Per A. Mohan Alankamony, Accountant Member
These two appeals preferred – (i) by the assessee and (ii) another by the Revenue– are directed against the order of the CIT (A), Mysore, for the assessment year 2005-06.
ITA NO.401 (By the assessee):
2. The assessee company has raised six grounds, out of which, ground Nos: 1, 2 and 6 are general and not specific and, therefore, do not survive for adjudication. The remaining three effective grounds are as under:
(1) sustaining of disallowance of bad debts to the tune of Rs.310861/-;
(2) confirming the disallowance of Rs.2731483/- being the payments made through uncrossed DDs; &
(3) confirming the disallowance of Rs. 768210/- being freight payments made in violation of s.40A (3) of the Act.
ITA NO.443 (By the Revenue):
3. Similarly, the Revenue has raised nine grounds, out of which, ground Nos: 1 and 9 are general and not specific and, thus not considered for adjudication. In the remaining seven grounds, the essence and crux of the issues can, at best, be reformulated, in a concise manner, as under:
(i) the deletion of addition of Rs.30. 78 lakhs being bad debts in respect of debtor V.S.Ganesh Babu; &
(ii) deletion of addition of Rs.1 7.59 lakhs being difference in parties’ accounts.
4. Both of these appeals are directed against the order of the CIT (A) and as the issues raised are more or less inter-connected, for the sake of convenience, they are considered together and disposed off in this common order.
I. ITA NO.401 (By the assessee):
5. The first effective ground is with regard to bad debts claimed in respect of the following parties have been turned down by the CIT(A):
|(i) Annapurneshwari Poultry Farm||Rs. 57803|
|(ii) C. Annaiah & Co||Rs. 97907|
|(iii) Palaniandavar Feeds Pvt. Ltd.||Rs.104397|
|(iv) Ratna Poultry Farm||Rs. 50754|
5.1. The AO’s stand was that none of the debtors have admitted that any such debts were due from them. Though the said parties have admitted that they have made business with the assessee, but, they have paid up all the transactions. However, it was contended by the assessee before the CIT (A) that –
“1.2. Normally debtors renegotiate price at the time of payment, citing various reasons viz., quality of the product/timeliness of delivery etc., appellant accommodates such requests by providing discounts from the bills. In some cases, debtors make payments within the stipulate period of time. To encourage such gesture of the parties, appellant provides discount on the bill amount. Evaporation losses are not very much part of this type of industry. Due to evaporation normally there will be quantity difference at the time of delivery of the oil/de-oiled cakes. Such differences are adjusted by way of debit notes received from the debtors. Sometimes rebate is provide for quantity differences. Invariably therefore, he amount realized by the appellant will not match with the bills raised by him. This difference gets accumulated over a period of time. It is only such difference that the assessee has written off in the books of accounts.
1.3. As regards books of accounts of the parties (trade debtors) is concerned, they do not mach with the assessee’s books of account since they would have accounted actual amount paid to the assessee as their purchase price. It is evident from the above journal entries passed in assessee’ s books of account that assessee would have offered income in respect of sale effected in earlier years without realization of the entire amount. The differences arising in the party’s account due to the reasons mentioned above are written off periodically.”
5.1.2. After due consideration of the assessee’s plea, The CIT (A) was of the firm view that the assessee company had agreed with the statements of these parties that there were no dues as ‘discounts given over a period of time had resulted in debit balance which was sought to be written off this year. However, the plea of the assessee that the discrepancy in accounts was on account of discounts was not backed up with any evidence. The fact remains that those parties have denied the factum of debt and the assessee had not led any evidence in rebuttal to show that the actual transaction was what was claimed by it. The existence of the debt itself was in doubt and as such the claim of bad debts in respect of the above parties was rightly disallowed by the AO.
5.2. During the course of hearing before us, the Ld. A R’s submission revolved around what was reiterated before the first appellate authority. Strong reliance was placed on the CBDT’s Circular No.551 dated 23.1.1990. The Ld. A R also furnished a paper book containing 1 – 78 pages which consists of, inter alia, copy of circular No.551, copies of ledger extract, copies of demand drafts etc.,
5.2.1. On the part of the Ld. D.R., she was emphatic in her approach that the AO had deliberated the issue in depth, besides drawing strength from the legal precedents laid down by the Hon’ble High Courts of Madras and Gujarat to justify in adding back the assessee’s claim to its income. Since the AO’s action has also been ratified by the CIT (A), it was pleaded that the stand of the lower authorities be sustained.
