M/S Jupiter Aqua Lin... v. The Dcit Circle-6(1)..., Income Tax Appellate Tribunal, Judgment, Law, casemine.com

Citation Codes

Equivalent Citations

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Case Number

ITA Nos. 1361 & 1362.CHD/2012, Assessment Years: 2008-2009 & 2009-10

Advocates

Appellant by: Shri Tej Mohan Singh
Respondent by: Shri Akhilesh Gupta

Judges

Shri T.R Sood, A.M
Ms. Sushma Chowla, J.M

Acts

section 36(1)(vii) of the Income-tax Act, 1961,

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Smart Summary

Factual and Procedural Background

These consolidated summaries concern two appeals filed by the assessee against separate orders of the Learned Commissioner of Income Tax (Appeals), Chandigarh dated 8.11.2012.

ITA No. 1361/Chd/2012 — Assessment Year 2008–09: The assessee appealed against confirmation by the CIT(A) of the Assessing Officer's treatment of bad debt claims. The Assessing Officer had allowed 50% of claimed bad debts (Rs. 23,44,363 total claimed; 50% allowed in the current year and 50% in the next year) because documentary evidence of recovery efforts was not on record. The CIT(A) confirmed the AO's action. The assessee sought full allowance of the written-off debts.

ITA No. 1362/Chd/2012 — Assessment Year 2009–10: The assessee raised multiple grounds including (a) the same bad-debt-related challenge as in AY 2008–09; (b) challenge to an addition of Rs. 9,37,435 computed as gross profit (G.P.) on short stock of Rs. 32,85,787 discovered during a survey on 15.7.2008; and (c) challenge to the charging of interest under sections 234B & 234C. The CIT(A) had confirmed the AO's actions on these points.

Legal Issues Presented

Whether the dismissal of the appeal as ex parte on the ground that no application for adjournment was received was justified (ground raised but not pressed by the assessee).
Whether the Assessing Officer (and CIT(A)) were justified in disallowing 50% of the amounts claimed and written off as bad debts (i.e., whether the entire amount of bad debts written off in the assessee's books is deductible in the year of write-off).
Whether an ad hoc disallowance of bad debts without identifying which specific debts had not become irrecoverable was legally sustainable.
Whether allowance of part of the claim in the subsequent year implies the original claim was bona fide and therefore should be allowed in the year of write-off.
Whether the addition of Rs. 9,37,435 (computed as G.P. on a short stock of Rs. 32,85,787 found during a survey) was justified on the material before the AO and CIT(A).
Whether the charging of interest under sections 234B & 234C was justified in the facts of the case (raised but not the focus of detailed disposal in the provided text).

Arguments of the Parties

Assessee's Arguments

For AY 2008–09: The amounts were trade debts written off as irrecoverable in the assessee's accounts and therefore deductible — reliance was placed on the Supreme Court decision in TRF Ltd. v. CIT (323 ITR 397 (SC)).
For AY 2009–10 (stock-shortage issue): The assessee produced a revised/updated trading account (letter dated 10.10.2008) and reconciliations showing closing stock at a lower figure than that first shown in the tentative trading account at the time of survey; the variance in figures was largely on account of sales not yet posted because the assessee awaited transport challans (freight adjustment on F.O.R. supplies), implying there was little or no real deficiency in stock.

Revenue's (Ld. DR) Arguments

For AY 2008–09: No documentary evidence was filed before the Assessing Officer or CIT(A) to demonstrate that the debts had in fact become bad; therefore, the AO's action in allowing only 50% was justified.
For AY 2009–10: No reconciliation or supporting details had been filed before the Assessing Officer; the AO's (and CIT(A)'s) additions were supported by survey findings and post-survey enquiries.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
TRF Ltd. v. CIT, 323 ITR 397 (SC)	After the amendment of section 36(1)(vii) of the Income-tax Act, 1961 (with effect from 1.4.1989), 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 sufficient if the bad debt is written off as irrecoverable in the accounts of the assessee.	The Tribunal relied on this Supreme Court decision to conclude that the statutory condition requiring proof of irrecoverability no longer applied post-amendment. On that basis, and because the writing off of debts in the assessee's accounts was not disputed by the AO, the Tribunal directed allowance of the full amount of bad debts in the year of write-off and the withdrawal of the deduction allowed in the subsequent year.

Court's Reasoning and Analysis

The Tribunal's analysis proceeded as follows:

Grounds relating to adjournment (ground No. 1 in both appeals): The Tribunal recorded that the assessee's counsel did not press the ground of adjournment in each appeal; accordingly those grounds were dismissed as not pressed.
Bad-debt issues (AY 2008–09 and the parallel issue in AY 2009–10): The AO had allowed only 50% of the claimed written-off amounts in the current year and treated the balance in the next year because the AO found no documentary evidence of recovery efforts (correspondence or litigation). On appeal, the Tribunal considered the statutory position post-amendment to section 36(1)(vii) (w.e.f. 1.4.1989) and the authoritative exposition in TRF Ltd. v. CIT. The Tribunal quoted the headnote of TRF Ltd. to the effect that post-amendment it is sufficient that bad debts are written off in the accounts; it is not necessary to prove debts are irrecoverable by extraneous evidence.
The Tribunal verified the assessee's accounts and observed that the accounts showed the debts had been written off and that the Assessing Officer did not dispute the fact of write-off. Applying TRF Ltd., the Tribunal concluded the entire claimed amount should be allowed in the year of write-off. It therefore set aside the CIT(A)'s confirmation and directed the AO to allow the whole claimed bad debt for AY 2008–09 and to withdraw the deduction allowed in the subsequent year (to avoid double allowance).
Stock-shortage / gross-profit addition (AY 2009–10): The AO's addition of Rs. 9,37,435 (computed as 28.53% gross profit on a short stock of Rs. 32,85,787 identified at survey) was based on a comparison between books' closing stock and physical stock at the time of survey. On appeal the assessee produced a revised trading account and reconciliations (letter dated 10.10.2008, and further documents produced at Tribunal hearing) purporting to explain that certain sales bills had not been posted because the assessee awaited transport challans and adjusted freight on F.O.R. transactions.
The Tribunal admitted the reconciliation and related documents produced before it. On analysis, the Tribunal found some force in the assessee's explanation (i.e., certain sales may not have been posted for a short period), but also noted an inconsistency: the serial numbers of the allegedly unposted bills were not running consecutively, and some bills were already entered. Because the assessee's explanation was not fully plausible in all respects, the Tribunal applied a pragmatic compromise: it held that an addition of Rs. 4,00,000 towards gross profit on account of goods sold outside the books would meet the ends of justice. The assessee's counsel accepted this proposal.
On this basis the Tribunal set aside the CIT(A)'s confirmation and directed the AO to make an addition of Rs. 4 lakhs in respect of the stock-shortage/gross-profit issue for AY 2009–10. The result as to that appeal was therefore a partial allowance.

Holding and Implications

Holding:

ITA No. 1361 (AY 2008–09): ALLOWED. The Tribunal directed the Assessing Officer to allow the entire amount of bad debts claimed (Rs. 23,44,363 as written off in the accounts) in the relevant year and to withdraw the deduction already allowed in the subsequent year.
ITA No. 1362 (AY 2009–10): PARTLY ALLOWED. The Tribunal applied the same reasoning on the bad-debt points (granting relief as in ITA No.1361) and resolved the stock-shortage addition by directing the AO to make an addition of Rs. 4,00,000 towards gross profit on account of goods sold outside the books; other parts of the appeal were either not pressed or were otherwise dealt with as above.

Implications:

Direct effect on the parties: For AY 2008–09, the assessee obtains full allowance of the written-off bad debts and the Assessing Officer is directed to reverse the deduction allowed in the subsequent year to prevent duplication. For AY 2009–10, the assessee obtains relief on the bad-debt point and a compromise reduction of the gross-profit addition to Rs. 4,00,000.
Broader precedent: The Tribunal's decision is grounded expressly on the Supreme Court's decision in TRF Ltd. and the post-amendment statutory position of section 36(1)(vii). The opinion does not purport to lay down any new principle of law beyond applying those authorities to the facts; no broader or novel precedent is announced by this order.

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M/S Jupiter Aqua Lines Ltd. D-192, Industrial Area Phase-Vii-B, Mohali v. The Dcit Circle-6(1), Mohali .

T.R Sood:— Both the appeals by the assessee are directed against the separate orders passed by the Ld. CIT(A), Chandigarh dated 8.11.2012

2. In ITA No. 1361.Chd/2012 for assessment year 2008-09, the assessee has raised the following grounds:—

1. That the Ld. Commissioner of Income Tax (Appeals) has erred in law as well as on facts in dismissing the appeal ex-parte holding that no application for adjournment was received which is factually incorrect in as much as application for adjournment was moved in person which was not placed on record by the Ld. Commissioner of Income Tax(Appeals) and as such dismissing the appeal is utter disregard of the settled Principals of Natural Justice is illegal, arbitrary and unjustified.

2. That the Ld. Commissioner of Income Tax (Appeals) has erred in law as well as on facts in upholding the disallowance of 50% of the expenses amounting to Rs. 11,72,181/- (total 23,44,363/-) claimed and written off as bad debts which is arbitrary and unjustified.

3. That the debts having become bad and written off which is the only condition as per law, the adhoc disallowance without pin pointing as to which debt has not become bad is illegal, arbitrary and unjustified.

4. That the allowance of the same in the next year leads to the inference that the expenses claimed are permissible and as such the claim of the assessee is bona-fide.

3. Out of the above grounds, ground No. 1 was not pressed by the Ld. Counsel for the assessee, therefore, the same is dismissed as not pressed.

4. Ground Nos. 2, 3 & 4: After hearing both the parties we find that Assessing Officer during assessment proceedings noticed that the assessee has claimed bad debts on account of balance written off (short and excess) amounting to Rs. 23,44,363/-. On an enquiry, it was stated that the same pertains to the bad debts and since the same have become irrecoverable and have been written off accordingly. At the same time, some of the amounts which were payable by the assessee and had not been paid have been credited to this account. Further, enquiry was made regarding efforts which have been made for recovery of such amounts. In response to this query, it was stated that marketing executive of the assessee had made personal visits to these parties. In this background the Assessing Officer observed that since no documentary evidence was available in respect of efforts made to recover the amount in the form of correspondence or any litigation, therefore, the same could not be allowed wholly. Further, the Assessing Officer ultimately allowed 50% of the amount in the current year and the balance 50% in the next year.

5. On appeal, the action of the Assessing Officer has been confirmed by the Ld. CIT(A).

6. Before us, the Ld. Counsel for the assessee submitted that these amount represents trade debts which were not ultimately found to be recoverable and have been written off during the year. The assessee has also written off the amounts which were not payable during the year, therefore, the same should have been allowed accordingly. In this regard, he referred to the decision of the Hon'ble Supreme Court in the case of TRF Ltd. v. CIT 323 ITR 397 (SC).

7. On the other hand, the Ld. DR submitted that no evidence was filed before Assessing Officer or CIT(A) to show that debts have really become bad and therefore, action of the Assessing Officer was justified.

8. We have considered the rival submissions carefully and find force in the submissions of Ld. Counsel for the assessee. After the amendment to section 36(1)(vii) w.e.f 1.4.1989, the condition to prove that debt have really become bad is no more there. This position stands confirmed by the Hon'ble Supreme Court in the case of TRF Ltd. v. CIT (supra). The head not of this decision reads as under:—

“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 bad debts, it is not necessary for the assessee to establish that the debt, in fact, have become irrecoverable: it is enough if the bad debt is written off as irrecoverable in the accounts of the assessee.”

9. During the course of hearing, we have verified the accounts of various parties and found that accounts have been generally written off by the assessee. In any case the fact regarding writing off of the debt has not been disputed by the Assessing Officer. Therefore, we set aside the order of Ld. CIT(A) and direct he Assessing Officer to allow whole of the amount of bad debt claimed before him. Since 50% deduction has been allowed in the next year, he is further directed to withdraw the deduction in the next year.

10. In the result, assessee's appeal is allowed.

ITA No. 1362.Chd/2012— Assessment year 2009–10

11. In this appeal, the assessee has raised the following grounds:—

1. That the Ld. Commissioner of Income Tax (Appeals) has erred in law as well as on facts in dismissing the appeal ex-parte holding that no application for adjournment was received which is factually incorrect in as much as application for adjournment was moved in person which was not placed on record by the Ld. Commissioner of Income Tax (Appeals) and as such dismissing the appeal is utter disregard of the settled Principals of Natural Justice is illegal, arbitrary and unjustified.

2. Without prejudice to the above, the Ld. Commissioner of Income Tax (Appeals) has erred in law as well as on facts in upholding the partly disallowed expenses amounting to Rs. 5,03,150/- claimed and written off as bad debts which is arbitrary and unjustified.

