DCIT, CHENNAI V. M/s. Maverick Systems Ltd., CHENNAI

ITA 150/CHNY/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 61167 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 4 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-05-2012
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 17-05-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 28-01-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: S SRIDHAR
• Keywords: Question of law; Bad and doubtful debts; Revenue expenditure
• Section: 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, CHENNAI BEFORE SHRI N.S.SAINI, ACCOUNT ANT MEMBER AND SHRI VIKAS AWASTHY, JUDICIAL MEMBER ITA NO.150/MDS/2011 (ASSESSMENT YEAR : 2006-07) DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE IV(1), AAYAKAR BHAVAN IV FLOOR, 121, M.G.ROAD, NUNGAMBAKKAM, CHENNAI-600 034. VS. M/S.MAVERICK SYSTEMS LTD. FAGUN MANSION V FLOOR, 74, ETHIRAJ SALAI, EGMORE, CHENNAI-600 105. PAN:AACCM2335D (APPELLANT) (RESPONDENT) APPELLANT BY : MR. SHAJI P.JACOB, ADDL. CIT RESPONDENT BY : MR. S. SRIDHAR, ADVOCATE DATE OF HEARING : 17 TH MAY, 2012 DATE OF PRONOUNCEMENT : 31 ST MAY, 2012 O R D E R PER VIKAS AWASTHY, JUDICIAL MEMBER: THE PRESENT APPEAL HAS BEEN FILED BY THE REVENUE AGAINST THE ORDER DATED 26.10.2010 PASSED BY THE CI T(A)-V, CHENNAI RELEVANT TO THE ASSESSMENT YEAR 2006-07. 2. IN THE PRESENT APPEAL, THE REVENUE HAS ASSAILED THE ORDER OF THE CIT(A) PRIMARILY ON THE FOLLOWING THRE E GROUNDS:- I) ALLOWING THE CLAIM OF BAD DEBTS TO THE TUNE OF ` 30,89,783/- WHICH WAS DISALLOWED BY THE ASSESSING OFFICER BEING CAPITAL IN NATURE; ITA NO.150/MDS/ 2011 2 II) ALLOWING THE CLAIM OF ASSESSEE TO WRITE OFF ` 19,80,469/- THE AMOUNT INCURRED ON BEHALF OF M/S. FUN IDEAS AND INNOVATIONS LTD.; AND III) ALLOWING THE CLAIM OF ` 79,29,122/- BEING WRITE OFF OF MARKETING EXPENSES. 3. ISSUE NO.1 RELATES TO ALLOWING THE CLAIM OF BAD DEBTS TO THE TUNE OF ` 30,89,783/- BY THE CIT(A) WHICH WAS DISALLOWED BY THE ASSESSING OFFICER HOLDING IT TO BE CAPITAL I N NATURE. THE COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE AMOUNT WAS ADVANCED TO THE COMPANIES I.E. STUDENTS CONCEPTS. C OM ( ` 18,89,783) AND M/S. PRATYAMNAYA EDUCATIONAL SERVICE S PVT. LTD., ( ` 12.00 LAKHS) FOR ENHANCING INCOME GENERATION OF TH E ASSESSEE COMPANY. AT NO POINT OF TIME, THE AMOUNT WAS ADVANCED AS INVESTMENT. EVEN IN THE BOOKS OF ACCOU NT OF THE ASSESSEE, THE AMOUNT ADVANCED TO THE ABOVE SAID COM PANIES WAS TREATED AS CURRENT ASSETS TILL THAT TIME THE SA ME WAS WRITTEN OFF DURING THE FINANCIAL YEAR 2005-06 RELEV ANT TO THE ASSESSMENT YEAR 2006-07. 4. ON THE OTHER HAND, THE D.R. SUBMITTED THAT THE A MOUNT WAS INVESTED IN THE ABOVE SAID COMPANIES AND WHEN T HE ITA NO.150/MDS/ 2011 3 AMOUNT INVESTED BECOME BAD, THE ASSESSEE TREATED IT AS BAD DEBT. 5. WITH REGARD TO ISSUE NO.2 PERTAINING TO ALLOWING THE CLAIM OF ASSESSEE TO WRITE OFF THE AMOUNT INCURRED ON BEHALF OF M/S. FUN IDEAS & INNOVATIONS LTD, THE COUNSEL FO R THE ASSESSEE SUBMITTED THAT EXPENSES WERE INCURRED ON B EHALF OF M/S. FUN IDEAS & INNOVATIONS LTD. WITH THE POSSIBIL ITY FOR RECOVERING THE SAME AT A FUTURE DATE AS WELL AS GAI N IN THE BUSINESS. THE D.R. SUBMITTED THAT THE ASSESSEE CANN OT CLAIM WRITE OFF OF THE EXPENSES INCURRED ON BEHALF OF M/S . FUN IDEAS & INNOVATIONS LTD. AS THE EXPENSES WERE NOT RELATE D TO THE BUSINESS OF THE ASSESSEE. 6. ISSUE NO.3 RELATES TO ALLOWING THE CLAIM OF ASSE SSEE OF WRITE OFF OF MARKETING EXPENSES. THE COUNSEL FOR TH E ASSESSEE SUBMITTED THAT EXPENDITURE ON MARKETING WERE INCURR ED MAINLY TO EXPLORE NEW AVENUES IN UNITED STATES AND THE EXP ENDITURE INCURRED WAS IN THE FORM OF PARTICIPATION FEES IN SEMINARS/CONFERENCE/EXHIBITIONS/TRADE FAIRS ETC. AL L THESE EXPENSES WERE INCURRED TOWARDS MARKET RESEARCH TO E XPLORE NEW AREAS. HE FURTHER SUBMITTED THAT FOR THE PURPOS E OF ITA NO.150/MDS/ 2011 4 ACCOUNTING AND SCHEDULE VI, THESE EXPENSES WERE DEF ERRED FOR THREE YEARS STARTING FROM THE FINANCIAL YEAR 20 05-06 RELEVANT TO THE ASSESSMENT YEAR 2006-07. ADJUSTMENT HAS BEEN CARRIED OUT IN COMPUTING INCOME BY ADDING BACK 1/3 RD OF THE TOTAL EXPENSES I.E. ` 79,29,122/-. 7. THE D.R. STRONGLY SUPPORTED THE ORDER PASSED BY THE ASSESSING OFFICER AND SUBMITTED THAT THE CIT(A) HAS ERRED IN ALLOWING THE APPEAL OF THE ASSESSEE. HE ALSO RELIE D ON THE FOLLOWING JUDGEMENTS AND ORDERS:- I) CIT VS. R.CHIDAMBARANATHA MUDALIAR, 240 ITR 552 II) TULIP STAR HOTELS LTD. VS. ACIT., 316 ITR (AT) 341 III) CIT VS. R.G.SCIENTIFIC ENTERPRISES P.LTD., 311 ITR 401 IV) CIT VS. UNITED BREWERIES LTD., 321 ITR 546 (KA R) V) CIT VS. POPULAR VEHICLES & SERVICES LTD.,326 ITR 387 (KER) VI) E.I.D. PARRY (INDIA) LTD. VS. CIT., 257 ITR 253 (MAD) VII) KWALITY FUN FOODS & RESTAURANTS LTD. VS. DCIT ., 108 ITD 274 8. IN ORDER TO SUPPORT THE CONTENTIONS/SUBMISSIONS MADE ON BEHALF OF THE ASSESSEE, THE COUNSEL FOR THE ASSE SSEE RELIED ON THE FOLLOWING JUDGEMENTS/ORDERS:- ITA NO.150/MDS/ 2011 5 I) ALEMBIC CHEMICAL WORKS CO. LTD., VS. CIT., 177 I TR 377(SC) II) CIT VS. CRESCENT FILMS PVT. LTD., (2001) 248 IT R 670(MAD) 9. WE HAVE HEARD THE SUBMISSIONS OF PARTIES AND HAV E TAKEN NOTE OF THE JUDGEMENTS RELIED ON BY THE RESPE CTIVE PARTIES. GROUND NOS.1 & 5 OF THE GROUNDS OF APPEAL ARE GENERAL IN NATURE AND THEREFORE THEY WERE NOT PRESS ED BY THE D.R. 10. ISSUE NO.1 I.E., CLAIM OF BAD DEBTS TO THE TU NE OF ` 30,89,783/-, IS SIMILAR TO THE GROUND RAISED BY TH E REVENUE IN ITA NO. 148/MDS/2011 RELEVANT TO THE ASSESSMENT YEA R 2005- 06. FOLLOWING OUR OWN VIEW ON THE IDENTICAL GROUND IN THE EARLIER ASSESSMENT YEAR DISCUSSED IN ITA NO.148/MD S/2011, WE REJECT THE FIRST ISSUE RAISED BY THE REVENUE IN THE PRESENT APPEAL. 11. WITH RESPECT TO ISSUE NOS.2 & 3, WE FIND THAT N EITHER THE ASSESSING OFFICER NOR THE CIT(A) HAVE BEEN ABLE TO GIVE PLAUSIBLE REASONS TO ARRIVE AT THEIR RESPECTIVE CO NCLUSIONS. THE RELEVANT EXTRACT OF THE ORDER OF CIT(A), ALLOW ING THE ITA NO.150/MDS/ 2011 6 APPEAL OF THE ASSESSEE ON ISSUE NOS. 2 & 3 , IS REP RODUCED HEREIN BELOW:- (V) WITH REFERENCE TO THE DISALLOWANCE OF ` 19,80,469/- (FUN IDEAS & INNOVATIONS LTD.) THIS WAS DISALLOWED ONLY ON THE REASON OF ITS PRIOR PERIOD I N NATURE AND THE GENESIS OF THIS EXPENDITURE FOR ALLOWABILITY HAVE NEVER BEEN DISCUSSED BY THE ASSESSING OFFICER. THE ASPECT OF THE DECISION AS TO THE WRITE OFF HAS BEEN TAKEN DURING THE FINANCIAL YEAR, IN LINE WITH THE ACCOUNTING PRINCIPLES FOLLOWED BY THE COMPANY ON A CONSISTENT BASIS. SUCH WRITE OFF FULLY SATISFIES AS ALREADY SUBMITTED IS FULLY SATISFYING THE GENESIS O F SECTION 37 IN TOTO AND AS SUCH ENTITLED FOR DEDUCTI ON IN THE YEAR OF WRITE OFF. (VI) WITH REFERENCE TO THE DISALLOWANCE OF ` 79,29,122/-(MARKETING EXPENSES INCURRED TOWARDS DEVELOPMENT OF US TERRITORY). THIS WAS DISALLOWED ONLY ON THE REASON OF ITS PRIOR PERIOD IN NATURE WH ILE THESE WERE INCURRED DURING THIS YEAR ONLY. FURTHER THE GENESIS OF THIS EXPENDITURE FOR ALLOWABILITY HAVE N EVER BEEN DISCUSSED BY THE ASSESSING OFFICER. IN FACT, THE SAID EXPENDITURE INCURRED DURING THIS YEAR AND HAS BEEN DEFERRED BY MEANS OF THREE YEARS COMMENCING FROM THIS YEAR, IN LINE WITH THE ITA NO.150/MDS/ 2011 7 ACCOUNTING POLICY ON THE DEFERRED REVENUE EXPENDITURE. THE SAID EXPENDITURE IS FULLY SATISFYI NG THE CONDITIONS OF SECTION 37 AND AS SUCH ENTITLED F OR DEDUCTION IN THE YEAR OF ACCRUAL. THE COMPUTATION SHEET ALONG WITH RETURN OF INCOME HAS BEEN MADE TO CORRECTLY PORTRAY THE ARITHMETICAL CORRECTNESS VIZ. , BY ADDING BACK 1/3 RD PORTION ( ` 26,43,041/-) CLAIMED IN THE AUDITED FINANCIALS TO THE PROFIT OF THE APPELLA NT COMPANY AND DEDUCT THE ENTIRE PORTION ( ` 79,29,122/-) TO ARRIVE AT THE CORRECT TOTAL INCOME . (VII) FURTHER THE DELHI HIGH COURTS DECISION IN TH E CASE OF CIT VS. VISHNU INDUSTRIAL GASES P.LTD., ITR NO.229/1988 IS A DIRECT POINTER FOR ITS ALLOWABILIT Y EVEN IF SUCH ITEMS ARE PRIOR PERIOD IN NATURE AS LO NG AS THERE IS NO CHANGE IN THE RATES OF TAXATION. ACCORDINGLY, THE ASSESSING OFFICER SHOULD HAVE BEEN SATISFIED AS TO ITS ALLOWANCE ON THE ABOVE CONSIDERATIONS. 3.6. THE ASSISTANT COMMISSIONER HAS PROCEEDED TO DISALLOW ON THE ASSUMPTIONS THAT THE SAID AMOUNT OF ADVANCES WERE NVESTMENT IN NATURE AND THEREBY IT PARTAKES THE CHARACTER OF CAPITAL AND AS WELL SOM E OF THESE WERE PRIOR PERIOD, WHICH IN REALITY WERE OTHERWISE, DISCUSSED SUPRA. ITA NO.150/MDS/ 2011 8 3.7. ON THE BASIS OF ABOVE ANALYSIS, I HOLD, THAT T HE ACTION OF THE ASSESSING OFFICER IN ADDING A SUM OF ` 1,29,99,374 (30,89,783 + 19,80,469 + 79,29,122) IS NOT JUSTIFIED. CONSEQUENTLY, I ALLOW THE CLAIM OF S UMS TOTALLING ` 1,29,99,374/- IN THE COMPUTATION OF TOTAL INCOME FOR THE ASSESSMENT YEAR 2006-07 IN THE TOTAL ACCEPTANCE OF THE GROUNDS OF APPEAL IN GROUND NO.3,4,5,6,7,8 & 9 FORMING PART OF STATUTORY FORM 35 FILED BEFORE YOU. 4. IN THE RESULT, THE APPEAL FILED BY THE APPELLAN T IS FULLY ALLOWED. 12. THE CASE LAWS RELIED ON BY THE D.R. CITED ABO VE ARE NOT APPLICABLE TO THE FACTS AND CIRCUMSTANCES OF TH E PRESENT CASE AS THE ASSESSING OFFICER AND THE CIT(A) HAVE N OT BEEN ABLE TO CULL OUT PROPER FACTUAL POSITION IN THE INS TANT CASE. FACTS OF THE CASE ARE ITS HEART AND SOUL. TILL THE TIME COMPLETE FACTS ARE BROUGHT IN RIGHT PERSPECTIVE, IT WILL NOT BE JUSTIFIED TO DECIDE THE ISSUES INDEPENDENTLY OR IN THE LIGHT OF LAW ALREADY LAID DOWN. THE RATIO OF THE JUDGEMENTS REFERRED TO CAN ONLY BE APPLIED, IF THE FACTS ARE IDENTICAL AND QUESTION OF LAW INVOLVED IS SAME TO THE CASES ALREADY DECIDED. ITA NO.150/MDS/ 2011 9 13. WE THEREFORE, SET ASIDE THE ORDER OF THE CIT(A ) ON THE TWO ISSUES I.E., I) WRITE OFF ` 19,80,469/- THE AMOUNT INCURRED ON BEHALF OF M/S. FUN IDEAS AND INNOVATIONS LTD.; AND II) ALLOWING THE CLAIM OF ` 79,29,122/- BEING WRITE OFF OF MARKETING EXPENSES AND REMAND THE MATTER TO THE ASSESSING OFFICER TO D ECIDE BOTH THE ISSUES DE NOVO AND TO PASS SPEAKING ORDER AFTER TAKING INTO CONSIDERATION ALL THE DOCUMENTS SUBMITT ED BY THE ASSESSEE. 14. IN THE RESULT, THE APPEAL OF THE REVENUE IS PAR TLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THURSDAY, TH E 31 ST OF MAY, 2012 AT CHENNAI. SD/- SD/- ( N.S. SAINI ) (VIKAS AWASTHY) ACCOUNTANT MEMBER JUDICIAL MEMBER CHENNAI, DATED THE 31 ST MAY, 2012. SOMU COPY TO: (1) APPELLANT (2) RESPONDENT (3) CIT (4) CIT(A) (5) D.R. (6) G.F .