Income Tax Appellate Tribunal - Delhi
Lotus Overseas Pvt. Ltd., New Delhi vs Department Of Income Tax on 1 July, 2010
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI 'D' BENCH BEFORE
SHRI C.L. SETHI, JM & SHRI A.N. PAHUJA, AM
ITA No.4446/Del/2010
Assessment Year:2006-07
Income Tax Officer, V/s. M/s Lotus Overseas Pvt.
W ard-4(4),Room no. Ltd., SF-9, Bhikaji Cama
234B,Central Revenue Bhawan, Bhikaji Cama
Building,I P Estate Place, New Delhi
New Delhi
[PAN:AAACL 0393 E]
(Appellant) (Respondent)
Assessee by None[written submissions]
Revenue by Ms. Y. Kakkar, DR
Date of hearing 21-09-2011
Date of pronouncement 30-09-2011
ORDER
A.N.Pahuja:- This appeal by the Revenue filed on 5.10.2010 against an order dated 1st July, 2010 of the learned CIT(A)-VII, New Delhi, raises the following grounds:-
1 "The order of the CIT(A) is erroneous & contrary to facts and law.
2 On the facts and circumstances of the case and in law, the learned CIT(A) has erred in deleting the addition of `1,53,874/-
made by the Assessing Officer on account of bad debts.
2.1 The learned CIT(A) ignored the fact that the assessee did not file any evidence to substantiate its claim of bad debts and even did not file the names and addresses of the parties whose debts were written off.
3 On the facts and in circumstances of the case and in law, the learned CIT(A) has erred in directing the Assessing Officer to allow depreciation @15% on office equipment as against 10% allowed by the Assessing Officer.
2 ITA no.4446/Del./2010 3.1 The learned CIT(A) ignored the fact that according to Income-
tax Act the depreciation on office equipment is allowable @10% and not @15% as claimed by the assessee.
4. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in restricting the addition of `9,70,525/- to Rs.2,50,000/- made by the Assessing Officer by disallowing the staff contract expenses.
4.1 The learned CIT(A) ignored the fact that the assessee neither deducted tax at source on these payments nor filed any details of the parties to whom the payments in question were made.
5. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in deleting the addition of `53,350/- made by the Assessing Officer on account of allowances sales.
5.1 The learned CIT(A) ignored the fact that these expenses pertains to prior period as confessed by the assessee vide letter dated 24.11.2008 and are not allowed in the year under consideration.
6. The appellant craves leave to add, to alter, or amend any grounds of the appeal raised above at the time of hearing."
2. At the outset, none appeared before us on behalf of the assessee nor any request for adjournment has been filed even when earlier adjournments were granted on 3.3.2011 & 7.6.2011 on the request of the counsel of the assessee. Instead, written submissions have been filed. In these circumstances, the Bench decided to dispose of the appeal after hearing the ld. DR in the light of aforesaid written submissions.
3. Adverting first to ground nos. 2 and 2.1 in the appeal, facts, in brief ,as per relevant orders are that return declared nil income filed on 24.11.2006 by the assessee, engaged in the restaurant business, after being processed on 20th August, 2007 u/s 143(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act") was selected for scrutiny with the service of a notice u/s 143(2) of the Act issued on 28th September, 2007. During the course of assessment proceedings, the Assessing Officer ('AO' in short) noticed that the assessee 3 ITA no.4446/Del./2010 debited an amount of `1,78,874/- towards bad debts. To a query by the AO, seeking details of these bad debts including name and address of the parties, reasons for write off and statement of their accounts in the books of the assessee, it was replied that despite their best efforts recovery became impossible and amounts had been written off. Except for an amount of `25,000/- the assessee did not furnish name & address of the parties nor their statement of accounts or even reasons for write off. In these circumstances, the AO disallowed an amount of `1,53, 874/-.
4. On appeal, the learned CIT(A) allowed the claim of the assessee in the following terms:-
"4.1 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 off debt. The question of applicability of section 36(l)(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 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.
4.2 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 allow ability of Bad Debts written off has been settled by the Hon'ble Supreme Court in T.R.F. Ltd. v. CIT [2010 ) 190 TAXMAN 391 (SC) where in it has been held as under:-
"2. In these appeals, we are concerned with assessment year 1990-91 and assessment year 1993- 4 ITA no.4446/Del./2010
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 hereinbelow provisions of section 36(1 )(vii) of the Act, both prior to 1-4-1989 andpost-1-4-1989:
" Pre-1-4-1989
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 debt. or part thereof: which is established to have become a bad debt in the previous year."
