Income Tax Appellate Tribunal - Delhi
Lloyd Insulation (India) Ltd., New ... vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "D" NEW DELHI
BEFORE SHRI R.K. GUPTA AND SHRI B.C. MEENA
ITA No. 2400/Del/11
Asstt. Yr. 2008-09
DCIT Cir. 4(1), Vs. M/s Lloyd Insulation (India) Ltd.,
New Delhi. M-13, Punjstar Premises,
Connaught Place, New Delhi.
PAN/ GIR No. AAACL0486E
C.O. No. 201/Del/11
( In ITA No. 2400/Del/11)
Asstt.Yr. 2008-09
M/s Lloyd Insulation (India) Ltd., Vs. DCIT Cir. 4(1),
M-13, Punjstar Premises, New Delhi.
Connaught Place, New Delhi.
( Appellant ) ( Respondent )
Department by : Shri D.K. Mishra DR
Assessee by : Shri K.V.S.R. Krishna CA
ORDER
PER R.K. GUPTA, J.M::
The department is in appeal against the order of CIT(A) dated 1-3- 2011 in respect of A.Y. 2008-09, raising as many as 7 grounds of appeal. The assessee has also filed cross objection assailing the order of CIT(A). Both the matters were heard together and are being disposed of by a consolidated order for the sake of convenience.
2. Ground nos. 1 & 7 raised by the revenue in its appeal are general in nature and require no adjudication.
2 ITA 2400 & CO 201/Del/11 Lloyd Insulation (India) Ltd.
3. Ground no. 2 relates to the deletion of addition of Rs. 29,08,07,163/- made by the Assessing Officer on account of difference between the income appearing in TDS certificate and income offered for taxation.
4. Assessing Officer made an addition of Rs. 29,08,07,163/- on account of TDS claimed on advance against running contracts by observing as under:
"During the year, the assessee has earned income from contract sales and the product sales. In respect of contract sales, it has claimed advance receipt of Rs.29,08,07,163/- which has not been considered as income of AY 2008-09 but considered as liability in the balance sheet. However, this advance money from various customers has been received after deduction of TDS. The assessee was asked to reconcile its claim of TDS credit with related income in the profit & loss account. The details submitted by the assessee in this regard lead to no conclusion as there are thousand of TDS tax credits as per Form No.26AS and the TDS claim made by the assessee which are not reconciled properly. The assessee itself has admitted that the TDS claim has been made in respect of advances receipts also. As per the provisions of Rule 37BA read with Sec. 199, 'credit for tax deducted at source and paid to the Central government, shall be given in assessment year in which such income is assessable.' Since TDS credit of Rs.66.01 has been claimed during the year, the corresponding advance receipts of Rs.29,08,07,163/- have also to be taken in the income related to AY 2008-09. Accordingly, addition of Rs.29,08,07,163/- is being made to the total income of the assessee."
5. During the appellate proceedings detailed submissions were filed before CIT(A) which have been incorporated in the order of CIT(A) at page 21, as under:
"At the outset, it is essential to understand the nature of assessee's business. The assessee company undertakes turnkey 3 ITA 2400 & CO 201/Del/11 Lloyd Insulation (India) Ltd.
contracts of Thermal insulation, Hydro and Acoustic Insulations, Spray Insulations, Electric Heat Tracing, buying and selling of insulations and ancillary material and manufacturing of ceramic fiber products, polyurethane board / slab slash pipe section, pre-fabricated buildings, doors, shape and sections of Iron and Steel Sheeting and isothane products.
The AO has understood advance against running contracts appearing in the liability side of the audited Balance sheet, copy enclosed of the company under the head "Current Liabilities"
as advance received of Rs.29,08,07,163/- and concludes that the said amount of advance money received from various customers is after deduction of TDS and consequently surmises the amount as income of the assessee which is factually wrong. The said amount is not advance received by the assessee from the customers but is the balance resulting upon working as per the method of revenue recognition prescribed by Accounting Standard 7 being accounting for construction contracts prescribed by the Institute of Chartered Accountants of India and consistently followed by the assessee in all the earlier years and accepted by the Department in the assessment u/s 143(3). Copy of the Accounting Standard-7 of the Institute of Chartered Accountants is enclosed.
The assessee had clarified vide letter dated 17th Nov. 2010 which is already filed alongwith the appeal papers that the TDS claimed by the assessee in the Income tax return aggregates to Rs.6,18,49,871/-, the corresponding amount reflected in the said TDS certificates aggregate to Rs.259.42 crores. This details the assessee has already filed along with the income tax return which is again enclosed with the submissions. As against the amount of Rs.259.42 crores, the assessee has reflected in the Profit & Loss account the total contract sales of 306.73 crores.
This completely satisfies the requirements of the provisions of sec. 199 in so far as the claim for TDS has been made by the assessee in the assessment year in which such income is assessable. Both the sections, viz., 198 and 199, fall within Chapter XVII of the Income-tax Act, 1961, which are titled as 4 ITA 2400 & CO 201/Del/11 Lloyd Insulation (India) Ltd.
"Collection and recovery of tax--Deduction at source." In other words, these are machinery provisions for effectuating collection and recovery of the taxes that are determined under the other provisions of the Act. In other words, these are only machinery provisions dealing with the matters of procedure and do not deal with either the computation of income or chargeability of income. The basis of charge of income to tax in the case of business income is provided in section 28 of the Act. The computation provisions of sections 28 to 43A deal with the assessment of profits and gains of business.
In computing the income from business or profession, the method of accounting followed by the assessee becomes relevant. The profits and gains of business or profession carried on by the assessee should be computed in accordance with the method of accounting regularly followed by the assessee as provided in section 145(1) of the Income-tax Act, 1961.
Sections 198 and 199 of the Act nowhere provide for an exception either to the determination of the income under the aforesaid provisions of section 28, 29 or as to the method of accounting employed under section 145 of the Act, which alone could be the basis for computation of income under the provisions of sections 28 to 43A of the Act. Section 198 has a limited intention. It only declares the amounts deducted at source to be treated as an income received. The purpose of section 198 is not to carve out an exception to section 145 of the Act. Section 199 of the Act has two objectives--one to declare the tax deducted at source as payment of tax on behalf of the person on whose behalf the deduction was made and to give credit for the amount so deducted on the production of the certificate in the assessment made for the assessment year for which such income is assessable.
In this connection, the assessee is consistently following accounting for construction contracts prescribed by the accounting standard 7 of the Institute of Chartered Accountants of India. This is a mandatory accounting standard and has been followed by the assessee for recognizing income from the time it came into existence. The basis of recognizing income in
5 ITA 2400 & CO 201/Del/11 Lloyd Insulation (India) Ltd.
respect of long term construction contracts is on percentage of completion method. This has been clearly stated by the assessee in the Notes forming parts of the accounts schedule-13 under the head "Statement of Significant accounting policies and practices". This system of recognizing income and expenditure from long term contracts has been accepted by the Assessing Officers in the earlier year's assessments u/s 143(3) as well as by the AO himself in this very assessment year.
Under this method, the percentage of completion is determined by the proportion that the contract costs incurred for work done as on reporting date bears to the estimated total contract cost.
Contract revenue comprises of initial estimated revenue as adjusted for subsequent variations in the contract work, claims / liquidated damages and incentive payments.
Income is recognized considering net revenue or expenses as on reporting date and adjusting for any additional revenue / cost with reference to stage of individual contracts. Expected losses on ongoing contracts are recognized as an expense immediately.
Estimate billings and expenses are based on budget approved by management at the time of finalization of the order / placement of procurement orders and includes subsequent revision, if any. Profit / Losses on job executed less than 10% of contract value has not been considered.