5.2.2. We have duly considered the rival submissions and also carefully perused the relevant records. We have also perused the CBDT’s Circular referred supra on which the assessee company has placed reliance to drive home its point. The relevant portion of which is extracted here below, for ready glance:
“6.6. The old provisions of clause (vii) of sub-section (1) read with sub-section (2) of section laid down conditions necessary for allowability of bad debts. It was provided that the debt must be established to have become bad in the previous year. This led to enormous litigation on the question of allowability of bad debts in a particular year, because the bad debts was not necessarily allowed by the assessing officer in the year which the same had been written of on the ground that the debt was not established to have become bad in that year. In order to eliminate the disputes in the matter of determining the year in which a bad debt can be allowed and also to rationalize the provisions, the amending Act, 1987 has amended clause (vii) of sub-section (1) and clause (i) of sub-section (2) of the section 36 to provide that the claim for bad debt will be allowed in the year in which such a bad debt has been written off as irrecoverable in the accounts of the assessee.
“6.7. Clauses (iii) and (iv) of sub-section (2) of the section 36 provided for allowing deduction for a bad debt in an earlier or later previous year, if the Income-tax officer was satisfied that the debt did not become bad in the year in which it was written off by the assessee. These clauses have become redundant, as the bad debts are now being straightway allowed in the year of write off. The amending Act, 1987, has, therefore, amended these clauses withdraw them after the assessment year 1988-89”
5.2.3. At the out-set, we are of the firm view that the amended clauses referred supra have been brought on the Statute after deliberating the issue pros and cons in depth. The intent of the Legislation, in our unanimous opinion, was to remove and to eliminate the disputes and also to mitigate the vigour of the old provisions of clauses referred supra. Furthermore, the erstwhile clause (vii) of sub-section (1) read with sub‑section (2) of section laid down conditions necessary for allowability of bad debts has since been removed from the Statute consequent to the Direct Tax Laws (Amendment)Act, 1987, the assessing authority has no locus‑standi whatsoever to penetrate into the issue as did in the present case. The amended provision entails the assessing authority to ensure that whether the bad debt has been written off in the assessee’s books of account during the previous year and if so, it has to be allowed, without over-stepping on the issue. If were to be probed further to find out, whether the bad debt has become bad or otherwise, we are of the considered view that the very purpose for which the intention of the Legislature to bring such an amendment to the existing provision(s) would be defeated.
5.2.4. In over all consideration of the issue and also drawing strength from the findings of the Hon’ble High courts (i) in the case of CIT v. Star Chemicals (Bombay) P. Ltd. reported in (2009) 313 ITR 126 (Bom); (ii) Lawlys Enterprises P. Ltd. v. CIT reported in (2009) 314 ITR 297 (Patna); and (iii) Suresh Gaggal v. ITO reported in (2009) 222 CTR (HP) 96, we are of the unanimous view that the actions of lower authorities are NOT in conformity with the amended provisions of the Act. It is ordered accordingly.
6. The second effective ground is in respect of confirming the disallowance of Rs.2731483/- being the payments made through uncrossed Demand Drafts.
6.1. On a specific request from the AO, the assessee had furnished confirmation letters from the suppliers from Challakere. On being found some defects in those confirmatory letters, the assessee was asked to produce those parties, for which, the assessee, instead of producing those parties, explained that the purchases were made through brokers and the payments were made through banking channels. Being not satisfied with the genuineness of the transactions and also the tax audit report had not given a clean chit with regard to all payments made in accordance with the provisions of s. 40A(3) of the Act, the AO had resorted to make disallowance u/s 40A(3) of the Act in respect of 20% of the payments made to six parties of Challakere.
6.1.2. It was contended before the CIT (A) that in the show-cause notice dt: 7.12.07 of the AO, there was no mention of disallowance u/s 40A (3) of the Act and consequential impact of such disallowance. After recording the reasons, the CIT (A) had admitted the additional evidence of the assessee to the effect that all payments were made by account payee cheques. The AO, in his remand report, had informed that, on an inquiry with the Bank authorities, the demand drafts to the extent of Rs.1,36,57,416/- [Vaishnavi Oil Traders of Rs.10451051/-; Laxmi Trading co. Rs.715294/- and Ratna Traders Rs.2491071] were found to be uncrossed, and for the contravention of s.40A(3), Rs.2731483/- was disallowed being 20% of Rs.1 .36 crores.
6.1.3. The contentions of the assessee company are very exhaustive and elaborate and for the sake of convenience and clarity, they are summarized in a concise manner:
(i) as required by the AO, specific certificates from the banker(s) to the effect that payments made to Challakere parties made through account payee cheques/DDs were furnished;
(ii) AO’s observations that DDs issued by SBI, City market Br., Bangalore and SBM, S.R.Patna Branch were uncrossed – we have always ensured that I (we) have issued only account payee Suppliers generally require DD as the realization of it is quick. It might have been possible that sometimes banker would have given uncrossed DDs which might not have come to our notice. The suppliers have confirmed that uncrossed DDs were deposited in their bank accounts;
(iii) On an enquiry with the bankers whether the amounts have been credited to the accounts of the suppliers or were encashed, they have provided only limited information, confirming that the payments would have been credited to the parties account since the rubber stamp affixed on all the DDs mention the word ‘Transfer’ thereby the amounts would have been credited to the bank accounts of the parties concerned and if the DDs were encashed in cash, the stamp would have been CASH instead of Transfer. Bankers have declined to reveal whether the payments have been credited to the suppliers account only, citing Banking Regulations Act;
(iv) Relied on the finding of the Hon ’ble Tribunal in the case of Sri Renukeshwara Rice Mill v. ITO reported in 93 ITD 263;
(v) Internal instructions for the bankers which stipulate that any amount in excess of Rs.50000 will be credited to the payees account only and no cash in excess of Rs.50000 is given across the counter in respect of DDs above Rs.50000 even if it is uncrossed;
(vi) As vouched by the AO, 90% DDs issued by the assessee to Dhanalaxmi Commercials, Challakere was from HDFC Bank who have pleaded inability to certify that all the DDs purchased from them were credited in payees accounts only since DDs were with the payees banker and such certificates can be provided by the payee bankers who have refused to provide such certificates;
(vii) After inquiry, the banker identified that though some of the DDs were uncrossed, they have been deposited into payees account;
(viii) HDFC Bank also provided certificate stating that the DDs issued from the account of the assessee were crossed DDs only;
(ix) Bank letters from (a) HDFC Bank Ltd.,Saraswathipuram, Mysore; (b) State Bank of India, Commercial Branch, Mysore; (c) SBI, City Market Branch, Bangalore and letter from SBM, Challakere to SBI, SJP Road, Bangalore, confirming that the payments towards uncrossed DDs have been routed through payees account only;
6.1.4. The AO’s rebuttal to the assessee company’s contentions is as under:
(i) the genuineness of transaction was not material for deciding the issue of s.40A(3) disallowance and s.40A(3) will not apply where uncrossed DDs were credited to bank accounts and not paid by cash is not valid, considering the provisions of s.40A(3) and rule 6DD;
(ii) in order to escape from the mischief of s. 40A(3), the assessee was legally bound to file the evidence in support of payments exceeding Rs.20000/- made by crossed cheque/DD either along with R/I itself or during the course of assessment proceedings;
(iii) except HDFC Bank, all other banks, SBI, Commercial Branch, Mysore, SBI, City Market Br., Bangalore, SBM, S.R.Patna and SBI, Mandya have failed to certify whether the cheques/DDs issued by the assessee company were crossed or not and also in the case of uncrossed cheques whether the payments were made in cash or not;
(iv) no confirmation whether the cheques/DDs issued to Challakere parties were crossed or not;
