Income Tax Appellate Tribunal - Bangalore
Abb Ltd.,, Bangalore vs Assessee on 5 October, 2001
IN THE INCOME TAX APPELLATE TRIBUNAL
"A" BENCH : BANGALORE
BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER\
AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER
ITA No.35/Bang/2010
Assessment year : 2001-02
The Additional Commissioner of
Income Tax (LTU),
Bangalore. : APPELLANT
Vs.
M/s. ABB Ltd.,
Khanija Bhavan,
Race Course Road, II Floor,
East Wing,
Bangalore - 560 071. : RESPONDENT
ITA No.158/Bang/2010
Assessment year : 2001-02
M/s. ABB Ltd.
(Successor of ABB
Instrumentation Ltd.,)
Khanija Bhavan,
Race Course Road, II Floor,
East Wing,
Bangalore - 560 071. : APPELLANT
Vs.
The Additional Commissioner of
Income Tax (LTU),
Bangalore. : RESPONDENT
Revenue by : Shri G.V. Gopala Rao, CIT-I(DR)
Assessee by : Shri P.J. Pardiwala, Sr. Advocate
ITA No.35 & 158/Bang/10
Page 2 of 35
ORDER
Per A. Mohan Alankamony, Accountant Member
These two appeals - preferred (i) by the Revenue and (ii) another by the assessee company - are directed against the order of the Ld. CIT (A)-I, Bangalore in ITA NO: 188/AC-11(1)/ CIT(A)-I/06-07 dated:
23.11.2009 for the assessment year 2001-02.
I. ITA NO: 35/B/10 - [By the Revenue]
2. The Revenue has raised five grounds, out of which, ground Nos.1 and 5 being general in nature and since no specific issues involved, they have become non-consequential. In the remaining grounds, the cruxes of the issues raised are as under:
(i) the CIT(A) erred in sustaining only 50% as against 100% of disallowance on miscellaneous expenditure;
(ii) the CIT(A) erred in deleting the addition of Rs.20,46,916/- made on account of compensation for delayed deliveries; &
(iii) the CIT(A) erred in deleting the disallowance of Rs.9,49,328/-
being part of expenditure incurred as interest charges for late payment.
II. ITA NO: 158/B/10 - [By the assessee]
3. The assessee company ['the assessee' in short] in its grounds of appeal had raised nine grounds in an illustrative and elaborate manner. For the sake of convenience and clarity, they are reformulated in a concise manner, as under:
ITA No.35 & 158/Bang/10 Page 3 of 35
(i) the CIT(A) erred in confirming the disallowance of Rs.1 lakh out of total expenditure of Rs.2.24 lakhs incurred as direct cost on installation;
(ii) the CIT(A) erred in sustaining the disallowance of Rs.13,47,946/- u/s 40A(2)(b) of the Act;
(iii) the CIT(A) erred in sustaining the disallowance of Rs.9,16,000/-
on protective basis being provision for warranty written back during the year;
(iv) the CIT(A) erred in confirming the disallowance of Rs.5 lakhs on the ground that information about yield of finished product, percentage of yield, shortage were not given in annexure XVII (Clause 28(B)(A)of the tax audit report;
(v) the CIT(A) erred in sustaining the disallowance of Rs.6,34,33,049/- being debts written off;
(vi) the CIT(A) erred in sustaining the disallowance to the extent of Rs.3,65,054/- being expenditure incurred as co-ordination expenses for the projects as the expenditure did not relate to the FY under dispute;
(vii) the CIT(A) erred in confirming the disallowance to the extent of Rs.30,00,000/- out of Rs.1,25,42,482/- being miscellaneous expenditure;
(viii) the CIT(A) erred in sustaining the disallowance of Rs.3,50,81,381/- being amount due from Gujarat Instruments Limited on the ground that no details have been provided; &
(ix) the CIT(A) erred in confirming the disallowance of Rs.32,25,000/- being a provision made for diminution in the value of investment in Gujarat Investments Ltd.
- without prejudice, if the expenditure of Rs.32.25 lakhs was not allowed as revenue expenditure, the same be considered as capital loss and allowed to be carried forward.
4. As the issues contested by the rival parties pertaining to the same assessment year, for the sake of expediency, both the appeals were heard, considered and disposed off in this common order.
ITA No.35 & 158/Bang/10 Page 4 of 35
5. Let us now take up the issues raised by the Revenue for consideration.
Briefly stated, the assessee was in the business of manufacturing of field instrumentation such as recorders, controllers, analyzers, flow meters and transmitters.
Ground No.1:
6. The CIT(A) erred in sustaining only 50% as against 100% of disallowance on miscellaneous expenditure.
(i) The assessee had claimed miscellaneous expenses of Rs.1,25,42,482/- under the head 'other expenses'. When the assessee was required to produce the details of such expenses during the course of assessment proceedings, according to the AO, no details were forth- coming and in the absence of any details as called for, he had resorted to disallow Rs.60 lakhs on this count.
(ii) When this issue was taken up with the CIT (A) for relief by the assessee, the Ld. CIT (A), after due consideration of the assessee's contentions as well as the AO's remand report, had reasoned that -
"24.4.................the details of Miscellaneous expenditure was provided in pages 224 to 228 of the paper book. The same were perused. In fact, it is part of schedule 20, however, the vouchers were neither produced before the AO or before me. It is pleaded that vouchers were not shown because it was not asked for which seems only a plea negated by the para 12 of the assessment order vide supra. Thus, I find still the expenditure claim has to be justified. In the absence of such justification and corroborative evidence I, on principle, accept the ratio for disallowance of the claim under this head, but, I find it excessive being almost 48% of the claim and, therefore, restrict the same to Rs.30 lakhs..."
ITA No.35 & 158/Bang/10 Page 5 of 35
(iii) It was contended by the Ld. D.R before us, in brief, that the stand of the Ld. CIT (A) was not justified in restricting the disallowance to 50% when there was lack of documentary evidence to justify such restriction.
(iv) On the other hand, the Ld. A.R was specific in his urge that after due consideration of the details submitted, the Ld. CIT (A) had restricted the disallowance to 50% which requires to be sustained.
(v) We have duly considered the rival submissions, diligently perused the relevant records, remand report of the AO, rejoinder of the assessee and also the details furnished during the course of hearing [source: P 171 to 175 of PB]. On a critical examination of such details, we find that the assessee had given the details of expenses incurred under various heads, chiefly, printing and stationery Rs.13,41,131/- motor car expenses of Rs.8,48,821/-, miscellaneous expenses of Rs.24,04,609/-, ABB management fee Rs.19.73 lakhs etc., However, no documentary evidences in the shape of vouchers, bills for having procured stationary and printing etc., were forthcoming. Keeping these aspects in view, the Ld. CIT (A) was magnanimous in arriving at a conclusion that disallowance to the tune of Rs.30 lakhs will meet the ends of justice. Disallowing a whopping sum of Rs.60,00,000/- out of the expenses claim of Rs.1,25,42,482/- as resorted to by the AO, in our considered view, was rather excessive. We are, therefore, of the firm view that the Ld. CIT (A) was fair in his finding which requires no interference at this stage. It is ordered accordingly.
ITA No.35 & 158/Bang/10 Page 6 of 35 Ground No.2:
7. The CIT(A) erred in deleting the addition of Rs.20,46,916/- made on account of compensation for delayed deliveries:
(i) The assessee had debited to P & L account a sum of Rs.20,46,916/- as compensation for delayed deliveries. On being queried by the AO, it was explained by the assessee that 'compensation for delayed deliveries are the expenses incurred for delayed delivery beyond the contractual delivery period. These expenses are incurred as a result of breach of commercial contracts and not for breach of law. These expenses are fully allowable as business expenses. The appellate authorities in earlier years have allowed these expenses." However, in the absence of required information and also the Revenue's appeal on this point was pending for the AY 2000-01 before the Tribunal, the AO disallowed the said sum.
(ii) On being agitated, the assessee had approached the CIT (A) for relief. During the course of appellate proceedings, the assessee had furnished the required details which were sent for AO's comments who had conceded that the issue may be decided on merit. Accordingly, the Ld. CIT (A) deleted the addition.
(iii) It was contended before us during the course of hearing that the CIT(A) had failed to appreciate that the addition was made due to ITA No.35 & 158/Bang/10 Page 7 of 35 non-furnishing of details by the assessee relating to the relevant assessment year.
(iv) On his part, the Ld. A R had furnished the details of compensation for delayed deliveries as on 31.3.2001 which contained the names of the parties and the amounts [Source: P 176 of PB AR].
(v) The Hon'ble ITAT, Delhi Bench C, New Delhi in ITA NO:6920/DEL/93 dated: 5.10.2001 in the case of ACIT v. Taylor Instruments Co (I) Ltd. had recorded its finding, in an identical issue, that -
"19........................we are of the view that no interference is warranted in the order passed by the CIT(A) allowing necessary deduction on account of damages claimed. As rightly held by the CIT (A), the payments were not for violation of any law, but, the payments necessarily had to be made because of non-fulfillment of terms of the contract between the parties...."
(vi) For appreciation of facts, we reproduce the observations of the CIT (A) [which culminated the issue in favour of the assessee] as under:
"11.2. I have carefully considered the facts of the case and the above submissions. A perusal of the details of compensation for delayed deliveries shows that these are the deductions made by customers on account of late delivery of instruments and equipments. The late deliveries has been explained by the appellant to be due to the reason that it does not get the components in time. In this regard, it has been explained that it manufacture, process, control instruments by procuring components from collaborators abroad as well as local components from various units situated all over India. The amounts deducted by the customers for late deliveries ( is) are as per the terms and conditions of the contract. In these facts and circumstances and after considering the ratio of the decision of the Hon'ble Delhi High Court cited above, it is held that the disallowance of Rs.4,12,260/- on account of liquidated damages on the basis of reason given by the assessing officer is not sustainable."
ITA No.35 & 158/Bang/10 Page 8 of 35
(vii) The Hon'ble Delhi A Bench in the case of ACIT v. Birla Kant Taylor Ltd. in ITA NO: 2172 & 6862/DEL of 1995 & ITA NO:4854/Del of 1996 dt: 12.11.2001 (for the AYs 1991-92 to 93-94 had concurred with the finding of the Hon'ble Delhi 'C' Bench cited supra [source: P 46 - 56 of PB AR].
(viii) In view of the above and also in conformity with the findings of the Hon'ble Tribunal, Delhi Benches referred above, we are of the considered view that the stand of Ld. CIT (A) on this issue warrants no interference at this stage. This ground of the Revenue fails. Ground No.3:
8. (i) The last ground of the Revenue was that ' the CIT(A) erred in deleting the disallowance of Rs.9,49,328/-being part of expenditure incurred as interest charges for late payment.' During the course of assessment proceedings, the AO noticed that in Schedule 21, Rs.1.54 crores was shown under the head 'exceptional items' as loss on sale of earlier year. In the Auditors Note of Schedule 22, it was noted that the assessee had supplied certain systems to Kudremukh Iron Ore co. Ltd. [KIOCL] in the year 1994 and due to mal-function of the system supplied, KIOCL invoked the arbitration proceedings and the arbitrator had directed the assessee to pay Rs.1.27 crores towards the cost of material and interest charges @ 18% P.A till the date of payment which amounted to Rs.27.49 lakhs till the year end.
ITA No.35 & 158/Bang/10 Page 9 of 35
(ii) After considering the explanation of the assessee, the AO was of the view that the assessee had to pay Rs.1,27,25,000/- plus interest of Rs.18 lakhs, totaling to Rs.1,45,25,000/- whereas the assessee had claimed Rs.1.54 crores whereby there was an excess claim of Rs.9,49,328/- which was disallowed by the AO.
