M/S. EFTEC SHROFF (INDIA) LTD, MUMBAI V. THE ACIT CIR 9(1),

ITA 6973/MUM/2007

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 1111 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 7 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-07-2010
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: J
• Next Hearing Date: 08-07-2010
• Assessment Year: 2004-2005
• Appeal Filed On: 22-11-2007
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S T BIDARI
• Assessee Lawyers: C Y TOPRANI
• Keywords: Gift; Depreciation; Business expenditure; Opportunity of being heard; Bad and doubtful debts; Revenue expenditure; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH J : MUMBAI BEFORE SHRI D.K. AGARWAL, (JM) AND SHRI PRAMOD KUM AR ,(AM) ITA NO.6973/MUM/2007 ASSESSMENT YEAR :2004-05 M/S. EFTEC SHROFF (INDIA) LIMITED PLOT NO.645/646 4 TH & 5 TH FLOOR, OBEROI CHAMBERS-II NEW LINK ROAD, ANDHERI (W) MUMBAI-400 053. ..( APPELLANT ) P.A. NO. (AAACE 7652 D) VS. ASSTT. COMMISSIONER OF INCOME TAX RANGE - 9(1), AAYAKAR BHAVAN M.K. ROAD MUMBAI-20. ..( RESPONDENT ) ITA NO.7244/MUM/2007 ASSESSMENT YEAR :2004-05 ASSTT. COMMISSIONER OF INCOME TAX RANGE - 9(1), AAYAKAR BHAVAN M.K. ROAD MUMBAI. ..( APPELLANT ) VS. M/S. EFTEC SHROFF (INDIA) LIMITED MUMBAI. ..( RESPONDENT ) APPELL ANT BY : MS. C.Y. TOPRANI RESPONDEN T BY : SHRI S.T. BIDARI O R D E R PER D.K. AGARWAL (JM). THESE CROSS APPEALS BY THE ASSESSEE AND THE REVENUE ARE DIRECTED AGAINST THE ORDER DATED 19.9.2007 PASSED BY T HE LD. CIT(A) FOR THE ASSESSMENT YEAR 2004-05. BOTH THESE APPEALS ARE DISPOSED OF BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE. ITA NO.6973 & 7244/M/07 A.Y:04-05 2 2. BRIEFLY STATED FACTS OF THE CASE ARE THAT THE ASSESSEE CO MPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND SALE OF PV C AND WAX BASED BONDING, COATING & SEALING PRODUCTS FOR AUTOMOTIVE INDUSTRIES, FILED ITS RETURN DECLARING TOTAL INCOME OF RS.4,62,61,4 83/-. HOWEVER, THE ASSESSMENT WAS COMPLETED ON A TOTAL INCOME OF RS.5,24,3 4,256/- INCLUDING THE DISALLOWANCE OF NEW PRODUCT DEVELOPMENT E XPENSES RS.38,69,588/-, UNUTILISED MODVAT CREDIT RS.17,23,286/- , BAD DEBTS RS.3,86,288/-, OUT OF ADVERTISEMENT/SALES EXPENSES RS.50, 000/- AND OUT OF TRAVELLING EXPENSES RS.1,15,272/-, VIDE ORDER DATED 15.12.2006 PASSED U/S.143(3) OF THE INCOME TAX ACT, 1961 (THE ACT). ON APPEAL THE LD. CIT(A) PARTLY ALLOWED THE APPEAL. 3. BEING AGGRIEVED BY THE ORDER OF THE LD. CIT(A) T HE ASSESSEE AND THE REVENUE BOTH ARE IN APPEAL BEFORE US. ITA NO.6973/M/07 (ASSESSEE'S APPEAL) : 4. GROUND NO.1 IS AGAINST THE SUSTENANCE OF ADDITION OF RS.38,69,588/- ON ACCOUNT OF NEW PRODUCT DEVELOPMENT EX PENSES TREATING IT AS CAPITAL EXPENDITURE INSTEAD OF REVENUE EXPENDITURE. 5. IN ADDITIONAL GROUND THE ASSESSEE WITHOUT PREJUDICE T O GROUND NO.1, AS ABOVE, CONTENDED TO ALLOW DEPRECIATION U/S.32 OF THE ACT, IF TREATED AS CAPITAL EXPENDITURE. ITA NO.6973 & 7244/M/07 A.Y:04-05 3 6. THE BRIEF FACTS OF THE ABOVE ISSUE ARE THAT DURING T HE COURSE OF ASSESSMENT PROCEEDING IT INTERALIA WAS OBSERVED BY THE ASSESSING OFFICER THAT THE ASSESSEE IN THE P&L ACCOUNT HAS DEBITED RS.38,69,588/- AS NEW PRODUCT DEVELOPMENT EXPENSES. CO NSIDERING THAT PRIMA FACIE IT IS OF A CAPITAL NATURE, THE ASSESSEE WAS ASKED TO