M/s. Sridhar & Co., CHENNAI V. ITO, CHENNAI

ITA 2589/CHNY/2016

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 8003 (ITAT-CHENNAI)
• Duration Of Justice: 5 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-02-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 05-01-2017
• Assessment Year: 2012-2013
• Appeal Filed On: 06-09-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: B SAHADEVAN
• Assessee Lawyers: N DEVANATHAN
• Keywords: Services rendered outside India; Bad and doubtful debts; Revenue expenditure

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, CHENNAI . . . , . . , BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI D.S. SUNDER SINGH, ACCOUNTANT MEMBER ./ ITA NO. 2589/MDS/2016 / ASSESSMENT YEAR : 2012-13 M/S. SRIDHAR & CO J3, J4, GOVT. INDUSTRIAL ESTATE, MADHAVARAM, CHENNAI 600 060. PAN : AALFS6349F V. THE INCOME TAX OFFICER, NON-CORPORATE WARD 6(3), CHENNAI 34. ( /APPELLANT) ( !' /RESPONDENT) # /APPELLANT BY : SHRI N. DEVANATHAN, ADVOCATE !' # /RESPONDENT BY : SHRI B. SAHADEVAN, J CIT # /DATE OF HEARING : 05.01.2017 # /DATE OF PRONOUNCEMENT : 10.02.2017 / O R D E R PER N.R.S. GANESAN, JUDICIAL MEMBER : THIS APPEAL OF THE ASSESSEE IS DIRECTED AGAINST T HE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-5, CHENNAI DATED 11.05.2016 AND PERTAINS TO THE ASSESSMENT YEAR 2012 -13. 2 I.T.A. NO. 2589/MDS/2016 2. SHRI N. DEVANATHAN, THE LD. COUNSEL FOR THE ASSE SSEE SUBMITTED THAT THE FIRST ISSUE ARISES FOR CONSIDERA TION IS DISALLOWANCE OF 5,86,499/- TOWARDS THE COMMISSION PAID TO FOREIGN A GENT. ACCORDING TO THE LD. COUNSEL, THE ASSESSEE ENGAGED IN THE BUSINESS OF EXPORT OF FINISHED LEATHER GOODS AND PROCESSED L EATHER MATERIAL. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE H AS PAID A SUM OF 5,86,499/- TO A FOREIGN AGENT FOR PROCURING ORDERS IN TAIWAN AND HONGKONG. SINCE, THE SERVICES WERE RENDERED OUTSID E INDIA, ACCORDING TO THE LD. COUNSEL, THE SAME IS NOT TAXAB LE IN THE HANDS OF THE RECIPIENT AGENT IN INDIA. THEREFORE, NO TAX WA S DEDUCTED. REFERRING TO THE ASSESSMENT ORDER, THE LD. COUNSEL SUBMITTED THAT THE ASSESSING OFFICER DISALLOWED THE CLAIM OF THE A SSESSEE ONLY BY PLACING RELIANCE ON THE EXPLANATION 2 TO SECTION 19 5 OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT). THE SERVICE RE NDERED BY THE FOREIGN AGENT IS NOT IN DISPUTE. HOWEVER, THE CIT (APPEALS) FOUND THAT THE ASSESSEE HAS NOT PRODUCED ANY EVIDENCE FOR THE SERVICES RENDERED BY THE FOREIGN AGENT. ACCORDING TO THE LD . COUNSEL, WHEN THE ASSESSING OFFICER HAS NOT DISPUTED THE SERVICES RENDERED BY THE FOREIGN AGENT BY PROCURING ORDERS ON BEHALF OF THE ASSESSEE, THE CIT (APPEALS) CANNOT SAY THAT NO EVIDENCE WAS AVAIL ABLE ON RECORD TO SUPPORT THAT THE FOREIGN AGENT HAS RENDERED ANY SERVICE TO THE 3 I.T.A. NO. 2589/MDS/2016 ASSESSEE. REFERRING TO SECTION 195 (5) OF THE ACT , THE LD. COUNSEL SUBMITTED THAT THE ASSESSEE WAS EXPECTED TO MAKE AN APPLICATION TO THE ASSESSING OFFICER PROVIDED THE PAYMENT TO NO