Post-1st April, 1989:
36. Other deductions.-(1) The deductions provided for in the of owing clauses shall he allowed in respect of the matters dealt with therein, in computing the income referred 10 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."
This position in law is well-settled. After 1-4-1989, it is not necessary (or 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 Assessing Officer has not examined 5 ITA no.4446/Del./2010 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. "
4.3 In the present case, the copies of the balance sheet for F. Y.1995-96 onwards were produced by the appellant. The perusal of the balance sheet for the F. Y.1995-96 shows that an amount of Rs.6,83,674/- was shown as "sundry debtors" in the said year. This implies that the income pertaining to the above amount was reflected in the accounts and the same was taken into account in computing the income of the assessee of the F.Y.1995-96. It is also observed that the said amount continued to be carried forward in the balance sheet of the subsequent years also because the same could not be realized. Therefore, I am of the considered view that in the present case, assessee has fulfilled all the aforestated 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.1,53,874/- out of bad debt written off. Therefore, the A.O. is directed to delete the said addition. As a result, Ground No. 2 is allowed.
5. The Revenue is now in appeal before us against the aforesaid findings of learned CIT(A). The ld. DR while inviting our attention to the assessment order pointed out that the assessee did not submit any details before the AO nor established as to whether or not the amount was disclosed as income in the earlier years. On the other hand, the learned CIT(A) while referring to balance sheet of the assessee for the financial year 2005-06 inferred that the amount was reflected in the accounts and had been taken into account in the income of the assessee for the financial year 1995-96. There is nothing to suggest that the amount of Rs.1,53,874/- was embedded in the debtors of Rs.6,73,674/- shown in the balance sheet as on 31st March, 1996. The assessee in its written submissions merely reiterated what was submitted before the learned CIT(A) and the AO.
6 ITA no.4446/Del./2010
6. We have heard the learned DR and gone through the written submissions filed on behalf of the assessee. Indisputably, the assessee did not furnish details of bad debts desired by the AO nor established that the amount of `1,53,874/- was reflected in the income of the assessee in the earlier years. The learned CIT(A) while referring to balance sheet of the assessee as on 31st March, 1996 inferred that the amount was taken into account in computing the income of the assessee for the financial year 1995-96. There is nothing to suggest as to whether or not the amount of `1,53,874/- is embedded in the sundry debtors of `6,83,674/- for the financial year 1995-96 or has been included in the income of the assessee for the said assessment year. The impugned order is cryptic and does not bring out clearly as to how the assessee fulfilled conditions stipulated u/s 36(2)(i) of the Act. In these circumstances, we have no alternative but to vacate the findings of learned CIT(A) and restore the matter to his file with the directions to readjudicate the issue ,bringing out clearly as to whether or not the assessee fulfilled the conditions stipulated u/s 36(2)(i) of the Act and the amount of `1,53,178/- was embedded in the figure of `6,83,674/- for the financial year 1995-96 and was shown as income in the said assessment year or any other assessment year ,after allowing sufficient opportunity to both the parties. With these directions, ground nos. 2 & 2.1 in the appeal are disposed of.
7. Ground nos.3 and 3.1 in the appeal relate to restriction of depreciation to 10% as against claim of 15% on the office equipment. During the course of assessment proceedings, the AO noticed that the assessee claimed depreciation @15% on the assets under the head office equipment. However, the AO restricted the claim to 10% of the WDV of the office equipment and fax machine, resulting in disallowance of Rs.17,725 +290/-.
8. On appeal, the learned CIT(A) allowed the claim of the assessee in the following terms:-
"5.1 I have carefully gone through the assessment order, the written and oral submission(s) of the appellant and the facts on record. The perusal of the depreciation table as per New Appendix I (which is 7 ITA no.4446/Del./2010 effective for assessment year 2006-07) reveals that the allowable depreciation on Machinery and Plant is 15% of the written down value. The Assessing officer has not given any finding which could make it clear that depreciation is allowable on office equipments and fax machine @ 10%.It is also observed that the A.O. has not made any finding that the said items fall in the category of furniture and fittings on which allowable depreciation is 10%. In the background of the facts stated above, I do not find any reason to form an opinion that the Office equipments and Fax machine are to be taken under the category of" Furniture and Fittings" on which allowable depreciation is 10% and not under the category of "Machinery and Plant" on which allowable depreciation is 15%. In view of the aforesaid, it is held that the office equipments and fax machine fall under the category of Machinery and Plant on which allowable depreciation is 15%. Subject to the above remarks, the A.O. is directed to allow depreciation @15% on the written down value of office equipments and fax machine, declared by the appellant in its accounts and statement of fixed assets for the year under consideration. As a result, Ground of appeal No.3 is allowed"
9. The Revenue is now in appeal before us against the aforesaid findings of learned CIT(A). The ld. DR supported the order of the AO while the assessee in their written submissions reiterated what was submitted before the learned CIT(A).
10. We have heard the learned DR and gone through the facts of the case as also the written submissions. We find that the extant appendix-1 in the Income- tax Rules,1962 stipulates depreciation @15% of the written down value of the plant and machinery. The AO in the assessment order did not identify the relevant entry of appendix-1 under which depreciation could be restricted to 10% nor brought out clearly as to how the office equipments could be categorised as furniture and fittings. Since the learned DR did not place any material before us, controverting the aforesaid findings of learned CIT(A), so as to enable us to take a different view in the matter, we are not inclined to interfere with the findings of learned CIT(A). Therefore, ground nos.3 & 3.1 in the appeal are dismissed.
11. Ground no.4 in the appeal relates to disallowance of `9,70,525/- on account of staff contract expenses. The AO noticed that the assessee debited 8 ITA no.4446/Del./2010 an amount of `9,70,525/- on account of staff on contract as against nil expenses in the preceding year. To a query by the AO, the assessee replied that they hired temporary staff during the peak season from October to March on contract basis. However, since the assessee did not furnish name and address of the persons nor the nature of work done by him nor even deducted tax at source, keeping in view the sales in the year under consideration vis-a-vis preceding year, the AO disallowed the aforesaid amount on the ground that there was no justification for incurring huge expenditure for the first time in the year under consideration.
12. On appeal, the learned CIT(A) restricted the disallowance to `2,50,000/- in the following terms:-
"6.1 I have carefully considered the above submissions made on behalf of the appellant and the facts and circumstances under which the said addition was made by the Assessing Officer. Considering the totality of the facts and circumstances of the case. I am of the considered view that the onus of proving necessary facts in order to avail the deduction u/s 37(1) has not been fully discharged. This also implies that the appellant has failed to establish the facts necessary to support its claim for deduction u/s 37(1) to the complete extent of hundred percent. Therefore, the claim for deduction of expenditure is not fully admissible and I hold that it is fair to disallow a sum of Rs.2,50,000/- out of the impugned expenses. As a result, the appellant gets a relief of Rs.7,20,525/- (Rs.9,70,525 -Rs.2,50,000/-). Subject to the above remarks, ground No.4 is partly allowed."
13. The Revenue is now in appeal before us against the aforesaid findings of learned CIT(A) in allowing the relief of `7,20,525/-. The ld. DR while inviting our attention to the findings of the AO contended that the assessee did not even furnish name of the persons or the nature of work done by them nor deducted tax at source from payments to the alleged staff on contract. Since the ld. CIT(A) himself concluded that the assessee failed to establish the facts necessary to support its claim for deduction u/s 37(1) of the Act, he was not justified in allowing any relief to the assessee, the ld. DR vehemently argued. On the other 9 ITA no.4446/Del./2010 hand, the assessee in their written submissions reiterated what was submitted before the learned CIT(A).
14. We have heard the learned DR and gone through the facts of the case as also the written submissions on behalf of the assessee. We find that the assessee did not furnish any details viz. name and address of the persons, nature of work done by them, before the AO nor adduced any reasons as to why tax was not deducted at source from the contractor wages of `9,70,525.55. We find from details placed at page 164 to 185 of the paper book that except few payments ,most of the amounts have been paid in cash to various persons. There is nothing to suggest as to whether or not the submissions/details filed by the assessee were confronted by the learned CIT(A) to the AO nor the basis for restriction of disallowance to `2,50,000/- is evident from the impugned order. In these circumstances, especially when the ld. CIT(A) himself concluded that the assessee failed to establish the facts necessary to support its claim for deduction u/s 37(1) of the Act to the complete extent of hundred percent, we consider it fair and appropriate to vacate the findings of learned CIT(A) and restore the matter to his file with the directions to re-adjudicate the claim in accordance with law in the light of our aforesaid observations after allowing sufficient opportunity to both the parties, bringing out clearly as to whether or not expenditure was incurred wholly and exclusively for the purpose of the business of the assessee. With these directions ground nos.4 and 4.1 in the appeal are disposed of.
15. Ground nos.5 & 5.1 relate to disallowance of `55,350/- on account of allowances on sales. The AO noticed during the course of assessment proceedings that the assessee adjusted an amount of `55,350/- on account of old sundry debtors pertaining to earlier years. To a query by the AO, the ld. AR on behalf of the assessee did not object to the disallowance. Accordingly, the amount of `55,350/- was disallowed. However, the assessee preferred an appeal before the learned CIT(A), who allowed the claim on the ground that the liability to pay the allowances pertaining to earlier years was crystallized during the year under consideration. The relevant findings of the learned CIT(A) read as under:-
10 ITA no.4446/Del./2010 "8.1 I have carefully considered the above submission made on behalf of the appellant and the facts and circumstances under which the said addition was made by the AO. It is now a well settled proposition that crystallization of the liability on a future date would necessarily relate back to the earlier period but the entitlement to a deduction would have reference to the date on which the liability gets crystallized. In this context, reliance is placed on the decision of the jurisdictional High Court of Delhi in CIT vs. Shriram Pistons & Rings Ltd.(2008) 174 Taxman 147(Delhi)/220 CTR 404(Delhi).In the instant case, there is no dispute over the fact that the liability to pay allowances(Sales) pertaining to earlier years was crystallized during the previous year relevant to assessment year 2006-07.Under the circumstances stated above, I am of the considered view that AO was not justified in disallowing the sum of Rs.55,350/- on account of allowances(sales).As a result, Ground no.6 is allowed granting relief of Rs.55,350/-."
16. The Revenue is now in appeal before us against the aforesaid findings of learned CIT(A). The learned DR while inviting our attention to the impugned orders contended that after having agreed before the AO for disallowance of the said amount, the learned CIT(A) was not justified in admitting the appeal of the assessee on the issue. Even otherwise, there is nothing to suggest as to whether or not the liability to incur the said amount crystallized in the year under consideration. On the other hand, the assessee in the written submissions merely reiterated what was submitted before the learned CIT(A).
17. We have heard the learned DR and gone through the facts of the case as also the written submissions on behalf of the assessee. We find that the assessee having agreed before the AO for disallowance, preferred appeal before the ld. CIT(A), who allowed the claim on the ground that the liability to pay allowances (sales) pertaining to earlier years was crystallized during the year under consideration. However, as pointed out by the learned DR, there is no material on record to justify as to how the liability for the amount of Rs.55,350/- crystallized in the year under consideration. In the absence of any basis, we have no alternative but to vacate the findings of learned CIT(A) and restore the matter back to his file with the directions to re-adjudicate the claim after allowing sufficient opportunity to both the parties, bringing out clearly as to how the liability 11 ITA no.4446/Del./2010 on account of Rs.55,350/- adjusted with the allowance written off, crystallized in the year under consideration. With these directions, ground nos.5 and 5.1 in the appeal are disposed of.
18. Ground no.1 in the appeal being general in nature nor any submissions having been made before us on this ground, does not require separate adjudication while no additional ground has been raised before us in terms of ground no.6 in the appeal, accordingly, these grounds are dismissed.
19. In result, appeal is allowed but partly for statistical purposes.
Order pronounced in Open Court
Sd/- Sd/-
(C.L. SETHI) (A.N. Pahuja)
(Judicial Member) (Accountant Member)
NS
Copy of the Order forwarded to:-
1. Income Tax Officer, Circle 4(4), New Delhi.
2. M/s Lotus Overseas Pvt. Ltd., SF-9, Bhikaji Cama Bhawan, Bhikaji Cama Place, New Delhi
3. CIT (Appeals)-VII, New Delhi
4. The CIT concerned.
5. The DR, ITAT,'D' Bench, New Delhi
6. Guard File.
BY ORDER, Deputy/Asstt.Registrar ITAT, Delhi