JUSTIFY ITS CLAIM. IN RESPONSE THE ASSESSEE FILED DETAILE D REPLY WHICH HAS BEEN EXTRACTED BY THE ASSESSING OFFICER AT PAGE 3 AND 4 OF HIS ORDER WHEREIN THE ASSESSEE HAS CONCLUDED THAT FOR THE ABO VE EXCLUSIVE SERVICES RENDERED IN THE YEAR 2003-04 EFTEC IN DIA PAID RS.38,69,588/- TOWARDS NEW PRODUCT DEVELOPMENT. CONSID ERING THE SAME, THE COMPANY INCURRED DURING THE YEAR THE ONE T IME COST FOR IMPROVING ITS EFFICIENCY AND FOR CUSTOMIZATION OF PRODU CTS CONSIDERING THE NEEDS OF ITS CUSTOMERS. THE SAID EXPENSES ARE OF REVEN UE NATURE AND THE SAME SHOULD BE FULLY ALLOWED. HOWEVER, THE A SSESSING OFFICER AFTER CONSIDERING THE ASSESSEE'S REPLY WAS OF THE VIEW THAT ....IF PROCESSING OF A PARTICULAR PRODUCT (NOT NECESSARILY A BRAND ) IS BASED ON A CERTAIN TECHNOLOGY OBTAINED BY THE ASSESSEE, THE CHANGE OF THAT TECHNOLOGY ESSENTIALLY REPLACES THE PREVIOUS ONE. THE OL D TECHNOLOGY BECOMES OBSOLETE NOT ONLY FOR THE PRESENT ASSESSEE BUT FOR THE ENTIRE SPECTRUM OF THE CUSTOMERS OVER THE WORLD. JUST BECAUSE T HE NEW PRODUCT DEVELOPMENT IS INCURRED FOR A SINGLE CUSTOMER OR A GROUP OF CUSTOMERS OF THE ASSESSEE, WOULD NOT BY ITSELF MAKE THE EX PENDITURE A ITA NO.6973 & 7244/M/07 A.Y:04-05 4 REVENUE OUTLAY. TO EFFECTUATE A BETTER MARKET BY USI NG A NEW TECHNOLOGY IS INDEED A CAPITAL EXPENDITURE AND CANNOT B E PUT INTO THE BRACKET OF SECTION 37(1). IN THESE CIRCUMSTANCES, THE AMOUN T OF RS.38,69,588/-, UNLIKE THE RE-ENGINEERING CHARGES, I S HELD TO BE ON CAPITAL ACCOUNT AND IS ACCORDINGLY DISALLOWED. 7. ON APPEAL BEFORE THE LD. CIT(A) IT WAS SUBMITTED BY THE ASSESSEE THAT (EXTRACTED FROM PARA 2.3 OF THE APPELLATE ORDER ): (I) THE CHANGE BROUGHT ABOUT IN THE PRODUCT CANNOT BE REGARDED TO BE SUBSTANTIAL MERELY BECAUSE IT MET SOME REQUIREMENTS OF CUSTOMERS OF THE APPELLANT. THE CHANGE WAS ALSO NOT SO SUBSTANTIAL AS TO CONVERT IT INTO TOTALLY NEW PRODUCT. THE END-USE APPLICATION OF THE PRODUCT REMAINED THE SAME I.E. AS BONDING, COATING AND SEALANT SOLUTION IN AUTOMOBILE INDUSTRY. (II) WHERE THE NEEDS OF THE CUSTOMER ARE DYNAMIC AND THERE IS NO CERTAINTY ABOUT PERIOD OF USEFULNESS OF IMPROVEMENT BROUGHT ABOUT IN THE APPELLANTS PRODUCT, THE BENEFIT OBTAINED BY IMPROVEMENT CANNOT BE CONSIDERED TO BE ENDURING BY ANY STANDARD. AN ENDURING BENEFIT IS ONE WHERE THE ASSESSEE IS REASONABLY ASSURED OF BENEFITS FLOWING IN FOR A LONG PERIOD. IN THIS REGARD, EVEN A PERIOD OF SEVEN YEARS WAS NOT REGARDED BY THE BOMBAY HIGH COURT TO BE OF ENDURING NATURE. (REFER CIT VS. THE FINLAY MILLS LTD.[17 ITR 595](BOM.) WHICH HAS BEEN APPROVED BY THE SUPREME COURT IN 20 ITR 475(SC). (III) EVEN IF THE KNOWLEDGE ACQUIRED BY THE APPELLANT IS CONSIDERED AS KNOW HOW, IT IS WELL ACCEPTED THAT TECHNOLOGY IS EVER CHANGING AND ANY KNOW ITA NO.6973 & 7244/M/07 A.Y:04-05 5 HOW ACQUIRED BECOMES OBSOLETE VERY FAST IN THIS AGE OF TECHNOLOGICAL AND SCIENTIFIC DEVELOPMENT.[REFER CIT VS. TELCO (123 ITR 538(BOM.) (IV) IT HAS BEEN JUDICIALLY WELL SETTLED THAT EXPENDITURE ON TECHNICAL KNOW HOW ON BRINGING ABOUT IMPROVEMENT IN EXISTING PRODUCTS DOES NOT AMOUNT TO CAPITAL EXPENDITURE. KINDLY REFER TO FOLLOWING CASE LAWS ON ILLUSTRATIVE BASIS. RELEVANT EXTRACTS ARE ENCLOSED HEREWITH AT PAGE 11 TO 35. (V) FURTHER THE FACTOR THAT THE COST INCURRED IS A ONE-TIME NON-RECURRING COST IS NOT AT ALL DETERMINATIVE AND IS NOT A RELEVANT CRITERION FOR DECIDING WHETHER THE EXPENDITURE IS A CAPITAL EXPENDITURE OR REVENUE EXPENDITURE.