4. That the allowance of the same in the next year leads to the inference that the expenses claimed are permissible and as such the claim of the assessee is bona-fide.

5. That the Ld. Commissioner of Income Tax (Appeals) has further erred in upholding the addition of Rs. 9,37,435/- on account of alleged profit on short stock of Rs. 32,85,787/- in utter disregard of the explanations rendered during the course of assessment proceedings which is arbitrary and unjustified.

6. That there was no difference in stock as explained during the course of assessment proceedings and as such the addition made of Rs. 9,37,435/- is arbitrary and unjustified.

7. That the Ld. Commissioner of Income Tax (Appeals) has further erred in upholding the charging of interest under sections 234B & 234C of the Act which is not chargeable in the facts of the case.

12. Out of the above grounds, Ground No. 1 was not pressed and therefore, the same is dismissed as not pressed.

13. Ground Nos. 2, 3 & 4: The issue raised in these grounds is identical to the issue raised in the assessment year 2008–09 in respect of bad debts which we have adjudicated in the above para Nos. 4 to 9. Following the same, we allow this ground with identical directions.

14. Ground Nos. 5 & 6: After hearing both the parties, we find that a survey was conducted on the premises of the assessee on 15.7.2008 During the course of survey and based on post-survey enquiry some difference was found in the stock as per books and physical inventory. Accordingly, addition was made on account of GP on such difference which has been worked out in para 4 of the assessment order which is as under:—

“Value of Closing Stock as per trading A/c as on 15.09.2008: 19524203.80 Cost Price of Stock found in 15.09.2008 : Rs. 13053224.00 Value of Stock lying at consignee agents : Rs. 2185191.83 Value of Spares : Rs. 10,00,000.00 Value of Physical Stock : 16238415.83 Difference (Short Stock) 3285787.97

Therefore, at the time of survey, there is shortage of stock to the tune of Rs. 3285787/- When confronted with the assesses counsel, he cannot submit any plausible explanation. Therefore, an addition of Rs. 937435/- (Rs. 3285787/- × G.P shown by assessee i.e 28.53%) is made in the returned income.”

15. On appeal, the action of the Assessing Officer has been confirmed by the Ld. CIT(A).

16. Before us, Ld. Counsel for the assessee referred to page No. 1 of the paper book which was tentative trading account drawn on the date of survey. He submitted later on that revised account was filed through letter dated 10.10.2008, copy of which is placed at page 147 which shows the closing stock at Rs. 1,73,27,276/- instead of Rs. 1,95,24,203/- which was shown to be tentative trading account on the date of survey. He filed a copy of reconciliation of sales which is also deviated from the original figures. He explained that variation was mainly on account of sales which were not posted. He pointed out that ledger posting for sales was being made only after receipt of transport receipts because freight was being reduced from the total sales value as assessee was supplying goods on F.O.R basis. This clearly shows that there was hardly any deficiency in the stock.

17. On the other hand, the Ld. DR submitted that no reconciliation was filed before the Assessing Officer. He strongly supported the order of Assessing Officer and CIT(A). We have considered the rival submissions carefully. We find that some details have been filed vide letter dated 10.10.2008, copy of which is available at pages 76 to 147. We have directed the Ld. Counsel for the assessee on the last day of hearing to produce the bills and fresh reconciliation which was produced on the date of hearing i.e 12.8.2013 Therefore, these documents were shown at the instance of the Tribunal and the objection for admission of these documents is rejected.

18. We have gone through the fresh reconciliation filed before us and find some force in the contention that some of the sales bills may have not been posted to the sales account for last one week from the date of survey because assessee was awaiting receipt of transport challan. However, at the same time it was noticed that serial numbers of the bills which were shown to have not been posted is not running consecutively. On the pointed query regarding this, the Ld. counsel submitted that some of the bills have already been entered, therefore, whole of the story of sales of not having been posted does not seems to be plausible. Therefore, considering the over all facts of the case, we are of the opinion that if an addition of Rs. 4 lacs is made towards gross profit on account of goods sold outside the books is made, the same would meet the ends of justice. This proposal was accepted by the Ld. Counsel for the assessee. Accordingly, we set aside thee order of Ld. CIT(A) and direct the Assessing Officer to make addition of Rs. 4 lakhs towards gross profit on account of deficiency in the stock.

19. In the result, appeal is partly allowed.

M/S Jupiter Aqua Lin... v. The Dcit Circle-6(1)...