MECA BETHARIA ENGINEERING LTD, NAVI MUMBAI V. ACIT CIR 10(3), MUMBAI

ITA 2836/MUM/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 8253 (ITAT-MUMBAI)
• Duration Of Justice: 11 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-03-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: F
• Assessment Year: 2007-2008
• Appeal Filed On: 09-04-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: D CHANDA
• Keywords: Depreciation; Business expenditure; Bad and doubtful debts; Revenue expenditure; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES F, MUMBAI BEFORE SHRI D.K. AGARWAL (J.M.) AND SHRI J. SUDHAKA R REDDY (A.M.) ITA NO. 2836/MUM /2010 ASSESSMENT YEAR : 2007-08 M/S MECA BETHARIA ENGINEERING LIMITED, D-173, MIDC, TTC INDUSTRIAL AREA, SHIRWANE, NAVI MUMBAI 400 706. PAN : AADCM9426E VS. A SST. COMMISSIONER OF INCOME - TAX, CIRCLE 10(3), ROOM NO. 451, AAYAKAR BHAVAN, M.K. ROAD, MUMBAI 400 020. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI KISHOR CHAUDHARI RESPONDENT BY : SHRI D. CHANDA O R D E R PER D.K. AGARWAL, J.M. THIS APPEAL PREFERRED BY THE ASSESSEE IS DIRECTED A GAINST THE ORDER DATED 22.02.2010 PASSED BY THE LD. CIT (A) FOR THE A.Y 2007-08. 2. BRIEFLY STATED FACTS OF THE CASE ARE THAT THE AS SESSEE COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF STEEL P UNCHES FOR CERAMIC PRODUCTS, FILED RETURN DECLARING TOTAL INCOME AT ` NIL. HOWEVER, THE ASSESSMENT WAS COMPLETED AT A LOSS OF ` 45,35,375/- INCLUDING THE DISALLOWANCE OF BAD DEBTS OF ` 42,901/- AND TECHNICAL KNOWHOW AT ` 1,88,618/- VIDE ORDER DATED 7.12.2009 PASSED U/S 14 3(3) OF THE INCOME TAX ACT, 1961 (THE ACT). ON APPEAL, THE LD. CIT(A) CONFIRMED BOTH THE DISALLOWANCES MADE BY THE A.O. ITA NO. 28 36/MUM/2010 M/S MECA BETHARIA ENGINEER ING LIMITED. 2 3. BEING AGGRIEVED BY THE ORDER OF THE LD. CIT(A), THE ASSESSEE IS IN APPEAL BEFORE US. 4. GROUND NO. 1 IS AGAINST THE SUSTENANCE OF DISALL OWANCE OF BAD DEBTS OF ` 42,901/-. 5. BRIEF FACTS OF THE ABOVE ISSUE ARE THAT IT WAS O BSERVED BY THE A.O. THAT THE ASSESSEE HAD DEBITED AN AMOUNT OF ` 42,901/- ON ACCOUNT OF BAD DEBTS. ON BEING ASKED, THE ASSESSEE VIDE LETTER DATED 12.10.09 SUBMITTED THE NAME OF THE PARTIES AND THE AMOUNT. IN THE ABSENCE OF ANY PROPER EXPLANATION, THE A.O. HELD THAT THE ASSE SSEE HAS NOT SATISFIED ALL THE THREE CONDITIONS VIZ. (I) THE DEBT MUST BE INCIDENTAL TO THE BUSINESS TRANSACTION, (II) THE DEBT MUST HAVE BEEN CONSIDERED AT THE TIME OF COMPUTATION OF INCOME OF THE EARLIER YEARS, AND (III) THE DEBT MUST BE WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE FOR THE PREVIOUS YEAR AND, HENCE, HE DISALLOWED THE CLAIM O F BAD DEBTS OF ` 42,901/- AND ADDED TO THE INCOME OF THE ASSESSEE. ON APPEAL, THE LD. CIT(A) WHILE OBSERVING THAT THE ASSESSEE HAS