Alfino Fashions Pvt.Ltd., Surat V. The Dy.CIT.,Cent.Circle-1, Surat

ITSSA 600/AHD/2011

• Counselvise Citation: [2016] 122 COUNSELVISE.COM (IT) 1607 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 4 month(s) 13 day(s)
• Appeal Type: Income Tax (Search & Seizure) Appeal
• Pronouncement Date: 31-03-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 12-02-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 17-11-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R I PATEL
• Assessee Lawyers: J P SHAH
• Keywords: Business income; Business expenditure; Bad and doubtful debts
• Section: 37(1); 37; 28

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, AHMEDABAD BEFORE SHRI SHAILENDRA K. YADAV, JUDICIAL MEMBER AN D SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER IT(SS)A NO.600/AHD/2011 / ASSESSMENT YEAR: 2009-10 ALFINO FASHIONS PVT LTD, GARDEN MILLS COMPLEX, SAHARA GATE, SURAT-395010 .. APPELLANT PAN : AABCA 9808 J VS DEPUTY COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE-1, SURAT .. RESPONDENT ASSESSEE(S) BY : SHRI J.P. SHAH, AR REVENUE BY : SHRI R.I PATEL, CIT-DR / DATE OF HEARING 12/02/2016 /DATE OF PRONOUNCEMENT 31/03/2016 / O R D E R PER SHAILENDRA K. YADAV, JUDICIAL MEMBER: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-II, AHMEDABAD DATED 19.09.2011 FOR ASSESSMENT YEAR 2009-10. 2. THE CONCISE GROUND OF APPEAL RAISED BY THE ASSES SEE READS AS UNDER:- THE C.I.T. (APPEALS) ERRED IN UPHOLDING THE DISALLO WANCE OF TRADING LOSS OF RS.27,55,547/- CONSISTING OF ADVANC E OF RS.23,61,396/- TO RAYEES READYMADE AND RS.3,94,151/ - TO DENGUS APPARELS LOST BY THE ASSESSEE. 3. THE BRIEF FACTS OF THE CASE, AS EMERGING FROM TH E CASE RECORDS, ARE THAT DURING THE YEAR UNDER CONSIDERATION THE ASSESS EE-COMPANY HAS IT(SS)A NO. 600/AHD/2011 ALFINO FASHIONS PVT LTD VS. DCIT AY : 2009-10 2 CLAIMED BAD DEBT OF RS. 27,55,557/- FOR ADVANCES GI VEN IN EARLIER YEARS TO RAYEES READYMADES FOR RS. 23,61,396 AND DENGUZ A PPARELS FOR RS.3,94,151/-. THE ASSESSING OFFICER ASKED THE ASSE SSEE AS TO WHY SUCH AMOUNT SHOULD NOT BE DISALLOWED AS THERE WAS NO BUS INESS CONNECTION OF SUCH WAIVER. THE ASSESSEE VIDE ITS LETTER DATED 08.11.2010 MADE WRITTEN SUBMISSION AND AFTER CONSIDERING THE SAME, THE ASSESSING OFFICER MADE DISALLOWANCE OF RS. 27,55,547/-, WHICH WAS CONFIRMED BY THE CIT(A) IN APPEAL. 3.1 BEFORE US, THE LD. AUTHORIZED REPRESENTATIVE SU BMITTED THAT THE ASSESSING OFFICER HAS MADE THE DISALLOWANCE ON THE ASSUMPTION THAT THE ASSESSEE HAS MADE BAD DEBTS U/S. 36(1)(VII) ON THE GROUND THAT THE ASSESSEES CLAIM DID NOT FULFILL THE CONDITIONS STI PULATED IN THE SAID PROVISION. HE FURTHER SUBMITTED THAT WHILE THE ASS ESSING OFFICER WRONGLY REJECTING THE ASSESSEES CLAIM AS IF IT HAD BEEN MADE U/S 36(1)(VII) OF THE ACT, THE ASSESSING OFFICER PROCEE DED ON THE BASIS THAT IT WAS INCUMBENT UPON THE ASSESSEE TO ESTABLISH THA T THE DEBTS IN QUESTION HAD REALLY BECOME BAD. HE FURTHER CONTEND ED THAT THE FACTS ON RECORD SHOWS THAT THE TWO PARTIES IN QUESTION WE RE CARRIED OUT JOB WORKS FOR THE ASSESSEE AND THAT THE ADVANCES TO BOT H THE PARTIES WERE MADE IN THE COURSE OF THE ASSESSEES BUSINESS OF DE ALING IN READYMADE GARMENTS. HE FURTHER SUBMITTED THAT THE DEBIT BALAN CE IN THE ACCOUNTS OF THE TWO PARTIES IN QUESTION HAD REMAINED AFTER T AKING INTO ACCOUNT DEBITS IN RESPECT OF PAYMENTS FOR JOB WORK CHARGES AND ADVANCES MADE TO THE PARTIES FROM TIME TO TIME AND THE CREDITS FO R FABRICATION CHARGES PAYABLE TO THEM FOR JOB WORKS CARRIED OUT FOR THE A SSESSEE AND THAT IT WAS INDISPUTABLE THAT THOSE DEBIT BALANCES HAD ARIS EN IN THE COURSE OF IT(SS)A NO. 600/AHD/2011 ALFINO FASHIONS PVT LTD VS. DCIT AY : 2009-10 3 THE ASSESSEES BUSINESS IN READYMADE GARMENTS. THE AUTHORIZED REPRESENTATIVE HAS REFERRED TO THE WRITTEN SUBMISSI ON FILED BEFORE THE LOWER AUTHORITIES IN SUPPORT OF ITS CLAIM AND PLEAD ED THAT THE ADDITION IN QUESTION MAY BE DELETED. ON THE OTHER HAND, LD. DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THE ASSESSEE WAS NOT ABLE TO PROVE THAT THE DEBT HAS BECOME BAD AND THEREFORE CANNOT BE ALL OWED AS DEDUCTION. HE FURTHER SUBMITTED THAT THE ASSESSEE HAS NEVER OFFERED ANY INCOME FROM THE SAID TRANSACTIONS AND THE DEBT WRITTEN OFF WAS NOT TOWARDS ANY SALE TRANSACTIONS, HENCE PROVISION OF S ECTION 36(1)(III) CANNOT BE APPLIED IN THE CASE OF ASSESSEE. THUS, HE SUPPORTED THE ORDER OF THE LOWER AUTHORITIES AND PLEADED THAT THE ORDER OF THE REVENUE AUTHORITIES MAY BE UPHELD. 4. AFTER GOING THROUGH THE RIVAL CONTENTIONS AND MA TERIAL AVAILABLE ON RECORD, WE FIND THAT THE ONLY ISSUE BEFORE US IS REGARDING THE DISALLOWANCE OF DEDUCTION OF RS.27,55,547/- CLAIMED BY THE ASSESSEE- COMPANY BY WRITING OFF CERTAIN TRADE DEBTS. THE AS SESSING OFFICER IN THE ASSESSMENT ORDER OBSERVED THAT THE ASSESSEE HAS CLAIMED AN AMOUNT AGGREGATING TO RS.27,55,547/- AS BAD DEBTS W RITTEN OFF DURING THE YEAR UNDER CONSIDERATION. THE ASSESSING OFFICE R STATED THAT THE AFORESAID BAD DEBTS COULD NOT BE CLAIMED BY WAY OF DEDUCTION AS THE SAME WAS NEVER INCLUDED IN THE COMPUTATION OF INCOM E AND FURTHER THERE WAS NO BUSINESS CONNECTION OF THE DEBTS WITH THE ASSESSEES BUSINESS. THE STAND OF THE ASSESSEE HAS BEEN THAT D URING THE COURSE OF ITS BUSINESS, THE ASSESSEE-COMPANY PAID ADVANCES TO THESE PARTIES, I.E., RAYEES RAADYMADES AND DENGUZ APPARELS, FOR THE PURC HASES OF FABRIC AS WELL AS TOWARDS RUNNING AND MAINTENANCE OF THEIR UNITS FOR IT(SS)A NO. 600/AHD/2011 ALFINO FASHIONS PVT LTD VS. DCIT AY : 2009-10 4 MANUFACTURING READYMADE GARMENTS TO BE SUPPLIED TO THE ASSESSEE- COMPANY. IT WAS CLAIMED BY THE ASSESSEE-COMPANY TH AT SUBSEQUENTLY, DUE TO ADVERSE MARKET CONDITIONS, THE BUSINESS OF R EADYMADE GARMENTS HAD TO BE DISCONTINUED AND THE ASSESSEE-CO MPANY MADE ALL EFFORTS TO RECOVER THE AFORESAID DEBTS BUT FAILED; AND THEREFORE, DEBTS BECAME IRRECOVERABLE AND BAD. IN THIS REGARD, THE S TAND OF THE ASSESSEE HAS BEEN THAT THE ASSESSING OFFICER HAS MISUNDERSTO OD THE NATURE OF TRADE DEBTS AS HE DISALLOWED THE SAME UNDER THE PRO VISIONS OF SECTION 36(1)(VII) OF THE ACT WITH REGARD TO BAD DEBTS WHIL E THE FACT IS THAT THE ASSESSEE HAS NEVER CLAIMED SUCH DEDUCTION. THE DED UCTION WAS CLAIMED EITHER UNDER SECTION 37(1) OR SECTION 28 ON ACCOUNT OF DEBTS BECOMING IRRECOVERABLE, WHICH IS CLEAR FROM THE ACC OUNTS OF THE ASSESSEE, THE COMPUTATION OF TOTAL INCOME FILED WI TH THE RETURN OF INCOME AND THE WRITTEN REPLY FILED BEFORE THE ASSES SING OFFICER DATED 10.09.2010. TO BE PRECISE, THE ASSESSEE-COMPANY, D URING THE YEAR UNDER CONSIDERATION, HAS WRITTEN OFF CERTAIN ADVANC ES IRRECOVERABLE FROM THE VENDORS AND CLAIMED DEDUCTION THEREOF ON T HE GROUND THAT THE VENDORS NEITHER SUPPLIED THE MATERIAL FOR WHICH THE ADVANCES WERE MADE NOR RETURNED THE MONEY BACK TO THE ASSESSEE-CO MPANY. THE DETAILS OF ADVANCES MADE BY THE ASSESSEE-COMPANY FO R PURCHASE OF MATERIAL ARE AS UNDER:- SR. NO. NAME AMOUNT (RS.) 1. RAYEES READYMADES 23,61,396 2. DENGUZ APPARELS 3,94,151 --------------- TOTAL 27,55,547 ======== COPIES OF LEDGER ACCOUNT OF THE ABOVE TWO VENDORS WERE PLACED BY THE ASSESSEE ON RECORD. IT(SS)A NO. 600/AHD/2011 ALFINO FASHIONS PVT LTD VS. DCIT AY : 2009-10 5 4.1 THE ASSESSEE MADE ALL NECESSARY EFFORTS FOR REC OVERY OF THE SAID ADVANCES FROM THESE TWO VENDORS BUT WAS NOT SUCCESS FUL IN CLAIMING BACK EITHER THE AMOUNT OR GETTING THE MATERIAL. ACC ORDINGLY, AFTER TAKING THE APPROVAL OF THE BOARD OF DIRECTORS, THE ASSESSEE-COMPANY DECIDED TO WRITE OFF THESE ADVANCES AS IRRECOVERABL E AND HENCE THE SAID ADVANCES REPRESENTED EXPENDITURE WHOLLY AND EXCLUSI VELY LAID OUT FOR THE PURPOSE OF ITS BUSINESS, SINCE THE AMOUNT HAD F ACTUALLY BECAME UNREALIZABLE DURING THE ASSESSMENT YEAR UNDER CONSI DERATION. THE COPY OF THE BOARD'S RESOLUTION APPROVING WRITE OFF OF THE SAID ADVANCES HAS ALSO BEEN PLACED ON RECORD. IN THIS REGARD, W E FIND THAT THE AMOUNT WHICH IS WRITTEN OFF IN THE BOOKS OF ACCOUNT WAS IN THE NATURE OF A TRADING LOSS INCURRED WHILE CARRYING OUT THE B USINESS AND WAS DIRECTLY INCIDENTAL TO THE OPERATION OF THE BUSINES S ACTIVITIES. HENCE, THE SAME IS ALLOWABLE UNDER SECTION 37 OF THE ACT. MOREOVER, THERE IS A DIRECT AND PROXIMATE RELATIONSHIP BETWEEN THE BUSIN ESS OPERATIONS AND THE LOSS; AND THE SAME IS DEDUCTIBLE WHILE COMPUTIN G THE INCOME OF THE ASSESSEE. IT IS ALSO PERTINENT TO NOTE THAT ALL THE CONDITIONS AS STATED IN SECTION 37(1) OF THE ACT ARE ALSO COMPLIED WITH AND ACCORDINGLY, THE LOSS DEBITED IN THE BOOKS OF ACCOUNT IS REQUIRED TO BE ALLOWED UNDER THE SAID SECTION. THE CONDITION PRESCRIBED UNDER SE CTION 37(1) IS AS UNDER: (A) THE EXPENDITURE SHOULD BE COVERED UNDER SPECIF IC SECTION I.E. 30 TO 36; (B) THE EXPENDITURE SHOULD NOT BE OF A CAPITAL NA TURE; (C) THE EXPENDITURE SHOULD HAVE BEEN DURING THE PREVIOU S YEAR; (D) THE EXPENDITURE SHOULD NOT BE OF A PERSONAL N ATURE; . (E) THE EXPENDITURE SHOULD HAVE BEEN IN CURRED WHOLLY AND EXCLUSIVELY FOR ITS BUSINESS OR PROFESSION; IT(SS)A NO. 600/AHD/2011 ALFINO FASHIONS PVT LTD VS. DCIT AY : 2009-10 6 4.2 WITHOUT PREJUDICE TO THE ABOVE, THE SAID LOSS I S A TRADING LOSS INCURRED BY THE ASSESSEE AND IS ALLOWABLE UNDER SEC TION 37 OF THE ACT, SINCE THE ADVANCES WRITTEN OFF IN THE BOOKS OF ACCO UNT HAD A DIRECT NEXUS WITH THE BUSINESS ACTIVITY CARRIED OUT BY THE ASSESSEE AND UNDER THAT CIRCUMSTANCES, THE LOSS INCURRED AND WRITTEN O FF BY THE ASSESSEE DURING THE ASSESSMENT YEAR IN QUESTION WAS ALLOWABL E BUSINESS LOSS UNDER SECTION 28 OF THE ACT. THIS VIEW IS FORTIFIED BY THE DECISION OF HONBLE PUNJAB AND HARYANA HIGH COURT IN THE CASE O F CIT VS. DAYACHAND HARDILAL, REPORTED IN 177 ITR 461, WHEREI N THE ASSESSEE- FIRM, WHICH ACTED AS SELLING AGENTS OF D, SOLD GO ODS ON CREDIT TO ONE H. ACCORDING TO THE COPY OF THE ACCOUNT OF H I N THE BOOKS OF THE ASSESSEE-FIRM FILED BEFORE THE INCOME-TAX OFFICER A T THE END OF THE ACCOUNTING YEAR ON 10.06.1972, THERE WAS A DEBIT BA LANCE OF RS.51,186/- AND ON 30.06.1975, THE DEBIT BALANCE STOOD AT RS.38 ,686/-. THE ASSESSEE CLAIMED THIS AMOUNT AS A BAD DEBT FOR THE ASSESSMEN T YEAR 1976-77. THE INCOME-TAX OFFICER REJECTED THE CLAIM OF THE AS SESSEE. THE TRIBUNAL, HOWEVER, ALLOWED THE CLAIM OF THE ASSESSEE TREATING IT AS A BUSINESS LOSS OR ALTERNATIVELY AS BUSINESS EXPENDITURE. ON A REFE RENCE, HONBLE HIGH COURT HELD THAT, ACCORDING TO THE TERMS OF THE AGRE EMENT BETWEEN THE ASSESSEE-FIRM AND D, PAYMENT FOR THE GOODS OF D SOLD BY THE ASSESSEE WAS THE RESPONSIBILITY OF THE ASSESSEE AND THEREFORE, WHEN H DID NOT PAY THE AMOUNT TO D, THE LIABILITY FE LL UPON THE ASSESSEE. THEREFORE, THE TRIBUNAL WAS RIGHT IN HOLDING THAT T HE SUM OF RS.38,686/- DEBITED TO THE ASSESSEES ACCOUNT IN TH E BOOKS OF D DURING THE RELEVANT PERIOD, ON ACCOUNT OF THE AMOUN T NOT BEING PAID BY ONE OF ITS CUSTOMERS, H, WAS AN ADMISSIBLE DED UCTION FROM THE BUSINESS INCOME OF THE ASSESSEE. IT(SS)A NO. 600/AHD/2011 ALFINO FASHIONS PVT LTD VS. DCIT AY : 2009-10 7 4.3 SIMILAR QUESTION AROSE BEFORE THE HONBLE GUJAR AT HIGH COURT IN THE CASE OF CIT VS. ABDUL RAZAK & CO, REPORTED IN ( 1982) 136 ITR 825. THE RELEVANT PORTION OF THE SAID JUDGEMENT IS REPRO DUCED AS UNDER:- 'THE ASSESSEE FIRM CARRIED ON BUSINESS AS COMMISSIO N AGENTS. THE I.T.O. FOUND THAT IN THE COURSE OF ITS BUSINESS AS COMMISSION AGENTS, THE ASSESSEE ADVANCED MONEY TO THE CONSTITU ENTS WHO WERE REQUIRED TO PAY INTEREST ON SUCH ADVANCES. THE ASSESSEE WAS ENGAGED BY M/S. M.P. AS COMMISSION AGENTS FOR P URCHASE OF GOODS. ONE SET OF BOOKS IN THE TRADING BOOKS OF THE ASSESSEE COMPRISED OF THIS COMMISSION AGENCY BUSINESS FOR PU RCHASE OF GOODS ON BEHALF OF M/S. M. P. THE SECOND WAS A SARA FI ACCOUNT AND IN THIS ACCOUNT THE ASSESSEE MADE ADVANCES ON B EHALF OF M/S. M. P. FOR THE ASSESSMENT YEAR 1967-68, THE ASS ESSEE CLAIMED RS.78,824/- IN RESPECT OF THE AMOUNT DUE FR OM M/S. M.P. AS A BAD DEBT IN THE COURSE OF THESE ADVANCES. THE I. T. O. REJECTED THE CLAIM AND, ON APPEAL, THE TRIBUNAL HEL D THAT THE ADVANCES COULD NOT BE SAID TO BE MADE IN THE ORDINA RY COURSE OF BUSINESS OF MONEY-LENDING AND, THEREFORE, THE ASSES SEE'S CLAIM FOR WRITING OFF THE BAD DEBT ARISING OUT OF THE MON EY-LENDING BUSINESS WAS NOT SUSTAINABLE. THE TRIBUNAL HAVING R EGARD TO THE FACT THAT THE ASSESSEE HAD DEALINGS WITH M/S. M.P. AND SINCE THERE WAS NO EVIDENCE TO SUGGEST THAT ANY PARTNER O F THE SAID DEBTOR-FIRM WAS RELATED TO PARTNER OF THE ASSESSEE FIRM, HELD THAT THE IMPUGNED LOSS SHOULD BE ALLOWED AS A DEDUCTING UNDER SECTION 28. ON A REFERENCE: HELD, ON THE FACTS, THAT THE TRIBUNAL HAD OVERLOOKE D THE STATEMENTS OF THE ASSESSEE AND THE DEBTOR-FIRM WHER E IT HAD BEEN CLEARLY STATED THAT THESE ADVANCES WERE ASKED FOR A ND MADE IN FACT, HAVING REGARD TO THE COMMERCIAL RELATIONS BET WEEN THE PARTIES AND THE COMMERCIAL RELATIONS WERE ADMITTEDL Y OF PRINCIPAL AND COMMISSION AGENTS. THE TRIBUNAL WAS N OT JUSTIFIED IN HOLDING THAT THE ADVANCE TO M/S. M.P. WAS NOT IN THE ORDINARY COURSE OF BUSINESS OF THE ASSESSEE FIRM. THE DEBT O WED BY M/S. M.P. WAS ONE WHICH SPRANG DIRECTLY FROM THE BUSINES S OF THE ASSESSEE AND WAS ALLOWABLE AS A BAD DEBT AND CONSEQ UENTLY, THEREFORE, AS A TRADING LOSS UNDER SEC. 28(1).' IT(SS)A NO. 600/AHD/2011 ALFINO FASHIONS PVT LTD VS. DCIT AY : 2009-10 8 IN THE AFORESAID CASE, THE HONBLE GUJARAT HIGH COU RT CATEGORICALLY HELD THAT ANY DEBT WHICH AROSE DURING THE COURSE OF NORMAL BUSINESS ACTIVITY AND WHICH BECOMES BAD OR I RRECOVERABLE, THE SAME HAS TO BE ALLOWED AS TRADING LOSS UNDER SECTIO N 28(1). CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE ON HAND, IN OUR OPINION, THE ASSESSING OFFICER WAS NOT JUSTIFIED IN MAKING THE DISALLOWANCE OF TRADING LOSS OF RS.27,55,547/- IN R ESPECT OF WRITTEN OFF OF TRADE ADVANCES MADE BY THE ASSESSEE TO THE PARTI ES NAMELY RAYEES READYMADE OF RS.23,61,396/- AND DENGUZ APPARELS OF RS.3,94,151/- IN THE COURSE OF ITS BUSINESS OPERATION. THEREFORE, T HE ASSESSING OFFICER IS DIRECTED TO ALLOW THE AFORESAID DISALLOWANCE MADE B Y HIM. 5. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE COURT ON 31ST MARCH 2016 AT AHMEDABAD. SD/- SD/- N.K. BILLAIYA SHAILENDRA K. YADAV (ACCOUNTANT MEMBER) (JUDICI AL MEMBER) AHMEDABAD; DATED 31/03/2016 BIJU T., PS ! / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ! ' ' # / CONCERNED CIT 4. ' ' # ( ) / THE CIT(A) 5. &'( ! , ' ! , / D R, ITAT, AHMEDABAD 6. (- . / GUARD FILE . / BY ORDER, TRUE COPY / ( DY./ASSTT.REGISTRAR) , / ITAT, AHMEDABAD