Adea International Private Limited, Bangalore V. ACIT, Bangalore

ITA 565/BANG/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 47693 (ITAT-BANGALORE)
• Duration Of Justice: 9 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-02-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 10-01-2011
• Assessment Year: 2003-2004
• Appeal Filed On: 21-04-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: G V GOPALA RAO CITI
• Keywords: Bad and doubtful debts
• Section: 143(3); 37(1); 143(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI GEORGE GEORGE K., JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ITA NO. 565/BANG/2010 ASSESSMENT YEAR : 2003 - 04 ADEA INTERNATIONAL PVT. LTD., (FORMER LY NET KRAFT PRIVATE LTD.), NO.319/1, BOMMANAHALLI HOSUR MAIN ROAD, BEGUR HOBLI, BANGALORE 560 068. : APPELLANT VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 11(1), BANGALORE. : RESPONDENT APPELLA NT BY : SHRI SHARATH RAO, C.A. RESPONDENT BY : SHRI G.V. GOPALA RAO, CIT - I (DR) O R D E R PER A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF LD. CIT(A) - I IN ITA NO.24/AC - 11(1)/A - I/06 - 07 DATED 15.12.2009 FOR THE A.Y. 2003 - 0 4 PASSED U/S. 143(3) OF THE ACT. 2. THE ASSESSEE HAS RAISED 12 GROUNDS IN ITS APPEAL WHEREIN GROUND NO.1 IS GENERAL IN NATURE AND DO NOT SURVIVE FOR ADJUDICATION. THE CRUX OF THE ISSUES ARISING OUT OF THE OTHER GROUNDS ARE SUMMARIZED HEREINBELOW: ITA NO.565/BANG/10 PAGE 2 OF 8 (1) IN GRO UND NOS.2, 3 & 4, IT IS STATED THAT THE LD. CIT(A) HAS ERRED BY UPHOLDING THE DISALLOWANCE OF BAD DEBTS ON EXPORT BILLS AMOUNTING TO RS.1,94,99,064. (2) IN GROUND NOS. 5, 6, 7, 8 , 9 & 10, IT IS STATED THAT THE LD. CIT(A) HAS ERRED IN UPHOLDING THE DISALL OWANCE OF, IRRECOVERABLE ADVANCES WRITTEN OFF BEING INTER - CORPORATE DEPOSITS WITH AISHWARYA BELTING & ALLIED INDUSTRIES PVT. LTD. AMOUNTING TO RS.10 LAKHS AND RS.25 LAKHS PAID AS ADVANCE TO MICROCOM SYSTEMS WRITTEN OFF WITHOUT FURNISHING ANY REASONS , IN A LL AGGREGATING TO RS.35 LAKHS. (3) IN GROUND NO S .11 & 12, IT IS STATED THAT THE LD. CIT(A) HAS ERRED IN DISALLOWING INTEREST AND PENAL CHARGES FOR RS.6,21,401. THE LD. AR AT THE TIME OF HEARING DID NOT PRESS FOR TH IS GROUND AND THEREFORE TH IS GROUND IS DI SMISSED. 3. THE APPELLANT IS AN INDIAN COMPANY INCORPORATED ON FEBRUARY 17, 1998 ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT FILED ITS RETURN OF INCOME FOR THE A.Y. 2003 - 04 ON 27.11.2003 DECLARING A LOSS OF RS.4.84 CRORES. INITIALLY THE FILE WAS PROCESS ED U/S. 143(1) OF THE ACT ON 18.2.2004, SUBSEQUENTLY SELECTED FOR SCRUTINY AND ASSESSMENT COMPLETED U/S. 143(3) OF THE ACT AFTER REFERENCE U/S. 92CA OF THE ACT ON 28.2.2006. 