Avery India Ltd., Haryana V. D.C.I.T, Cir- 1, Kolkata, Kolkata

ITA 601/KOL/2013

• Counselvise Citation: 60123514 RSA 2013
• Duration Of Justice: 2 year(s) 8 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-11-2015
• Appeal Filed By: Assessee
• Bench Allotted: C
• Assessment Year: 2006-2007
• Appeal Filed On: 21-03-2013
• Court: TRIBUNAL
• Department Lawyers: D NASKAR JCIT LD
• Assessee Lawyers: SAURABH KEDIA LD
• Keywords: Gift; Bad and doubtful debts; Revenue expenditure; Capital expenditure
• Section: 28; 43B; 143(3); 37(1)

Judgement Text

ITA NO.601/KOL/2013-C-AM M/S. AVERY INDIA LTD 1 IN THE INCOME TAX APPELLATE TRIBUNAL, C BENCH, K OLKATA BEFORE : S HRI MAHAVIR SINGH, JUDICIAL MEMBER, AND SHRI BALAGANESH, ACCOUNTANT MEMBER I.T.A NO. 601/KOL/2013 A.Y. 2006-07 M/S. AVERY INDIA LTD VS. THE DEPUTY COMMISSIONE R OF PAN: AACCA 4694B OF INCOME-TAX, CIR-1, KOLKATA (APPELLANT) (RESPONDENT) FOR THE APPELLANT/ASSESSEE: SHRI SAURABH KEDIA, LD.A/R FOR THE RESPONDENT/DEPARTMENT : SHRI D. NASKA R, JCIT, LD.DR DATE OF HEARING: 18-11-2015 DATE OF PRONOUNCEMENT: 27- 11-2 015 ORDER SHRI M.BALAGANESH, AM THIS APPEAL OF THE ASSESSEE ARISES OUT OF THE ORDE R OF THE LEARNED CIT(A) IN APPEAL NO. 85/CIT/(A)-XX/CIRCLE-1/2011-12/KOL DATE D 16-01-2013 FOR THE ASST YEAR 2006-07 PASSED AGAINST THE ORDER OF ASSESSMENT FRAMED BY THE LEARNED AO U/S 143(3) OF THE INCOME TAX ACT, 1961 (HEREINAFTER REF ERRED TO AS THE ACT). 2. THE FIRST ISSUE TO BE DECIDED IN THIS APPEAL IS AS TO WHETHER IN THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE ASSESSEE IS ENTIT LED FOR CLAIM OF DEDUCTION IN RESPECT OF ADVANCES WRITTEN OFF U/S 28 OF THE ACT TO THE EX TENT OF RS. 13,73,258/-. 2.1. THE BRIEF FACTS OF THIS ISSUE IS THAT THE A SSESSEE IS ENGAGED IN THE MANUFACTURING, TRADING & SERVICING OF WEIGHING MACHINES, TESTING M ACHINES AND FUEL DISPENSING PUMPS. IT WAS OBSERVED BY THE LEARNED AO DURING TH E COURSE OF ASSESSMENT PROCEEDINGS THAT THE ASSESSEE HAD INCLUDED A SUM OF RS. 13,73,258/- IN THE ADMINISTRATIVE AND OTHER EXPENSES ON ACCOUNT OF ADV ANCES WRITTEN OFF. THE ASSESSEE ITA NO.601/KOL/2013-C-AM M/S. AVERY INDIA LTD 2 WAS ASKED TO FURNISH THE DETAILS OF THE SAME BY THE LEARNED AO WHICH WERE DULY SUBMITTED BY THE ASSESSEE VIDE LETTERS DATED 16.10. 2009 AND 4.12.2009. THE ASSESSEE PLEADED BEFORE THE LEARNED AO THAT THE ADVANCES WER E IN THE NATURE OF TRADING ADVANCES, EARNEST MONEY DEPOSIT, TENDER DEPOSIT AND WERE PURELY ON REVENUE ACCOUNT AND WERE MADE LONG BACK AND ALL THE EFFORTS TAKEN B Y THE MANAGEMENT TO RECOVER THE SAME WERE IN VAIN. HENCE THE MANAGEMENT THOUGHT IT PRUDENT TO WRITE OFF THE SAME IN THE BOOKS AS IRRECOVERABLE ADVANCES. THE ASSESSEE CLAIMED DEDUCTION FOR THE SAME U/S 28 READ WITH SECTION 37(1) OF THE ACT AS IT WAS INC URRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. THE LEARNED AO SOUGHT TO DISALLOW THE SAME BY PLACING RELIANCE ON THE ORDER OF HIS PREDECESSOR FO R THE ASST YEARS 2004-05 & 2005-06 WHEREIN SIMILAR DISALLOWANCES WERE MADE ON THE PRET EXT THAT NO INCOME WAS OFFERED BY THE ASSESSEE IN RESPECT OF SUCH ADVANCES IN THE EAR LIER YEARS, WHICH WAS ALSO UPHELD BY THE LEARNED CITA ON FIRST APPEAL. AGGRIEVED, THE A SSESSEE IS IN APPEAL BEFORE US ON THE FOLLOWING GROUNDS:- 1.0 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD.CIT(APPEALS) ERRED IN CONFIRMING THE DISALLOWANC E OF RS.13,73,258/- MADE BY THE ASSESSING OFFICER ON ACCOUNT OF ADVANCE S WRITTEN OFF. 1.1 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, THE LD.CIT(APPEALS) AS WELL AS THE ASSESSING OFFICER ER RED IN NOT APPRECIATING THE FACT THAT THE CLAIM FOR ADVANCES WRITTEN OFF WA S ALLOWABLE U/S. 28 READ WITH SECTION 37(1) OF THE ACT. 2.2. THE LEARNED AR REITERATED THE SUBMISSIONS MAD E BEFORE THE LOWER AUTHORITIES. IN RESPONSE TO THIS, THE LEARNED DR VEHEMENTLY SUPPORT ED THE ORDERS OF THE LOWER AUTHORITIES. 2.3. WE FIND THAT THE ASSESSEE HAD MADE FOLLOWING ADVANCES IN THE EARLIER YEARS WHICH WERE WRITTEN OFF DURING THE ASSESSMENT YEAR UNDER A PPEAL AFTER TREATING IT AS IRRECOVERABLE AS A MEASURE OF PRUDENCE:- IN ANY EVENT, IT IS HUMBLY SUBMITTED THAT ADVANCES WERE MADE IN THE NORMAL COURSE OF THE EXISTING BUSINESS BEING IN THE NATURE OF EARNEST MONEY DEPOSITS, TENDER ITA NO.601/KOL/2013-C-AM M/S. AVERY INDIA LTD 3 DEPOSITS, SECURITY DEPOSITS AND CIVIL ADVANCES AND WERE PURELY ON REVENUE ACCOUNT. SUMMARY OF THE ADVANCES WRITTEN OFF IS MENTIONED HE REUNDER: - NAME OF PARTY AMOUNT SUBMISSION ADVANCES TO CIVIL CONTRACTOR [NEITHER COMPLETED WOR K NOR GIVEN THE B ILLS TO ADJUST AJAY SHARMA 43,234 AS REGARD CIVIL ADVANCES, IT IS HUMBLY SUBMITTED T HAT THE APPELLANT IS INTER-ALIA ENGAGED IN THE PROVISION OF AFTER SALES SERVICES BEING IN THE NATURE OF INSTALLATION OF WE IGH BRIDGES AT THE CUSTOMER SITES TOWARDS WHICH IT SEEKS SUPPO RT FROM THE CONTRACTORS ON A REGULAR BASIS. TOWARDS EXECUTION O F SUCH CONTRACTS ENTERED INTO WITH THE CONTRACTORSS, THE APPELLANT USUALLY PAYS A CERTAIN SUM OF THE CONTRACTED VALUE IN ADVANCE. DUE TO DELAY IN FINALIZATION OF THE SITE ON WHICH THE WEIGH BRIDGE SOLD BY THE ASSESSEE WAS TO BE INSTALL ED, THE CONTRACTOR IN THE PROCESS DID NOT REFUND THE AD VANCE RECEIVED FROM THE APPELLANT. THE SAID LOSS BEING WHOLLY INCURRED FOR THE PURPOSE OF BUSINESS IS AN ALLOWABLE DEDUCTION U/S. 28, DINESH ENGINEERING 85,000 85,000 M.P SINGH 255,851 NANDA ENGINEERING 302,881 NIRU PRASADR 51,702 PRATIHAR CONSTRUCTION 43,600 RAJ KUMAR RAI 68,000 TARUN CONSTRUCTION 136,000 BINOD BHATT 138,000 SUB-TOTAL[A] 11,24,268 EARNEST MONEY DEPOSITS & TENDER DEPOSITS [ DEPOSITED BUT NOT REFU NDED] CENTRAL WAREHOUSE CORPORATION 100,000 IN RESPECT OF EARNEST MO NEY DEPOSITS AND TENDER DEPOSITS WRITTEN OFF IT IS HUMBLY SUBMITTED THAT THE APPELL ANT EXECUTES ORDERS IN BULK TOWARDS WHICH IT HAD APPLIED TO TENDERS FLOATED BY THE CUSTOMERS, ESSENTIALLY GOVERNMENT PARTIES. THE PAYMENTS REPRESENT AMOUNT PAID AS DEPOSITS WITH TENDERS WHIC H WERE REFUNDABLE IF THE JOB IS NOT AWARDED AND ADJUSTABLE. HOWEVER, SINCE THE SAME WERE NEITHER REFUNDED NOR ADJUSTED SINCE LONG TIME THE ASSESSEE CONSIDERED IT AS PRUDENT TO WRITE OFF THE AMOUNT. RELIANCE IN THIS REGARD IS PLACED ON THE FOLLOWING JUDGEMENTS:- M/S. PYOGINAM VS- ADD.CIT (2010 130 TTJ 7 (DEL) CIT-VS- SUGAR DEALERS (1975) 100 ITR 424(ALL) THACKERS H.P & CO VS- CIT (1982) 134 ITR 21(MP) NARANDAS MATHURADAS AND CO VS- CIT (1959) 35 ITR 461 (BOM) DHEERAJLAL RAGHAV & CO . ITO (1978) 5 TTJ 557 (CUTTACK) UP CO OP SUGAR FACTORY 75,000 FOOD CORPORATION OF INDIA 45,080 BHARAT COOKING COAL LTD 6,021 SUB-TOTAL ( C ) 2,26,101 RENT DEPOSIT [ DEPOSITED BUT NOT REFUNDABLE WHILE V ACATING THE FLAT RENT DEPOSIT 2,000 THE RENT DEPOSITS WERE MADE IN RESPECT OF FLAT TAKEN ON LEASE BY THE COMPANY FOR USE BY ITS EMPLOYEES. THE SAID FLAT WAS VACATED BY THE COMPANYS EMPLOYEE LONG BACK; HOWEVER, IN SPITE OF REPEATED EFFORTS THE COMPANY COULD NOT RECOVER THE SAID REFUNDABLE SECURITY DEPOSITS AND HENCE DECIDED TO WRITE OFF THE SAME IN BOOKS OF ACCOUNT SUB-TOTAL[D] 2,000 ELECTRICITY DEPOSITS [ DEPOSITED FOR ELECTRICITY BU T ADJUSTED WITH BILLS] ITA NO.601/KOL/2013-C-AM M/S. AVERY INDIA LTD 4 PATNA ELECTRICITY 2,537 ELECTRICITY DEPOSITS WERE GIVEN TO PATNA ELECTRICIT Y AUTHORITY IN ORDER TO HAVE REGULAR SUPPLY OF ELECTRICITY FOR SMOOTH RUNNING OF BUSINESS. IN SPIT E OF REPEATED EFFORTS THE COMP ANY COULD NOT RECOVER THE SAID REFUNDABLE SECURITY DEPOSITS AND HENCE DECIDED TO W RITE OFF THE SAME IN BOOKS OF ACCOUNT SUB-TOTAL [E] 2,537 OTHERS ECL 2,500 COMPANY C;LOSED, THEREFORE, NO CHANCE TO RECOVER TH E ADVANCE ADVANCE TO SUPPLIERS/ PARTIES 15,853 SUB-TOTAL [F] 18,353 TOTAL [A+B+C=D+E=F= 13,73,258 2.3.1. WE HOLD THAT SECTION 28 OF THE ACT PROVIDES THAT ANY INCOME BY WAY OF PROFITS AND GAINS OF ANY BUSINESS CARRIED ON BY AN ASSESSEE ARE TAXABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION. IN COMPUTING THE NET PROFIT, THE EXPENSES INCURRED IN CONNECTION WITH THE BUSINESS IS REQUIRE D TO BE DEDUCTED FROM THE INCOME EARNED BY THE SAID BUSINESS. WE HOLD THAT IN ORDER TO CLAIM DEDUCTION FOR AN EXPENSE U/S 28 OF THE ACT, THE PRE-CONDITION IS TO ESTABLIS H THAT ADVANCES WERE MADE FOR THE PURPOSE OF AN ASSESSEES BUSINESS. ADMITTEDLY, IT IS NOT THE CASE OF THE REVENUE IN THE FACTS BEFORE US THAT THE ADVANCES WERE NOT MADE IN THE COURSE OF ITS BUSINESS BY THE ASSESSEE. MOREOVER, FROM THE DETAILS OF THE SAID A DVANCES WHICH WERE SUBJECTED TO WRITE OFF, IT COULD BE SEEN THAT THE ENTIRE ADVANCE S WERE ONLY MEANT FOR THE PURPOSE OF BUSINESS. WE FIND THAT THE ASSESSEE IS NOT ENGAGE D IN THE BUSINESS OF LOANS AND ADVANCES AND THESE ADVANCES WERE NOT MADE TO PARTIE S WITH A VIEW TO EARN INTEREST INCOME OUT OF SUCH ADVANCES. THE BUSINESS NEXUS O F THESE ADVANCES HAVE BEEN PROVED BEYOND DOUBT. MOREOVER, WE ALSO FIND THAT TH E REVENUE HAD NOT BROUGHT ANY MATERIAL ON RECORD TO PROVE THAT IN THE YEARS IN WH ICH THESE ADVANCES WERE GIVEN, THE SAME WERE MEANT FOR NON-BUSINESS PURPOSES AND FINDI NG IN THIS REGARD THAT THERE WERE ITA NO.601/KOL/2013-C-AM M/S. AVERY INDIA LTD 5 DISALLOWANCE OF INTEREST, IF ANY, ON THE PRETEXT T HAT BORROWED FUNDS WERE DIVERTED FOR NON-BUSINESS PURPOSES. MOREOVER, WE ARE ALSO IN AG REEMENT WITH THE ARGUMENT OF THE LEARNED AR THAT THE REVENUE DID NOT BRING ANY MATER IAL ON RECORD DISPUTING THE RECOVERABILITY OF THE AFORESAID ADVANCES. 2.3.2. WE HOLD THAT THE REVENUE CANNOT COMPEL A BU SINESSMAN TO MAXIMIZE HIS REVENUE ON EACH AND EVERY TRANSACTION. WE FIND THA T THE CLAIM OF DEDUCTION HAS BEEN MADE BY THE ASSESSEE U/S 28 OF THE ACT AND NOT U/S 36(1)(VII) READ WITH SECTION 36(2) OF THE ACT. WE HOLD THAT AS LONG AS THE ADVANCES WERE MADE FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE AND THERE IS NO CONTRARY FINDING TO THAT EFFECT, IT HAS TO BE ALLOWED AS A DEDUCTION ON ITS WRITE OFF IN TERMS OF SECTION 28 O F THE ACT. 2.3.3. WE PLACE RELIANCE ON THE FOLLOWING DECISIO NS IN THIS REGARD:- A. HONBLE SUPREME COURT IN THE CASE OF BADRIDAS D AGA VS CIT REPORTED IN (1959) 34 ITR 10 (SC) , WHEREIN IT WAS HELD THAT : WHEN A CLAIM IS MADE FOR A DEDUCTION FOR WHICH TH ERE IS NO SPECIFIC PROVISION U/S. 10(2), WHETHER IT IS ADM ISSIBLE OR NOT WILL DEPEND ON WHETHER, HAVING REGARD TO ACCEPTED COMMER CIAL PRACTICE AND TRADING PRINCIPLES, IT CAN BE SAID TO ARISE OUT OF THE CARRYING ON OF THE BUSINESS AND BE INCIDENTAL TO IT. THE LOSS F OR WHICH A DEDUCTION IS CLAIMED MUST BE ONE THAT SPRINGS DIRECTLY FROM C ARRYING ON OF THE BUSINESS AND IS INCIDENTAL TO IT, AND NOT ANY LOSS SUSTAINED BY THE ASSESSEE EVEN IT HAS SOME CONNECTION WITH HIS BUSIN ESS. IF THAT IS ESTABLISHED, THEN THE DEDUCTION MUST BE ALLOWED, PR OVIDED THAT THERE IS NO PROVISION AGAINST IT, EXPRESSED OR IMPLIED, I N THE ACT. B. HONBLE SUPREME COURT IN THE CASE OF CIT VS ABHD ULLABHAI ABDULLACADAR REPORTED IN (1961) 41 ITR 545 (SC) , WHEREIN IT WAS HELD THAT : IN ORDER THAT A LOSS MIGHT BE DEDUCTIBLE IT MUST A LOSS IN THE BUSINESS OF THE ASSESSEE AND NOT A PAYMENT REL ATING TO THE ITA NO.601/KOL/2013-C-AM M/S. AVERY INDIA LTD 6 BUSINESS OF SOMEBODY ELSE WHICH UNDER THE PROVISION S OF THE ACT WAS DEEMED TO BE AND BECAME THE LIABILITY OF THE ASSESS EE. LOSS WAS ALLOWABLE IF IT SPRANG DIRECTLY FROM AND WAS INCI DENTAL TOTHE BUSINESS OF THE ASSESSEE. C. HONBLE SUPREME COURT IN THE CASE OF CIT VS MYSORE SUGAR CO. LTD REPORTED IN (1962) 46 ITR 649 (SC) . THE FACTS BEFORE THE HONBLE APEX COURT AND DECISI ON RENDERED THEREON IS GIVEN BELOW:- FACTS: THE ASSESSEE WAS A SUGAR COMPANY. THE ASSE SSEE PURCHASED SUGARCANE FROM THE SUGARCANE GROWERS AND CRUSHED THEM IN ITS FACTORY TO PREPARE SUGAR. AS A PART OF ITS BUSINESS OPERATIONS. IT ENTERED INTO AGREEMENTS WITH THE SUGARCANE GROWERS, AND ADVANCED THEM SUGARCANE SEEDLINGS, FER TILIZERS AND ALSO CASH. THE SUGARCANE GROWERS ENTERED INTO A WRITTEN AGREEMENT BY WHICH THEY AGREED TO SELL SUGARCANE EXCLUSIVELY TO THE ASSESSEE AT CURRE NT MARKET RATES AND TO HAVE THE ADVANCES ADJUSTED TOWARDS THE PRICE OF SUGARCANE, A GREEING TO PAY INTEREST IN THE MEANTIME. FOR THIS PURPOSE, AN ACCOUNT OF EACH SUGA RCANE GROWERS WAS OPENED BY THE ASSESSEE-COMPANY. A CROP OF SUGARCANE TOOK A BOUT 18 MONTHS TO MATURE, AND THESE AGREEMENTS TOOK PLACE AT THE HARVEST SEA SON EACH YEAR, IN PREPARATION FOR THE NEXT CROP. IN THE YEAR 1948-49, DUE TO DROUGHT, THE ASSESSEE COMPANY COULD NOT WORK ITS SUGAR MILLS AND THE SUGARCANE GROWERS COULD NOT GROW OR DELIVER THE SUGARCANE. THE ADVANCES MADE IN 1948-49 THUS REMAINED UNRECOVERED, BECAUSE THEY COULD ONLY BE RECOVERED BY THE SUPPLY OF SUGARCANE TO THE ASSESSEE-COMPANY. THE MYSORE GOVER NMENT REALISING THE HARDSHIP APPOINTED A COMMITTEE TO INVESTIGATE THE M ATTER AND TO MAKE A REPORT AND RECOMMENDATIONS. THE COMMITTEE RECOMMEND ED THAT THE ASSESSEE-COMPANY SHOULD EX GRATIA FORGO SOME OF IT S DUES, AND IN THE YEAR OF ACCOUNT ENDING 30-6-1952, THE COMPANY WAIVED I TS RIGHTS IN RESPECT OF RS.2,87,422. THE COMPANY CLAIMED THIS AS A DEDUCTIO N UNDER SECTION 10(2)(XV) OF 1922 ACT. THE ITO DECLINED TO MAKE THE DEDUCTION, BECAUSE, IN HIS OPINION, THIS WAS NEITHER A TRADE DEBT NOR EVEN A BAD DEBT BUT AN EX GRATIA PAYMENT ALMOST LIKE A GIFT. AN APPEAL TO THE AAC ALSO FAILED. THE APPELLATE TRIBUNAL UPHELD THE DISALLOWANCE. ON REF ERENCE THE HIGH COURT HELD THAT THE EXPENDITURE WAS NOT IN THE NATURE O F A CAPITAL EXPENDITURE, AND WAS DEDUCTIBLE AS A REVENUE EXPENDITURE. HELD: TO FIND OUT WHETHER AN EXPENDITURE IS ON THE CAPITAL ACCOUNT OR ON REVENUE, ONE MUST CONSIDER THE EXPEND ITURE IN RELATION TO THE BUSINESS. SINCE ALL PAYMENTS REDUCE CAPITAL I N THE ULTIMATE ANALYSIS, ONE IS OPT TO CONSIDER A LOSS AS AMOUNTING TO A LO SS OF BUSINESS. BUT THIS IS ITA NO.601/KOL/2013-C-AM M/S. AVERY INDIA LTD 7 NOT TRUE OF ALL LOSSES, BECAUSE LOSSES IN THE RUNN ING OF THE BUSINESS CANNOT BE SAID TO BE OF CAPITAL. THE QUESTIONS TO CONSIDE R IN THIS CONNECTION ARE: FOR WHAT PURPOSE WAS THE MONEY LAID OUT? WAS IT TO ACQUIRE AN ASSET OF AN ENDURING NATURE FOR THE BENEFIT OF THE BUSINESS, O R WAS IT AN OUTGOING IN THE DOING OF THE BUSINESS? IF MONEY BE LOST IN THE FIRST CIRCUMSTANCES, IT IS A LOSS OF CAPITAL, BUT IF LOST IN THE SECOND CIRCUM STANCE, IT IS A REVENUE LOSS. IN THE FIRST, IT BEARS THE CHARACTER OF AN INVESTME NT, BUT IN THE SECOND, TO USE A COMMONLY UNDERSTOOD PHRASE, IT BEARS THE CHAR ACTER OF CURRENT EXPENSES. IN INSTANT CASE THE AMOUNT WAS AN ADVANCE AGAINST PRICE OF ONE CROP. THE OPPIGEDARS WERE TO GET THE ASSISTANCE NOT AS AN INVESTMENT BY THE ASSESSEE-COMPANY IN ITS AGRICULTURE, BUT ONLY AS AN ADVANCE PAYMENT OF PRICE. THE AMOUNT, SO FAR AS THE ASSESSEE-COMPAN Y WAS CONCERNED, REPRESENTED THE CURRENT EXPENDITURE TOWARDS THE PUR CHASE OF SUGARCANE, AND IT MADE NO DIFFERENCE THAT THE SUGARCANE THUS P URCHASED WAS GROWN BY THE OPPIGEDARS WITH THE SEEDLINGS, FERTILIZER AN D MONEY TAKEN ON ACCOUNT FROM THE ASSESSEE-COMPANY. IN SO FAR AS THE ASSESSEE-COMPANY WAS CONCERNED, IT WAS DOING NO MORE THAN MAKING A FORWARD ARRANGEMENT FOR THE NEXT YEARS CROP AND PAYING AN AMOUNT IN ADVANCE OUT OF THE PRICE, SO THAT THE GROWING OF THE CROP MIGHT NOT SUFFER DUE TO WANT OF FUNDS IN THE HANDS OF THE GROWERS. THERE W AS HARDLY ANY ELEMENT OF INVESTMENT WHICH CONTEMPLATED MORE THAN PAYMENT OF ADVANCE PRICE. THE RESULTING LOSS TO THE ASSESSEE-COMPANY WAS JUST AS MUCH A LOSS ON THE REVENUE SIDE AS WOULD HAVE BEEN, IF IT HAD PAID FOR THE READY CROP WHICH WAS NOT DELIVERED. HENCE, THE DECISION OF THE HIGH COURT WAS RIGHT. THE APPEAL WAS DISMISSED. D. HONBLE BOMBAY HIGH COURT IN THE CASE OF HARSHAD J . CHOKSI VS CIT REPORTED IN (2012) 25 TAXMANN.COM 567 (BOM) ALSO SUPPORTS THE VIEW OF THE ASSESSEE. THE QUESTION RAISED BEFORE THE HONBLE BOMBAY HIGH COUR T AND THE DECISION RENDERED THEREON IS REPRODUCED BELOW:- QUESTIONS: WHETHER IF AN AMOUNT IS HELD TO BE NOT DEDUCTIBLE A S A BAD DEBT IN VIEW OF NON-COMPLIANCE OF THE CONDITION PRECEDENT A S PROVIDED UNDER SECTION 36(2), COULD THE SAME BE CONSIDERED AS AN ALLOWABLE BUSINESS LOSS? WHETHER, THEREFORE, THE AMOUNT OF RS.44.98 LA KHS COULD BE CONSIDERED AS AN ALLOWABLE BUSINESS LOSS? ITA NO.601/KOL/2013-C-AM M/S. AVERY INDIA LTD 8 HELD: SECTION 28 IMPOSES A CHARGE ON THE PROFITS OR GAINS OF BUSINESS OR PROFESSION. THE EXPRESSION 'PROFITS AND GAINS OF BU SINESS OR PROFESSION' IS TO BE UNDERSTOOD IN ITS ORDINARY COMMERCIAL MEANING AN D THE SAME DOES NOT MEAN TOTAL RECEIPTS. WHAT HAS TO BROUGHT TO TAX IS THE NET AMOUNT EARNED BY CARRYING ON A PROFESSION OR A BUSINESS WHICH NECESS ARILY REQUIRES DEDUCTING EXPENSES AND LOSSES INCURRED IN CARRYING ON BUSINESS OR PROFESSION. THE SUPREME COURT IN THE CASE OF BADRIDAS DAGA V. CIT [1958] 34 ITR 10 HAS HELD THAT IN ASSESSING THE AMOUNT OF PROFITS A ND GAINS LIABLE TO TAX, ONE MUST NECESSARILY HAVE REGARD TO THE ACC EPTED COMMERCIAL PRACTICE THAT DEDUCTION OF SUCH EXPENSES AND LOSSES IS TO BE ALLOWED, IF IT ARISES IN CARRYING ON BUSINESS AND IS INCIDENTAL TO IT. [PARA 10] ON THE BASIS OF THE AFORESAID DECISION, IT CAN BE C ONCLUDED THAT EVEN IF THE DEDUCTION IS NOT ALLOWABLE AS BAD DEBTS, THE TRIBUN AL OUGHT TO HAVE CONSIDERED THE ASSESSEE'S CLAIM FOR DEDUCTION AS BU SINESS LOSS. THIS IS PARTICULARLY SO, AS THERE IS NO BAR IN CLAIMING A L OSS AS A BUSINESS LOSS, IF THE SAME IS INCIDENTAL TO CARRYING ON OF A BUSINESS . THE FACT THAT CONDITION OF BAD DEBTS WERE NOT SATISFIED BY THE ASSESSEE WOU LD NOT PREVENT HIM FROM CLAIMING DEDUCTION AS A BUSINESS LOSS INCURRED IN T HE COURSE OF CARRYING ON BUSINESS AS SHARE BROKER. [PARA 11] IN FACT, THE BOMBAY HIGH COURT IN THE CASE OF CIT V. R.B. RUNGTA & CO. [1963] 50 ITR 233 UPHELD THE FINDING OF THE TRIBUNAL THAT THE LOSS C OULD BE ALLOWED ON GENERAL PRINCIPLES GOVERNING COMPUTATION OF PROFITS UNDER SECTION 10 OF THE INDIAN INCOME-TAX ACT, 1922, WHIC H IS SIMILAR/IDENTICAL TO SECTION 28 OF THE 1961 ACT. THE REVENUE IN THAT CAS E URGED THAT THE ASSESSEE HAVING CLAIMED DEDUCTION AS A BAD DEBT THE BENEFIT OF THE GENERAL PRINCIPLE OF LAW THAT ALL EXPENDITURE INCURRED IN CARRYING ON THE BUSINESS MUST BE DEDUCTED TO ARRIVE AT A PROFIT CANNOT BE EXTENDED. THIS SUBMISSION WAS NEGATIVED BY THE COURT AND IT WAS HELD THAT EVEN WH ERE THE DEBT IS NOT HELD TO BE ALLOWABLE AS BAD DEBTS YET THE SAME WOULD BE ALLOWABLE AS A DEDUCTION AS A REVENUE LOSS IN COMPUTING PROFITS OF THE BUSINESS UNDER SECTION 10(1) OF THE INDIAN INCOME-TAX ACT, 1922. [ PARA 12] THEREFORE, THE AMOUNT OF RS. 44.98 LAKHS, WHICH WAS HELD TO BE NOT DEDUCTIBLE AS BAD DEBTS IN VIEW OF THE PROVISIONS O F SECTION 36(2), COULD BE CONSIDERED AS AN ALLOWABLE BUSINESS LOSS. [PARA 13] E. HONBLE CALCUTTA HIGH COURT IN THE CASE OF A.W.F IGGIS & CO (P) LTD VS CIT REPORTED IN (2002) 254 ITR 63 (CAL) , WHEREIN THE QUESTIONS RAISED BEFORE THEIR LORDSHIPS AND THEIR DECISION ARE AS UNDER:- ITA NO.601/KOL/2013-C-AM M/S. AVERY INDIA LTD 9 1. WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE TRIBUNAL WAS CORRECT IN HOLDING THAT THE ASSESSEES CLAIM WA S NOT ALLOWABLE UNDER S. 28 OF THE IT ACT, 1961, BEING DEDUCTIBLE BUSINESS L OSS IN THE YEAR UNDER REFERENCE ? 2. WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE TRIBUNAL WAS RIGHT IN LAW IN REJECTING THE ASSESSEES CLAIM FOR DEDUCTION OF THE SUM OF RS. 1,76,751/- AS A BAD DEBT ? HELD THAT : THE LOAN WAS ADVANCED IN 1978. ASSESSEE FIRST TIME CLAIMED THE DEBT AS A BAD DEBT IN THE ASST YEAR 1980-81. THE CLAIM WAS R EJECTED. AGAIN ASSESSEE HAS CLAIMED IN THE YEAR UNDER CONSIDERATION 1982-8 3. THAT HAS ALSO BEEN REJECTED UP TILL TRIBUNAL. IT IS ALSO BROUGHT TO OU R NOTICE BY COUNSEL OF THE ASSESSEE THAT THE LOAN HAS NOT BEEN RECOVERED SO FA R. WHEN THE CONSIDERATION IN 1982-83 AND AS ON DATE IT IS THE S AME AND THE ADVANCE THAT IS TREATED AS LOAN HAS NOT BEEN RECOVERED TILL TODA Y, WHY THAT CLAIMS OF THE ASSESSEE AS BAD DEBT SHOULD NOT BE ALLOWED. WE DO NOT FIND ANY JUSTIFICATION. IF ASSESSEE KNEW IT WELL THAT FILIN G IN THE SUIT IN ANYWAY HOLD THE ASSESSEE BUT RATHER BURDEN THE ASSESSEE WITH AD DITIONAL FINANCIAL EXPENSES. IF ASSESSEE FEELS THAT IN SPITE OF THE SUIT, THE LOAN WILL NOT BE RECOVERED THE FILING OF CIVIL SUIT FOR RECOVERY OF DEBT IS NOT NECESSARY TO CLAIM THE BAD DEBT. THEREFORE, IN THIS CASE THE AMO UNT SHOULD BE ALLOWED AS BAD DEBT. AS WE ALLOWED THE AMOUNT OF RS. 1,76,751 /- AS BAD DEBT, THEREFORE, WHETHER IT IS A BUSINESS LOSS OR NOT ANS WER TO THIS 1 ST QUESTION WILL BE OF ACADEMIC INTEREST. IN THE RESULT, WE ANSWER THE QUESTION NO. 2 IN THE NEGATIVE THAT IS IN FAVOUR OF THE ASSESSEE AND AGAI NST REVENUE. 2.3.4. IN VIEW OF THE AFORESAID FACTS AND CIRCUMST ANCES AND RESPECTFULLY FOLLOWING THE VARIOUS JUDICIAL PRECEDENTS RELIED UPON HEREINABOVE , WE HOLD THAT THE ASSESSEE IS ENTITLED TO CLAIM DEDUCTION TOWARDS WRITE OFF OF AD VANCES AMOUNTING TO RS. 13,73,258/- AND WE HAVE NO HESITATION IN DIRECTING THE LEARNED AO TO GRANT DEDUCTION TOWARDS THE SAME. ACCORDINGLY, THE GROUND NOS.1 & 1.1 RAISED B Y THE ASSESSEE IN THIS REGARD ARE ALLOWED. ITA NO.601/KOL/2013-C-AM M/S. AVERY INDIA LTD 10 3. THE NEXT GROUND TO BE DECIDED IN THIS APPEAL I S AS TO WHETHER THE ASSESSEE IS ENTITLED FOR DEDUCTION TOWARDS PROVISION MADE FOR L EAVE ENCASHMENT IN THE CONTEXT OF PROVISIONS OF SECTION 43B(F) OF THE ACT IN THE SUM OF RS. 4,77,357/-. 4. THE BRIEF FACTS OF THIS ISSUE IS THAT THE ASSES SEE HAD MADE PROVISION FOR LEAVE ENCASHMENT TO THE TUNE OF RS. 4,77,357/- IN ITS BO OKS AND CLAIMED THE SAME AS A DEDUCTION. THE LEARNED AO DISALLOWED THE SAME INVO KING THE PROVISIONS OF SECTION 43B(F) OF THE ACT BY STATING THAT THE SAME IS ALLOW ABLE ONLY ON PAYMENT BASIS WHICH WAS ALSO UPHELD BY THE LEARNED CITA. AGGRIEVED, TH E ASSESSEE IS IN APPEAL BEFORE US ON THE FOLLOWING GROUNDS:- 2.0 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD.CIT(APPEALS) ERRED IN CONFIRMING THE DISALLOWANC E OF RS.4,77,357/- MADE BY THE ASSESSING OFFICER ON ACCO UNT OF PROVISION FOR LEAVE ENCASHMENT. 2.1 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, THE LD.CIT(APPEALS) AS WELL AS THE ASSESSING OFFICER ER RED IN NOT APPRECIATING THAT CLAUSE (F) OF SECTION 43B PROVIDI NG FOR ALLOWANCE OF LEAVE ENCASHMENT ON PAYMENT BASIS IS ARBITRARY, UNCONSCIONABLE AND DE HORS THE SUPREME COURT DECIS ION IN THE CASE OF BHARAT EARTH MOVERS, AS HELD BY THE JURISDI CTIONAL HC IN THE CASE OF EXIDE INDUSTRIES LIMITED (292 ITR 470) 4.1. THE LEARNED AR RELIED ON THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF EXIDE INDUSTRIES LTD VS UNION OF INDIA REPORTED IN 292 ITR 470 (CAL) WHEREIN THE PROVISIONS OF SECTION 43B (F) OF THE ACT HAS BE EN STRUCK DOWN AS ARBITRARY. HOWEVER HE FAIRLY CONCEDED THAT THE HONBLE APEX CO URT THOUGH HAD STAYED THE OPERATION OF THE JUDGEMENT OF CALCUTTA HIGH COURT I NITIALLY BUT LATER, IT HAD DIRECTED THE ASSESSES TO COMPLY WITH THE PROVISIONS OF SECTION 4 3B(F) OF THE ACT AND PAY TAXES THEREON BUT PARALLELY CLAIM DEDUCTION FOR LEAVE ENC ASHMENT ON PROVISION BASIS, AS AN INTERIM MEASURE TILL THE DISPOSAL OF THE CIVIL APPE AL BY THE APEX COURT. IN RESPONSE TO THIS, THE LEARNED DR VEHEMENTLY SUPPORTED THE ORDER OF THE LOWER AUTHORITIES. ITA NO.601/KOL/2013-C-AM M/S. AVERY INDIA LTD 11 4.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND WE F IND THAT THE ISSUE UNDER APPEAL IS CONSIDERED IN THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF EXIDE INDUSTRIES LTD VS UNION OF INDIA REPORTED IN 292 IT R 470 (CAL) . WE FIND THAT IT IS RELEVANT TO GET INTO THE OPERATIVE PORTION OF THE S AID DECISION OF THE CALCUTTA HIGH COURT, WHEREIN IT WAS HELD THAT:- 11. IN THIS REGARD THE OBSERVATION OF THE APEX COU RT IN THE CASE OF BHARAT EARTH MOVERS (SUPRA) IS QUOTED BELOW: THE LAW IS SETTLED: IF A BUSINESS LIABILITY HAS DEF INITELY ARISEN IN THE ACCOUNTING YEAR, THE DEDUCTION SHOULD BE ALLOWED ALTHOUGH THE LIABILITY MAY HAVE TO BE QUANTIFIED AND DISCHARGED AT A FUTURE DATE. WHAT SH OULD BE CERTAIN IS THE INCURRING OF THE LIABILITY. IT SHOULD ALSO BE CAPAB LE OF BEING ESTIMATED WITH REASONABLE CERTAINTY THOUGH THE ACTUAL QUANTIFICATI ON MAY NOT BE POSSIBLE. IF THESE REQUIREMENTS ARE SATISFIED THE LIABILITY IS NOT A C ONTINGENT ONE. THE LIABILITY IS IN PRAESENTI THOUGH IT WILL BE DISCHARGED AT A FUTURE DATE. IT DOES NOT MAKE ANY DIFFERENCE IF THE FUTURE DATE ON WHICH THE LIABILIT Y SHALL HAVE TO BE DISCHARGED IS NOT CERTAIN.... APPLYING THE ABOVE SAID SETTLED PRINCIPLES TO THE F ACTS OF THE CASE AT HAND WE ARE SATISFIED THAT THE PROVISION MADE BY THE APPELLANT COMPANY FOR MEETING THE LIABILITY INCURRED BY IT UNDER THE LEAVE ENCASHMENT SCHEME PROPORTIONATE WITH THE ENTITLEMENT EARNED BY EMPLOYEES OF THE COMPANY, INC LUSIVE OF THE OFFICERS AND THE STAFF, SUBJECT TO THE CEILING ON ACCUMULATION AS AP PLICABLE ON THE RELEVANT DATE, IS ENTITLED TO DEDUCTION OUT OF THE GROSS RECEIPTS FOR THE ACCOUNTING YEAR DURING WHICH THE PROVISION IS MADE FOR THE LIABILITY. THE LIABILITY IS NOT A CONTINGENT LIABILITY. THE HIGH COURT WAS NOT RIGHT IN TAKING T HE VIEW TO THE CONTRARY. 12. *** *** *** *** *** 13. THE APPEAL SUCCEEDS AND IS ALLOWED. SECTION 43B(F) IS STRUCK DOWN BEING ARBITRARY, UNCONSCIONABLE AND DE HORS THE APEX COUR T DECISION IN THE CASE OF BHARAT EARTH MOVERS (SUPRA). IT IS OBSERVED THAT THE REVENUE HAD PREFERRED SPECI AL LEAVE PETITION (SLP) BEFORE THE HONBLE SUPREME COURT AGAINST THE JUDGEMENT OF HON BLE CALCUTTA HIGH COURT. THE HONBLE APEX COURT IN SLP PROCEEDINGS IN CC 12060 / 2008 DATED 8.9.2008 HAD HELD AS UNDER:- THE PETITION WAS CALLED ON FOR HEARING TODAY. UPON HEARING COUNSEL THE COURT MADE THE FOLLOWING O RDER. ITA NO.601/KOL/2013-C-AM M/S. AVERY INDIA LTD 12 ISSUE NOTICE. IN THE MEANTIME, THERE SHALL BE STAY OF THE IMPUGNE D JUDGEMENT, UNTIL FURTHER ORDERS. LATER THE HONBLE SUPREME COURT IN CC 22889 / 2008 DATED 8.5.2009 HAD HELD AS UNDER:- THE PETITION WAS CALLED ON FOR HEARING TODAY. UPON HEARING COUNSEL THE COURT MADE THE FOLLOWING O RDER DELAY CONDONED. LEAVE GRANTED. PENDING HEARING AND FINAL DISPOSAL OF THE CIVIL APP EAL, DEPARTMENT IS RESTRAINED FROM RECOVERING PENALTY AND INTEREST WHI CH HAS ACCRUED TILL DATE. IT IS MADE CLEAR THAT AS FAR AS THE OUTSTANDI NG INTEREST DEMAND AS OF DATE IS CONCERNED, IT WOULD BE OPEN TO THE DEPARTMENT TO RECOVER THAT AMOUNT IN CASE CIVIL APPEAL OF THE DEPARTMENT IS AL LOWED. WE FURTHER MAKE IT CLEAR THAT THE ASSESSEE WOULD, D URING THE PENDENCY OF THIS CIVIL APPEAL , PAY TAX AS IF SECTION 43B(F) IS ON THE STATUTE BOOK BUT AT THE SAME TIME IT WOULD BE ENTITLED TO MAKE A CLAIM IN ITS RETURNS. RESPECTFULLY FOLLOWING THE AFORESAID JUDICIAL PRECE DENT RELIED UPON, WE DEEM IT FIT AND APPROPRIATE , IN THE INTEREST OF JUSTICE AND FAIR P LAY, TO SET ASIDE THIS ISSUE TO THE FILE OF THE LEARNED AO TO PASS ORDERS BASED ON THE OUTCOME OF THE MAIN APPEAL ON MERITS BY THE HONBLE SUPREME COURT AS STATED SUPRA. ACCORDI NGLY, THE GROUND NOS. 2 & 2.1 RAISED BY THE ASSESSEE ARE ALLOWED FOR STATISTICAL PURPOSES. 5. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PAR TLY ALLOWED. THIS ORDER IS PRONOUNCED IN OPEN COURT ON 27/ 11 /2015 SD/- ( MAHAVIR SINGH, JUDICIAL MEMBER ) SD/- (M. BALAGANESH, ACCOUNTANT MEMBER) DATE 27/ 11 /2015 ITA NO.601/KOL/2013-C-AM M/S. AVERY INDIA LTD 13 COPY OF THE ORDER FORWARDED TO: 1.. THE APPELLANT :M/S. AVERY INDIA LIMITED PLOT N O. 50-59, SECTOR-25 BALLABGARH 121 004 (HARYANA). 2 THE RESPONDENT- THE DCIT,CIR-1 AAYKAR BHAWAN, P- 7 CHOWRINGHEE SQ, KOL-69. 3 4.. THE CIT, THE CIT(A) 5. DR, KOLKATA BENCH 6. GUARD FILE. TRUE COPY, BY ORDER, ASSTT REGISTRAR ** PRADIP SPS