The ITO,JR, Ward-2(3), PORBANDAR V. D.R. Garments (India) Pvt. Ltd., PORBANDAR

ITA 432/RJT/2011

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 2392 (ITAT-RAJKOT)
• Duration Of Justice: 4 year(s) 2 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-01-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 06-10-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 04-11-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: YOGESH PANDEY
• Assessee Lawyers: VIMAL DE SAI RESPONDEN
• Keywords: Business income; Business expenditure; Bad and doubtful debts
• Section: 143(3)

Judgement Text

I.T.A. NO. 432/RJT/2011 : ASSESSMENT YEAR 2008 - 09 : PAGE 1 OF 6 IN THE INCOME TAX APPELLATE TRIBUNAL RAJKOT BENCH, RAJKOT . [CORAM: PRAMOD KUMAR , AM AND RAJPAL YADAV, JM ] I.T.A. NO. 432 /RJT/ 2011 ASSESSMENT YEAR: 2008 - 09 INCOME - TAX OFFICER, JR, WARD - 2(3), PORBANDAR . ......... ...... .... APPELLANT VS. D. R . GARMENTS (INDIA) PVT. LTD., PLOT NO.287, VANANA IND. ESTATE, NATIONAL HIGHWAY 8B, RANAVAV PORBANDAR ROAD, AT :VANANA, DIST.PORBANDAR . . RESPONDENT PAN AACCD1676J APPEARANCES BY: YOGESH PANDEY ........... FOR THE APPELLANT VIMAL DE SAI ...... .... F OR THE RESPONDENT D ATE OF CONCLUDING THE HEARING : 6 TH OCTOBER, 2015 DATE OF PRONOUNCING THE ORDER : 4 TH JANUARY, 2016 O R D E R PER PRAMOD KUMAR , AM : BY WAY OF THIS APPEAL, THE ASSESSING OFFICER HAS CHALLENGED CORRECTNESS OF THE ORDER DATED 19 TH AUGUST, 2011, PASSED BY THE LEARNED CIT(A) IN THE MATTER OF ASSESSMENT UNDER SECTION 143(3) OF THE INCOME - TAX ACT, 1961, FOR THE ASSESSMENT YEAR 2008 - 09. 2. GRIEVANCE OF THE APPELLANT IS THAT THE LEARNED CIT(A) HAS ERRED, IN LAW AND ON FACTS, IN DE LETING THE ADDITION OF RS.5,14,73,365/ - MADE BY THE AO ON ACCOUNT OF DISALLOWANCE OF QUALITY CLAIM EXPENSES . I.T.A. NO. 432/RJT/2011 : ASSESSMENT YEAR 2008 - 09 : PAGE 2 OF 6 3. THE RELEVANT MATERIAL FACTS, TO THE EXTENT NECESSARY FOR ADJUDICATION ON THE ABOVE GRIEVANCE, ARE AS FOLLOWS. THE ASSESSEE IS A MANUFACTURER A ND EXPORTER OF THE READYMADE GARMENTS. DURING THE COURSE OF SCRUTINY ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS CLAIMED A DEDUCTION OF RS.5,14,73,365/ - TOWARDS QUALITY CLAIMS BY THE BUYERS. WHEN THIS MATTER WAS PROBED FURTHE R THE ASSESSEE EXPLAINED THAT MAJOR SALES OF THE ASSESSEE IS MADE THROUGH A U.K. BASED RETAIL CHAIN BY THE NAME OF FASHION 8 LTD. OUT OF TOTAL SALES OF RS.2,136.79 LAKHS, THE SALES OF RS.1,217.73 LAKHS IS MADE TO FASHION 8 LTD. ONLY. IT WAS SUBMITTED THAT DUE TO DEFECTIVE GOODS SUPPLIED BY US, AND DUE TO THE FACT THAT SUCH GOODS WAS SOLD ON MASSIVE DISCOUNTS BY THIS BUYER, THE ASSESSEE HAD TO ALLOW QUALITY CLAIM BY THE