ACIT, Mysore V. M/s. M.K. Agrotech Pvt. Ltd., Mandya

ITA 443/BANG/2009

• Counselvise Citation: [2009] 114 COUNSELVISE.COM (IT) 9445 (ITAT-BANGALORE)
• Duration Of Justice: 4 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-09-2009
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 02-09-2009
• Assessment Year: 2005-2006
• Appeal Filed On: 08-05-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PREETHI GARG
• Keywords: Additional evidence; Bad and doubtful debts; Corroborative evidences
• Section: 40A(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI K.P.T. THANGAL, VICE PRESIDENT AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ITA NO.443/BANG/2009 ASSESSMENT YEAR : 2005-06 THE ADDITIONAL CIT, RANGE-2, MYSORE. : APPELLANT VS. M/S. M.K. AGROTECH PVT. LTD., M.B. ROAD, SRIRANGAPATNA, MANDYA DISTRICT. : RESPONDENT ITA NO.401/BANG/2009 ASSESSMENT YEAR : 2005-06 M/S. M.K. AGROTECH PVT. LTD., M.B. ROAD, SRIRANGAPATNA, MANDYA DISTRICT. : APPELLANT VS. THE ADDITIONAL CIT, RANGE-2, MYSORE. : RESPONDENT ITA NO.401 & 443/B/09 PAGE 2 OF 22 REVENUE BY : SMT. PREETHI GARG ASSESSEE BY : SRI SACHIN KUMAR O R D E R PER A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER THESE TWO APPEALS PREFERRED - (I) BY THE ASSESSEE AND (II) ANOTHER BY THE REVENUE ARE DIRECTED AGAINST THE ORDER OF THE CIT (A), MY SORE, FOR THE ASSESSMENT YEAR 2005-06. ITA NO.401 (BY THE ASSESSEE) : 2. THE ASSESSEE COMPANY HAS RAISED SIX GROUNDS, OU T OF WHICH, GROUND NOS: 1, 2 AND 6 ARE GENERAL AND NOT SPECIFIC AND, THEREFORE, DO NOT SURVIVE FOR ADJUDICATION. THE REMAINING THREE EFFECTIVE GROUNDS ARE AS UNDER: (1) SUSTAINING OF DISALLOWANCE OF BAD DEBTS TO THE TUNE OF RS.310861/-; (2) CONFIRMING THE DISALLOWANCE OF RS.2731483/- BEING T HE PAYMENTS MADE THROUGH UNCROSSED DDS; & (3) CONFIRMING THE DISALLOWANCE OF RS.768210/- BEING FR EIGHT PAYMENTS MADE IN VIOLATION OF S.40A (3) OF THE ACT. ITA NO.443 (BY THE REVENUE) : 3. SIMILARLY, THE REVENUE HAS RAISED NINE GROUNDS, OUT OF WHICH, GROUND NOS: 1 AND 9 ARE GENERAL AND NOT SPECIFIC AN D, THUS NOT CONSIDERED FOR ADJUDICATION. IN THE REMAINING SEVEN GROUNDS, THE ESSENCE AND CRUX OF THE ISSUES CAN, AT BEST, BE REFORMULATED, IN A CONC ISE MANNER, AS UNDER: (I) THE DELETION OF ADDITION OF RS.30.78 LAKHS BEING B AD DEBTS IN RESPECT OF DEBTOR V.S.GANESH BABU; & ITA NO.401 & 443/B/09 PAGE 3 OF 22 (II) DELETION OF ADDITION OF RS.17.59 LAKHS BEING DIFFER ENCE IN PARTIES ACCOUNTS . 4. BOTH OF THESE APPEALS ARE DIRECTED AGAINST THE ORDER OF THE CIT (A) AND AS THE ISSUES RAISED ARE MORE OR LESS I NTER-CONNECTED, FOR THE SAKE OF CONVENIENCE, THEY ARE CONSIDERED TOGETHER A ND DISPOSED OFF IN THIS COMMON ORDER. I. ITA NO.401 (BY THE ASSESSEE) : 5. THE FIRST EFFECTIVE GROUND IS WITH REGARD TO BAD DEBTS CLAIMED IN RESPECT OF THE FOLLOWING PARTIES HAVE BE EN TURNED DOWN BY THE LD.CIT(A): (I) ANNAPURNESHWARI POULTRY FARM RS. 57803 (II) C. ANNAIAH & CO RS. 97907 (III) PALANIANDAVAR FEEDS PVT. LTD. R S.104397 (IV) RATNA POULTRY FARM RS. 507 54 5.1. THE AOS STAND WAS THAT NONE OF THE DEBTORS H AVE ADMITTED THAT ANY SUCH DEBTS WERE DUE FROM THEM. THOUGH TH E SAID PARTIES HAVE ADMITTED THAT THEY HAVE MADE BUSINESS WITH THE ASSE SSEE, BUT, THEY HAVE PAID UP ALL THE TRANSACTIONS. HOWEVER, IT WAS CONTE NDED BY THE ASSESSEE BEFORE THE CIT (A) THAT 1.2. NORMALLY DEBTORS RENEGOTIATE PRICE AT THE TIME OF PAYMENT, CITING VARIOUS REASONS VIZ., QUALITY OF TH E PRODUCT/TIMELINESS OF DELIVERY ETC., APPELLANT ACCO MMODATES SUCH REQUESTS BY PROVIDING DISCOUNTS FROM THE BILLS. IN SOME CASES, DEBTORS MAKE PAYMENTS WITHIN THE STIPULATE PERIOD O F TIME. TO ENCOURAGE SUCH GESTURE OF THE PARTIES, APPELLANT PR OVIDES DISCOUNT ON THE BILL AMOUNT. EVAPORATION LOSSES ARE NOT VER Y MUCH PART OF THIS TYPE OF INDUSTRY. DUE TO EVAPORATION NORMALLY THERE WILL BE ITA NO.401 & 443/B/09 PAGE 4 OF 22 QUANTITY DIFFERENCE AT THE TIME OF DELIVERY OF THE OIL/DE-OILED CAKES. SUCH DIFFERENCES ARE ADJUSTED BY WAY OF DEB IT NOTES RECEIVED FROM THE DEBTORS. SOMETIMES REBATE IS PRO VIDE FOR QUANTITY DIFFERENCES. INVARIABLY THEREFORE, HE AMO UNT REALIZED BY THE APPELLANT WILL NOT MATCH WITH THE BILLS RAISED BY HIM. THIS DIFFERENCE GETS ACCUMULATED OVER A PERIOD OF TIME. IT IS ONLY SUCH DIFFERENCE THAT THE ASSESSEE HAS WRITTEN OFF IN THE BOOKS OF ACCOUNTS. 1.3. AS REGARDS BOOKS OF ACCOUNTS OF THE PARTIES (TRADE DEBTORS) IS CONCERNED, THEY DO NOT MACH WITH THE ASSESSEES BOOKS OF ACCOUNT SINCE THEY WOULD HAVE ACCOUNTED ACTUAL AMOU NT PAID TO THE ASSESSEE AS THEIR PURCHASE PRICE. IT IS EVIDEN T FROM THE ABOVE JOURNAL ENTRIES PASSED IN ASSESSEES BOOKS OF ACCOU NT THAT ASSESSEE WOULD HAVE OFFERED INCOME IN RESPECT OF SALE EFFECT ED IN EARLIER YEARS WITHOUT REALIZATION OF THE ENTIRE AMOUNT. TH E DIFFERENCES ARISING IN THE PARTYS ACCOUNT DUE TO THE REASONS M ENTIONED ABOVE ARE WRITTEN OFF PERIODICALLY. 5.1.2. AFTER DUE CONSIDERATION OF THE ASSESSEES P LEA, THE CIT (A) WAS OF THE FIRM VIEW THAT THE ASSESSEE COMPANY HAD AGREED WITH THE STATEMENTS OF THESE PARTIES THAT THERE WERE NO DUES AS DISCOUNTS GIVEN OVER A PERIOD OF TIME HAD RESULTED IN DEBIT BALANCE WHICH WAS SOUGHT TO BE WRITTEN OFF THIS YEAR. HOWEVER, THE PLEA OF THE AS SESSEE THAT THE DISCREPANCY IN ACCOUNTS WAS ON ACCOUNT OF DISCOUNTS WAS NOT BACKED UP WITH ANY EVIDENCE. THE FACT REMAINS THAT THOSE PAR TIES HAVE DENIED THE FACTUM OF DEBT AND THE ASSESSEE HAD NOT LED ANY EVI DENCE IN REBUTTAL TO SHOW THAT THE ACTUAL TRANSACTION WAS WHAT WAS CLAIM ED BY IT. THE EXISTENCE OF THE DEBT ITSELF WAS IN DOUBT AND AS SU CH THE CLAIM OF BAD DEBTS IN RESPECT OF THE ABOVE PARTIES WAS RIGHTLY DISALLO WED BY THE AO. 5.2. DURING THE COURSE OF HEARING BEFORE US, THE L D. A RS SUBMISSION REVOLVED AROUND WHAT WAS REITERATED BEFO RE THE FIRST APPELLATE ITA NO.401 & 443/B/09 PAGE 5 OF 22 AUTHORITY. STRONG RELIANCE WAS PLACED ON THE CBDTS CIRCULAR NO.551 DATED 23.1.1990. THE LD. A R ALSO FURNISHED A PAPER BOOK CONTAINING 1 78 PAGES WHICH CONSISTS OF, INTER ALIA, COPY OF CIRCUL AR NO.551, COPIES OF LEDGER EXTRACT, COPIES OF DEMAND DRAFTS ETC., 5.2.1. ON THE PART OF THE LD. D.R., SHE WAS EMPHAT IC IN HER APPROACH THAT THE AO HAD DELIBERATED THE ISSUE IN D EPTH, BESIDES DRAWING STRENGTH FROM THE LEGAL PRECEDENTS LAID DOWN BY THE HONBLE HIGH COURTS OF MADRAS AND GUJARAT TO JUSTIFY IN ADDING BACK THE AS SESSEES CLAIM TO ITS INCOME. SINCE THE AOS ACTION HAS ALSO BEEN RATIFI ED BY THE CIT (A), IT WAS PLEADED THAT THE STAND OF THE LOWER AUTHORITIES BE SUSTAINED. 5.2.2. WE HAVE DULY CONSIDERED THE RIVAL SUBMISSIO NS AND ALSO CAREFULLY PERUSED THE RELEVANT RECORDS. WE HAVE AL SO PERUSED THE CBDTS CIRCULAR REFERRED SUPRA ON WHICH THE ASSESSEE COMPA NY HAS PLACED RELIANCE TO DRIVE HOME ITS POINT. THE RELEVANT POR TION OF WHICH IS EXTRACTED HERE BELOW, FOR READY GLANCE: 6.6. THE OLD PROVISIONS OF CLAUSE (VII) OF SUB-SE CTION (1) READ WITH SUB-SECTION (2) OF SECTION LAID DOWN CONDITION S NECESSARY FOR ALLOWABILITY OF BAD DEBTS. IT WAS PROVIDED THAT TH E DEBT MUST BE ESTABLISHED TO HAVE BECOME BAD IN THE PREVIOUS YEAR . THIS LED TO ENORMOUS LITIGATION ON THE QUESTION OF ALLOWABILIT Y OF BAD DEBTS IN A PARTICULAR YEAR, BECAUSE THE BAD DEBTS WAS NOT NECE SSARILY ALLOWED BY THE ASSESSING OFFICER IN THE YEAR WHICH THE SAME HAD BEEN WRITTEN OF ON THE GROUND THAT THE DEBT WAS NOT ESTABLISHED TO HAVE BECOME BAD IN THAT YEAR. IN ORDER TO ELIMINATE THE DISPUTES IN THE MATTER OF DETERMINING THE YEAR IN WHICH A BAD DEBT CAN BE ALL OWED AND ALSO TO RATIONALIZE THE PROVISIONS, THE AMENDING ACT, 1987 HAS AMENDED CLAUSE (VII) OF SUB-SECTION (1) AND CLAUSE (I) OF S UB-SECTION (2) OF THE SECTION 36 TO PROVIDE THAT THE CLAIM FOR BAD DEBT W ILL BE ALLOWED IN THE YEAR IN WHICH SUCH A BAD DEBT HAS BEEN WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE. ITA NO.401 & 443/B/09 PAGE 6 OF 22 6.7. CLAUSES (III) AND (IV) OF SUB-SECTION (2) OF THE SECTION 36 PROVIDED FOR ALLOWING DEDUCTION FOR A BAD DEBT IN A N EARLIER OR LATER PREVIOUS YEAR, IF THE INCOME-TAX OFFICER WAS SATISF IED THAT THE DEBT DID NOT BECOME BAD IN THE YEAR IN WHICH IT WAS WRIT TEN OFF BY THE ASSESSEE. THESE CLAUSES HAVE BECOME REDUNDANT, AS THE BAD DEB TS ARE NOW BEING STRAIGHTWAY ALLOWED IN THE YEAR OF WR ITE OFF. THE AMENDING ACT, 1987, HAS, THEREFORE, AMENDED THESE C LAUSES WITHDRAW THEM AFTER THE ASSESSMENT YEAR 1988-89 5.2.3. AT THE OUT-SET, WE ARE OF THE FIRM VIEW THA T THE AMENDED CLAUSES REFERRED SUPRA HAVE BEEN BROUGHT ON THE STA TUTE AFTER DELIBERATING THE ISSUE PROS AND CONS IN DEPTH. THE INTENT OF TH E LEGISLATION, IN OUR UNANIMOUS OPINION, WAS TO REMOVE AND TO ELIMINATE T HE DISPUTES AND ALSO TO MITIGATE THE VIGOUR OF THE OLD PROVISIONS OF CLA USES REFERRED SUPRA. FURTHERMORE, THE ERSTWHILE CLAUSE (VII) OF SUB-SECTION (1) READ WITH SUB- SECTION (2) OF SECTION LAID DOWN CONDITIONS NECESSA RY FOR ALLOWABILITY OF BAD DEBTS HAS SINCE BEEN REMOVED FROM THE STATUTE CONSEQUENT TO THE DIRECT TAX LAWS (AMENDMENT)ACT, 1987, THE ASSESSING AUTHOR ITY HAS NO LOCUS- STANDI WHATSOEVER TO PENETRATE INTO THE ISSUE AS DI D IN THE PRESENT CASE. THE AMENDED PROVISION ENTAILS THE ASSESSING AUTHORI TY TO ENSURE THAT WHETHER THE BAD DEBT HAS BEEN WRITTEN OFF IN THE AS SESSEES BOOKS OF ACCOUNT DURING THE PREVIOUS YEAR AND IF SO, IT HAS TO BE ALLOWED, WITHOUT OVER-STEPPING ON THE ISSUE. IF WERE TO BE PROBED FURTHER TO FIND OUT, WHETHER THE BAD DEBT HAS BECOME BAD OR OTHERWISE, W E ARE OF THE CONSIDERED VIEW THAT THE VERY PURPOSE FOR WHICH THE INTENTION OF THE LEGISLATURE TO BRING SUCH AN AMENDMENT TO THE EXIST ING PROVISION(S) WOULD BE DEFEATED. 5.2.4. IN OVER ALL CONSIDERATION OF THE ISSUE AND ALSO DRAWING STRENGTH FROM THE FINDINGS OF THE HONBLE HIGH COUR TS (I) IN THE CASE OF CIT V. ITA NO.401 & 443/B/09 PAGE 7 OF 22 STAR CHEMICALS (BOMBAY) P. LTD. REPORTED IN (2009) 313 ITR 126 (BOM); (II) LAWLYS ENTERPRISES P. LTD. V. CIT REPORTED IN (2009) 314 ITR 297 (PATNA); AND (III) SURESH GAGGAL V. ITO REPORTED IN (2009) 222 CTR (HP) 96, WE ARE OF THE UNANIMOUS VIEW THAT THE ACTIONS OF LOWER AUTHORITIES ARE NOT IN CONFORMITY WITH THE AMENDED PROVISIONS O F THE ACT. IT IS ORDERED ACCORDINGLY. 6. THE SECOND EFFECTIVE GROUND IS IN RESPECT OF CONFIRMING THE DISALLOWANCE OF RS.2731483/- BEING THE PAYMENTS MAD E THROUGH UNCROSSED DEMAND DRAFTS. 6.1. ON A SPECIFIC REQUEST FROM THE AO, THE ASSESS EE HAD FURNISHED CONFIRMATION LETTERS FROM THE SUPPLIERS F ROM CHALLAKERE. ON BEING FOUND SOME DEFECTS IN THOSE CONFIRMATORY LETTERS, T HE ASSESSEE WAS ASKED TO PRODUCE THOSE PARTIES, FOR WHICH, THE ASSESSEE, INSTEAD OF PRODUCING THOSE PARTIES, EXPLAINED THAT THE PURCHASES WERE MA DE THROUGH BROKERS AND THE PAYMENTS WERE MADE THROUGH BANKING CHANNELS . BEING NOT SATISFIED WITH THE GENUINENESS OF THE TRANSACTIONS AND ALSO THE TAX AUDIT REPORT HAD NOT GIVEN A CLEAN CHIT WITH REGARD TO AL L PAYMENTS MADE IN ACCORDANCE WITH THE PROVISIONS OF S. 40A(3) OF THE ACT, THE AO HAD RESORTED TO MAKE DISALLOWANCE U/S 40A(3) OF THE ACT IN RESPE CT OF 20% OF THE PAYMENTS MADE TO SIX PARTIES OF CHALLAKERE. 6.1.2. IT WAS CONTENDED BEFORE THE CIT (A) THAT IN THE SHOW-CAUSE NOTICE DT: 7.12.07 OF THE AO, THERE WAS NO MENTION OF DISALLOWANCE U/S 40A (3) OF THE ACT AND CONSEQUENTIAL IMPACT OF SUCH DIS ALLOWANCE. AFTER RECORDING THE REASONS, THE CIT (A) HAD ADMITTED THE ADDITIONAL EVIDENCE OF ITA NO.401 & 443/B/09 PAGE 8 OF 22 THE ASSESSEE TO THE EFFECT THAT ALL PAYMENTS WERE M ADE BY ACCOUNT PAYEE CHEQUES. THE AO, IN HIS REMAND REPORT, HAD INFORME D THAT, ON AN INQUIRY WITH THE BANK AUTHORITIES, THE DEMAND DRAFTS TO THE EXTENT OF RS.1,36,57,416/- [VAISHNAVI OIL TRADERS OF RS.10451 051/-; LAXMI TRADING CO. RS.715294/- AND RATNA TRADERS RS.2491071] WERE FOUND TO BE UNCROSSED, AND FOR THE CONTRAVENTION OF S.40A(3), R S.2731483/- WAS DISALLOWED BEING 20% OF RS.1.36 CRORES. 6.1.3. THE CONTENTIONS OF THE ASSESSEE COMPANY ARE VERY EXHAUSTIVE AND ELABORATE AND FOR THE SAKE OF CONVEN IENCE AND CLARITY, THEY ARE SUMMARIZED IN A CONCISE MANNER: (I) AS REQUIRED BY THE AO, SPECIFIC CERTIFICATES FROM T HE BANKER(S) TO THE EFFECT THAT PAYMENTS MADE TO CHALLAKERE PARTIES MADE THROUGH ACCOUNT PAYEE CHEQUES/DDS WERE FURNISHED; (II) AOS OBSERVATIONS THAT DDS ISSUED BY SBI, CITY MARK ET BR., BANGALORE AND SBM, S.R.PATNA BRANCH WERE UNCROSSED WE HAVE ALWAYS ENSURED THAT I (WE) HAVE ISSUED ONLY ACCOUNT PAYEE CHEQUES. SUPPLIERS GENERALLY REQUIRE DD AS THE REA LIZATION OF IT IS QUICK. IT MIGHT HAVE BEEN POSSIBLE THAT SOMETIMES BANKER WOULD HAVE GIVEN UNCROSSED DDS WHICH MIGHT NOT HAVE COME TO OUR NOTICE. THE SUPPLIERS HAVE CONFIRMED THAT UNCROSSE D DDS WERE DEPOSITED IN THEIR BANK ACCOUNTS; (III) ON AN ENQUIRY WITH THE BANKERS WHETHER THE AMOUNTS HAVE BEEN CREDITED TO THE ACCOUNTS OF THE SUPPLIERS OR WERE E NCASHED, THEY HAVE PROVIDED ONLY LIMITED INFORMATION, CONFIRMING THAT THE PAYMENTS WOULD HAVE BEEN CREDITED TO THE PARTIES AC COUNT SINCE THE RUBBER STAMP AFFIXED ON ALL THE DDS MENTION THE WORD TRANSFER THEREBY THE AMOUNTS WOULD HAVE BEEN CRED ITED TO THE BANK ACCOUNTS OF THE PARTIES CONCERNED AND IF THE D DS WERE ENCASHED IN CASH, THE STAMP WOULD HAVE BEEN CASH IN STEAD OF TRANSFER. BANKERS HAVE DECLINED TO REVEAL WHETHER THE PAYMENTS HAVE BEEN CREDITED TO THE SUPPLIERS ACCOUNT ONLY, C ITING BANKING REGULATIONS ACT; (IV) RELIED ON THE FINDING OF THE HONBLE TRIBUNAL IN TH E CASE OF SRI RENUKESHWARA RICE MILL V. ITO REPORTED IN 93 ITD 26 3; ITA NO.401 & 443/B/09 PAGE 9 OF 22 (V) INTERNAL INSTRUCTIONS FOR THE BANKERS WHICH STIPULA TE THAT ANY AMOUNT IN EXCESS OF RS.50000 WILL BE CREDITED TO TH E PAYEES ACCOUNT ONLY AND NO CASH IN EXCESS OF RS.50000 IS G IVEN ACROSS THE COUNTER IN RESPECT OF DDS ABOVE RS.50000 EVEN I F IT IS UNCROSSED; (VI) AS VOUCHED BY THE AO, 90% DDS ISSUED BY THE ASSESSE E TO DHANALAXMI COMMERCIALS, CHALLAKERE WAS FROM HDFC BA NK WHO HAVE PLEADED INABILITY TO CERTIFY THAT ALL THE DDS PURCHASED FROM THEM WERE CREDITED IN PAYEES ACCOUNTS ONLY SINCE DD S WERE WITH THE PAYEES BANKER AND SUCH CERTIFICATES CAN BE PROV IDED BY THE PAYEE BANKERS WHO HAVE REFUSED TO PROVIDE SUCH CERT IFICATES; (VII) AFTER INQUIRY, THE BANKER IDENTIFIED THAT THOUGH SO ME OF THE DDS WERE UNCROSSED, THEY HAVE BEEN DEPOSITED INTO PAYEE S ACCOUNT; (VIII) HDFC BANK ALSO PROVIDED CERTIFICATE STATING THAT TH E DDS ISSUED FROM THE ACCOUNT OF THE ASSESSEE WERE CROSSED DDS O NLY; (IX) BANK LETTERS FROM (A) HDFC BANK LTD.,SARASWATHIPURA M, MYSORE; (B) STATE BANK OF INDIA, COMMERCIAL BRANCH, MYSORE; (C) SBI, CITY MARKET BRANCH, BANGALORE AND LETTER FROM SBM, CHALLAKERE TO SBI, SJP ROAD, BANGALORE, CONFIRMING THAT THE PA YMENTS TOWARDS UNCROSSED DDS HAVE BEEN ROUTED THROUGH PAYE ES ACCOUNT ONLY; 6.1.4. THE AOS REBUTTAL TO THE ASSESSEE COMPANYS CONTENTIONS IS AS UNDER: (I) THE GENUINENESS OF TRANSACTION WAS NOT MATERIAL FOR DECIDING THE ISSUE OF S.40A(3) DISALLOWANCE AND S.40A(3) WIL L NOT APPLY WHERE UNCROSSED DDS WERE CREDITED TO BANK ACC OUNTS AND NOT PAID BY CASH IS NOT VALID, CONSIDERING THE PROVISIONS OF S.40A(3) AND RULE 6DD; (II) IN ORDER TO ESCAPE FROM THE MISCHIEF OF S.40A(3), T HE ASSESSEE WAS LEGALLY BOUND TO FILE THE EVIDENCE IN SUPPORT O F PAYMENTS EXCEEDING RS.20000/- MADE BY CROSSED CHEQUE/DD EITH ER ALONG WITH R/I ITSELF OR DURING THE COURSE OF ASSES SMENT PROCEEDINGS; (III) EXCEPT HDFC BANK, ALL OTHER BANKS, SBI, COMMERCIAL BRANCH, MYSORE, SBI, CITY MARKET BR., BANGALORE, SB M, S.R.PATNA AND SBI, MANDYA HAVE FAILED TO CERTIFY WH ETHER THE CHEQUES/DDS ISSUED BY THE ASSESSEE COMPANY WERE CRO SSED OR NOT AND ALSO IN THE CASE OF UNCROSSED CHEQUES WH ETHER THE PAYMENTS WERE MADE IN CASH OR NOT; ITA NO.401 & 443/B/09 PAGE 10 OF 22 (IV) NO CONFIRMATION WHETHER THE CHEQUES/DDS ISSUED TO CHALLAKERE PARTIES WERE CROSSED OR NOT; (V) THERE WAS NO MATERIAL CHANGE AS TO THE FACTS OF TH E CASE I.E., THE ASSESSEE HAD MADE CERTAIN PAYMENTS EXCEEDING RS.20000/- BY WAY OF UNCROSSED CHEQUES/DDS TO CERTA IN CHALLAKERE PARTIES AND THEREBY CONTRAVENED THE PROV ISIONS OF S.40A(3) OF THE ACT; (VI) THE ASSESSEE HAD FAILED TO OBTAIN CERTIFICATES OF T HE BANK AUTHORITIES IN RESPECT OF ALL THE PAYMENTS MADE TO CHALLAKERE PARTIES. IN RESPECT OF CHEQUES/DDS ISSUED BY SBI, CITY MARKET BRANCH, BANGALORE, SBM, SR PATNA AND SBI, MANDYA, THE ASSESSEE COULD NOT PRODUCE EVIDENCE FOR HAVING ISSUED CROSSED DDS/CHEQUES; 6.1.5. AFTER HAVING GIVEN DUE WEIGHT-AGE TO THE FO RCEFUL SUBMISSIONS OF EITHER PARTY, THE CIT (A) WENT AHEAD WITH THE DISALLOWANCES U/S 40A (3) TO THE EXTENT OF RS.27314 83/-, CITING THE FOLLOWING REASONING: (I) INITIALLY THE ASSESSEE COMPANY HAD FURNISHED BANK CERTIFICATES TO THE EFFECT THAT ALL THE DDS WERE CROSSED, HOWEVE R, ON EXAMINATION, HAD TURNED OUT TO BE QUITE CONTRARY, A S MANY DDS WERE FOUND TO BE UNCROSSED; (II) THE ASSESSEE CAME UP A FRESH CERTIFICATES FROM THE BANKS AFFIRMING THAT THE SO CALLED DDS WERE EITHER ROUTED THROUGH THE ACCOUNT(S); (III) IN THE CASE OF DDS FAVOURING RATHNA TRADERS, THE DR AFTS WERE PRESENTED BY ING VYSYA BANK AND, THEREFORE, PRESUMA BLY ROUTED THROUGH BANK ACCOUNT. HOWEVER, NO SUPPORTIN G EVIDENCE WAS PRODUCED INCLUDING CORRELATION BETWEEN THESE DDS AND THE BANK ACCOUNTS OF THE PAYEES; (IV) THE EVIDENCES FURNISHED WERE INCONCLUSIVE; (V) SINCE THE PURPOSE OF CROSSING DDS IS ONLY TO HAVE T HEM PAID THROUGH BANK ACCOUNTS, THERE WAS INCONCLUSIVE EVIDE NCE TO SHOW THAT THE PAYMENTS HAVE ACTUALLY BEEN MADE THRO UGH BANK ACCOUNTS; (VI) SINCE THE BREACH OF S.40A(3) BY PAYMENTS THROUGH UN CROSSED DDS WAS ESTABLISHED IN RESPECT OF IMPUGNED DDS, THE ONUS WAS ON THE ASSESSEE TO SHOW THAT THE PAYMENTS WERE INDEED THROUGH BANK ACCOUNTS AND NOT THE AO. ITA NO.401 & 443/B/09 PAGE 11 OF 22 7. AGGRIEVED, THE ASSESSEE COMPANY HAS COME UP WIT H THE PRESENT APPEAL. THE LD.A.R REITERATED MORE OR LESS WHAT WAS PUT-FORTH BEFORE THE FIRST APPELLATE AUTHORITY. IN CONCLUSION , IT WAS ASSERTED THAT THERE WAS NO JUSTIFICATION ON THE PART OF EITHER THE AO O R THE CIT (A), IN DISALLOWING THE LEGITIMATE CLAIM OF THE ASSESSEE CO MPANY WHICH MAY BE DELETED. 7.1. ON THE OTHER HAND, THE LD. D R WAS OF THE FIR M VIEW THAT THERE WAS A CLEAR CASE OF CONTRAVENTION OF THE PROVISIONS OF SECTION 40A(3) OF THE ACT WHICH HAS BEEN BROUGHT OUT ON RECORD/IMPUGNED O RDER IN A JUDICIOUS MANNER BY THE AO WHICH REQUIRES TO BE UPHELD. 8. WE HAVE CAREFULLY GONE THROUGH THE RIVAL SUBMIS SIONS AND ALSO PERUSED THE IMPUGNED ORDERS. IT WAS THE CASE OF THE REVENUE THAT PAYMENTS TO THE TUNE OF RS.1.36 CRORES WERE MADE TO SOME OF CHALLAKERE PARTIES THROUGH UNCROSSED DEMAND DRAFTS. BEING QU ERIED, THE ASSESSEE COMPANY HAD, INITIALLY, FURNISHED BANK CERTIFICATES TO THE EFFECT THAT ALL THE DDS WERE CROSSED, HOWEVER, ON EXAMINATION, HAD TURN ED OUT TO BE QUITE CONTRARY, AS MANY DDS WERE FOUND TO BE UNCROSSED. INSTEAD OF FURNISHING SATISFACTORY INFORMATION WITH REGARD TO THE PAYMENT S BY MEANS OF UNCROSSED DDS, THE ASSESSEE COMPANY CAME UP WITH A THEORY THAT THE BANKS AFFIRMING THAT THE SO CALLED DDS WERE EITHER ROUTED THROUGH THE ACCOUNT(S) AND EVEN IN THE CASE OF DDS FAVOURING RA THNA TRADERS, THE DRAFTS WERE PRESENTED BY ING VYSYA BANK AND, THEREF ORE, PRESUMABLY ROUTED THROUGH BANK ACCOUNT. HOWEVER, AS RIGHTLY P OINTED OUT BY THE CIT (A), NO SUPPORTING EVIDENCE WAS PRODUCED INCLUDING CORRELATION BETWEEN ITA NO.401 & 443/B/09 PAGE 12 OF 22 THOSE DDS AND THE BANK ACCOUNT OF THE PAYEE. ON A PERUSAL OF THE CONTENTIONS OF THE ASSESSEE COMPANY, ONE COULD DRAW AN IMPRESSION THAT THE ASSESSEE COMPANY HAS BEEN TRYING TO IMPRESS UPO N THE REVENUE THAT THE PAYMENTS MADE THROUGH BANKING CHANNELS. HOWEVE R, IT HAD FAILED TO COME UP WITH A STRAIGHT ANSWER TO A POINTED QUESTIO N THAT WHY PAYMENTS HAVE NOT BEEN MADE THROUGH CROSSED DDS/ACCOUNT PAYE E CHEQUES ETC. 8.1. SECTION 40A(3) IS VERY SPECIFIC THAT WHERE THE ASSESSEE INCURS ANY EXPENDITURE IN RESPECT OF WHICH PAYMENT IS MADE IN A SUM EXCEEDING TWENTY THOUSAND RUPEES OTHERWISE THAN BY AN ACCOUNT PAYEE CHEQUE DRAWN ON A BANK OR ACCOUNT PAYEE BANK DRAFT, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF SUCH EXPENDITURE . EVEN RULE 6DD EMPHASIS [PRIOR TO ITS SUBSTITUTION BY THE IT(ENGLI SH AMDT.) RULES 2007, W.E.F. A.Y 2008-09] THAT 6DD. CASES AND CIRCUMSTANCES IN WHICH PAYMENT IN A SUM EXCEEDING TWENTY THOUSAND RUPEES M AY BE MADE OTHERWISE THAN BY AN ACCOUNT PAYEE CHEQUE DRAWN ON A BANK OR ACCOUNT PAYEE BANK DRAFT.- . 8.1.1. WE QUOTE FROM THE ASSESSEE COMPANYS OWN VE RSION THAT , ..GENERALLY, I SIGN A YOURSELF CHEQUE FOR PUR CHASING DD FROM THE BANK. MY ACCOUNTANT TENDERS YOURSELF CHE QUE SIGNED BY ME IN THE BANK TO PURCHASE THE DD. IT MIGHT HAVE BEEN POSSIBLE THAT SOMETIMES BANK WOULD HAVE GIVEN UNCROSSED DD WHICH MIGHT NOT HAVE COME TO OUR NOTICE.. . WE WOULD HAVE CONCEDED TO THE ASSESSEE COMPANYS REASONING, HAD IT BEEN AN ISOLAT ED INSTANCE ITA NO.401 & 443/B/09 PAGE 13 OF 22 WHEREIN THE BANK WOULD HAVE GIVEN UNCROSSED DD ONCE OR EVEN FOR THAT MATTER TWICE, BUT, CERTAINLY NOT ALL THE TIME BY THE DIFFERENT BANKS. TO OUR SURPRISE, THE ASSESSEE COMPANY HAD OBTAINED A NUMBER OF UNCROSSED DDS (FROM DIFFERENT BANKS) TO THE TUNE OF RS.1.36 CRORES. THE LAME EXCUSE OF THE ASSESSEES VERSION THAT BANK WOULD HAVE GIVEN UNCROSSED DD WHICH MIGHT NOT HAVE COME TO OUR NOTICE IS, TO PUT IT MILDLY, HARDLY CONVINCING. AS HIGHLIGHTED BY TH E CIT(A), SINCE THE BREACH OF S.40A(3) BY PAYMENTS THROUGH UNCROSSED DD S WAS ESTABLISHED IN RESPECT OF IMPUGNED DDS, THE ONUS WA S ON THE ASSESSEE COMPANY WHO HAD FAILED TO DISCHARGE ITS OB LIGATION FOR HAVING CONTRAVENED THE PROVISIONS OF S.40A(3). IN AN OVER ALL CONSIDERATION OF THE FACTS AS NARRATED SUPRA, WE HAVE NO RESERVATION IN UPHOLDING THE ACTIONS OF THE LOWER AUTHORITIES IN TOTO ON THIS COUNT. 9. THE THIRD EFFECTIVE GROUND OF THE ASSESSEE COMPANY IS WITH REGARD TO THE CONFIRMING THE DISALLOWANCE OF RS.768 210/- BEING FREIGHT PAYMENTS MADE IN VIOLATION OF S.40A (3) OF THE ACT BY THE CIT (A). 9.1. ON A PERUSAL OF THE IMPUGNED ORDER OF THE AO, WE COULD NOT FIND ANY SPECIFIC DISALLOWANCE BEING FREIGHT PAYMENTS MADE IN VIOLATION OF S.40A (3) OF THE ACT. HOWEVER, AS COULD BE SEEN FRO M THE IMPUGNED ORDER WHICH IS IN DISPUTE (ON PAGE 22), THE LD. CIT (A) T OOK UP THIS ISSUE, PERHAPS, ON THE STRENGTH OF THE AOS REPORT DATED: 12.12.2008 WHICH IS EXTRACTED AS UNDER: ITA NO.401 & 443/B/09 PAGE 14 OF 22 [PAGE 22 OF CITS ORDER]IN HIS REPORT DATED 1 2.12.2008, HOWEVER, THE AO HAS POINTED OUT FURTHER BREACH OF S EC.40A(3) AS UNDER IN RESPECT OF PAYMENT OF FREIGHT CHARGES: 1. FREIGHT CHARGES PAID TO VAISHNAVI OIL TRADERS R S. 450965 2. PAYMENTS TO LAXMI TRADING CO. 2507102 3.PAYMENTS TO RAJALAXMI COMMERCIALS 541581 4.PAYMENTS TO RATNA TRADERS 267360 5.PAYMENTS TO DHANALAXMI COMMERCIALS 74090 TOTAL 3841098 20% THEREOF 768210 9.1.1. AFTER DUE CONSIDERATION OF THE ASSESSEES R EJOINDER TO THE AOS LETTER CITED SUPRA, THE CIT(A), FOR THE REASON S SET-OUT IN THE IMPUGNED ORDER, HELD THAT THE PAYMENT OF FREIGHT CH ARGES IN EXCESS OF RS.20000/- IS DISALLOWABLE U/S 40A(3). 9.1.2. AT THE OUTSET, IT IS PERTINENT TO MENTION H ERE THAT NEITHER THE FREIGHT CHARGES NOR OTHER PAYMENTS MADE TO CHAL LAKERE PARTIES AMOUNTING TO RS.38.41 LAKHS OR THE SO CALLED 20% TH EREOF OF RS.7.68 LAKHS IS FINDING A PLACE IN THE IMPUGNED ORDER OF T HE AO. EVEN ON A PERUSAL OF THE GROUNDS OF APPEAL OF THE ASSESSEE CO MPANY RAISED BEFORE THE CIT (A), WE FIND NO SUCH A GROUND. IN TO TALITY OF THE SITUATION AND IN THE INTEREST OF JUSTICE AND EQUITY, WE ARE O F THE UNANIMOUS VIEW THAT THIS ISSUE SHOULD BE REMANDED BACK ON THE FILE OF THE AO FOR FRESH CONSIDERATION. HE IS, FURTHER, DIRECTED TO CONSIDE R THE ISSUE AFRESH AND FRAME HIS FINDINGS BY WAY OF A SPEAKING ORDER IN AC CORDANCE WITH LAW, AFTER PROVIDING A REASONABLE OPPORTUNITY TO THE ASS ESSEE COMPANY OF BEING HEARD. IN THE MEANTIME, THE ASSESSEE COMPANY THROUGH ITS A.R IS ADVISED TO FURNISH ALL RELEVANT PARTICULAR S IN A COMPREHENSIVE ITA NO.401 & 443/B/09 PAGE 15 OF 22 MANNER WHICH WOULD FACILITATE THE AO TO LOOK INTO T HE ISSUE IN ITS ENTIRETY. IT IS ORDERED ACCORDINGLY. II. ITA NO.443 (BY THE REVENUE) : 10. THE FIRST EFFECTIVE GROUND OF THE REVENUE IS WITH REGARD TO THE DELETION OF ADDITION OF RS.30.78 LAKHS BEING BAD DEBTS IN RESPECT OF DEBTOR, V.S.GANESH BABU. 10.1. THE ISSUE, IN BRIEF, IS THAT THE ASSESSEE CO MPANY, AMONG OTHERS, HAD CLAIMED RS.3078847/- AS BAD DEBT IN THE CASE OF V.S.GANESH BABU, BY DEBITING THE SAME TO THE P & L ACCOUNT. THE DEBTOR, GANESH BABU HAD DISPUTED WITH THE ASSESSEE S VERSION OF RECOVERABILITY OF HIS DEBT AS HE CONTENDED THAT HE HAD NEVER DECLARED OR COMMUNICATED TO THE ASSESSEE THAT HE WAS NOT IN A POSITION TO DISCHARGE HIS LIABILITY. IN THE MEANWHILE, THE ASS ESSEE COMPANY HAD FILED A CASE IN THE CIVIL COURT, SRIRANGAPATNA UNDE R THE NEGOTIABLE INSTRUMENT ACT AS THE CHEQUES ISSUED BY GANESH BABU WERE DISHONOURED FOR PAUCITY OF FUNDS IN HIS ACCOUNT AND THE CASE WAS STILL PENDING FOR FINALIZATION. IN HIS STATEMENT, GANES H BABU HAD ACKNOWLEDGED THAT HE WAS STILL SHOWING THE LIABILIT Y IN HIS BOOKS OF ACCOUNT AS A VALID LIABILITY AND THE ASSESSEE WAS S TILL PURSUING THE RECOVERY OF THE DUES THROUGH COURT AND THAT THE ASS ESSEES STAND TO TREAT THE DEBT AS BAD DEBT WAS ONE SIDED WITHOUT AN Y WRITTEN CONSENT FROM HIM. AFTER CONSIDERING THE ASSESSEES VERSION , THE AO TOOK A STAND THAT THE ASSESSEE COMPANY HAD NOT FULFILLED A LL THE CONDITIONS ITA NO.401 & 443/B/09 PAGE 16 OF 22 WHICH WERE REQUIRED BEFORE RESORTING TO WRITING OFF OF BAD DEBT IN ITS BOOKS OF ACCOUNT. 10.1.1. THIS WAS AGITATED BY THE ASSESSEE COMPANY BEFORE THE LD. CIT (A). AFTER DUE CONSIDERATION OF THE CONTENTIONS AND ALSO THE CASE LAWS ON WHICH THE ASSESSEE COMPANY HA D PLACED STRONG RELIANCE AND ALSO DISTINGUISHING THE CASE LAWS ON W HICH THE AO DREW STRENGTH, THE CIT(A) WAS OF THE FIRM VIEW THAT, IT CANNOT BE SAID THAT THE ASSESSEES JUDGMENT IN WRITING OFF THE DEBT WAS NOT HONEST. AFTER ALL, THERE ARE NO FACTS TO SHOW (EXCEPT ACKNOWLEDGEMENT OF DEBT BY DEBTOR WHICH IS NOT SUFFICIENT FOR RECOVERY) THAT THE DEBT S CAN BE RECOVERED . HE WENT ON TO DELETE THE DISALLOWANCE MADE BY THE A O ON THIS COUNT. 11. BEFORE US, IT WAS CONTENDED BY THE REVENUE THA T (I ) THE DEBTOR HAD NOT YET GIVEN FINAL REPLY TO THE ASSESSE E COMPANY TO THE EFFECT THAT HE WILL NOT DISCHARGE HIS LIABILITY, (II) THE FACT THAT THE VERY BASIC PRE-REQUISITE TO WRITE OFF A DEBT IN ORDER TO CLAIM DEDUCTION U/S 36(1)(VII) OF THE ACT WAS TO ESTABLISH THE FACT THA T SUCH DEBT HAD BECOME BAD, HAD GIVEN A GO-BYE BY THE LD.CIT(A); AND (III) THE RATIOS LAID DOWN BY THE HONBLE HIGH COURTS IN THE CASES OF SOUTH IN DIA SURGICAL COMMITTEE LTD. V. ACIT [287 ITR 62 (MAD)] AND DHAL ENTERPRISES AND ENGINEER (P) LTD V. CIT [295 ITR 481 (GUJ)] HAVE BE EN OVERLOOKED BY THE CIT(A). FORCEFUL EMPHASIS WAS MADE IN THE FINDINGS OF THE H ONBLE COURTS REFERRED SUPRA AND PLEADED THAT THE ACTION O F THE CIT (A) IN DISALLOWING THE ADDITION MADE BY THE AO MAY BE ASSA ILED. ITA NO.401 & 443/B/09 PAGE 17 OF 22 11.1. ON THE OTHER HAND, THE LD. AR HAD REITERATED THE SUBMISSIONS MADE BEFORE THE FIRST APPELLATE AUTHORITY AND HE WA S IN FULL AGREEMENT WITH THE FINDING OF THE CIT (A) AND PLEADED THAT NO INTE RFERENCE IS CALLED FOR ON THIS POINT. 