Control Techniques India Private Limited, CHENNAI V. DCIT, CHENNAI

ITA 226/CHNY/2017

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 4157 (ITAT-CHENNAI)
• Duration Of Justice: 5 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-06-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 21-06-2017
• Assessment Year: 2011-2012
• Appeal Filed On: 25-01-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ASHISH TRIPATHI IRS
• Assessee Lawyers: K B MURALIDHARAN
• Keywords: Bad and doubtful debts; Commercial expediency
• Section: 37(1)

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : CHENNAI . . . , !' . #$#% , & '' ( [BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER ] ./I.T.A. NO. 226/MDS/2017 / ASSESSMENT YEAR : 2011-2012 M/S. CONTROL TECHNIQUES INDIA P. LTD, 117B, DEVELOPED PLOTS ESTATE, PERUNGUDI, CHENNAI 600 096. [PAN AAACC 1343B] VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE 1(2) CHENNAI. ( )* / APPELLANT) ( +,)* /RESPONDENT) / APPELLANT BY : SHRI. K.B.MURALIDHARAN, C.A. /RESPONDENT BY : SHRI. ASHISH TRIPATHI, IRS, JCIT. /DATE OF HEARING : 21-06-2017 ! /DATE OF PRONOUNCEMENT : 29-06-2017 / O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER IN THIS APPEAL FILED BY THE ASSESSEE, IT IS AGGR IEVED ON A DISALLOWANCE OF RS.18,36,318/- CLAIMED BY IT U/S. 3 7(1) OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT). ITA NO. 226/MDS/2017 :- 2 -: 2. FACTS APROPOS ARE THAT ASSESSEE, A COMPANY IS ENGA GED IN MANUFACTURING OF CONTROL DRIVES, HAD FILED ITS RET URN OF INCOME FOR THE IMPUGNED ASSESSMENT YEAR DECLARING A SUM OF RS.7,6 0,56,670/-. IN THE COMPUTATION OF INCOME FILED IN THE IMPUGNED ASS ESSMENT YEAR, ASSESSEE HAD REDUCED A SUM OF RS.18,36,318/- FROM I TS PROFITS AS PROVISION FOR ADVANCES, WRITTEN BACK. CLARIFICATI ON OF THE ASSESSEE WAS SOUGHT. EXPLANATION OF THE ASSESSEE WAS THAT THESE WERE ADVANCES GIVEN TO A SUBSIDIARY COMPANY CALLED M/S. CONTROL TECHNICAL ELPRO AUTOMATION LTD. AS PER ASSESSEE, THE SAID COMPANY WAS UNDER LIQUIDATION, AND ADVANCES HAD TO BE WRITTEN OFF AS BUSINESS LOSS. ASSESSEE ALSO POINTED OUT THAT THE SAID AMOUNT WAS DEBITED AS A PROVISION IN THE ACCOUNTS FOR PREVIOUS YEAR ENDING 31 ST MARCH, 2010 RELEVANT YEAR TO ASSESSMENT YEAR 2010-2011, AND TH IS WAS WRITTEN BACK AND SUO-MOTU ADDED IN THE INCOME COMPUTATIO N FOR THAT YEAR. HOWEVER, LD. ASSESSING OFFICER WAS NOT IMPRESSED B Y THE ABOVE EXPLANATION. ACCORDING TO HIM, THE AMOUNT WAS NO T AN ALLOWABLE