The assessee-company is carrying on the business of product sales and job contracts. The assessee-company is maintaining its books of account on accrual system. The profits on contracts entered into by the assessee-company undisputedly have been recognized on percentage of completion method as per the accounting standards indicated above and offered for taxation accordingly. It does not mean that income from a project is earned only at the completion of the project. Income is earned by the assessee-company simultaneously with the progress in the project execution in a contemporaneous manner. The assessee-company is accounting for the expenditure in 6 ITA 2400 & CO 201/Del/11 Lloyd Insulation (India) Ltd.
work-in-progress account as well as raising running bills and being carried forward from assessment year to assessment year till the completion of the project. However, profits are bench marked upon percentage completion over the period of the contract as explained above and taxed. The income is, therefore, earned from year to year as per the method of recognizing income explained above.
There is no conflict between the claim for credit of TDS made by the assessee-company and the provisions of law contained in section 199 of the Income-tax Act, 1961. The provisions of section 199 it has been provided that credit for TDS shall be given to the assessee for the amount so deducted on the production of the certificate furnished u/s 203 in the assessment made in the Act in the assessment year in which such income is assessable. Such income is impregnated in the value of the jobs completed during the year as well as jobs which are in work-in- progress and considered as income based on percentage completion method of recognizing income.
Earning of income is a continuous, indivisible process embedded in the business dynamics especially in the case of contractors' job contract accounting. The income is recognized for a particular period, statutorily for one year on the basis of the method employed by an assessee. The income or loss of an assessee is the cumulative result of the working carried on by the assessee and reasonably measured for that particular assessment year. Even the section 199 does not contemplate that there should be immediate nexus between the income as such and the TDS made out of a particular payment. Tax deduction at source is basically a machinery provision for collecting tax on the potential income of the assessee.
The pith and substance is that it may not be possible all the time to co-relate a specific amount of TDS with a specific amount of income earned by an assessee in a particular assessment year. If at all such a nexus is required, such nexus is rather notional or conceptual, rather than specific or immediate. When the law has used the words in section 199 of the Income-tax Act that "credit shall be given to the tax deducted at source" on 7 ITA 2400 & CO 201/Del/11 Lloyd Insulation (India) Ltd.
production of the certificate for the assessment year for which such income is assessable; it implied that the nexus between TDS and the corresponding income element would remain rather notional/conceptual. In this connection, reference is made to the Mumbai Tribunal decision in the case of Toyo Engineering India Ltd. vs. JCIT SR 27 reported in (2006) 5 SOT 616 (Mum), copy enclosed.
The provisions of section relating to deduction of tax at source are not charging sections or computation section unless and until it is followed by an assessment order making a charge of tax. The deduction of tax is not a levy of tax. Deduction of tax at source is merely one of the mode of collection of tax. The amount on which TDS is deducted is subject to charge as per the provisions of the Act. There are few instances which can further elaborate this view. For example, the recipient maintains account on cash basis which may not match with the amounts certified in the TDS Certificate due to the reason that the deductor has maintained the account on mercantile basis. Naturally the deductor will deduct the tax on accrual basis; however, the recipient shall disclose the income on receipt basis. In this situation, there shall always be a mismatch between the amount of receipt as per TDS Certificate and the taxable income offered by the assessee. Due to this reason, the statute has clarified that it is not necessary that the receipts on which tax was deducted as per TDS Certificate should be offered to tax in the same assessment year as per the dates mentioned in the TDS Certificate. There can be an instance that the TDS was deducted on the income which may not be subject to tax at all, such as, eligible for deduction u/s.10A, etc. So the deduction of tax on an income does not ipso facto declare that the amount referred in the TDS certificate is subject to tax on the whole figure that too on the same year mentioned in the certificate. An income of a taxpayer is not required to be computed merely with reference to the TDS Certificate but assessment of an income is altogether an independent exercise.
Therefore, the addition made by the AO on the basis that the assessee has claimed TDS credit of Rs. 6,18,49,871/- and therefore, the sum of Rs.29,08,07,163/- as the income of the 8 ITA 2400 & CO 201/Del/11 Lloyd Insulation (India) Ltd.
assessee is without appreciating the consistent method of accounting regularly followed by the assessee for income recognition in respect of job contracts, without appreciating that the assessee has already declared income from job contracts of Rs.306.73 crores more than what has been the cumulative total reflected in the TDS certificates of Rs.259.42 crores as explained above satisfying the provisions of 199 of the Income- tax Act, 1961. A chart is enclosed covering assessment year 2006-07 upto 2010-11 depicting the contract job income reflected in the P&L account, the TDS claim made by the assessee in the income tax return with the corresponding amount reflected in the TDS certificates. In all the years the contract job income is more in comparison to the amount reflected in the TDS certificates.
Hence, the addition of Rs.29,08,07,163/- is factually, legally not tenable and should be deleted."
6. After considering the submissions and perusing the material on record, CIT(A) found that assessee has filed reconciliation chart and from that chart it is clearly seen that no addition is warranted as these are not advances on account of receipt but are on account of advance on running jobs. The CIT(A) has also noted that neither assessee has offered advance of Rs. 29 lacs and odd to tax in the relevant year nor claimed any TDS corresponding to this amount. Therefore, he held that perhaps the Assessing Officer could understand the method of accountancy maintained by the assessee. Accordingly, he deleted the addition.
7. Ld. DR simply placed reliance on the order of Assessing Officer. On the other hand, counsel of the assessee placed reliance on the order of CIT(A).
8. After considering the orders of Assessing Officer and CIT(A) we find no infirmity in the finding of CIT(A). The finding of CIT(A) has been 9 ITA 2400 & CO 201/Del/11 Lloyd Insulation (India) Ltd.
incorporated in para 3.2 to 3.6 at pages 6 to 10 of his order, which are self explanatory and in detail. The findings of CIT(A) are reproduced herein below:
3.2. I have carefully considered the submissions made on behalf of the appellant, the findings of the Assessing Officer and the facts on record. The perusal o the return of income and the computation of taxable income filed alongwith the return of income reveals that the assessee has claimed credit for TDS in the Income tax return amounting to Rs.6,18,49,871/- and the corresponding amount reflected in the said TDS certificates is to the tune of Rs.259,42,51,681/-. As against the amount of Rs.259,42,51,681/-, the assessee has shown contract sales of Rs.306,73,33,963/- in the Profit & Loss account (Refer to Schedule-8 to the accounts for the year5 ended 31st March 2008). There is also no dispute over the fact that the assessee has shown contract sales of Rs.306,73,33,963/- after reducing advance of Rs.29,08,07,163/- which implies that the said advance of Rs. 29,08,07,163/- has not been considered as income of A.Y. 2008-09 but considered as liability in the balance sheet. It passes my comprehension that on what basis the Assessing Officer has arrived a the conclusion that this advance money from various customers has been received after deduction of Tax at source (TDS) the credit of which has been claimed in the year under appeal. There is absolutely nothing on record brought about by the Assessing Officer to suggest that TDS credit corresponding to advance of Rs.29,08,07,163/- has been claimed by the assessee during the year under appeal. If credit for TDS corresponding to advance of Rs.29,08,07,163/- would have been claimed by the assessee, the Assessing Officer would have been fully justified in denying credit of the said TDS as the corresponding advance were not offered to tax for the relevant year, but it is not understandable as to why the advance of Rs.29,08,07,163/- should be brought to tax
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only during the year under appeal. Needless to mention that the assessee has neither offered advance of Rs.29,08,07,163/- to tax in the relevant year nor claimed credit for TDS corresponding to the said advance of Rs.29,08,07,163/-.
3.3. It is observed that the deduction of tax at source is made in accordance with provisions of Part B to Chapter XVII of the Act titled 'Collection and Recovery of Tax'. Part A of the said Chapter is titled 'General' and contains two provisions, which are in the name of a prelude to the ensuing parts of the Chapter. Section 190 of the Act clarifies that the tax shall be deducted and collected, as the case may be, as per the provisions of the Chapter, notwithstanding that the regular assessment in respect of income (which is subject to tax deduction or collection) is to be made in a later assessment year and, further, that the said provision is without prejudice to the charge of tax on income u/s 4(1) of the Act. Section 191 states that TDS is only one of the modes of recovery of tax, and that the same does not preclude direct payment of tax by the person receiving income. The obligations cast as per the various provisions relating to TDS in Chapter XVII of the Act are for deduction of tax at source at the earlier of the two points in time, i.e., payment or credit, the latter signifying accrual. In other words, the tax deduction has to match in time the earlier of the payment (receipt) or accrual. Put differently, the deduction of tax at source does not necessarily, or is not required to, match alongside the corresponding income, recognition of which by the recipient could be either on accrual or on receipt basis. The accrual of the tax liability on income would arise only on the same being/becoming assessable. There is thus an inherent mismatch, in terms of time, between the payment of tax (per TDS) and the accrual of tax liability against the corresponding income, i.e., given the fact of admission of income as per the relevant provisions of law. It is in view of and to address this mismatch in time, so that the tax stands deducted while the corresponding income, though accrued has yet to be 11 ITA 2400 & CO 201/Del/11 Lloyd Insulation (India) Ltd.
received or though received, as by way of an advance, is yet to accrue, that the law [per section 199 r/w ss. 190 & 191 and Rule 37BA] clarifies that the credit for the TDS shall be available for the year for which the corresponding income is assessable. The law as provided by the statute, to my mind, could not get clearer than this.
3.4. There should not be any controversy, in fact, even in the absence of the provision of section 199, as section 191 clearly states that TDS is only one of the modes of recovery of tax, so that tax to that extent has been paid on a particular income, and the liability to tax of the assessee-deductee on the corresponding income abates to that extent. Now, it cannot be that while the tax deduction at source, which is only a manner or mode of payment or recovery of tax is on income 'A', the credit thereof is allowed against income 'B'. In any case, section 1999 and Rule 37BA of Income Tax Rules, 1962 make things abundantly clear, eliminating scope of any doubt. It would be evident from plain reading of section 199 of the Act and Rule 37BA of Income Tax rules, 1962 that credit is to be given to the assessee for the amount so deducted in the assessment made under this Act for the assessment year for which such income is assessable. So important conditions for getting benefit of TDS as per section 199 of the Act are;
(a) the assessee should produce the certificate for the amount of tax deducted at source;
(b) show that income subjected to TDS is disclosed in the return of the assessment year as 'assessable'.
Thus both the above mentioned conditions are to be satisfied. It is, therefore, clear that the assessee will not be entitled to have benefit or credit for the amount though mentioned in the certificate for the assessment year if income relatable to the amount is not shown and is not assessable in that assessment year. If instead of entire income referable to amount of tax deducted, only a portion of income is found assessable the benefit has to be allowed only on the portion shown. If balance income, on account of system of accounting followed by the 12 ITA 2400 & CO 201/Del/11 Lloyd Insulation (India) Ltd.
assessee or for some other reason is found to be assessable in future, then the credit for the balance TDS can be allowed only in future when income is assessable. Credit allowed on pro rata basis in the year in which the certificate is issued and also in future where balance or such income is found to be assessable is as per the mandate of provision of section 199 of the Act. Any amount which has not been assessed in any year but referred in the TDS certificate, cannot be claimed under section 199 of the Act. In the case of Smt. Varsha G. Salunke vs. DCIT (2006) 98 ITD 147(Mumbai)™: 101 TTJ (Mumbai) (™)703, it was held as under:--
"Section 199 of the Act has two objectives - one to declare the TDS as payment of tax on behalf of the person on whose behalf the deduction was made and to give credit for the amount so deducted on the production of the certificate in the assessment made for the assessment year for which such income is assessable. The second objective mentioned in section 199 is only to answer the question as to the year in which the credit for TDS shall be given. It links up the credit with assessment year in which such income is assessable. In other words, the Assessing Officer is bound to give credit in the year in which the income is offered to tax. This section 199 does not empower he Assessing Officer to determine the year of assess ability of the income itself but it only mandates the year in which the credit is to be given on the basis of the certificate furnished. In other words, when the assessee produces the certificates of TDS, the Assessing Officer is required to verify whether the assessee has offered the income pertained to the certificate before giving credit. If he finds that the income of the certificate is not shown, the Assessing Officer has not only to give the credit for TDS in that assessment year and has to defer the credit being given to the year in which the income is to be assessed."
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3.5. In the present case, there is no dispute regarding system of accounting consistently followed by the assessee and its income has been computed as per above system. It may be relevant to mention here that the assessee has been following accounting for construction contracts prescribed by the accounting standard 7 of the Institute of Chartered Accountants of India which is a mandatory accounting standard and has been followed by the assessee for recognizing income from the time it came into existence. The basis of recognizing income in respect of long term construction contracts is on percentage of completion method. Benefit for the tax deducted at source is to be allowed as per statutory provisions contained in section 199 of the Act. It has nothing to do with the system of accounting followed by the assessee. In the present case, the assessee has neither offered advance of Rs.29,08,07,163/- to tax for the relevant year nor claimed credit for TDS corresponding to advance of Rs.29,08,07,163/-. The Assessing Officer did not dispute the method of accounting followed by the assessee and compliance of the accounting standard. The main reason for making addition of Rs.29,08,07,163/- is that according to the AO credit for TDS corresponding to advance of Rs.29,08,07,163/- has been claimed during the year under consideration. The Assessing Officer has not pointed out any specific defect or discrepancy in the books of accounts. Admittedly, the assessee had been maintaining regular Books of Account, which were duly audited by independent Chartered Accountants. The accounts which are regularly maintained in the course of business and are duly audited, free from any qualification by the auditors, should normally be taken as correct unless there are adequate reasons to indicate that they are incorrect or unreliable. The onus is upon the Assessing Officer to show that either the Books of Account maintained by the assessee were incorrect or incomplete or method of accounting adopted by him was such that true profits of the assessee cannot be deduced therefrom. The assessing authority has to look into the substance of 14 ITA 2400 & CO 201/Del/11 Lloyd Insulation (India) Ltd.
the situation and decide the matter in such a manner that neither is put to unreasonable liability nor the assessee is subjected to unreasonable hardship. No doubt it is not only the right but also the duty of the Assessing Officer to consider whether or not the books disclosed the true state of accounts and the correct income can be deduced therefrom. But these rights and duty have to be exercised in such a manner and have to be based on cogent reasons and sufficient material. The reasons given by the Assessing Officer in this case on the facts and circumstances is demonstrated, as erroneous by the assessee. Accounts regularly maintained in the course of business have to be taken as correct unless there are strong and sufficient reasons to indicate that they are unreliable and incorrect. The procedure of the Assessing Officer is of judicial nature and in making the assessment he should proceed on judicial principles. If evidence is produced by the assessee in support of its return it should be accepted unless it is rebutted by admissible evidence and not by mere hearsay.
3.6. Thus for all these reasons and as the assessee has produced sufficient material justifying its claim and as it has repelled the contentions advanced by the Assessing Officer with cogent material and evidence, I am of the considered view that on the facts and in the circumstances of the case, the Assessing Officer was not justified in making the addition of Rs.29,08,07,163/- on account of "TDS claim on advance against running contracts". The addition to the extent of Rs.29,08,07,163/- is, therefore, directed to be deleted. As a result, Grounds of appeal Nos. 1 to 5 are allowed.
9. The above findings of CIT(A), which are in detail, could not be controverted by ld. DR. Neither any material has been brought on record to establish the finding of CIT(A) otherwise. Therefore, there is no reason to interfere in the finding of CIT(A). Accordingly, we confirm the finding of CIT(A) on this issue.
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10. Ground no. 3 will taken lateron along with ground raised in assessee's cross objection.
11. Ground no. 4 in appeal of the department is against deleting the disallowance of Rs. 1,78,34,914/- made by the Assessing Officer u/s 40(a)(ia) of the Act.
12. The Assessing Officer made disallowance of Rs. 1,78,34,914/- u/s 40(a)(ia) of the Act on account of payment in respect of expenditure made before last month of A.Y. 2007-08 on which TDS was deducted but paid after 31st March 2008. Therefore, Assessing Officer made disallowance u/s 40A(ia).
13. Detailed submissions were made before CIT(A), which have been incorporated at pages 14 and 15 of CIT(A)'s order, which are as under:
"The deduction of tax at source has been correctly made and the deposit of tax has been made before the due date of filing of return specified under sub-sec. (1) of section 139 of the Income-tax Act, 1961. This factual aspect has not been disputed by the AO because in the assessment order, it is clearly stated that the TDS on the said payments have been duly deposited by the assessee on 31st July 2008.
Assessee would like to drawn the attention to the provisions of sec. 40(a)(ia) and the development of law to appreciate that a purposive interpretation should be followed rather than a narrow and pedantic approach.
The provisions of sec. 40(a)(ia) as they stood for the relevant assessment year are as under:-
Amounts not deductible.
40. Notwithstanding anything to the contrary in sections 30 to 88 [38], the following amounts shall not be deducted in 16 ITA 2400 & CO 201/Del/11 Lloyd Insulation (India) Ltd.
computing the income chargeable under the head "Profits and gains of business or profession (ia)any interest, commission or brokerage, 91[rent, royalty,] fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub- contractor, being resident, for carrying out any work (including supply of labour for carrying out any work), on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction , has not been paid,-
(A) in a case where the tax was deductible and was so deducted during the last month of the previous year, on or before the due date specified in sub sec. (1) of sec. 139, or (B) in any other case, on or before the last day of the previous year.
The high lighted part in the above provisions has been substituted by the Finance Act 2010 with effect from 1st April 2010 for the following words :
"has not been paid on or before the due date specified in sub-section (1) of section 139".
Therefore, with the above amendment by the Finance Act, 2010, the distinction between payments made in the last month of the previous year and payments made before the last month of the previous year for allowability u/s 40(a)(ia) has been done away with. In respect of both the payments, the TDS thereon if deposited on or before the due date specified u/s 139(1), there will be no disallowance u/s 40(a)(ia) of the Income Tax Act, 1961.
The assessee submits that the above amendment brought in by the Finance Act, 2010 is curative in nature and therefore would apply retrospectively for the A.Y. 2008-09 also. Since the deposit of TDS has been done by the assessee by July 2008 i.e. 17 ITA 2400 & CO 201/Del/11 Lloyd Insulation (India) Ltd.
within the due date of the filing of the return u/s 139(1), no disallowance u/s 40(a)(ia) should be made.
Reference in this connection is made to the CBDT Circular No.1 of 2009 dated 27.3.2009 which clarifies the amendment made to sec. 40(a)(ia) by the Finance Act, 2008 i.e. the earlier amendment, with retrospective effect from 1st April 2005 was to mitigate hardship caused by the above provisions of sec. 40(a)(ia) while maintaining TDS discipline. The further amendment whereby the time limit for payment of TDS deducted/deductible during the year has been extended till the due date of filing return by the Finance Act, 2010 therefore is an amendment to the previous amendment made by the Finance Act 2008 which was with retrospective effect from 1st April 2005, hence this amendment made by Finance Act, 2010 also should be considered as retrospective as it is curative in nature and therefore clarificatory and hence would apply to all cases.
Assessee is drawing support from similar amendment made to sec. 43B wherein by the Supreme Court in the case of CIT vs. Alom Extrusions Ltd., 319 ITR 306(SC) (copy enclosed) has held that amendment to sec 43B to be retrospective in operation allowing the assessee the benefit upon deposit of statutory dues on or before the due date of filing of the return as it is curative in nature and was brought in to remove the hardship caused to the assessee.
On a parity of reasoning the amendment made by the Finance Act, 2010 extending the time limit of deposit of TDS on or before the due date of filing of return u/s 139(1) should also be made available for A.Y. 2008-09. As the assessee has deposited the TDS by July 2008, consequently, there is no disallowance to be made u/s 40(a)(ia).
Reliance is placed on the decision of the Mumbai Tribunal in the case of Global Stables Lifestyle Centre Pvt. Ltd. vs. CIT in ITA No.5145/Mum/2009 reported in BCAJ November 2010 issue, the relevant extract is enclosed, ITAT "B" Bench Ahmedabad in ITA No.3983/Ahd./2008 dated 3rd Dec. 2010 reported in 2010-TIOL-765-ITAT/AHM (extract enclosed) 18 ITA 2400 & CO 201/Del/11 Lloyd Insulation (India) Ltd.
wherein it has been held that the amendment made by the Finance Act 2010 being curative in nature and brought in to remove the hardship of the assessee is applicable retrospectively from 2005 onwards.
Hence, the addition of Rs.1,78,31,914/- may kindly be deleted."
14. After considering the submissions and perusing the material on record CIT(A) found that Assessing Officer was not justified in making the disallowance. Various case laws relied on by assessee were found in favour of the assessee and accordingly he deleted the addition by further observing that provisions of sec. 40(a)(ia) as amended by Finance Act 2010 w.e.f. 1-4- 2010 to be effective for the year under consideration as these provisions are applicable with retrospective effect as held by various Courts. Accordingly, the issue was decided in favour of the assessee.
15. Ld. DR placed reliance on the order of Assessing Officer . It was stated that though ld. CIT(A) has held that provisions are applicable with retrospective effect whereas these provisions should have been taken applicable only from the date of amendment i.e. 1-4-2010 and not for the year under consideration.
16. On the other hand, ld. AR of the assessee first placed reliance on the order of CIT(A) and further stated that besides various case laws relied on before ld. CIT(A), the Hon'ble Calcutta High Court in the case of CIT Vs. Virgin Creations [ ITA no. 302 of 2011 dated 23-11-2011], has also held that provisions of sec. 4(a)(ia) are applicable with retrospective effect. Therefore, the payment on the payments made before due date of filing of the return u/s 139(1), provisions of sec. 40(a)(ia) are not applicable.
19 ITA 2400 & CO 201/Del/11 Lloyd Insulation (India) Ltd.
17. After considering the submissions and perusing the material on record, again we find no infirmity in the order of CIT(A), which remained uncontroverted. It is further seen that TDS has been deposited within due date because the same was deducted in the period of last month of the end of the year and due date of filing in the next month i.e. April of the year and the payment had been made before the due date of filing of the return. Therefore, provisions of sec. 40(a)(ia) are not attracted at all.
18. In the case of ITO Vs. Taru Leading Edge (P) Ltd. (ITA no. 3592/Del/11 for A.Y. 2008-09), similar disallowances made were deleted. In that case the Tribunal has followed the decision of Hon'ble Calcutta High Court in the case of CIT Vs. Virgin Creations in ITA no. 302 of 2011 dated 23-11-2011. The Tribunal has observed that:
"In view of the foregoing, following the view taken in the aforesaid decision of the Hon'ble Calcutta High Court in Virgin Creations (supra), we are of the opinion that the amendment to the provisions of Sec. 40(a)ia) of the Act, by the Finance Act, 2010 is applicable retrospectively from 1.4.2005. Consequently, any payment of tax deducted at source on or before the due date for filing return of income u/s 139(1) of the Act, cannot be disallowed in terms of provisions of sec. 40a(ia) of the Act. Undisputedly, in the instant case the assessee deposited the tax deducted at source on 11.4.2008 i.e. before the due date for filing return of income u/s 139(1) of the Act. In this situation, especially when the Revenue have not brought to our notice any contrary decision, we are not inclined to interfere with the findings of the ld. CIT(A)."
18.1. Accordingly, the ground of the department was dismissed.
19. Here in before us, the facts are identical. CIT(A) followed various other decisions whereby similar view has been expressed. Undisputedly the 20 ITA 2400 & CO 201/Del/11 Lloyd Insulation (India) Ltd.
payment of TDS has been made before due date of filing of the return. Return has been filed u/s 139(1), therefore, no disallowance can be made on account of non-payment of TDS u/s 40(a)(ia) on these facts. Therefore, the order of CIT(A) remained uncontroverted. Therefore, we see no reason to interfere in the finding of CIT(A) on this issue also. The ground is dismissed.
20. Ground no. 5 relates to the deletion of additions of Rs. 51,68,020/- and Rs. 1,74,88,597/- made by the Assessing Officer on account of non- inclusion of excise duty in the closing stock of finished goods and raw material respectively.
21. The Assessing Officer made a disallowance of Rs. Rs. 51,68,020/- on account of non-inclusion of excise duty in the closing of finished goods; and Rs. 1,74,88,597/- on account of non-inclusion of excise duty in the closing stock of raw material. Assessing Officer noted that these amounts have not been included in the valuation of closing stock of finished goods and raw material in terms of provisions of sec. 145 of the Act. Therefore, he made the disallowance. Detailed submissions were filed before CIT(A) which have been incorporated in the order of CIT(A) at page 19, which are as under:
"It is not clear on what grounds the AO states that the treatment given by the assessee is incorrect. In respect of opening balance the excise duty element is paid and discharged in the last year and therefore, does not form part of the computation u/s 145A for the previous year relevant to this assessment year. So far as the payment of Rs.51,68,020/- is concerned, we are enclosing the copy of the challan for payment of excise duty before 31st of July 2008 which has been duly verified by the 21 ITA 2400 & CO 201/Del/11 Lloyd Insulation (India) Ltd.
Chartered Accountants signing the tax audit report. Therefore, there is no addition called for.
Coming to the excise duty on the closing stock of raw-material of Rs.1,74,88,597/-. The excise duty component is set off against the cenvat credit available to the assessee. Copy of the Cenvat account for adjustment of the excise duty is enclosed. The Officer himself states that there is corresponding debit balance of excise duty in assets / loans and advances. That is the assessee has still to recover excise duty from the Govt. as on the close of the Balance sheet.
The assessee has submitted during the course of assessment proceedings that the provisions of sec. 145A are fully complied with and so far as the impact of excise duty on the closing stock of finished goods as well as the closing stock of raw material is reflected in Schedule - III of the Tax Audit Report duly verified by the Chartered Accountant. The consistent practice followed by the assessee in the books is neither to debit the expenditure of excise duty nor credit the excise duty as part of the closing stock.
However, for the purpose of Income Tax computation, a separate working is done u/s 145A depicting the excise duty on the closing stock of finished goods as well as raw material and also reflecting the adjustment by way of Cenvat credit available to the assessee towards the excise liability. As a result of this working an amount of Rs.11,93,668/- is the amount of excise duty on closing stock which has remained unpaid up to 31st July 2008 and has been considered by the assessee for disallowance u/s 43B with the Income Tax Act, 1961.
Only if the AO had understood the working under 145A, the addition would not have resulted. The assessee has consistently followed the same system in the earlier years which has been accepted by the AO in assessment u/s 143(3). Copy of the working u/s 145A for the assessment year 2006-07 and 2007-08 is enclosed to appreciate the consistent method of valuation of closing stock followed by the assessee which is in line with sec. 145A of the Income Tax Act 1961.
22 ITA 2400 & CO 201/Del/11 Lloyd Insulation (India) Ltd.
There is no deviation by the assessee. Therefore, no addition is called for. The assessee has fully complied with the provision of sec. 145A of the Income Tax Act, 1961 as has been reported by the Tax Auditors giving the complete working. Therefore, the addition made of Rs.51,68,020/- and Rs.1,74,88,597/- may kindly be deleted."
22. After considering the submissions and perusing the material on record CIT(A) was satisfied with the explanation of the assessee. Accordingly, he deleted both the additions by giving following finding recorded in paras 6.1 to 6.3 (at pages 20 & 21) of his order:
"6.1. I have carefully considered the submissions made on behalf of the appellant, the findings of the Assessing Officer in the assessment order and the facts on record. The Assessing Officer has referred to Annexure-3 of the Tax Audit Report and observed that the excise duty related to closing stock of finished goods comes to Rs.63,61,688/- out of which Rs.51,68,020/- has been shown to be paid under section 43B in respect of clearances up to 31st July 2008 and the balance amount of Rs.11,93,668/- has been added in the computation as the disallowance u/s 43B of the Act. Regarding the payment of Rs.51,68,020/- it is an admitted fact that it has been done before 31st of July 2008 which has been duly verified by the Chartered Accountants signing the tax audit report and which is also evident from the copies of challans produced on behalf of the appellant during the assessment proceedings as well as the appellate proceedings. Therefore, addition on this account is not justified.
6.2. With regard to the excise duty on the closing stock of raw-materials of Rs.1,74,88,597/-, it is observed that the excise duty component is set off against the Cenvat credit available to the assessee which is evident from the perusal of the copy of the Cenvant account for adjustment of the excise duty. The Assessing Officer has himself observed in the assessment order that there is corresponding debit balance of excise duty in assets
23 ITA 2400 & CO 201/Del/11 Lloyd Insulation (India) Ltd.
/ loans and advances, which implies that the assessee has still to recover excise duty from the Government as on 31.03.2008. It is also noted that the assessee has consistently followed the practice according to which the expenditure of excise duty is neither debited from nor credited to the excise duty as part of the closing stock which implies that the net impact on profit or loss will be nil. The details furnished by the appellant also show that no disallowance was made by the Assessing Officer in assessment years 2006-07 & 2007-08. The action of the Assessing Officer in disallowing the identical claim in the year under consideration is not tenable on the principles of consistency also. It is settled law that in the absence of any change either in facts or in law, principles of consistency itself can be made a basis to uphold the claim of the appellant company. Reliance is placed on the judgments of the Hon'ble Delhi High Court in the cases of Commissioner of Income-tax vs. Neo Poly Pack (P) Ltd. (2000) 245 ITR 492 (Del) and CIT vs. Rajeev Grinding Mills (2005) 279 ITR 86 (Delhi) wherein the judgment of the Hon'ble Apex Court in the case of Radhasoami Satsang vs. CIT (1992) 193 ITR 321 (SC) was followed.
6.3. It is also observed that for the purpose of computation of taxable income, a separate working has been done u/s 145A of the Act depicting the excise duty on the closing stock of finished goods as well as raw material and also reflecting the adjustment by way of Cenvat credit available to the assessee towards the excise liability. The above working shows that the excise duty on closing stock amounting to Rs.11,93,668/- has remained unpaid up to 31.07.2008 and therefore has been voluntarily disallowed under section 43B of the Act and added back to the total income by the assessee. In view of the above, it is held that the disallowances of (a) Rs.51,68,020/- on account of non inclusion of excise duty in the closing stock of finished goods and (b) Rs.1,74,88,597/- on account of non- inclusion of excise duty pertaining to closing stock of raw- materials are not sustainable in law and the Assessing Officer is accordingly directed to delete the said additions. As a result, grounds of appeal No.12, 13 and 14 are allowed."
24 ITA 2400 & CO 201/Del/11 Lloyd Insulation (India) Ltd.
23. Ld. DR firstly placed reliance on the order of Assessing Officer . It was further submitted that every year is independent and if by any reason no disallowances were made in earlier year, then it cannot be said that addition cannot be made during the year under consideration as principles of res- judicata are not applicable in income-tax proceedings. Reliance was placed on the decisions of Apex Court in the cases of CIT Vs. Luxmi Devi Sugar Mills P. Ltd. 188 ITR 41 (SC); and 31 ITR 12.
24. On the other hand, ld. AR of the assessee firstly placed reliance on the order of CIT(A). It was further submitted that no doubt the provisions of sec. 145 are mandatory but as per the instruction of Institute of Chartered Accountants of India (ICAI), the assessee is free to choose any method of accounting out of two methods available i.e. inclusive method or exclusive method. Assessee has chosen exclusive method and it has been approved by the Hon'ble Delhi High Court in the case of Mahavir Alluminium 297 ITR 77 (Del.). It was further submitted that it is wrong to say that no details were filed. All the details were filed before Assessing Officer as well as before CIT(A). Attention of the Bench was drawn on page 107 of the paper book, where copy of the details are placed. It is noted that sum of Rs. 51,68,020/- was disallowed by the auditors u/s 43B. However, it can be seen that this payment was made before 31st July 2008, which has been duly verified by the C.A. signing the tax audit report and CIT(A) has verified from the copies of challans produced on behalf of the assessee which were also produced before Assessing Officer . Therefore, disallowance of this amount was not justified at all because they were disallowable u/s 43B but they were allowable for the reason that payments were made before due date of filing of the return of income.
25 ITA 2400 & CO 201/Del/11 Lloyd Insulation (India) Ltd.
25. We have heard rival submissions and considered them carefully. After considering the submissions and perusing the material on record, we are of the view that adjustment made of Rs. 51,68,020/- was not justified for the simple reason that assessee has himself included this amount. However, since the payments were made before due date of filing of return, they were claimed as deduction. Ld. CIT(A) has examined this aspect and therefore, it ha been held that the addition of adjustment of Rs. 51,68,020/- was not correct.
26. In fact the excise duty relating to closing stock of finished goods was Rs. 63,61,688/- out of which Rs. 51,68,020/- has been shown to be paid in view of the provisions of sec. 43B in respect of clearance up to 31st July 2008 and balance amount of Rs. 11,93,668/- has already been added in the computation as disallowance u/s 43B, therefore, if the contention of the department is accepted, then this would amount to double addition because of the reason that assessee has added itself and as the same was paid before the due date of filing of the return and therefore to this extent the amount was claimed as deduction on account of excise duty paid. This is a factual finding given by CIT(A). Therefore, to this extent the order of ld. CIT(A) is liable to be confirmed and we confirm the same.
27. However, regarding the remaining amount of Rs. 1,74,88,597/- as non-inclusion of excise duty pertaining to closing stock of raw-material, assessee has maintained exclusive method and working has been given by it. As per this working, the opening balance on account of excise duty is also adjusted and thereafter closing amount of excise duty is also adjusted and if both these amounts are taken into consideration then there is no effect of computation of income.
26 ITA 2400 & CO 201/Del/11 Lloyd Insulation (India) Ltd.
28. The Hon'ble Delhi High Court in the case of Mahavir Alluminium Ltd. 297 ITR 77 has clearly held that:
"Held, dismissing the appeal, that paragraph 23.13 of the guidance note on tax audit under section 44AB issued by the Institute of Chartered Accountants of India made it clear that whenever any adjustment is made in the valuation of inventory, this will affect both the opening as well as the closing stock. If any adjustment was required to be made by a statute, effect should be given to it irrespective of any consequences on the computation of income for tax purposes. Section 145A begins with a non obstante clause and therefore to give effect to section 145A, if there is a change in the opening stock as on Mach 31, 1999, there must necessarily be a corresponding adjustment made in the opening stock as on April 1, 1998. Thus, the question of double deduction did not arise since no adjustment was made by the assessee in the profit and loss account for the year ending March 31,1998."
29. While holding so, the Hon'ble Delhi High Court has examined the issue in depth. The decision of Privy Council in the case of CIT Vs. Ahmedabad New Cotton Mills CO. Ltd. AIR 1930 PC 56 has been considered along with the Board's Circular no. 772 dated 23-12-1998 235 ITR (Stat.) 35. The Privy Counsel has also clarified that both ends of the valuation of stock i.e. opening stock as on first day of the previous year and last day of the previous year has to be taken into consideration . This position has been further clarified by the Board Circular no. 772 (supra) by which it has been clarified that in view of the provisions of sec. 145A for valuation both ends i.e. opening and closing is to be taken into consideration and thereafter the Hon'ble High Court has given its finding which has been reproduced herein above in this order. Accordingly the mater is required to be re-examined in the light of the decision of the Hon'ble High Court and 27 ITA 2400 & CO 201/Del/11 Lloyd Insulation (India) Ltd.
guidelines of ICAI in respect of provisions of sec. 145A and in the light of the working made by the assessee on the basis of exclusive method by which it has been stated that there will be Nil effect. Accordingly, we restore this issue to the file of Assessing Officer to examine the issue afresh in view of our observations above and after affording opportunity to the assessee of being heard. We order accordingly. This ground of the department is partly allowed for statistical purposes.
30. Ground no. 6 is against the deletion of addition of Rs. 3,57,55,437/- made on account of bad debt.
31. The Assessing Officer made addition of Rs. 3,57,55,437/- on account of bad debt written off by following observations:
"It was noticed that these debts belong to very sound parties like BHEL, TATA, NTPC, L&T etc. Assessee has itself also accepted vide its reply dated 17.11.2010 that it is not a case where non-realisability is due to the party absconding or non- traceability. For any debt to become bad, it is imperative that it should really become non-recoverable i.e. either the debtor is incapable of paying or non-traceable etc. As these conditions are not all satisfied and keeping in view of the fact that assessee has never made any provision in the previous years and also the fact that assessee is having business relationship with these debt is disallowed and added to the total income of the assessee"
32. Detailed submissions were filed before CIT(A) which have been incorporated in the order of CIT(A) in para 7.1 ( at page 22) of his order, as under:
"The assessee vide letter dated 17th November 2010 has given detailed submission to the AO. The assessee reiterates the facts in order to appreciate that the bad debts written off by the assessee are allowable deduction u/s 36(1)(vii) read with sec. 36(2) of the Income Tax Act 1961.
28 ITA 2400 & CO 201/Del/11 Lloyd Insulation (India) Ltd.
Enclosed please find the details giving the name and address of the party, job no., product sale/job bill with bill number, date of bill and the year of considering as part of income of the assessee i.e. the bad debts are arising as a result of the income which has been booked and taxed in the earlier years. Secondly, the bad debts have been written off in the books as irrecoverable. This factual aspect submitted to the A.O. is not in dispute.
The law relating to allowability of bad debts u/s 36(1)(vii) is now well settled. Assessee is enclosing photo copy of the Supreme court decision in the case of T.R.F. Ltd. vs. CIT (2010) 323 ITR 397 (SC). The relevant portion of the judgment is reproduced below:-
"This position in law is well-settled. After April 1, 1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written of as irrecoverable in the accounts of the assessee"
Further, the jurisdictional Delhi High Court in CIT vs. Modi Telecommunication Ltd. (2010) 325 ITR 291 (Del), copy enclosed following the above Supreme Court has upheld the order of the tribunal allowing the bad debts which has been written off as irrecoverable in the accounts of the assessee as allowable business deduction.
Hence, the claim of the assessee for allowability of bad debt is fully covered by the above decision of the Hon'ble Supreme Court as well as High Court and the claim should be allowed. The assessee has also explained to the AO during the course of hearing that the nature of the business activity of the assessee is such that the debtors become irrecoverable due to job/material rejections, quality of material used/supply order, measurement differences, Non-payment of extra work done, delays in completion resulting in slashing of bills by the party. It may be noted that these disputes may arise with any of the customers, even reputed parties like BHEL, TATA, NTPC, L&T will not admit the job work bills / product bills unless it is scrutinized by their officials and are satisfied with the work.
29 ITA 2400 & CO 201/Del/11 Lloyd Insulation (India) Ltd.
Assessee has also reflected in the profit & loss account the recovery of bad debts as and when there is a realization of the bad debts as its income. Even in the earlier years such claim of the assessee has been allowed in the assessment u/s 143(3). For the Asst. Year 2006-07, the bad debt claimed by the assessee is Rs.1,67,76,043/-and for Asst. Year 2007-08 the bad debts claimed is Rs.3,56,27,738/- which has been allowed to the assessee.
Therefore the conditions required for allowability of bad debt u/s 36(1)(vii) read with sec. 36(2) of the Income Tax Act are fully satisfied namely the bad debt is as a result of income which has been offered for tax and secondly, the amount has been written off in the books as bad debt, therefore, the claim of the assessee may be allowed."
33. After considering the submissions and perusing the material on record, CIT(A) found that in view of the provisions of sec. 36(1)(vii) of the Act, the assessee is entitled to a deduction equivalent to the amount of written off. CIT(A) has also observed in his order that conditions of sec. 36(2) have been satisfied by the assessee. The CIT(A) following the decision of the Apex Court in the case of T.R.F. Ltd. Vs. CIT (2010) 323 ITR 397 (SC), held that assessee is entitled for deduction on account of bad debt written off. The findings of CIT(A) have been recorded in para 7.2 to 7.4 of his order as under:
"7.2. I have gone through the assessment order, the written and oral submission(s) of the appellant and the facts on record. It is apparent from the plain reading of section 36(1)(vii) of the Act that an assessee is entitled to a deduction equivalent to the amount of a written of debt. The question of applicability of section 36(1)(vii) of the Act will, however, arise if the assessee can establish the fulfillment of the ingredients of section 36(2) of the Act. A plain reading of clause (i) of section 36(2) of the 30 ITA 2400 & CO 201/Del/11 Lloyd Insulation (India) Ltd.
Act prima facie shows the following essential ingredients thereof:-
i) the assessee ought to have depicted the debt under reference, as his income, during the previous year (during which the deduction is sought) or any other earlier previous year (prior to the year during which the deduction is sought);
ii) the assessee ought to have shown the debt as irrecoverable or as a bad debt, and ought to have written off the same during the previous year;
iii) the deduction for such a debt which has been written off, can be claimed in the previous year during which the assessee has written off the debt.
7.3. An analysis of clause (i) of section 36(2) of the 1961 Act shows that all 3 essential ingredients thereof must be fulfilled before an assessee can claim a deduction. It would also be relevant to mention that the controversy regarding the allowability of Bad Debts written off has been settled by the Hon'ble Supreme Court in T.R.F. Ltd. v. CIT (2010) 323 ITR 397(SC): 190 TAXMAN 391 (SC) wherein it has been held as under:-
"2. In these appeals, we are concerned with assessment year 1990-91 and assessment year 1993-94. Prior to 1.4.1989, every assessee had to establish, as a matter of fact, that the debt advanced by the assessee had in fact, become irrecoverable. That position got altered by deletion of the word "established", which earlier existed in section 36(1)(vii) of the Income-tax Act, 1961 ('Act').
3. For the sake of clarity, we reproduce herein below provisions of section 36(1)(vii) of the Act, both prior to 1.4.1989 and post 1.4.1989:
"Pre-1-4-1989 31 ITA 2400 & CO 201/Del/11 Lloyd Insulation (India) Ltd.
36. Other deductions--(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28--
(i) to (vi) ** ** **
(vii) subject to the provisions of sub-section (2) the amount of any debt, or part thereof, which is established to have become a bade debt in the previous year.
Post- 1st April, 1989 :
36. Other deductions---(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28--
(i) to (vi) ** ** **
(vii) subject to the provisions of sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year"
4. This position in law is well-settled. After 1.4.1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. However, in the present case, the AO has not examined whether the debt has, in fact, been written off in accounts of the assessee. When bad debt occurs, the bad debt account is debited and the customer's account is credited thus, closing the account of the customer. In the case of companies, the provision is deducted from sundry debtors".
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7.4. In the present case, the perusal of the profit and loss account for the year under consideration shows that that an amount of Rs.3,57,55,437/- was shown as "bad debts" in the year under appeal. Elaborate submissions were made on behalf of the assessee before the A.O. as well as before the undersigned to establish that the income pertaining to the above amount was reflected in the accounts and the same was considered as part of sales in the earlier years. Therefore, I am of the considered view that in the present case, assessee has fulfilled all the afore stated mandatory conditions and the assessee would be entitled to a deduction on the basis of its having written off the debt under reference. In view of the discussion made above, I am of the considered view that the A.O. was not justified in making addition of Rs.3,57,55,437/- out of bad debt written off. Therefore, the A.O. is directed to delete the said addition. As a result Ground No. 15 & 16 are allowed."
34. Ld. D.R. strongly objected the finding of ld. CIT(A). It was further submitted that the debt has not become bad and therefore, they are not allowable. Attention of the Bench was drawn on pages 121 & 122 of the paper book and it was submitted that as per these details it cannot be established that these debts have become bad. It was further submitted that the matter may be sent back to the file of Assessing Officer to examine the same afresh in the light of the decision of the Apex Court in the case of T.R.F. Ltd. 323 ITR 397.
35. On the other hand, learned counsel for the assessee strongly placed reliance on the order of CIT(A). It was further submitted that both the conditions are satisfied in this case as the sales have been effected in the last so many years which have been offered for taxation in those very respective years. Now since the payments have not been received, therefore, in this year the amount has been written off by treating these receivable payments 33 ITA 2400 & CO 201/Del/11 Lloyd Insulation (India) Ltd.
as bad debts. Therefore, it cannot be said that conditions are not satisfied. It was further submitted that all these details were filed before Assessing Officer and he has not commented over the details whether they are right or not, as he disallowed the claim of the assessee by observing that the debts have become bad. Accordingly, conditions were not satisfied and therefore disallowance was made. Whereas, ld. CIT(A) has examined this aspect and after satisfying himself then only following the decision of the Hon'ble Supreme Court has allowed the claim of the assessee. Further reliance was placed on the decisions of Hon'ble Delhi High Court in the cases of CIT v. Modi Telecommunication (2010) 325 ITR 291 (Del.) and CIT v. Prasad & Co. 341 ITR 480 (Del.).
