METRO MOTORS AUTO DIVISION, MUMBAI V. ITO RG 16(3)(4), MUMBAI

ITA 8000/MUM/2011

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 3401 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 8 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-08-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 22-02-2016
• Assessment Year: 2005-2006
• Appeal Filed On: 28-11-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: CHANDRA VIJAY
• Keywords: Business expenditure; Bad and doubtful debts

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI B BENCH, MUMBAI BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER, AND SHRI RAJESH KUMAR, ACCOUNTANT MEMBER. ITA. NO. 8000/MUM/2011 (ASSESSMENT YEAR:2005-06) METRO MOTORS AUTO DIVISION MAKER BHAWAN NO.2, 2 ND FLOOR, 18, NEW MARINE LINES, MUMBAI 400 020 APPELLANT VS. THE INCOME TAX OFFICER, RANGE 16(3)(4), MATRU MANDIR, MUMBAI-400 007 RESPONDENT PAN: AABFM7783R /BY APPELLANT : SHRI MAYUR KISNADWALA, A.R. /BY RESPONDENT : SHRI CHANDRAVIJAY, A.R. /DATE OF HEARING : 18.08.2016 /DATE OF PRONOUNCEMENT : 26.08.2016 ORDER PER SHAILENDRA KUMAR YADAV, J.M: THIS APPEAL HAS BEEN FILED BY ASSESSEE AGAINST THE ORDER OF COMMISSIONER OF INCOME-TAX (APPEALS)-27, MUMBAI, DA TED 05.02.2010 FOR A.Y. 2005-06 ON FOLLOWING GROUNDS: ITA NO.8000/MUM/11 A.Y. 05-06 [METRO MOTORS AUTO DIVISION VS. ITO) PAGE 2 1. ON FACTS AND CIRCUMSTANCES OF THE CASE, THE LEA RNED COMMISSIONER OF INCOME TAX (APPEAL) CIT(A) HAS ER RED IN DISALLOWANCE OF BUSINESS EXPENDITURE, BEING PRIO R PERIOD EXPENSES OF RS.9,71,793/- DEBITED BY THE APPELLANT FIRM IN ITS P&L ACCOUNT. 2. ON FACTS AND CIRCUMSTANCES OF THE CASE, THE LEAR NED COMMISSIONER OF INCOME TAX (APPEAL) CIT(A) HAS ER RED IN DISALLOWANCE OF BUSINESS EXPENDITURE, BEING IRRECOVERABLE DEBTS/ADVANCES WRITTEN OFF OF RS.1,84,708 BY THE APPELLANT FIRM IN ITS P&L ACCOUN T. 3. ON FACTS AND CIRCUMSTANCES OF THE CASE, THE LEAR NED COMMISSIONER OF INCOME TAX (APPEAL) CIT(A) HAS ER RED IN DISALLOWANCE OF THE FOLLOWING BUSINESS EXPENDITU RE COMMUNICATION EXPENSES RS.76,000 (APPROX) STAFF WELFARE EXPENSES RS.51,000 OFFICE EXPENSES RS.45,000 MISCELLANEOUS EXPENDITURE RS.59,000 TRAVELLING & CONVEYANCE EXPENSES RS.50,000 SELLING EXPENSES RS.12,70,347 IT IS PRAYED THAT THE LEARNED CIT(A) BE DIRECTED TO ALLOW THE ABOVE EXPENSES AS A DEDUCTION. 2. ASSESSEE IS A DEALER OF VEHICLES OF HINDUSTAN MO TORS LTD. FOR SALE, DISTRIBUTION AND SERVICING OF CARS IN MUM BAI. THE PARTNERS OF FIRM ARE BOMBAY METRO MOTORS LTD. AND G MMCO LTD., BOTH COMPANIES INCORPORATED UNDER THE COMPANI ES ACT, 1956. 2.1 FIRST ISSUE IS WITH REGARD TO PRIOR PERIOD EXPE NSES OF RS.9,71,793/-. IN F.Y. 1998-99, IN COURSE OF ITS T RADING BUSINESS, ASSESSEE PURCHASED MOTOR CARS WORTH RS.1,94,35,846/- FROM HINDUSTAN MOTORS (IN SHORT H M), AN ITA NO.8000/MUM/11 A.Y. 05-06 [METRO MOTORS AUTO DIVISION VS. ITO) PAGE 3 UNRELATED PARTY. ASSESSEE SUBMITTED C FORM UNDER THE CENTRAL SALES TAX (IN SHORT CST) ACT TO HM, HM CO LLECTED CST @ 4% (IN ABSENCE OF SUCH 'C' FORM, THE RATE OF TAX IS 14%) AND SOLD THE CARS. IN SALES TAX ASSESSMENT OF HM, THE 'C' FORMS FURNISHED BY ASSESSEE TO HM WERE NOT ACCEPTED AND CONSEQUENTLY DIFFERENTIAL CST OF 10% OF SALES VALUE S OF CARS WAS LEVIED ON HM OF RS.19,43,585/- (10% OF RS.1,94, 35,846/-). UNDER THE SALES TAX ACT, THE DEALER IS MERELY SUPPO SED TO COLLECT THE LEVY FROM PURCHASER AND PAY IT TO THE G OVERNMENT. ACCORDINGLY, UNDER THE LAW, THE ENTIRE DIFFERENTIAL OF RS. 19,43,585/- WAS THE LIABILITY OF ASSESSEE. HOWEVER, CONSEQUENT TO THE OBJECTION RAISED BY ASSESSEE, AFTER PROTRACT ED NEGOTIATIONS, ON COMPROMISE, IT WAS DECIDED AND AGR EED DURING THE IMPUGNED YEAR THAT BOTH THE PARTIES WILL BEAR D IFFERENTIAL TAX EQUALLY; ACCORDINGLY, HM RAISED A DEBIT OF RS.9 ,71,793 (50% OF RS.19,43,585/-) DURING THE IMPUGNED YEAR, WHICH WAS CLAIMED AS A DEDUCTION BY ASSESSEE. REVENUE AUTHO RITIES OBSERVED THAT THIS IS A PRIOR PERIOD EXPENSES AND T HAT AMOUNT RELATING TO F.Y. 1998-99 HAS NOT CRYSTALLISED DURIN G THE IMPUGNED YEAR. AS ASSESSEE FOLLOWED MERCANTILE SYST EM OF ACCOUNTING, THIS AMOUNT MUST HAVE BEEN ALREADY DEBI TED TO PROFIT AND LOSS ACCOUNT IN THE PREVIOUS YEAR IN WHI CH IT WAS INCURRED I.E. F.Y. 1998-99. AS THE DIFFERENTIAL SAL ES TAX AMOUNT DEMAND WAS ON HM, ASSESSEE WAS NOT INVOLVED AS IT D OES NOT PERTAIN TO THEIR SALES TAX ASSESSMENT AND THEY HAVE VOLUNTARILY AGREED TO SHARE THE BURDEN. IN THIS REGARD, STAND OF ASSESSEE HAS BEEN THAT REVENUE AUTHORITIES HAVE NOT APPRECIA TED THE ITA NO.8000/MUM/11 A.Y. 05-06 [METRO MOTORS AUTO DIVISION VS. ITO) PAGE 4 FACTS OF CASE; IF THE 'C' FORMS FURNISHED BY ASSESS EE TO HM WERE NOT ACCEPTED IN SALE TAX ASSESSMENT OF HM, THEY WER E INCLINED TO RAISE A DEBIT ON ASSESSEE FOR THE ENTIRE AMOUNT OF DIFFERENTIAL TAX OF RS.19,43,585/- AS HM WAS RESPONSIBLE FOR MER ELY COLLECTING THE CORRECT SALES TAX FROM THE PURCHASER AND PAYING IT TO THE DEPARTMENT. HOWEVER, ASSESSEE DISPUTED TH AT THE ADDITIONAL DEMAND WAS NOT ON ACCOUNT OF ANY LAPSE F ROM ITS SIDE. LETTERS TO THAT EFFECT WERE EXCHANGED AND PUR SUANT TO NEGOTIATIONS BETWEEN ASSESSEE AND HM, VIDE LETTER D ATED 27.12.2004, ASSESSEE WAS SUCCESSFUL IN REDUCING ITS LIABILITY BY 50% TO RS.9,71,793/-. THESE FACTS HAVE NOT BEEN DIS PUTED BY THE REVENUE AUTHORITIES. AS THIS LIABILITY WAS A CO NTRACTUAL LIABILITY (ON PURCHASE OF CARS), UNDER THE MERCANTI LE SYSTEM OF ACCOUNTING, A CONTRACTUAL LIABILITY CAN BE SAID TO HAVE BEEN PROPERLY ACCRUED ONLY WHEN THE DISPUTE REGARDING LI ABILITY IS FINALLY ADJUDICATED, WHICH IN ASSESSEES CASE WAS D URING THE YEAR UNDER CONSIDERATION. AS REGARDS THE YEAR OF A CCRUAL OF LIABILITY, RELIANCE WAS PLACED ON THE DECISION OF J IWANRAM SHEODUTTRAI VS. CIT [2006] 279 ITR 512 (CAL.). AS REGARDS THE CONTENTION OF THE REVENUE AUTHORITIES THAT SUCH LIA BILITY WAS VOLUNTARILY ASSUMED BY ASSESSEE, APART FROM THE FAC T THAT BY DOING SO, IT HAS CURTAILED ITS LOSSES, THE COURTS H AVE HELD THAT THE REVENUE AUTHORITIES HAVE TO LOOK AT THE MATTER FROM THE VIEW POINT OF A PRUDENT BUSINESSMAN AND NOT FROM IT S ANGLE. AGREEING TO THE CONTENTION OF ASSESSEE, WE DELETE A DDITION IN QUESTION. ITA NO.8000/MUM/11 A.Y. 05-06 [METRO MOTORS AUTO DIVISION VS. ITO) PAGE 5 3. NEXT ISSUE IS WITH REGARD TO DISALLOWANCE OF BUS INESS EXPENDITURE BEING IRRECOVERABLE DEBTS/ADVANCES WRIT TEN OFF OF RS.1,84,708/- BY ASSESSEE FIRM IN ITS P&L ACCOUNT. THE FACTS OF THE CASE ARE THAT IRRECOVERABLE DEBTS/RECEIVABLE S FROM DEBTORS ON ACCOUNT OF RATE DIFFERENCES/DISCOUNTS WE RE WRITTEN OFF IN P&L ACCOUNT DURING YEAR UNDER CONSIDERATION. ASSESSING OFFICER STATED THAT NO STEPS WERE TAKEN TO RECOVER THE DEBTS/RECEIVABLES FROM THE DEBTORS. IT WAS NOT EST ABLISHED THAT THE DEBTS HAD BECOME BAD AND THERE WERE EXISTING TR ANSACTIONS WITH THOSE PARTIES. IT WAS NOT SHOWN THAT SUCH DEBT S HAD BEEN OFFERED AS INCOME IN THE EARLIER YEARS. IN THIS RE GARD, WE FIND THAT HONBLE SUPREME COURT IN TRF LIMITED VS. CIT [ 2010] 323 ITR 397 (SC) HAS HELD THAT IN ORDER TO OBTAIN A DED UCTION IN RELATION TO BAD DEBTS, IT IS NOT NECESSARY FOR THE ASSESSEE TO ESTABLISH THAT THE DEBT, IN FACT, HAS BECOME IRRECO VERABLE AND IT IS ENOUGH IF DEBTS IS WRITTEN OFF AS IRRECOVERABLE IN ACCOUNTS BY ASSESSEE. NOTHING CONTRARY WAS BROUGHT TO OUR KNOW LEDGE, SO, FOLLOWING THE DECISION OF TRF LTD. (SUPRA), ADDITIO N IN QUESTION IS DIRECTED TO BE DELETED. 