4. THE LD. AO DISALLOWED THE CLAIM OF THE ASSESSEE FOR WRITING OFF BAD DEBTS TO THE TUNE OF RS.1,94,99,064 ARISING OUT OF EXPORT TURNOVER SINCE THE REQUISITE APPROVAL FROM THE APPROPRIATE AUTHORITIES WERE NOT OBTAINED. LD. CIT(A) UPHELD THE ORDER OF LD. AO AND HELD AS UNDER: 7.2 I SEE NO STRENGTH IN THE ARGUMENTS MADE ABOVE. F IRSTLY THE BOARD MEETING SHOWS THE NAME OF THE COMPANY VIDE ANNEXURE - 1 AS NET KRAFT PRIVATE LTD. EVEN LETTERS FOR OBTAINING APPROVAL FOR WRITE OFF HAS BEEN WRITTEN FOR M/S. NET KRAFT PRIVATE ITA NO.565/BANG/10 PAGE 3 OF 8 LIMITED AND NOT THE APPELLANT. THERE IS NO INFORMATION IN THE A SSESSMENT RECORDS AS TO THE RELATIONSHIP OF THE APPELLANT WITH M/S. NET KRAFT PRIVATE LTD. BESIDES, THE RESOLUTION WHICH DECIDED TO WRITE OFF THE ALLEGED BILLS OF FOREIGN EXCHANGE VIDE ANNEXURE - 2 HAS BEEN TAKEN ON JULY 2003 I.E, IN A.Y 2004 - 05 AND NOT IN THE RELEVANT A.Y. 2003 - 2004. BESIDES WHAT IS PROVIDED AS PROOF OF APPROVAL LETTERS OF WRITE OFF BY THE AUTHORIZED DEALER I.E. VIJAYA BANK IS ONLY A LETTER FROM CHIEF MANAGER, VIJAYA BANK TO THE DEPUTY GENERAL MANAGER, R.B.I. TO REQUEST TO CONSIDER THE CAS E FAVOURABLY VIDE ANNEXURE - 3 , TO THIS ORDER. THIS LETTER CANNOT BE EQUATED WITH THE CERTIFICATE OF APPROVAL FOR WRITE OFF. THE RELEVANT CIRCULAR IS MADE PART OF THIS ORDER AS ANNEXURE - 4, IN PARA 4 OF THIS CIRCULAR READS AS UNDER. 4. AFTER THE WRITE OF F HAS BEEN PERMITTED AUTHORIZED DEALERS MAY SUBMIT THE DUPLICATE GR/SDF FORMS IN QUESTION TO THE RESERVE BANK ALONG WITH R - RETURN, DULY CERTIFIED AS UNDER: - WRITE OFF OF . (AMOUNT IN WORDS AND FIGURES) PERMITTED IN TERMS OF AP(DIR SERIES) CIRCULAR NO.30 DATED APRIL 4, 2001. DATE STAMP & SIGNATURE OF AUTHORISED DEALER. 7.3 THUS WHAT HAS BEEN PROVIDED AS PROOF OF APPROVAL OF WRITE OFF IS NOT THE APPROVAL AT ALL. HENCE EVEN IF THE BOARD MAKES RESOLUTION AND THE BOOKS R EFLECTS WRITE OFF THE SAME CANNOT BE CONSIDERED AS HAS BEEN WRITTEN OFF. 7.4 IN THE LIGHT OF THE ABOVE, THE GROUND OF APPEAL DISMISSED. 5. LD. AO FURTHER DISALLOWED AN AMOUNT OF RS.35 LAKHS ON THE GROUND THAT THE ADVANCES WERE MADE TO THE ASSESSEE S SISTER CONCERN AND IS NOT A BAD DEBT OCCURRING IN THE NORMAL COURSE OF BUSINESS. LD. AO S BELIEF WAS THAT SUCH EXPENSES ARE NOT ALLOWABLE AS PER THE PROVISIONS OF SECTION 36(2) OF THE I.T. ACT. LD. CIT(A) UPHELD THE ORDER OF THE AO WITH THE FOLLOWING OBSERVATIO NS: ITA NO.565/BANG/10 PAGE 4 OF 8 8.4 THE ABOVE WERE CONSIDERED. EVIDENCES FILED SHOW THAT AISHWARYA, BELTING AND