ADA CELLWORKS WIRELESS ENGG PVT LTD., Mumbai V. DY. CIT 15(1)(1), Mumbai

ITA 2151/MUM/2019

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 0110 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 9 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-01-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2015-2016
• Appeal Filed On: 07-04-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Bad and doubtful debts
• Section: 115JB

Judgement Text

1 ITA 2151/Mum/2019 N THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH, MUMBAI BEFORE SHRI S.RIFAUR RAHMAN (ACCOUNTANT MEMBER AND SHRI PAVAN KUMAR GADALE (JUDICIAL MEMBER) I.T.A No. 2151/Mum/2019 (Assessment year : 2015-16) Ada Cellworks Wireless Engg Pvt Ltd Gobal Vision, Electronic Sadan II MIDC, TTC Industrial Area, Mahape Navi Mumbai-400 710 PAN : AAECA7029E vs Dy.Commissioner of Income-tax- 15(1)(1), Mumbai APPELLANT RESPONDENT Assessee represented by Shri Manish Shah Revenue represented by Shri Mehul Jain (DR) Date of hearing 28-10-2021 Date of pronouncement 17-01-2022 O R D E R Per S. Rifaur Rahman (AM) This appeal filed by the assessee arise out of the order of the Commissioner of Income-tax (Appeals)-24, Mumbai for the assessment year 2015-16. 2. Brief facts of the case are that assessee is a company engaged in the business of providing consultancy services for network planning, designing and ancillary services for telecom companies. The assessee filed its return of income for assessment year 2015-16 on 13-10-2016 declaring loss of Rs.8,16,165/-. During assessment proceedings assessing officer observed from the Profit & Loss 2 ITA 2151/Mum/2019 account ̧ under the head ‘Other expenses’ an amount of Rs.14,95,00,000/- debited to Profit & Loss account being provision for advance and another amount of Rs.7,09,55,966/- being provision for trade receivables. Assessing Officer observed that assessee itself had disallowed the provision for advance of Rs.14.95 crores in the computation of income but the provision for trade receivables was not added back. The assessing officer observed that provisions are not allowed as deduction under the Income-tax Act. Accordingly, he disallowed the abovesaid amount. Aggrieved, assessee preferred appeal before CIT(A) and made a detailed submission. For the sake of brevity, the submissions of the assessee before CIT(A) are reproduced below:- “ The Ld. AR has, inter alia filed its submissions which are reproduced hereunder: Broadly, the appellant places reliance on the following contentions: The provisions for trade receivable is debited to P&L account under the head "other expenses" and in the balance sheet, trade receivables have been reflected net of provision for trade receivable. Where besides debiting the P&L account and creating a provision for trade receivables, the appellant has simultaneously obliterated the said provision from its accounts by reducing corresponding amount from debtors on the assets side of the balance sheet, there is an actual write off of debtors by the appellant and hence, the conditions of section 36(1)(vii) of the Act are satisfied. . . . Provisions for trade receivables is not provision for any liability but for the amount receivable by the appellant. It has been held by the Supreme Court in Apollo Tyres v. CIT (255 ITR 273) (Refer Page No. 1 of legal paper book "LPB") that it is not open for the AO to tamper with the profits disclosed in the P&L account and which are duly accepted (not qualified) by the auditors and by the shareholders and where the Registrar of companies has raised no objections. Having regard to this decision, provision for bad debts, would be in accordance with the mandatory accounting standards a debit to the P&L account in respect thereof would be a proper charge against the profits and it would not be open for the AO to add back the same in absence of any qualificatory remark from auditors/shareholders of the company. Your honour's kind attention is drawn to the decision of the Supreme Court in the case of Vijaya Bank vs. CIT (323 ITR 166) (Refer Page A/o.9 of LPB) wherein it has been held that "where besides debiting the P&L account and creating a provision bad and doubtful debt, the assessee correspondingly / simultaneously obliterated the said provision from its accounts by reducing corresponding amount from loans and advances/debtors on the assets side of the balance sheet and consequently at the end of the year, the figure in the loans and advances or the debtors on the 3 ITA 2151/Mum/2019 assets side of the balance sheet is shown as net of the provision for impugned bad debt the assessee will be entitled to the benefit of deduction u/s.36(1)(vii) as there is an actual write off by the