EXPENDITURE, SINCE IT WAS CONTINGENT IN NATURE. A S PER LD. ASSESSING OFFICER, ASSESSEE HAD NOT WRITTEN OFF SUCH ADVANCE FROM ITS BOOKS OF ACCOUNTS. HE MADE A DISALLOWANCE OF RS.18,36,318/- RELYING ON SECTION 36(1) (VII) OF THE ACT. 3. AGGRIEVED, ASSESSEE MOVED IN APPEAL BEFORE THE LD. COMMISSIONER OF INCOME TAX (APPEALS). ARGUMENT OF THE ASSESSEE ITA NO. 226/MDS/2017 :- 3 -: WAS THAT DURING THE RELEVANT PREVIOUS YEAR PROVISIO N MADE IN THE PRECEDING YEAR WAS SET OFF AGAINST THE DUES FROM T HE SUBSIDIARY, AND THUS THERE WAS ACTUAL AN WRITE OFF. HOWEVER, LD. COMMISSIONER OF INCOME TAX (APPEALS) WAS ALSO NOT IMPRESSED. ACCOR DING TO HIM, ASSESSEE AND ITS SUBSIDIARY WAS IN SIMILAR LINE OF BUSINESS AND THERE WERE REGULAR BUSINESS TRANSACTIONS. OPINION OF T HE LD. COMMISSIONER OF INCOME TAX (APPEALS) WAS THAT DUES FROM THE SAID COMPANY COULD NOT BE CONSIDERED AS IRRECOVERABLE MERELY ON ACCOU NT OF THE LOSSES SUFFERED BY IT. AS PER THE LD. COMMISSIONER OF INC OME TAX (APPEALS) EXPENDITURE THAT COULD BE ALLOWED U/S. 37(1) OF T HE ACT WAS ONLY FOR MONEY PAID WHOLLY AND EXCLUSIVELY FOR THE PURPOSE O F BUSINESS. FURTHER, AS PER LD. COMMISSIONER OF INCOME TAX (APP EALS) ASSESSEE COULD NOT CLAIM THE AMOUNT AS BAD DEBTS U/S. 36(1 ) (VII) OF THE ACT ALSO SINCE THE TRANSACTIONS GIVING RISE TO THE DEBT WERE NOT CONSIDERED WHILE COMPUTING THE PROFITS OF ANY PRECEDING YEARS . AS PER THE LD. COMMISSIONER OF INCOME TAX (APPEALS) BY VIRTUE OF J UDGMENT OF HONBLE APEX COURT IN THE CASE OF CIT VS. NAINITAL BANK LTD 55 ITR 707 AND THAT OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS.TEXTOOL CO. LTD 135 ITR 200, EVERY LOSS WAS NOT DEDUCTIBLE BUT ONLY THOSE WHICH WERE INCURRED WHILE CARRYING OUT T HE BUSINESS OPERATIONS WAS DEDUCTIBLE. HE THUS UPHELD THE ORDE R OF THE LD. ASSESSING OFFICER. ITA NO. 226/MDS/2017 :- 4 -: 4. NOW BEFORE US, THE LD. AUTHORISED REPRESENTATIVE S TRONGLY ASSAILING THE ORDERS OF THE LOWER AUTHORITIES SUBM ITTED THAT ASSESSEE HAD WRITTEN-OFF THE ADVANCE IN ITS BOOKS OF ACCOUN TS, BY PASSING JOURNAL ENTRY AGAINST THE PROVISION FOR DOUBTFUL DEBTS MADE IN THE PRECEDING YEAR. AS PER LD. AUTHORISED REPRESENTAT IVE SUCH PROVISION WHICH WAS MADE IN THE PRECEDING ASSESSMENT YEAR WA S ADDED BACK TO THE INCOME IN THE COMPUTATION FOR THAT YEAR. TH US, ACCORDING TO HIM, FOR THE IMPUGNED ASSESSMENT YEAR THERE WAS A N ACTUAL WRITE- OFF OF THE ADVANCES DUE FROM THE SUBSIDIARY, WHICH WAS AN ALLOWABLE AS BUSINESS LOSS. RELIANCE WAS PLACED ON THE DECISION OF CO-ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF ACIT VS. BEST & CROMPTON ENGINEERING LTD (2013) 60 SOT 0053. 5. PER CONTRA, LD. DEPARTMENTAL REPRESENTATIVE SUBMITT ED THAT THERE WAS NO WRITE-OFF IN THE BOOKS OF ACCOUNTS AND ASSESSEE COULD NOT HAVE MADE A SUO MOTU REDUCTION OF INCOME IN ITS COM PUTATION STATEMENT, WITHOUT AN ACTUAL WRITE OFF. 6. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSE D THE ORDERS OF THE AUTHORITIES BELOW. ENTRIES PASSED BY THE ASSESSEE IN ITS PROFIT AND LOSS ACCOUNT, FOR WRITING OFF THE DUES F ROM ITS SUBSIDIARY APPEAR AT SCHEDULE P OF ITS AUDITED PROFIT AND L OSS ACCOUNT FOR YEAR ITA NO. 226/MDS/2017 :- 5 -: ENDING 31 ST MARCH, 2011 PLACED AT PAPER BOOK PAGE 62. THE SAI D SCHEDULE IS REPRODUCED HEREUNDER:- SCHEDULE P MANUFACTURING AND OTHER EXPENSES:- POWER AND FUEL 767,010 745,603 SUBCONTRACTOR CHARGES 3,935,251 2,279,910 RENT 2,651,732 2,901,643 RATES AND TAXES 620,914 350,122 REPAIRS AND MAINTENANCE -PLANT AND MACHINERY 1,938 25,164 -OTHERS 1,911,175 1,704,666 INSURANCE 835,435 708,732 TRAVELLING AND CONVEYANCE 7,629,396 5,937,567 CAR RENTAL CHARGES 553,959 869,512 COMMUNICATION EXPENSES 1,759,683 1,809,626 PROVISION FOR INVENTORY 2,538,169 525,201 LEGAL AND PROFESSIONAL CHARGES 1,752,400 1,547,124 MANAGEMENT FEES 12,989,084 10,345,208 SALES COMMISSION 745,531 338,360 PACKING AND FORWARDING EXPENSES 2,306,879 2,278,780 CONFERENCE AND SEMINAR EXPENSES 707,522 525,546 PROVISIONS FOR DOUBTFUL DEBTS (NET OF PROVISION WRITTEN BACK ON BAD DEBTS PROVIDED IN THE PREVIOUS YEARS OF NIL (MACH 31, 2010, 9,96,373/-) 464,286 2,051,439 ADVANCES WRITTEN OFF 1,836,318 252,872 LESS: PROVISION WRITTEN BACK (1,836,318) --- --- PROVISIONS FOR DOUBTFUL ADVANCES --- 1,836,318 BAD DEBTS WRITTEN OFF --- 1,398,818 LOSS ON SCRAP OF FIXED ASSETS 1,851 --- MISCELLANEOUS EXPENSES 3,819,378 3,633,529 45,991,593 42,065,740 IT IS CLEAR FROM THE ABOVE, THAT THE ADVANCE OF RS. 18,36,318/- HAS BEEN WRITTEN OFF IN THE BOOKS, BY ADJUSTMENT AGAIN ST THE PROVISION MADE IN THE PRECEDING YEAR. THE PROVISION WAS MAD E BY THE ASSESSEE IN ITS ACCOUNT FOR FINANCIAL YEAR ENDED 31.03.2010 AND THIS IS CLEAR ITA NO. 226/MDS/2017 :- 6 -: FROM SCHEDULE P ITS PROFIT AND LOSS ACCOUNT FOR YEAR ENDING THAT DATE PLACED AT PAGE BOOK PAGE 53. IN THE COMPUTATION ST ATEMENT FOR ASSESSMENT YEAR 2010-2011, THE SUM OF RS.18,36,318/ - HAS BEEN ADDED BACK BY THE ASSESSEE AS AN INADMISSIBLE CLA IM. THUS EFFECTIVELY ASSESSEE