11.1.1. WE HAVE CAREFULLY CONSIDERED THE ARGUMENTS PUT-FORTH BY THE RIVAL PARTIES. BEFORE GOING INTO THE MATTER IN DETAIL, LET US NOW LOOK INTO THE ISSUE ON HAND. AS ADMITTED BY THE ASSESSE E COMPANY, THE COMPANY HAD FILED A CASE IN THE COURT OF THE CIVIL JUDGE, SRIRANGAPATNA U/S 138A OF THE NEGOTIABLE INSTRUMENT ACT [N.I.ACT] AS THE CHEQUES ALLEGED TO HAVE BEEN ISSUED BY THE ABOVE PARTY WERE DISHONO URED DUE TO PAUCITY OF FUNDS IN BANK ACCOUNT. IT IS VERY PERTINENT TO MEN TION HERE THAT THE ASSESSEE COMPANY HAD FILED A CASE UNDER N.I.ACT, BE ING THE CHEQUES WERE DISHONOURED. PURSUING THE CASE UNDER N.I.ACT IN TH E COURT TO ITS LOGIC CONCLUSION, IN OUR CONSIDERED VIEW, HAS NO NEXUS WI TH THE WRITING OFF THE DEBT AS IRRECOVERABLE. MOREOVER, GANESH BABUS ASS ERTION THAT HE WAS STILL SHOWING THE LIABILITY IN HIS BOOKS OF ACCOUNT AS A VALID LIABILITY DOES NOT HOLDS WATER, AS ALL POSSIBLE EFFORTS PURSUED BY THE ASSESSEE COMPANY FOR THE RECOVERY HAVE BECOME FUTILE. AFTER HAVING FAI LED TO RECOVER THE DUES FROM THE SAID PARTY, THE ASSESSEE COMPANY HAD, PERH APS, RESORTED TO WRITTEN OFF THE AMOUNT AS IRRECOVERABLE DEBT IN ITS BOOKS OF ACCOUNT DURING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR U NDER DISPUTE. 11.1.2. CIRCULAR NO.551 OF THE CBDT HAS COME TO T HE RESCUE OF THE ASSESSEE COMPANY FOR ITS STAND. THE RELEVAN T PORTION OF THE CIRCULAR IS EXTRACTED HEREUNDER: ITA NO.401 & 443/B/09 PAGE 18 OF 22 6.7. CLAUSES (III)AND (IV) OF SUB-SECTION (2) OF THE SECTION 36 PROVIDED FOR ALLOWING DEDUCTION FOR A BAD DEBT IN A N EARLIER OR LATER PREVIOUS YEAR, IF THE INCOME-TAX OFFICER WAS SATISF IED THAT THE DEBT DID NOT BECOME BAD IN THE YEAR IN WHICH IT WAS WRIT TEN OFF BY THE ASSESSEE. THESE CLAUSES HAVE BECOME REDUNDANT, AS THE BAD DEB TS ARE NOW BEING STRAIGHTWAY ALLOWED IN THE YEAR OF WR ITE OFF 11.1.3. WITH RESPECTS, WE HAVE DULY PERUSED THE CA SE LAWS REFERRED SUPRA, ON WHICH THE REVENUE WAS BANGING HE AVILY TO ITS FAVOUR. AS HIGHLIGHTED BY THE CIT (A), THE FINDING OF THE H ONBLE HIGH COURT OF GUJARAT WAS A GENERAL PROPOSITION WITH REGARD TO TH E ONUS OF THE ASSESSEE. WITH REGARD TO THE HONBLE MADRAS HIGH COURTS FIND ING, WE DUE REGARDS, WE OF THE CONSIDERED VIEW, IT STANDS ON A DIFFERENT FOOTING SINCE THE ASSESSEE SUPPLIED GOODS TO GOVERNMENT HOSPITALS AND OTHERS AND THE NON- PAYMENT OF DUES HAD RESULTED IN DUE TO PAUCITY OF A LLOCATED BUDGET TO GOVERNMENT HOSPITALS AND IN SPITE THAT THE ASSESSE E WAS CONTINUING ITS BUSINESS TRANSACTIONS WITH ALL DEBTORS. FURTHERMOST , THE DEBTOR BEING GOVERNMENT HOSPITALS, THE DEBT CANNOT BE CLASSIFIED AS BAD. 11.1.4. WE ARE ALSO DRAWING STRENGTH FROM THE FOLL OWING CASE LAWS WHICH ARE DIRECTLY ON POINT: (I) LAWLYS ENTERPRISES P.LTD. V.CIT REPORTED IN (2009) 314 ITR 297 (PATNA); (II) CIT V. STAR CHEMICALS (BOMBAY) P.LTD. (2009) 313 IT R 126 (BOM) & (III) SURESH GAGGAL V. ITO (2009) 222 CTR (H P) 96 11.1.5. IN OVER ALL FACTS AND CIRCUMSTANCES OF THE ISSUE, WE FIND NO JUSTIFICATION TO INTERFERE WITH THE FIND ING OF THE LD.CIT (A) ON THIS COUNT. IT IS ORDERED ACCORDINGLY. ITA NO.401 & 443/B/09 PAGE 19 OF 22 12. ANOTHER GRIEVANCE OF THE REVENUE IS WITH REGA RD TO THE CIT (A)S ACTION IN DELETING THE ADDITION OF RS .17.59 LAKHS BEING DIFFERENCE IN PARTIES ACCOUNTS MADE BY THE AO. THE MAIN THRUSTS OF THE ARGUMENTS OF THE REVENUE ARE TWO FOLDS (I) THE ASSESSEE COMPANY HAD FAILED TO PRODUCE NECESSAR Y EVIDENCES BY WAY OF CONFIRMATORY LETTERS FROM THE PARTIES EVEN A FTER AVAILING ADEQUATE OPPORTUNITIES DURING THE COURSE OF ASSESSM ENT PROCEEDINGS; AND (II) THE CIT(A) HAD ERRED IN DELETING THE ADDITION ON T HE GROUND THAT THERE WAS NO REQUIREMENTS OF OBTAINING CONFIRMATION LETTERS FROM THE PARTIES CONCERNED, CONSIDERING THE VOLUME OF AS SESSEE COMPANYS TRADE RUNNING INTO SEVERAL CRORES. 12.1. ON ITS PART, THE ASSESSEE COMPANYS CONTENTI ON CENTRED MORE OR LESS WHAT WAS SUBMITTED BEFORE THE FIRST APPELLA TE AUTHORITY. BESIDES, IT HAD FURNISHED A COPY OF DIFFERENCE IN PARTYS A /C (LEDGER ACCOUNT PAGE 45 OF P.BOOK). 12.1.1. THE GIST OF THE EXPLANATION OF THE ASSESSEE COMPANY WAS THAT THE AMOUNTS WERE AS A RESULT OF CONTINUOUS RECONCIL IATION OF DIFFERENT PARTIES ACCOUNTS THAT WERE EITHER SELLERS OR BUYER S AND IDENTIFIABLE. THE WRITE OFF WAS RESORTED TO DUE TO MISTAKES AND DIFFE RENCE IN QUANTITY AND CARRIED FORWARD FROM THE EARLIER YEARS AND IDENTIFI ED THEM AS NOT RECEIVABLE OR NOT PAYABLE. THIS VERSION OF THE ASSESSEE CO MPANY WAS NOT FOUND FAVOUR WITH THE AO WHO WAS OF THE VIEW THAT NO CONF IRMATION LETTERS FROM THOSE PARTIES WERE FORTH-COMING. HE HAD FURTHER DIFFERED WITH THE ASSESSEE COMPANY - WHO CLAIMED THAT THE WRITE OFF O F BALANCES TO BE SMALL AMOUNTS THAT MOST OF THE AMOUNTS WERE EXCEEDING RS.10000/-. 