DY CIT 10 (3)(1), MUMBAI V. M/S OLIVIA IMPEX PVT LTD., MUMBAI

ITA 8046/MUM/2019

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 7475 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 2 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-03-2022
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2011-2012
• Appeal Filed On: 29-12-2019
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Depreciation; Bad and doubtful debts; TDS; Set aside
• Section: 143(3); 142(1); 115JB; 40(a)(ia); 37(1); 143(1); 250; 143(2); 194A; 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH, MUMBAI BEFORE SHRI S RIFAUR RAHMAN, ACCOUNTANT MEMBER & SHRI PAVAN KUMAR GADALE, JUDICIAL MEMBER ITA No. 8046/Mum/2019 (A.Y: 2011-12) DCIT – 10(3)(1) Room No. 217, 1 st Floor, Aayakar Bhavan, MK Road, Mumbai – 400020. Vs. M/s. Olivia Impex Pvt Ltd, 8 th Floor, Premier House, Plot No. 38, MIDC, Andheri East, Mumbai – 400093. ./ज आइआर ./PAN/GIR No. : AAACO4346A Appellant .. Respondent Appellant by : Sri.R A Dhyani. Sr. DR Respondent by : Sri.Gunjan Kakkad.AR Date of Hearing 23.02.2022 Date of Pronouncement 07.03.2022 आद श / O R D E R PER PAVAN KUMAR GADALE JM: The revenue has filed the appeal against the order of the Commissioner of Income Tax (Appeals)-17 Mumbai, passed u/s 143(3) and 250 of the Act. The assessee has raised the following ground of appeal: 1. The Ld. CIT (A) erred in deleting the Disallowance of Bad Debts of Rs. Rs.17.86,898/-. In the facts and circumstances the Ld. CIT (A) has ignored the fact that the irrecoverability of bad debts from the angle of the debtor and not on the basis of the ability of the Assessee to recover the same. ITA No. 8046/Mum/2019 Olivia Impex Pvt Ltd., Mumbai. - 2 - 2. The Ld. CIT (A) erred in deleting Addition of Unrealized foreign exchange loss aggregating to Rs. 23,15348/-. On the facts and in the circumstances the Ld. CIT (A) ignored the fact that ignored the fact that the loss is unrealized and booked at the time of preparing the Balance Sheet. 3. The Ld. CIT (A) erred in deleting the Disallowance of interest paid to others of Rs.1,14,29,361/-. On the facts and in the circumstances the Ld. CIT (A) allowed the appeal of the Assessee Company without calling for remand report under rule 46 A of the I.T. Rule, 1962 for the Additional Evidences submitted by the Assessee. 4. The Ld. CIT (A) erred in deleting Disallowance of Commission & Brokerage paid to Resident Agents amounting to Rs.57,52,980/and Account of Commission & Brokerage aggregating to Rs.43,95,937/- paid to foreign country. On the facts and in the circumstances Ld. CIT (A) relied upon the submission of the Assessee Company which does not prove the identity of the part' involved and genuineness of the transaction. 5. The appellant prays that the order of the CIT)A) on the above grounds be set aside and that of the AO be restored. 6. The appellant craves leave to amend or alter any grounds or add a new ground which may be necessary. 2. The brief facts of the case are that the assessee is engaged in the business of trading in soaps and soap based material. The assessee filed the return of income for the A.Y 2011-12 on 27.09.2011 disclosing a total income of Rs.1,64,58,715/- and the return of income was processed u/s 143(1) of the Act. Subsequently, the case was selected for scrutiny and notice u/s 143(2) and 142(1) of the Act along with ITA No. 8046/Mum/2019 Olivia Impex Pvt Ltd., Mumbai. - 3 - questionnaire was issued. In compliance the Ld. AR of the assessee appeared from time to time and furnished the details and the case was discussed. The Assessing officer (A.O) on perusal of the profit and loss account found that the assessee has claimed (i)the business promotion and travelling expenses of Rs.37,82,817/- and the assessee was required to submit the details and the comparative analysis with the figures of earlier year. The assessee has submitted the ledger account of business promotion expenses and most of the payments are credit card payments which are debited to the business promotion expenses account incurred by the directors of the company. The A.O is of the opinion that there is a personal usage by the directors and same cannot be ruled out and made a ad-hoc disallowance @ 10% which worked out to Rs.1,54,147/-. (ii) The assessee has claimed the bad debts of Rs.10,56,982/-and the A.O. has called for the information referred at page 3 of the assessment order.The assessee has filed the details referred at Para 5.2 of the order in respect of bad debts and Net bad debts. The A.O dealt on the provisions of Sec. ITA No. 8046/Mum/2019 Olivia Impex Pvt Ltd., Mumbai. - 4 - 36(1)(vii) and its amendment exhaustively and treated that the assessee has not proved the debtors were written off and made addition of Rs.17,86,898/-. (iii) The A.O found that the assessee has claimed in the profit and loss account, the foreign exchange loss of Rs. 12,54,560/- and a show cause notice was issued on 16.09.2013 to submit the details.The assessee has submitted the information, ledger account were the assessee has incurred unrealized loss of Rs. 23,15,348/-and the loss is not allowable. The A.O considered the facts and provisions in respect of Mark to Market(MTM) and dealt at Para 6.4.1 to 6.5 of the A.O order and finally observed that the mark to market losses cannot be allowed and should be added in the computation of book profit u/s 115JB of the Act. (iv) The A.O found that the assessee has claimed the interest expenditure to the extent of Rs.1,14,29,361/- under the head interest and other financial charges and the assessee was called for the details referred at Para7.1 of the order. The A.O observed that the interest payments are made without deduction of TDS u/s 194A of the Act. The A.O. applied the provisions ITA No. 8046/Mum/2019 Olivia Impex Pvt Ltd., Mumbai. - 5 - of Sec. 40(a)(ia) of the Act and made disallowance of Rs.1,14,29,361/-. (v) the A.O found that the assessee has paid brokerage/ commission to Domestic Agents and Foreign Agents. The assessee has filed the explanations and details referred at Para 8(d) of the AO order and the assessee emphasized that no TDS U/sec195 r.w.s 5 and 9 of the Act is required, if the commission is paid to foreign agents. The A.O was not satisfied with the explanations and made the addition of brokerage and commission paid to foreign Agents and also commission paid to resident Agents. Finally the A.O. has assessed the total income of Rs.42,293,390/- and similarly worked out to computation of book profits under 115JB of the Act with addition of unrealized foreign exchange loss and passed the order u/s 143(3) of the Act dated 07.03.2014. 3. Aggrieved by the order, the assessee has filed an appeal before the CIT(A). Whereas the CIT(A) on the dispute issues considered the grounds of appeal, submissions of the assessee, findings of the A.O and deleted the addition of bad debts, the disallowance of ITA No. 8046/Mum/2019 Olivia Impex Pvt Ltd., Mumbai. - 6 - foreign exchange loss and disallowance of interest paid to others. The CIT(A) also deleted the addition of commission and brokerage paid to resident and foreign agents and partly allowed the assessee appeal. Aggrieved by the order of the CIT(A), the revenue has filed an appeal before the Honble Tribunal. 4. At the time of hearing, the Ld.DR submitted that the CIT(A) has erred in granting the relief overlooking the factual details and findings of the assessing officer. The Ld.DR made submissions on the disputed issues and prayed for allowing the revenue appeal. 5. Contra, the Ld.AR supported the order of the CIT(A) and submitted the information on the each issue raised in the course of hearing. The Ld.AR has supported the submissions with the paper book and material information. 6. We heard the rival submissions and perused the material on record. The sole crux of the disputed issue that the CIT(A) has granted the relief to the assessee in respect of four disallowances made by the A.O.On the first disputed issue, the Ld. DR submitted that the CIT(A) has erred in allowing the bad debts ITA No. 8046/Mum/2019 Olivia Impex Pvt Ltd., Mumbai. - 7 - claim irrespective of the fact that the assessee could not establish the debt has become bad and doubtful. The Ld. DR relied on the observations of the A.O at Para 5.The Ld. AR supported the submissions and observations of the CIT(A) and relied on the judicial decisions. We find the CIT(A) has dealt on the facts of the issue relying on the decision of the Hon’ble Supreme Court in the case of TRF Ltd Vs. CIT, [2010] 323 ITR 397 (SC). The observations of the CIT(A) at page 5 Para 4.2 are as under: This ground relates to disallowance of Bad Debts of Rs.17,86,898/-. The assessee company has claimed gross bad debts of Rs.17,86,8981- for the period from 01.04.2010 to 31.03.2011. The AC in the assessment order has opined that it cannot be so claimed as the assessee company has failed to establish that the debts have become bad and irrecoverable and has also not shown any efforts made by it to recover the same. The AC stated that it has not submitted any corroborative evidence to show that the debt has become genuinely bad. The AC also stated that assessee company has not proved that the debtors written off were offered as revenue income in any of the previous year. The position in law as regards this is well settled after 1- 4-1989, 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. As rightly contended by the ITA No. 8046/Mum/2019 Olivia Impex Pvt Ltd., Mumbai. - 8 - AR of the appellant, the assessee company is entitled for deduction on account of bad debts if such bad debts are written off in the books of account for the relevant year as irrecoverable and the amount of such bad debts was offered to tax as income in the earlier years . In this case the relevant debts claimed as bad were written off by the assessee company in the books of account as irrecoverable and appellant has submitted that the said amount was offered as income by the assessee in the respective years of sale i.e in the FY 2006-07, 2008-09, 2009-10, 2010-11 which was substantiated by the ledger accounts of the relevant debtors. Reliance is placed on following case laws: T.R.F. Limited Vs. CIT (2010) 323 ITR 397.(SC):- Prior to 1st April, 1989, every assessee had to establish, as a matter of fact, that debt advanced by the assessee had, in fact, become irrecoverable. That position got altered by deletion of the word "established", which earlier existed in Section 36(1)(vii) of the Income Tax Act, 1961 ['Act', for short]. Post-ist April, 1989 the provisions of Section 36(1)(vii) read as under: "36(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28-- (i) to (vi) xxxx xxxx xxxx (vii) subject to the provisions of sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year." ITA No. 8046/Mum/2019 Olivia Impex Pvt Ltd., Mumbai. - 9 - This position in law is well-settled. The Hon 'ble Supreme Court has stated that After 1st April, 1989, 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. Similar view has also been taken in the following judgements: • CIT vs. Times Business Solution Ltd. (2013) 354 ITR 25 (Delhi) • Onprocess Technology India (P.) Ltd. vs. DOlT (2018) Further The Central Board of Direct Tax (CBDT) vide its Circular dated 1212016 dated 30 May 2016 has observed that the legislative intention of the aforesaid amendment to section 36(1)(vii) was to eliminate litigation on the issue of allowability of bad debts by removing the conditions of establishing irrecoverability of the debt by the taxpayer. In view of the above, the addition of Rs. 17,86,898/- is not justified and the AO is directed to delete the same. The ground of appeal filed on this issue is hereby allowed. 6.1 The Ld. AR submitted that the claim has been reflected in the books of accounts and substantiated with facts and the details of bad debts at page 75 to 92 of the paper book. The Ld.AR explained that the actual bad debts written off are Rs. 17,86,898/-, whereas the net bad debts written off in the profit and loss account is Rs. 10,56,082/-, whereas the A.O has ITA No. 8046/Mum/2019 Olivia Impex Pvt Ltd., Mumbai. - 10 - not considered the sundry balances written off. The Ld.A substantiated with the party wise details of the bad debts written off at page 77 to 92 of the paper book. We find that the CIT(A) has relied on the Hon’ble Supreme Court decision and the factual findings in the books of account and allowed the deduction. 6.2 On the second disputed issue, the Ld. DR submitted that the CIT(A) has erred in deleting the foreign exchange loss. The Ld.DR has submitted that the A.O has made adequate enquiry referred at Para 6 to 6.4 of the order with respect to mark to market basis. Whereas the Ld.AR submitted that the CIT(A) has considered the foreign exchange rate difference and the fact of calculation of net foreign exchange loss in the books of accounts and relied on the Hon’ble Supreme Court decision in the case of Woodward Governor India Pvt Ltd, 312 ITR 254. We find the CIT(A) has dealt at Page 6 Para 4.3 as under: 4.3 This ground relates to disallowance of foreign exchange loss aggregating to Rs. 23,15,348/-. The assessee company has shown Exchange Rate Gain or Loss of Rs.12,54,560/-. During scrutiny ITA No. 8046/Mum/2019 Olivia Impex Pvt Ltd., Mumbai. - 11 - proceedings the assessee company also filed ledger account of exchange rate difference and foreign gain or loss for the period from 01.04.2010 to 31 .03.2011 as per which there was a year end loss adjustment of forex of Rs 23.15,348/- The appellant is engaged in the business of trading in soaps and soap based material. The appellant has booked the sale at the prevailing exchange rate credited in the books of account of the company. The realization of the said amount was not received by the appellant as on the date of balance sheet i.e 31.03.2011 and therefore the appellant has disclosed the said receivables in the books of account at the exchange rate as on the balance sheet date. While effecting the said entry the appellant has claimed that he suffered a loss on account of the transaction in the form of the difference in the exchange rate. Here the AO has noted that the assessee has not closed the transaction and the realization of the amount to the assessee is a future eventi.e after the balance sheet date. Actual loss or gain will be ascertained/determined after the expiry of period of contract for sale of goods and assessee may end up with further losses or may actually gain from the transaction. The AO hence stated that the said expenditure debited by the appellant to the P & L A/c in the form of foreign exchange losses are contingent in nature and cannot be allowed to be set off against the taxable income. The appellant has submitted that the Foreign Exchange loss claimed by the appellant is because the company follows mercantile system of accounting and the foreign currency is held by the assessee on revenue account. As such profit or loss on account of appreciation or depreciation in the value of foreign currency held by the assessee, on conversion into another currency, is ITA No. 8046/Mum/2019 Olivia Impex Pvt Ltd., Mumbai. - 12 - ordinarily considered as trading profit or loss. This foreign exchange loss has been bifurcated by the appellant as follows: i) Foreign Exchange Gain I (Loss) On Settlement of Export transactions Rs. 7,49,991 ii) Foreign Exchange Gain I (Loss) On Restatement Debtors & Creditors as on 31.03.2011 of Rs 2,63,379 iii) Foreign Exchange Gain /loss on restatement of Balance in EEFC Acclunt as on 31.03.2011 Rs 7,67,949 Net Foreign Exchange loss Rs. 12,54,560 1. Woodward Governor India P. Ltd 312 ITR 254 (SC) The Hon'ble Supreme Court has held that the "loss" suffered by the assessee on account of the exchange difference as on the date of the balance sheet is an item of expenditure under Section 37(1) of the 1961 Act. Further, it stated that in order to find out if an expenditure is deductible the following have to be taken into account (i) whether the system of accounting followed by the assessee is mercantile system, which brings into debit the expenditure amount for which a legal liability has been incurred before it is actually disbursed and brings into credit what is due, immediately it becomes due and before it is actually received; (ii) whether the same system is followed by the assessee from the very beginning and if there was a change in the system, whether the change was bona fide; (iii) whether the assessee has given the same treatment to losses claimed to have accrued and to the gains that may accrue to it; (iv) whether the assessee has been consistent and definite in making entries in the account books in respect of losses and gains; (v) whether the method adopted by the assessee for making entries in the books both in respect of losses and gains is as per nationally accepted accounting standards; (vi) whether the system adopted by the assessee is fair and reasonable or is adopted only with ITA No. 8046/Mum/2019 Olivia Impex Pvt Ltd., Mumbai. - 13 - a view to reducing the incidence of taxation. Similar view has also been taken in the following judgements: • Pleasant Time Industries vs Department Of Income Tax I.T.A. No. 359Asr) /2010 • Oil & Natural Gas Corporation Ltd. Vs. DCIT (2002) 83 ITD 151 (Del) (SB) In view of the above, the addition of Rs.23,15,348/- is not justified and the AO is directed to delete the same. The ground of appeal filed on this issue is hereby allowed. The Ld. AR substantiated with the information in respect of unrealized foreign exchange loss with the ledger accounts placed at page 95 to 108 of the paper book and relied on the judicial decisions. 7. The third disputed issue being interest paid to others, the Ld.DR submitted that the CIT(A) has allowed the claim of the assessee irrespective of the fact that no TDS was deducted u/s 194A of the Act. The CIT(A) has considered the information submitted and the A.O was not provided any details to file the comments on the disputed issue.The Ld.AR submitted that the CIT(A) has considered the various factual aspects and the same information was submitted before the A.O. in the course of assessment proceedings and referred to page 150 to 181 of the ITA No. 8046/Mum/2019 Olivia Impex Pvt Ltd., Mumbai. - 14 - paper book explaining the details of interest paid to others along with the statement placed at page 151 and TDS deducted in respect of payment made to the parties. The Ld.AR explained that the assessee has submitted the details before the A.O and the same material information was submitted with the CIT(A) and no new material information was filed in the appellate proceedings and relied on the order of the CIT(A). We considered it appropriate to refer to the observations of the CIT(A) at page 8 Para 4.4 as under: 4.4 Ground No. 4 This ground is with regard to disallowance of Interest paid to Others aggregating to Rs.1,14,29,361/- under section 40(a)(ia) on the grounds that tax has not been deducted at source The AO during scrutiny proceedings observed that the appellant has claimed interest to others amounting to Rs.114,29,361/- under the head "Interest & Other Financial Charges". The appellant was requested to furnish the complete details of expenses debited under the major heads of the P&L A/c. along with comparative analysis with previous year's figures and nature of such expenses. In response to the same the assessee company did not furnish any details. The AO noted that the appellant was liable to deduct tax at source on the interest paid in accordance with the provisions of Section 194A of the Act. In absence of any details of TDS on interest paid, to others the AO opined that ITA No. 8046/Mum/2019 Olivia Impex Pvt Ltd., Mumbai. - 15 - the provisions of Sec.40(a)(ia) of the IT Act is attracted and the amount paid as interest to others was disallowed. The appellant during the course of appellate proceedings have provided the details of interest paid. The same was provided during the scrutiny proceedings. The details of interest paid to others is as follows. Sr.No Name of the party Pan No. Amount TDS 1 Farid Sabuwala ALRPS7134F 3,288,593 328,859 2 Fazal Sabuwala AAEPS2748D 6,938,636 693,865 3 Shehnaz Sabuwala ABFPS2753Q 764,946 76,496 4 Dimple Sabuwala AAVJPS0881L 10,329 1,033 5 Doison International ALRPS7134F 419,340 41,934 6 Interest on TDS 7,517 Total 11,42,361 1,142,186 In view of the above and on the basis of the said facts the AO is directed to delete the addition of Rs. 1,14,29,361/- made on account of interest paid to others. The ground of appeal filed on this issue is hereby allowed. 7.1 The last ground of appeal which the revenue has challenged is with respect to disallowance of commission and brokerage paid to resident and foreign agents. The A.O has made an addition irrespective of the fact that the provisions of Sec. 194A of the Act are not applicable to the foreign agents . The Ld. DR submitted that the A.O has not accepted the facts with respect to the payments and the details of foreign agents and local agents were not submitted before the A.O. The local agents plays vital role and TDS should be deducted and in respect of the foreign agents, the A.O has made a meticulous ITA No. 8046/Mum/2019 Olivia Impex Pvt Ltd., Mumbai. - 16 - working which cannot be overruled by the CIT(A). The Ld.AR submitted that the assessee has made two types of payments were the commission payment of Rs.57,52,980/- was paid to the agents in India for procuring the sales order and TDS has been deducted u/s 194H of the Act. The assessee has submitted the party wise details along with the ledger accounts, sample invoice, TDS certificate before the A.O. Whereas in respect of the foreign party transactions towards export commission paid to foreign agent, the agents are not the citizens and they are the residents of foreign country and they do not have permanent establishment(PE) in India and the commission income of the foreign agent cannot be taxed in India, since the operations are from their own country and the no TDS has been deducted u/s 194A of the Act. The Ld.AR substantiated the claim with the judicial decisions.The Ld. AR referred to the statement of commission and brokerage paid to residents agents at page 183 and ledger account copy and payments made to foreign agents. We find the CIT(A) has elaborately dealt on this disputed issue at Page 9 Para 4.5 and granted the relief. ITA No. 8046/Mum/2019 Olivia Impex Pvt Ltd., Mumbai. - 17 - 8. We considering the overall facts, circumstances and provisions law and submissions are of the opinion that the CIT(A) has considered the factual aspects and judicial decisions in respect of all the disputed issues raised in the revenue appeal and passed a reasoned and speaking order.The Ld.DR could not controvert the observations of the CIT(A) with any new cogent material or information and relied on the order of the Assessing officer. Accordingly, we do not find any infirmity in the order of the CIT(A) and uphold the same and dismiss the grounds of the appeal of the revenue. 9. In the result, the appeal filed by the revenue is dismissed. Order pronounced in the open court on 07.03.2022. Sd/- Sd/- (S RIFAUR RAHMAN) (PAVAN KUMAR GADALE) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Dated 07.03.2022 KRK, PS /Copy of the Order forwarded to : 1. / The Appellant ITA No. 8046/Mum/2019 Olivia Impex Pvt Ltd., Mumbai. - 18 - 2. / The Respondent. 3. आ र आ / The CIT(A) 4. आ र आ ( ) / Concerned CIT 5. "#$ % & &' , आ र ) र*, हमद द / DR, ITAT, Mumbai 6. % -. / 0 / Guard file. ान ु सार/ BY ORDER, " & //True Copy// 1. ( Asst. Registrar) ITAT, Mumbai