[REFER FOR INSTANCE, ALEMBIC CHEMICAL WORKS CO. LTD. VS. CIT (177 ITR 377)(SC) AND CIT VS. MADRAS AUTO SERVICE(P.) LTD. (233 ITR 575)(SC). (VI) AS HELD BY THE SUPREME COURT IN ALEMBIC CHEMICAL WORKS CO. LTD. VS. CIT (177 ITR 377), IT WOULD BE UNREALISTIC TO IGNORE THE RAPID ADVANCES MADE IN SCIENCE AND TECHNOLOGY AND TO ATTRIBUTE A DEGREE OF ENDURABILITY AND PERMANENCE TO THE TECHNICAL KNOW-HOW AT ANY PARTICULAR STAGE IN THIS FAST CHANGING AREA. THOUGH THE SUPREME COURT WAS CONCERNED WITH MEDICAL SCIENCE IN THAT DECISION, IT HAS BEEN ACCEPTED THAT THE PRINCIPLE APPLIES TO ALL OTHER FIELDS OF SCIENCE INCLUDING CHEMICAL TECHNOLOGY. IT WAS FURTHER SUBMITTED THAT THE EXPENDITURE EVEN IF IT IS REGARDED AS CAPITAL EXPENDITURE FULLY QUALIFIES FOR DEDUCTION U/S. 35(1)(IV). 8. THE LD. CIT(A) WHILE AGREEING WITH THE ASSESSING OFF ICERS VIEWS THAT THE CHANGE IN TECHNOLOGY OR THE PAYMENT MADE FO R TRANSFER OF ITA NO.6973 & 7244/M/07 A.Y:04-05 6 TECHNOLOGY BY THE APPELLANT TO ITS PROMOTER COMPANY I. E. EAPL CAN ONLY BE TREATED AS ATTRIBUTABLE TO CAPITAL WITH A VIE W TO BRINGING AN ADVANTAGE FOR THE ENDURING BENEFIT OF THE TRADE, RE LIED ON THE RATIO OF THE DECISIONS OF HONBLE SUPREME COURT IN COAL SHIPMENT (82 ITR 902), DEVIDAS VITHALDAS & CO.(84 ITR 277) AND SITALPU R SUGAR WORKS LTD. VS. CIT (49 ITR 160) AND HELD AS UNDER : ...IN THE INSTANT CASE, THE APPELLANTS PROMOTER COMPANY I.E. EAPL CARRIED OUT MODIFICATION AT SINGA PORE TO GET THE DESIRED FORMULATION, SPECIFICALLY FOR TH E APPELLANT SO AS TO ENABLE THE APPELLANT TO MAINTAIN QUALITY OF PRODUCT. THUS, BY GETTING THE NEW TECHNOLOGY, T HE APPELLANT ACQUIRED AN ADVANTAGE OF ENDURING NATURE. HENCE, THE EXPENDITURE INCURRED FOR THE SAME HAS RIG HTLY BEEN TREATED AS CAPITAL EXPENDITURE. THE APPELLANT S ALTERNATIVE CLAIM WITH REGARD TO DEDUCTION AS EXPEN DITURE ON SCIENTIFIC RESEARCH U/S.35(1)(VI) R.W.S. 35(2) O F THE I.T. ACT, IS ALSO NOT TENABLE SINCE NO EVIDENCE IS BROUG HT ON RECORD TO PROVE THAT IT RELATES TO SOME SCIENTIFIC RESEARCH WORK RELATING TO THE APPELLANTS BUSINESS.. 9. AT THE TIME OF HEARING THE LD. COUNSEL FOR THE ASSE SSEE WHILE REITERATING THE SAME SUBMISSIONS AS SUBMITTED BEFORE THE ASSESSING OFFICER AND THE LD. CIT(A) APPEARING AT PAGE 20, 21 AND 22 OF THE ASSESSEE'S PAPER BOOK FURTHER SUBMITS THAT SINCE THE PAYMEN T OF RS.38,69,588/- ON NEW PRODUCT DEVELOPMENT EXPENSES IS IN THE NATURE OF SERVICES IN ADDITION TO REGULAR TECHNICAL AND MARKET ING SUPPORT SERVICES FOR WHICH ASSESSEE PAID RS.12 LACS AND RS.15 LACS PER AN NUM SEPARATELY, EAPL INVOICED THE ASSESSEE FOR THE ABOVE SERVI CES FOR AN AMOUNT OF RS 38.69 LACS (US $ 86,240) WHICH WAS PAID AF TER DEDUCTING ITA NO.6973 & 7244/M/07 A.Y:04-05 7 APPROPRIATE TAX AT SOURCE, THEREFORE, IT IS A REVENUE EXPENDITURE ALLOWABLE AS BUSINESS EXPENDITURE UNDER THE ACT. SHE FUR THER SUBMITS THAT IN CASE THE NEW PRODUCT DEVELOPMENT EXPENDITURE I S TREATED AS CAPITAL EXPENDITURE, THEN DEPRECIATION U/S.32 OUGHT TO BE ALLOWED THEREON. HERE IT IS NECESSARY TO MENTION THAT AT THE T IME OF HEARING THAT THE LD. COUNSEL FOR THE ASSESSEE HAS NOT MADE ANY SU BMISSION ON THE PROVISIONS OF SEC 35(1)(IV) R.W.S. 35(2) OF THE ACT. SHE, THEREFORE, SUBMITS THAT THE ASSESSEE'S CLAIM BE ALLOWED. 