ACIT, CHENNAI V. M/s. Tyco Sanmar Limited, CHENNAI

ITA 1831/CHNY/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 57902 (ITAT-CHENNAI)
• Duration Of Justice: 2 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-01-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 19-01-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 11-11-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: K E B RENGARAJAN JUNIOR
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Business income

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHRI GEORGE MATHAN, JUDICIAL MEMBER I.T.A. NO. 1831/MDS/2011 (ASSESSMENT YEARS : 2005-06) THE ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE III(2), CHENNAI - 600 034 . (APPELLANT) V. M/S TYCO SANMAR LIMITED, 9, CATHEDRAL ROAD, CHENNAI - 600 086. PAN : AAACT7409H (RESPONDENT) APPELLANT BY : SHRI K.E.B. RENGARAJAN, JUNIOR STANDING COUNSEL RESPONDENT BY : SHRI R. VIJAYAR AGHAVAN, ADVOCATE DATE OF HEARING : 19.01.2012 DATE OF PRONOUNCEMENT : O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : IN THIS APPEAL FILED BY THE REVENUE, ITS GRIEVANC E IS THAT COMMISSIONER OF INCOME TAX (APPEALS)-VI, CHENNAI, V IDE HIS ORDER DATED 29.8.2011, DELETED A DISALLOWANCE OF ` 1.68 CRORES MADE BY THE ASSESSING OFFICER. AS PER THE REVENUE, THE ASS ESSING OFFICER I.T.A. NO. 1831/MDS/11 2 HAD RIGHTLY COME TO A CONCLUSION THAT ASSESSEE HAD MADE ENTRIES IN ITS BOOKS BASED ON EVENTS SUBSEQUENT TO THE DATE OF THE BALANCE SHEET. 2. SHORT FACTS APROPOS ARE THAT ASSESSEE MANUFACTUR ER AND SELLER OF SAFETY RELIEF VALVES, HAD DURING THE RELEVANT PR EVIOUS YEAR, EXPORTED FINISHED GOODS AND COMPONENTS WORTH ` 28,45,59,850/- TO ONE M/S TYCO VALVES AND CONTROLS LP USA. IT SEEMS AT THE T IME OF AUDIT IN MAY 2005, IT WAS NOTED THAT THE INVOICING WAS DONE INCORRECTLY SINCE ASSESSEE HAD APPLIED SURCHARGE ON FERRO AND MOLY, W HICH WERE USED IN THE MANUFACTURE OF COMPONENTS. ASSESSEE, THEREF ORE, CONTACTED ITS CUSTOMERS IN USA AND MADE REVERSAL ENTRIES BY I SSUING CREDIT NOTES TO THE SAID CUSTOMERS. AS PER THE ASSESSEE, THERE WAS A REQUIREMENT FOR RESTATING THE SALE VALUE SINCE THE ORIGINAL BILLING WAS DONE INCORRECTLY AND THE ACCOUNTS HAD TO BE CORRECT ED. ASSESSEE ALSO PRODUCED LETTERS FROM ITS CUSTOMERS IN SUPPORT . HOWEVER, A.O. WAS NOT IMPRESSED. ACCORDING TO HER, THE EXCESS BI LLING, IF ANY, CAME TO THE NOTICE OF ASSESSEE ONLY AFTER END OF THE REL EVANT PREVIOUS YEAR, AT THE TIME OF AUDIT AND THEREFORE, IT WAS AN EVENT OCCURRING AFTER THE I.T.A. NO. 1831/MDS/11 3 DATE OF BALANCE SHEET. AS PER ACCOUNTING STANDARD 4 OF INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA, THE EFFECT OF SUCH EVENTS COULD BE CONSIDERED ONLY IN THE NEXT YEAR AND THE EVENTS DID NOT SHOW THAT THE CONDITION FOR REVERSAL STOOD EXISTING AS ON THE DAT E OF BALANCE SHEET. THE SUMS REVERSED BY THE ASSESSEE BY PASSING CREDIT NOTE WAS ` 1.68 CRORES AND THIS WAS ADDED BACK BY THE A.O. 3. BEFORE THE LD. CIT(APPEALS) , ARGUMENT OF THE AS SESSEE WAS THAT THERE WAS NO BAD DEBT WRITE-OFF BUT, ON THE OT HER HAND, IT HAD REDUCED THE TOTAL SALES TURNOVER BY GIVING CREDIT N OTES TO ITS CUSTOMERS FOR THE EXCESS AMOUNT CHARGED. ACCORDING TO ASSESSEE, THE CUSTOMERS WERE NOT BOUND TO PAY THE EXCESS BILL ING WHICH WAS MADE DUE TO ERRONEOUS APPLICATION OF SURCHARGE ON F ERRO MOLY AND NICKEL. ASSESSEE COULD NOT LEGALLY MAKE SUCH A CLA IM ON THE CUSTOMERS AND AT THE TIME OF AUDIT WHEN IT CAME TO KNOW ABOUT EXCESS BILLING, PROPER REVERSAL ENTRIES WERE PASSED . LD. CIT(APPEALS) WAS APPRECIATIVE OF THIS CONTENTION. ACCORDING TO HIM, IT WAS NOT A BAD DEBT CLAIM BUT ONLY RESTATEMENT OF THE SALE VAL UE CORRECTLY. LD. CIT(APPEALS) ALSO NOTED THAT A RBI CIRCULAR ALLOWE D EXPORTERS TO I.T.A. NO. 1831/MDS/11 4 EFFECT A WRITE-OFF OF 10% OF THE EXPORT VALUE DURIN G A CALENDAR YEAR AND THE AMOUNT REDUCED IN THE INVOICE BY THE ASSESS EE WAS LESS THAN 10% OF ITS TOTAL EXPORTS. RELYING ON THE DECISION OF HONBLE APEX COURT IN THE CASE OF STATE BANK OF TRAVANCORE V. CI T (158 ITR 102) HELD THAT WHAT COULD BE TAXED WAS ONLY REAL INCOME AND NOT HYPOTHETICAL INCOME. HE, THEREFORE, DELETED THE AD DITION MADE BY THE A.O. 4. NOW BEFORE US, LEARNED D.R. SUBMITTED THAT THE A .O. WAS WELL WITHIN HER POWERS TO MAKE THE ADDITION SINCE WHAT W AS EFFECTED BY THE ASSESSEE WAS ONLY A BAD DEBT WRITE-OFF. AS PER LEARNED D.R., THE INVOICES RAISED, WHICH HAD GIVEN RISE TO THE DEBTS, COULD BE REDUCED ONLY BY WRITING OFF OF SUCH DEBTS. JUST BY PASSING REVERSAL ENTRIES, ASSESSEE OUGHT NOT HAVE REDUCED THE INVOICE PRICE. WHAT THE ASSESSEE EFFECTIVELY HAD DONE WAS A WRITE-OFF OF BA D DEBT AND SUCH BAD DEBT WRITE-OFF COULD NOT BE ALLOWED IN THE SAME YEAR IN WHICH THE DEBTS HAD COME INTO VOGUE. THEREFORE, LD. CIT(APPE ALS) MADE AN ERROR IN ALLOWING THE CLAIM OF THE ASSESSEE. I.T.A. NO. 1831/MDS/11 5 5. PER CONTRA, LEARNED A.R. SUPPORTED THE ORDER OF LD. CIT(APPEALS) . 6. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL SUBMISSIONS. THERE IS NO DISPUTE THAT ASSESSEE HAD EXCESS BILLED ITS CUSTOMERS FOR A SUM OF ` 1.68 CRORES ON ACCOUNT OF WRONG APPLICATION OF SURC HARGE ON FERRO MOLY AND NICKEL WHICH WERE USED IN MANUFAC TURE IN THE PRODUCTS SUPPLIED BY IT TO ITS CUSTOMERS. NO DOUBT , ASSESSEE BECAME AWARE OF ERROR ONLY AT THE TIME OF AUDIT WHICH WAS AFTER THE END OF THE YEAR. IN OUR OPINION, CORRECTION OF AN ERROR IN BI LLING AND EFFECTING A WRITE-OFF OF BAD DEBT ARE ENTIRELY DIFFERENT. ANY BUSINESSMAN WITH GOOD REPUTATION WILL NOT BILL HIS CUSTOMERS IN EXCE SS OF WHAT IS LEGITIMATELY DUE AS PER CONTRACTS. WHEN ASSESSEE F OUND THAT IT HAD BILLED SOMETHING INCORRECTLY, IT PASSED CREDIT NOTE S AND REDUCED THE BILL AMOUNT AND CORRESPONDINGLY REDUCED THE DEBTS A LSO. THIS CANNOT, IN OUR OPINION, BE EQUATED WITH A BAD DEBT WRITE-OF F. THE CUSTOMERS WERE NOT LEGALLY AND LAWFULLY BOUND TO PAY SUCH EXC ESS AMOUNT TO THE ASSESSEE AND WHEN THERE IS NO LEGAL RIGHT VESTED ON THE ASSESSEE TO RECOVER THE AMOUNT FROM THE CUSTOMERS, THERE CANNOT BE ANY DEBTORS I.T.A. NO. 1831/MDS/11 6 AT ALL. WHEN THE ASSESSEE ITSELF HAD RECOGNIZED TH E MISTAKE, IT PASSED REVERSAL ENTRIES. JUST BECAUSE ASSESSEE HAD COME TO KNOW OF THE ERROR ONLY AFTER THE END OF YEAR WILL NOT ME AN THAT IT SHOULD BE TAXED ON AMOUNTS WHICH WERE NEVER ITS INCOME. AS N OTED BY THE LD. CIT(APPEALS), ENDEAVOUR OF THE REVENUE SHOULD BE TO TAX REAL INCOME AND NOT HYPOTHETICAL INCOME. WE ARE OF THE OPINION THAT LD. CIT(APPEALS) WAS WELL JUSTIFIED IN DELETING THE ADD ITION. NO INTERFERENCE IS CALLED FOR. 7. IN THE RESULT, APPEAL FILED BY THE REVENUE IS DI SMISSED. THE ORDER WAS PRONOUNCED IN THE COURT ON 31 ST JANUARY, 2012. SD/- SD/- (GEORGE MATHAN) (ABRAHAM P. GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 31 ST JANUARY, 2012. KRI. COPY TO: (1) APPELLANT (2) RESPONDENT (3) CIT(A)-VI, CHENNAI (4) CIT-I, CHENNAI (5) D.R. (6) GUARD FILE