N-RESIDENT IS TAXABLE IN INDIA. REFERRING TO THE JUDGMENT OF THE MADRAS HIGH COURT IN CIT VS. FARIDA LEATHER COMPANY, TAX CASE A PPEAL NO.484 OF 2015 DATED 20.01.2016, THE LD. COUNSEL SUBMITTED THAT THE PAYMENT MADE BY THE ASSESSEE IS NOT TAXABLE IN INDI A. THEREFORE, THERE IS NO NEED FOR DEDUCTING ANY TAX WOULD ARISE FOR CONSIDERATION AT THE TIME OF PAYMENT. THE LD. COUNSEL HAS ALSO P LACED HIS RELIANCE IN ANOTHER JUDGMENT OF THE MADRAS HIGH COU RT IN CIT V KIKANI EXPORTS PVT. LTD., [2014] 369 ITR 96 (MAD). 3. ON THE CONTRARY, SHRI B. SAHADEVAN, THE LD. DEPA RTMENTAL REPRESENTATIVE, SUBMITTED THAT FOR THE PURPOSE OF M AKING PAYMENT, THE ASSESSEE HAS TO PROVE THAT THE FOREIGN AGENT HA S RENDERED ANY SERVICE. IN THIS CASE, NO MATERIAL IS AVAILABLE ON RECORD TO SUGGEST THAT THE FOREIGN AGENT HAS RENDERED ANY SERVICE TO THE ASSESSEE. IN THE ABSENCE OF ANY MATERIAL TO SUPPORT THE CLAIM OF SERVICES TO BE RENDERED BY FOREIGN AGENT, THE CIT (APPEALS) HAS RI GHTLY CONFIRMED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. 4 I.T.A. NO. 2589/MDS/2016 4. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITH ER SIDE AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE PAYME NT OF 5,86,499/- TO A FOREIGN AGENT IS NOT IN DISPUTE. T HE ASSESSING OFFICER DISALLOWED THE CLAIM ON THE GROUND THAT SIN CE PAYMENT WAS MADE TO A FOREIGN AGENT, THE ASSESSEE HAS TO MAKE A N APPLICATION BEFORE THE ASSESSING OFFICER UNDER EXPLANATION 2 TO SECTION 195 (5) OF THE ACT. SINCE SUCH APPLICATION WAS NOT MADE, T HE ASSESSING OFFICER DISALLOWED THE CLAIM OF THE ASSESSEE. ON FURTHER APPEAL BEFORE CIT (APPEALS), THE CIT (APPEALS) FOUND THAT THERE WAS NO SUPPORTING MATERIAL TO SAY THAT THE FOREIGN AGENT H AS RENDERED ANY SERVICES TO THE ASSESSEE. THIS TRIBUNAL IS OF THE CONSIDERED OPINION WHEN THE PAYMENT WAS MADE TO A FOREIGN AGENT FOR TH E SERVICES RENDERED EXCLUSIVELY OUTSIDE INDIA, THE SAME IS NOT TAXABLE IN INDIA. IN OTHER WORDS, THE PROFIT EARNED BY THE FOREIGN AG ENT ON THE SERVICES RENDERED OUTSIDE INDIA FOR PROCURING ORDER S CANNOT BE SUBJECT MATTER OF TAXATION IN INDIA. THE MADRAS HI GH COURT IN CIT V FAIZAN SHOES PVT. LTD., [2014] 367 ITR 155 (MAD) FO UND THAT THE SERVICES RENDERED BY NON-RESIDENT AGENT CAN AT THE BEST BE CALLED AS A SERVICES FOR COMPLETION OF EXPORT COMMITMENT. THE MADRAS HIGH COURT FURTHER FOUND THAT THE ASSESSEE WAS NOT LIABLE TO DEDUCT TAX AT SOURCE WHEN THE NON-RESIDENT AGENT PROVIDES SERVICES OUTSIDE 5 I.T.A. NO. 2589/MDS/2016 INDIA ON PAYMENT OF COMMISSION. THE MADRAS HIGH CO URT IN FACT PLACED ITS RELIANCE ON THE JUDGMENT OF THE SUPREME COURT IN THE GE INDIA TECHNOLOGY CEN. (P) LTD. V CIT, [2010] 327 IT R 456 (SC). HOWEVER, THE ASSESSEE HAS TO SUBSTANTIATE THAT THE NON-RESIDENT AGENT RENDERED SOME KIND OF SERVICES TO THE ASSESSE E EITHER BY WAY OF PROCURING ORDERS OR OTHERWISE. IN THIS CASE, TH E CIT (APPEALS) FOUND, NO EVIDENCE WAS AVAILABLE ON RECORD FOR THE SERVICES RENDERED BY THE NON-RESIDENT AGENT. WHEN THE ASSES SEE