BUYER. HOWEVER, THE ASSESSING OFFICER WAS NOT IMPRESSED WITH THIS EXPLANATION. HE WAS OF THE VIEW THAT AS PER THE PROVISIONS OF THE INCOME - TAX ACT, SUCH PROVISIONS ARE NOT ALLOWABLE AS EXPENSES AND THAT THE PROVISION IS MADE AGAINST UNCERTAIN LOSS . HE WAS ALSO OF THE VIEW THAT SINCE ONLY PROVISION IS CREATED AND AMOUNT IS NOT ACTUALLY WRIT TEN OFF, THE DEDUCTION IS NOT ADMISSIBLE UNDER SECTION 36(1)(VII). THE ASSESSEE ONCE AGAIN EXPLAINED THAT THE QUALITY CLAIM AND FACTS REGARDING INVENTORY ARE DULY EVIDENCED BY SPECIALIZED INVENTORY SOFTWARE, I.E. PROME AND SATAGE, WHICH CALCULATES INTER AL IA, QUALITY CLAIM ACCORDING TO STOCK RECORDS IN THE SYSTEM. THE DETAILED SUBMISSION S ON THE WORKING OF THESE RECORDS WERE ALSO MADE. IT WAS ALSO EXPLAINED THAT THE ASSESSEE WAS NEW IN THIS LINE OF ACTIVITY, THAT LABOUR EMPLOYED BY THE ASSESSEE WAS SOURCED FROM SURROUNDING VILLAGES AND WAS NOT EXPERIENCED ENOUGH, THAT SI N CE GOODS WERE MADE AS PER SPECIFICATIONS OF, AND UNDER BRAND NAME OF THE BUYER, IT COULD NOT BE SOLD TO OUTSIDERS UPON BUYER S REJECTION AND THAT IT WAS A GENUINE BUSINESS LOSS. IT WAS ALSO EXPLAINED THAT EVEN THE BUYER SUFFERED MASSIVE LOSSES DUE TO THESE QUALITY ISSUES AND THE BUYER COMPANY HAD TO GO INTO LIQUIDATION. IT WAS ALSO EXPLAINED THAT THE BILLS DRAWN UP ON THE BUYER WERE PURCHASED BY THE BANK EVEN THOUGH THESE HAVE BEEN EVENTUALLY REALIZED. NONE OF THESE SUBMISSIONS AS ALSO OTHER SUBMISSIONS, WHICH ARE NOT REPRODUCED FOR THE SAKE OF BREVITY IMPRESSED THE ASSESSING OFFICER. I.T.A. NO. 432/RJT/2011 : ASSESSMENT YEAR 2008 - 09 : PAGE 3 OF 6 HE PROCEEDED TO DISALLOW THE CLAIM OF RS.5,14,73,365/ - AND JUSTIFIED THE SAME AS FOLLOWS : - 4.3 THE SUBMISSI ON OF THE ASSESSEE HAS BEEN CONSIDERED CAREFULLY. IN BRIEF THE ASSESSEE HAS CONTENDED THAT IT HAS SUPPLIED THE GOODS HAVING MANUFACTURING DEFECTS THEREFORE IT HAS TO GIVE DISCOUNT TO THE PURCHASER BECAUSE IN TURN THE DEALER HAS TO GIVE FURTHER DISCOUNTS IN THE RETAIL SALES. UNDER THE CIRCUMSTANCES, THE ASSESSEE OF ITS OWN DETERMINE AN AMOUNT OF RS.5,14,737,365/ - PAYABLE TO THE SAID PURCHASER ON ACCOUNT OF RS. DAMAGED /DEFECTIVE GOODS SUPPLIED. HOWEVER, IN SUPPORT OF THE SAID AMOUNT OF RS.5,14 CRORES THE ASS ESSEE HAS FURNISHED DEBIT NOTE ISSUED BY FASHION 8 LTD. OF UK DATED 31/3/2008 STATING THAT WE HAVE DEBITED YOUR ACCOUNT QUALITY CLAIM IN GARMENTS DURING YEAR. THE DETAILS QUALITY CLAIM STATEMENT GENERATED FROM PROM FOR THE AMOUNT OF 5399987 (FIVE LACKS TH IRTY NINE THOUSAND NINE HUNDRED AND EIGHTY SEVEN GBP) AND 2 ND FROM THREADS D.R. PVT. LTD. MANCHESTER LE 54PH UK FOR INR 7921608/DT.31.3.2008. ON VERIFICATION OF THE SAID DEBIT NOTE IT IS NOTICED THAT THE SAID DEBIT NOTE HAVE BEEN ISSUED BY THE BUYER AT THE END OF THE FY 2007 - 08 I.E. BEFORE CLOSING OF BOOKS OF ACCOUNTS. THE ASSESSEE S FINAL ACCOUNTS WERE NOT COMPLETED, BUT NO WHERE THE ASSESSEE COMPANY HAS GIVEN THE EFFECT TO THAT DEBIT NOTE. THE COMPANY HAS TO REDUCE THE SALE TO THAT EXTENT AND HAS TO REDUC E THE DEBTORS. FOR THE SUCH LOSSES ASSESSEE HAS TO WRITTEN OFF THE DEBIT IN ITS BOOKS OF ACCOUNT AND HAS TO REDUCE THE RECEIVABLE TO THAT EXTENT. BUT HAS FAILED TO DO SO, IT HAS NO WHERE PASSED SUCH ENTRY IN BOOKS OF ACCOUNT. THE PROVISION IS MADE FOR UNCE RTAIN LOSS OF RECOVERY SO SUCH PROVISION IS NOT ALLOWABLE AS DEDUCTION THE CORRESPONDING ENTRY MADE BY THE ASSESSEE COMPANY IN BOOKS SHOWS THAT THE ASSESSEE HAS ONLY PASSED THE ENTRY TO REDUCE THE PROFIT. AS PER SCHEDULE VI OF THE COMPANY ACT. THE PROVISIO N IS A CHARGE AGAINST PROFITS. IT IS CREATED TO MEET LIABILITIES WHICH ARE KNOWN AND FORESEEABLE BUT WHOSE EXACT TIMING AND HENCE WHOSE QUANTIFICATION ALONE, IS UNCERTAIN AT THE MOMENT. THE PROVISIONS MADE AGAINST ANTICIPATED LOSSES AND CONTINGENCIES ARE C HARGES AGAINST PROFITS AND THEREFORE TO BE TAKEN IN TO ACCOUNT AGAINST THE GROSS RECEIPT IN THE PROFIT AND LOSS ACCOUNT AND THE BALANCE SHEET. IN VIEW OF THE ABOVE DISCUSSION, THE CLAIM OF THE ASSESSEE COMPANY FOR PROVISION OF QUALITY CLAIM IS REJECTED AN D AN AMOUNT OF RS.5,14,73,365/ - IS ADDED WITH THE TOTAL INCOME. 4. AGGRIEVED, ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT(A). LD. CIT(A) REVERSED THE ACTION OF THE ASSESSING OFFICER, AND THUS DELETED THE DISALLOWANCE, BY OBSERVING AS FOLLOWS : - I.T.A. NO. 432/RJT/2011 : ASSESSMENT YEAR 2008 - 09 : PAGE 4 OF 6 6. I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS MADE BY THE AR OF THE APPELLANT AND THE DISCUSSIONS MADE BY THE AO IN THE ASSESSMENT ORDER. IT IS NOT THE CLAIM OF THE AO THAT THE READYMADE MATERIALS SUPPLIED BY THE APPELLANT WERE NOT DEFECTIVE OR OF INFE RIOR QUALITY. IT IS AN ADMITTED FACT THAT THE READYMADE MATERIALS SUPPLIED WERE FOUND DEFECTIVE BY THE FOREIGN BUYERS WHO IN TURN RAISED THE DEBIT NOTES ON THE APPELLANT TOWARDS QUALITY CLAIM. THE REASONS FOR DISALLOWANCE OF CLAIM AS CITED BY THE AO ARE TH AT THE APPELLANT HAS NOT WRITTEN OFF DEBTS AND HAS NOT REDUCED SALES IN THE BOOKS AND THAT THE CLAIM IS TOWARDS PROVISION FOR UNCERTAIN RECOVERY LOSS AND SUCH PROVISION IS NOT ALLOWABLE. ON CAREFUL CONSIDERATION OF SUBMISSIONS MADE BY THE AR OF THE APPELLA NT AND DOCUMENTS PLACED ON RECORD IN THE PAPER BOOK, I FIND THE CONTENTIONS RAISED BY THE AO PATENTLY INCORRECT BECAUSE THE APPELLANT S CLAIM TOWARDS QUALITY ALLOWANCE WAS NEVER A CLAIM TOWARDS BAD DEBTS SO THAT IT WAS REQUIRED TO WRITE OFF