HAD WRITTEN OFF THE ADVANCE DU E FROM ITS SUBSIDIARY IN ITS BOOKS OF ACCOUNTS, DURING THE R ELEVANT PREVIOUS YEAR. LD. COMMISSIONER OF INCOME TAX (APPEALS) HAS GIVEN A CLEAR FINDING THAT THE DUES FROM THE SUBSIDIARY AROSE DUE TO REG ULAR TRANSACTION OF BUSINESS AS WELL AS HOLDING SUBSIDIARY RELATIONSHI P. THE QUESTION WHETHER AMOUNT EXTENDED TO SUBSIDIARY FOR SUPPORTIN G THE BUSINESS OF THE ASSESSEE, WRITTEN OFF IN BOOKS, COULD BE CONSI DERED AS LEGITIMATE BUSINESS LOSS HAD COME UP BEFORE THIS TRIBUNAL IN THE CASE OF BEST & CROMPTON ENGINEERING LTD (SUPRA). WHAT WAS HELD BY THE TRIBUNAL IN PARA 17 IS REPRODUCED HEREUNDER:- 17. THE ASSESSING OFFICER WHILE COMPLETING THE AS SESSMENT DISALLOWED THE CLAIM OF THE ASSESSEE FOR WRITE OFF OF ADVANCES TO ITS SUBSIDIARY COMPANIES ON THE GROUND THAT THE ASS ESSEE FAILED TO SUBSTANTIATE THAT THE ADVANCES HAVE BEEN MADE IN THE COURSE OF NORMAL BUSINESS. THE COMMISSIONER OF INCOME TAX (APPEALS) DELETED THE DISALLOWANCE FOLLOWING THE OR DER OF HIS PREDECESSOR IN ASSESSEES OWN CASE FOR THE ASSESSME NT YEAR 2004-05 WHERE SIMILAR CLAIM FOR WRITE OFF OF BAD AD VANCES MADE TO SUBSIDIARY COMPANIES WRITTEN OFF HAS BEEN A LLOWED. WE FIND THAT THE CO-ORDINATE BENCH OF THIS TRIBUNAL SU STAINED THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) F OR THE ASSESSMENT YEAR 2004-05 ON THE ISSUE OF WRITE OFF O F ADVANCES TO SUBSIDIARY COMPANIES HOLDING AS UNDER:- ITA NO. 226/MDS/2017 :- 7 -: 6. WE HAVE HEARD THE PARTIES AND HAVE PERUSED THE ORDERS PASSED BY THE CIT(A) AS WELL AS THE ASSESSIN G OFFICER. WE HAVE ALSO GONE THROUGH THE JUDGEMENTS C ITED BY THE RESPECTIVE PARTIES. IT IS AN ADMITTED FACT T HAT LOAN WAS ADVANCED BY THE ASSESSEE COMPANY TO THE SUBSIDIARIES. THE ASSESSING OFFICER IN HIS ASSESSME NT ORDER DATED 23.3.2006 HAS STATED THAT ONE OF THE SUBSIDIARY COMPANIES HAS PAID INTEREST TO THE TUNE OF ` 9,19,270/- TO THE ASSESSEE. THE OTHER SUBSIDIARY COMPANIES TO WHOM LOAN HAS BEEN ADVANCED, THEY HAVE FILED APPLICATION BEFORE BIFR AS THEY HAVE GONE SIC K. AS PER THE CONDITIONS LAID DOWN BY THE BIFR NO INTERES T CAN BE CHARGED BY HOLDING COMPANY ON ITS SUBSIDIARY. TH E FACTS AND CIRCUMSTANCES OF THE CASE SHOW THAT THE ASSESSEE HAS EXTENDED LOANS AND ADVANCES TO ITS SUBSIDIARIES TO SUPPORT THE BUSINESS AND ON ACCOUNT OF COMMERCIAL EXPEDIENCY. THE SUBSIDIARIES COULD NOT R EPAY THE LOANS OR ADVANCES FOR THE REASON THAT THEY HAVE INCURRED HUGE FINANCIAL LOSSES AND HAVE GONE SICK. THE ASSESSING