assessee in his books. The Supreme Court has clearly rejected the Department arguments that every debtors should be squared up. It held that if the individual account are to be closed then the debtor/defaulter in each of those suits would rely upon the financial statements and contend that no amount is due and payable in which event the suit may be dismissed. In view of the above, we most humbly submit that our case clearly falls within the ratio laid down by the Supreme Court in Vijaya Bank's case (supra) and therefore, the amount debited to P&L account as provision for trade receivables and simultaneously obliterated from schedule of debtors on the assets side of the balance sheet amounts to write off and is allowable u/s.36(1)(vii) of the Act. Further, by following Vijaya Bank (supra) same view is taken by the Jurisdictional Tribunal in the case of KEC International Ltd. vs. DCIT (33 taxmann.com 243) (Refer Page No.15 of LPB). The relevant extract of the said judgement is as under- "We have perused the records and considered the matter carefully. The dispute is regarding allowably of deduction on account of bad debts u/s.36(1)(vii). The AO disallowed the claim on the ground that the assessee had made only provision in the P&L account and had not actually written off individual debtor's account as required u/s.366(1)(vii) in view of the Explanation to the said section applicable from April 1, 2001. We however, find the this aspect has already been considered by the Hon'ble Supreme Court in the case of Vijaya Bank' (supra), in which it has been held that for allowably of deduction on account of bad debt it was not necessary for the assessee to close individual account of each debtor in its books suffice if the amount had been reduced from the debtors .balance shown on the asset side of the balance sheet at the close of the year. The said judgment also related to clause (vii) of section 36(1). In view of the above position, the claim of the assessee is allowable." May we invite your honor’s attention to the decision of the Apex Court in the case of HCL Comnet Systems & Services Ltd. (174 Taxman 118) (Refer Page No.24 of LPB) which reads as under: "There are two types of debt a debt payable by the assessee is different from a debt receivable by the assessee. A debt is payable by the assessee where it has to pay the amount to others, whereas the debit receivable by the assessee is an amount which it has to receive from others. In the instant case, debt under consideration was' debit receivable by the assessee. The provision for bad and doubtful debt, therefore, was made to cover up the probable diminution in the value of asset, i.e. debt which was an amount receivable by the assessee. Therefore, such a provision could not be said to be a provision for liability, because even if a debt was not recoverable, no liability could be fastened upon the assessee. In the instant case, since the debt was the amount receivable by the assessee and not any liability payable by it, any provision made towards irrecoverability of the debt could not be said to be a provision for liability. Therefore, clause (c) of the Explanation to section 115JA was not attracted to the facts of the instant case. The AO was not justified in 4 ITA 2151/Mum/2019 adding back the provision for bad and trade receivables under clause (c) of the Explanation to section 115JA for the purpose of computing book profit u/s. 115JA. it may also be mentioned that the Mumbai Tribunal In Maharashtra State Electricity Board v. JCIT (82 ITD 422) has also held that provision for bad and trade receivable is merely a provision for re-stating the value of assets and that it was not a provision for setting aside any amount to meet any liability. The same view is taken in the decision of the Delhi High Court in CIT v. Eicher Ltd. (287ITR 170). The Jurisdictional Tribunal' decision in the case of Tribunal Chemicals & Plastics India Ltd. v ACIT- 8(3) (ITA No.3338/M/2008) where it has been held, following Vijaya Bank's case (supra) that Since amount debited to P&L account and simultaneously obliterated from the debtors account's on the asset side of balance sheet is allowable under normal computation, there is no question of adding back the same to the book profits under section 115JB of the Act. Now the Tribunal's decision is upheld by the Jurisdictional Bombay High Court in same case of Tainwala Chemicals & Plastics India Ltd. (34 Taxmann.com 159) (Refer Page No.29 of LPB). The relevant extract reads as under- "In so far as question (k) is concerned the grievance of the Revenue is that for the purpose of computing profits U/S.115JB, the provision of trade receivable had to be added. In view of our decision to question (c) above, issue of adding back the provisions for the purpose of computing book profits does not survive. This is particularly so in view of the fact' that the Tribunal has recorded a finding of fact that the provision had been written off. Accordingly, we see no reason to entertain question (k)." Further, the Jurisdictional Tribunal following the decision of Tainwala Chemicals & Plastics India Ltd. (supra) has in the case of ACIT v. LML Ltd. (72 Taxmann.com 207) (T Mum.) held as under: "After considering the relevant submissions of the assessee and on perusal of the impugned orders, wo agree with the contention of the Ld. Counsel that if a provision for doubtful debt is debited to the P&L account and simultaneous reduction from the debtors account is made, then same amounts to writing off in the books of account and-should be allowed as deduction u/s.36(1)(vii). This principle has been reiterated by the Hon'ble Bombay Court in the case Tainwalla Chemicals and Plastics (supra)." In view of the foregoing, the appellant prays that the said assessment order be quashed as bad in law or m alternative, the disallowance made by the AO be deleted.” 3. After considering the detailed submissions of the assesseeLd.CIT(A) dismissed the ground raised by the assessee with the following observations:- 5.2,8 The appellant's case is squarely covered by the facts of Elite Industries (supra). The fact that the appellant has not written off the bad debts in the books but merely made a provision of the same, the provisions of section 36(1)(vii) are not applicable and thus, all the decisions relied upon by the appellant are out of context here. The 'provision for trade receivables' is also not the actual expenditure but mere provision and hence, not 5 ITA 2151/Mum/2019 allowable as expenditure u/s. 37(1). In light of the above discussions. I confirm the disallowance of provision of expenses made by the Ld. AO. This ground of appeal is dismissed.” 4. At the time of hearing, learned AR brought to our notice pages 51 & 52 of the paper book to submit that in the year ending 31/03/2014 the trade receivables stood at Rs.7,32,64,747/- whereas as at 31/03/2015 it has been reduced to Rs.22,06,123/- and he brought to our notice the other expenses claimed by the assessee which includes provision for trade receivables, which assessee has claimed as bad debts. However, in the Profit & Loss Account, under the head ‘Other expenses’ the narration mentioned is as ‘provision for trade receivables’. However, in fact, the assessee has actually claimed bad debts which assessee could not recover from the parties to whom it has raised bills for the services rendered. He submitted that the intention has to be appreciated under the nomenclatures used in the P&L Account to claim the same. He submitted that the findings of the Ld.CIT(A) and assessing officer are not correct and deserve to be quashed. 5. On the other hand, Ld.DR relied on the orders passed by the lower authorities. 6. Considered the rival submissions and material placed on record. We observe from the Profit & Loss Account submitted before us clearly indicate that the trade receivables which stood as on 31/03/2014 is substantially reduced as on 31/03/2015 which clearly indicates that assessee should have received the payment from the trade receivables or assessee must have written off the above said balances. From the P&L Account, the details submitted under the head ‘Other expenses’ which carried narration ‘Provision for trade receivables’. 6 ITA 2151/Mum/2019 However, when compared with the balance-sheet figure of trade receivables, it clearly indicate that assessee has actually wrote off the trade receivables and claimed bad debt. Just because the narration used by the assessee as ‘provision for trade receivables, but in fact, it is only actual loss / expenditure claimed by the assessee which can be classified under the head ‘bad debts’ as per section 36(1)(vii) of the Act, we have to consider substance over the form and the intention of the assessee has to be appreciated and not the nomenclature noted to claim the expenses, it has merely mentioned the term ‘provision’ it does not mean that it becomes provision. Therefore, we direct the assessing officer to delete the addition as it actually pertains to bad debts written off in the books of account. 7. In the result, appeal filed by the assessee is allowed. Order pronounced on 17/01/2022. Sd/- sd/- Mumbai, Dt : 1701/2022 Pavanan Copy to : 1. Applicant 2. Respondent 3. The CIT concerned 4. The CIT(A) 5. The DR, ITAT, Mumbai 6. Guard File /True copy/ By Order Asstt. Registrar, ITAT, Mumbai (PAVAN KUMAR GADALE) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER