Income Tax Appellate Tribunal - Delhi
Alcatel India Ltd. vs Joint Commissioner Of Income Tax on 12 October, 2007
Equivalent citations: (2008)115TTJ(DELHI)881
ORDER
K.G. Bansal, A.M.
1. The cross-appeals for asst. yr. 2000-01 and other two appeals of the assessee for asst. yrs. 1997-98 and 1998-99 were argued in a consolidated manner by the learned Counsel for the assessee and the learned Departmental Representative. Therefore, a consolidated order is passed.
ITA No. 278/Del/2004--Asst. yr. 2000-01--Appeal of the Revenue2. The only ground taken in this appeal is that on the facts and in the circumstances of the case, the learned CIT(A) erred in deleting the addition of Rs. 2,49,39,41,578, made by the AO on account of bad debt claimed in respect of the debt due from M/s Koshika Telecom Ltd. (KTL). In this connection, it is mentioned in the assessment order that the assessee claimed bad debt of about Rs. 249.94 crores by debiting this amount to P&L a/c. It was submitted that a sum of about Rs. 249.35 crores was receivable from the KTL in respect of supply of equipments, sale of cellular exchange equipments and related services on a deferred credit basis. The KTL defaulted on the payment schedule right from the beginning. After protracted negotiations, the assessee entered into an agreement with the KTL on 7th Sept., 2000 for final settlement of the dues. In terms of this settlement, the debtor was released from its obligation from payment except for a sum of Rs. 75 crores, which was payable in two instalments of Rs. 35 crores and Rs. 40 crores before 21st Oct., 2000 and 6th Sept., 2000 respectively. Thus, the debt minus Rs. 75 crores was written off as bad debt, being the amount not recoverable from the KTL. The AO considered the submissions made before her. It was pointed out that the date of settlement was 7th Sept., 2000. The date fell in previous year relevant to asst. yr. 2001-02 and not this year. She also examined the record of the KTL and found some discrepancies for which no answer could be obtained. In the previous year relevant to asst. yr. 2000-01, the KTL showed the outstanding amount in respect of its sundry creditors at Rs. 330.04 crores, as against the amount of Rs. 324.35 crores involved in the settlement as per the assessee. The P&L a/c of the KTL for asst. yr. 2001-02 showed that a sum of Rs. 130.81 crores was credited to the accounts and offered for taxation under Section 41(1) of the Act, being the remission of liability from the assessee. Therefore, against the claim of Rs. 249.35 crores made by the assessee as bad debt in this year, the KTL showed credit of Rs. 130.81 crores, leaving a balance of Rs. 118.54 crores, which escaped from the tax net. This discrepancy was not reconciled by the assessee in spite of the query raised vide letter dt. 11th March, 2003. Having noted these facts, the AO concluded that the debt did not crystallize as bad in this year and, therefore, the assessee was not entitled to deduct any amount in the assessment of this year. It was also held that the impugned amount was not deductible under the amended provisions of Section 36(1)(vii) because the amendment did not allow sham transactions through collusion between unscrupulous assessees to defraud the Government of crores of revenue.
3. The matter was agitated before the CIT(A) and in the course of hearing before him some additional evidence was also filed. The learned CIT(A) obtained the remand report of the AO in respect of the additional evidence. After considering the assessment order and various submissions made by rival parties before him, he came to the conclusion that he was unable to accept the view of the AO that the debt became bad on 7th Sept., 2000 when the settlement agreement was signed with the KTL. Sufficient evidence had been filed to show that the debt has become bad by 31st March, 2000. The Department of Telecommunication (DOT) had cancelled the license granted to the KTL and encashed bank guarantee of Rs. 94 crores given by the KTL to the DoT well before 31st March, 2000. The director's report of the KTL for the period ended on 30th June, 1999 showed that huge amount was being claimed by the DoT and the net assets of the KTL were inadequate even to meet the claims of the DOT. Therefore, he came to the conclusion that the write off was bona fide as the debt had become bad in the perception of the assessee. In regard to the quantum of bad debt, it was mentioned that the company had credited liability of about Rs. 202.38 crores for the equipments supplied and capitalized. However, the supplier failed to honour its various contractual commitments. The management was of the view that no amount was payable to them. The liability will be adjusted with the supplier. The supplier debit note on account of services and interest were also disputed and nothing was payable. The difference between the amount of Rs. 202.38 crores in the aforesaid note and the total debt of Rs. 324.35 crores shown by the assessee was on account of the fact that certain liabilities were not accounted by the KTL, for which a reconciliation was furnished as under:
(Rs. in crores) Total amount claimed as bad debt by the appeal 249 Less:
Amount not considered by KTL as per note 7(b) in Sch.
O of balance sheet of KTL for the period ended 30.6.1999 (the balance sheet of KTL was obtained from the RoC) (1) Services 31 (2) Interest 76 107 ____ ____ Less: 142 Difference between exchange fluctuation as per 28 appellant's balance sheet as on 31.3.2000 As per KTL's balance sheet as on 30.6.1999 20 8 ____ ____ Balance 134 Amount written back by KTL 131 _____ Difference 3
Thus, the findings of the learned CIT(A) were that,--(i) the correct amount of the debt was about Rs. 249.39 crores which had been shown by the assessee as income in earlier years by taking into account deferred payments to be received; (ii) the KTL could not discharge its obligation to the DoT because of which bank guarantee given to the DoT was encashed by it; and (iii) the KTL was not able to make any payment to the assessee out of the debt in financial years 1996-97 to 1999-2000. Therefore, it was held that the claim of the assessee was bona fide and the amount was allowable as bad debt. Accordingly, the addition made by the AO was deleted.
4. Before us, the learned Departmental Representative pointed out that the Revenue has disputed the order only on one ground regarding allowance of the bad debt in respect of the KTL. He relied on the order of the AO to argue that on the facts and in the circumstances of the case, the amount could not have been deducted in computing the income.
5. In reply, the learned Counsel for the assessee referred to the finding of the learned CIT(A) that in view of the weak financial position of the KTL, there was no hope of recovery of the debt and, therefore, the write off in this year was bona fide. In this connection, he relied on para 5.5 of the order of the learned CIT(A), which is reproduced below for ready reference:
5.5 I have carefully considered the arguments of the AO summarized in paras 5.2 and 5.2.2 above and also the summary of submissions of the appellant in paras 5.4.2 to 5.4.9. I am unable to persuade myself to accept the observations made by the AO which have been summarized in paras 5.2 and 5.2.2 above. The bad debt claimed by the appellant had arisen against income shown by the appellant in earlier years (paras 5.1.5 and 5.1.6 above). I am, therefore, unable to agree with the AO that the amount of bad debt claimed by the appellant was 'not a debt'. The AO had in the first para on p. 4 of her order referred to mismatch in the figures of bad debt claimed by the appellant and the amount offered to taxation by KTL by observing as under:
Secondly in the P&L a/c for the year 2001-02, a sum of Rs. 130.81 crores has been offered for taxation under Section 41 of the IT Act, 1961 being remission of liability of Alcatel. Therefore, as against Rs. 249.35 crores claimed by the assessee as bad debts in the asst. yr. 2000-01, a sum of only Rs. 130.81 crores has been offered for taxation by KTL in asst. yr. 2001-02. The balance of Rs. 118.54 crores has totally escaped the tax net.
6. The mismatch has been explained by the appellant in para 5.4.5.3 above. Further, the balance sheet of KTL for the period ended 30th June, 1999 (obtained by the appellant from RoC) admits the debt in Note 7 in Schedule 0 as under:
7(a) Observing the prudent accounting policies, the company had created the liability of Rs. 20,237.98 lakhs for equipment supplied and capitalized. The supplier Alcatel Modi Network Systems Ltd. had failed to honour its various contractual commitments. The management has view that no amount is payable to them. The liability will be adjusted with the supplier.
(b) The supplier debit notes on account of services and interest are also disputed and nothing is payable.
The difference between Rs. 202.37 crores mentioned in the above note and the total debt of Rs. 324.35 crores shown by the appellant, is on account of the reasons mentioned in para 5.4.5.3 above.
7. I also find myself unable to accept the view of the AO that the debt became bad only on 7th Sept., 2000 when settlement agreement was signed with KTL. Sufficient evidence has been filed by the appellant to show that the debt had become bad by 31st March, 2000. The DoT had cancelled the licence granted to KTL and also encashed the bank guarantee of Rs. 94 crores (given by KTL to DOT) well before 31st March, 2000. The director's report of KTL for the period ended 30th June, 1999 reflected huge amounts being claimed by DoT and that KTL had inadequate net assets to meet even the claims of DOT. The Note 7 in Schedule 0 to the balance sheet of KTL for the period ended 30th June, 1999 (para 5.4.5.3 above) also supports the appellant's claim. Otherwise also, under amended Section 36(1)(vii) the appellant could not be required to prove that the debt had become bad by 31st March, 2000. The AO's argument that under the Deferred Payment Agreement (DPA)with KTL, there was moratorium on recovery of debts till 13th July, 2000 stands rebutted by the appellant in para 5.4.2 above. In view of appellant's detailed submissions, it is not possible to sustain the AO's view that the settlement agreement of 7th Sept., 2000 was a sham document to facilitate evasion of taxes. On the contrary, it is due to the settlement agreement that the appellant claimed write off of debt less by Rs. 75 crores. The argument that the appellant had not acted bona fide and on prudent commercial principles to secure the debt [items (i) to (xi) on pp. 5 to 7 of the AO's order] can also not be accepted in view of appellant's allegation wise reply (reproduced in the 8 page annexure to this order). Otherwise also, even if a taxpayer does not follow 'prudent commercial principles' and consequently loses some debt, I do not think the AO would be justified in disallowing the bad debt that became bad because of taxpayer's imprudence. More often than not, it is only the imprudent taxpayer who loses his debts. Even the present incumbent AO's argument in para 5.2.2 above that the write off of bad debt was an afterthought (i.e., a thought which occurred to the appellant after 31st March, 2000) to evade the taxes, has no force in view of:
(i) Following qualification (para 3 of the qualifications) by auditors in the audited financial statements for the year ended 31st Dec, 1999:
3...Had the company made full provision against these receivables at 31st Dec, 1999, deferred receivables and the profit for the year then ended would be reduced by Rs. 3,216 million.
(ii) Note 7 in Sch. O to the balance sheet of KTL for the period ended 30th June, 1999 which reads as under:
7(a) Observing the prudent accounting policies, the company had created the liability of Rs. 20,237.98 lakhs for equipment supplied and capitalized. The supplier Alcatel Modi Network Systems Limited had failed to honour its various contractual commitments. The management has view that no amount is payable to them. The liability will be adjusted with the supplier.
(b) The supplier debit notes on account of services and interest are also disputed and nothing is payable.
(iii) Non-payment of any advance tax by the appellant during the financial year 1999-2000, and
(iv) Cancellation of KTL's licence by DoT and encashment of bank guarantee of Rs. 94 crores (given by KTL to DOT) well before 31st March, 2000 and inadequacy of net assets of KTL as early as on 30th June, 1999 to meet even the claims of DOT.
(v) Non-making of any payment by KTL to the appellant during the financial years 1996-97, 1997-98, 1998-99 and 1999-2000.
5.5.2 Accordingly, the claim of the appellant for write off of bad debt of Rs. 249.34 crores is hereby allowed and the addition made by the AO is hereby deleted.
8. Coming to the legal arguments, reliance was placed on the order of Hon'ble Tribunal, Mumbai Bench "H" (Special Bench), Mumbai in the case of Dy. CIT v. Oman International Bank, SAOG . The Hon'ble Tribunal dealt with the expression "bad debt" used in Section 36(1)(vii) and pointed out that strict proof of establishing the debt to have become bad is unnecessary if one has regard to the plain meaning of the expression. By referring to Chamber's Twentieth Century dictionary, it was pointed out that "bad debt" means a debt that cannot be recovered. Further, referring to Mitra's Legal and Commercial dictionary, it was pointed out that a debt becomes bad when the creditor has no reasonable chance of recovering it from the debtor. Reference was also made to the Law Laxicon, where the definition is that a debt that is not reasonably collected, a debt about which there is no reasonable expectation of recovery, a debt believed to be unrecoverable. It was pointed out that it is within the personal knowledge of businessman whether a debt has become bad or not. So long as his decision is bona fide, it cannot be disputed by demanding from him a demonstrative proof that the debt has actually become bad. The write off of a bad debt was, thus, held to be a prima facie evidence on the part of the assessee with whom the information vests and that was also held to be a sufficient compliance of the requirement under the amended provision. Thus, the question was answered in favour of the assessee.
9. He also relied on the decision of Hon'ble Delhi High Court in the case of CIT v. Morgan Securities & Credit (P) Ltd. (2007) 210 CTR (Del) 336 : (2007)-TOIL- 15HC-DEL-IT dt. 7th Dec, 2006, a copy of which was placed before us. The decision of the Hon'ble Court was that after amendment of Section 36(1)(vii), w.e.f. 1st April, 1989, all that the assessee had to show was that the bad debt was written off as irrecoverable. Circular No. 551 [(1990) 82 CTR (St) 325] issued by the CBDT left no scope for debate since it specifically notices the previous practice of having to establish that a debt has become bad in the previous year, which generated enormous litigation. For the sake of ready reference, the relevant portions of the judgment of the Hon'ble High Court are reproduced below:
5. A conjoint reading of Section 36(2) and Section 36(1)(vii) makes it clear that the assessee would be entitled to a deduction of the amount of any bad debt which has been written off as irrecoverable in its accounts for the previous year. Any lingering doubt would vanish on a careful reading of Circular No. 551, dt. 23rd Jan., 1990 [(1990) 82 CTR (St) 325], the relevant portion of which reads as follows:
6.6 The old provisions of Clause (vii) of Sub-section (1) r/w Sub-section (2) of the section laid down conditions necessary for allowability of bad debts. It was provided that the debt must be established to have become bad in the previous year. This led to enormous litigation on the question of allowability of bad debt in a particular year, because the bad debt was not necessarily allowed by the AO in the year in which the same had been written off on the ground that the debt was not established to have become bad in the year. In order to eliminate the disputes in the matter of determining the year in which a bad debt can be allowed and also to rationalize the provisions, the Amending Act, 1987 has amended Clause (vii) of Sub-section (1) and Clause (i) of Sub-section (2) of the section to provide that the claim for bad debt will be allowed in the year in which such a bad debt has been written off as irrecoverable in the accounts of the assessee.
6.7 Clauses (iii) and (iv) of Sub-section (2) of the section provided for allowing deduction for a bad debt in an earlier or later previous year, if the ITO was satisfied that the debt did not become bad in the year in which it was written off by the assessee. These clauses have become redundant, as the bad debts are now being straightway allowed in the year of write off. The Amending Act, 1987 has, therefore, amended these clauses to withdraw them after the asst. yr. 1988-89.
6. The conundrum which has arisen before us had also engaged the attention of the Gujarat High Court in CIT v. Girish Bhagwat Prasad with which we are in respectful agreement. Our learned Brothers had pointedly observed that the genuineness of the claim predicated on Section 36(1)(vii) of the IT Act was not in doubt. Where the loan transaction is itself shrouded in uncertainty other provision of the statute would immediately come into play. Our learned Brothers further observed that prior to the amendment from 1st April, 1989, the allowance under the said section was confined to debts and loans which had become irrecoverable in the accounting year. Without adverting to the above extracted circular, it was opined that w.e.f. 1st April, 1989 all that the assessees had to show was that the bad debt was written off as irrecoverable. One year later an altogether different Bench of the Gujarat High Court had to decide the question of whether it was enough if the assessee writes off the debt as bad in its books of account and whether the assessee company need not establish the debt to have become bad, in Dy. CIT v. Patidar Ginning & Pressing Co. (1999) 157 CTR (Guj) 177. The appeal of the Revenue was dismissed.
7. It is our view that the Circular No. 551 leaves no scope for debate since it specifically notices the previous practice of having to establish that a debt had become bad in the previous year, which had generated enormous litigations on the question of allowability of bad debt in a particular year. The circular expressed the hope that this litigation would be eliminated by permitting a debt to be treated as a bad or irrecoverable no sooner it was written off in the books of the assessee concerned.
10. We have considered the facts of the case and rival submissions. The AO had made comments about the discrepancy between the amount shown as debt by the assessee and the KTL. The learned CIT(A) reconciled the difference, as mentioned above and, therefore, there is no controversy that the amount involved in question was Rs. 2,49,39,41,578. It has been pointed out by him that this amount was taken into account as income in the earlier year, which included not only the payment due in the relevant years but also payment becoming due in subsequent years. The amount was computed after taking into account the settlement agreement, under which the KTL was required to pay a sum of Rs. 75 crores in two instalments in financial year 2000-01. It was pointed out that even this amount could not be recovered from the KTL. The learned CIT(A) has taken into account the fact that the KTL did not make any payment to the assessee in financial years 1996-97 to 1999-2000, the DoT had encashed bank guarantee of Rs. 95 crores given by the KTL well before 31st March, 2000 and the net assets of the KTL were not sufficient to meet even the claims of the DOT. These facts lead to a reasonable inference that the KTL was not in a position to make payment to the assessee in view of its weak financial position. Therefore, its settlement with the KTL in the immediately following year could not have been said to be a device to avoid payment of tax. Further, the finding of the learned CIT(A) was that the financial position of the KTL was precarious even on 31st March, 2000 and there was no possibility of the assessee recovering any amount from it. These facts lead to a reasonable conclusion that the write off made by the assessee was bona fide. In these circumstances, it was not required from the assessee to show that the debt had become bad in this very accounting year. What was required to be shown was that the writing off of the debt was bona fide, as decided by Hon'ble Gujarat High Court in the case of Sarangpur Cotton Manufacturing Co. Ltd. v. CIT , which was followed by Hon'ble Delhi High Court, being the jurisdictional High Court in this case. The learned Departmental Representative has not made out any case either that the impugned amount of about Rs. 249.39 crores was not shown as income in earlier years or that on the facts of the case the writing off of the debt was not bona fide. Therefore, respectfully following the decision of jurisdictional High Court in the case of Morgan Securities & Credit (P) Ltd. (supra), it is held that the learned CIT(A) was right in deducting this amount in computing the income of the assessee.
11. In the result, the appeal is dismissed.
ITA No. 292/Del/2004--Asst. yr. 200001--Appeal of the assessee.12. Ground Nos. 1 and 2 are to the effect that the learned CIT(A) erred 0n facts and in law in confirming the disallowance of bad debts amounting to Rs. 59,58,422 in respect of dues from the DOT. It is further mentioned that the learned CIT(A) erred in pot directing the AO to allow the aforesaid bad debts in the relevant year.
13. The aforesaid issue has not been discussed in the order of the AO as he appeared to be under the mistaken belief that the impugned amount was a part of the bad debt in respect of the KTL. However, the learned CIT(A) mentioned that the DoT had issued purchase order No. 117-10/94-MND/AMNS, dt. 8th May, 1996 for supply of automatic telephone exchange equipments of the value of Rs. 65.87 crores to the assessee. However, the assessee received an amount of Rs. 65,27,47,578 only in respect of the aforesaid supply of the equipments and the balance amount of Rs. 59,58,422 was not received. The DoT did not pay this amount on account of delay and shortage in the supply of the equipments. Therefore, the amount was written off in the books of the assessee. It was explained to him that the DoT had issued an amendment dt. 25th Feb., 1997 to the aforesaid order, which contemplated the imposition of liquidated damages in case the supplies were effected not in time but during the extended delivery schedule, and in such cases only 98.46 per cent of the rate indicated in the purchase order was to be paid. The impugned short payment was on account of the aforesaid amendment in the terms and conditions of the purchase order. The learned CIT(A) considered the facts of the case. It was pointed out that the liquidated damages became payable in terms of amendment No. 3 dt. 25th Feb., 1997. The assessee was following mercantile system of accounting and, therefore, the contractual liability arose in asst. yr. 1997-98 and not in the instant assessment year. Therefore, the claim of the assessee was dismissed.
14. Before us, the learned Counsel for the assessee pointed out that there was no dispute regarding the claim and its amount and the only dispute was the year in which the claim could be made. The details of the impugned amount and the letter of the DoT dt. 25th Feb., 1997 were placed in the paper book on pp. 435 to 437. It was his case that all the supplies had been made by the end of this year and the accounts had been reconciled. Therefore, the claim may be allowed in this year. In the alternative, it was mentioned that the claim may be allowed in asst. yr. 1997-98, the appeal for which was pending before theTribunal.
15. In reply, the learned Departmental Representative pointed out that the claim may be allowed in asst. yr. 1997-98 as the liquidated damage clause was communicated to the assessee in the previous year relevant to asst. yr. 1997-98 and the default of timely supplies had occurred in that year.
16. We have considered the facts of the case and rival submissions. It is an undisputed fact that the assessee has been following mercantile method of accounting. Further, it is an undisputed fact that in respect of the purchase order dt. 8th May, 1996, issued in the previous year relevant to asst. yr. 1997-98, the clause of liquidated damages was communicated and accepted on 25th Feb., 1997, a date falling in asst. yr. 1997-98. The effect of the aforesaid amendment to the supply contract was that in respect of supplies made after 15th Jan., 1997, the assessee was entitled to receive only 98.46 per cent of the amount agreed upon in the order dt. 8th May, 1996. Thus, it is not a case of any bad debt, but a case of the lowering of purchase consideration in the case of delayed supply, which was in the knowledge of the assessee in the previous year relevant to this assessment year. Therefore, in respect of supplies after 15th Jan., 1997, the assessee ought to have credited only 98.46 per cent of the original contracted consideration as the sale price. No bad debt or any liability accrued in this year. Therefore, we are of the view that the learned CIT(A) was right in not allowing the impugned amount as bad debt in this year. However, it may be added that appeal for asst. yr. 1997-98 is also pending before us, in which an additional ground on the aforesaid issue has been taken up by the assessee and admitted by the Tribunal for adjudication. The issue will be decided on merits in that appeal. Thus, these grounds are dismissed.