EXPORTED FINISHED LEATHER GOODS AND PROCESSED LEATHER GOODS, THERE MAY BE EITHER AN AGREEMENT OR CORRESPONDENCE BETWEEN THE P ARTIES TO SUPPORT THE FACT OF RENDERING SERVICES BY THE NON-R ESIDENT AGENT AND THE PAYMENT OF COMMISSION. IF THERE WAS NO CORRES PONDENCE BETWEEN THE PARTIES OR AGREEMENT, THERE MAY BE REFE RENCE EITHER IN THE PURCHASE ORDER PLACED BY THE PURCHASER OF THE F OREIGN COUNTRY OR THERE MAY BE SOME REFERENCE IN THE INVOICE RAISED B Y THE ASSESSEE FOR EXPORT OF GOODS. 5. THIS TRIBUNAL IS OF THE CONSIDERED OPINION, THES E MATTER HAS TO BE EXAMINED BY THE ASSESSING OFFICER TO FIND OUT THE REASON FOR PAYMENT OF 5,86,499/-. SINCE BOTH THE AUTHORITIES BELOW HAVE NOT EXAMINED THESE DOCUMENTS, THIS TRIBUNAL IS OF THE C ONSIDERED 6 I.T.A. NO. 2589/MDS/2016 OPINION THAT THE MATTER NEEDS TO BE RECONSIDERED. ACCORDINGLY, THE ORDERS OF THE LOWER AUTHORITIES ARE SET ASIDE AND T HE ISSUE RAISED BY THE ASSESSEE IS REMITTED BACK TO THE FILE OF THE AS SESSING OFFICER. THE ASSESSING OFFICER SHALL RE-EXAMINE AFRESH IN T HE LIGHT OF THE MATERIAL THAT MAY BE SUBMITTED BY THE ASSESSEE AND THEREAFTER DECIDE THE SAME IN ACCORDANCE WITH LAW AFTER GIVING A REASONABLE OPPORTUNITY TO THE ASSESSEE. 6. THE ASSESSEE HAS RAISED ONE MORE GROUND WITH REG ARD TO DISALLOWANCE OF BAD DEBTS OF 2,72,226/- 7. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE CLAIMED AN AMOUNT OF 2,72,226/- TOWARDS BAD DEBT. HOWEVER, IT IS NOT A BAD DEBT AT ALL. IT SHOULD BE TREATED AS TRADING LOSS IN THE COURSE OF THE BUSINESS. ACCORDING TO T HE LD. COUNSEL, THERE WAS ELECTRICITY DEPOSIT OF 1,53,618/- AND UNREALIZED RENT TO THE EXTENT OF 1,18,608/-. SINCE THE ELECTRICITY DEPARTMENT SAID THAT THE DEPOSIT CANNOT BE REFUNDED BY THE BOARD AND THE ASSESSEE COULD NOT REALIZE THE RENT TO THE EXTENT OF 1,18,608/- THE SAME WAS CLAIMED AS BAD DEBT INSTEAD OF TRADING LOSS. THERE FORE, ACCORDING TO 7 I.T.A. NO. 2589/MDS/2016 THE LD. COUNSEL THE CLAIM MADE BY THE ASSESSEE HAS TO BE ALLOWED AS TRADING LOSS. 8. ON THE CONTRARY, THE LD. D.R., SUBMITTED THAT IT IS NOT KNOWN IN WHOSE NAME THE ELECTRICITY DEPOSIT STANDS. IF T HE ASSESSEE CLAIMS THE EB DEPOSIT AS REVENUE EXPENDITURE AT THE TIME OF MAKING THE DEPOSIT, THE SAME CANNOT BE ALLOWED AS BAD DEBT . FURTHERMORE THE UNREALIZED RENT CANNOT BE CONSTRUED AS BAD DEBT AT ALL. IT IS ALSO NOT A TRADING LOSS. HENCE, IT IS NOT CORRECT TO SA Y THAT THE CIT (APPEALS) HAS WRONGLY DISALLOWED THE CLAIM OF THE A SSESSEE. 9. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITH ER SIDE AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE ASSE SSEE CLAIMS THAT THE ELECTRICITY BOARD HAS NOT REFUNDED THE SUM OF 1,53,618/- TOWARDS EB DEPOSIT FOR PROVIDING SERVICE CONNECTION . THE ASSESSEE HAS ALSO CLAIMED ANOTHER SUM OF 1,18,608/- UNDER THE HEAD BAD DEBT WRITTEN OFF. IN FACT, NO SUCH BAD DEBT WAS WR ITTEN OFF IN BOOKS OF ACCOUNTS. THE ASSESSEE NOW CLAIMS THAT 2,72,226/- IS ONLY A TRADING LOSS. THEREFORE, THE SAME HAS TO BE EXAMIN ED BY THE