANGAN, REVENUE BY : SHRI A. SUNDAR RAJAN, JCIT DATE OF HEARING : 2 9-10-2012 DATE OF PRONOUNCEMENT : 02- 10-2012 O R D E R PER SMT. P. MADHAVI DEVI, JM: BOTH ARE ASSESSEES APPEALS FOR THE ASSESSMENT YEARS 2004-05 & 2007-08 RESPECTIVELY. IN BOTH THE YEARS, THE ISSUE IS COMMON AND THEREFORE, THEY WERE HEARD TOGETHER AND FOR THE SAKE OF CONVEN IENCE THEY ARE DISPOSED OFF BY THIS COMMON AND CONSOLIDATED ORDER. 2. THE ONLY ISSUE IN BOTH THE APPEALS IS DISALLOWA NCE OF THE CLAIM OF THE ASSESSEE OF RETENTION MONEY AS BAD DEBTS WRITTE N OFF IN THE BOOKS OF ACCOUNTS OF THE ASSESSEE. ITA NOS.1051 & 1052(B)/2011 2 2.1 THE BRIEF FACTS OF THE CASE ARE THAT THE ASSES SEE COMPANY WHICH IS ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF VIBRATION ISOLATION SYSTEMS AND NOISE CONTROL DEVISES FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEARS 2004-05 & 2007-08 RESPECTIVELY. DU RING THE ASSESSMENT PROCEEDINGS U/S 143(3) THE AO DISALLOWED THE CLAIM OF RETENTION MONEY WRITTEN OFF AS BAD DEBTS. THE ISSUE TRAVELED UPTO ITAT AND THE ITAT HAD REMANDED THE ISSUE TO AO FOR RECONSIDERATION OF THE ASSESSEES CLAIM THAT THE AMOUNT WRITTEN OFF DID NOT ACCRUE TO THE ASSESS EE AS INCOME IN THE RELEVANT PREVIOUS YEAR AND HENCE NOT TAXABLE. I N COMPLIANCE THEREOF, THE AO AGAIN EXAMINED THE CLAIM OF THE ASSESSEE OF BAD DEBTS WRITTEN OFF BY ISSUING REQUISITE NOTICES. THE ASSESSEE FURNISHED ITS SUBMISSIONS STATING THAT THE ASSESSEE COMPANY SOLD VIBRATION ISOLATION SYSTEMS AND NOISE CONTROL DEVISES TO ITS CUSTOMERS AND PART OF THE CO NSIDERATION IS WITHHELD BY THE CUSTOMERS AS RETENTION MONEY AND AS THE ASSE SSEEE COMPANY IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING, IT HAS C REDITED THE ENTIRE CONSIDERATION FOR THE MACHINERY DURING THE RELEVANT ASSESSMENT YEAR ITSELF, WHEREAS A PART OF THE SALE CONSIDERATION IS RETAINE D BY ITS CUSTOMERS TO BE PAID ONLY AFTER THE MACHINERY IS INSTALLED AND THE WORKING OF THE MACHINERY IS TO THE SATISFACTION OF THE CUSTOMER. THE ASSESS EE HAS WRITTEN OFF THE RETENTION MONEY FROM ITS BOOKS FOR THE RELEVANT PRE VIOUS YEAR ON THE GROUND THAT IT HAS NOT ACCRUED TO THE ASSESSEEE DURING THE RELEVANT PREVIOUS YEAR. THE ASSESSEE RELIED ON VARIOUS JUDICIAL PRECEDENTS FOR THE PROPOSITION THAT ITA NOS.1051 & 1052(B)/2011 3 THE ASSESSEE IS NOT ENTITLED TO THE SAID RETENTION MONEY DURING THE RELEVANT PREVIOUS YEAR AND THEREFORE, THIS HAS BEEN WRITTEN OFF AS BAD DEBTS. 