(v) there was no material change as to the facts of the case i.e., the assessee had made certain payments exceeding 20000/- by way of uncrossed cheques/DDs to certain Challakere parties and thereby contravened the provisions of s.40A(3) of the Act;
(vi) the assessee had failed to obtain certificates of the bank authorities in respect of all the payments made to Challakere parties. In respect of cheques/DDs issued by SBI, City Market Branch, Bangalore, SBM, SR Patna and SBI, Mandya, the assessee could not produce evidence for having issued crossed DDs/cheques;
6.1.5. After having given due weight-age to the forceful submissions of either party, the CIT (A) went ahead with the disallowances u/s 40A (3) to the extent of Rs.2731483/-, citing the following reasoning:
(i) initially the assessee company had furnished bank certificates to the effect that all the DDs were crossed, however, on examination, had turned out to be quite contrary, as many DDs were found to be uncrossed;
(ii) the assessee came up a fresh certificates from the banks affirming that the so called DDs were either routed through the account(s);
(iii) in the case of DDs favouring Rathna Traders, the drafts were presented by ING Vysya Bank and, therefore, presumably routed through bank account. However, no supporting evidence was produced including correlation between these DDs and the bank accounts of the payees;
(iv) the evidences furnished were inconclusive;
(v) since the purpose of crossing DDs is only to have them paid through bank accounts, there was inconclusive evidence to show that the payments have actually been made through bank accounts;
(vi) since the breach of s.40A(3) by payments through uncrossed DDs was established in respect of impugned DDs, the onus was on the assessee to show that the payments were indeed through bank accounts and not the AO.
7. Aggrieved, the assessee company has come up with the present appeal. The Ld.A.R reiterated more or less what was put-forth before the first appellate authority. In conclusion, it was asserted that there was no justification on the part of either the AO or the CIT (A), in disallowing the legitimate claim of the assessee company which may be
7.1. On the other hand, the Ld. D R was of the firm view that there was a clear case of contravention of the provisions of section 40A(3) of the Act which has been brought out on record/impugned order in a judicious manner by the AO which requires to be upheld.
8. We have carefully gone through the rival submissions and also perused the impugned orders. It was the case of the Revenue that payments to the tune of Rs.1 .36 crores were made to some of Challakere parties through uncrossed demand drafts. Being queried, the assessee company had, initially, furnished bank certificates to the effect that all the DDs were crossed, however, on examination, had turned out to be quite contrary, as many DDs were found to be uncrossed. Instead of furnishing satisfactory information with regard to the payments by means of uncrossed DDs, the assessee company came up with a theory that the banks affirming that the so called DDs were either routed through the account(s) and even in the case of DDs favouring Rathna Traders, the drafts were presented by ING Vysya Bank and, therefore, presumably routed through bank account. However, as rightly pointed out by the CIT (A), no supporting evidence was produced including correlation between those DDs and the bank account of the payee. On a perusal of the contentions of the assessee company, one could draw an impression that the assessee company has been trying to impress upon the Revenue that the payments made through banking channels. However, it had failed to come up with a straight answer to a pointed question that why payments have not been made through crossed DDs/account payee cheques etc.
8.1. Section 40A(3) is very specific that “Where the assessee incurs any expenditure in respect of which payment is made in a sum exceeding twenty thousand rupees otherwise than by an account payee cheque drawn on a bank or account payee bank draft, NO DEDUCTION shall be allowed in respect of such expenditure”. Even Rule 6DD emphasis [prior to its substitution by the IT(English Amdt.) Rules 2007, w.e.f. A.Y 2008-09] that “6DD. Cases and circumstances in which payment in a sum exceeding twenty thousand rupees may be made otherwise than by an account payee cheque drawn on a bank or account payee bank draft.-….”