17. The ground Nos. 3 and 4 are to the effect that the learned CIT(A) erred on facts and in law in confirming the disallowance of salaries amounting to Rs. 5,18,44,248 as prior period expenditure. It is also mentioned that the learned CIT(A) erred in not directing the AO to allow the impugned amount in the year under appeal. In this connection, it is mentioned in the assessment order that as per tax audit report, a sum of Rs. 5,18,44,248 had been debited in respect of salaries as prior period expenses. It was submitted that the assessee company received invoice dt. 17th Dec, 1999 from Alcatel CIT, France towards salary of expatriates. Since the invoice was received in the current financial year, the liability was crystallized in this year and, therefore, it was deductible in computing the income of this year. The AO pointed out that the salary accrues on day-to-day basis irrespective of the date of its payment. The liability was in the nature of contractual liability and the amount to be paid was well defined. Thus, there was no justification for not accounting for the liability on accrual basis. It was further mentioned that the amount appears to be in the nature of adjustment between the assessee company and Alcatel CIT.
18. There was no dispute about the amount to be paid and, therefore, there was no question of crystallization or settlement of the liability in this year. Therefore, the impugned claim was disallowed.
19. Before the learned CIT(A), it was pointed out that the assessee received an invoice dt. 17th Dec, 1999 from Alcatel CIT towards salaries of expatriates for rendering various services to the assessee. Therefore, the liability was entered into the books of account under the head "Salary". Since this liability crystallized in this year, it was rightly claimed in this year. In order to support the contention, reliance was placed on the decision of Hon'ble Gujarat High Court in the case of Saurashtra Cement & Chemical Industries Ltd. v. CIT , in which it was inter alia pointed out that merely because an expense related to a transaction of an earlier year, it does not become a liability payable in the earlier year unless it can be said that the liability was determined and crystallized in the year in question on the basis of the system of accounting followed by the assessee. In each case where accounts are maintained on mercantile basis, it has to be found in respect of any claim whether such liability was crystallized and quantified during the previous year so as to be required to be adjusted in the books of account of that previous year. If any liability, though related to the earlier year, depends upon making a demand and its acceptance by the assessee and such liability has actually been claimed and paid in the later previous year, it cannot be disallowed as deduction merely on the basis that the accounts are maintained on mercantile basis. The learned CIT(A) considered the facts of the case and submissions made before him. It was the case of the assessee that he was not aware as to whether he would be required to bear the entire or only a part of the salary of the expatriates. Therefore, the liability crystallized on receipt of the invoice. The tax was deducted and deposited on the salary paid to the expatriate personnel. These by themselves do not imply that the liability was crystallized in this year. It was pointed out that since the assessee deducted tax and deposited the same, it was all along aware that the liability in respect of the whole of the salary was on it in respect of expatriate employees deputed by its parent company, Alcatel CIT. Therefore, it was held that the assessee was not entitled to deduct the, impugned amount in computation of income of this year J
20. Before us, the learned Counsel for the assessee pointed out that Alcatel CIT was the parent of the assessee company and it had seconded its employees to work for the assessee company. The salary was partly paid in India by the assessee company and partly by its parent company in France. Although the tax was deducted on the global salary, there was no agreement in force regarding the liability of the assessee in respect of salary paid in France. The assessee received a debit note from its parent company on 17th Dec, 1999, which has been placed in the paper book on p. 451. The note is in respect of HE staff secondment, raising a bill of Rs. 5,90,052. Therefore, a provision was made for this liability and the same was paid through the running account of Alcatel CIT, France.
21. In order to support his contention that the amount was deductible in this year, reliance was placed on the decision in the case of Saurashtra Cement & Chemical Industries Ltd. (supra). It was also pointed out that the assessee incurred loss in this year as well as in all earlier years. Therefore, the delay in claiming the liability was not on account of any tax planning undertaken with a view to reduce tax liability, and, thus, it was immaterial whether the liability was allowed in this year or in the earlier year.
22. In reply, the learned Departmental Representative pointed out that the transaction was between the holding company and the subsidiary company and it could not be said that it was at arm's length. Nothing has been brought on record to show that any dispute persisted between the holding company and the subsidiary company in earlier years as to who would bear the cost of salary paid in France. Thus, it cannot be said that the liability arose or was crystallized in this year. The liability to pay salary rested with the assessee right from the beginning, which also stands proved by the fact that the tax was deducted at source on the global salary. Therefore, it cannot be said that the liability arose in this year or was crystallized in this year. Thus, it was urged that the order of the learned CIT(A) may be upheld.
23. In the rejoinder, the learned Counsel referred to the order of the Hon'ble Tribunal, Ahmedabad Bench "A", Ahmedabad, in the case of Perfect Equipments v. Dy. CIT . In that case, the assessee was not able to produce any evidence to support its claim that the liability for payment of commission became due in asst. yr. 1992-93 after settlement of the dispute. The debit note in respect of the commission was raised in the previous year relevant to asst. yr. 1991-92. The claim was disallowed in asst. yr. 1992-93, which was upheld by the Tribunal. The assessee wanted the Tribunal to give a finding that the amount was deductible in asst. yr. 1991-92, which was opposed by the Revenue on the ground that no direction could be given by the Tribunal in respect of that year as no appeal for that year was pending before it. The Hon'ble Tribunal pointed out that Section 254(1) empowers the Tribunal to pass such orders on an appeal which it thinks fit for the disposal of the appeal. This meant that the only limitation to give direction or finding in respect of another assessment year is that such direction etc. was necessary for disposal of the appeal and not merely incidental to it. Therefore, the Tribunal was well within its right to give directions for another year which were necessary for disposal of the appeal. He also relied on the order of the Hon'ble Tribunal, Delhi Bench "G", New Delhi in the case of Jt. CIT v. H.M.A. Udyog Ltd. in ITA No. 2230/Del/1999 for asst. yr. 1994-95 dt. 11th March, 2004, in which a direction was given that the claim of bad debt may be allowed in the year in which it is written off in accordance with the law. In this case, the order in the case of Perfect Equipments (supra) was followed.
24. We have considered the facts of the case and rival submissions. The facts are that the parent company of the assessee had seconded employees for the work of the assessee company over a period of time. The assessee was debiting salaries paid in India as well as deducting tax on the global salaries. There is no evidence on record to show that there was any dispute between the parent company and the subsidiary company regarding its liability in respect of salary paid in France. Therefore, since the expatriate personnel were working for the assessee, it is natural to conclude that the liability was that of the assessee and, therefore, it ought to have been claimed from year to year, although the same was not done. On reminder from the parent company in this year, the provision was made and the liability was paid through the running account that does not mean that the disputed liability was crystallized in this year. The liability did not depend upon any demand made by the parent company and accepted by the assessee. Thus, the ratio of the decision in the case of Saurashtra Cement & Chemical Industries (supra) is not applicable to the facts of this case.
25. We are also not in agreement with the argument that it is immaterial whether the liability was claimed in the earlier year or in this year as the assessee suffered losses in all the years. The reason being that the income-tax is a charge on the profit of a year and each year is an independent year. The claim of liabilities of earlier years in the current year will distort the figure of profit or loss of this year, which would be against the provisions of Sections 4 and 5 of the Act. Thus, we are of the view that the impugned amount could not have been deducted in computing the income of this year. The second issue is whether we ought to give a direction in the order of this year about deductibility of this amount in earlier years, especially when the quantum to be allowed in each year has not been specified before us and appeals for those years are not pending before us. In the case of Perfect Equipments (supra), the year of liability was clearly known, which is not the case here. In such a circumstance, we are of the view that it is not incumbent on us to give a finding that the impugned amount may be allowed in the year or years of incurring the liability by the AO. However, we find that a part of the liability pertains to asst. yr. 1998-99. That year's appeal is pending before us. Therefore, the liability, insofar as it pertains to that year, shall be considered in that appeal. Thus, these grounds are dismissed.
26. Ground No. 5, regarding levy of interest under Section 234B, was stated to be consequential in nature. The AO is directed to compute the interest after giving effect to this order and the order in ITA No. 278/Del/2004 (supra).
27. In the result, the appeal is partly allowed.
ITA No. 104/Del/2004--Asst yr. 1997-98--Appeal of the assessee28. Ground No. 1 is against the finding of the learned CIT(A) that the assessee was not entitled to deduct a sum of Rs. 50 lakhs in computing the income in respect of provision for doubtful advances. In this connection, it is mentioned in the assessment order that the impugned amount was debited to P&L a/c and it represented extra payment of customs duty demanded by the Customs Department on account of the possibility of underinvoicing of import. It was explained that the assessee had filed a claim for refund of this amount, but the same was rejected by the Customs Department. However, subsequently the Central Excise and Gold (Control) Appellate Tribunal (CEGAT) accepted the claim of the assessee, against which the Customs Department filed appeal before the Supreme Court. In these circumstances, the aforesaid provision was held to be not deductible in computing the income of the assessee.
29. Aggrieved by this order, the assessee moved an appeal before the CIT(A). It was represented before him that the assessee imported components from Alcatel CIT, France, and the customs authorities entertained doubts about the possibility of underinvoicing in respect of import made from the foreign holding company. In such cases, the authorities generally issued notices for determining the price of the goods and it is for the importer to establish before the Special Valuation Branch (SVB), who analysed the invoice value with the international price with a view to determine whether there was any underinvoicing. If the authorities are satisfied that there was no underinvoicing, the order is issued to accept the price and thus, no extra levy is imposed. On receipt of the order from SVB, the importer can claim refund of the extra import duty already paid on the bill of entry. It was further represented that the assessee had paid provisionally the customs duty and filed claims of refund after receipt of the order of SVB. The assessee had filed such claims of refund to the extent of Rs. 53,51,742 on 13th Feb., 1997 and 6th March, 1997. These claims were made after the expiry of six months for making such claims under Section 37 of the Customs Act, 1962. These claims were not admitted by the customs authorities. On appeal, the CEGAT allowed the claim of the assessee. However, the Customs Department filed appeal before the Supreme Court and the appeal was dismissed by the Hon'ble Court. It was also represented that the assessee had received refund to the extent of Rs. 25.03 lakhs in the previous year relevant to asst. yr. 2001-02, which was not offered for tax. The learned CIT(A) considered the claim made by the assessee under Section 36(1)(vii). It was pointed out that the claims were entertained by the customs authorities, being barred by limitation. The order of CEGAT was passed on 26th May, 1998. The assessee also recovered part of the amount, which was not offered for tax. In this scenario, it was pointed out by him that the debt had not become bad in the relevant previous year. It was also held that the amount was not deductible under Section 36(2)(i) as it had not been written off in the books of account. Therefore, the claim of deduction was denied.
30. Before us, the learned Counsel for the assessee repeated the facts stated above and pointed out that the whole of the amount was received back by the assessee in the previous years relevant to asst. yrs. 2001-02 and 2005-06. The amounts were not offered for tax in these years. In view thereof, it was fairly conceded that this ground has become infructuous because of subsequent events. In reply, the learned Departmental Representative merely stated that the amount was refunded to the assessee, which showed that it was not the liability fastened on the assessee.
31. We have considered the facts of the case and rival submissions. We find "-that the assessee had made only a provision and the amount was not written off in the books of account, which is a requirement for claiming bad debt under Section 36(2)(i). In any case, the claims of refunds were due and made, and refunds were granted. Thus, on merits also, this amount could not have been deducted in computing the income. Thus, this ground is dismissed.
32. Ground No. 2 is against the finding of the learned CIT(A) that the assessee was not entitled to deduct the aforesaid amount of Rs. 50 lakhs in computing the deemed income under Section 115JA of the Act. Since the impugned amount was not deducted by the AO in computing the total income, he disallowed the same while computing the deemed income also. It was represented before him that the provision for doubtful advance was not a liability and, therefore, the provision contained in Clause (c) of the Explanation to Section 115JA had no application. It was further represented that the amount was specific and ascertained and, therefore, the same could not have been added back in terms of the aforesaid Clause (c). The learned CIT(A) considered the assessment order and the submissions of the assessee. It was pointed out that the AO did not assign any reason for adding back this amount. It was further pointed out that for the purpose of Section 115JA, the P&L a/c has to be prepared in accordance with the provisions of Part II and Part III of Sch. VI to the Companies Act, 1956. The provision made by the assessee could not have been made under the said Schedule. It was also mentioned that the customs authority had not rejected the claim of refund by the end of the year, which was done on 26th Feb., 1998. Therefore, the ground taken by the assessee in appeal before him was rejected.
33. Before us, the learned Counsel for the assessee relied on the order of Hon'ble Tribunal, Kolkata Bench (Special Bench) in the case of Jt. CIT v. Usha Martin Industries Ltd. (2006) 105 TTJ (Kol)(SB) 543 : (2007) 104 ITD 249 (Kol)(SB). In that case, a provision was made for bad and doubtful debt, which was disallowed by the AO while computing deemed income under Section 115JA. The question before the Tribunal was whether, a provision made for doubtful debts, advances and investment, i.e., for unascertained liability, fall within the purview of adjustment under Section 115JA of the IT Act, 1961, and whether the AO was justified to make adjustment of Rs. 1,56,000 in the case in computing book profit ? The Hon'ble Tribunal pointed out that the provision of aforesaid Clause (c) was not applicable in respect of provision for bad and doubtful debt for the reason that the impugned provision was made for diminution in the value of the asset held by the assessee. The Hon'ble Tribunal also considered whether the Impugned amount could be added back under Clause (b), being the amount carried to any reserve by whatever name called. On the facts of that case, it was pointed out that the debts could not be recovered and were ultimately written off. It was not the case of the AO that the provision was unreasonable or excessive. Therefore, it was held that the amount could not be disallowed even under Clause (b).
34. In reply, the learned Departmental Representative pointed out that the liability was a contingent liability and as a matter of fact there was no liability on the assessee as the amount was refunded to the assessee in the previous years relevant to asst. yrs. 2001-02 and 2005-06.
35. We have considered the facts of the case and rival submissions. The facts are that in regard to imports made from a related party, the goods were cleared at a value being 105 per cent of the invoice price. The amount equivalent to 50 per cent of the incremental duty was deposited with the customs authority without admission that there was any under invoicing. The assessee was entitled to receive the amount as refund on proof that there was no underinvoicing. Thus, the payment was not in the nature of a liability but it was in the nature of an advance, which could be claimed as refund by proving before the SVB that there was no underinvoicing in the imports. Such claims were made during this year, but were not entertained by the Customs Department. The assessee filed appeal before CEGAT, who allowed the claims. Thus, it cannot be said that the value of these advances depreciated in any manner. In any case, the amount was lying with a Government Department and its value could not have depreciated with time for fear of non-recovery. The assessee had no reason to believe that the goods were imported at deflated value. Therefore, the facts of the case are not on all fours with the facts of the case of Usha Martin (supra), in which the provision was made in respect of doubtful debt, based upon the guidelines of the RBI in respect of debts which were not properly serviced. Thus, it is not a case of reduction in the value of the assets of the assessee. It is only a provision made for future customs liability and such liability was unascertained for the reason that there was no ground for the assessee to entertain a reasonable belief that the goods were imported at less than fair market value. As the subsequent event showed, the claim of the assessee was allowed and refunds were received. These refunds were not offered for tax. Thus, it is held that the provision was an advance to the Customs Department, which was claimed and allowed as refund as there was no corresponding liability. Thus, the case is covered under Clause (c) of the Explanation to Section 115JA. We may add that the nomenclature "provision for doubtful advances" does not determine the nature of advance, and, therefore, the ratio of the decision in the case of Usha Martin (supra) cannot be applied mechanically without having regard to the real nature of the advance. Further, the advance was refunded in this case while the debts were written off later in that case
36. In view thereof, we are of the view that the learned CIT(A) rightly rejected the case of the assessee for deleting this addition. Thus, ground No. 2 is dismissed.