10. ON THE OTHER HAND THE LD. DR SUPPORTS THE ORDER O F THE ASSESSING OFFICER AND THE LD. CIT(A). 11. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE R IVAL PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE FIND THAT THE DISPUTE IS AS TO WHETHER NEW PRODUCT DEVELOPMENT EXPENSES OF RS.3 8,69,588/- IS REVENUE EXPENDITURE OR CAPITAL EXPENDITURE. ACCORDI NG TO THE ASSESSEE SINCE THE PAYMENT WAS MADE FOR MODIFICATION OF THE FORMULATIONS SO AS TO ENABLE THE ASSESSEE TO MAINTAIN QU ALITY OF PRODUCT EVEN IN THE CONTINGENCY SUCH AS HIGHER HEAT RESISTE NCE REQUIRED BY THE CUSTOMERS AND THE MODIFIED PRODUCT WAS M ANUFACTURED WITH THE SAME MACHINERY AT THE SAME FACILITY AND MARKE TED UNDER THE SAME BRAND NAME, THEREFORE, THE PAYMENT MADE BY THE ASSESSEE FOR SUCH SERVICES TO EAPL AMOUNTING TO RS.38,69,588/- IS A REV ENUE ITA NO.6973 & 7244/M/07 A.Y:04-05 8 EXPENDITURE ALLOWABLE AS A BUSINESS EXPENDITURE UNDER THE ACT. WHEREAS ACCORDING TO THE REVENUE, THE NEW TECHNOLOGY ACQ UIRED BY THE ASSESSEE IS AN ADVANTAGE OF AN ENDURING NATURE AND H ENCE, THE EXPENDITURE INCURRED FOR THE SAME IS A CAPITAL EXPENDIT URE. 12. HERE IT IS NECESSARY TO TAKE NOTE OF THE DECISION IN T HE CASE OF CIT VS. SARAVANA SPINNING MILLS P. LTD. (2007) 293 IT R 201(SC) WHEREIN IT HAS BEEN OBSERVED (PAGE 210 PLACITUM 14) : THIS COURT IN THE CASE OF BALLIMAL NAVAL KISHORE V . CIT [1997] 2 SCC 449 APPROVED THE TEST FORMULATED BY CHAGLA CJ. IN THE CASE OF NEW SHOR-ROCK SPINNING AND MANUFACTURING CO. LT D. V. CIT [1956] 30 ITR 338 ( BOM) AS TO WHEN THE EXPENDITURE CAN BE SAID TO HAVE BEEN INCURRED ON CURRENT REPAIRS. IN THAT C ASE IT WAS OBSERVED AS FOLLOWS (PAGE 417) : THE SIMPLE TEST THAT MUST BE CONSTANTLY BORNE IN M IND IS THAT AS A RESULT OF THE EXPENDITURE WHICH IS CLAIME D AS AN EXPENDITURE FOR REPAIRS WHAT IS REALLY BEING DONE I S TO PRESERVE AND MAINTAIN AN ALREADY EXISTING ASSET. TH E OBJECT OF THE EXPENDITURE IS NOT TO BRING A NEW ASS ET INTO EXISTENCE, NOR IS ITS OBJECT THE OBTAINING OF A NEW OR FRESH ADVANTAGE. THIS CAN BE THE ONLY DEFINITION OF REPA IRS BECAUSE IT IS ONLY BY REASON OF THIS DEFINITION OF REPAIRS THAT THE EXPENDITURE IS A REVENUE EXPENDITURE. IF THE AMOUNT SPENT WAS FOR THE PURPOSE OF BRINGING INTO EXISTENCE A NEW ASSET OR OBTAINING A NEW ADVANTAGE, THEN OBVIOUSLY SUCH AN EXPENDITURE WOULD NOT BE AN EXPENDITURE OF A REVENUE NATURE BUT IT WOULD BE A C APITAL EXPENDITURE, AND IT IS CLEAR THAT THE DEDUCTION WHI CH THE LEGISLATURE HAS PERMITTED UNDER SECTION 10(2)(V) IS A DEDUCTION WHERE THE EXPENDITURE IS A REVENUE EXPEND ITURE AND NOT A CAPITAL EXPENDITURE. 13. IN CIT VS. EMPTEE POLY-YARN P. LTD. (2010) 320 I TR 665 (SC) IT HAS BEEN OBSERVED BY THEIR LORDSHIPS (PAGE-666 PLACITUM 5 ): ITA NO.6973 & 7244/M/07 A.Y:04-05 9 REPEATEDLY THIS COURT HAS RECOMMENDED TO THE DEPARTMENT, BE IT UNDER EXCISE ACT, CUSTOMS ACT OR THE INCOME TAX ACT, TO EXAMINE THE PROCESS APPLICABLE T O THE PRODUCT IN QUESTION AND NOT TO GO ONLY BY DICTIONAR Y MEANINGS. THIS RECOMMENDATION IS NOT BEING FOLLOWE D OVER THE YEARS. EVEN WHEN THE ASSESSEE GIVES AN OP INION ON A GIVEN PROCESS, THE DEPARTMENT DOES NOT SUBMIT ANY COUNTER OPINION WHEREVER SUCH COUNTER OPINION IS POSSIBLE. 14. SINCE IN THE CASE BEFORE US THE COMPLETE FACTS ARE NOT ON RECORD INASMUCH AS THERE IS NO MATERIAL OR REFERENCE THEREOF T O SHOW AS TO WHETHER THE PAYMENT WAS MADE FOR THE SERVICES TO EAPL TO PRESERVE AND MAINTAIN AN ALREADY EXISTING ASSET OR FOR THE PURP OSE OF BRINGING INTO EXISTENCE A NEW ASSET OR OBTAINING A NEW ADVANTAGE . IN THE ABSENCE OF COMPLETE FACTS ON RECORD AND KEEPING IN VIEW T HAT THE ADDITIONAL GROUND CLAIMING DEPRECIATION ON THE COST OF NEW PRODUCT DEVELOPMENT RS.38,69,588/- WAS RAISED BY THE ASSESSEE FOR THE FIRST TIME BEFORE THE TRIBUNAL WE ARE OF THE VIEW THAT IN THE INTEREST OF JUSTICE THE ISSUES RAISED IN THE GROUND OF APPEAL AND ADD ITIONAL GROUND OF APPEAL SHOULD GO BACK TO THE FILE OF THE ASSESSING OF FICER AND ACCORDINGLY WE SET ASIDE THE ORDER PASSED BY THE REVENUE AUTHORITIES ON THIS ACCOUNT AND SEND BACK THE MATTER TO THE FILE OF THE ASSESSING OFFICER WHO SHALL EXAMINE THE ISSUE AFRESH IN THE LIGHT OF OUR OBSERVATIONS HEREIN ABOVE AND THE TEST LAID DOWN IN T HE CASE OF NEW SHORROCK SPINNING AND MANUFACTURING CO. LTD. SUPRA, A ND ACCORDING TO LAW AFTER PROVIDING REASONABLE OPPORTUNITY OF BEING HEARD TO THE ITA NO.6973 & 7244/M/07 A.Y:04-05 10 ASSESSEE . THE GROUND AND ADDITIONAL GROUND TAKEN BY TH E ASSESSEE ARE THEREFORE, PARTLY ALLOWED FOR STATISTICAL PURPOSES. 15. GROUND NO.2 IN ASSESSEE'S APPEAL IS AGAINST THE SUSTEN ANCE OF ADDITION ON ACCOUNT OF UNUTILISED MODVAT AND 16. GROUND NO.4 IN REVENUE S APPEAL IS AGAINST THE D ELETION OF ADDITION OF RS.17,23,286/- ON ACCOUNT OF UNUTILISED MOD VAT CREDIT. 17. THE BRIEF FACTS OF THE ABOVE ISSUE ARE THAT IT WAS O BSERVED BY THE ASSESSING OFFICER THAT THE ASSESSEE HAS SHOWN RS.17,23,286/- AS UNUTILISED MODVAT UNDER THE HEAD OF LOANS AND ADVANCES IN THE TAX AUDIT REPORT. ON BEING ASKED AS TO WHY THE SAID AMOUN T SHOULD NOT BE INCLUDED IN THE CLOSING STOCK AS PER AMENDED PROVISIONS O F SECTION 145A, IT WAS SUBMITTED BY THE ASSESSEE THAT THE INCLUSIVE AND EXCLUSIVE METHOD OF ACCOUNTING THE MODVAT HAS NO BEARING ON THE PROFIT OF THE YEAR. HOWEVER, THE ASSESSING OFFICER DID N OT ACCEPT THE ASSESSEE'S SUBMISSION. ACCORDING TO THE ASSESSING OFFICER AS PER PROVISIONS OF SEC.145A THERE IS AN OBLIGATION ON THE ASSE SSEE TO MAKE SUCH ADJUSTMENT TO THE CLOSING STOCK, NOT ONLY OF THE FINISHED GOODS, BUT ALSO TO THE INPUTS FOR PURCHASE OF RAW MATERIAL. S INCE THE ASSESSEE HAS FAILED TO ADD THE SAID SUM OF RS.17,23,286/- THE ASSE SSING OFFICER ADDED THE SAME TO THE TOTAL INCOME OF THE ASSESSEE . ON APPEAL THE LD. CIT(A) DIRECTED THE ASSESSING OFFICER TO MAKE ADJUSTME NTS IN TERMS ITA NO.6973 & 7244/M/07 A.Y:04-05 11 OF HIS DIRECTIONS BOTH IN REGARD TO THE STOCKS, PURCHASE, SALES, EXCISE DUTY PAYMENTS AND IF SUCH ADJUSTMENT RESULTS IN AN ADDI TION TO THE INCOME OF THE APPELLANT, RESTRICT THE ADDITION ONLY T O THAT EXTENT. 18. AT THE TIME OF HEARING BOTH PARTIES HAVE AGREED THAT THEY HAVE NO OBJECTION IF THE ISSUE IS SENT BACK TO THE FILE OF THE ASSESSING OFFICER TO DECIDE THE SAME IN THE LIGHT OF THE RATIO OF RECENT DECISION OF HON'BLE JURISDICTIONAL HIGH COURT IN CIT VS. MAHALAXMI GLASS WOR KS PVT. LTD. 19. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE R IVAL PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. UNDER T HE PROVISIONS OF SECTION 145A OF THE ACT, ADJUSTMENTS ON ACCOUNT OF MODVAT ARE REQUIRED TO BE MADE IN RESPECT OF PURCHASES, SALES AND INV ENTORY IN THE CLOSING STOCK. WE FIND THAT RECENTLY THE HONBLE JURI SDICTIONAL HIGH COURT IN CIT VS. MAHALAXMI GLASS WORKS PVT. LTD. (2009) 318 ITR 116(BOM.) WHILE AGREEING WITH THE REASONING AND FI NDING GIVEN BY THE HONBLE DELHI HIGH COURT IN CIT VS. MAHAVIR ALUMINIU M LTD. (2008) 297 ITR 77(DEL.) THAT TO GIVE EFFECT TO SECTION 145A, IF THERE IS ANY CHANGE IN THE CLOSING STOCK AT THE END OF THE YEAR THE N THERE MUST NECESSARILY BE A CORRESPONDING ADJUSTMENT MADE IN THE OPE NING STOCK OF THAT YEAR AND THIS WOULD NOT AMOUNT TO GIVE DOUBL E BENEFIT TO THE ASSESSEE AND WOULD BE NECESSARY TO COMPUTE THE TRUE AND CORR ECT PROFIT FOR THE PURPOSE OF ASSESSMENT, UPHELD THE ORDER OF THE TRIBUNAL ITA NO.6973 & 7244/M/07 A.Y:04-05 12 IN DIRECTING THE ASSESSING OFFICER TO MAKE NECESSARY CORRESPON DING ADJUSTMENT IN THE OPENING STOCK OF NEXT YEAR. IN TH E ABSENCE OF ANY DISTINGUISHING FEATURE BROUGHT ON RECORD BY THE PARTIE S WE RESPECTFULLY FOLLOWING THE JUDGMENT OF HONBLE JURISDICTIONAL HIGH C OURT SUPRA, DO NOT FIND ANY ERROR IN THE ORDER OF THE LD. CIT(A) I N SETTING ASIDE THE ISSUE TO THE FILE OF THE ASSESSING OFFICER WHO SHALL DECIDE THE ISSUE AFRESH IN THE LIGHT OF THE DECISION OF THE HONBLE JURI SDICTIONAL HIGH COURT AND ACCORDING TO LAW AFTER PROVIDING A REASONAB LE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. THE GROUNDS TAKEN BY THE A SSESSEE AND REVENUE ARE THEREFORE, REJECTED . ITA NO.7244/M/2007 (REVENUES APPEAL): 20. GROUND NO.1 IS AGAINST THE DELETION OF DISALLOWANCE OF BAD DEBTS RS.3,86,288/-. 21. THE BRIEF FACTS OF THE ABOVE ISSUE ARE THAT IT WAS O BSERVED BY THE ASSESSING OFFICER THAT THE ASSESSEE HAS DEBITED BAD DEBTS OF RS.7,72,576/- IN ITS ACCOUNTS. THE ASSESSING OFFICER AFTER CONSIDERING THE AMENDED PROVISIONS OF SECTION 36(1)(VII) OF THE AC T AND THE CBDT CIRCULAR NO.551 DATED 23.10.1990 OBSERVED THAT ON EXA MINATION OF THE LIST OF PARTIES WHOSE DEBTS ARE WRITTEN OFF FURNISHED BY THE ASSESSEE IT IS SEEN THAT THE MISCELLANEOUS PROVISIONS OF RS.20,903/- AN D INCOME TAX FOR ASSESSMENT YEAR 2002-03 RS.1,60,015/- ARE NOT A LLOWABLE ITA NO.6973 & 7244/M/07 A.Y:04-05 13 UNDER THE ACT. HE FURTHER OBSERVED IT IS THE DUTY OF T HE ASSESSEE TO EXPLAIN AS TO HOW IT HAS BECOME BAD NOT TO ESTABLISH I T, WAS OF THE VIEW THAT SINCE THE ASSESSEE HAS FAILED TO DISCHARGE THE ONU S OF PROVING THE CLAIM OF BAD DEBTS, DISALLOWED RS.3,86,288/ - BEING 50% OF THE AMOUNT OF BAD DEBTS AND ADDED TO THE INCOME OF TH E ASSESSEE. ON APPEAL, THE LD. CIT(A) AFTER CONSIDERING THE AMENDED PROVISIONS OF SECTION 36(1)(VII) RELIED ON THE DECISION OF ITAT MUMBA I SPECIAL BENCH IN DY. CIT VS. OMAN INTL. BANK, SAOG 286 ITR (AT) 8, DELETED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER . 22. AT THE TIME OF HEARING THE LD. DR SUBMITS THAT FO R THE REASONS AS MENTIONED IN THE ASSESSMENT ORDER THE LD. CIT(A) WAS NOT JUSTIFIED IN DELETING THE DISALLOWANCE MADE BY THE ASSESSING OFFICER . HE THEREFORE, SUBMITS THAT THE DISALLOWANCE MADE BY THE A SSESSING OFFICER BE RESTORED. 23. ON THE OTHER HAND THE LD. COUNSEL FOR THE ASSESSEE W HILE RELYING ON THE ORDER OF THE LD. CIT(A) FURTHER SUBMITS THAT UNDER SEC.36(1)(VII) R.W.S. 36(2) OF THE ACT BAD DEBTS OUGHT TO BE ALLOWED ONLY IF TWO CONDITIONS ARE SATISFIED I.E. THE BAD DEBTS WRITTEN OFF IN THE BOOKS OF ACCOUNTS AND THE RELEVANT DEBT HAS BEEN OFFERED TO TAX IN EARLIER YEARS. SINCE THE ASSESSEE SATISFIES BOTH THE CONDITIONS HENCE, NO DISALLOWANCE IS CALLED FOR. THE RELIANCE WAS ALSO PLACED I N (I) T.R.F. ITA NO.6973 & 7244/M/07 A.Y:04-05 14 LTD. VS. CIT (2010) 35 DTR (SC) 156 (SC); (2010) 323 ITR 397 (SC) (2) DIT VS. OMAN INTERNATIONAL BANK (2009) 313 ITR 128(BOM.) AND (3) CIT VS. STAR CHEMICALS (BOMBAY) P. LTD. 313 ITR 12 6(BOM.) SHE THEREFORE SUBMITS THAT THE ORDER PASSED BY THE LD. CIT( A) BE UPHELD. 24. HAVING CAREFULLY HEARD THE SUBMISSIONS OF THE RIVAL PARTIES AND PERUSING THE MATERIAL AVAILABLE ON RECORD WE FIND THA T THE FACTS ARE NOT IN DISPUTE. AS PER PROVISIONS OF SEC.36(1)(VII) OF THE ACT, AS AMENDED W.E.F. APRIL 1, 1989, THE ASSESSEE WAS NOT REQUIRED TO E STABLISH THAT THE CONCERNED DEBT HAS ACTUALLY BECOME BAD IN THE RELEVA NT YEAR FOR THE PURPOSE OF CLAIMING DEDUCTION UNDER THE SECTION AND THE ONLY REQUIREMENT FOR CLAIMING THIS DEDUCTION IS THAT THE ASSE SSEE HAS TO WRITE OFF THE RELEVANT DEBTS IN ITS BOOKS OF ACCOUNT TRE ATING THE SAME AS BAD. IN THE PRESENT CASE THE ASSESSEE HAD WRITTEN OFF T HE RELEVANT BAD DEBTS IN ITS BOOKS OF ACCOUNTS BY PASSING NECESSARY ENTRIE S. THIS BEING SO AND RESPECTFULLY FOLLOWING THE RATIO OF THE J UDGEMENTS RELIED ON BY THE LD. COUNSEL FOR THE ASSESSEE SUPRA, WE ARE OF THE VIEW THAT THE LD. CIT(A) WAS FULLY JUSTIFIED IN DELETING THE D ISALLOWANCE MADE BY THE ASSESSING OFFICER EXCEPT 50% AMOUNT OF INCOME TAX FOR ASSESSMENT YEAR 2002-03 RS.1,60,015/- AND MISCELLANEOUS PRO VISION RS.20,903/-. IN THE ABSENCE OF ANY MATERIAL TO SHOW A S TO HOW 50% OF THE AMOUNT OF INCOME TAX RS.1,60,015/- AND MISCELLAN EOUS PROVISION RS.20,903/- ARE ALLOWABLE AS BAD DEBTS, WE AR E OF THE VIEW ITA NO.6973 & 7244/M/07 A.Y:04-05 15 THAT IN THE INTEREST OF JUSTICE THE MATTER SHOULD GO B ACK TO THE FILE OF THE ASSESSING OFFICER AND ACCORDINGLY WE SET ASIDE THE ORDE RS PASSED BY THE REVENUE AUTHORITIES ON THIS ACCOUNT AND SEND BA CK THE MATTER TO THE FILE OF THE ASSESSING OFFICER WHO SHALL EXAMINE T HE ISSUE AFRESH IN THE LIGHT OF THE OBSERVATIONS HEREINABOVE AND ACCORD ING TO LAW AFTER PROVIDING REASONABLE OPPORTUNITY OF BEING HEARD TO T HE ASSESSEE AND ACCORDINGLY THE GROUND TAKEN BY THE REVENUE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 25. GROUND NO.2 AND 3 ARE AGAINST THE DELETION OF DI SALLOWANCE OF RS.50,000/- OUT OF ADVERTISEMENT AND SALES PROMOTION EX PENSES, RS.1,15,272/- OUT OF TRAVELLING EXPENSES AND RS.28,339/ - OUT OF DEPRECIATION ON VEHICLES. 26. THE BRIEF FACTS OF THE ABOVE ISSUE ARE THAT IT WAS O BSERVED BY THE ASSESSING OFFICER THAT WITH REGARD TO ADVERTISEMENT AND SA LES PROMOTION EXPENSES THE ASSESSEE WAS REQUIRED TO FURNISH DET AILS OF EXPENSES IN RESPECT OF SALES PROMOTION. THE ASSESSEE STATED T HAT THIS INCLUDES GIVING AWAY CERTAIN GIFT ARTICLES, ADVERTISEMENT IN SOUVENIR AND SUCH OTHER CUSTOMARY EXPENDITURE AND CLAIMED THAT THIS BEING IN THE NORMAL COURSE OF RUNNING OF THE BUSINESS HAS TO BE A LLOWED. IN THE ABSENCE OF ANY SPECIFIC DETAILS AND FOR WANT OF