(iii) On an appeal, the assessee had contended before the CIT(A) that it had correctly claimed the deduction for a sum of Rs.1,54,74,328/- as against Rs.1,45,25,000/- considered by the AO. The Ld. CIT (A) deleted the addition on the basis of remand report [reference: P 20 of CIT(A)'s order].
(iv) The brief submission during the course of hearing before this Bench was that the CIT (A) had erred in deleting the disallowance in spite of assessee's failure to furnish fresh evidence as regards the disallowance of Rs.9.49 lakhs being part of expenditure incurred as interest charges for late payment.
(v) However, the Ld. AR was emphatic in his urge that during the course of remand (report) proceedings, the AO had in no manner controverted any of the submissions made and on the basis of which the CIT (A) deleted the said disallowance which requires to be sustained.
(vi) We have diligently considered the rival submissions and also perused the relevant records. On a decisive perusal of the ITA No.35 & 158/Bang/10 Page 10 of 35 arbitration award dated: 23.9.2000 [Reference: P 187 of PB AR], we find the award of Arbitration Board goes like this -
"This is part of the award running several pages, which essentially awards in favour of the claimant that a sum of Rs.1,27,25,000/- with interest thereon at the rate of 18% per annum from today till the date of payment, as also a fixed sum of Rs.18 lakhs towards interest till today.
(vii) Thus, the assessee was required to pay to KOICL Rs.1,27,25,000/- plus interest at the rate of 18% per annum from 20.9.2000 till the date of payment plus a fixed sum of Rs.18 lakhs towards interest as on 20.9.2000. However, as could be seen from the impugned order of the AO, he had arrived at the figure of Rs.1,45,25,000/- [Rs.1,27,25,000 + Rs.18,00,000/-], but, perhaps inadvertently, failed to observe that the assessee had also to pay interest at the rate of 18% p.a. for Rs.1,27,25,000/- from 20.9/.2000 till the date of actual payment to KOICL, apart from Rs.1,45,25,000/-.
(viii) The assessee asserted during the course of hearing that the sum of Rs.9.49,328/- disallowed by the AO represents the interest from the date of the award till the date of payment and, hence, was correctly claimed as a deduction. It was, therefore, contended that the Ld. CIT (A) was justified in deleting the disallowance of Rs.9,49,328/- resorted to by the AO.
(ix) This issue has been examined once again by the AO at the time of furnishing the remand report. In the remand report, the ld. AO has categorically mentioned that at the earlier instance the correct factual position was not brought out. The specific terms of the award was overlooked. The sum of Rs.9,49,328 disallowed by the AO actually represents the interest from the date of the award till the date of payment and hence the assessee has correctly claimed it as a deduction. In view of ITA No.35 & 158/Bang/10 Page 11 of 35 the same, we uphold the order of the ld. CIT(A) on this issue. It is ordered accordingly.
9. We shall now address to the grievances of the assessee. Ground No.1:
Disallowance of Rs.1 lakh out of total expenditure of Rs.2.24 lakhs incurred as direct cost on installation:
(i) The assessee had claimed an expenditure of Rs.2.24 lakhs as direct cost on installation. On being queried by the AO, it was explained that such expenses were incurred towards traveling and accommodation charges of engineers to complete the balance job of installations. In the absence of details, the AO had disallowed Rs.1 lakh on this count.
(ii) After due consideration of the contention of the assessee, remand report of the AO as well as the rejoinder of the assessee - wherein it was claimed that the entire expenditure was supported by vouchers which were produced before his predecessor - the CIT (A) was of the view that since no such vouchers were produced during the course of appellate proceedings, the disallowance was justified.
(iii) It was contended during the course of hearing that as per the terms of the contract with the customer the assessee was under obligation to do installation of equipments supplied and expenditure incurred on the same was debited to direct cost of installation, jobs and services. It was, further, contended that since the expenditure was revenue in nature relating to the business of the assessee, the same requires to be allowed in full.
ITA No.35 & 158/Bang/10 Page 12 of 35
(iv) On the other hand, the Ld. D R was of the firm view that no documentary evidence was adduced even at the stage of appellate stage to justify its claim and, thus, the stand of the authorities requires to be sustained.
(v) We have duly considered the rival submissions, perused the relevant records and also voluminous paper books furnished by the Ld. A.R in this regard.
(vi) The AO in his remand report before the CIT(A) had justified the disallowance of Rs.1 lakh on account of personal in nature. However, he had failed to substantiate his stand with any documentary evidence.
(vii) The assessee, on its part, had furnished under the caption "Details of direct cost of installation jobs" [source" 153 of PB AR] Rs.1,46,883/- being house rent deducted by the customer a site provided to the workers and Rs.77,181/- being traveling, hotel accommodation, conveyance, telephone, food expenses etc., However, no vouchers/hotel bills/receipts worth the name are forth-coming to justify the expenses to the tune of Rs.2.24 lakhs, but, at the same breath, the claim of the assessee cannot also be brushed aside. The assessee had claimed house rent of Rs.1.46 lakhs deducted by the customer for having provided accommodation to its workers for executing installation work. It is not uncommon to provide accommodation by the customers as a gesture for ITA No.35 & 158/Bang/10 Page 13 of 35 executing installation work in their premises to the workers and meeting their expenses.
(viii) Considering the over all facts and circumstances of the issue and also the enormity of the situation on which the assessee was placed for execution of installation work etc., we are of the considered view that disallowance of Rs.1,00,000 is unwarranted. It is ordered accordingly. Ground No.2:
10. Disallowance of Rs.13,47,946/- u/s 40A(2)(b) of the Act:
(i) The assessee had claimed Rs.13,47,946/- having been paid to ABB Holding (South Asea) Ltd. - an associate concern of the assessee. On being queried the details of services rendered by the said company, it was explained before the AO that the said company had arranged a loan of Rs.15 crores from ICICI Bank for a period of nine months and from Standard Chartered Bank for a period of 3 months and stood as a guarantor for which debit note to the tune of Rs.13,47,946/- was raised. The AO took a view that it was in the nature of capital expenditure and exorbitant and, thus, disallowed u/s 40A(2)(b) of the Act.
(ii) After analyzing the contention of the assessee as well as the reasoning of the AO in his remand report, the CIT (A) had observed thus -
"13.1.......................Cited case laws held that the expenditure incurred for the purpose of obtaining a loan is allowable as revenue expenditure 60 ITR 52 (1966) (SC) and the charges paid to a guarantor is also allowable as revenue expenditure 227 ITR 465 ( SC) (1997). However, the documents provided in the paper book only show that M/s.ABB Holdings (South Asia) has stood as the corporate guaranteer of the appellant before ITA No.35 & 158/Bang/10 Page 14 of 35 the Standard Chartered Grindlays Bank, but, no paper reveals that what should be the charge for being the guarantor i.e., 1% or 0.6% as claimed in the written submission. Thus, in the absence of documentary evidence to support the claim that the charge of commission is 1% of the net balance as in case of other borrowers, the details of debit notes shown in page 108 of paper book has no evidentiary value at all. Hence, on facts, the addition is sustained...."
(iii) It was vehemently contended before us by the Ld. AR that as the net worth of the assessee was negative and the bankers were charging high rate of interest for providing finance/working capital, on the basis of guarantee given by ABB Holding (South Asia) Ltd., bankers have provided loan @ the rate of 11.95% which enabled the assessee to save in the interest cost and, therefore, the guarantee commission as charged by ABB Holding (S A) Ltd. was reasonable and normal which was incurred during the course of business. Further, it was submitted that the loans were taken for working capital purposes only. It, was, further, submitted that the said company was a profit making company and the assessee was a loss making company and, thus, there was no intention to transfer income to avoid/reduce income-tax liability and as such, the provisions of s.40A(2)(b) have no application.
(iv) However, the Ld. D R supported the views of the authorities below on this score and urged that the stand of the CIT(A) requires to be sustained.
(v) We have duly considered the rival submissions and also perused the relevant records.
ITA No.35 & 158/Bang/10 Page 15 of 35 The impugned assessment order doesn't throw any light except a vague and casual description of the issue that the amount was exorbitant and moreover in nature of capital nature.
(vi) On his part, the Ld. CIT(A) admitted that the expenditure incurred for the purpose of obtaining a loan is allowable as revenue expenditure 60 ITR 52 (1966) (SC) and the charges paid to a guarantor is also allowable as revenue expenditure 227 ITR 465 (SC) (1997). However, the documents provided in the paper book only show that M/s. ABB Holdings (South Asia) has stood as the corporate guaranteer of the appellant before the Standard Chartered Grindlays Bank, but, no paper reveals that what should be the charge for being the guarantor i.e., 1% or 0.6% as claimed in the written submission.
(vii) Thus, the authorities below have not disputed the transaction. The AO had claimed that the claim of the assessee was exorbitant, but, failed to substantiate it with any documentary proof.
(viii) The Standard Chartered Grindlays Bank Limited [SCGBL] in its communication dated: 22.12.2000 [source: P 79 of PB AR] to the assessee offered the enhancement of credit facilities to the tune of Rs.150000K on the security (corporate guarantee) from ABB Holdings (South Asia) Limited to cover the WCDL facility. The ABB Holdings (S A) Ltd. on its part guaranteed for the assessee for extending credit facility by SCGBL to the tune of Rs.150 million and also Indemnity-cum-undertaking ITA No.35 & 158/Bang/10 Page 16 of 35 in favour of SWCGBL for extending credit facility to the assessee [Reference: P 84 & 87 of PB AR]
(ix) The AO in his remand report had remarked that, Now the assessee has submitted copy of letter from SCGB Ltd. and copy of indemnity cum guarantee in support of its claim. Perusal of the same reveals that there is no clause of guarantee commission to be paid on the guarantee given by ABB Holdings (S A) Ltd.....'
(x) As rightly contended by the assessee, the payment of guarantee commission was a matter of contract between the assessee and ABB Holdings (S A) Ltd and it was not the concern of the SCGB Ltd as to how much of the guarantee commission to be paid by the assessee to ABB Holdings and as such there was no mention or any clause of guarantee commission to be paid on the guarantee given by ABB Holdings in the said Indemnity-cum-guarantee. The reasoning of the AO to deny the claim of the assessee was not on the sound footing and it was rather hypothetical.
Any prudent businessman or a company, as the case may be, will not stand guarantee for another company for securing credit facility for a whopping sum of Rs.150 millions without any guarantee commission and the charging of guarantee commission of 0.6% by ABB Holdings was quite reasonable, considering the circumstances of the issue. Moreover, the AO had not brought any documentary evidence to suggest that the guarantee commission claimed was excessive and unreasonable having regard to the prevailing trends in the business community. The ITA No.35 & 158/Bang/10 Page 17 of 35 AO's cryptic reasoning was that 'This amount is exorbitant and moreover in nature of capital expenditure and exorbitant also'.
(xi) In fact, the Ld. CIT (A) had conceded that the expenditure incurred for the purpose of obtaining a loan was allowable revenue expenditure as ruled by the Hon'ble Apex Court reported in 60 ITR 52 and the charges paid to a guarantor was also an allowable revenue expenditure [227 ITR 465 (SC)]. When ABB Holdings stood as a guarantor for the assessee for availing of credit facility which has not been disputed either by the AO or the first appellate authority, the legitimate claim of guarantee commission paid - that too at 0.6% - cannot be denied on a flimsy ground. We are, therefore, of the firm view that the AO was not justified in disallowing the claim of Rs.13,47,946/- and also the stand of the Ld. CIT(A) in sustaining such a disallowance. It is ordered accordingly.
Ground No.3:
11. Disallowance of Rs.9,16,000/- on protective basis being provision for warranty written back during the year:
(i) As per clause 20 of Tax Audit Report, Rs.1.13 crores represented profit chargeable to tax u/s 41 of the Act which included Rs.9.16 lakhs being provision for warranty written back. In the foot note of Tax Audit Report, it was mentioned that this amount was disallowed in the AY. 99-00 which was confirmed by the CIT(A) and the issue was pending before the Tribunal. The AO was of the view that Rs.9.16 lakhs being the provision for warranty written back was concerned and although was ITA No.35 & 158/Bang/10 Page 18 of 35 already disallowed for the AY 99-00 and the issue was still pending before the Tribunal, the same was included in the total of Rs.1.31 crores on protective basis and assessed. Conceding the assessee's contention that Rs.1.13 crores was already credited to P & L account having been included in the total of 'other income', no separate addition was made, however, no deduction was allowed for Rs.9.16 lakhs.
(ii) When the assessee took up this issue with the CIT (A) for relief, the first appellate authority had dismissed the assessee plea on a cryptic reasoning that '14..... I find the addition has been made on protective basis. Hence, no decision is given thereon....'
(iii) It was contended before us by the Ld. A R that the said amount has been provided for the liability for the AY 99-00 which was disallowed as contingent expenditure and this stand of the AO was subsequently upheld by higher authorities for that year; that taxing the same now would result in taxing it twice. It was, therefore, submitted that the same requires to be deleted.
(iv) We have considered the submission of the assessee and also perused the relevant records. The AO in his impugned order had stated that the assessee's appeal [including the subject matter] for the AY 99-00 was pending before the Tribunal and that the outcome of the Hon'ble Tribunal has not been brought to the reference of this Bench by either party. The assessee pleaded before us that the said amount has been provided for the liability for the AY 99-00 which was disallowed as contingent expenditure and this stand of the AO was subsequently upheld by ITA No.35 & 158/Bang/10 Page 19 of 35 higher authorities for that year; that taxing the same now would result in taxing it twice. However, it was not made explicitly clear whether the stand of the AO has since been sustained by the Hon'ble Tribunal for the AY 99-
00. In view of the above, this issue is remitted back on the file of the AO with a specific direction to look into the grievance of the assessee and to take appropriate action in accordance with the law. While doing so, the AO shall keep in view and ensure that the said sum of Rs.9.16 lakhs is not subjected to be taxed twice. It is ordered accordingly. Ground No.4:
12. Disallowance of Rs.5 lakhs on finished product:
(i) The AO had added back Rs.5 lakhs on the ground that information about the yield of finished produce, percentage of yield, shortages were not given in Annexure XVII (Clause 28(b)(A) of the Tax audit report.
(ii) When it was agitated before the first appellate authority who, after due consideration of the assessee's contentions, upheld the stand of the AO with the reasoning that -
"17.1. It is only pleaded above that GP ratio of current year is better than preceding years, but, no details regarding the GP rates of earlier years was provided in the appellate proceeding. Even the Paragraph 6 of page 276 of paper book explains that the auditors comments should not be used to take an adverse view because they have not understood the proper nature of business of the appellant when they commented that the concern is only an assembly unit and not manufacturing unit. In spite of all arguments, the details of raw materials used for assembly of instruments, transmitters auto- meters etc., and yield there-from was neither produced at the time of assessment nor before the auditors or at appellate stage. In view of the above, I uphold the addition....."
ITA No.35 & 158/Bang/10 Page 20 of 35
(iii) It was vehemently contended before us that the assessee was not a processing industry, but, was basically doing assembly work of different types of components, equipments and instruments and, hence, it was not possible to provide yield of the finished product, percentage of yield or shortages. The Note given by the auditors in the tax audit report in Annexure XVII reflects this fact which cannot be treated as adverse remark. It was, further, urged that there was no basis on which addition of Rs.5 lakhs could be made and, therefore, pleaded for deletion of the same.
(iv) We have duly considered the assessee's contentions as well as the relevant records. The assessee had, in fact, furnished in Annexure XVII [p 65, 66 & 67 of PB] the quantitative details of raw materials consumed, quantitative details of finished goods and also gross profit/turnover ratio wherein, the material consumed/finished goods produced at 84.45% comparing to the percentage obtained at 85% for the AY 2000-01 [Source: P 90 of PB AR]. However, the assessee had explained in a note that considering the nature of business and as per accounting practice followed in the business, information with regard to the yield of finished produces, percentage of yield, shortage of raw materials and furnished goods and percentage thereof was not practicable to furnish.
(v) It was maintained by the assessee's counsel during the hearing before us that this Note was a regular feature in the assessee's account in the past years and at no point of time had the AO made any addition to the assessee's income based on the same. It was, further, ITA No.35 & 158/Bang/10 Page 21 of 35 contended that the current year's gross profits ratio was higher than the GP of the earlier years.
(vi) On a glimpse of the remand report of the AO, we find that the AO had remarked that, 'since the assessee has not filed any fresh evidence in its submission on this issue, therefore, the addition was rightly made on protective basis'. However, on a perusal of the impugned assessment order, the addition was not made on protective basis as claimed by the AO in his remand report.
(vii) In an overall consideration of the facts of the issue and since the AO had not brought any documentary proof to suggest the basis on which addition of Rs.5 lakhs has been made that too on an ad-hoc basis. It was well settled that no addition could be made on an ad-hoc basis which doesn't stand the testimony of law. We, therefore, delete, the addition of Rs.5 lakhs which, in our considered view, has been resorted to without a sound basis. It is ordered accordingly. Ground No.5:
13. Disallowance of Rs.6,34,33,049/- being debts written off:
(i) In the absence of any information - though the assessee was specifically to asked to furnish - the AO had disallowed the whopping sum of Rs.6,34,33,049/- being debts written off.
(ii) On his part, the Ld. CIT (A) had, after deliberating the issue extensively and quoting his finding in the case of IMB Global Services India Pvt. Ltd. dt.5.10.2009 and also findings of various Tribunals, observed thus
-
ITA No.35 & 158/Bang/10 Page 22 of 35 "21.3.....................................In fact, I have only elaborated the procedure of write off and found the procedure deficient so as to make the bad debts eligible for allowance in the eye of law. Thus, on interpretation of law point and analysis of facts involved I consider the disallowance made by the AO justified. "
(iii) In his brief submission, the Ld. A R took a stand that as per the provisions of s.36(2) of the Act, the deduction is allowable once it is established that the debts or part therefore has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year.
(iv) The Ld. D R present was heard.
(v) At the out-set, we would like to point out that once the
assessee had written off debts as irrecoverable in his/its accounts, the assessee need not be required to prove that they have become bad etc., Our view is in consonance with the various judicial pronouncements on the issue, chiefly -
(a) In the case of Lawlys Enterprises P. Ltd. v. CIT reported in (2009) 314 ITR 297 (Patna) the Hon'ble Patna High Court was pleased to observe that -
"The laws as amended with effect from April 1, 1989, permitted deduction of the amount of any bad debt or part thereof, which was written off as irrecoverable in the accounts of the assessee for the previous year. The assessee having written off the amount as irrecoverable in its accounts for ITA No.35 & 158/Bang/10 Page 23 of 35 the previous year was entitled to deduction of the amount of the bad debt. ...."
(b) The Hon'ble High Court of Himachal Pradesh in the case of Suresh Gaggal v. ITO reported in (2009) 222 CTR (HP) 96 had held that -
"Once the assessee writes off the debt as irrecoverable, his claim for deduction cannot be rejected on the ground that the debt has not been established to have become irrecoverable. The aforesaid position is also supported by the amendment made to s.36(2) w.e.f. 1st April, 1989 and any doubt, if remaining, has been clarified by Circular No.551 dated:
23rd January, 1990.
(c) The Hon'ble Bombay High court, in the case of CIT v. Star Chemicals (Bombay) P. Ltd. reported in (2009) 313 ITR 126 (Bom), in its wisdom had held that 'under section 36(1)(vii) of the Income-tax Act, 1961 and Circular No.551 dated January, 23, 1990 if the assessee had written off the debt as a bad debt that would satisfy the purpose of the section."
(d) The Hon'ble highest judiciary of the land in its recent verdict in the case of T.R.F.Ltd. v. CIT reported in (2010) 323 ITR 397 (SC), observed that -
"After the amendment of section 36(1)(vii) of the Income-tax Act, 1961, with effect from April 1, 1989, in order to obtain a deduction in relation to bad debts, 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."
ITA No.35 & 158/Bang/10 Page 24 of 35 Accordingly, we hold that the bad debts written off by the assessee in its books of account shall be allowed as a deduction. It is ordered accordingly.
Ground No.6:
14. Disallowance of Rs.3,65,054/- being as co-ordination expenses for the projects:
(i) According to the AO, the assessee had failed to furnish information with regard to project coordinated expenses and as such a sum of Rs.37,19,927-/ was disallowed.
(ii) On an appeal before the CIT (A), it was contended that the payments were fully vouched, duly supported by invoices and made through account payee cheques. TDS u/s 194C of the Act had also been effected. The expenses were since incurred wholly and exclusively for the purpose of business, it was urged that the same requires to be allowed in full.
(iii) However, the AO in his remand report averred that the expenses to the extent of Rs.3,66,054/- doesn't relate to the financial year under consideration, the same requires to be disallowed.
(iv) It was pleaded before the CIT (A) that the corresponding income was offered for tax in the current year, though the dates of bills etc. pertain to earlier and, hence, the same is to be allowed.
ITA No.35 & 158/Bang/10 Page 25 of 35
(v) The Ld. CIT (A) turned down the plea of the assessee on the ground that the earning of corresponding income remains un-shown and unproved and, thus, restricted the addition to the tune of Rs.3,65,054/-.
(vi) Before us, it was submitted that the invoices were received during the year under dispute and, therefore, the liability was for the year under dispute and, hence, the claim is an allowable deduction. It was contended that similar claims in the earlier years were allowed.
(vii) On a perusal of the details of project co-ordination expenses for the period under challenge [Reference: Pages 109 to 150 of PB AR], we find invoices dt: 30.11.99, 10.12.99, 23.12.99, 14.12.99, 3.3.00, 15.9.99, 2.2.00, 21.9.99, 24.2.00, 18.10.99 amounting to Rs.3,65,054/- for which payments were made during the AY under consideration. Moreover, the assessee, in its rejoinder to the remand report of the AO, asserted that the corresponding income has been offered to tax in the current year, though the dates of bills pertain to earlier year. However, this assertion of the assessee has not been examined by the CIT (A), but, went ahead in turning down its request.
(viii) On perusing the records and hearing the arguments put forth before us, it is abundantly clear that the Revenue has not disputed the bonafide of the expenditure. The only grouse of the Revenue is that this expenditure pertains to prior period. However keeping in mind the concept of materiality, we are of the opinion that the denial of expenditure for Rs.3,65,054 being too meagre comparing to the operations of the company is unwarranted. It is ordered accordingly.
ITA No.35 & 158/Bang/10 Page 26 of 35 Ground No.7:
Disallowance of Rs.30 lakhs out of Rs.1,25,42,482/- being misc. expenditure:
As per Schedule 20, the assessee had claimed Misc. expenses of Rs.1,25,42,482/- under the head 'other expenses'. According to the AO, the assessee had claimed expenses on entertainment, legal expenses, software development charges sundry debt balance written off etc., in the absence of any details - in spite of specifically asked to do so - a sum of Rs.60 lakhs was disallowed out of misc. expenses contained in Schedule
20.
The issue was taken up by the assessee with the CIT (A) for relief. After due consideration of the assessee's contentions, stand of the AO on his remand report and also the rejoinder of the assessee, the Ld. CIT (A) was of the view that-
"24.4. The above shows that the details of Misc expenditure was provided in pages 224 to 228 of the Paper Book. The same were perused. In fact, it is part of schedule 20, however, the vouchers were neither produced before the AO or before me. It is pleaded that vouchers were not shown because it was not asked for which seems only a plea negated by the Para 12 of the assessment order vide supra. Thus, I find still the expenditure claim has to be justified. In the absence of such justification and corroborative evidence, I, on principle accept the ratio for disallowance of the claim under this head, but, I find it excessive being almost 48% of the claim and, therefore, restrict the same to Rs.30 lakhs...."
The submission before us was more or less similar which was advanced before the CIT(A) during the appellate proceeding. At the outset, we would like to point out that the identical issue was raised by the Revenue alleging that the Ld. CIT (A) erred in sustaining only 50% ITA No.35 & 158/Bang/10 Page 27 of 35 as against 100% of disallowance on miscellaneous expenditure. For the reasons recorded in paragraph 6 supra (Ground 1 of Revenue's appeal), we have upheld the finding of the CIT (A) on this count. We are, therefore, of the firm view that our reasoning in the Revenue's appeal supra holds good for this ground of the assessee too. Thus, this ground of the assessee is dismissed.
Ground No.8:
15. Disallowance of Rs.3,50,81,381/- due from Gujarat Instruments Limited:
(i) The assessee had written off Rs.3.50 crores due from M/s.Gujarat Instruments Limited promoted by ABB Instrumentation Ltd. for the promotion of its own business as the latter went into liquidation and the assessee could not able to recover the dues. However, the AO took a divergent view that since no details with regard to the investments/finance provided, the business interest with the latter and also circumstances under which it went in liquidation etc., were forth-coming, the loss suffered by the assessee was a dead loss of the nature of capital loss arising from non-
business consideration and, accordingly, disallowed the entire claim.
(ii) It was contended before the Ld. CIT (A) that the assessee had made certain trade investments by acquiring the equity shares of a company known as Gujarat Instruments Ltd which used to manufacture instruments and there was tremendous synergy between the instruments manufactured by that company and that of the assessee as they complemented each other. There was a due of Rs.1,29 crores ITA No.35 & 158/Bang/10 Page 28 of 35 towards unpaid price for instrument supplied by the assessee. The assessee had from time to time made advances to enable that company to meet certain expenses incurred by it on day-to-day business activities which was claimed as a deduction; however, AO took a view that the same represented a capital loss. It was contended by the assessee that these investments were made in the course of the trade, the loss arising there- from had to be allowed as a revenue deduction. Citing the finding of the Tribunal in the case of ABB Ltd. and on an analogy of reasoning the amounts recoverable from Gujarat Instruments Ltd. having become doubtful of recovery, the AO was not justified in rejecting the assessee's claim. It was, further, submitted that the sum of Rs.1.29 crores being a bad debt on account of supply made can never be regarded as on capital account, and that the said company was ordered to be wound up pursuant to proceedings initiated by certain creditors which clearly demonstrates the irrecoverable action of the advance.
(iii) The AO in his remand report submitted that the assessee had advanced to GIL to meet certain expenditure incurred by it on its day to day business activities which have certainly a capital nature. With regard to claim of bad debts of Rs.1.29 crores, the AO had remarked that the assessee had failed to substantiate its claim that it was on account of supply made and fulfilled the conditions laid down in s.36(1)(vii) of the Act for allowing as bad debts.
(iv) After considering the rival contentions, the CIT (A) had observed that the claims cannot even be allowed as capital loss but ITA No.35 & 158/Bang/10 Page 29 of 35 has to be treated as dead loss not capable of being carried forward for set off in subsequent years. Distinguishing the finding of the Hon'ble Tribunal relied on by the assessee and also the claim of relief of Rs.3.50,81,381/- as bad trade debts written off, the CIT (A), citing his own finding in the case of IBM Global services India Pvt. Ltd. dated: 5.10.2009 [reference: Para 21.1 of his impugned order under challenge], had rejected the assessee's claim.
(v) The submission of the Ld. A R during the course of hearing before this Bench was that -
(i) during the year the assessee had written off loans, advances and sundry debtors of Rs.2,21,29,761/- and Rs.1,29,51,620/-, totaling to Rs.3,50,81,381/- due from its associate company GIL which had gone into liquidation and the same amounts have become irrecoverable, they were charged to P&L account;
(ii) the assessee had promoted GIL for promoting the business of the assessee and, therefore, loans and advances written off should be allowed as deduction from business income of the assessee while computing its total income; &
(iii) without prejudice, it was, further, submitted that if the expenditure of Rs.3.50 crores was not allowed as revenue expenditure, the same be considered as capital loss and the assessee be allowed to carry forward such a capital loss.
(vi) The crux of the issue was that the there was a due of Rs.1,29,5,620/- towards unpaid price for instrument supplied by the assessee to GIL and that the assessee had from time to time made advances to GIL to enable it to meet certain expenditure by it on its day-to- day business activities. During the year under dispute, the assessee had written off Rs.3.50,81,381/- representing advances and dues from GIL as irrecoverable as GIL, according to the assessee, had gone in liquidation.
ITA No.35 & 158/Bang/10 Page 30 of 35 Notes to accounts (Tax Audit) [source: P 25 of PB] No.7, it has been stated that "Loans and advances and sundry debtors include Rs.2,21,29,761 and Rs.1,29,5,620/- (previous year Rs.2,20,50,830/- and Rs.1,29,51,620/-) due from the associate company, Gujarat Instruments Limited, which has gone under liquidation. In view of this, the management considers the said amounts as not recoverable and accordingly has charged off the same in the profit and loss account in the current year and disclosed under exceptional items in Schedule 21...."