ALLIED INDUSTRIES (P) LTD. (HENCEFORTH REFERRED TO AS ABAI) 116 - B, DADA NAGAR, KANPUR 208022 HAD TAKEN AN INTERCORPORATE DEPOSIT FROM M/S. NET KRAFT (I) LTD., BANGALORE THROUGH TWO CHEQUES OF VIJAYA BANK KANPUR, EACH OF RS.5 LAKHS DATED 08 - 05 - 01 AND 31 - 05 - 2001 I.E., A.Y. 2002 - 03. HOWEVER, THE SAME HAD BEEN RETURNED BACK ON 25 - 09 - 2001 THROUGH CHEQUES OF PUNJAB NATIONAL BANK, KANPUR WHICH HAS BEEN DISHONORED WHEN PRESENTE D ON 13 - 03 - 2002 I.E., A.Y. 2002 - 03. FIRST OF ALL THE EVIDENCES DO NOT REVEAL THAT THE AMOUNT OF DEBT HAD BEEN PAID BY THE APPELLANT AS IT IS PAID BY NET KRAFT (P) LTD. EVEN IF ACCEPTING, BUT NOT ADMITTING, FOR ARGUMENTS SAKE THAT NET KRAFT (P) LTD. IS TH E EARLIER NAME OF THE APPELLANT. IN FACT I FIND STRENGTH IN A.O S CONCLUSION THAT THE INTERCORPORATE DEPOSIT WITH ABAI WAS NOT AT ALL FOR THE PURPOSE OF BUSINESS OF THE APPELLANT BECAUSE THE BUSINESS OF APPELLANT AND ABAI WERE ENTIRELY DIFFERENT AND NOT L INKED EVEN REMOTELY. SECONDLY I CONSIDER SUCH DEPOSIT CANNOT BE TERMED AS A DEBT. DEBT ALWAYS PRESUPPOSES THE RELATIONSHIP OF CREDITOR AND DEBTOR OR LENDOR AND BORROWER I.E., A PERSON IN NEED OF MONEY REQUESTING FOR DEBT I.E., BORROWER AND THE OTHER FULF ILLING SUCH REQUEST I.E., LENDER. HERE NO SUCH RELATIONSHIP CAN BE VISUALIZED BETWEEN ABAI AND APPELLANT. SUCH AMOUNT CANNOT ALSO BE ALLOWED AS A TRADE LOSS U/S 37(1) OF IT ACT BECAUSE SUCH DEPOSIT IS NOT FOR THE PURPOSES OF BUSINESS. 8.5 IN VIEW OF THE ABOVE, THE ADDITION IS UPHELD AND THE GROUND OF APPEAL IS DISMISSED. 6. LD. AR SUBMITTED BEFORE US THAT THE APPELLANT HAD WRITTEN OFF RS.1,94,99,064 AS BAD DEBTS IN THE BOOKS OF ACCOUNTS BEING UNREALIZED EXPORT BILLS THAT WERE NOT RECOVERABLE ANY MORE. THE APPELLANT HAD ALSO WRITTEN OFF RS.35 LAKHS BEING ADVANCES MADE BY THE COMPANY WHICH HAS NOW BECOME IRRECOVERABLE. THESE ADVANCES WERE MADE TO INDEPENDENT SOFTWARE COMPANIES IN INDIA IN RELATION TO A SUB - CONTRACT OF SOFTWARE DEVELOPMENT THAT THE APPELLANT HAD ENTERED INTO. HOWEVER, SUBSEQUENTLY AFTER SHORT PERIOD OF TIME, THESE COMPANIES WERE UNTRACEABLE AND ALSO DID NOT RENDER ANY SOFTWARE DEVELOPMENT SERVICE TO THE APPELLANT. LD. AR ITA NO.565/BANG/10 PAGE 5 OF 8 FORCEFULLY SUBMITTED THAT THE APPELLANT HAD CLAIMED THESE AMOUNTS AS BA D DEBTS AS PER THE PROVISIONS OF SECTION 36(1)(VII) READ WITH SEC. 36(2) OF THE ACT. THE APPELLANT HAD ALSO OBTAINED A CERTIFICATE FROM THE CHARTERED ACCOUNTANT FOR THE PURPOSE OF EXCHANGE CONTROL REGULATIONS WHEREIN INVOICE - WISE DETAILS OF THE AMOUNTS WR ITTEN OFF HAVE BEEN PROVIDED. THE APPELLANT HAD COMPLIED WITH THE FORMALITIES UNDER FOREIGN EXCHANGE CONTROL ACT AND WAS AWAITING THEIR APPROVAL, WHICH DOES NOT HAVE A BEARING ON THE ALLOWABILITY OF CLAIM UNDER INCOME - TAX ACT. LD. AR PLACED RELIANCE ON T HE FOLLOWING CASE LAWS. (1) SOUTHERN TECHNOLOGIES LTD. V. JCIT 320 ITR 577 (SC) (2) PEARL AGENCIES V. DY.CIT 61 ITD 511 TDEL 7. LD. DR FORCEFULLY STATED THAT THE ASSESSEE HAS NOT COMPLIED WITH THE NORMS OF FOREIGN EXCHANGE MANAGEMENT ACT WHEREIN AN EXPOR TER WHO HAS NOT BEEN ABLE TO REALIZE THE OUTSTANDING AS PER DUES DESPITE BEST EFFORTS HAS TO APPROACH THE AUTHORIZED DEALER WHO HAD HANDLED THE RELEVANT SHIPPING DOCUMENTS WITH APPROPRIATE SUPPORTING DOCUMENTARY EVIDENCE WITH A REQUEST FOR WRITE OFF OF THE UNREALIZED PORTION. SUCH APPROVAL ARE GRANTED SUBJECT TO CERTAIN CONDITIONS. WITH RESPECT TO ADVANCES MADE TO OTHER COMPANIES LD. DR ASSERTED THAT THERE WERE NO BUSINESS NEXUS BETWEEN THE APPELLANT AND RECIPIENT OF THE ADVANCES, HENCE IT CANNOT BE CONS IDERED TO BE A BAD DEBT INCURRED IN THE COURSE OF THE BUSINESS OF THE ASSESSEE. 8. WE HAVE HEARD THE RI VAL SUBMISSIONS AND PERUSED THE PAPERBOOK FILED BY THE ASSESSEE ALONG WITH THE COPIES OF THE DECIDED CASES. IT IS NOT DISPUTED THAT THE AMOUNT OF RS.1,9 4,99,064 WERE THE BILLS OUTSTANDING FOR ITA NO.565/BANG/10 PAGE 6 OF 8 REALIZATION FROM EXPORT TURNOVER. THE ONLY GROUSE OF THE REVENUE IS THAT THEY CANNOT BE CLAIMED AS BAD DEBTS SINCE THE ASSESSEE HAD NOT OBTAINED THE REQUISITE APPROVAL FROM THE APPROPRIATE AUTHORITY AS PER THE FOREI GN EXCHANGE MANAGEMENT ACT. THE ASSESSEE HAS RELIED ON THE CASE SOUTHERN TECHNOLOGIES LTD. V. JCIT 320 ITR 577 (SC) , WHEREIN IT WAS HELD THAT THE RBI DIRECTIONS OF 1998 ARE MERELY PRUDENTIAL NORMS REGARDING PRESENTATION OF NON - PERFORMING ASSETS PROVISIO N IN THE BALANCE SHEET; THEY DO NOT TOUCH UPON THE NATURE OF EXPENSE TO BE DECIDED BY THE ASSESSING OFFICER IN THE ASSESSMENT PROCEEDINGS UNDER THE INCOME TAX ACT. THOUGH THIS JUDGMENT IS RENDERED WITH RESPECT TO COMPLIANCE OF RBI DIRECTIONS ON PRUDENTIA L NORMS REGARDING PRESENTATION OF NON PERFORMING ASSETS, THE RATIO OF THIS DECISION HAS A BEARING ON THE INSTANT CASE ON HAND. WE HAVE ALSO PERUSED THE CASE PEARL AGENCIES V. DY. CIT DELHI REFERRED SUPRA WHEREIN IT WAS HELD AS REGARDS THE QUESTION AS T O WHETHER THE DEBT IN QUESTION REALLY BECAME BAD IN THE YEAR IN WHICH SUCH A CLAIM WAS MADE AND THE AMOUNT WAS DEBITED IN THE PROFIT AND LOSS ACCOUNT WITH A CORRESPONDING CREDIT TO EITHER THE INDIVIDUAL ACCOUNT OF THE DEBTOR OR TO ACCOUNT LIKE BAD DEBT RES ERVE ACCOUNT INDICATING THE AMOUNT DUE BY THE PARTICULAR DEBTOR, IT WOULD BE A SUFFICIENT COMPLIANCE WITH THE PROVISIONS OF THE STATUTORY REQUIREMENT FOR WRITING OFF AS IRRECOVERABLE THE CONCERNED DEBT IN THE BOOKS OF THE ASSESSEE FOR THE PURPOSES OF THE A CT. IT IS NOT ESSENTIAL THAT THE DEBTOR S INDIVIDUAL ACCOUNT BE SQUARED OFF BY AN APPROPRIATE CREDIT ENTRY. IN THE INSTANT CASE THE AMOUNT IN QUESTION WAS DEBITED IN THE PROFIT AND LOSS ACCOUNT WITH A CORRESPONDING CREDIT TO BAD DEBT RESERVE ACCOUNT. HE NCE, THIS CONDITION ITA NO.565/BANG/10 PAGE 7 OF 8 ALSO STOOD FULFILLED IN THE CASE OF THE ASSESSEE. IN VIEW OF THE AFORESAID FACTS AND DISCUSSIONS, THE ASSESSEE WAS ENTITLED TO GRANT OF DEDUCTION OF A SUM OF RS.11,46,432 CLAIMED AS BAD DEBT IN THE YEAR UNDER CONSIDERATION. 9. IT IS A SE TTLED LAW THAT WHEN THE ASSESSEE ARRIVES AT A DECISION THAT CERTAIN DEBTS HAVE BECOME BAD AND ACCORDINGLY WRITES OFF THE SAME IN THE BOOKS OF ACCOUNTS, SECTION 36(1)(VII)OF THE ACT PROVIDES FOR A DEDUCTION. FUR THER, SECTION 41(1) OF THE ACT PROVIDES THAT IF SUCH BAD DEBTS WRITTEN OFF IS RECOVERED DURING THE SUBSEQUENT ASSESSMENT YEARS, IT SHALL BE TREATED AS INCOME OF THAT YEAR. FROM THE FACTS AND CIRCUMSTANCES OF THE CASE, WE ARE OF THE CONSIDERED VIEW THAT THE ASSESSEE IS JUSTIFIED TO CLAIM DEDUCTION U/ S. 36(1)(VII) OF THE ACT WITH RESPECT TO THE UNREALIZED BILLS FROM EXPORT TURNOVER TO THE TUNE OF RS. 1,94,99,064 . 10. WITH RESPECT TO THE ADVANCES MADE TO CORPORATES FOR RS.35 LAKHS THE ASSESSEE HAS STATED THAT THESE ADVANCES WERE MADE PURSUANT TO AN AGREEM ENT FOR CONTRACTUAL WORK. NO SUCH AGREEMENTS WERE PRODUCED BEFORE US FOR SUBSTANTIATING SUCH CLAIM. FURTHER, FROM THE ASSESSMENT ORDER AND LD. C IT(A) S ORDER, NO SUCH FACTS EMANATE . THE FINDINGS OF THE LD. ASSESSING OFFICER IS THAT THE LOAN HAD BEEN GIV EN TO A SISTER CONCERN AND NOT FOR THE BUSINESS OF THE APPELLANT. THIS FACT HAS NOT BEEN DISPROVED BEFORE THE LD. CIT(A). HOWEVER, IN THE INTEREST OF JUSTICE, WE ARE OF THE CONSIDERED VIEW THAT THIS MATTER BE REMITTED BACK TO THE FILE OF LD. CIT(A) IN ORDER TO GRANT ONE MORE OPPORTUNITY TO THE ASSESSEE TO ESTABLISH THE BONAFIDE OF ITS CLAIM. IT IS ORDERED ACCORDINGLY. ITA NO.565/BANG/10 PAGE 8 OF 8 11. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON THIS 11 TH DA Y OF FEBRUARY, 2011 . SD/ - SD/ - ( GEORGE GEORGE K. ) (A. MOHAN ALANKAMONY ) JUDICIAL MEMBER ACCOUNTANT MEMBER BANGALORE, DATED, THE 11 TH FEBRUARY, 2011. DS/ - COPY TO: BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE. 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5 . DR, ITAT, BANGALORE. 6. GUARD FILE