8.1.1. We quote from the assessee company’s own version that, “…………… Generally, I sign a ‘yourself cheque’ for purchasing DD from the bank. My Accountant tenders ‘yourself cheque’ signed by me in the bank to purchase the DD. It might have been possible that sometimes bank would have given uncrossed DD which might not have come to our notice…………….. ” We would have conceded to the assessee company’s reasoning, had it been an isolated instance wherein the bank would have given uncrossed DD once or even for that matter twice, but, certainly not all the time by the different banks. To our surprise, the assessee company had obtained a number of uncrossed DDs (from different banks) to the tune of Rs.1.36 crores. The lame excuse of the assessee’s version that ‘bank would have given uncrossed DD which might not have come to our notice’ is, to put it mildly, hardly convincing. As highlighted by the CIT(A), since the breach of s.40A(3) by payments through uncrossed DDs was established in respect of impugned DDs, the onus was on the assessee company who had failed to discharge its obligation for having contravened the provisions of s.40A(3). In an over all consideration of the facts as narrated supra, we have no reservation in upholding the actions of the lower authorities in toto on this count.
9. The third effective ground of the assessee company is with regard to the confirming the disallowance of Rs.768210/- being freight payments made in violation of s.40A (3) of the Act by the CIT (A).
9.1. On a perusal of the impugned order of the AO, we could not find any specific disallowance being ‘freight payments’ made in violation of s.40A (3) of the Act. However, as could be seen from the impugned order which is in dispute (on page 22), the Ld. CIT (A) took up this issue, perhaps, on the strength of the AO’s report dated: 12.12.2008 which is extracted as under:
“[Page 22 of CIT’s order]……………………. In his report dated 12.12.2008, however, the AO has pointed out further breach of Sec.40A(3) as under in respect of payment of freight charges:
|1. Freight charges paid to Vaishnavi Oil traders||Rs. 450965|
|2. Payments to laxmi Trading Co.||2507102|
|3. Payments to Rajalaxmi Commercials||541581|
|4. Payments to Ratna Traders||267360|
|5. Payments to Dhanalaxmi Commercials||74090|
9.1 .1. After due consideration of the assessee’s rejoinder to the AO’s letter cited supra, the CIT(A), for the reasons set-out in the impugned order, held that the payment of freight charges in excess of Rs.20000/- is disallowable u/s 40A(3).
9.1.2. At the outset, it is pertinent to mention here that neither the freight charges nor other payments made to Challakere parties amounting to Rs.38.41 lakhs or the so called 20% thereof of Rs.7.68 lakhs is finding a place in the impugned order of the AO. Even on a perusal of the grounds of appeal of the assessee company raised before the CIT (A), we find no such a ground. In totality of the situation and in the interest of justice and equity, we are of the unanimous view that this issue should be remanded back on the file of the AO for fresh consideration. He is, further, directed to consider the issue afresh and frame his findings by way of a speaking order in accordance with law, after providing a reasonable opportunity to the assessee company of being heard. In the meantime, the assessee company – through its A.R – is advised to furnish all relevant particulars in a comprehensive manner which would facilitate the AO to look into the issue in its entirety. It is ordered accordingly.
II. ITA NO.443 (By the Revenue):
10. The first effective ground of the Revenue is with regard to the deletion of addition of Rs.30.78 lakhs being bad debts in respect of debtor, V.S.Ganesh Babu.
10.1. The issue, in brief, is that the assessee company, among others, had claimed Rs.3078847/- as bad debt in the case of V.S.Ganesh Babu, by debiting the same to the P & L account. The debtor, Ganesh Babu had disputed with the assessee’s version of recoverability of his debt as he contended that he had never declared or communicated to the assessee that he was not in a position to discharge his liability. In the meanwhile, the assessee company had filed a case in the Civil Court, Srirangapatna under the Negotiable instrument Act as the cheques issued by Ganesh Babu were dishonoured for paucity of funds in his account and the case was still pending for finalization. In his statement, Ganesh Babu had acknowledged that he was still showing the liability in his books of account as a valid liability and the assessee was still pursuing the recovery of the dues through Court and that the assessee’s stand to treat the debt as bad debt was one sided without any written consent from him. After considering the assessee’s version, the AO took a stand that the assessee company had not fulfilled all the conditions which were required before resorting to writing off of bad debt in its books of account.
10.1.1. This was agitated by the assessee company before the Ld. CIT (A). After due consideration of the contentions and also the case laws on which the assessee company had placed strong reliance and also distinguishing the case laws on which the AO drew strength, the CIT(A) was of the firm view that, “it cannot be said that the assessee’s judgment in writing off the debt was not honest. After all, there are no facts to show (except acknowledgement of debt by debtor which is not sufficient for recovery) that the debts can be recovered.” He went on to delete the disallowance made by the AO on this count.
11. Before us, it was contended by the Revenue that (i) the debtor had not yet given final reply to the assessee company to the effect that he will not discharge his liability, (ii) the fact that the very basic pre-requisite to write off a debt in order to claim deduction u/s 36(1)(vii) of the Act was to establish the fact that such debt had become bad, had given a go-bye by the Ld. CIT(A); and (iii) the ratios laid down by the Hon’ble High courts in the cases of South India Surgical Committee Ltd. v. ACIT [287 ITR 62 (Mad)] and Dhal Enterprises and Engineer (P) Ltd v. CIT [295 ITR 481 (Guj)] have been overlooked by the CIT(A). Forceful emphasis was made in the findings of the Hon’ble Courts referred supra and pleaded that the action of the CIT (A) in disallowing the addition made by the AO may be assailed.
11 .1. On the other hand, the Ld. AR had reiterated the submissions made before the first appellate authority and he was in full agreement with the finding of the CIT (A) and pleaded that no interference is called for on this point.
11.1.1. We have carefully considered the arguments put-forth by the rival parties. Before going into the matter in detail, let us now look into the issue on hand. As admitted by the assessee company, the company had filed a case in the Court of the Civil Judge, Srirangapatna u/s 138A of the Negotiable instrument Act [N.I.Act] as the cheques alleged to have been issued by the above party were dishonoured due to paucity of funds in bank account. It is very pertinent to mention here that the assessee company had filed a case under N.I.Act, being the cheques were dishonoured. Pursuing the case under N.I.Act in the Court to its logic conclusion, in our considered view, has no nexus with the writing off the debt as irrecoverable. Moreover, Ganesh Babu’s assertion that he was still showing the liability in his books of account as a valid liability does not holds water, as all possible efforts pursued by the assessee company for the recovery have become futile. After having failed to recover the dues from the said party, the assessee company had, perhaps, resorted to written off the amount as irrecoverable debt in its books of account during the previous year relevant to the assessment year under dispute.
11.1.2. Circular No.551 of the CBDT has come to the rescue of the assessee company for its stand. The relevant portion of the Circular is extracted hereunder:
“6.7. Clauses (iii)and (iv) of sub-section (2) of the section 36 provided for allowing deduction for a bad debt in an earlier or later previous year, if the Income-tax Officer was satisfied that the debt did not become bad in the year in which it was written off by the assessee. These clauses have become redundant, as the bad debts are now being straightway allowed in the year of write off………….. ”
11.1.3. With respects, we have duly perused the case laws referred supra, on which the Revenue was banging heavily to its favour. As highlighted by the CIT (A), the finding of the Hon’ble High Court of Gujarat was a general proposition with regard to the onus of the assessee. With regard to the Hon’ble Madras High Court’s finding, we due regards, we of the considered view, it stands on a different footing since the assessee supplied goods to Government Hospitals and others and the nonpayment of dues had resulted in due to paucity of allocated budget to Government hospitals and in spite that the assessee was continuing its business transactions with all debtors. Furthermost, the debtor being Government Hospitals, the debt cannot be classified as ‘bad’.
11.1.4. We are also drawing strength from the following case laws which are directly on point:
(i) Lawlys Enterprises P.Ltd. v. CIT reported in (2009) 314 ITR 297 (Patna);
(ii) CIT v. Star Chemicals (Bombay) P.Ltd. (2009) 313 ITR 126 (Bom) &
(iii) Suresh Gaggal v. ITO (2009) 222 CTR (H P) 96
11.1.5. In over all facts and circumstances of the issue, we find no justification to interfere with the finding of the Ld.CIT (A) on this count. It is ordered accordingly.
12. Another grievance of the Revenue is with regard to the CIT (A)’s action in deleting the addition of Rs.17.59 lakhs being difference in parties’ accounts made by the AO. The main thrusts of the arguments of the Revenue are two folds –
(i) the assessee company had failed to produce necessary evidences by way of confirmatory letters from the parties even after availing adequate opportunities during the course of assessment proceedings; and
(ii) the CIT(A) had erred in deleting the addition on the ground that there was no requirements of obtaining confirmation letters from the parties concerned, considering the volume of assessee company’s trade running into several crores.