12.1.2. AFTER ANALYZING THE RIVAL SUBMISSIONS, THE LD. CIT(A) HAD PUT IT ACROSS HIS VIEWS WHICH ARE EXTRACTED AS UNDER: ITA NO.401 & 443/B/09 PAGE 20 OF 22 THE EXPLANATION OF THE APPELLANT THAT A NUMBER OF MISTAKES, DIFFERENCES AND DISPUTES ARISE DURING THE COURSE OF BUSINESS AND PERIODIC CLEANING UP AND RECONCILIATION OF ACCOUNTS IS DONE TO BRING THEM UP-TO DATE IS QUITE CONVINCING. THE RECONCI LIATION HAS BEEN DONE IN RESPECT OF IDENTIFIED PARTIES AND WITH RESP ECT TO DISCLOSED TRANSACTIONS ONLY. FURTHER, THERE IS WRITE OFF AS W ELL AS WRITE BACK AND ONLY ONE PART CANNOT BE PICKED UP IN ISOLATION FOR DISALLOWANCE. CONSIDERING THE LARGE VOLUME OF APPELLANTS TRADE R UNNING INTO SEVERAL TENS OF CRORES, THE QUANTUM OF THESE WRITE OFF CANNOT BE CONSIDERED AS UNUSUAL OR EXCEPTIONAL REQUIRING DETA ILED EXPLANATION ITEM-WISE OR AN OBLIGATION TO OBTAIN CONFIRMATIONS FROM THE PARTIES. IN ANY CASE, NOTHING ADVERSE HAS BEEN FOUND BY THE AO IN THIS REGARD. NO DOUBT, THE WRITE OFF IN SOME CASES APPE AR TO BE IN HE NATURE OF BAD DEBT WRITE OFF IN AS MUCH AS THAT ALS O APPEARS TO BE A REASON FOR THE WRITE OFF BUT THAT IS ONLY A PART OF THE RECONCILIATION. IN ANY CASE, THEY ARE WRITTEN OFF IN THE BOOKS. TH E AMOUNTS INVOLVED MAY BE ABOVE RS.10000/- BUT CANNOT BE CONSIDERED SI GNIFICANT ON A HOLISTIC VIEW OF THE NATURE OF THE TRANSACTIONS AND GROUND REALITIES OF BUSINESS. CONSIDERING EVERYTHING, I DO NOT FIND TH AT THERE IS CASE FOR DISALLOWANCE. 13. WE HAVE CAREFULLY CONSIDERED THE ARGUMENTS OF EITHER PARTY. WE HAVE ALSO PERUSED THE IMPUGNED ORDERS OF THE LOW ER AUTHORITIES. ON A CAREFUL PERUSAL OF THE LEDGER ACCOUNT OF THE ASSESS EE COMPANY [PAGE 45 OF PB], WE FIND THAT THE WRITE OFF OF BALANCES IN S OME OF THE PARTIES WERE, OF COURSE, SUBSTANTIAL, BUT, ON THE SAME BREATH, WE AD MIT THAT THE CREDITS WERE ALSO MATCHED/NEUTRALIZED WITH DEBITS. 13.1. CONSIDERING THE WRITE OFF OF DEBITS AS WELL AS GIVEN CREDITS, THE OUTCOME OF WHICH, HAD RESULTED IN A NET SURPLUS OF RS.4000/-. WE ARE ALSO IN AGREEMENT WITH THE LD. CIT(A) PHILOSOPHY THAT FURTHER, THERE IS WRITE OFF AS WELL AS WRITE BACK AND ONLY ONE PART CANNOT BE P ICKED UP IN ISOLATION FOR DISALLOWANCE . OF COURSE, THE WRITE OFF IN SOME CASES APPEARS TO BE IN THE NATURE OF BAD DEBTS WRITE OFF, EVEN THEN ALSO THE A SSESSEE COMPANY CAN TAKE REFUGE UNDER THE AMENDED PROVISIONS OF S.36(1) (VII) OF THE ACT, AS ITA NO.401 & 443/B/09 PAGE 21 OF 22 THESE DEBTS HAVE BEEN WRITTEN OFF IN THE BOOKS OF T HE ACCOUNT OF THE ASSESSEE COMPANY DURING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER DISPUTE. EVEN, IF IT WERE TO BE CONSIDE RED THE STAND OF THE AO THAT 27. IN VIEW OF THE ABOVE MENTIONED FACTS AND CIRCU MSTANCES, IT CAN BE REASONABLY CONCLUDED THAT- (A) THE ASSESSEE COMPANY HAS NO MATERIAL EVIDENCE TO PR OVE THE GENUINENESS OF DIFFERENCE IN PARTYS ACCOUNT WR ITTEN OFF; (B) IN CASE OF GENUINE TRANSACTIONS OR DEBTS OUTSTANDIN G, THE ASSESSEE SHOULD HAVE CLAIMED SUCH DEDUCTIONS ONLY U NDER SECTION 36(1)(VII); (C) EVEN AFTER CONSIDERING THE DEDUCTION U/S 36(1)(VII) AS BAD DEBTS, THE ASSESSEE HAS FAILED TO PROVE THE CRUCIAL TEST O F DEBT HAS BECOME BAD DEBT BEFORE MAKING SUCH CLAIM; (D) MERELY BY MAKING ENTRIES IN THE BOOKS , THE ASSESSEE CANNOT CLAIM DEDUCTIONS UNDER THE INCOME-TAX ACT WITHOUT DISCLOSING THE TRANSACTIONS/ACCOUNTS EITHER IN THE P & L A/C, BALANCE SHEET OR SCHEDULES FORMING PART OF THE FINANCIAL STATEMENTS OR IN THE NOTES ON ACCOUNT 13.1.1. AS ADMITTED BY THE AO HIMSELF [27.(D)] REFE RRED SUPRA, HAD THE ASSESSEE COMPANY WRITTEN OFF THESE BAD DEBTS BY MAK ING ENTRIES IN ITS BOOKS OF ACCOUNT, THEN THE AMENDED PROVISIONS OF S .36(1)(VII) OF THE ACT COMES TO ITS RESCUE? ON EITHER WAY, THE ASSESSEE C OMPANY STANDS TO BENEFIT. 13.1.2. IN OVER ALL CONSIDERATION OF THE FACTS AND CIRCUMSTANCES OF THE ISSUE, WE ARE OF THE UNANIMOUS VIEW THAT THE LD. CIT (A) WAS JUSTIFIED IN HIS ENDEAVOUR IN DELETING THIS ADDITION. WE, AC CORDINGLY, UPHOLD THE ACTION OF THE LD.CIT (A) ON THIS COUNT. ITA NO.401 & 443/B/09 PAGE 22 OF 22 14. IN THE RESULT (I) THE ASSESSEE COMPANYS APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES; (II) THE REVENUES APPEAL IS DISMISSED. PRONOUNCED IN THE OPEN COURT ON THIS 30 TH DAY OF SEPTEMBER 2009. SD/- SD/- ( K.P.T. THANGAL ) (A. MOHAN ALANKAMONY ) VICE PRESIDENT ACCOUNTANT MEMBER BANGALORE, DATED, THE 30 TH SEPTEMBER, 2009. DS/- COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE (1+1) BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.