2.2 IT WAS ALSO SUBMITTED THAT AS AND WHEN THE RET ENTION MONEY HAS BEEN RECEIVED BY THE ASSESSEE IN THE SUBSEQUENT ASS ESSMENT YEARS THE ASSESEE HAS OFFERED THE SAME TO TAX. THE AO HOWEV ER, CALLED FOR THE CLARIFICATION FROM THE CUSTOMERS AS TO THE DELAY IN PAYMENTS ETC. AFTER RECEIPT OF THE REPLIES FROM THE SAID COMPANIES, THE AO CAME TO THE CONCLUSION THAT THE ASSESSEE HAS NOT PROVED AS TO H OW THE DEBTS HAVE BECOME BAD U/S 36(1)(VII) R.W.S 36(2)(VII) OF THE I T ACT. 3. AGGRIEVED, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A) REITERATING THE SUBMISSIONS MADE BEFORE THE AO. 4. THE CIT(A) WHILE AGREEING WITH THE ASSESSEE THA T THE RETENTION MONEY HAS ACCRUED TO THE ASSESSEE IN THE YEAR WHEN THE SAME IS ACTUALLY PAID TO IT AND ALSO THAT THE ASSESSEE HAS TREATED T HE 100% OF THE CONTRACT AMOUNT AS ITS INCOME DURING THE RELEVANT FINANCIAL YEAR AND THAT THE REST 10% IS TO BE RECEIVED IN FUTURE ON SATISFACTORY EXE CUTION OF THE CONTRACT, HE HOWEVER, AGREED WITH THE AO THAT THE PARTIES CANNOT BE DESIGNATED AS DEBTORS OF THE ASSESSEE IN TRUE SENSE OF THE TERM A ND ALSO THAT THE ASSESEEE HAS NOT DEBITED THE ACCOUNTS OF THE PARTIES AGAINST WHOM IT IS SHOWING RETENTION MONEY AND OTHER MONIES AS RECEIVABLE. HE THUS, CONFIRMED THE DISALLOWANCE MADE BY THE AO AND THE ASSESSEE IS IN SECOND APPEAL BEFORE US ITA NOS.1051 & 1052(B)/2011 4 5. THE LEARNED COUNSEL FOR THE ASSESSEE SHRI G.SAR ANGAN, WHILE REITERATING THE SUBMISSIONS MADE BEFORE THE AUTHORI TIES BELOW SUBMITTED THAT THE ASSESSEE MANUFACTURES MACHINERY AS PER THE REQUIREMENT OF ITS CUSTOMERS AND AS PER CONTRACTUAL TERMS BETWEEN THE PARTIES, THE ASSESSEE IS ENTITLED TO RECEIVE RETENTION MONEY ONLY AFTER S UCCESSFUL INSTALLATION AND SATISFACTORY WORKING OF THE MACHINERY IN THE OPINIO N OF THE CUSTOMER. THUS, ACCORDING TO HIM FOLLOWING THE MATCHING PRINC IPLE OF REVENUE, THE AMOUNT RECEIVED DURING THE RELEVANT PREVIOUS YEAR O N THE DELIVERY OF THE MACHINERY ONLY IS TO BE TREATED AS INCOME OF THE AS SESSEE AND THE RETENTION MONEY SHOULD BE RECOGNISED AS INCOME OF THE ASSESSE E IN THE YEAR OF RECEIPT. HE SUBMITTED THAT THE ASSESSEE HOWEVER, HAS CONSIDERED 100% OF CONTRACT AMOUNT AS ITS INCOME DURING THE RELEVANT F INANCIAL YEAR ITSELF AND THEREFORE, THE RETENTION MONEY WHICH IS NOT RECOVER ABLE DURING THE RELEVANT FINANCIAL YEAR HAS TO BE REDUCED. HE SUBMITTED TH AT THE ASSESSEE HAS RAISED INVOICES AND ACCOUNTED THE SAME BY CREDITING INCOME ACCOUNT AND DEBITING PARTIES ACCOUNT THUS ESTABLISHING A VALID DEBT IN ITS BOOKS OF ACCOUNTS AND LATER