OFFICER HAS NOT DISPUTED THE FACT THAT SUBSIDIARY COMPANIES ARE UNDER LIQUIDATION PROCEEDI NGS AND THEREFORE LOANS ARE NOT RECOVERABLE. IT IS UNDERSTANDABLE THAT ASSESSEE WAS CONSTRAINED TO WRI TE OFF THE ADVANCES AS THE SAME WERE NOT RECOVERABLE O N ACCOUNT OF LOSSES SUFFERED BY THE SUBSIDIARIES AND IN SOME OF THE CASES ON ACCOUNT OF LIQUIDATION PROCEED INGS. THE ASSESSEE IS ENTITLED TO CLAIM THE SAME AS DEDUC TION. THE HONBLE SUPREME COURT OF INDIA IN THE CASE OF S.A.BUILDERS (SUPRA) HAS HELD THAT WHERE IT IS OBV IOUS THAT A HOLDING COMPANY HAS A DEEP INTEREST IN ITS SUBSIDIARY, AND HENCE IF THE HOLDING COMPANY ADVANC ES BORROWED MONEY TO A SUBSIDIARY AND THE SAME IS USED BY THE SUBSIDIARY FOR SOME BUSINESS PURPOSES, THE ASSE SSEE WOULD, IN OUR OPINION, ORDINARILY BE ENTITLED TO DE DUCTION OF INTEREST ON ITS BORROWED LOANS. IN THE INSTANT CASE, IT IS AN ADMITTED FACT THAT THE LOANS ADVANCED TO THE SUBSIDIARY COMPANIES WERE UTILIZED BY THEM FOR THEI R BUSINESS REQUIREMENTS AND HAVE NOT BEEN UTILIZED FO R THE PERSONAL BENEFITS OF THE INDIVIDUALS/DIRECTORS. THE REFORE, THE CIT(A) HAS RIGHTLY DELETED THE DISALLOWANCE OF INTEREST ON BORROWED FUNDS ADVANCED AS LOAN TO SUBSIDIARY COMPANIES BY THE ASSESSEE. 7. IN VIEW OF THE ABOVE, WE DO NOT FIND ANY INFIRMITY IN THE ORDER PA SSED BY THE CIT(A) AND UPHOLD THE SAME. THUS, BOTH THE APPEALS OF THE REVENUE ARE DISMISSED AS DEVOID OF A NY MERIT. ITA NO. 226/MDS/2017 :- 8 -: IT IS ADMITTED POSITION THAT ASSESSEE AND THE ASSE SSEES SUBSIDIARY WERE IN SAME LINE OF BUSINESS. THERE IS ALSO NO C ASE FOR THE REVENUE THAT THE ADVANCE GIVEN BY THE ASSESSEE TO ITS SU BSIDIARY WAS USED FOR ANY PERSONAL PURPOSE OF ITS DIRECTORS. HENCE , ASSESSEE COULD NOT HAVE DENIED THE CLAIM OF WRITE OFF OF SUCH IRRECOVE RABLE ADVANCES UNDER SEC.37(1) OF THE ACT. THAT SAID SECTION COV ERS A CLAIM OF BUSINESS LOSS ALSO HAS BEEN HELD BY THE HONBLE AP EX COURT IN THE CASE OF CIT VS. WOODWARD GOVERNOR INDIA P. LTD 312 ITR 254. IN THE CIRCUMSTANCES, WE SET ASIDE THE ORDERS OF THE LOWER AUTHORITIES AND ALLOW THE APPEAL OF THE ASSESSEE. 7. IN THE RESULT, APPEAL OF THE ASSESSEE STANDS ALLOWE D. ORDER PRONOUNCED ON THURSDAY, THE 29TH DAY OF J UNE, 2017, AT CHENNAI. SD/- SD/- ( . . . ' ) (N.R.S. GANESAN) / JUDICIAL MEMBER ( !' . #$#% ) (ABRAHAM P. GEORGE) & / ACCOUNTANT MEMBER #$ / CHENNAI %& / DATED: 29TH JUNE, 2017. KV &' ()*) / COPY TO: 1 . / APPELLANT 3. +,' / CIT(A) 5. )-. / / DR 2. / RESPONDENT 4. + / CIT 6. .01 / GF