ACIT, Bangalore V. M/s. Valdel Engineers & Constructors Pvt. Ltd., Bangalore

ITA 616/BANG/2008

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 8671 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 6 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-11-2010
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 09-11-2010
• Assessment Year: 2002-2003
• Appeal Filed On: 08-05-2008
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: VS MS VALDEL ENGINEERS
• Keywords: Bad and doubtful debts; Set aside
• Section: 143(3); 147

Judgement Text

THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH A BEFORE DR. O.K NARAYANAN, VICE PRESIDENT AND SMT. P MADHAVI DEVI, JUDICIAL MEMBER ITA NOS.616 TO 618/B ANG/2008 (ASST. YEAR 2002-03, 2003-04 & 2005-06) THE ASST. COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE-2(2), BANGALORE. . APPELLANT BY VS. M/S VALDEL ENGINEERS AND CONSTRUCTIONS PVT. LTD., MEGHDOOOTH MANSION, 9, CIVIL STATION, HOSUR ROAD, BANGALORE-560 025. . RESPONDENT BY APPELLANT BY : SHRI G.V GOPALA RAO, COMMISSIONE R OF INCOME-TAX RESPONDENT BY : SHRI V CHANDRASHEKAR, ADVOCATE O R D E R PER DR. O.K NARAYANAN, VICE PRESIDENT THESE THREE APPEALS ARE FILED BY THE REVENUE. THE RELEVANT ASSESSMENT YEARS ARE 2002-03, 2003-04 AND 2004-05. THESE APPEALS ARE DIRECTED AGAINST THE COMMON ORDER OF THE COMMIS SIONER OF INCOME-TAX (APPEALS) AT BANGALORE DATED 18.02.2008. THE APPEALS ITA NOS.616 TO 618 /B/08 2 ARISE OUT OF THE ASSESSMENTS COMPLETED U/S 143(3) A S FAR AS THE ASSESSMENT YEARS 2002-03 AND 2004-05 ARE CONCERNED. THE APPEAL FOR THE ASSESSMENT YEAR 2003-04 ARISES OUT OF THE ASSES SMENT COMPLETED U/S 143(3) READ WITH SEC. 147 OF THE INCOME-TAX AC T, 1961. 2. FIRST, WE WILL CONSIDER THE APPEAL FILED FOR THE ASSESSMENT YEAR 2002-03 IN ITA NO.616/BANG/2008. 3. THE FIRST GROUND RAISED BY THE REVENUE IS THAT T HE CIT(A) HAS ERRED IN ALLOWING THE CLAIM OF THE ASSESSEE FOR DED UCTION U/S 10A WITHOUT TAKING INTO CONSIDERATION THE FACT THAT THE ASSESSEE DID NOT FULFILL THE BASIC CONDITIONS FOR CLAIMING DEDUCTION U/S 10A. IT IS THE CASE OF THE REVENUE THAT THE NEW UNDERTAKING WAS FO RMED BY SPLITTING UP/RECONSTRUCTION OF THE BUSINESS OF THE ASSESSEE A LREADY IN EXISTENCE. 4. IN THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER APPEAL, THE ASSESSEE HAD SET UP A STPI UNIT DULY RE GISTERED UNDER THE SCHEME DECLARED BY THE GOVT. OF INDIA. BY SETTING UP THE STPI UNIT, THE ASSESSEE WAS DELIVERING SOFTWARE SERVICES AT SO UTH KOREA. THE ASSESSEE CLAIMED THE STATUS OF AN ELIGIBLE UNIT FOR ITS NEW VENTURE U/S ITA NOS.616 TO 618 /B/08 3 10A OF THE INCOME-TAX ACT 1961. THE ASSESSING OFFI CER DENIED THE CLAIM OF EXEMPTION U/S 10A ON THE FOLLOWING GROUNDS : I) THE NEW STPI UNIT HAS BEEN SET UP BY THE ASSESSEE IN THE SAME PREMISES FROM WHERE THE ASSESSEE WAS CARRYING ON THE EXISTING BUSINESS. THIS AMOUNTED TO SPLITTING UP OF AN EXISTING BUSINESS. II) THE ASSESSEE HAS NOT ACQUIRED ANY NEW PLANT OR MACHINERY AND IN THAT WAY, THE ASSESSEE HAS USED THE INFRASTRUCTURE OF THE EXISTING BUSINESS FOR THE PURPOSE OF NEW STPI UNIT. III) THE SERVICES OF EMPLOYEES OF THE EXISTING UNIT HAVE BEEN UTILIZED IN SETTING UP OF THE NEW STPI UNIT. IV) THE TOTAL INCOME OF THE ASSESSEE IS LOSS AND, THEREFORE, ALTERNATIVELY DEDUCTION ITA NOS.616 TO 618 /B/08 4 U/S 10A CANNOT BE GIVEN IN THE LIGHT OF THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF IPCA LABORATORIES LTD. VS. DCIT. 5. IN FIRST APPEAL, THE CIT(A) FOUND THAT THERE IS NO MATERIAL ON RECORD TO SHOW THAT THE NEW STPI UNIT OF THE ASSESS EE WAS FORMED BY SPLITTING UP/RECONSTRUCTION OR BY TRANSFER OF MACHI NE OR PLANT OF A BUSINESS ALREADY IN EXISTENCE. HE OBSERVED THAT TH E ASSESSEE DID NOT PURCHASE ANY PLANT AND MACHINERY BECAUSE OF THE NAT URE OF THE ACTIVITIES CARRIED ON BY THE ASSESSEE. THE ACTIVIT Y OF THE ASSESSEE WAS TO DEPUTE ITS TRAINED PERSONNEL TO THE WORK SITES O F THE CLIENTS IN SOUTH KOREA. AS ALL THE ACTIVITIES WERE CARRIED ON IN TH E CLIENT PREMISES AT SOUTH KOREA, IT WAS NOT NECESSARY FOR THE ASSESSEE TO SET UP INFRASTRUCTURAL FACILITIES IN INDIA. THE CIT(A) AL SO FOUND THAT PLANT AND MACHINERY WERE PURCHASED BY THE ASSESSEE MAINLY IN THE FORM OF COMPUTERS IN THE SUBSEQUENT YEARS AS AND WHEN NEED AROSE FOR THE SAME. THEREFORE, THE CIT(A) FOUND THAT THERE IS NO CASE OF ANY SPLITTING/RECONSTRUCTION OF AN EXISTING BUSINESS. THE CIT(A) FURTHER HELD THAT IN THE LIGHT OF THE JUDGMENT OF THE HONB LE SUPREME COURT IN THE CASE OF BAJAJ TEMPO LTD., VS. CIT, 196 ITR 188 THE NEW UNIT SET ITA NOS.616 TO 618 /B/08 5 UP IN THE LEASED PREMISES AND PAYING RENT BY THE NE W UNIT TO THE EXISTING BUSINESS DID NOT CONSTITUTE SPLITTING UP O F AN EXISTING BUSINESS. 6. AFTER HEARING BOTH SIDES AND GOING THROUGH THE D ETAILED ORDERS PASSED BY THE LOWER AUTHORITIES, WE ARE OF THE CONS IDERED VIEW THAT THE FINDINGS ARRIVED AT BY THE CIT(A) ARE RIGHTFUL, JUS T AND PROPER. THE CIRCULAR NO.694 DATED 22.11.1994 ISSUED BY THE CBDT IN THE CONTEXT OF SEC. 10A HAS CLARIFIED THAT DEVELOPMENT OF PROGR AMME ON SITE IS COVERED BY THE EXEMPTION SCHEME PROPOUNDED BY THE C ENTRAL GOVERNMENT. THE ASSESSEE WAS ENGAGED ON SITE DEVELO PMENT OF SOFTWARE PROGRAMME. THE PROGRAMMES ARE DELIVERED A T THE CLIENTS PREMISES AT WORK SITE IN SOUTH KOREA. THERE IS NO DOUBT THAT THE ACTIVITIES CARRIED OUT BY THE ASSESSEE ARE FALLING UNDER THE PURVIEW OF THE SEC. 10A AS SPECIFIED BY THE EXPLANATION PROVID ED UNDER THE SAID SEC. 10A AND FURTHER CLARIFIED BY THE CIRCULAR NO.6 94 DATED 22.11.94. THE CIT(A) HAS EXAMINED THE QUESTION OF SPLITTING U P OF AN EXISTING BUSINESS AS ALLEGED BY THE REVENUE. AS RIGHTLY POI NTED OUT BY HIM, AS THE ACTIVITIES WERE FINALLY CULMINATED AT THE WORK SITE OF THE CLIENTS IN SOURTH KOREA, THERE WAS NO NEED FOR FULL FLEDGED IN FRASTRUCTURAL FACILITIES IN INDIA. SUCH FACILITY IS NOT CALLED F OR IN THE LINE OF BUSINESS ITA NOS.616 TO 618 /B/08 6 CARRIED ON BY THE ASSESSEE. THEREFORE, IN THE FACT S AND CIRCUMSTANCES OF THE CASE, WE FIND THAT THE ASSESSEE IS ENTITLED FOR THE DEDUCTION U/S 10A AND THE CIT(A) HAS RIGHTLY HELD SO. THEREFORE, WE AGREE WITH THE FINDING OF THE CIT(A) THAT THE ASSESSEE IS ENTITLED FOR CLAIMING DEDUCTION U/S 10A. THIS ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE. THE GROUND RAISED BY THE REVENUE ON THIS POINT IS D ISMISSED. 7. THE NEXT GROUND, WHICH IS ALTERNATIVE IN NATURE RAISED BY THE REVENUE IS THAT THE CIT(A) HAS ERRED IN LAW AND IN FACTS IN ALLOWING THE CLAIM OF THE ASSESSEE FOR DEDUCTION U/S 10A DES PITE THERE BEING A NEGATIVE INCOME FOR ASSESSMENT THE YEAR 2002-03. 8. THE ASSESSING OFFICER HAS DENIED DEDUCTION U/S 10A ALSO ON THE GROUND THAT THE ASSESSEE HAD SUFFERED LOSS IN T HE FIRST ASSESSMENT YEAR 2002-03. THE CASE BEING SO, THE ASSESSING AUT HORITY RELIED ON THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE O F IPCA LABORATORIES AND HELD THAT NO DEDUCTION COULD BE AL LOWED U/S 10A. THE CIT(A) HELD THAT THE DECISION OF THE HONBLE SU PREME COURT IN THE CASE OF IPCA LABORATORIES LTD. WAS NOT APPLICAB LE TO THE PRESENT CASE IN HAND. THE DECISION OF THE HONBLE SUPREME COURT WAS IN THE CONTEXT OF DEDUCTIONS PROVIDED UNDER CHAPTER VIA. THE HONBLE ITA NOS.616 TO 618 /B/08 7 SUPREME COURT WAS EXAMINING THE EFFECT OF SUCH DEDU CTIONS IN THE LIGHT OF THE OVER ALL LIMITING PROVISION CONTAINED IN SEC. 80AB. BUT IN THE PRESENT CASE, THE CLAIM OF DEDUCTION OF THE ASS ESSEE IS NOT UNDER CHAPTER VIA. THE DEDUCTION IS CLAIMED U/S 10A. THE REFORE, THE SAID DECISION DOES NOT APPLY. 9. REGARDING THE ALTERNATIVE CONTENTION OF THE REVE NUE, WE AGREE WITH THE FINDING OF THE CIT(A). THE JUDGMENT OF TH E HONBLE SUPREME COURT IN THE CASE OF IPCA LABORATORIES LTD. IS NOT IN THE CONTEXT OF SEC. 10A OR ANY SUCH OTHER ITEM WHICH WO ULD NOT FORM PART OF THE TOTAL INCOME OF AN ASSESSEE AS PROVIDED IN C HAPTER III OF THE INCOME-TAX ACT 1961. THE JUDGMENT OF THE HONBLE S UPREME COURT WAS DELIVERED IN THE CONTEXT OF EXAMINING THE EFFEC T AND SCOPE OF SEC. 80AB WHILE GIVING THE DEDUCTIONS PROVIDED UNDER CHA PTER VIA OF THE INCOME-TAX ACT 1961. THE HONBLE COURT HELD THAT S EC. 80AB IS HAVING AN OVERRIDING EFFECT ON THE DEDUCTION PROVID ED UNDER CHAPTER VI A AND, THEREFORE, SUCH DEDUCTION SHOULD BE CONTR OLLED BY THE PROVISION OF LAW CONTAINED IN SEC. 80AB. IN THE PR ESENT CASE, THE DEDUCTION HAS BEEN CLAIMED BY THE ASSESSEE U/S 10A. SECTION 10A FALLS UNDER CHAPTER III OF THE INCOME-TAX ACT 1961, WHICH ENUMERATES VARIOUS KINDS OF INCOME WHICH DO NOT FORM PART OF T HE TOTAL INCOME OF ITA NOS.616 TO 618 /B/08 8 AN ASSESSEE. SUCH INCOME DOES NOT FORM PART OF THE COMPUTATION OF INCOME. THEREFORE, AS RIGHTLY POINTED OUT BY THE CI T(A), THE DECISION RELIED ON BY THE ASSESSING AUTHORITY TO DENY THE CL AIM OF THE ASSESSEE IS NOT JUSTIFIED. 10. WE FIND THAT THE ASSESSEE HAS MAINTAINED SEPARA TE SET OF ACCOUNT FOR ITS NEW STPI UNIT. IN SUCH CIRCUMSTANCES, IF T HE ASSESSEE HAS EARNED A POSITIVE INCOME IN THE STP BUSINESS AS AN INDEPENDENT UNIT, THE ASSESSEE MUST BE ENTITLED FOR THE EXEMPTION. B UT AS THE DETAILS OF SUCH LOSS OR PROFIT IS NOT AVAILABLE WITH US AT PRE SENT, WE REMIT BACK THIS ISSUE TO THE ASSESSING OFFICER FOR THE LIMITED PURPOSE OF EXAMINING WHETHER STPI SET UP BY THE ASSESSEE HAS E ARNED POSITIVE INCOME FOR THE IMPUGNED ASSESSMENT YEAR AS AN INDEP ENDENT UNIT. IF SUCH INDEPENDENT PROFIT IS AVAILABLE IN THE HANDS O F THE ASSESSEE, THE ASSESSEE IS ENTITLED FOR DEDUCTION U/S 10A. 11. WE HAVE ACCEPTED ALL THE LEGAL ARGUMENTS OF THE ASSESSEE AS UPHELD BY THE CIT(A) AND REJECTED THE GROUNDS RAISE D BY THE REVENUE IN THIS REGARD. THE CASE IS REMITTED BACK TO THE A SSESSING OFFICER FOR THE LIMITED PURPOSE OF VERIFYING THE ACCOUNTS AND A SCERTAINING THE PROFIT OF THE NEW STPI UNIT. ITA NOS.616 TO 618 /B/08 9 12. THE NEXT GROUND RAISED BY THE REVENUE IS THAT T HE CIT(A) HAS ERRED IN ALLOWING DEDUCTION ON ACCOUNT OF BAD DEBTS WRITTEN OFF WITHOUT CONSIDERING THE FACTS ELABORATELY DEALT IN THE ASSESSMENT ORDER. 13. THE ASSESSEE HAS RECOGNIZED ITS PROFIT ON PERC ENTAGE COMPLETION METHOD AND FOLLOWS THE ACCOUNTING STAND ARD AS-7 PROMULGATED BY THE INSTITUTE OF CHARTERED ACCOUNTAN TS OF INDIA. WHILE ASCERTAINING THE INCOME ON THE ABOVE BASIS, T HE ASSESSEE IS CREDITING THAT PART OF COMPLETED PROJECT TO THE PRO FIT AND LOSS ACCOUNT AND THEREBY DECLARES THE RELEVANT INCOME UNDER THE PERCENTAGE METHOD. IN THE CORRESPONDING EXPENDITURE, THE ASSE SSEE FINDS THAT SOME CLIENTS ARE NOT ACCEPTING THE BILLS ISSUED BY THE ASSESSEE IN FULL THEREBY THE ASSESSEE COMPANY IS NOT REALIZING THE F ULL AMOUNTS OF THE BILLS ISSUED BY IT. THIS PART OF THE MONEY NOT PAI D BY THE CUSTOMERS IS TREATED BY THE ASSESSEE COMPANY AS BAD DEBTS AND WR ITTEN OFF IN THE BOOKS OF ACCOUNTS. THIS IS DISALLOWED BY THE ASSES SING AUTHORITY AND ALLOWED BY THE CIT(A). 14. WE CONSIDERED THE ISSUE VERY CAREFULLY. THE AM OUNT IS NOT REALIZED BY THE ASSESSEE FROM THE BILLS ISSUED TO I TS CUSTOMERS. IN FACT, IT DID NOT PERTAKE THE CHARACTER OF BAD DEBTS. A D EBT MEANS AN ITA NOS.616 TO 618 /B/08 10 ACTIONABLE CLAIM. AN ACTIONABLE CLAIM IS AN AMOUNT EXISTED, ADMITTED, AND ACKNOWLEDGED BOTH BY THE CREDITOR AND THE DEBTO R. IF SUCH DEBTS ARE WRITTEN OFF IN THE BOOKS OF ACCOUNTS IT MIGHT B E QUALIFIED AS DEDUCTION U/S 36 OF THE INCOME-TAX ACT 1961. IN TH E PRESENT CASE, THE SITUATION IS DIFFERENT. THE ASSESSEE IS ISSUING BI LLS SAY FOR RS.100/-. FOR VARIOUS REASONS POINTED OUT BY THE CLIENT TO TH E ASSESSEE, THE CLIENT ACKNOWLEDGES THE LIABILITY TO PAY ONLY RS.80/-. THE BALANCE RS.20/- WAS NOT PAID BY THE CLIENT AND NOT REALIZED BY THE ASSESSEE. IN SUCH CIRCUMSTANCES WHAT ACTUALLY HAPPENS IS THAT THE CLI ENT ACCEPTS A DEBT OF RS.80/- ALONE. THEREFORE, THE ENTIRE BILL AMOUNT OF RS.100/- CANNOT BE CONSIDERED AS AN AMOUNT DUE FROM THE CLIENT. TH E AMOUNT DUE FROM THE CLIENT IS ONLY RS.80/-. IF THAT AMOUNT OF RS.80/- IS PAID BY THE ASSESSEE, THERE IS NO CASE OF ANY BAD DEBTS. BUT IN THE PRESENT CASE, THE ASSESSEE HAS ALREADY CREDITED RS.100/- IN ITS PROFI T AND LOSS ACCOUNT, AGAINST WHICH THE ASSESSEE IS GETTING RS.80/- ALONE . IN THAT WAY, WHAT IS INCURRED BY THE ASSESSEE IS A LOSS WHICH CANNOT BE DESCRIBED AS BAD DEBTS. THEREFORE, THE CIT(A) HAS GONE WRONG IN AC CEPTING THE CONTENTION OF THE ASSESSEE REGARDING THE WRITING OF F AND DEDUCTION OF BAD DEBTS. THE ORDER OF THE CIT(A) ON THIS POINT I S SET ASIDE. ITA NOS.616 TO 618 /B/08 11 15. BUT WE MAKE IT CLEAR THAT WHEREVER THE ASSESSEE HAS CREDITED GROSS AMOUNTS OF THE BILLS ISSUED TO THE CUSTOMERS AND THE ASSESSEE HAS NOT REALIZED A PART OF THAT AMOUNT, THE SAID UNREAL IZED PART SHOULD BE ALLOWED AS A DEDUCTION IN THE HANDS OF THE ASSESSEE AS BUSINESS LOSS. THIS NEEDS VERIFICATION. THEREFORE, THIS ISSUE IS SET ASIDE AND SENT BACK TO THE ASSESSING OFFICER FOR QUANTIFYING SUCH UNREALIZED BILL AMOUNTS CAUSED BECAUSE OF THE NON ACCEPTANCE OF THE CLIENTS OF THE ASSESSEE. ONCE THEY ARE QUANTIFIED, THE OFFICER HA S TO VERIFY WHETHER THE SAID AMOUNT HAS ALREADY BEEN OFFERED BY THE ASS ESSEE AS INCOME IN ITS PROFIT AND LOSS ACCOUNT. IF THESE TWO CONDITIO NS ARE SATISFIED, THEN THE ASSESSING OFFICER MAY ALLOW THE DEDUCTION AS BU SINESS LOSS AND PASS ORDERS IN ACCORDANCE WITH LAW. 16. NEXT, WE WILL CONSIDER THE APPEAL FILED FOR THE ASSESSMENT YEAR 2003-04 IN ITA NO.617/BANG/2008 17. THE FIRST GROUND IS REGARDING THE DEDUCTION U/S 10A. WE HAVE ALREADY HELD THAT THE ASSESSEE IS ENTITLED FOR THE DEDUCTION U/S 10A IN THE COURSE OF ADJUDICATING THE APPEAL FOR THE ASSES SMENT YEAR 2002-03. AS FAR AS THE IMPUGNED ASSESSMENT YEAR 2003-04 IS C ONCERNED, THERE IS ITA NOS.616 TO 618 /B/08 12 NO QUESTION OF NEGATIVE PROFIT. IN THESE CIRCUMST ANCES, WE CONFIRM THE ORDER OF THE CIT(A) ON THIS POINT. 18. THE SECOND GROUND RAISED BY THE REVENUE IS THAT THE CIT(A) HAS ERRED IN ALLOWING DEDUCTION ON ACCOUNT OF BAD D EBTS WRITTEN OFF. THIS ISSUE IS REMITTED BACK TO THE ASSESSING OFFICE R AS DONE FOR THE EARLIER ASSESSMENT YEAR 2002-03. 19. NEXT, WE WILL CONSIDER THE APPEAL FILED FOR THE ASSESSMENT YEAR 2004-05 IN ITA NO/618/BANG/2008. 20. THE ONLY ISSUE RAISED IN THIS APPEAL IS THE QUE STION OF DEDUCTION U/S 10A. WE HAVE HELD THAT THE ASSESSEE IS ENTITLE D FOR THE DEDUCTION U/S 10A. THE ORDER OF THE CIT(A) ON THIS POINT IS UPHELD AND THE GROUND RAISED BY THE REVENUE IS REJECTED. 21. IN RESULT, THE APPEALS FILED BY THE REVENUE FOR THE ASSESSMENT YEAR 2002-03 AND 2003-04 ARE TREATED AS PARTLY ALLO WED FOR STATISTICAL PURPOSES. THE APPEAL FOR THE ASSESSMENT YEAR 2004- 05 IS DISMISSED. ITA NOS.616 TO 618 /B/08 13 ORDER PRONOUNCED ON WEDNESDAY THE 10TH DAY OF NOVEMBER, 2010, AT BANGALORE. SD/- SD/- (P MADHAVI DEVI) ( DR. O.K NARAYANAN) JUDICIAL MEMBER VICE PRESIDENT VMS. COPY TO : 1. THE ASSESSEE 2. THE REVENUE 3.THE CIT CONCERNED. 4.THE CIT(A) CONCERNED. 5.DR 6.GF BY ORDER ASST. REGISTRAR, I TAT, BANGALORE.