37. The additional ground is that the learned CIT(A) erred in not deducting a sum of Rs. 59,58,422 being the damages imposed/ deducted by the DoT from the total amount receivable against the purchase order. The facts regarding this issue are stated in our order in ITA No. 292/Del/2004 for asst. yr. 2000-01, in which it was pointed out that the amendment to the contract had been made on 25th Feb., 1997, a date falling in this previous year. Consequent upon this amendment, the assessee was entitled to receive a consideration @ 98.46 per cent of the contracted amount for the supply of goods. Thus, the assessee was not entitled to receive the whole amount of the contracted price and reduction in the consideration amounted to Rs. 59,58,422. Since this amount did not accrue to the assessee as income because of the amendment in the supply contract, this amount could not have been taken as sale proceeds even if it was shown as sale proceeds in the books of account. Therefore, the assessee was entitled to reduce the sale consideration by the impugned amount in this year. Thus, this ground is allowed.
38. Ground No. 3 is against levy of interest under Sections 234B and 234C for shortfall and deferment respectively for payment of advance tax. The issue stands covered by the decision of Hon'ble Supreme Court in the case of CIT v. Kwality Biscuits Ltd. , in which it was pointed out that interest under Sections 234B and 234C cannot be levied in respect of tax on deemed income under Section 115J, since the entire exercise of computing income under the said section can only be done at the end of the financial year and the provisions of Sections 207, 208, 209 and 210 cannot be made applicable until and unless the accounts are audited and the balance sheet is prepared. The ratio of this case will apply mutatis mutandis in respect of tax on deemed income under Section 115JA. Respectfully following this decision, it is held that the assessee was not liable to pay interest under Sections 234B and 234C. Thus, this ground is allowed.
39. In the result, the appeal is partly allowed.
ITA No. 105/Del/2004~-Asst. yr. 1998-99Appeal of the assessee40. The ground in this appeal is that the learned CIT(A) erred on facts and in law in holding that the assessee was liable to pay interest under Sections 234B and 234C for shortfall and deferment respectively in payment of advance tax while computing the liability under Section 115JA. The learned Counsel pointed out that this issue stands covered in ITA No. 104/Del/2004 (supra), in which it was argued by him that interest, under these sections cannot be levied in view of the decision of Hon'ble Supreme in the case of Kwality Biscuits Ltd. (supra). This judgment was delivered under Section 115J and it was pointed out that the entire exercise of computing income can only be done at the end of the financial year and, thus, provisions of Sections 207, 208, 209 and 210 cannot be made applicable until and unless the accounts are audited and the balance sheet prepared. No particular argument was made by the learned Departmental Representative in this matter.
41. We have considered the facts of the case and the submissions made before us. This issue stands covered by our order in ITA No. 104/Del/2004 (supra) in favour of the assessee. It may be added here that Section 115JA contains Sub-section (4) to the effect that unless otherwise provided in this section, all other provisions in this Act shall apply to every assessee, being a company mentioned in this section. There was no corresponding provision under Section 115J. Therefore, it could be argued that provisions of Sections 207, 208, 209 and 210 can be made applicable to the assessee in the light of the provision contained in the aforesaid Sub-section. However, the decision of the Hon'ble Supreme Court was that for computing the income under Section 115J can only be done at the end of the financial year when accounts are audited and the balance sheet is prepared. Similar consideration will apply in respect of Section 115JA also as the deemed income can be computed only after accounts are audited and the balance sheet is prepared. The mode and method of computing the income under these sections are identical. Therefore, we are of the view that the ratio of that case applies mutatis mutandis in respect of Section 115JA also. Thus, this ground is allowed by respectfully following the decision of the apex Court.
42. The assessee moved an additional ground to the effect that on the facts and in circumstances of the case and in law, the assessee was entitled to deduction for salary of Rs. 2.62,09,920 paid to expatriate employees on which tax was deducted at source in the relevant assessment year.
43. It was explained that the assessee received a debit note dt. 17th Dec, 1999 from its parent company towards salary paid by it to the expatriate employees, out of which Rs. 2,19,45,920 pertained to this year. The said debit note was accounted for in the books of account in the previous year relevant to asst. yr. 2000-01. This amount was not allowed by the AO and the learned CIT(A) in that year by holding it to be prior period expenditure. Therefore, it was contended that since the appeals of both these years are pending before the Tribunal, this expenditure may be allowed to be deducted in computing the income of this year. In reply, the learned Departmental Representative fairly stated that the liability for salary arose from year to year and could be allowed in the year in which the expenditure was incurred.
44. We have considered the facts of the case and rival submissions. We find that appeals for asst. yr. 2000-01, in which the claim was made and for asst. yr. 1998-99 to which the liability pertains, are pending before us. Therefore, it will be well within our right to consider the deductibility of this amount in asst. yr. 1998-99. On the basis of the facts available before us. it is seen that the quantification of the liability for this year has not been examined by the AO as the issue did not arise before him. The learned CIT(A) dismissed the ground in asst. yr. 2000-01 by stating that the liability shown In the debit note did not pertain to that year. The quantum with reference to each year was, thus, not examined by him. However, it is common ground of both the parties before us that the liability pertaining to this year may be allowed in this year. In law, the claim of the assessee is well founded as the liability arose in this year. It was not claimed and allowed in this year by the AO and it was also not allowed in asst. yr. 2000-01 even by the Tribunal. Therefore, it is held that the assessee is entitled to deduct the liability accrued in this year in computing the income. The same is allowed subject to verification of the amount by the AO. In the result, the appeal is allowed.