4. NEXT ISSUE IS WITH REGARD TO VARIOUS DISALLOWANC ES. THE FACTS OF THE CASE ARE THAT ASSESSEE DEBITED VARIOUS EXPENSES IN ITS P&L ACCOUNT AS DETAILED IN A TABLE ATTACHED TO THE WRITTEN SUBMISSION FILED ON BEHALF OF ASSESSEE, WHICH HAVE BEEN PARTIALLY DISALLOWED BY ASSESSING OFFICER AND CIT(A ) GAVE PART RELIEF. THE STAND OF ASSESSEE HAS BEEN THAT INCURR ENCE OF SUCH EXPENSES WERE NOT DISPUTED. ONLY DISPUTE IS WITH R EGARD TO ITA NO.8000/MUM/11 A.Y. 05-06 [METRO MOTORS AUTO DIVISION VS. ITO) PAGE 6 ITEMS OF EXPENSES AT SERIAL NOS.1 TO 5, ELEMENT OF PERSONAL USE. AS REGARDS ITEM NO. 6, ASSESSING OFFICER ADMITTED T HAT ASSESSEE HAS FILED ALL DETAILS. HOWEVER, HE STATED THAT BUSI NESSMAN ARE PRUDENT AND DO THE BUSINESS FOR PROFIT MAKING AND N OT FOR MAKING LOSSES. NO BUSINESSMAN CAN TOLERATE LOSSES A ND IN SUCH CASES, IT IS BETTER TO CLOSE THE BUSINESS. MO REOVER, IN THEIR VIEW, SUCH DISCOUNTS SHOULD BE OFFERED BY THE MANUFACTURER AND NOT THE DEALER-ASSESSEE. IN THIS REGARD, STAND OF ASSESSEE HAS BEEN THAT ITEMS OF EXPENSES A T SERIAL NOS. 1 TO 5, THE ACCOUNTS OF ASSESSEE WERE AUDITED UNDER SECTION 44AB OF THE ACT AND NO ADVERSE COMMENTS HAVE BEEN M ADE BY THE AUDITOR; ALL THE DETAILS WERE SUBMITTED BEFORE ASSESSING OFFICER FROM WHICH HE HAS NOT FOUND ANY ERRORS/OMIS SIONS AND HENCE DISALLOWANCES ARE NOT DISALLOWED. TAKING ALL FACTS AND CIRCUMSTANCES INTO CONSIDERATION, PARTIAL DISALLOWA NCE MADE BY CIT(A) WITHOUT DISPUTING THE EXPENSES IN QUESTION, ADDITIONS ARE NOT JUSTIFIED. SAME IS DIRECTED TO BE DELETED. AS REGARDS ITEM OF EXPENSE AT SERIAL NO. 6 BEING SELLING EXPEN SES IN THE NATURE OF TRADE DISCOUNT - ACCESSORIES, TRADE DISCO UNT - PARTS, REBATE ON LANCER CARS AND REBATE ON PAJERO CARS, WE FIND THAT FULL DETAILS OF SUCH EXPENSES WERE FURNISHED BEFORE THE ASSESSING OFFICER, IN WHICH HE HAS NOT FOUND ANY DISCREPANCIES. REVENUE AUTHORITIES HAVE ONLY GRIEVA NCE IS THAT THESE EXPENSES SHOULD NOT HAVE BEEN INCURRED BY ASS ESSEE AS IT WAS MAKING LOSSES AND THEY SUGGESTED THAT INSTEAD O F MAKING SUCH LOSSES, ASSESSEE SHOULD HAVE CLOSED ITS BUSINE SS. THE ENTIRE EXPENSES ARE ALLOWABLE AND BY MAKING THE DIS ALLOWANCE, ITA NO.8000/MUM/11 A.Y. 05-06 [METRO MOTORS AUTO DIVISION VS. ITO) PAGE 7 ASSESSING OFFICER WAS NOT JUSTIFIED IN STEPPING INT O THE SHOES OF BUSINESS DECISIONS OF ASSESSEE. ONLY LOSS IN THE BU SINESS CANNOT BE THE SOUND BASIS FOR MAKING DISALLOWANCE I N QUESTION. SO, SAME IS DIRECTED TO BE DELETED. 5. IN THE RESULT, THE APPEAL FILED BY ASSESSEE IS A LLOWED. PRONOUNCED IN THE OPEN COURT ON THIS THE 26 TH DAY OF AUGUST, 2016. SD/- SD/- ( RAJESH KUMAR ) (SHAILENDRA KUMAR YADAV) ACCOUNTANT MEMBER JUDICIAL MEMBE R MUMBAI: DATED 26/08/2016 TRUE COPY S.K.SINHA / COPY OF ORDER FORWARDED TO:- 1. / REVENUE 2. / ASSESSEE 3. %&%'( ) / CONCERNED CIT 4. )- / CIT (A) 5.-./00'(, '( , %& / DR, ITAT, MUMBAI 6./4567 / GUARD FILE. BY ORDER / , / % , '( , %&