Income Tax Appellate Tribunal - Ahmedabad
Naranlala Pvt.Ltd.,, Navsari vs Assessee on 17 March, 2009
IN THE INCOME TAX APPELLATE TRIBUNAL
'C' BENCH - AHMEDABAD
(BEFORE S/SHRI BHAVNESH SAINI, JM AND A. K. GARODIA, AM)
ITA No.1831/Ahd/2009
A. Y.: 2006-07
Naran Lala Pvt. Ltd., Vs The D. C. I. T., Navsari Circle,
Near Railway Station, Navsari
Navsari
PA No. AAACN 7719 C
(Appellant) (Respondent)
ITA No.2128/Ahd/2009
A.Y.: 2006-07
The D. C. I. T., Navsari Circle, Vs Naran Lala Pvt. Ltd.,
Navsari Near Railway Station,
Navsari
PA No. AAACN 7719 C
(Appellant) (Respondent)
Assessee by Shri Sunil Talati, AR
Department by Shri G. S. Souryavanshi, Sr. DR
ORDER
PER BHAVNESH SAINI: Both the cross appeals are directed against the order of the learned CIT(A), Valsad dated 17-03-2009 for assessment year 2006-07.
2. We have heard the learned representatives of both the parties, perused the findings of the authorities below and considered the material available on record. Both the appeals are disposed of as under.
ITA No.1831 and 2128/Ahd/2009 2Naran Lala Pvt. Ltd.
ITA No.1831/Ahd/2009 (assessee's appeal)3. Grounds No.1 to 7 of the appeal of the assessee read as under:
"1. The learned C.I.T.(A) erred both in law and on facts in confirming the addition of Rs.78,68,282/- on account of Retention money which the appellant was not entitled to receive and which was retained by the customer for effective performance of the plants supplied. The learned C. I. T. (A) ought to have held that the amount of Rs.78,68,282/- did not accrue as income of the appellant and was not taxable for the year under appeal. It be so held now and the addition of Rs.78,68,282/- directed by the C. I. T.(A) in Para-7 of his order be deleted.
2. Without prejudice to the above the C. I. T. (A) further erred both in law and on facts in not appreciating that the appellant had been showing the income of the Retention money actually received during the year in the year of receipt and hence reduction of the actual amount received ought to have been given. It be so held now and direction may be given to reduce actual amount received during the year as also to reduce the same when received and offered to tax in future.
3. The learned C.I.T. (A) failed to appreciate the submission made that the facts for Assessment Year 1997-98 were different when there was change in the method for the first time. The learned C. I. T. (A) ought to have accepted the submission that for the year under appeal there is no change in the method of accounting with regard to treatment of Retention money and hence the decision of the I. T. A. T. for asst. Year 1997-98 is not applicable. It be so held now and the addition of Retention money be deleted.ITA No.1831 and 2128/Ahd/2009 3
Naran Lala Pvt. Ltd.
4. The learned C. I. T. (A) failed to appreciate that the various case laws cited before him including the decisions of the Gujarat High Court, had decided the issue in favour of the assessee. It be so held now and the addition of Retention money confirmed by the C. I. T.(A) be deleted.
5. The learned C. I. T. (A) erred in enhancing the disallowance of Retention money without any notice as the learned Assessing Officer had disallowed Rs.7 lakhs in the Assessment Order. It be so held now that the order of the learned C. I. T.(A) to the above extent is bad in law.
6. The order passed by the learned C. I. T. (A) is bad in law and contrary to the provisions of law and facts. It is submitted that the same be held so now.
7. The learned C. I. T. (A) ought to have allowed the appeal in toto."
4. The AO made the addition of Rs.7,00,000/- on account of retention money. The assessee is a manufacturer of distillery and alcohol based chemical plant and their equipments and had entered into specific agreement to effect the sale of plant and equipments with the purchaser at the site. During the year the assessee company has shown retention money of Rs. 78,68,282/- and excluded this sum from the profit. The assessee was asked to show cause as to why the retention money should not be added back to the total income in view of the findings of the department in preceding years. The show cause issued to the assessee company and the reply submitted has been duly reproduced by the AO in page numbers 3 to 5 of the assessment order. The AO observed that in the year prior to assessment year 1997-98 as per the method of accounting followed by the assessee ITA No.1831 and 2128/Ahd/2009 4 Naran Lala Pvt. Ltd.
company the retention money was part of sales. It was also observed by the AO that the retention money was a part of sales during the year as well but the assessee company has reduced the net figure deducting the same stating as retention money. Thus according to the AO the assessee has adopted both the system of accounting and manipulated its taxable income merely on the advice of a chartered accountant without going into the merits of the issuer, contrary to the accounting practice, which the assessee company has been following since very long time up to assessment year 1996-97. The AO also discussed the normal agreement of 'Payment Schedule' and Terms & Conditions of the purchase order placed by the customers, which is as under:-
Payment Schedule The price stipulated in "A" above shall be payable according to the terms of payment hereunder.-
For know-how, Basic Engineering and Detailed Engineering A, 10% at the time of signing the Agreement against submission of Indemnity Bond.
A. 10% at the time of signing the agreement against submission of Indemnity Bond.
B. 15% after submission of material balance, P & I Diagram, Floor-wise Equipment Layout Drawing with Load Data or within 30 days of signing of agreement, whichever is later.ITA No.1831 and 2128/Ahd/2009 5
Naran Lala Pvt. Ltd.
C. 65% against submission of various technical documents.
D. 10% within 30 days after commissioning and or performance test against Bank Guarantee for like amount towards Performance Guarantee to be effective for twelve months from the data of commissioning.
The assessee had been following a mercantile method of accounting and till assessment year 1996-97 the assessee consistently credited 100% of the amount as sales and accordingly the income was offered for taxation. However, from the assessment year 1997-98 a bona fide change in the method of accounting was adopted by the assessee whereby the retention money was credited separately and the same was offered as an income in the year of receipt as the receipt of the retention money is dependent upon the satisfactory supply and successful commissioning of plant to the customer after the expiry of the warranty period as well. Since assessment year 1997-98 the said method of accounting has been followed consistently and regularly by the assessee. The AO while disallowing the retention money of the current year Rs. 7,00,000/- contented that the assessee has changed its method of accounting wherein 90% of sale consideration is treated as trading receipt and balance 10% of sale consideration being retention money is to be treated as trading receipt after expiry of guarantee period mentioned in the agreement for performance of plant /equipments supplied to the client, as the actual payment of sale consideration was not received from client. The AO however, did not accept the contention of the assessee that balance 10% being ITA No.1831 and 2128/Ahd/2009 6 Naran Lala Pvt. Ltd.
retention money did not accrue to it till the expiry of guarantee period mentioned in the agreement entered in to with the client. It was the argument of the AO that there are only two recognized methods of accounting namely the cash method of accounting and the mercantile method of accounting. In mercantile method of accounting, entries are posted in the books of accounts on the date of transaction when the rights accrue or liabilities are incurred, irrespective of the date of payment. It was the finding of the AO that right to receive the said installment has accrued to the assessee and it cannot be diverted on the plea contrary to the accounting practice and with reference to its modus operandi under the Central Excise & Sales Act, Sales Tax Act and under Central Sales Tax Act, since the assessee company is following accrual method of accounting, a part of receipt cannot be taken on piecemeal / receipt basis. The AO further contented that the assessee had excluded the retention money from the profit, following the method of accounting whereby the said sum does not form part of sales in the normal course of preparing the profit & loss account. The assessee had excluded the amount of retention money from the sales / turnover though the same is a part of sales / turnover as stated in the invoice raised to the customer. The amount of retention money so excluded continues to be a part of sales / turnover of the purpose of sales tax and excise duty leviable there upon. The AO contented that although the assessee follows mercantile method of accounting; it excludes the retention money treating the same on receipt basis and thereby defers the accrual of income till the final payment is received after commissioning of the equipment. The assessee, following the ITA No.1831 and 2128/Ahd/2009 7 Naran Lala Pvt. Ltd.
mercantile method of accounting, effects and enters the sales in the same books of accounts paying indirect taxes thereupon and simply for the purpose of deferment of payment of direct taxes, resorted to such method of accounting which is not permitted. The AO contented that there can never be a piecemeal method of accounting for a common source of income, irrespective of method of accounting followed by the assessee, as there are only two recognized methods of accounting, it cannot be permitted to account for the receipt on piecemeal basis, where the expenditure in relation thereto is claimed in totality. The AO relied upon the following decisions wherein it is held that the transaction cannot be split in to mercantile and cash method of accounting (i) G Padmanabha Chattiyar & Sons vs CIT 182 ITR 1, 5 (Mad.), (ii) Reform Flour Mills Pvt. Ltd. vs CIT 132 ITR 184,196 (Cal) and (iii) CIT v/s A Krishnaswamy Mudaliar & Others 53 ITR 122 (SC). Further, the AO also relied upon the following cases where the Hon'ble Apex Court had held that the amount receivable has to be credited irrespective of the receipt thereof and the expenditure therefore has to be debited irrespective of the payment thereof in case of mercantile method of Accounting:-
i) Keshav Mills Ltd. Vs CIT (1953) 23 ITR 230,239 (SC)
ii) Calcutta Co Ltd. Vs CIT (1959) 37 ITR 1,3 (SC)
iii) CIT Vs Swadeshi Cotton & Flour Mills Pvt. Ltd. (1964) ITR 134,137 (SC) The learned Counsel for the assessee submitted that the AO has not appreciated the assessee's business. The assessee is engaged in ITA No.1831 and 2128/Ahd/2009 8 Naran Lala Pvt. Ltd.
the business of manufacture of distillery and alcohol based chemical plant and equipments including Ethyl Acetate Plant. These plants are sold to manufacturers of alcohol and other chemicals. To manufacture of such plants take a long time. In most of the cases the assessee gets turnkey contracts under which the assessee has to manufacture the plant on the basis of customer's requirements and has to ensure that the plant so manufactured and installed work properly during the guarantee period stated in the contract. The customer retain 10% or there about as "Retention Money" out of the contract amount. This amount is released after the specific guarantee period stated in respective contract is over after the date of commissioning of the plant. During this guarantee period if defects are noticed in the working of the plant and the assessee has to attend the defects and rectify the same and no separate charge can be made for this purpose. The assessee submitted that the retention money which was payable after expiry of plant performance guarantee period is over, did not accrue to it on the supply of plant / equipment, hence the same cannot be considered as income of the assessee as the amount did not accrue or become due at that time. Hence from, the assessee accordingly changed the treatment of accounting of retention money; there is no change in method of accounting. In support of this submission, the assessee relied on following decisions. The submission made by the assessee company is reproduced herewith for the sake of convenience:
1.6 The appellant submitted before the assessing officer that the retention money which -was payable after the plant was commissioned and worked for a ITA No.1831 and 2128/Ahd/2009 9 Naran Lala Pvt. Ltd.
certain period cannot be considered as income of the appellant as the amount did not accrue or become due at that time. In support of this submission the appellant relied on the decision of Calcutta High Court in the case of CIT V/s. Simplex Concrete Piles (India) Pvt. Ltd. 179 ITR 8 (Calcutta) In this case the company carried on the business of concrete piling for buildings. Up to the A.Y. 1994-95 the company credited 100% of the job value. However, from the A.Y. I965-B6, if credited only 90% deducting the retention money, which resulted in reduction of income. This method was not accepted by the Assessing Officer but the Tribunal accepted the method. The Tribunal held that it could not be said that the right to receive payment of the remaining 10% of the value of the job done accrued as soon as it was complete. The tribunal further held that since assessee was following mercantile system of accounting, it credited its accounts as and when the right to receive the sum accrued and that would be only in respect of 90% in the first instance when the job was done and the remaining only when it became due as per the terms of the contract.
When the matter went to the High Court it has held as under:
"That having regard to the terms & conditions of the contract it could not be held that either 10% or 5% as the case may be being retention money became legally due to the assessee on the completion of the work. Only after the assessee fulfilled the obligations under the contracts the retention money would be released And the assessee would acquired the right to receive such retention money Therefore on the date when the bills were submitted having regard to the nature of the contract no enforceable liability accrued or arose accordingly it could not be said that the assessee had any right to receive the entire amount ITA No.1831 and 2128/Ahd/2009 10 Naran Lala Pvt. Ltd.
on the completion of the work or on the submission of bills. The assessee had no right to claim any part of the retention money till the verification of satisfactory execution of the contract there fore the tribunal was right in holding that the retention money in respect of the jobs completed by the assessee during the relevant previous year should not be taken in to account in computing the profit of the assessee for the Assessment year in question ".
In arriving at the above conclusion the high court has followed the principles laid down by the Supreme Court in the case of JCIT V/s. Rajapathy Naidu (53 ITR 114) and Sheth Pushalal Mansinghaa (P) Limited V/s, CIT (66 ITR 159).
1.7 Similar question had arisen in the case of Hon'ble Gujarat High Court in the case of Anup Engineering Ltd. V/S CIT 247 ITR 457 held that the appellant company manufacturing vessels used in chemical industries and entered in to a contract with a party for supply and erection of a spray drying for a synthetic detergent plant. Under clause 14 of the contract, the said party had a right to retain 10% of contract amount. The retention amount cannot be treated as income at all. There could not be any tax, even though in books of accounts entry was made about a hypothetical income which did not materialized.
The learned Counsel for the assessee submitted that accounting of any income depends upon the right to receive the same income. In case of retention money, simply by raising invoice the right to receive does not arise, as the right to receive is dependent upon the satisfactory commissioning and installation of equipment. The learned Counsel for the assessee citing the decisions as relied upon by him ITA No.1831 and 2128/Ahd/2009 11 Naran Lala Pvt. Ltd.
submitted that it has been explained to the assessing officer that in cases of one party there were contracts involving retention money of Rs. 7 lacs and the details were given to the AO in the form of statements, copies of statements and a copy of the same was submitted before me. It was submitted that the assessee has shown retention money as its income as soon as it acquired right to receive retention money as per mercantile system of accounting though the appellant had not actually received retention money. The learned Counsel for the assessee also submitted before the learned CIT(A) that none of the cases as relied upon by the AO deals with the question of retention money, and are not relevant since the facts in those cases are different. The assessee submitted before the learned CIT(A) that there was no splitting of sale price and mixed method of accounting as assumed by the AO. The assessee also submitted before the learned CIT(A) that it is well settled principle that when the terms of contracts provide for retention money during the guarantee period, the income comprised in retention money would accrue only when the guarantee period is over and the said amount become due. It was further submitted by the assessee that the liabilities for the excise and sales tax depend on the provisions of the relevant enactments and these provisions are not determinative of the fact of accrual of income. It was also submitted that there is no saving of tax because during the guarantee period, the assessee has to incur cost of rectification of defects and that would to some extent off set the retention money is shown as income in the next year. The assessee also submitted before the learned CIT(A) that this issue has been decided in their favor by the CIT(Appeals)-III, Surat for assessment ITA No.1831 and 2128/Ahd/2009 12 Naran Lala Pvt. Ltd.
year 1998-1999. It was also submitted that for assessment year 2002-03 this office has also decided the issue in assessee's favour. The assessee submitted before the learned CIT(A) that the ITAT Ahmedabad Bench in the case of the assessee in ITA No. 740/Ahd/2001 for assessment year 1997-98 held that "Looking to the facts that the assessee itself was treating the accrual on the same transaction, there was no counter claim from the parties, in the facts of the assessee, we have to hold that assessee has changed method to differ payment of tax without any cogent legal basis. In view thereof, we up hold the order of owner authorities on this issue and this ground of appeal is dismissed. We shall, however, point out that if the assessee has offered retention money pertains to this year as income in subsequent year, the same should be excluded and AO will suitable relief as consequence."
The assessee submitted that in assessment year 1997-98, ITAT Ahmedabad had rejected the assessee's claim as there was change in accounting method of accounting. In assessment year 1996-97 wholesale proceeds was shown as income in profit & loss account, while in assessment year 1997-98 sales was shown in profit & loss account after deducting amount of retention money. But in current year, i.e. assessment year 2006-2007 there is no change in method of accounting as far as treatment of retention money. Treatment of retention money followed by the assessee in assessment years 2005- 06 and 2006-07 are same. So, the decision of the ITAT of assessment year 1997-98 is not applicable in the assessee's case because in assessment years 2005-06 and 2006-07 treatment of ITA No.1831 and 2128/Ahd/2009 13 Naran Lala Pvt. Ltd.
retention money as per mercantile system of accounting was same. In view of the above submissions the assessee submitted that the AO was not justified in making the addition of Rs.7,00,000/- being retention money in respect of the contract work. In the light of various judicial pronouncements stated above and relied upon by the assessee directly apply to the facts of the assessee's case. The disallowance of retention money amounting to Rs. 7,00,000/- may be deleted. It was further submitted by the assessee that if the claim of the assessee is not accepted and addition made by the AO is up held, the AO may be direct to give deduction of retention money Rs. 7,00,000/- credited by the assessee as business receipt in immediately succeeding year i.e. assessment year 2007-08 by passing order u/s 154 of the IT Act of immediately succeeding year.
5. The learned CIT(A) considering the submission of the assessee in the light of the order of the Tribunal in the assessee's own case for assessment year 1997-98 not only confirmed the addition made by the AO but enhanced the addition to Rs.78,68,282/- . His findings in Para 7 and 7.1 are reproduced as under:
7. I have perused the factual matrix of the case, the submission made by the appellant company and the judicial decisions as relied upon by both the assessing officer and the appellant company. The actual amount of retention money at the year ended on 31/03/2006 i.e. in A.Y. 2006-07 is Rs. 78,68,282/- and not Rs. 7,00,000/- added by the A.O. Considering the legal position referred to herein above one has to see whether a right had been created in favour of ITA No.1831 and 2128/Ahd/2009 14 Naran Lala Pvt. Ltd.
the appellant to receive a sum of Rs. 78,68,282/- which was claimed by way of deduction by the appellant in the relevant previous year. As per the terms of payment of contracts, balance 10% of contract being retention money accrued to the appellant after commissioning and effective performance test for certain period from the date of commissioning. It is well settled principle that when the terms of contracts provides for retention money during the guarantee period the income comprised in retention money would accrue only when the guarantee period is over and the said amount becomes due.
The liability for the excise and sales tax depends upon the provisions of the relevant enactments. These provisions are not determining of the facts of accrual of income under the Income Tax Act.
7.1 From the facts and relevant circumstances of the case and in the light of Hon'ble ITAT in the appellant's own case for A.Y. 1997-98. I respectfully follow the decision of the Hon'ble Ahmedabad ITAT in appeal No. 740/Ahd/2001 dated 09/02/2007 and held that the appellant has changed method of accounting to differ payment of tax. In the view thereof, I hold that the assessing officer was justified in making the addition of Rs. 78,68,282/- being the retention money. The appellant company does not succeed in this ground of appeal."
6. The learned Counsel for the assessee reiterated the submissions made before the authorities below and filed the details of retention amount from the financial year 1996-97 to the financial year 2010-11 and submitted that the issue is now settled by the Hon'ble ITA No.1831 and 2128/Ahd/2009 15 Naran Lala Pvt. Ltd.
Supreme Court in the case of Rotork Controls India P. Ltd. Vs CIT 314 ITR 62 in which it was held as under:
"Held, reversing the decision of the High Court, that the valve actuators, manufactured by the assessee, were sophisticated goods and statistical data indicated that every year some of these were found defective; that valve actuator being a sophisticated item no customer was prepared to buy a valve actuator without a warrant. Therefore, the warranty became an integral part of the sale price; in other words, the warranty stood attached to the sale price of the product. In this case the warranty provisions had to be recognized because the assessee had a present obligation as a result of past events resulting in an outflow of resources and a reliable estimate could be made of the amount of obligation. Therefore, the assessee had incurred a liability during the assessment year which was entitled to deduction under section 37 of the Income- tax Act, 1961.
The present value of a contingent liability, like the warranty expense, if properly ascertained and discounted on accrual basis can be an item of deduction under section 37. The principle of estimation of the contingent liability is not the normal rule. It would depend on the nature of the business, the nature of sales, the nature of the product manufactured and sold and the scientific method of accounting adopted by the assessee. It would also depend upon the historical trend and upon the number of articles produced.
A provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when: (a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources will be required ITA No.1831 and 2128/Ahd/2009 16 Naran Lala Pvt. Ltd.
to settle the obligation, and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision can be recognized.
The principle is that if the historical trend indicates that a large number of sophisticated goods were being manufactured in the past and the facts show that defect existed in some of the items manufactured and sold, then provision made for warranty in respect of such sophisticated goods would be entitled to deduction from the gross receipts under section 37."
6.1 He has also relied upon the decision of the Hon'ble Punjab & Haryana High Court in the case of CIT Vs Subrata Dutta Choudhary 197 Taxman 71, in which it was held as under"
"1. Section 28(i), read with section 5, of the Income-tax Act, 1961 - Business income - Year in which chargeable - Assessment year 2004-05 - Assessee got purchase order from a buyer for supply of mash seem welder equipment for certain contract price - As per terms of payment only 85 per cent of contract price was paid to assessee in year under consideration and remaining 15 per cent was paid in subsequent years on fulfillment of certain conditions
- However, Assessing Officer added amount of aforesaid 15 per cent also to assessee's income for year under consideration on ground that assessee was following mercantile system of accounting and since he had booked expenses of purchase of material and other manufacturing expenses in profit and loss account on mercantile system of accounting and had supplied machinery to buyer, he was bound to show entire sale price of machinery - On appeal, Commissioner (Appeals) and Tribunal deleted addition on ground that assessee had not acquired ITA No.1831 and 2128/Ahd/2009 17 Naran Lala Pvt. Ltd.
right to receive 15 per cent of price till conditions of contract were fulfilled - Whether, on facts, there was no ground to interfere with concurrent findings of Commissioner (Appeals) and Tribunal - Held, yes."
6.2 He has also submitted that out of the retention amount, the assessee spent expenditure which should have to be taken into consideration by the AO, but such expenses have not been taken into consideration and have not been verified by the AO. Therefore, verification of above facts of incurring of expenses by the assessee out of retention amount is necessary, as in some years expenses were more than the retention amount.
6.3 The learned Counsel for the assessee submitted that since the above decision are in favour of the assessee; therefore, earlier decision of the Tribunal would no longer apply against the assessee. He has submitted that since the AO did not examine the facts of the case in the light of the above decisions delivered later on after passing of the assessment order, therefore, matter may be remanded to the file of the AO for reconsideration of the decision in accordance with law.
7. The learned DR did not have any objection for remanding the matter to the file of the AO for reconsideration of the issue as per the above decisions.
8. On consideration of the facts of the case it is clear that earlier the issue was decided against the assessee by ITAT Ahmedabad Bench in the case of the assessee itself, copies of the same are filed ITA No.1831 and 2128/Ahd/2009 18 Naran Lala Pvt. Ltd.
in the paper book. The authorities below have gone by the findings given against the assessee in the earlier years and confirmed the addition on this issue. Therefore, complete facts of the case were not examined and verified including the amount if any incurred by the assessee for business purpose out of the retention amount. However, after passing of the impugned orders, there is a change on the matter in issue and the points have now been decided in favour of the assessee which is also not disputed by the learned DR. However, the authorities below have no occasion to examine the facts of the case in the light of the above decisions cited by the learned Counsel for the assessee. Both the parties agreed that the matter may be remanded to the file of the AO for reconsideration of the issue in the light of the decision delivered by the Hon'ble Punjab & Haryana High Court and the Hon'ble Supreme Court (supra). We find force in the submissions of both the parties that the matter requires reconsideration in the light of the above decisions. We accordingly, set aside the orders of the authorities below and restore this issue to the file of the AO for reconsideration of the same in the light of the above decisions cited by the learned Counsel for the assessee. The AO shall also verify the details filed by the assessee on this issue and shall pass reasoned order in accordance with law by giving reasonable sufficient opportunity of being heard to the assessee. In the result, these grounds of appeal of the assessee are allowed for statistical purposes.
9. On ground No.8 of the appeal, the assessee challenged the disallowance of Rs.10,000/- out of printing and stationery expenses ITA No.1831 and 2128/Ahd/2009 19 Naran Lala Pvt. Ltd.
etc. The revenue on ground No.4 of the appeal challenged the order of the learned CIT(A) in granting relief of Rs.49,275/- on the same issue. Both the grounds are, therefore, considered together. The AO disallowed Rs.59,275/- on this issue being one tenth of various expenses like printing and stationery, postage and telegram, office expenses etc. The AO discussed this issue in Para 8 of the assessment order and observed that vouchers for small amount were not verifiable in terms of date and name of the payee etc. and the vouchers of small amount were not available for verification. It was submitted before the learned CIT(A) that the finding of the AO is incorrect that vouchers of small amount were not produced for verification. The assessee produced all the vouchers before the AO along with complete details of these expenses and the same contained the name of the payees also and since complete details were filed, therefore, nothing should be disallowed. The learned CIT(A) on consideration of the details noted that copies of the accounts of these expenses have been produced before him and would support the contention of the assessee to be correct. It was noted that the assessee kept all the details of the expenses and disallowance was made on mere suspicion on the part of the AO. The learned CIT(A), therefore, noted that disallowance out of these expenses and others are restricted to Rs.10,000/- is deleted. It was also noted that the assessee succeeds in this ground of appeal.
10. On consideration of the submissions of the parties, we do not find any justification to sustain even part of the addition. The assessee specifically pleaded before the learned CIT(A) that the ITA No.1831 and 2128/Ahd/2009 20 Naran Lala Pvt. Ltd.
assessee kept all the vouchers which were also produced before him for verification. The learned CIT(A) found the submission of the assessee to be correct. The learned CIT(A) also noted that disallowance made by the AO is merely on suspicion. After that the learned CIT(A) held that disallowance out of these expenses are restricted to Rs.10,000/- is deleted and further this ground was allowed. It would, therefore, show that the learned CIT(A) was satisfied with the explanation of the assessee and there is a confusion in his finding because in earlier stage the learned CIT(A) stated that disallowance is made merely on suspicion and also allowed the appeal of the assessee on this ground. However, in between it was noted that disallowance out of these expenses are restricted to Rs.10,000/- is deleted. Nothing was produced before us to contradict the findings of the learned CIT(A), therefore, it appears to be ad hoc addition made by the AO and in confusion confirmed by the learned CIT(A) at Rs.10,000/-. Considering these facts, part of the disallowance is also not permissible. We accordingly, confirm the findings of the learned CIT(A) in deleting the addition and also direct that the addition of Rs.10,000/- if any shall also be deemed to have been deleted. In the result, the appeal of the assessee on this ground is allowed and the departmental appeal on ground No.4 is dismissed.
11. In the result, the appeal of the assessee is partly allowed as indicated above.
ITA No.1831 and 2128/Ahd/2009 21Naran Lala Pvt. Ltd.
ITA No.2128/Ahd/2009 (departmental appeal)12. On grounds No.1 and 2 of the appeal, the revenue challenged the deletion of addition of Rs.37,44,298/- on account of bad debt. The AO disallowed the above amount on account of bad debt. It was submitted before the learned CIT(A) that the AO has erred in not considering the amended provisions of section 36(1) (vii) of the IT Act after 01-04-1989 because mere writing off of the bad debt in the books of accounts is sufficient compliance to delete the addition. The AO however, contended that the assessee has not furnished documentary evidence that such debts became irrecoverable and no evidence of taking any steps for recovery has been made. The submission of the assessee is reproduced in the appellate order in which the assessee explained that bad debt pertains to 7 parties which were written off as irrecoverable in the books of accounts. It was also briefly stated that the assessee has made all efforts for recovery of the due against these parties but the assessee could not recover any amount from them. Therefore, the management considering the facts and circumstances of each debt identified the same as bad and written off in the books of accounts as irrecoverable. The assessee relied upon several decisions in support of the contentions including the decision of ITAT Mumbai Special Bench in the case of Oman International Ltd. 100 ITD 285. The learned CIT(A) considering the amended provisions of law in section 36 (1) (vii) of the IT Act applicable to the assessment year under appeal noted that the assessee has written off the debts as irrecoverable in the books of accounts during the relevant financial ITA No.1831 and 2128/Ahd/2009 22 Naran Lala Pvt. Ltd.
year as per law, therefore, claim of the assessee shall have to be allowed. Addition was accordingly deleted.
13. The learned representatives of both the parties submitted that the issue is now covered in favour of the assessee by the judgment of the Hon'ble Supreme Court in the case of T. R. F. Ltd. Vs CIT 323 ITR 397 in which it was held as under:
"This position in law is well-settled. After 1st April, 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 Assessing Officer 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. As stated above, the Assessing Officer has not examined whether, in fact, the bad debt or part thereof is written off in the accounts of the assessee. This exercise has not been undertaken by the Assessing Officer. Hence, the matter is remitted to the Assessing Officer for de novo consideration of the above-mentioned aspect only and that too only to the extent of the write off."
It is, therefore, stated that the departmental appeal may be dismissed accordingly.
ITA No.1831 and 2128/Ahd/2009 23Naran Lala Pvt. Ltd.
14. On consideration of the above facts, we are of the view the issue is covered in favour of the assessee by the judgment of the Hon'ble Supreme Court in the case of T. R. F. Ltd. (supra). Since, the assessee complied with the conditions of the amended provisions of the law, therefore, the learned CIT(A) rightly deleted the addition. Grounds No.1 and 2 of the appeal of the revenue are accordingly dismissed.
15. On ground No.3 of the appeal, the revenue challenged the deletion of Rs.1,39,238/- on account of disallowance of labour charges. The AO the made the above addition being 2% of the labour charges and observed that vouchers for small amounts are not verifiable in terms of date, name of the payee and signature thereof. It was submitted before the learned CIT(A) that the assessee kept all the vouchers and produced the same before the AO, therefore, addition is unjustified. It was submitted that except small amounts were paid in cash, most of the payments were made through account payee cheques and the parties are assessed to tax, therefore, no disallowance should be made. The learned CIT(A) on examining the details filed before him found the contention of the assessee to be correct and noted that the assessee kept all the records of labour expenses, therefore, addition is made on mere suspicion. Addition was accordingly deleted.
16. On consideration of the rival submissions, we do not find any justification to interfere with the order of the learned CIT(A) in deleting the addition. It appears to be ad hoc addition made by the AO which ITA No.1831 and 2128/Ahd/2009 24 Naran Lala Pvt. Ltd.
was rightly deleted by the learned CIT(A) on examination of the facts and material on record. Ground No.3 of the appeal of the revenue has no merit and is dismissed.
17. Ground No.4 of the appeal of the revenue is already dismissed while considering the appeal of the assessee. Other grounds No.5, 6 and 7 are general in nature and calls for no specific finding.
18. In the result, the departmental appeal fails and is dismissed.
19. In the result, the appeal of the assessee is partly allowed whereas the departmental appeal is dismissed.
Order pronounced in the open Court on 17-06-2011 Sd/- Sd/-
(A. K. GARODIA) (BHAVNESH SAINI)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Date : 17-06-2011
Lakshmikant/-
Lakshmikant/-
Copy of the order forwarded to:
1. The Appellant
2. The Respondent
3. The CIT concerned
4. The CIT(A) concerned
5. The DR, ITAT, Ahmedabad
6. Guard File
BY ORDER
Dy. Registrar, ITAT, Ahmedabad