DCIT, V. M/s Big Bags India Pvt. Ltd.,

ITA 673/BANG/2013

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 7012 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 3 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-08-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2009-2010
• Appeal Filed On: 10-05-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: L V BHASKAR REDDY JT
• Keywords: Bad and doubtful debts
• Section: 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER ITA NO.673/BANG/2013 ASSESSMENT YEAR : 2009-10 THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 11(2), BANGALORE. VS. M/S. BIG BAGS INDIA PVT. LTD., NO.37, NADAKERAPPA INDUSTRIAL ESTATE, ANDHRAHALLI MAIN ROAD, VISWANEEDAM POST, NEAR PEENYA II STAGE, BANGALORE 560 091. PAN : AAACB 5856E APPELLANT RESPONDENT APPELLANT BY : SHRI L.V. BHASKAR REDDY, JT. CIT(DR) RESPONDENT BY : SHRI NARENDRA SHARMA, ADVOCATE DATE OF HEARING : 05.08.2014 DATE OF PRONOUNCEMENT : 21.08.2014 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THIS APPEAL BY THE REVENUE IS AGAINST THE ORDER DA TED 28.02.2013 OF THE CIT(APPEALS)-I, BANGALORE RELATING TO ASSESSMEN T YEAR 2009-10. 2. THE GROUNDS RAISED BY THE REVENUE READS THUS:- 1. THE ORDER OF THE LEARNED CIT (APPEALS), IN SO FAR AS IT IS PREJUDICIAL TO THE INTEREST OF REVENUE, IS OPPOSED TO LAW AND THE FACTS AND CIRCUMSTANCES OF THE CASE. ITA NO.673/BANG/2013 PAGE 2 OF 8 2. THE CIT(A) ERRED IN DELETING THE DISALLOWANCE M ADE ON ACCOUNT OF BAD DEBTS WRITTEN OFF AMOUNTING TO RS. 7 1,49,374/-. 3. THE CIT(A) ERRED IN HOLDING THAT RBI DIRECTIVES CANNOT OVERRIDE THE STATUTORY PROVISIONS OF EXPLANATION TO SECTION 36(1)(VII) OF THE ACT BY PLACING RELIANCE ON THE DE CISION OF THE HONBLE ITAT, MUMBAI BENCH DECISION IN THE CASE OF M/S SABRA IMPEX LTD. WITHOUT APPRECIATING THE FACT THAT THE D ECISION RELIED UPON HAS NOT REACHED FINALITY. 4. FOR THESE AND SUCH OTHER GROUNDS THAT MAY BE UR GED AT THE TIME OF HEARING. IT IS HUMBLY PRAYED THAT THE ORDER OF THE CIT(A) BE REVERSED AND THAT OF THE ASSESSING OFFICER BE RE STORED. 5. THE APPELLANT CRAVES LEAVE TO ADD, TO ALTER, TO AMEND OR DELETE ANY OF THE GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING OF THE APPEAL. 3. THE ASSESSEE IS A COMPANY. IT IS ENGAGED IN TH E BUSINESS OF MANUFACTURE AND MARKETING OF HDPE PRODUCTS. THE AO NOTED THAT THE ASSESSEE HAD CLAIMED A SUM OF RS.71,49,374/- BEING BAD DEBTS WRITTEN OFF REPRESENTING DEBTORS RELATED TO EXPORTS MADE. ON TH E GROUND THAT THE ASSESSEE HAD NOT TAKEN PERMISSION FROM THE RESERVE BANK OF INDIA FOR MAKING THE WRITE-OFF OR FOR EXTENSION FOR RECEIPT O F FOREIGN EXCHANGE, THE AO DISALLOWED THE CLAIM FOR DEDUCTION AND BROUGHT THE SUM OF RS.71,49,374/- TO TAX. 4. BEFORE THE CIT(APPEALS), THE ASSESSEE SUBMITTED THAT DURING THE COURSE OF ITS BUSINESS IT HAD MADE EXPORTS OF THE F INISHED GOODS BEING HDPE PRODUCTS TO VARIOUS FOREIGN CUSTOMERS WHO ARE THE IMPORTERS, AT THE CONSIDERATION AGREED TO THROUGH A CONTRACT. FOR THE MANUFACTURE OF THE ITA NO.673/BANG/2013 PAGE 3 OF 8 ABOVE PRODUCTS, THE ASSESSEE HAD TO IMPORT RAW MATE RIALS. DUE TO HEAVY FLUCTUATION IN THE FOREIGN EXCHANGE RATE, THE ASSES SEE HAD TO REMIT EXCESS COST IN TERMS OF INDIAN RUPEE TOWARDS SUCH IMPORTS. THUS, SUCH HEAVY COST INCURRED BY THE ASSESSEE HAD RESULTED IN LOSS IN IT S BUSINESS AND IN ORDER TO CONTAIN THE LOSS THE ASSESSEE HAD MADE/RAISED DEBIT NOTES TO ITS CUSTOMERS BEING THE IMPORTERS OF THE PRODUCTS, FOR INCREASING THE SALE PRICE AND SUCH EXCESS CONSIDERATION REQUESTED TO BE PAID BY THE IM PORTER WHICH WAS REFLECTED THROUGH DEBIT NOTE ISSUED TO THEM WAS CON SIDERED IN ITS ACCOUNTS AS SALE CONSIDERATION RECEIVABLE. SUCH SALE CONSIDE RATION RECEIVABLE, IN ACCORDANCE WITH THE ASSESSEES UNILATERAL CLAIM, WA S OFFERED FOR TAXATION IN THE YEAR 2006-07. IT WAS POINTED OUT THAT COPIES O F THE ACCOUNTS RELATED TO ASSESSMENT YEAR 2006-07 WHEREIN THE INCOME WAS OFFE RED WAS ALSO SUBMITTED. HOWEVER, THE FOREIGN CUSTOMER/IMPORTERS DID NOT ACKNOWLEDGE THE ADDITIONAL CONSIDERATION CLAIMED BY THE ASSESSE E AND HAVING FOUND AFTER PERSUASION THAT THE AMOUNT WAS NOT RECEIVABLE AND NOT EXPECTED TO BE REALIZED IN THE RELEVANT PREVIOUS YEAR TO THE ASSES SMENT YEAR 2009-10, THE ASSESSEE HAD TO WRITE OFF THE AMOUNT OF RS.71,49,37 4/- AND REDUCE ITS INCOME ACCORDINGLY. THE DETAILS OF CUSTOMERS WHOSE DEBIT WAS WRITTEN OFF WERE FURNISHED WHICH WERE AS FOLLOWS: 1. ISOLOCK OFFERED TO TAX DURING FINANCIAL YEAR 2006-07 RS.4,58,623/-. 2. NORDENIA FRANCE OFFERED TO TAX DURING THE FIN ANCIAL YEAR 2006-07 RS.8,15,472/-. ITA NO.673/BANG/2013 PAGE 4 OF 8 3. RODIGUEZ OFFERED TO TAX DURING THE FINANCIAL YEAR 2006- 07 RS.9,42,818/-. 4. WEIR AND CARMICHAEL LTD - OFFERED TO TAX DURING THE FINANCIAL YEAR 2006-07 RS.3,34,925/-. 5. UNSA AMBALAJ SAN GERMANY OFFERED TO TAX DURIN G THE FINANCIAL YEAR 2006-07 RS.45,97,536/-. 5. IT WAS SUBMITTED BEFORE THE CIT(A) THAT SINCE TH E AMOUNT OFFERED FOR TAXATION IN THE YEAR 2006-07, HAD SUFFERED TAX AND HAS NOT RECEIVED THE SUM SO OFFERED TO TAX AND HENCE IT WAS TREATED AS B AD DEBT AND THE ACCOUNTS OF THE PARTIES WAS DULY WRITTEN OFF AND TH E CLAIM HAD BEEN MADE AS BAD DEBTS. THUS, THE PROVISIONS OF SEC.36(1)(VII ) R.W.S.36(2) OF THE ACT ARE SATISFIED. RELIANCE WAS PLACED ON THE JUDGMENT OF THE SUPREME COURT ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF T.R.F. LTD. VS. CIT, 323 ITR 397 WHEREIN IT WAS HELD THAT IT IS NOT NECESSARY THAT THE DEBT WRITTEN OFF AS BAD DEBTS HAS IN FACT BAD AND T HAT IT IS ENOUGH IF IT IS WRITTEN OFF AS BAD DEBTS IN THE BOOKS OF ACCOUNTS. 6. THE CIT(APPEALS) AFTER CONSIDERING THE SUBMISSIO NS OF THE ASSESSEE AND THE ASSESSMENT ORDER, DIRECTED THE AO TO ALLOW DEDUCTION TO THE ASSESSEE ON ACCOUNT OF BAD DEBTS WRITTEN OFF. THE RELEVANT OBSERVATIONS OF THE CIT(APPEALS) ARE AS FOLLOWS:- 5.4 THUS THE QUESTION NOW TO BE CONSIDERED IS AS TO WHETHER THE BAD DEBTS WRITTEN OFF IN RESPECT OF FOR EIGN PARTIES ON ACCOUNT OF RAISING DEBIT NOTES IS AN ALLOWABLE DEDU CTION. THE CONTENTION OF THE AO IS THAT THERE SHOULD BE PERMIS SION FROM THE RBI BEFORE THE WRITE OFF WAS MADE. HOWEVER, THERE A RE NO SPECIFIC PROVISIONS IN THIS REGARD AND THE AOS REA SONING IS NOT ITA NO.673/BANG/2013 PAGE 5 OF 8 JUSTIFIABLE. THE PROVISIONS U/S 36(1)(VII) R.W.S. 3 6(2) ARE SELF CONTAINED CODE AND THE ASSESSEE FULFILLED THESE CON DITIONS. UNDER SIMILAR CIRCUMSTANCES, THE HONBLE ITAT, MUMBAI BEN CH IN THE CASE OF SABRA IMPEX LTD. [141 TTJ (MUMBAI)(UO) 11] HELD THAT THE RBI DIRECTIVES CANNOT OVERRIDE THE STATUTORY PR OVISIONS OF EXPLANATION TO SECTION 36(1)(VII) OF THE ACT AND, T HEREFORE, THE ASSESSEES CLAIM FOR WRITE OFF OF BAD DEBTS PERTAIN ING TO FOREIGN PARTY COULD NOT BE DISALLOWED MERELY FOR WANT OF RB I APPROVAL. IN THE INSTANT CASE ALSO, THE INCOME ARISING ON ACC OUNT OF THE EXPORTS WAS ADMITTED BY THE APPELLANT IN THE ASSESS MENT YEAR 2006-07 AND ALL THE CONDITIONS AS REQUIRED U/S 36(1 )(VII) READ WITH SECTION 36(2) OF THE ACT ARE FULFILLED. RESPECTFULL Y FOLLOWING THE SAID DECISION, THE AO IS DIRECTED TO ALLOW THE DEDU CTION OF BAD DEBTS WRITTEN OFF BY THE APPELLANT DURING THE PERIO D UNDER CONSIDERATION. 7. BEFORE US, THE LD. DR POINTED OUT THAT IN THE GR OUNDS OF APPEAL, THE DEPARTMENT HAS TAKEN AN OBJECTION THAT THE DECISION RENDERED BY THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF M/S SABRA IMPEX LTD. (SUPRA) HAS NOT ATTAINED FINALITY. WITHOUT PREJUDICE TO THE ABOVE SUBMISSION, IT WAS ALSO SUBMITTED BY HIM THAT THE D ISALLOWANCE MADE BY THE AO CAN BE SUSTAINED BY INVOKING EXPLANATION TO SECTION 37(1) OF THE ACT. 8. THE LD. COUNSEL FOR THE ASSESSEE, BESIDES RELYIN G ON THE ORDER OF THE CIT(APPEALS), ALSO FILED A COPY OF THE DECISION OF THE ITAT BANGALORE BENCH RENDERED IN THE CASE OF M/S. ACE DESIGNERS LTD. V. ADDL. CIT , ITA NO.1150(B)/2009 FOR THE A.Y. 2004-05 , WHEREIN SIMILAR VIEW HAS EXPRESSED BY THE MUMBAI BENCH OF THE TRIBUNAL IN TH E CASE M/S SABRA IMPEX LTD. (SUPRA) HAS BEEN TAKEN. ITA NO.673/BANG/2013 PAGE 6 OF 8 9. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. IN TH E CASE OF M/S SABRA IMPEX LTD. (SUPRA) AS WELL AS IN THE CASE OF M/S. ACE DESIGNERS LTD. (SUPRA) , A CONSISTENT VIEW HAS BEEN TAKEN THAT NON- REALISATION OF EXPORT PROCEEDS FROM A FOREIGN PARTY CAN BE CONSIDERED AS A BAD DEBT AND WRITTEN OFF AND CLAIMED AS A DEDUCTION . IT WAS ALSO HELD THAT THE FACT THAT PERMISSION OF RBI HAS NOT BEEN OBTAIN ED FOR SUCH WRITE OFF WILL NOT BE A BAR TO CLAIM DEDUCTION ON ACCOUNT OF SUCH BAD DEBTS WRITTEN OFF. THE FOLLOWING OBSERVATIONS OF THE BANGALORE BENCH O F THE TRIBUNAL IN THE CASE OF M/S. ACE DESIGNERS LTD. (SUPRA) ARE RELEVANT IN THIS REGARD:- 18. WE HAVE HEARD THE RIVAL SUBMISSIONS. THE ISSU E WITH REGARD TO WRITE OFF OF BAD DEBTS AND THE CIRCUMSTAN CES UNDER WHICH THE SAME CAN BE CLAIMED AS DEDUCTION IS NOW W ELL SETTLED BY THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF M/S T.R.F LTD., VS CIT 323 ITR 397(SC). THE HONBLE SUP REME COURT IN THE AFORESAID DECISION, HELD AS FOLLOWS; AFTER THE AMENDMENT OF SECTION 36(1)(VII) OF THE INCOME-TAX ACT, 1961, WITH EFFECT FROM APRIL 1, 1989, IN ORDER TO OBTAIN A DEDUCTION IN RELATION TO BAD DEBTS, IT IS NOT NECESSARY FOR THE ASSESSEE TO ESTABLISH THAT THE DEBT, IN FACT, HAS BECOME IRRECOVERABLE; IT IS ENOUGH IF THE BAD DEBT IS WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE. 19. IN THE PRESENT CASE, THERE IS NO DISPUTE THAT THE ASSESSEE HAD NOT ONLY WRITTEN OFF THE AMOUNTS IN QUESTION IN THE PROFIT & LOSS ACCOUNT, BUT ALSO CLOSED THE INDIVIDUAL ACCOUN T OF THE DEBTOR. IN SUCH CIRCUMSTANCES, WE ARE OF THE VIEW T HAT THE CLAIM OF THE ASSESSEE FOR DEDUCTION HAS TO BE ALLOWED. W ITH REGARD TO THE PERMISSION OF THE RBI WHICH HAS NOT BEEN OBTAIN ED FOR THE PERIOD RELEVANT TO THE PREVIOUS YEAR, WE ARE OF THE VIEW, THAT THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CAS E OF CIT VS ITA NO.673/BANG/2013 PAGE 7 OF 8 SAWHNEY EXPORTS SUPRA WILL BE SQUARELY APPLICABLE. ADMITTEDLY, THERE WAS APPROVAL OF THE RBI IN THE SUBSEQUENT ASS ESSMENT YEAR AND THEREFORE, THIS WOULD BE SUFFICIENT. WE ARE ALS O OF THE VIEW THAT THE CLAIM FOR DEDUCTION UNDER THE ACT, WILL HA VE NO RELEVANCE TO PERMISSION BY THE RBI. THUS, GROUND NOS.5 TO 7 B Y THE ASSESSEE ARE ALLOWED. 10. THE FACT THAT THE AFORESAID DECISION HAS NOT BE EN ACCEPTED BY THE REVENUE WILL NOT BE RELEVANT. FOLLOWING THE DECISI ONS OF THE TRIBUNAL REFERRED TO ABOVE, WE UPHOLD THE ORDER OF THE CIT(A PPEALS). 11. AS FAR AS THE ISSUE OF APPLICABILITY OF EXPLANA TION TO SECTION 37(1) OF THE ACT IS CONCERNED, WE ARE OF THE VIEW THAT THE A FORESAID EXPLANATION WILL APPLY ONLY WHEN AN EXPENDITURE IS INCURRED FOR ANY PURPOSE WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW. IN OUR VIEW , THE SALE PROCEEDS TO BE RECEIVED FROM A FOREIGN BUYER WHICH ALREADY SHOWN A S INCOME AND WHICH IS NOW WRITTEN OFF AS IRRECOVERABLE, CANNOT BE SAID TO BE AN EXPENDITURE INCURRED BY THE ASSESSEE FOR ANY PURPOSE WHICH IS A N OFFENCE OR WHICH IS PROHIBITED BY LAW. WE THEREFORE REJECT THIS CONTEN TION RAISED ON BEHALF OF THE REVENUE. 12. IN THE RESULT, THE APPEAL BY THE REVENUE IS DISMISSED . PRONOUNCED IN THE OPEN COURT ON THIS 21 ST DAY OF AUGUST , 2014 . SD/- SD/- ( JASON P. BOAZ ) ( N.V. VASUDEVA N ) ACCOUNTANT MEMBER JUDICIAL MEMBE R BANGALORE, DATED, THE 21 ST AUGUST , 2014 . /D S/ ITA NO.673/BANG/2013 PAGE 8 OF 8 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR / SENIOR PRIVATE SECRETARY ITAT, BANGALORE.