Advance for Bogus Purchases cannot be written off as bad debt

 ITAT CHENNAI BENCH ‘D’

Deputy Commissioner of Income-tax

versus

Vistas Wind Technology India (P.) Ltd.

IT Appeal Nos. 927 & 928 (Mds.) of 2011
[ASSESSMENT YEARS 2005-06 & 2006-07]

Date of Pronouncement- 31.01.2012

ORDER

Abraham P. George, Accountant Member  

These are appeals of the Revenue against orders dated 18.2.2011 of Commissioner of Income Tax (Appeals)-III, Chennai, for impugned assessment years.

2. Appeal for assessment year 2006-07 is taken up first for disposal. Revenue has raised five grounds of which, Ground Nos.1 and 5 are general needing no adjudication.

3. Grievance raised in Ground No.2 is that ld. CIT(Appeals) deleted disallowance of warranty provisions of Rs. 3,16,38,858/-.

4. Short facts apropos are that assessee had offered an income of Rs. 3,16,38,858/- in its return, as excess warranty provision reversed. However, by way of a revised computation, assessee sought withdrawal of such income of Rs. 3,16,38,858/-. The amount of Rs. 3,16,38,858/- was arrived by reducing the warranty provision of Rs. 10,74,22,129/- for the relevant previous year from the total provisions of Rs. 13,90,60,987/- for earlier years. As per the assessee, provisions made for earlier years were disallowed by the Hon’ble Income Tax Settlement Commission by their order in SA Nos. 600/III/57-2003-IT and 6000/III/51-2004-IT, dated 24.3.2008, wherein it was held that such provisions were contingent liability and hence not allowable. Settlement Commission for this purpose placed reliance on the decision of Hon’ble Madras High Court in the case of CIT v. Rotork Controls India Ltd.[2007] 293 ITR 311. As per the assessee, the order of Settlement Commission was received after the return for impugned assessment year was filed and there was no time available with it for filing a revised return. Therefore, through a revised computation, it had reversed the earlier provisions which were disallowed by the Settlement Commission and this reversal resulted in the income of Rs. 3,16,38,858/- earlier offered being withdrawn. Assessee requested the A.O. to consider the revised computation while completing assessment. However, the A.O. was of the opinion that this was a fresh claim made by the assessee and assessee could not make such a fresh claim otherwise than through a revised return. A.O. noted that assessee had time upto 31.3.2008 for filing a revised return and there were seven days left after the date of the order of Settlement Commission, for filing such a revised return. Having not filed a revised return, A.O. was of the opinion that the claim of the assessee, made through a revised computation, could not be accepted in view of the decision of Hon’ble Apex Court in the case of Goetze (India) Ltd. v. CIT[2006] 284 ITR 323.

5. In its appeal before ld. CIT(Appeals), pleading of the assessee was that withdrawal of income was consequential to the order of Settlement Commission and the ratio of decision of Hon’ble Apex Court in the case of Goetze (India) Ltd. (supra) would not apply. As per the assessee, this was not a fresh claim, but, was a reduction required to be made on account of prior period adjustment of income. Reliance was also placed on decision of Mumbai Bench of this Tribunal in the case of Asian Paints Ltd. v. Addl. CIT [IT Appeal No. 5092-5142 (Mum.) of 2007, dated 23-3-2009] in support. Ld. CIT(Appeals) was appreciative of this contention and held that the claim was allowable. As per the ld. CIT(Appeals), he had co-terminus power that of the A.O., and could accept such a claim though made through a revised computation.

6. Now before us, learned D.R., assailing the order of ld. CIT(Appeals), submitted that assessee still had seven days’ time for filing a revised return after getting the order of Settlement Commission and hence it could not justify the filing of a claim through a revised computation. As per learned D.R., Assessing Officer had no go but to ignore such a revised computation withdrawing a part of the income, since in the absence of revised return, decision of Hon’ble Apex Court in the case of Goetze (India) Ltd. (supra) squarely applied.

7. Per contra, learned A.R., filing a copy of the order of Settlement Commission (supra), submitted that though the order of Settlement Commission was dated 24.3.2008, assessee could not lay hands on such orders before the last date for filing a revised return. According to him, it was clearly held in the order of Settlement Commission that warranty provisions made for assessment years 1999-2000 to 2003-04 could not allowed and hence, assessee had no go but to make a claim before the A.O. for reversal of excess provision written back for the impugned assessment year. According to him, ld. CIT(Appeals) was absolutely justified in allowing the claim in view of the circumstance of the case and in view of the extensive powers enjoyed by him in his appellate jurisdiction.

8. We have perused the orders and heard the rival submissions. Income Tax Settlement Commission in its order dated 24.3.2008 at para 3 has given a clear finding that warranty provision was a contingent liability and for this reliance was placed by the Settlement Commission on the decision of Hon’ble jurisdictional High Court in the case of Rotork Controls India Ltd. (supra). No doubt, the said decision of Hon’ble jurisdictional High Court stands now reversed by the decision of Hon’ble Apex Court in the case of Rotork Controls India (P.) Ltd. v. CIT[2009] 314 ITR 62. But, nevertheless, Apex Court’s decision dated 12th May 2009 was not available either to the assessee or the Settlement Commission or the A.O. The assessee, prior to the receipt of the order of the Settlement Commission, in its original return had reversed the excess provision made for the earlier years against the provision for the impugned assessment year. This endeavour resulted in an income of Rs. 3,16,38,858/-, since the gross excess provision reversed was Rs. 13,90,60,987/-, whereas, the provision for warranty which was allowable for the relevant previous year was Rs. 10,74,22,129/- only. No doubt, assessee was very well within its right to claim the provision for the relevant previous year in view of the decision of Hon’ble Apex Court in the case of Rotork Controls India (P.) Ltd. (supra). The question left here is whether the excess provision for earlier years Rs. 3,16,38,858/-, which stood nullified by the Settlement Commission order, could be withdrawn by the assessee by way of a revised computation, otherwise than through a revised return. We find much substance in the claim of the assessee that Settlement Commission’s order dated 24.3.2008 might not have been readily available to the assessee by 31.3.2008, being the last date available for filing a revised return. It was therefore left with no other go other than to file a revised computation. Assessing Officer has not disputed that the above amount could not be considered as income of the assessee for impugned assessment year, but, disallowed claim for withdrawal only for a reason that revised return was not filed. If we have a look at the decision of Hon’ble Apex Court in the case of Goetze (India) Ltd. (supra), there the claim was for deduction. But, on the other hand, in the present case, the claim was for a reduction of income. In Goetze (India) Ltd.’s case (supra), a fresh claim was made by the assessee during the course of assessment proceedings, whereas, here we cannot say that this was a fresh claim. On the other hand, it was a consequential claim arising out of decision of Settlement Commission. In any case, the decision of Hon’ble Apex Court only circumscribes the power of the assessing authority and does not limit the powers of appellate authorities. Ld. CIT(Appeals) , having co-terminus power that of the A.O. and was well within his right to allow a legitimate claim of withdrawal of income made by the assessee which arose out of circumstances which were not in its control. We do not find any reason to interfere with the order of ld. CIT(Appeals).

9. Ground No.2 taken by the Revenue stands dismissed.

10. In its Ground No.3, grievance raised by the Revenue is that ld. CIT(Appeals) deleted a disallowance of Rs. 3,93,48,570/- paid to one Shri Pawar.

11. Short facts apropos are that Assessing Officer, during the course of assessment, received a reference from Additional Commissioner of Income Tax, Sattara Range, Sattara, that one Shri D.H. Pawar had entered into certain transactions with assessee-company and a sum of Rs. 3,93,48,570/- was shown by the said Pawar as advance received by him from assessee. A.O. put the assessee on notice as to why the amount, which had been claimed by the assessee as expense, should not be disallowed, when Shri Pawar had shown it as only advance. Reply of the assessee was that it had shown the amount as expenditure based on the invoices raised by Shri Pawar. Assessee also produced some copies of invoices. Assessing Officer noted that the assessee could produce invoices only for Rs. 2,73,28,500/-. In any case, according to him, since Shri Pawar had treated the amount of Rs. 3,93,48,570/- as advance in his hands, the claim could not be allowed as revenue expenditure for the assessee. He made an addition of Rs. 3,93,48,570/- on protective basis.

12. In its appeal before ld. CIT(Appeals), claim of the assessee was that it had received invoices from Shri D.H. Pawar for services rendered by him and expenses were properly entered in the books of accounts. According to assessee, invoices were also produced before the A.O. and mode of treatment of the amounts by Shri Pawar in his books was not relevant in so far the claim of the assessee was concerned. Ld. CIT(Appeals) was appreciative of this contention of the assessee. According to him, the fact of expenditure and the genuineness thereof were not disputed. Assessee had rightly claimed such expenses as revenue outgo and disallowance could not be made. He, therefore, deleted the disallowance.

13. Now before us, learned D.R., strongly assailing the order of ld. CIT(Appeals) , submitted that assessee in first place could not place before the A.O. invoices for full amount but, had only produced invoices for part of the claim. Shri Pawar had shown the amount as advance and therefore, assessee could not be allowed to claim it as revenue expenditure. A.O. was very much correct in making the disallowance.

14. Per contra, learned A.R. strongly supported the order of ld. CIT(Appeals).

15. We have perused the orders and heard the rival submissions. Assessing Officer had proceeded to make the disallowance based on the reference received from the Assessing Officer of Shri D.H. Pawar who had shown a sum of Rs. 3,93,48,570/- received from assessee as advance. It is undisputed that assessee had produced invoices for Rs. 2,73,28,500/-. Assessing Officer has not doubted the correctness of transaction at least to this extent. He had made a disallowance since the amount was shown as advance by Shri Pawar in his books. Except the fact that out of the claim of Rs. 3,93,48,570/-, invoices were produced before A.O. only for Rs. 2,73,28,500/-, nothing is coming out from the record as to what was the service rendered by Shri Pawar and why such an amount was treated by him as advance in his books. We are, therefore, of the opinion that the matter requires a fresh look by the A.O. We, therefore, set aside the orders of ld. CIT(Appeals) and A.O. in this regard and remit the issue back to A.O. for verifying the claim with evidence produced by the assessee in support of the claim. If the assessee is able to prove that the claim was based on invoices raised by Shri Pawar and if the transactions are genuine, it will have to be allowed irrespective of the treatment given by Shri Pawar in his books. The A.O. shall give an opportunity to the assessee for proving its case.

16. Ground No.3 of the Revenue is allowed for statistical purpose.

17. Vide its ground No.4, Revenue’s grievance is that ld. CIT(Appeals) deleted a disallowance of interest of Rs. 1,62,14,635/-.

18. Short facts giving raise to this issue are that assessee had claimed interest payments of Rs. 6,03,11,000- on fixed loans and Rs. 42,65,000/- on other loans, in its Profit & Loss account . From the balance sheet, it was noted by the A.O. that assessee had given loans and advances to its subsidiary companies Rs. 21,78,46,000/-. Assessee was required to explain why corresponding interest should not be disallowed for investment made in subsidiary company out of loans. Reply of the assessee was that loans and investments were made from its own funds and were not made out of borrowed capital and for the relevant previous year, it had income of more than Rs. 240 Crores. As per the assessee, the subsidiary companies, where assessee had invested, were incorporated in Karnataka to facilitate assessee’s business interest. However, A.O. was not appreciative. According to him, the subsidiary companies had a separate role of purchasing lands and selling them and there was no rationale in the claim of the assessee that loans were given to such subsidiary companies free of interest for commercial expediency. He, therefore, made a prorata disallowance of Rs. 1,62,14,635/- out of total interest claim of Rs. 6,45,76,000/-.

19. In its appeal before ld. CIT(Appeals), argument of the assessee was that subsidiary companies had to be floated in Karnataka since only companies registered in Karnataka could acquire lands there. As per assessee, lands were required for erection of wind farms and such loans were advanced by the assessee for its business interest, since it had substantial interest in the subsidiary companies. In any case, according to assessee, the loans were taken in earlier years and the taxable income of the assessee in various years starting from 2001-02 till the impugned assessment year 2006-07 totalled to Rs. 3,17,68,29,790/-. Relying on the decision of Hon’ble Apex Court in the case of S.A. Builders Ltd. v. CIT[2007] 288 ITR 1, assessee pleaded that the commercial expediency, for having given the loans stood proved and hence, the claim had to be allowed. Ld. CIT(Appeals) was appreciative of this contention of the assessee. According to him, assessee had business interest in the subsidiary companies and out of commercial expediency, it had given loans to such subsidiary companies. Even otherwise, it had sufficient funds for giving loans free of interest and there was no justification for disallowance of interest. He, therefore, deleted the disallowance.

20. Now before us, learned D.R. strongly assailing the order of ld. CIT(Appeals), submitted that assessee was unable to show commercial expediency for giving such huge loans to subsidiary companies.

21. Per contra, learned A.R. supported the order of ld. CIT(Appeals) .

22. We have perused the orders and heard the rival submissions. No doubt, the loans were given to subsidiary companies. Also, without doubt, such subsidiary companies were all in Karnataka and had acquired lands for the purpose of erection of wind farms and the assessee’s business was to erect, commission and sell windmills. In our opinion, commercial interest of the assessee in its subsidiaries stood well demonstrated. The role performed by subsidiary companies might have been different from that of the assessee-company but this effectuated the business interests of the assessee. There is also no dispute that the taxable income of the assessee for assessment year 2001-02 to 2006-07 totalled to more than Rs. 317 Crores. Assessee thus had more than sufficient own funds with it for giving advance of Rs. 21,78,46,000/-. In the case of S.A. Builders Ltd. (supra), Hon’ble Apex Court clearly held that “commercial expediency” is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of his business. Once it is established that there was nexus between the expenditure and purpose of business, Hon’ble Apex Court held, revenue could not assume the role of the businessman to decide what was reasonable expenditure having regard to the circumstances of the case. We are, therefore, of the opinion that ld. CIT(Appeals) was well justified in relying on the decision of Hon’ble Apex Court in the case of S.A. Builders Ltd. (supra) for deleting the disallowance.

23. Ground No.4 of the Revenue stands dismissed.

24. In the result, appeal of the Revenue for assessment year 2006-07 is partly allowed for statistical purpose.

25. Now, we take up Revenue’s appeal for assessment year 2005-06. Two issues have been raised by the Revenue of which, one is regarding disallowance of pro-rata interest on interest free funds advanced to subsidiaries which was deleted by ld. CIT(Appeals) .

26. We have already dealt with this issue at para 22 of this order in Revenue’s appeal for assessment year 2006-07.

27. This leaves us with the only other issue which is regarding deletion of disallowance of advance of Rs. 1,00,92,400/- written off by the assessee.

28. Short facts apropos are that the assessee had, in the relevant previous year, claimed a deduction of Rs. 1,06,98,000/- as irrecoverable advances written off. As per the assessee, the amount represented advances given by it for purchases which had to be written off subsequently. Again as per the assessee, the sum of Rs. 1,06,98,000/- comprised of following items:-

Out of the above Rs. 1,00,92,401/- relatable to Sambhav Steel Distributors was the difference between Rs. 5,95,43,410/- offered by the assessee before Settlement Commission for assessment year 2004-05, against the actual amount of Rs. 4,94,51,010/-. As per the assessee, said advance had become irrecoverable and therefore, written off in the impugned assessment year. According to it, the amount was considered as income for assessment year 2004-05 and therefore, eligible for a write-off in the impugned assessment year. However, the A.O. was not impressed. According to him, assessee was not a money lender to claim that the amounts advanced to Sambhav Steel Distributors and other parties were a part of its business of money lending. According to him, assessee could not prove that these debts were considered in computing its income for any of its earlier assessment years. He, therefore, declined to allow the claim of write-off of Rs. 1,06,98,381/-.

29. In its appeal before ld. CIT(Appeals), argument of the assessee was that it had offered a sum of Rs. 5,95,43,410/- being advance given to Sambhav Steel Distributors, as income for assessment year 2004-05, before Settlement Commission and the said amount comprised of purchases of Rs. 4,94,51,010/- and advance of Rs. 1,00,92,400/-. Therefore, as per the assessee, what was written off in the impugned assessment year was advance part only out of total sum of Rs. 5,95,43,410/- and balance stood offered for assessment year 2004-05. According to assessee, the whole of sum of Rs. 5,95,43,410/- was considered as a part of income for assessment year 2004-05 and it was well within its right to write-off a part of it as bad for the impugned assessment year. Vis-à-vis the other advances, there were no contentions made by the assessee before ld. CIT(Appeals) . Ld. CIT(Appeals) was of the opinion that the sum of Rs. 1,00,92,401/-, being advance given to Sambhav Steel Distributors stood already offered by the assessee as income before Settlement Commission and therefore, addition in this regard was not called for in the impugned assessment year. In other words, ld. CIT(Appeals) held that such an amount was allowable as bad debt for the impugned assessment year. He, therefore, deleted the disallowance of Rs. 1,00,92,401/- out of the total disallowance of Rs. 1,06,98,381/- made by the A.O.

30. Now before us, learned D.R., strongly assailing the order of ld. CIT(Appeals) , submitted that assessee had, before Settlement Commission offered Rs. 5,95,43,410/- as income and was now trying to claim a part thereof as bad debt in the impugned assessment year. According to learned D.R., there was no purchase and the whole of the alleged transactions with Sambhav Steel Distributors were bogus and therefore, write-off of any advance representing such bogus transaction could not be allowed.

31. Per contra, learned A.R. supported the order of ld. CIT(Appeals) and submitted that the actual purchases, which were admitted by the assessee before Settlement Commission as not having been made from M/s Sambhav Steel Distributors, came to Rs. 4,94,51,010/- against the offered sum of Rs. 5,95,43,410/-. According to him, the balance of Rs. 1,00,92,400/- was an advance that was not existing. Hence, in order to write it off from the balance sheet, the bad debt claim became imperative. The claim, according to him, should not have been disallowed and ld. CIT(Appeals) was correct in deleting this disallowance.

32. We have perused the orders and heard the rival submissions. Para 2 of the order of Income Tax Settlement Commission dated 24.3.2008 deal with the purchases claimed to have been made by the assessee from M/s Sambhav Steel Distributors. Assessee had clearly admitted before Settlement Commission that the claim of purchase from M/s Sambhav Steel Distributors were all bogus. Additional income of Rs. 9,05,87,044/- relating to assessment years 1999-2000 to 2003-04 was also offered by the assessee before Settlement Commission. Assessee having admitted that the whole of the purchases from M/s Sambhav Steel Distributors was bogus, no reliance could be placed on its claim that there was an advance of Rs. 1,00,92,400/- given by it to M/s Sambhav Steel Distributors. No doubt, assessee had offered Rs. 5,95,43,410/- for assessment year 2004-05 as bogus purchases from M/s Sambhav Steel Distributors before Settlement Commission. This is also clear from para 2 of the order of Settlement Commission, which is reproduced hereunder:-

“It is admitted that the steel claimed to be purchased from M/s Sambhav Steel Distributors is bogus. The applicant has disclosed additional income of Rs. 9,05,87,044/- relating to AYs 1999-00 to 2003-04 (Pg 1 of APB II) in this regard. However, in Rule 9 report the CIT has stated that in AY 2001-02, the purchases from this party is Rs. 2,32,40,000/- which should have been offered, whereas the applicant has offered only Rs. 1,96,79,595/- and thus there was short disclosure of Rs. 33.70 lakhs. In this regard the AR pointed out that the amount of Rs. 2,32,40,000/- is no doubt the total purchases from Sambhav Steel Distributors for the year ended 31.3.2001 reflected in the statement of account. However, it is explained that the total includes opening balance of Rs. 10,60,036/- and reversal of purchases of Rs. 25,01,970/- as returned. Hence the entire purchase of steel of Rs. 1,96,79,595/- is offered for Asst. Year 2001-02 which is the correct amount.

On verification the offer made by the applicant is correct. Hence, no adjustment is required.

In addition, the applicant has offered Rs. 5,95,43,410/- in AY 2004-05 as additional income. The total payments to M/s Sambhav Steel Distributors being Rs. 15,01,30,454/-, the entire sum is offered. (Rs. 9,05,87,044 + 5,95,43,410/-)

The above facts being correct, there is no need to make any adjustment on this account.”

Now the claim of the assessee is that out of Rs. 5,95,43,410/-, a sum of Rs. 1,00,92,400/- was only an advance and since this amount continued to appear in its balance sheet, it was required to effect a write-off and thus the claim of bad debt was to be allowed. We are unable to appreciate it for two reasons. In the first place, the claim of advance itself cannot be accepted when by assessee’s own version, its transactions of purchase from M/s Sambhav Steel Distributors were all bogus. In the second place, if allowed, the effect will be that income of Rs. 5,95,43,410/- admitted by the assessee before Settlement Commission for assessment year 2004-05 would get reduced by Rs. 1,00,92,400/-. In our opinion, assessee cannot be allowed to approbate and re-approbate. It cannot say that the purchases were all bogus but, advances were genuine. It cannot say purchases were bogus only for Settlement Commission but, these were true when the matter comes before the Tribunal. We are of the opinion that ld. CIT(Appeals) fell in error in deleting the disallowance made by the A.O. The disallowance of Rs. 1,00,92,400/- made by the A.O. therefore stands reinstated.

33. Ground No.2 stands allowed.

34. In the result, appeal of the Revenue for assessment year 2005-06 is partly allowed.

35. To summarise the result, both the appeals of assessment years 2005-06 and 2006-07 of the Revenue are partly allowed, the latter for statistical purposes.

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