12.1. On its part, the assessee company’s contention centred more or less what was submitted before the first appellate authority. Besides, it had furnished a copy of “Difference in party’s A/c (Ledger Account – Page 45 of P.Book).
12.1.1. The gist of the explanation of the assessee company was that the amounts were as a result of continuous reconciliation of different parties’ accounts that were either sellers or buyers and identifiable. The write off was resorted to due to mistakes and difference in quantity and carried forward from the earlier years and identified them as ‘not receivable or not payable’. This version of the assessee company was not found favour with the AO who was of the view that no confirmation letters from those parties were forth-coming. He had further differed with the assessee company – who claimed that the write off of balances to be small amounts – that most of the amounts were exceeding Rs.1 0000/-.
“The explanation of the appellant that a number of mistakes, differences and disputes arise during the course of business and periodic cleaning up and reconciliation of accounts is done to bring them up-to date is quite convincing. The reconciliation has been done in respect of identified parties and with respect to disclosed transactions only. Further, there is write off as well as write back and only one part cannot be picked up in isolation for disallowance. Considering the large volume of appellant’s trade running into several tens of crores, the quantum of these write off cannot be considered as unusual or exceptional requiring detailed explanation item-wise or an obligation to obtain confirmations from the parties. In any case, nothing adverse has been found by the AO in this regard. No doubt, the write off in some cases appear to be in he nature of bad debt write off in as much as that also appears to be a reason for the write off but that is only a part of the reconciliation. In any case, they are written off in the books. The amounts involved may be above Rs.10000/- but cannot be considered significant on a holistic view of the nature of the transactions and ground realities of business. Considering everything, I do not find that there is case for disallowance….”
13. We have carefully considered the arguments of either party. We have also perused the impugned orders of the lower authorities. On a careful perusal of the Ledger account of the assessee company [Page 45 of PB], we find that the write off of balances in some of the parties were, of course, substantial, but, on the same breath, we admit that the credits were also matched/neutralized with debits.
13.1. Considering the write off of debits as well as given credits, the outcome of which, had resulted in a net surplus of Rs.4000/-. We are also in agreement with the Ld. CIT(A) philosophy that “Further, there is write off as well as write back and only one part cannot be picked up in isolation for disallowance”. Of course, the write off in some cases appears to be in the nature of bad debts write off, even then also the assessee company can take refuge under the amended provisions of s.36(1)(vii) of the Act, as these debts have been written off in the books of the account of the assessee company during the previous year relevant to the assessment year under dispute. Even, if it were to be considered the stand of the AO that –
“27. In view of the above mentioned facts and circumstances, it can be reasonably concluded that-
(a) the assessee company has no material evidence to prove the genuineness of difference in party’s account written off;
(b) in case of genuine transactions or debts outstanding, the assessee should have claimed such deductions only under section 36(1)(vii);
(c) Even after considering the deduction u/s 36(1)(vii) as bad debts, the assessee has failed to prove the crucial test of ‘debt has become bad debt’ before making such claim;
(d) Merely by making entries in the books, the assessee cannot claim deductions under the Income-tax Act without disclosing the transactions/accounts either in the P & L A/c, balance sheet or schedules forming part of the financial statements or in the notes on account”
13.1.1. As admitted by the AO himself [27.(d)] referred supra, had the assessee company written off these bad debts by making entries in its books of account, then the amended provisions of s.36(1)(vii) of the Act comes to its rescue? On either way, the assessee company stands to benefit.
13.1.2. In over all consideration of the facts and circumstances of the issue, we are of the unanimous view that the Ld. CIT (A) was justified in his endeavour in deleting this addition. We, accordingly, uphold the action of the Ld.CIT (A) on this count.
14. In the result –
(i) the assessee company’s appeal is partly allowed for statistical purposes;
(ii) the Revenue’s appeal is
Pronounced in the open court on this 30th day of September 2009.