(vii) The assessee had taken a view that the loans, advances and sundry debtors amounting to Rs.3.50 crores due from its associate company - GIL - which had gone in liquidation and there was no trace of recovering the same, the management took a view to write off the said sum in its ledger of accounts during the previous year relevant to the assessment year under dispute where the ruling of the Hon'ble Apex Court in the case of T.R.F.LTD v. CIT reported in (2010) 323 ITR 397 (SC) comes to its rescue. The Hon'ble judiciary had, in its wisdom, ruled that 'in order to obtain a deduction in relation to bad debts, 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.' The assessee had precisely in its books of account written off as irrecoverable.
(viii) In view of the above, the assessee succeeds on this count. It is ordered accordingly.
ITA No.35 & 158/Bang/10 Page 31 of 35 Ground No:9:
15. Disallowance of Rs.32,25,000/- being a provision made for diminution in the value of investment in Gujarat Investments Ltd.
(i) The issue, in brief, was that the assessee had made a provision for Rs.32.25 lakhs towards diminution in value of its investment in GIL, according to the assessee, the investment was made for the promotion of its business. Since GIL had gone in liquidation and nothing could be realized from investment made and it made a provision. The plea of the assessee was that the same may be allowed as business expenditure or in the alternate to treat the same as capital loss and be allowed to be carried forward.
(ii) As no explanation was forth coming, the AO treated the same as dead capital loss and as such it cannot be carried forward as an ordinary capital loss. Accordingly, he disallowed the entire claim of Rs.32.25 lakhs.
(iii) On a similar line, the Ld. CIT (A) took a stand that the claim of relief on account of diminution in value of equity capital of GIL was not supported by any documentary evidence or any details were filed in the paper book or at the appellate stage. Since no details of the date of incorporation of GIL, nature of business, name of the directors etc., were furnished to justify that the business organization of GIL was actually set up so that a part of expenditure incurred for set up could actually be treated as capitalized expenditure. He went on further to add that the expenditure ITA No.35 & 158/Bang/10 Page 32 of 35 being pre-set up expenditure, the AO had justified in treating it as dead loss not capable of being carried forward for set off.
(iv) Before us, it was vehemently argued that the assessee made the investment for the promotion of its business with GIL and since GIL had gone into liquidation it was realized that nothing could be recovered from the investment so made, the assessee had made the provision. It was, therefore, pleaded that the same may be treated as business expenditure and be allowed the same as a deduction. In the alternative, it was pleaded that if the expenditure claim of Rs.32.25 lakhs were to be disallowed, the same be considered as capital loss and the benefit of carry forward of loss be extended to the assessee.
The Ld. D R present was duly heard.
(v) We have duly considered the rival submission, diligently perused the relevant records as well as the paper book furnished by the Ld. A.R.
(vi) It was submitted before the Ld. CIT (A) that, '...had the AO given an opportunity in the course of remand proceedings to adduce such evidence which he had considered necessary, the comments made in the remand report would not have been necessary.' In its rejoinder too, the assessee's averment was that 'nowhere in the course of the remand proceeding did the assessing officer ask us to produce any further details in support of such claim and, therefore, it was inappropriate on his part to say that no documentary evidence was furnished."
ITA No.35 & 158/Bang/10 Page 33 of 35
(vii) Curiously, the Ld. CIT (A), without addressing to the grievance of the assessee, took a stand that "25.5. I find no justification in the rejoinder but see strength and merit in the argument of AO that the claims cannot even be allowed as capital loss, but, has to be treated as dead loss not capable of being carried forward for set off in subsequent years..."
(viii) Incidentally, an identical issue had cropped up before the Hon'ble Gujarat High Court in the case of CIT v. Jaykrishna Harivallabudas reported in 231 ITR 108 (Guj) The issue in brief, was that the assessee had claimed before the AO a loss of Rs. 27,154 being loss on shares of IBL and H.K. under the head "Capital gains". The assessee's case was that the company with respect to whose shares the loss had been claimed had gone into voluntary liquidation and nothing was distributed by those companies to its members, therefore, the assessee received nil consideration for his holdings in the companies. He claims that capital loss should have been computed under section 46(2) read with section 48 and dealt with under the provisions of the Income-tax Act as such. The AO as well as the CIT (A) held that on liquidation of the company, no event of transfer of asset either by the liquidator or by the shareholder takes place so as to give rise to the question of computation of capital loss chargeable under the head "Capital gains" . The Tribunal held that the assessee was entitled to claim capital loss under the provisions of s. 46(2) of the Act, 1961. On a reference, the Hon'ble court concurred with the view of the Hon'ble Tribunal that that 'A shareholder who on distribution of money or other assets on the company being wound up, gets ITA No.35 & 158/Bang/10 Page 34 of 35 nothing and suffers a loss, can treat it as a capital loss by virtue of section 46(2) of the Act.'
(ix) In conformity with the ruling of the Hon'ble Gujarat High Court cited supra and as the issue on hand is similar to that of the case which was dealt by the Hon'ble Court, we are of the firm view that the ratio laid down by the Hon'ble Court is directly applicable to the issue under consideration. In view of the above, we are of the considered view that the assessee is entitled to avail the benefit of capital loss and, accordingly, the issue is remitted back on the file of the AO to address to the grievance of the assessee and to take appropriate action in accordance with the provisions of the Act, of course, after affording an opportunity to the assessee of being heard. It is ordered accordingly.
16. In the result:
(i) The Revenue's appeal is partly allowed; &
(ii) The assessee's appeal is partly allowed.
Pronounced in the open court on this 26th day of November, 2010.
Sd/- Sd/-
( SMT. P. MADHAVI DEVI ) (A. MOHAN ALANKAMONY )
Judicial Member Accountant Member
Bangalore,
Dated, the 26th November, 2010.
Ds/-
ITA No.35 & 158/Bang/10
Page 35 of 35
Copy to:
1. Assessee
2. Revenue
3. CIT
4. CIT(A)
5. DR, ITAT, Bangalore.
6. Guard file
By order
Assistant Registrar
ITAT, Bangalore.