ON THE RETENTION MONEY, WHICH, I N THE JUDGMENT OF THE ASSESSEE IS NOT RECOVERABLE DURING THE RELEVANT PRE VIOUS YEAR WAS WRITTEN OFF. HE SUBMITTED THAT AFTER AMENDMENT TO SEC.36( 1)(VII) W.E.F.1989, IT IS NO LONGER REQUIRED TO PROVE THAT THE DEBT HAS BECOM E BAD AND IT IS SUFFICIENT IF THE ASSESSEE HAS WRITTEN OFF THE SAME AS IRRECOVERABLE IN ITS BOOKS OF ACCOUNTS. IN SUPPORT OF HIS CONTENTIONS, HE PLACED RELIANCE UPON ITA NOS.1051 & 1052(B)/2011 5 THE DECISION OF HE APEX COURT IN THE CASE OF M/S TR F LTD., VS CIT(2010) 323 ITR 397(SC) 6. THE LEARNED DR ON THE OTHER AND, SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 7. HAVING HEARD BOTH THE PARTIES AND HAVING CONSID ERED THE RIVAL CONTENTIONS, WE FIND THAT THE ASSESSEES CASE IS FA IRLY COVERED BY THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F M/S TRF LTD., VS CIT(2010) CITED SUPRA. THE ASSESSEE BY CREDITING T HE ENTIRE CONTRACT AMOUNT IN ITS BOOKS OF ACCOUNTS AND DEBITING THE PA RTIES ACCOUNT HAS ESTABLISHED THE DEBT. THUS, IT HAS OFFERED THE EN TIRE CONTRACT AMOUNT DURING THE YEAR OF DELIVERY OF THE MACHINERY ITSELF WHICH FACT NOT DOUBTED BY THE AUTHORITIES BELOW. FOR ALLOWING THE WRITE OFF OF A DEBT AS BAD AND IRRECOVERABLE U/S 36(1)(VII) OF THE IT ACT, THE AMO UNT HAS TO BE OFFERED AS INCOME OF THE RELEVANT FINANCIAL YEAR OR EARLIER YE ARS AS SPECIFIED U/S 36(2) OF THE IT ACT. AS THE ASSESSEE HAS ALREADY OFFERED THE INCOME DURING THE RELEVANT FINANCIAL YEAR AS THE INCOME ACCRUED TO TH E ASSESSEE DURING THE RELEVANT PREVIOUS YEAR THE ASSESSEEE WA NOT ENTITLE D TO RECEIVE THE SAME DURING THIS PREVIOUS YEAR ITSELF, BUT SINCE THE ASS ESSEE HAS DULY WRITTEN OFF THE SAME AS BAD DEBTS U/S 36(1)(VII) OF THE IT ACT, 1961. FURTHER, IT IS ALSO TO BE CONSIDERED THAT AS AND WHEN THE ASSESSEE HAS RECEIVED THE RETENTION MONEY, THE ASSESSEE HAS OFFERED THE SAME AS ITS INC OME AS DULY NOTED BY THE AO IN THE ASSESSMENT ORDER. IN VIEW OF THE SA ME, WE SET ASIDE THE ITA NOS.1051 & 1052(B)/2011 6 ORDER OF THE CIT(A) AND DIRECT THE AO TO ALLOW DEDU CTION U/S 36(1)(VII) OF THE IT ACT, 1961. 8. IN THE RESULT, BOTH THE APPEALS OF THE ASSESSEE ARE ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 2 ND NOVEMBER, 2012. SD/- SD/- (JASON P BOAZ) (P. MADHA VI DEVI) ACCOUNTANT MEMBER JUDICIAL M EMBER BANGALORE: D A T E D : 02-11-2012 AM* COPY TO : 1 APPELLANT 2 RESPONDENT 3 CIT(A)-IV, BANGALORE. 4 CIT 5 DR, ITAT, BANGALORE. 6 GUARD FILE (1+1) BY ORDER SR. PRIVATE SECRETARY ITAT, BANGALORE