ASSESSING OFFICER. IN OTHER WORDS, THE CLAIM OF T HE ASSESSEE THAT THE SO CALLED BAD DEBT WRITTEN OFF TO THE EXTENT OF 2,72,226/- HAS TO 8 I.T.A. NO. 2589/MDS/2016 BE EXAMINED BY THE ASSESSING OFFICER AFRESH. ACCO RDINGLY THE ORDERS OF THE LOWER AUTHORITIES ARE SET ASIDE AND T HE DISALLOWANCE OF BAD DEBTS OF 2,72,226/- IS REMITTED BACK TO THE FILE OF THE ASSE SSING OFFICER. THE ASSESSING OFFICER SHALL RE-EXAMINE TH E MATTER AFRESH IN THE LIGHT OF THE MATERIAL THAT MAY BE FILED BY THE ASSESSEE AND THEREAFTER DECIDE THE SAME IN ACCORDANCE WITH LAW A FTER GIVING A REASONABLE OPPORTUNITY TO THE ASSESSEE. 10. THE NEXT GROUND OF APPEAL IS REGARDING DISALLOW ANCE OF 1/4 TH OF THE COURIER CHARGES. 11. SHRI N. DEVANATHAN, THE LD. COUNSEL FOR THE ASS ESSEE SUBMITTED THAT THE ASSESSEE HAS DEBITED 5,69,756/- TOWARDS COURIER CHARGES. HOWEVER, THE ASSESSING OFFICER DI SALLOWED 1/4 TH OF THE SAME WITHOUT ANY BASIS. ACCORDING TO THE LD. C OUNSEL, WHEN THE ASSESSEE HAS INCURRED THE COURIER EXPENDITURE, THE ASSESSING OFFICER CANNOT RESTRICT THE SAME. 12. ON THE CONTRARY SHRI B. SAHADEVAN, THE LD. DEPA RTMENTAL REPRESENTATIVE SUBMITTED THAT THE ASSESSEE COULD NO T PRODUCE THE RECEIPTS FOR PAYMENT OF COURIER CHARGES. THE COURI ER CHARGES FOR THE 9 I.T.A. NO. 2589/MDS/2016 LAST YEAR WAS ONLY RS.7,178/-. SINCE THERE WAS AN EXORBITANT INCREASE DURING THE YEAR UNDER CONSIDERATION, IN TH E ABSENCE OF ANY PROOF OF PAYMENT, THE ASSESSING OFFICER HAS RIGHTLY DISALLOWED RS.1,42,439/-. 13. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EIT HER SIDE AND PERUSED THE MATERIAL AVAILABLE ON RECORD. FROM THE ORDER OF THE ASSESSING OFFICER, IT APPEARS THAT THE ASSESSEE DEB ITED 25,29,659/- TOWARDS ADMINISTRATIVE CHARGES OUT OF W HICH A SUM OF 5,69,756/- WAS SAID TO BE INCURRED TOWARDS COURIER CHARGES. IN THE EARLIER ASSESSMENT YEAR, THE ASSESSEE APPEARS WOULD HAVE DEBITED ONLY A SUM OF 7,178/- TOWARDS COURIER CHARGES. THE ASSESSEE APPEARS TO CLAIM BEFORE THE ASSESSING OFFICER THAT SAMPLES WERE SENT TO THE PURCHASERS BY COURIER. HOWEVER, NO MAT ERIAL WAS PRODUCED BEFORE THE ASSESSING OFFICER TO SUPPORT TH E CLAIM. THEREFORE, THE ASSESSING OFFICER DISALLOWED 1/4 TH OF THE TOTAL CLAIM AND MADE ADDITION TO THE EXTENT OF 1,42,439/-. THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT IN THE ABSENCE OF ANY M ATERIAL TOWARDS PAYMENT OF COURIER CHARGES, THE ASSESSING OFFICER H AS RIGHTLY RESTRICTED THE SAME BY DISALLOWANCE OF 1,42,439/-. THIS TRIBUNAL 10 I.T.A. NO. 2589/MDS/2016 DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF THE LOWER AUTHORITY. ACCORDINGLY THE SAME IS CONFIRMED. 14. IN THE RESULT THE APPEAL OF THE ASSESSEE IS PAR TLY ALLOWED. ORDER PRONOUNCED ON 10 TH FEBRUARY, 2017 AT CHENNAI. SD/- SD/- ( . . ) ( . . . ) (D.S. SUNDER SINGH) (N.R.S. GANESAN) /ACCOUNTANT MEMBER /JUDICIAL MEMBER /CHENNAI, /DATED, THE 10 TH FEBRUARY, 2017. JR. # ! $ % $ /COPY TO: 1. /APPELLANT 2. !' /RESPONDENT 3. &' ( )/CIT(A)-5, CHENNAI 4. &' /CIT 5. ! $ /DR 6. () /GF.