FULL VERI FIABILITY, THE ASSESSING OFFICER DISALLOWED RS.50,000/- OUT OF ADVERTISEME NT AND ITA NO.6973 & 7244/M/07 A.Y:04-05 16 SALES PROMOTION EXPENSES. WITH REGARD TO THE TRAVELLING EXPENSES AND OTHERS RS.11,52,716/- IT WAS OBSERVED BY ASSESSING OFFICER THAT THE ASSESSEE HAS NOT GIVEN THE PURPOSES AND PERSONS WHO HAVE INCU RRED THESE EXPENDITURE, NOR ARE THE VERIFIABLE BILLS OR VO UCHERS PRODUCED. IN THE ABSENCE THEREOF, THE ASSESSING OFFICER DISALLOWED RS. 1,15,272/- BEING 10% OF TRAVELLING EXPENSES AND OTHERS AND FOR TH E SAME REASON HE ALSO DISALLOWED DEPRECIATION @ 10% U/S.38(2) OF THE ACT RS.28,339/-. ON APPEAL, THE LD. CIT(A) WHILE OBSERVIN G THAT THE DISALLOWANCE HAS BEEN MADE ON ESTIMATE BASIS AND IN THE ABSENCE OF ANY EVIDENCE BROUGHT ON RECORD TO PROVE THAT THE EXPE NDITURE INCURRED WERE FOR NON BUSINESS PURPOSES, DELETED THE ABOVE DISALLO WANCE. 27. AT THE TIME OF HEARING THE LD. DR SUPPORTS THE O RDER OF THE ASSESSING OFFICER. 28. ON THE OTHER HAND THE LD. COUNSEL FOR THE ASSESSEE R ELIED ON THE ORDER OF THE LD. CIT(A). SHE ALSO RELIED ON THE FOL LOWING DECISIONS. I) RAJ ENTERPRISES VS. ITO 51 TTJ 408(JP), II) MONARCH FOODS PVT. LTD. VS. ACIT 54 TTJ 405(AHD.), III) BETA NAPHTHOL (P) LTD. VS. DCIT 50 TTJ 375 (IND.), IV) PRITAM HOTEL(P.) LTD. VS.ITO 17 TTJ 550(BOM.), V) SUARASHTRA SAMACHAR LTD. VS. ITO 60 TTJ 465 (AHD.), VI) PERFECT PAC LTD. VS. IAC 46 ITD 438 (DEL.), VII) DINESH MILLS LTD. 254 ITR 673 (GUJ.) AND VIII) DAKS COPY SERVICES(P.) LTD. VS. ITO 30 ITD 223(MUM.)(S B) ITA NO.6973 & 7244/M/07 A.Y:04-05 17 29. HAVING CAREFULLY HEARD THE SUBMISSIONS OF THE RIVAL PARTIES AND PERUSING THE MATERIAL AVAILABLE ON RECORD WE FIND T HAT THERE IS NO DISPUTE THAT THE ASSESSING OFFICER HAS MADE THE DISALLOWAN CE ON ESTIMATED BASIS WITHOUT BINGING ANY MATERIAL ON RECORD TO SHOW THAT THE EXPENSE HAVE NOT BEEN INCURRED FOR THE BUSINESS PURP OSES OR THE SAME ARE PERSONAL OR CAPITAL IN NATURE. THIS BEING SO A ND IN THE ABSENCE OF ANY CONTRARY MATERIAL PLACED ON RECORD BY THE REVENUE AGAINST THE FINDING OF THE LD. CIT(A) AND ALSO KEEPI NG IN VIEW THAT THIS IS A CASE OF COMPANY, WE ARE OF THE VIEW THAT THE ADHOC DISALLOWANCE MADE BY THE ASSESSING OFFICER IS UNCALLED FOR AND ACCORDINGL Y WE ARE INCLINED TO UPHOLD THE FINDING OF THE LD. CIT(A) IN DELETING THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. THE GROUNDS TA KEN BY THE REVENUE ARE THEREFORE, REJECTED. 30. GROUND NO.5 AND 6 ARE GENERAL IN NATURE AND IN THE ABSENCE OF ANY SPECIFIC PLEA THE SAME ARE, THEREFORE, REJECTED. 31. IN THE RESULT, THE ASSESSEE'S AND REVENUE S APPEAL ST AND PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 16.7.2010. SD/- SD/- (PRAMOD KUMAR) ( D.K. AGARWAL ) ACCOUNTANT MEMBER JUDIC IAL MEMBER MUMBAI, DATED: 16.7.2010. JV. ITA NO.6973 & 7244/M/07 A.Y:04-05 18 COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR BENCH TRUE COPY BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI. ITA NO.6973 & 7244/M/07 A.Y:04-05 19 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 8.7.10 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 9.7.10 SR.PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON 16.7.10 SR.PS/PS 7. FILE SENT TO THE BENCH CLERK 20.7.10 SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER