DCIT, Circle-3(2), Hyderabad, Hyderabad V. Speck Systems Limited, Hyderabad, Hyderabad

ITA 1630/HYD/2016

• Counselvise Citation: [2021] 109 COUNSELVISE.COM (IT) 3251 (ITAT-HYDERABAD)
• Duration Of Justice: 4 year(s) 2 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-02-2021
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB-A
• Next Hearing Date: 03-02-2021
• Assessment Year: 2004-2005
• Appeal Filed On: 02-12-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SUNIL KUMAR PANDEY
• Assessee Lawyers: A V RAGHURAM
• Keywords: Opportunity of being heard; Bad and doubtful debts
• Section: 143(3); 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES A : HYDERABAD (THROUGH VIDEO CONFERENCE) BEFORE SHRI S.S.GODARA, JUDICIAL MEMBER AND SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER I.T.A. NO. 1630/HYD/2016 ASSESSMENT YEAR: 2004-05 THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-3(2), HYDERABAD VS M/S.SPECK SYSTEMS LIMITED, HYDERABAD [PAN: AADCS4067M] (APPELLANT) (RESPONDENT) FOR REVENUE : SHRI SUNIL KUMAR PANDEY, DR FOR ASSESSEE : SHRI A.V.RAGHURAM, AR DATE OF HEARING : 03-02-2021 DATE OF PRONOUNCEMENT : 22-02-2021 O R D E R PER BENCH : THIS REVENUES APPEAL FOR AY.2004-05 ARISES FROM THE CIT(A)-3, HYDERABADS ORDER DATED 26-09-2016 PASSED IN APPEAL NO.1150/CIT(A)-3/14-15, IN PROCEEDINGS U/S.1 43(3) R.W.S. 254 OF THE INCOME TAX ACT, 1961 [IN SHORT, THE ACT]. 2. THE REVENUE HAS PROPOSED THE FOLLOWING SUBSTANTIVE GROUNDS IN THE INSTANT APPEAL : 1. THE LEARNED CIT(A) ERRED BOTH IN LAW AND ON FAC TS OF THE CASE. 2. THE LEARNED CIT(A) ERRED IN DELETING THE DISALLO WANCE OF SALES RETURNS OF RS.1,85,16,690/- WITHOUT APPRECIATING TH E FACT THAT THE MINISTRY OF DEFENCE HAS DENIED THE PURCHASE OF ANY THING FROM THE ASSESSEE VIDE INVOICE NO.184 DATED 31-03-2013. ITA NO.1630/HYD/2016 :- 2 -: 3. THE LEARNED CIT(A) OUGHT TO HAVE CONSIDERED THE FACT THAT, IN THE EVENT OF SALES PROVED TO BE UNVERIFIABLE BY THE ASS ESSING OFFICER, THERE CANNOT BE ANY QUESTION OF SALES RETURNS. 4. THE LEARNED CIT(A) IN ALLOWING THE APPEAL OBSERV ING THAT THE DISALLOWANCE MADE BY THE AO IS BY MERE SUSPICION, I N LIGHT OF THE FACT THAT THE ASSESSEE COULD NOT PROVIDE ANY COGENT EVID ENCES FOR THE ENTRIES MADE IN THE LEDGERS FOR AYS:2003-04 & 2004- 05. 5. THE LEARNED CIT(A) ERRED IN TAKING INTO CONSIDER ATION THE ORDER OF SALES TAX AUTHORITIES WITHOUT APPRECIATING THE FACT THAT THE SALES TAX AUTHORITIES HAVE ALLOWED THE SALES RETURNS ONLY ON THE GROUND THAT THE PRODUCT IS A TAX EXEMPT PRODUCT AND DOES NOT IMPACT THEIR REVENUE. 6. ANY OTHER GROUND(S) THAT MAY BE URGED AT THE TIM E OF HEARING. 3. WE COME TO THE CIT(A)S LOWER APPELLATE ORDER AND N OTICE THAT HE HAS DISCUSSED THE ENTIRE ISSUE AS UNDER: 3. THE APPELLANT IS ENGAGED IN MANUFACTURE AND SUP PLY OF DIGITAL FILM RECORDERS USED IN SATELLITES FOR TOPOGRAPHICAL MAPPING. HE SUPPLIED THE EQUIPMENT AND SOFTWARE USED IN SATELLI TES FOR MAPPING EARTH TO MINISTRY OF DEFENCE, GOVERNMENT OF INDIA. FOR A.Y.2004-05, HE ADMITTED INCOME OF RS.4,49,97,566/-. ORIGINAL AS SESSMENT U/S 143(3) DATED 22.12.2006 DETERMINING THE INCOME AT R S.7,44,51,846/- MAKING SEVERAL ADDITIONS. ONE OF THE ADDITION MADE WAS DISALLOWANCE OF 'SALES RETURN' OF RS.1,85,16,690/-. THE FACTS PERTAINING TO SUCH DISALLOWANCE ARE, DURI NG F.Y.2002- 03 (A.Y.2003-04), THE COMPANY HAD SUPPLIED 'PHOTO R IGHTS SOFTWARE' FOR A VALUE OF RS.1,92,50,000/- VIDE INVOICE NO.184 DATED 31.3.2013 TO MINISTRY OF DEFENCE. THE SAME WAS INCLUDED IN SA LES FOR A.Y.2003- 04. SALES REGISTER WAS CREDITED BY RS.1,92,50,000/- AND MINISTRY OF DEFENCE ACCOUNT WAS DEBITED WITH RS.1,85,16,690/- ( AFTER ADJUSTING CREDIT NOTE OF RS.7,33,310/- RECEIVED FROM THE PART Y). FOR F.Y.2003-04 (A.Y.2004-05) THE ASSESSEE REDUCED 'SALES RETURN' O F RS.1,85,16,690/- ON THE GROUND THAT THE MINISTRY OF DEFENCE DID NOT ACCEPT THE PRODUCT AS THE SAME DID NOT MEET CRITERIA OF MINISTRY OF DE FENCE. 4. IN THE ORIGINAL SCRUTINY ASSESSMENT DATED 22.12. 2006, THE ASSESSING OFFICER DID NOT ALLOW THE SALES RETURN OF RS.1,85,16,690/- FOR THE REASONS (A) THERE IS NO DOCUMENTARY EVIDENCE THAT THE SALES WER E RETURNED. (B) THERE IS NO BASIS FOR ARRIVING AT VALUE OF SOFTWARE AT RS.1,92,50,000/-. ITA NO.1630/HYD/2016 :- 3 -: (C) THAT THE ASSESSEE FAILED TO FURNISH 'COPIES OF AGRE EMENT WITH THE MINISTRY OF DEFENCE IN RESPECT OF SUPPLY OF SOF TWARE. (D) THERE IS NO EVIDENCE THAT SUCH SOFTWARE WAS DELIVER ED TO THE MINISTRY OF DEFENCE. (E) THERE IS NO FINDING IN THE SALES TAX ASSESSMENT ORD ER REGARDING 'SALES RETURN'. (F) THAT THE ASSESSEE FAILED TO FURNISH CONFIRMATION FR OM THE MINISTRY OF DEFENCE(MOD) AS TO WHETHER THE SOFTWARE AGAINST INVOICE NO.184 DATED 31.3.2003 IS RETURNED BY IT. 5. IN FIRST APPEAL THE CIT(A) IN HIS ORDER DATED 15 .2.2008 CONFIRMED DISALLOWANCE MADE ON THE GROUND THAT THE APPELLANT HAS NOT BEEN ABLE TO PROVE THE INCID ENCE OF THE 'DEBT' ITSELF AS THE INVOICE WAS NEVER RECEIVED OR ACKNOWLEDGED BY THE M OD. IT, THEREFORE, REMAINS UNPROVED AS TO WHAT WAS SOLD BY WAY OF INVOICE NO.1 84 AND TO WHOM IN FINANCIAL YEAR 2002-03. SINCE THE DEBTOR ITSELF REMAINS UNIDE NTIFIED, ANY AMOUNT WRITTEN OFF IN THE SUBSEQUENT YEAR FIRSTLY CANNOT BE CONSIDERED AS A 'BAD DEBT', SECONDLY, IN THE ABSENCE OF ANY EVIDENCE AND CO-RELATION THE APPELLA NT HAS NOT BEEN ABLE TO PROVE AS TO (1,85,16,690/- BEING CLAIMED AS BAD DEBT IN ASST . YEAR 2004-05 IS PART OF THE SAME (1,92,50,000/- AS WAS OFFERED FOR TAXATION IN THE A SST. YEAR 2003-04. UNDER THE CIRCUMSTANCES, THE CLAIM OF THE APPLICANT OF BAD DE BTS WRITTEN OFF IS ALSO NOT ALLOWABLE. THE ADDITION OF RS.1,85,16,690/- IS, THE REFORE, CONFIRMED 6. ON FURTHER APPEAL, THE HON'BLE ITAT VIDE ITS ORD ER DATED 10.12.2010 RESTORED THE ISSUE TO THE FILE OF THE AS SESSING OFFICER WITH THE FOLLOWING COMMENTS 'WE HAVE CONSIDERED THE SUBMISSIONS OF THE RIVAL PA RTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE FIND THAT THE WHOLE ACCOUNT ING TREATMENT GIVEN TO THE TRANSACTION IS AGAINST THE GENERAL PRINCIPLES OF AC COUNTANCY. THE ASSESSEE COMPANY, ON ONE HAND, CREDITED THE PURCHASER/DEBTOR IN ITS B OOKS OF ACCOUNT WITHOUT THERE BEING ANY ACKNOWLEDGEMENT OF THE SALE AFFECTED IN O NE YEAR AND ON THE OTHER HAND, IN THE SUBSEQUENT YEAR THE SAID SALE ITSELF IS BEIN G CLAIMED AS RETURNED MERELY ON THE BASIS OF THE ACCOUNTING ENTRIES. THE LEARNED COUNSE L FOR THE ASSESSEE, EVEN BEFORE US, NOT IN A POSITION TO FURNISH ANY EVIDENCE WITH REGA RD TO THE DELIVERY OF SOFTWARE TO THE MINISTRY OF DEFENCE OR IN SUPPORT OF ITS RETURN . THE NATURE AND THE VALUE OF SAID SOFTWARE HAS NOT BEEN ESTABLISHED BY FURNISHING ANY CONCRETE EVIDENCE BEFORE THE DEPARTMENT. EVEN THE LETTER DATED 27-3-2007 ISSUED BY THE DIRECTORATE OF MILITARY INTELLIGENCE DOES NOT ESTABLISH THE FACT THAT WHAT WAS SUPPLIED BY THE ASSESSEE COMPANY TO THEM AS TO WHETHER IT WAS SOFTWARE OR SE RVICES OR ITS VALUE. WE FIND THAT IT IS AN UNACCEPTABLE CHARGE OVER THE CURRENT YEAR' S PROFITABILITY. WE ALSO FIND THAT THERE ARE SO MANY QUERIES TO BE CLARIFIED AS POINTE D OUT BY THE APPELLANT AUTHORITY IN HIS ORDER. IN OUR CONSIDERED OPINION, TO ALLOW THE CLAIM OF THE ASSESSEE COMPANY, EITHER AS SALES RETURN OR BAD DEBTS, REQUIRES IN DE PTH INVESTIGATION. ACCORDINGLY, WE FEEL IT PROPER AND JUST TO REMIT THIS MATTER TO THE FILE OF THE ASSESSING OFFICER FOR FRESH CONSIDERATION IN ACCORDANCE WITH LAW AFTER AFFORDIN G AN OPPORTUNITY OF BEING HEARD TO THE ASSESSEE ON THIS ISSUE. WE ALSO DIRECT THE A SSESSEE COMPANY TO FURNISH ALL THE ITA NO.1630/HYD/2016 :- 4 -: NECESSARY EVIDENCE IN SUPPORT OF ITS CLAIM BEFORE T HE ASSESSING OFFICER. HENCE, THIS GROUND IS ALLOWED FOR STATISTICAL PURPOSE . 7. IN ORDER U/S.143(3) R.W.S.254 OF IT ACT DATED 30 .12.2011, THE ASSESSING OFFICER OBSERVED THAT AS PER THE LETTER O F THE MINISTRY OF DEFENCE DATED 23.3.2007, THE MINISTRY OF DEFENCE ST ATED AS UNDER: 1. NO SUPPLY ORDER PERTAINING TO INVOICE NO.184 HA S BEEN ISSUED BY THIS OFFICE. 2. NO RECORD OF RECEIPT OF ABOVE INVOICE IS HELD WI TH US. 3. NO BILL/INVOICE PERTAINING TO THE REFERRED INVOI CE HAS EVER BEEN FORWARDED TO PCDA. 4. NO RECORD OF ANY PAYMENT MADE (RS.1,92,50,000) B Y THE PCDA WITH REFERENCE TO THE ABOVE INVOICE IS HELD WITH US . BASED ON THE ABOVE LETTER, THE ASSESSING OFFICER CO NCLUDED THAT (A) THAT THE SALE OF RS.92,50,000/- VIDE INVOICE DA TED 184 DATED 31.3.2003 WAS NOT MADE TO MINISTRY OF DEFENCE. IF T HERE WAS NO SALE THERE CANNOT BE SALE RETURN FROM MINISTRY OF DEFENC E. THEREFORE IT REMAINS UNPROVED AS TO WHAT WAS SOLD AND TO WHOM VI DE INVOICE NO.184, AS THE MINISTRY OF DEFENCE DENIED HAVING GI VEN ANY SUPPLY ORDER. (B) SINCE THE DEBTOR REMAINS UNVERIFIABLE, THERE CA NNOT BE ANY BAD DEBT. (C) IT IS POSSIBLE THAT SALE OF RS.92,50,000/- VIDE INVOICE NO.184 DATED 31.3.2003 WAS ACTUALLY MADE TO UNKNOWN PARTY AND CO NSIDERATION FROM THE SAME MIGHT HAVE BEEN RECEIVED OUT OF BOOKS . 8. ON THE OTHER HAND THE APPELLANT SUBMITTED THAT D EFENCE MINISTRY IS ITS MAJOR CUSTOMER, IN EARLIER YEARS IT SUPPLIED EQ UIPMENT WHICH IS FITTED IN SATELLITES TO TAKE PHOTOS OF EARTH, FOR B ETTER EFFICIENCY OF EQUIPMENT, DURING THE YEAR 2003-04, APPELLANT SUPPL IED 'APPLICATION SOFTWARE' TO MINISTRY OF DEFENCE. THE MINISTRY OF D EFENCE HAS STRINGENT PROCUREMENT PROCESS INVOLVING SUBSTANTIAL TIME, THEREFORE THE SOFTWARE IS DEVELOPED FIRST AND WAS PROVIDED TO THE MINISTRY OF DEFENCE WITHOUT ANY FORMAL ORDER. HOWEVER SINCE MIN ISTRY OF DEFENCE WAS NOT SATISFIED WITH SOFTWARE, NO PROCUREMENT ORD ER WAS ISSUED. 9. INFORMATION ON RECORD IS CAREFULLY CONSIDERED, THE CRUX OF THE ISSUE IS WHETHER ANY SOFTWARE WAS S UPPLIED TO MINISTRY OF DEFENCE OR NOT? IF NOT, TO WHOM SUCH SO FTWARE WAS SUPPLIED' IF SO WHETHER THE SOFTWARE RETURNED RELAT ED TO SOFTWARE SUPPLIED TO MINISTRY OF DEFENCE? FROM THE SALES LE DGER OF A.Y.2003- 04, AN AMOUNT OF RS.1,92,50,000/- WAS CREDITED AS S ALES MADE TO ITA NO.1630/HYD/2016 :- 5 -: MI-17(MILITARY INTELLIGENCE) VIDE INVOICE NO.184 DA TED 31.3.2003 AND AN AMOUNT OF RS.1,85,16,690/- WAS REDUCED FROM THE SALE AS SALES RETURN FROM SALES LEDGER OF A.Y.2004-05 WITH DESCR IPTION 'MI-17 SOFTWARE'. FROM SALES REGISTERS OF BOTH YEARS IT IS EVIDENT THAT APPELLANT COMPANY MADE LOT OF SUPPLIES TO DEFENCE M INISTRY, BOTH EQUIPMENT & SOFTWARE. IN FACT IT IS ALSO PERTINENT TO MENTION THAT EVEN THE SALES TAX AUTHORITIES IN THEIR FINAL SALES TAX ASSESSMENT FOR A.Y.2003-04 DATED 27.2.2007 DID ALLOW THE SALES RET URN OF 'APPLICATION SOFTWARE' OF RS.1,85,16,690/- AND TO T HAT EXTENT SALES WERE REDUCED FOR THE PURPOSE OF SALES TAX. THEREFOR E KEEPING IN VIEW THE ABOVE FACTS, IT IS ONLY MERE SUSPICION THAT 'SA LES RETURNS' WERE NOT OUT OF THE SAME SALES MADE TO MINISTRY OF DEFENCE. THEREFORE THE ASSESSING OFFICER IS DIRECTED TO ALLOW RS.1,85,16,6 90/-. IN RESULT GROUND NO.1 TO 3 ARE ALLOWED & GROUND NO. 4 DOES NOT ARISE AND TREATED AS DISMISSED. 4. WE HAVE GIVEN OUR THOUGHTFUL CONSIDERATION TO RIVAL PLEADINGS AGAINST AND IN SUPPORT OF THE IMPUGNED SALES WRITE- OFF OF ADDITION OF RS.1,85,16,690/-. SUFFICE TO SAY, THE ASSESSEES CLAIM THROUGHOUT IS THAT IT HAD BEEN SUPP LYING EQUIPMENTS TO THE MINISTRY OF DEFENCE, GOVT. OF INDIA O N ROUTINE BASIS SINCE LONG. LEARNED COUNSEL INVITED OUR ATTENTION TO ASSESSEES DETAILED PAPER BOOK RUNNING INTO 126 PAG ES TO THIS EFFECT. 5. COMING TO MERITS, MR. RAGHURAM SOUGHT TO CLARIFY BEF ORE US THAT ALTHOUGH THERE IS NO EVIDENCE OF THE SUPPLY ORDE R FROM MINISTRY OF DEFENCE REGARDING THE IMPUGNED SOFTWARE; WHICH WAS SENT BY HAND TO THE AUTHORITIES CONCERNED, THIS TAXP AYER HAD RECORDED SALES SUBJECT TO APPROVAL IN THE EARLIER ASSESSMENT YEAR FOLLOWED BY THE SOFTWARES REJECTION IN THE RELEVANT PREVIOUS YEAR. THIS TAXPAYER THEREFORE HAD M ISTAKENLY RECORDED THE IMPUGNED SUM OF THE SALE IN THE EARLIER Y EAR AND REVERSED IN THE RELEVANT PREVIOUS YEAR. HE HAS ALSO M ADE A STRONG ENDEAVOUR TO COME TO THE ASSESSEES BOOKS/ ITA NO.1630/HYD/2016 :- 6 -: CORRESPONDING LEDGERS TO THE EFFECT THAT THE CUSTOMERS CONFIRMATION DENYING ITS CLAIM DURING THE COURSE OF CONSEQUENTIAL ASSESSMENT GOES AGAINST THE RECORDS. 6. MR.PANDEY PLACES A VERY STRAY RELIANCE ON ASSESSM ENT FINDINGS DISPUTING THE ASSESSEES SALES AS WELL AS THE IMPUGNED WRITE-OFF. ALL THESE ARGUMENTS FROM THE LATTER SIDE APP EAR TO BE CONVINCING AT THE FIRST BLUSH. THE FACT, HOWEVER, REMAI NS THAT THE DEPARTMENTAL STAND DISPUTING THE WRITE-OFF GOES CONTRA RY AS THE SALES(S) DULY ACCEPTED IN PRECEDING ASSESSMENT YEAR. LEARNED ASSESSING AUTHORITY OUGHT TO HAVE REJECTED THE SALES AS WELL OTHERWISE IT AMOUNTS TO ADOPTING MUTUALLY CONTRADICTORY STANDS QUA THE TWIN ASPECTS OF SALE AND REVERSAL THEREOF. WE ARE ALSO VERY MUCH CONSCIOUS OF THE FACT THAT ALTHOUGH SECTION 155 DULY ENABLES US TO DIRECT THE AUT HORITIES TO REVERSE THE SALE ITSELF IN AY.2003-04, IT WOULD AMOU NT TO UNSETTLING THE SETTLED POSITION ON THE ISSUE AFTER MUCH WATER HAVING FLOWN DOWNSTREAM. FACED WITH THIS PECULIAR SIT UATION, WE DEEM IT APPROPRIATE TO UPHOLD THE CIT(A)S IMPUGNED FINDINGS UNDER CHALLENGE DELETING THE IMPUGNED WRITE-O FF THEREFORE. 7. THIS REVENUES APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 22 ND FEBRUARY, 2021 SD/- SD/- (LAXMI PRASAD SAHU) (S.S.G ODARA) ACCOUNTANT MEMBER JUDICIAL MEM BER HYDERABAD, DATED: 22-02-2021 TNMM ITA NO.1630/HYD/2016 :- 7 -: COPY TO : 1.THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-3(2 ), HYDERABAD. 2.M/S.SPECK SYSTEMS LIMITED, B-49, ELECTRONICS COMP LEX, KUSHAIGUDA, HYDERABAD. 3.CIT(APPEALS)-3, HYDERABAD. 4.PR.CIT-3, HYDERABAD. 5.D.R. ITAT, HYDERABAD. 6.GUARD FILE.