ACIT, CHENNAI V. M/s. Manali Petrochemicals Ltd., CHENNAI

ITA 860/CHNY/2010

• Counselvise Citation: 86021714 RSA 2010
• Duration Of Justice: 1 year(s) 4 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-10-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 12-10-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 03-06-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DR I V IJAYAKUMAR IRS
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Bad and doubtful debts
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, CHENNAI BEFORE DR. O.K.NARAYANAN, VICE-PRESIDENT AND SHRI HARI OM MARATHA, JUDICIAL MEMBER ITA NO.860(MDS)/2010 ASSESSMENT YEAR: 2006-07 THE ASSISTANT COMMISSIONER OF INCOME-TAX, LARGE TAX PAYER UNIT, CHENNAI. VS. M/S.MANALI PETROCHEMICALS LTD., PONNERI HIGH ROAD, MANALI, CHENNAI-600 068. PAN AAACM3404D. (APPELLANT) (RESPONDENT) APPELLANT BY : DR. I.V IJAYAKUMAR, IRS, CIT-DR. RESPONDENT BY : SHRI R.VIJA YARAGHAVAN,ADVOCATE DATE OF HEARING : 12 TH OCTOBER, 2011 DATE OF PRONOUNCEMENT : 18 TH OCTOBER, 2011 O R D E R PER DR.O.K.NARAYANAN, VICE-PRESIDENT: THIS APPEAL IS FILED BY THE REVENUE. THE RELEVAN T ASSESSMENT YEAR IS 2006-07. THE APPEAL IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME-TAX(APPEALS), L ARGE TAX PAYER UNIT, CHENNAI, DATED 15-3-2010. THE APPEAL A RISES OUT OF - - ITA NO.860 OF 2010 2 THE ASSESSMENT COMPLETED UNDER SECTION 143(3) OF TH E INCOME- TAX ACT, 1961. 2. THE FIRST GROUND RAISED BY THE REVENUE IN THE PRESENT APPEAL IS THAT THE COMMISSIONER OF INCOME-T AX(APPEALS) HAS ERRED IN ALLOWING THE CLAIM OF THE ASSESSEE TOW ARDS BAD DEBTS, THEREBY DELETING THE ADDITION OF ` 2,40,47,000/-. IT IS THE CASE OF THE REVENUE THAT THE ASSESSEE CONTINUED TO HAVE TRANSACTIONS WITH THOSE PARTIES EVEN AFTER WRITING OFF THEIR DEBTS AS BAD AND IN SUCH CIRCUMSTANCES THE WRITE OFF OF B AD DEBTS MADE BY THE ASSESSEE IS NOT BASED ON AN HONEST JUDG MENT AND THE COMMISSIONER OF INCOME-TAX(APPEALS) HAS ERRED I N OVERLOOKING SUCH A REALISTIC SITUATION OF THE CASE. THE REVENUE HAS ALSO RELIED ON THE JUDGMENT OF THE HONBLE MADR AS HIGH COURT IN THE CASE OF SOUTH INDIA SURGICAL CO. LTD. VS. CIT, 287 ITR 62 AND THAT OF THE HONBLE GUJARAT HIGH COURT I N THE CASE OF DHALL ENTERPRISES & ENGINEERS PVT. LTD., 295 ITR 48 1. 3. WE CONSIDERED THIS ISSUE. IT IS A FACT THAT TH OSE DEBTS WRITTEN OFF BY THE ASSESSEE-COMPANY IN THE IM PUGNED ASSESSMENT YEAR HAD IN FACT BEEN CREDITED IN THE AC COUNTS OF THE EARLIER ASSESSMENT YEARS AS IN THE NATURE OF PROCEE DS FOR SALES - - ITA NO.860 OF 2010 3 AND SERVICES AND THUS HAD FORMED PART OF COMPUTATIO N OF THE PROFIT AND LOSS OF THE ASSESSEE COMPANY FOR THOSE A SSESSMENT YEARS. IT IS ALSO TRUE THAT WHEREVER THE ASSESSEE HAS ASCERTAINED BAD DEBTS AND CLAIMED AS DEDUCTION, THOSE DEBTS HAV E BEEN WRITTEN OFF IN ITS BOOKS OF ACCOUNT. IN PURSUANCE OF THE AMENDMENT BROUGHT INTO SECTION 36(1) OF THE INCOME- TAX ACT, 1961, THE LAW HAS BROUGHT A STATUTORY EVIDENCE TO C LAIM THE DEDUCTION OF BAD DEBTS. THOSE STATUTORY EVIDENCES HAVE BEEN SATISFIED IN THE PRESENT CASE. THE ONLY ADDITIONAL POINT TO BE CONSIDERED IS THE CONTENTION OF THE REVENUE THAT EV EN AFTER WRITING OFF THE BAD DEBTS, THE ASSESSEE HAD CARRIED OUT TRANSACTIONS WITH THOSE PARTIES AND THEREFORE THE W RITE OFF MAY NOT BE THE RESULT OF AN OBJECTIVE ASSESSMENT OF THE NATURE OF THE DEBT. IN THIS CONTEXT WE HAVE TO SEE THAT A BAD DE BT NEED NOT BE A DEBT AS A WHOLE, BUT MAY ALSO BE A PART OF THAT D EBT. WHEN THE ASSESSEE HAS SUPPLIED GOODS AND RAISED BILLS AGAINS T THE DEBTORS, THE DEBTORS MAY MAKE PART PAYMENT AND THER EAFTER THEY MAY DISPUTE THE FINAL AMOUNT OF THE BILL PAYABLE BY THEM. EVEN AFTER DELIVERING THE GOODS AND RAISING THE BILLS AN D ACKNOWLEDGING THE BILLS, IT IS POSSIBLE IN PRACTICA L BUSINESS - - ITA NO.860 OF 2010 4 CIRCUMSTANCES THAT THERE COULD BE DISPUTES REGARDIN G THE FINAL SETTLEMENT OF THE BILL. IN SUCH CIRCUMSTANCES WHER EVER THE ENTIRE DEBTS ARE NOT CLEARED BY THE PARTIES, THE REMAINING BALANCES WILL HAVE TO BE WRITTEN OFF BY THE ASSESSEE AS IRRECOVER ABLE. THIS DOES NOT MEAN THAT THOSE BALANCE AMOUNTS ARE TREATE D AS BAD DEBTS AS A RESULT OF THE BREAK DOWN OF THE RELATION SHIP BETWEEN THE PARTIES. THESE ARE ALL THE CONSEQUENCES OF THE ADJUSTMENT OF THE FINAL AMOUNT PAYABLE, SUBSEQUENT TO THE TRANSAC TION OF THE SALE. THE LEARNED COUNSEL APPEARING FOR THE ASSESSE E HAS EXPLAINED THAT IN ALL THESE CASES, WHERE THE ASSESS EE HAS STILL BUSINESS TRANSACTIONS WITH THE PARTIES WHOSE DEBTS WERE WRITTEN OFF, THE AMOUNTS WRITTEN OFF WERE IN THE NATURE OF SUCH BALANCES WHERE THE DEBTORS HAVE DECLINED TO PAY, BUT WHERE T HE BUSINESS RELATIONSHIP STILL EXISTED. AS FAR AS THE PRESENT CASE IS CONCERNED, THE REVENUE HAS NO MATERIAL ON RECORD TO REBUT THE ABOVE FACTUAL EXPLANATION. 4. THEREFORE, IN THE FACTS AND CIRCUMSTANCES OF TH E CASE WE FIND THAT THE CASE OF THE ASSESSEE IS COVER ED BY THE DECISION OF THE HONBLE SUPREME COURT RENDERED IN T HE CASE OF T.R.F.LTD. VS. CIT, 323 ITR 397. - - ITA NO.860 OF 2010 5 5. THIS GROUND RAISED BY THE REVENUE FAILS. 6. THE SECOND GROUND RAISED BY THE REVENUE IS THAT THE COMMISSIONER OF INCOME-TAX(APPEALS) HAS ERRED I N DISALLOWING THE ADDITION OF ` 35,32,62,000/- TOWARDS REDUCTION OF SHARE CAPITAL. IT IS THE CASE OF THE REVENUE THAT THE COMMISSIONER OF INCOME-TAX(APPEALS) HAS FAILED TO A PPRECIATE THAT THE ADDITION MADE ON ACCOUNT OF THE REDUCTION OF SHARE CAPITAL AND SHARE PREMIUM IS COVERED BY EXPLANATION (1)(B) TO SECTION 115JB(2) OF THE INCOME-TAX ACT,1961. 7. WE CONSIDERED THIS ISSUE. THE ASSESSEE HAS EFFECTED A REDUCTION IN ITS PAID-UP SHARE CAPITAL T HROUGH LEAVE OF THE COURT, AS PERMISSIBLE UNDER SECTION 100 OF THE COMPANIES ACT, 1956. AS A RESULT OF THIS STRUCTURAL ADJUSTME NT, THE BROUGHT FORWARD LOSS REFLECTED IN THE ASSET SIDE OF THE BAL ANCE SHEET OF THE ASSESSEE COMPANY HAS BEEN DEDUCTED FROM THE PAI D-UP CAPITAL ACCOUNT OF THE ASSESSEE COMPANY REFLECTED O N THE CREDIT SIDE OF THE BALANCE SHEET. IN NON-TECHNICAL LANGUA GE, IT IS A CASE OF WRITING OFF OF ACCUMULATED LOSS FROM THE PAID-UP CAPITAL OF THE ASSESSEE COMPANY. THE ASSESSEE HAS FOLLOWED ALL TH E - - ITA NO.860 OF 2010 6 NECESSARY STATUTORY REQUIREMENTS TO GIVE EFFECT TO THE REDUCTION IN ITS SHARE CAPITAL. 8. IN TERMS OF THE REQUIREMENTS OF SCHEDULE VI TO THE COMPANIES ACT, 1956, THE ASSESSEE HAD MADE THE ABOV E STATED ADJUSTMENT BY REFLECTING THE CONCERNED ENTRIES IN I TS PROFIT AND LOSS ACCOUNT. IT IS NOT EXACTLY IN THE PROFIT AND LOSS ACCOUNT DEALING WITH PROFIT OR LOSS OF THE IMPUGNED ASSESSM ENT YEAR. THOSE ADJUSTMENT ENTRIES HAVE BEEN REFLECTED BELOW THE LINE, IN THE APPROPRIATION PORTION OF THE PROFIT AND LOSS AC COUNT. THE ACCUMULATED LOSS AMOUNT HAS BEEN BROUGHT DOWN FROM THE BALANCE SHEET TO THE DEBIT SIDE OF THE PROFIT AND L OSS APPROPRIATION ACCOUNT, WHICH HAS BEEN COMPENSATED T HERE ITSELF BY AN ADJUSTMENT ENTRY PASSED IN RESPECT OF THE SHA RE CAPITAL AND SHARE PREMIUM ACCOUNT. THEREFORE IT IS TO BE S EEN THAT THE REFLECTION OF THE BROUGHT FORWARD LOSS IN THE PROFI T AND LOSS APPROPRIATION ACCOUNT HAS BEEN MADE BY THE ASSESSEE COMPANY ONLY FOR THE PURPOSE OF DISCLOSURE, AS REQUIRED U NDER THE COMPANIES ACT AND IT DOES NOT IN ANY WAY INFLUENCE THE WORKING RESULTS OF THE ASSESSEE COMPANY FOR THE IMPUGNED AS SESSMENT YEAR. IT IS CLEAR FROM THE PROFIT AND LOSS ACCOUNT ITSELF. THE PROFIT - - ITA NO.860 OF 2010 7 AFTER TAX WAS ` 343.30 LAKHS AND ULTIMATELY THE PROFIT AVAILABLE F OR APPROPRIATION ALSO STOOD AT THE SAME FIGURE. THERE FORE, IT IS CLEAR THAT THE ADJUSTMENT OF BROUGHT FORWARD LOSS MADE OV ER TO PAID-UP SHARE CAPITAL AND SHARE PREMIUM ACCOUNT HAS NOT AT ALL AFFECTED THE WORKING RESULT OF THE ASSESSEE COMPANY AND THER EFORE ON THAT GROUND ITSELF NO ADJUSTMENT IS CALLED FOR, UND ER SECTION 115JB. 9. THIS ISSUE HAS BEEN SUCCINCTLY CONSIDERED BY TH E HONBLE HIGH COURT OF DELHI IN THE CASE OF CIT-III, NEW DELHI VS. SUMI MOTHERSON INNOVATIVE ENGG. LTD., 195 TAXMAN 35 3. THE HONBLE HIGH COURT HELD THAT THE EXPRESSION LOSSES BROUGHT FORWARD IN CLAUSE(III) OF EXPLANATION(1) TO SECTIO N 115JB(2) MEANS LOSS ON LAST DATE OF THE IMMEDIATELY PRECEDIN G ASSESSMENT YEAR, WHICH IS NECESSARILY TO BE BROUGHT FORWARD TO THE NEXT FINANCIAL YEAR AND IT DOES NOT HAVE ANY RE LEVANCE TO THE WORKING RESULT OF THE IMPUGNED ASSESSMENT YEAR DESP ITE THE COURSE OF EVENTS ARISING OUT OF SUCH ADJUSTMENTS. TO BE MORE SPECIFIC, THE PROVISION POINTED OUT BY THE ASSESSIN G OFFICER DEALS WITH THE RESERVES TRANSFERRED BY THE ASSESSEE COMPA NY. IT DOES NOT DEAL WITH THE UNABSORBED LOSS BROUGHT FORWARD F ROM THE - - ITA NO.860 OF 2010 8 EARLIER ASSESSMENT YEAR. THEREFORE, WE FIND THAT T HE COMMISSIONER OF INCOME-TAX(APPEALS) HAS RIGHTLY HEL D THAT THE ADJUSTMENT ADDITION MADE BY THE ASSESSING AUTHORITY FOR THE PURPOSE OF BOOK PROFIT WAS NOT JUSTIFIED. 10. THIS GROUND ALSO FAILS. 11. IN RESULT THIS APPEAL FILED BY THE REVENUE STA NDS DISMISSED. ORDER PRONOUNCED ON TUESDAY, THE 18 TH OF OCTOBER, 2011 AT CHENNAI. SD/- SD/- (HARI OM MARATHA) (DR. O.K.NARAYANAN) JUDICIAL MEMBER VICE-PRESIDENT CHENNAI, DATED THE 18 TH OCTOBER, 2011. V.A.P. COPY TO: (1) APPELLANT (2) RESPONDENT (3) CIT (4) CIT(A) (5) D.R. (6) G.F.