36. After considering the submissions and perusing the material on record we find no infirmity in the findings of CIT(A) which are reproduced some where above in this order.
37. Ld. D.R's main plank of argument is that these amounts have not become bad. The Various Courts including the Apex Court have held that any amount which is not received by the assessee can be claimed as bad debt, if other conditions are satisfied. In the present case, the assessee has shown the sale amount in its P&L a/c of previous year and in this year the assessee has claimed bad debt which is about 3.57% of the total gross receipts, since these amounts were not received by the assessee.
38. Ld. DR has stated that in view of the decision of Hon'ble Supreme Court in the case of T.R.F. (supra), the matter should be sent back to the file of Assessing Officer . However, we have gone through the order of Hon'ble Supreme Court by which it has been clearly held that"
34 ITA 2400 & CO 201/Del/11 Lloyd Insulation (India) Ltd.
"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."
39. The Hon'ble Supreme Court further has remanded the matter to the Assessing Officer to examine solely to the extent of write off, whether the debt or part thereof was written off in the accounts of the assessee.
40. In the present case, there is no dispute that these amounts were written off in the books of a/c on account of irrecoverable, therefore, the decision of the Apex Court in the case of T.R.F. Ltd. supports the case of the assessee. The ld. CIT(A) has considered the same and then has only allowed the deduction to the assessee. The issue is squarely covered by the decision of the Supreme Court.
41. Further, the decisions of Hon'ble Delhi High Court in the cases of Modi Telecommunication (supra) and Prasad & Co. 341 ITR 480 also support the case of the assessee.
42. In view of the above facts and circumstances we hold that CIT(A) was justified in allowing the claim of the assessee. Accordingly, we confirm the order of CIT(A) on this issue also.
43. Remaining ground i.e. ground no. 3 in appeal of department is against restricting the addition u/s 14A to Rs. 5,39,063/- as against Rs. 13,88,000/- made by the Assessing Officer . The assessee has also challenged the 35 ITA 2400 & CO 201/Del/11 Lloyd Insulation (India) Ltd.
addition sustained by ld. CIT(A) by filing its cross-objection. Since these grounds are common, therefore, they are being disposed of together.
44. Assessing Officer made a disallowance of Rs. 13,88,000/- u/s 14A of the Act read with Rule 8D of the I.T. Rules. It was submitted before CIT(A) that Assessing Officer had mechanically applied the provisions of Rule 8D without appreciating the submissions of the assessee that there is no expenditure incurred to earn dividend income, which is only Rs. 2,228/-. It was further submitted that this dividend income was earned by the assessee on the basis of investments made in March 05 and before the year 1990 in Punjab National Bank and Bombay Oxygen Ltd., on which dividend has been received of Rs. 2,228/-. Reliance was placed on various case laws i.e. Delhi Tribunal's decisions in Minda Investments Vs. DCIT; DCIT Vs. Jindal Photo Ltd. and also the decision of Hon'ble Punjab & Haryana High Court in the case of Hero Cycles Ltd. After considering the submissions and considering various case laws, the CIT(A) found that disallowance has to be made on the basis of formula given in view of the decision of Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. Vs. DCIT & Anr. 328 ITR 81 (Bom.). Accordingly, he reduced the disallowance to Rs. 5,39,063/-. Working of this has been given by CIT(A) on page 13 of his order.
45. The ld. DR stated that Rule 8D is applicable and ld. CIT(A) has decided the issue on the basis of Hon'ble Mumbai High Court.. However, Rule 8D should be applied on the gross amount as applied by the Assessing Officer .
36 ITA 2400 & CO 201/Del/11 Lloyd Insulation (India) Ltd.
46. On the other hand, ld. A.R. stated that the decision of Hon'ble Punjab & Haryana High Court decision in the case of Hero Cycle (supra) and decisions of the Tribunal in various cases, copies of which are placed in the compilation, no disallowance is warranted as no expenditure has been incurred to earn dividend of s. 2,228/-. Further, it was stated that the matter can be sent back to the file of Assessing Officer to find out as to what expenditure has been incurred for earning of dividend of Rs. 2,228/- in the light of the decision of Hon'ble Punjab & Haryana High Court (supra) and the decisions of various Benches of the Tribunal.
47. After considering the submissions and perusing the material on record, we are of the view that this matter should go back to the file of Assessing Officer to examine the issue afresh in the light of the decision of Hon'ble Punjab & Haryana High Court in the case of Hero Cycles Ltd. 323 ITR 518 (P&H), wherein the Hon'ble High Court has held "that the expenditure on interest was set off against the income from interest and the investment in the shares and funds were out of dividend proceeds. In view of this findings of fact disallowance u/s 14A was not sustainable". While holding so, the Hon'ble Punjab & Haryana High Court has also taken into account the provisions of Rule 8D.
48. Thereafter, the Delhi Bench 'E' of the Tribunal in the case of Minda Investments Ltd. Vs. DCIT vide order dated 13-10-2010 rendered in ITA no. 4046/Del/09 has held that:
"6.3. We have considered the submissions carefully. We find that in the case of Hero Cycles Ltd. the Hon'ble Punjab and Haryana High Court has held that disallowance u/s 14A required finding of incurring of expenditure and where it was found that for earning exempted income no expenditure had 37 ITA 2400 & CO 201/Del/11 Lloyd Insulation (India) Ltd.
been incurred, disallowance under section 14A could not stand. On the other hand, the Hon'ble Mumbai High Court decision in the aforesaid case of Godrej Boyce Mfg. Co. Ltd. Has held that Assessing Officer can adopt a reasonable basis to identify the expenses in relation to the earning of exempt income. Now in the present case, we find that the matter cannot be set aside to the files of Assessing Officer to apply Rule 8D as the said provision cannot be applicable for the current assessment year. Secondly, the assessee has urged that no expenditure has been identified to have been incurred to exempt income. Neither the Assessing Officer nor the ld. Commissioner of Income Tax (Appeals) has rebutted these submission. Assessing Officer has gone into to make the ad hoc estimate which is not sustainable in the light of the Hon'ble Punjab and Haryana High Court decision above.
6.4. Under such circumstances, we refer the Hon'ble Apex Court decision in the case of M/s Vegetable Products Ltd. 88 ITR 192, that in the taxing provision if two constructions are possible, one favouring assessee should be adopted.
6.5. Accordingly, following the precedent from the Hon'ble Punjab and Haryana High Court as above, we set aside the orders of the authorities below and decide the issue in favour of the assessee."
49. The ratio of this decision of the Tribunal is squarely applicable on the facts of the present case, therefore, we direct the Assessing Officer to decide the issue afresh in the light of the decision of the Tribunal (supra) which is after taking into consideration the decision of Hon'ble Punjab and Haryana High Court in the case of Hero Cycles Ltd. (supra). Accordingly, we restore this issue to the file of Assessing Officer to pass order afresh. We order accordingly.
38 ITA 2400 & CO 201/Del/11 Lloyd Insulation (India) Ltd.
50. In the result, the appeal of the department is partly allowed for statistical purposes and the cross objection of the assessee is allowed for statistical purposes.
Order pronounced in open court on 09-08-2012.
Sd/- Sd/- ( B.C. MEENA ) ( R.K. GUPTA ) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 09-08-2012. MP Copy to : 1. Assessee 2. AO 3. CIT 4. CIT(A) 5. DR