NEITHE R FURNISHED THE BONAFIDE NOR HAS NARRATED ANY CIRCUMSTANCES, UPHELD THE DISALLOWANCE MADE BY THE A.O. 6. AT THE TIME OF HEARING, THE LD. COUNSEL FOR THE ASSESSEE SUBMITS THAT THE ASSESSEE HAS FILED COPY OF BAD DEBTS ACCOU NT AND COPY OF PARTY LEDGER ACCOUNT TO SHOW THAT THE AMOUNT HAS BEEN ACT UALLY WRITTEN OFF AS IRRECOVERABLE. HE FURTHER SUBMITS THAT THE ASSESSE E HAS MADE DUE COMPLIANCE OF THE LEGAL REQUIREMENTS AS UNDER:- SECTION NO. HOW SATISFIED ITA NO. 28 36/MUM/2010 M/S MECA BETHARIA ENGINEER ING LIMITED. 3 36(2)I THE BAD DEBTS RELATE TO INVOICE NO. MB/1/05 - 06/021 AND INVOICE NO. MB/06-07/-026 FOR THE YEAR ENDED 31 ST MARCH, 2006 AND 31 ST MARCH 2007 RESPECTIVELY. THE AMOUNT HAS BEEN CONSIDERED IN COMPUTING THE TOTAL INCOME OF THE ASSESSEE FOR THE RELEVANT YEAR. 36(2)II NO AMOUNT HAS BEEN RECEIVED AGAINST THE AMOUNTS WRITTEN OFF. IF ANY AMOUNT HAD BEEN RECEIVED AGAIN ST THESE DEBTS, THE SAME WOULD NOT HAVE REMAINED AS RECEIVABLE TO BE WRITTEN OFF AS BAD DEBTS. 36(2)III THIS AMOUNT HAS NOT BEEN WRITTEN OFF AS BAD DEBT IN ANY EARLIER PREVIOUS YEAR. IT IS ALSO NOT THE CASE OF THE INCOME TAX OFFICER THAT THE AMOUNT HAS NOT BECOME B AD DURING THE RELEVANT ASSESSMENT YEAR. IN THE LIGHT OF THE ABOVE, HE SUBMITS THAT THE ASSE SSEE HAS SATISFIED ALL THE REQUIREMENTS OF SECTION 36 FOR ALLOWANCE OF BAD DEBTS, THEREFORE, THE DISALLOWANCE MADE BY THE A.O. BE DELETED. 7. ON THE OTHER HAND, THE LD. D.R. SUPPORTS THE ORD ER OF THE A.O. AND THE LD. CIT(A). 8. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE RIVAL PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE FI ND THAT THERE IS NO DISPUTE THAT THE PROVISIONS OF SECTION 36(1)(VII) O F THE ACT AS AMENDED W.E.F. 1.4.1989, THE ASSESSEE IS NOT REQUIRED TO ES TABLISH THAT THE CONCERNED DEBTS HAS ACTUALLY BECOME BAD IN THE RELE VANT YEAR FOR THE PURPOSE OF CLAIMING DEDUCTION AND THE ONLY REQUIREM ENT FOR CLAIMING THE DEDUCTION IS THAT THE ASSESSEE HAS TO WRITE OFF THE RELEVANT DEBTS IN ITS BOOKS OF ACCOUNT TREATING THE SAME AS BAD. IN THE PRESENT CASE, THERE IS NO DISPUTE THAT THE ASSESSEE HAS WRITTEN OFF THE RE LEVANT BAD DEBTS OF ` 42,901/- (RS 20 +42824+56) BY DEBITING THE P&L ACC OUNT AND REDUCING ITA NO. 28 36/MUM/2010 M/S MECA BETHARIA ENGINEER ING LIMITED. 4 EQUIVALENT AMOUNT FROM THE TOTAL DEBTS, THEREFORE, RESPECTFULLY FOLLOWING THE DECISION OF THE HONBLE SUPREME COURT IN THE CA SE OF TRF LTD. VS. CIT [2010] 323 ITR 397(SC) WHEREIN IT HAS BEEN HELD THA T AFTER THE AMENDMENT OF SECTION 36(1)(VII)OF THE INCOME-TAX AC T, 1961, WITH EFFECT FROM APRIL 1, 1989, IN ORDER TO OBTAIN A DEDUCTION IN RELATION TO BAD DEBTS, IT IS NOT NECESSARY FOR THE ASSESSEE TO ESTA BLISH THAT THE DEBT, IN FACT, HAS BECOME IRRECOVERABLE : IT IS ENOUGH IF TH E BAD DEBTS IS WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE, WE HOLD THAT THE ASSESSEE IS ENTITLED TO DEDUCTION OF BAD DEBTS OF ` 42,901/- AND ACCORDINGLY THE DISALLOWANCE OF BAD DEBTS OF ` 42,901/- MADE BY THE A.O. AND CONFIRMED BY THE LD. CIT(A) IS DELETED. THE GR OUND TAKEN BY THE ASSESSEE IS THEREFORE ALLOWED. 9. GROUND NO. 2 IS AGAINST THE SUSTENANCE OF DISALL OWANCE OF TECHNICAL KNOWHOW OF ` 1,88,618/-. 10. IT WAS OBSERVED BY THE A.O. THAT THE ASSESSEE H AS CLAIMED AN EXPENDITURE OF ` 2,51,491/- ON ACCOUNT OF TECHNICAL KNOWHOW. ACCOR DING TO THE A.O., THE EXPENSES CLAIMED BY THE ASSESSEE A RE CAPITAL IN NATURE AND ACCORDINGLY THE ASSESSEE WAS ASKED TO EXPLAIN A S TO WHY THE SAME SHOULD NOT BE CAPITALISED AND THE DEPRECIATION ON T HE SAME IS ALLOWED. IN RESPONSE, THE ASSESSEE SUBMITTED THAT THE EXPENSES ARE INCURRED FOR MAINTENANCE OF IMPORTED MACHINERY. THE EXPENSES DO ES NOT RESULT IN ANY KIND OF IMPROVEMENT IN THE MACHINERY. IT IS RE CURRING EXPENSES AND HENCE CHARGED TO THE P&L ACCOUNT. HOWEVER, THE A.O . WAS OF THE VIEW THAT THE EXPENSES INCURRED BY THE ASSESSEE FOR TECH NICAL KNOWHOW IS NOTHING BUT THE CAPITAL IN NATURE AND HENCE THE SAM E NEEDS TO BE CAPITALISED. ACCORDINGLY, HE AFTER ALLOWING DEPREC IATION, DISALLOWED NET AMOUNT OF ` 1,88,618/- ON ACCOUNT OF EXPENDITURE INCURRED ON T ECHNICAL KNOWHOW AND ADDED THE SAME TO THE INCOME OF THE ASS ESSEE. ON APPEAL ITA NO. 28 36/MUM/2010 M/S MECA BETHARIA ENGINEER ING LIMITED. 5 BEFORE THE LD. CIT(A), IT WAS SUBMITTED BY THE ASSE SSEE THAT THE MACHINERY WAS GIVING SOME TROUBLE AND MANUFACTURER AGREED TO SEND HIS TECHNICIAN BEARING TRAVEL COST HIMSELF BUT LOCAL TR AVEL AND LODGING AND BOARDING HAD TO BE BORNE BY THE ASSESSEE. THEREFOR E, THE SAME IS A REVENUE EXPENDITURE AND BE ALLOWED. HOWEVER, THE L D. CIT(A) WAS OF THE VIEW THAT THE APPELLANT HAS CHANGED ITS STAND NOW. EARLIER, IT WAS SUBMITTED THAT THE EXPENDITURE IS INCURRED FOR MAIN TENANCE OF THE MACHINERY WHICH IS NOW BEEN CLAIMED AS THE EXPENSES RELATED TO TRAVEL ETC. THEREFORE, THE LD. CIT(A) WHILE OBSERVING THA T THE ASSESSEE HAS NOT BEEN ABLE TO SUBSTANTIATE ITS CLAIM, UPHELD THE ACT ION OF THE A.O. 11. AT THE TIME OF HEARING, THE LD. COUNSEL FOR THE ASSESSEE WHILE REITERATING THE SAME SUBMISSIONS AS SUBMITTED BEFOR E THE LD. CIT(A) FURTHER SUBMITS THAT THE ASSESSEE HAD IMPORTED MACH INERY DURING THE YEAR ENDED ON 31.3.2005. AFTER SATISFACTORY PERFOR MANCE FOR TWO YEARS, THE SAID MACHINERY STARTED GIVING SOME TROUBLE AND NEEDED ATTENTION FROM A TECHNICALLY COMPETENT PERSON TO HANDLE THE S AME MACHINE. THE MACHINERY MANUFACTURER AGREED TO SEND HIS TECHNICIA N BEARING ALL THE TRAVEL COST HIMSELF. HOWEVER, LOCAL TRAVEL, LODGIN G AND BOARDING HAD TO BE BORNE BY THE ASSESSEE COMPANY. ACCORDINGLY, AN OFFI CIAL FROM THE MACHINERY SUPPLYING COMPANY CAME AND THE ASSESSEE H AS INCURRED EXPENDITURE ON THE CONVEYANCE, LODGING, REFRESHMENT S ETC. PROVIDED TO THE TECHNICIAN, THEREFORE, IT IS REVENUE EXPENDITUR E. THERE IS NO NEW ASSET COMING INTO EXISTENCE OR NO BENEFIT OF ENDURI NG NATURE IS RECEIVED BY THE ASSESSEE. HE, THEREFORE, SUBMITS THAT THE D ISALLOWANCE MADE BY THE A.O. AND SUSTAINED BY THE LD. CIT(A) BE DELETED . ITA NO. 28 36/MUM/2010 M/S MECA BETHARIA ENGINEER ING LIMITED. 6 12. ON THE OTHER HAND, THE LD. D.R. SUBMITS THAT SI NCE THE ASSESSEE HAS FAILED TO SUBSTANTIATE ITS CLAIM, THEREFORE, TH E DISALLOWANCE MADE BY THE A.O. AND SUSTAINED BY THE LD. CIT(A) BE UPHELD. 13. WE HAVE CAREFULLY HEARD THE SUBMISSIONS OF THE RIVAL PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE FIND T HAT THERE IS NO DISPUTE THAT THE ASSESSEE HAD IMPORTED THE MACHINERY DURING THE YEAR ENDED ON 31.3.2005 AND AFTER SATISFACTORY PERFORMANCE FOR TW O YEARS, THE ASSESSEE HAS INCURRED EXPENSES ON CONVEYANCE, LODGING & REFR ESHMENTS PROVIDED TO THE TECHNICIAN WHO CAME FROM ABROAD FOR THE PURP OSE, THE TRAVEL COST OF WHICH WAS BORNE BY THE SUPPLIER. SINCE THE MACH INERY IS AN OLD MACHINERY AND THE ASSESSEE HAS INCURRED SOME EXPENS ES ON THE TECHNICIAN OF THE MACHINERY WHO CAME FROM ABROAD TO REPAIR THE MACHINERY, AND IN THE ABSENCE OF ANY MATERIAL TO SH OW THAT THE EXPENSES INCURRED BY THE ASSESSEE ARE CAPITAL EXPENDITURE, W E ARE OF THE VIEW THAT THE EXPENSES INCURRED BY THE ASSESSEE ARE REVENUE I N NATURE AND ARE ALLOWABLE AS BUSINESS EXPENDITURE AND ACCORDINGLY W E DIRECT THE A.O. TO ALLOW THE EXPENDITURE OF ` 2,51,491/- AFTER WITHDRAWING THE DEPRECIATION ALLOWED BY HIM. THE GROUND TAKEN BY THE ASSESSEE I S THEREFORE ALLOWED. 14. IN THE RESULT, ASSESSEES APPEALS STANDS ALLOWE D. ORDER PRONOUNCED ON THIS 11 TH OF MARCH, 2011. SD/- (J. SUDHAKAR REDDY) ACCOUNTANT MEMBER SD- (D.K. AGARWAL) JUDICIAL MEMBER MUMBAI, DATED 11 TH MARCH, 2011. RK ITA NO. 28 36/MUM/2010 M/S MECA BETHARIA ENGINEER ING LIMITED. 7 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. COMMISSIONER OF INCOME TAX (APPEALS)- 22, MUMBA I 4. COMMISSIONER OF INCOME TAX, 10, MUMBAI 5. DEPARTMENTAL REPRESENTATIVE, BENCH F, MUMBAI //TRUE COPY// BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI ITA NO. 28 36/MUM/2010 M/S MECA BETHARIA ENGINEER ING LIMITED. 8 1 DRAFT DICTATED ON 8.3.11 SR PS 2 DRAFT PLACED BEFORE AUTHOR ON 9.3.11 SR PS 3 DRAFT PROPOSED & PLACE BEFORE THE 2 ND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY 2 ND MEMBER JM/AM 5 APPROVED DRAFT COMES TO THE SR PS SR.PS 6 KEPT FOR PRON OUNCEMENT ON SR PS 7 FILE SENT TO THE BENCH CLERK SR PS 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 9 DATE ON WHICH FILE GOES TO THE AR 10 DATE OF DESPATCH SR PS