THE DEBTS IN TH E BOOKS. FURTHER, THE CLAIM WAS ON ACCOUNT OF DEFECTIVE QUALITY MATERIALS SUPPLIED BY THE APPELLANT TO THE BUYERS AS EVIDENT FROM DOCUMENTARY EVIDENCES AND CORRESPONDENCE PLACED IN THE PAPER BOOK FILED BY THE APPELLANT. IT IS ALSO SEEN THAT THE CLAIM AMOUN T WAS DETERMINED BY AN INVENTORY MANAGEMENT SYSTEM THROUGH TECHNICAL AND SCIENTIFIC PROCESS. SAID CLAIM HAS NOT BEEN FOUND BOGUS OR NON - GENUINE BY AO. UNDER THE CIRCUMSTANCE, I FURTHER FAIL TO UNDERSTAND HOW THE SAID CLAIM CAN BE SAID TO BE A CLAIM TOWARDS U NCERTAIN LOSS OF RECOVERY. I ALSO AGREE WITH THE ARGUMENT OF THE LD. AR OF THE APPELLANT THAT IT I S THE TRUE NATURE AND SUBSTANCE OF A PARTICULAR TRANSACTION THAT DETERMINES ITS ALLOWABILITY OR OTHERWISE AND NOT THE ACCOUNTING ENTRY. AO HAS COMPLETELY MISCONCEIVED THE DEDUCTION CLAIMED BY THE APPELLANT AND WENT INTO ACCOUNTING TREATMENT OF THE TRANSACTION WHICH IS NOT DECISIVE FOR THE IMPUGNED CLAIM. IT IS NOTICED THAT P & L ACCOUNT SHOWS GROSS SALES OF RS.21,36,79,522.83 AS AGAINST THIS ON THE BASIS OF DEBIT NOTES OF BUYERS. QUALITY CLAIM EXPENDITURE OF RS.4,22,55,778/ - HAS BEEN DEBITED AND THE ACCOUNTING IS PROPER. OTHER METHOD COULD BE TO REDUCE SALES OF RS.21,36,79,522.83 BY QUALITY CLAIM EXPENDITURE OF RS.4,22,55,775 AND TAKE NET SALES FIGURES AT RS .17,09,23,745. NET RESULT WOULD BE SAME 3 ALTERNATIVE WAYS OF ACCOUNTS PRESENTED BY AR (DISCUSSED AT PAGE 6 & 7 ABOVE) ALSO SHOWS THAT IT IS ONLY DIFFERENT WAY OF ACCOUNTING BUT NET EFFECT WILL BE SAME AND IT WOULD NOT A FFECT NET INCOME ANY WAY. AS FAR AS BALANCE SHEET IS CONCERNED PROVISION (MIS - NOMENCLATURE) IF NOT SHOWN SEPARATELY WOULD REDUCE THE DEBTORS OF RS.17,46,46,163.33 BY SAME AMOUNT OF RS.5,90,18,140.36 & BALANCE SHEET WOULD STILL TALLY. THE WORDS PROVISION HAS BEEN WRONGLY READ BY THE AO. IT IS AN AMOUNT BY WHICH LIABILITY TOWARDS DEBTORS FOR SALES IN RESPECT OF QUALITY CLAIM WOULD BE DIS CLAIMED. THIS CLAIM IS ACTUAL AND NOT UNCERTAIN LOSS. THE REAL NATURE OF TRANSACTION IS REQUIRED TO BE UNDERSTOOD. HENCE ADDITION MADE BY THE AO IS FOUND DEVOID OF MERIT. THEREFORE, I HOLD THAT THE DEDUCTION FOR EXPENDITURE TOWARDS QUALITY CLAIM IS MADE DURING THE NORMAL COURSE OF BUSINESS OF THE APPELLANT AND IS THEREFORE ALLOWABLE AS BUSINESS EXPENDITURE. THE DISALLOWANCE OF RS.5,14,73,365/ - I.T.A. NO. 432/RJT/2011 : ASSESSMENT YEAR 2008 - 09 : PAGE 5 OF 6 MADE BY THE AO IS T HEREFORE NOT JUSTIFIED AND IS DIRECTED TO BE DELETED. THIS GROUND OF APPEAL IS ALLOWED. 5. THE ASSESSING OFFICER IS AGGRIEVED AND IS IN APPEAL BEFORE US. 6. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTS OF THE CASE IN THE LIGHT OF THE APPLICABLE LEGAL POSITION. 7. WE FIND THAT THERE IS ENOUGH MATERIAL ON RECORD TO EVIDENCE THAT THE ASSESSEE WAS CONFRONTED WITH QUALITY CLAIMS BY THE VENDOR. THE CLAIMS WERE QUANTIFIED AND ALREADY MADE. UNDER THESE CIRCUMST ANCES, THE QUALITY CLAIM CANNOT BE SAID TO BE CONTINGENT OR UNCERTAIN LIABILITIES. HERE IS A CASE IN WHICH THE CLAIM IS QUANTIFIED BUT EVEN IN A SITUATION THE CLAIM IS NOT QUANTIFIED BUT ONLY REASONABLY ESTIMATED THE DEDUCTION IS ADMISSIBLE. AS OBSERVED BY HON BLE SUPREME COURT IN THE CASE OF BHARAT EARTH MOVERS LTD. VS. CIT [(2000) 245 ITR 428 (SC)], THE LAW IS WELL SETTLED; IF A BUSINESS LIABILITY HAS DEFINITELY ARISEN IN THE ACCOUNTING YEAR, THE DEDUCTION SHOULD BE ALLOWED ALTHOUGH THE LIABILITY MAY HAV E TO QUANTIFIED AND DISCHARGED AT A LATER DATE. WHAT SHOULD BE CERTAIN IS INCURRING OF THE LIABILITY. IN THE PRESENT CASE, IT IS NOT EVEN IN DISPUTE THAT THE QUALITY CLAIM WERE MADE. AS FOR THE ASSESSING OFFICER S STAND THAT IN VIEW OF DEBIT NOTE SENT BY THE BUYER, THE ASSESSEE SHOULD HAVE REDUCED ITS SALE AND ONLY SHOWN THE NET FIGURE OF SALES, WE FIND THAT WHETHER GROSS SALES IS SHOWN ON THE CREDIT SIDE, WITH A QUALITY CLAIM SHOWN ON THE DEBIT SIDE, OR WHETHER A NET SALE FIGURE IS SHOWN EFFECT IS THE SAM E. HIS HYPER TECHNICAL OBJECTION DOES NOT OUR APPROVAL. LEARNED DEPARTMENTAL REPRESENTATIVE HAS NOW GIVEN A NEW TWIST TO THE MATTER. HE SUBMITS THAT SINCE ALL THE FOREIGN BILLS WERE PURCHASED BY THE BUYER, AND THE ASSESSEE HAD ALREADY RECEIVED THE SALE PRO CEEDS, THERE WAS NO LOSS TO THE ASSESSEE. THIS ARGUMENT, HOWEVER, PROCEEDS ON THE FALLACIOUS ASSUMPTION THAT BANKER PURCHASES BILLS DRAWN ON THE BUYER, AND HE HAS NO RECOURSE TO THE ASSESSEE. EVEN THOUGH IN THE BANKING TERMINOLOGY SUCH TRANSACTIONS OF LOAN AGAINST RECEIVABLES FROM FOREIGN BUYERS ARE SOMETIMES TERMED AS FDBP (FOREIGN DOCUMENTARY BILLS PURCHASED), THESE ARE ESSENTIALLY NATURE OF LOANS TO EXPORTERS. NOTHING, THEREFORE, TURNS ON THE RECEIPT OF I.T.A. NO. 432/RJT/2011 : ASSESSMENT YEAR 2008 - 09 : PAGE 6 OF 6 LOANS IN RESPECT OF BILLS RAISED BY THE ASSESSEE. T HESE ARE NOT REVENUE RECEIPTS AT ALL, NOR WAS IT EVER THE CASE OF EVEN THE ASSESSING OFFICER, ON THE LIGHT OF THESE DISCUSSIONS, WE APPROVE THE WELL REASONED OF THE CIT(A) AND DECLINE TO INTERFERE IN THE MATTER. 8. IN THE RESULT, THE APPEAL IS DISMISSED. PRONOUNCED TODAY ON 4 TH DAY OF JANUARY, 2016 SD/ - SD/ - ( RAJPAL YADAV ) ( PRAMOD KUMAR ) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) DATED: 4 TH DAY OF JANUARY, 2016 COPIES TO: (1) THE APPELLANT (2) THE RESPONDENT ( 3) COMMISSIONER (4) CIT(A) (5) DEPARTMENTAL REPRESENTATIVE (6) GUAR D FILE BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL RAJKOT