PCIT Vs Maneesh Pharmaceuticals Pvt. Ltd. (Bombay High Court)
The Bombay High Court considered two appeals filed by the Revenue against a common order of the Income Tax Appellate Tribunal (ITAT) dated 17 June 2021 arising from assessment years 2011-12 and 2012-13. Both the Revenue and the assessee had filed cross-appeals before the ITAT, which allowed the assessee’s appeals and dismissed the Revenue’s appeals. Aggrieved by that decision, the Revenue approached the High Court.
The Revenue raised three questions of law in Income Tax Appeal No. 1050 of 2024 concerning the allowability of write-offs relating to inventories, bad debts and investments in wholly owned subsidiaries. In Income Tax Appeal No. 940 of 2024, the Revenue challenged the allowability of the investment write-off and the write-off of advances made to M/s. Lilac Medicine Private Limited (LMPL).
Regarding the inventory write-off of Rs.94,05,01,000/-, the ITAT had recorded that the assessee furnished complete item-wise details of the stock written off, including quantity, rate and value. The assessee claimed that expired goods had been written off in accordance with the norms of the Food & Drug Administration, Maharashtra, after taking back expired goods from stockists, C&F agents and other parties and destroying them. Although the Assessing Officer disallowed the claim for lack of documentary evidence, both the Commissioner of Income-tax (Appeals) and the ITAT held that the assessee had produced the requisite details. The ITAT also relied upon a report prepared by M/s. Grant Thornton evaluating debtors and inventories, including verification and assessment of saleable inventories, and noted that expired stocks had been identified during physical verification and written off accordingly.
The High Court observed that the CIT(A), after considering the Assessing Officer’s remand report dated 26 March 2019, found that the expiry of goods was not disputed and that the inventories had been thoroughly verified. Since both appellate authorities had concurrently accepted the documentary evidence and treated the matter as one of fact, the High Court held that no substantial question of law arose on the inventory write-off issue and dismissed the Revenue’s challenge on this question.
The second issue related to the write-off of bad debts amounting to Rs.84,37,45,000/- under Section 36(1)(vii) of the Income-tax Act, 1961. The ITAT recorded that the assessee had produced additional evidence, including details of sundry debtors written off, copies of sale invoices, ledger accounts showing sales in earlier years and an ageing report prepared by M/s. Grant Thornton recommending creation of a provision for doubtful debts. According to the ITAT, the Grant Thornton report dated 22 November 2011 recommended the write-off after conducting an ageing analysis, and the assessee determined the quantum of bad debts based on that report and management’s past experience.
The ITAT further held that the requirements of Sections 36(1)(vii) and 36(2) had been satisfied because the debts claimed as bad had already been taken into account in earlier years. It also found that the assessee had established the irrecoverability of the debts and that, once the debts had been written off in the books, it was not necessary to prove that they had actually become bad. The ITAT relied upon the Supreme Court decision in TRF Limited vs. CIT and CBDT Circular No. 12/2016 dated 30 May 2016 in reaching this conclusion.
The High Court noted that the ITAT’s findings were based on documentary evidence and the legal position regarding bad debt write-offs. It held that the Revenue’s challenge essentially raised questions of fact rather than substantial questions of law and declined to entertain the question relating to bad debt write-off.
With respect to the write-off of investments amounting to Rs.282,01,00,000/- in wholly owned subsidiaries, the High Court observed that the corresponding question of law required admission. It accordingly admitted the Revenue’s appeal on the question whether the ITAT was justified in allowing the investment write-off despite the Revenue’s contention that the investments were capital in nature and that no evidence had been furnished to establish that they were made for business purposes.
The High Court also admitted the second question raised in Income Tax Appeal No. 940 of 2024 concerning the write-off of advances of Rs.5,75,13,726/- made to M/s. Lilac Medicine Private Limited (LMPL). The admitted question concerns whether the ITAT was justified in allowing the write-off despite the Revenue’s contention that the advances were non-trade advances, capital in nature, and that the assessee had failed to explain how they were for business purposes. The Court recorded that the respondent waived service.
FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT
1. These are two appeals filed by the Appellant/revenue challenging the common order dated 17 June 2021 passed by the Income-tax Appellate Tribunal (for short “ITAT”) against the order dated 28 March 2019 passed by the Commissioner of Income-tax (Appeals) (for short “CIT(A)”). The assessment years (A.Ys) involved are AY 2011-12 and 2012-13.
2. The Appellant/revenue and the Respondent/assessee have filed cross-appeals before the ITAT, which were disposed of by the impugned order dated 17 June 2021. The ITAT by the aforesaid impugned order allowed the Respondent/assessee’s appeal on the grounds of appeal raised by the Respondent/assessee and dismissed the Appellant/revenue’s appeal on the grounds of appeals raised by the Appellant/revenue therein.
3. Being aggrieved by the aforesaid, the Appellant/revenue has preferred the present appeals. In Income-tax Appeal No. 1050 of 2024 the following questions of law have been raised:
“(i) Whether on the facts and in the circumstances of the case and in law, the Hon’ble ITAT was justified in allowing to write off from the inventory of finished goods in the books of accounts of Rs.94,05,01,000/- without appreciating the facts that the assessee has failed to submit the details of the inventory of Rs. 9405.01 lakhs which was supposed to be non moving. Further, the item wise/quantity wise list of the purchases, the year of purchase, reasons for the goods/inventory held as non moving/expired etc. have not been justified by the assessee with any documentary evidences.
(ii) Whether on the facts and in the circumstances of the case and in law, the Hon’ble ITAT was justified in allowing to write off the bad debt of Rs.8,437,45,000/- without appreciating the facts that assessee has failed to furnish any details regarding the names and addresses of the C & Fs and C & As, details regarding when the materials were sent to them on consignment and in which year these sales were included in the income by the assessee. Assessee had also failed to furnish any details on what efforts were made to collect the amounts outstanding against these debtors.
(iii) Whether on the facts and in the circumstances of the case and in law, the Hon’ble ITAT was justified in allowing to write off the investment made of Rs.282,01,00,000/- without appreciating the facts that the assessee has failed to furnish any evidence to show that the investments in the wholly owned subsidiaries was for the purpose of business and the investments made by the assessee in subsidiaries companies were capital in nature and not for business purpose.”
4. In Income-tax Appeal No. 940 of 2024, the following questions of law are raised:
“(i) Whether on the facts and in the circumstances of the case and in law, the Hon’ble ITAT was justified in allowing to write off the investment made of Rs.282,01,00,000/- without appreciating the facts that the assessee has failed to furnish any evidence to show that the investments in the wholly subsidiaries was for the purpose of business and the investments made by the assessee in subsidiaries companies were capital in nature and not for business purposes. The decision of the ITAT Ahmedabad in the case of APS Star Industries Ltd. (86 ITD 182) is squarely applicable to the facts of the case.
(ii) Whether on the facts and in the circumstances of the case and in law, the Hon’ble ITAT was justified in allowing to write off the advances made to M/s. Lilac Medicine Private Limited (LMPL) of Rs.5,75,I3,726/- without appreciating the facts that the advances given by the assessee were non trade advances and were capital in nature and the assessee has failed to clarify the reasons for the trade advances and how the same was for the purpose of business.”
5. Since some common questions of law are raised in the aforesaid appeals, and they arise out of the same impugned order, we can conveniently dispose of the aforesaid appeals by this common order.
6. Insofar as question of law no. (i) in Income-tax Appeal No. 1050 of 2024 is concerned, the ITAT, in the impugned order, has categorically held that, in respect of write-off of inventories amounting to Rs.94,05,01,000/-, the Respondent/assessee had submitted complete item-wise details of the stock written-off along with quantity, rate and value. The ITAT has also held that the Respondent/assessee claimed the loss on the basis that the expired goods had been written off as per the norms of Food & Drug Administration (FDA), Maharashtra. The Respondent/assessee had also taken back expired goods from stockiest, C&F agents and other parties and had destroyed the same, which was written off in the books of accounts. The Assessing officer, however, disallowed the aforesaid write-off on the ground that the Respondent/assessee had failed to substantiate its claim by sufficient documentary evidence. The CIT(A) as well as the ITAT reversed the findings of the Assessing Officer, holding that the Respondent/assessee had furnished the requisite details and that the inventories in respect of which the write-off was claimed were old inventories. The ITAT also placed reliance on the report submitted by the Respondent/assessee given by the reputed firm of Chartered Accountants (C.A.) M/s Grant Thornton, prepared during the year 2011 to evaluate the status of debtors and inventories, particularly with regard to the verification and assessment of saleable inventories. The ITAT further held that, during the course of physical verification, the Respondent- assessee identified the expired stocks and accordingly wrote-off the same in its books of account.
7. As noted above, the Respondent-assessee has furnished item-wise details of stock written-off. The CIT(A), after considering the remand report dated 26 March, 2019 submitted by the Assessing Officer, observed that the fact of expiry of goods was not in dispute and that the same stood explained by thorough verification of inventories undertaken by the Respondent-assessee during AYs 2011-12 & 2012-13.
8. Considering the categorical findings recorded by the ITAT in the impugned order that the write-off of Rs.94,05,01,000/- claimed by the Respondent-assessee is supported by appropriate documentary evidence, we do not see as to how a substantial question of law arises, inasmuch as, the issue of write off is a pure finding of fact and two concurrent fact-finding appellate bodies, namely, CIT(A) and ITAT, on consideration of the material evidence placed on record by the Respondent-assessee, have allowed the aforesaid write-off. Therefore, insofar as question of law no. (i) in Income Tax Appeal No. 1050 of 2024 is concerned, we hold that the same does not give rise to any substantial question of law and accordingly, deserves to be dismissed/rejected.
9. Insofar as question of law no. (ii) in Income Tax Appeal No. 1050 of 2024 is concerned, relating to the write-off of bad debts amounting to Rs.84,37,45,000/- in respect of outstanding debtors under section 36(1)(vii) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”), the ITAT, in the impugned order has held that the Respondent-assessee furnished additional evidence in support of its claim for bad debts. These evidences included details of sundry debtors written-off, copies of sale invoices pertaining to these debtors and ledger accounts indicating sales made to those debtors in earlier years. The ITAT has also held that the Respondent-assessee furnished an ageing report as given by C.A. firm M/s Grant Thornton recommending the creation of a provision for doubtful debts. The ITAT further held that M/s Grant Thornton, in its report dated 22 November 2011, recommended the write-off of debts after conducting ageing analysis and that, on the basis of the said report, coupled with the past experience of the management, the quantum of bad debts was determined and written off during the relevant year. The ITAT accordingly held that there was sufficient documentary evidence to support the Respondent-assessee’s claim of bad debts. Further, upon reading of Section 36(1)(vii) with Section 36(2) of the Act, the ITAT has held that the mandate of the aforesaid section has been fulfilled by the Respondent-assessee, inasmuch as the debts claimed as bad debts in the present assessment year, were claimed as deduction in the earlier years in its books of accounts. The ITAT also held that the Respondent-assessee had established that the debt had become irrecoverable and that, once such exercise had been carried out, it was enough if the debts were written-off as irrecoverable in the books of account. Relying on the decision of the Supreme Court in the case of TRF Limited vs. CIT1, the ITAT further held that it was not necessary for the Respondent-assessee to prove that the debts had actually become bad. In view of the decision of TRF Limited vs. CIT (supra) and the CBDT Circular No.12/2016 dated 30 May 2016, the ITAT rightly held that, once the debts had been written-off, then the onus of proving that the debts were bad was no longer there on the Respondent-assessee.
10. Accordingly, having regard to the material placed on record, the ITAT allowed the write-off of bad debts of Rs.84,37,45,000/-. Considering these findings of the ITAT, which are based on documentary evidence, and legal position insofar as write-off of bad debts is concerned, we are not inclined to entertain question of law no. (ii) as raised by the Appellant/revenue in Income Tax Appeal No. 1050 of 2024. We are in fact of the view that this question of law is more in the nature of question of fact, which has been raised by the Appellant-revenue and in view thereof, the same requires to be dismissed/rejected.
11. Question of law no. (iii) in Income-tax Appeal No. 1050 of 2024 is similar to question of law no. (i) raised in Income-tax Appeal No. 940 of 2024. Having heard the learned counsel for the parties and having perused the reasoning of the ITAT in the impugned order, we are of the opinion that said question of law requires to be admitted. Hence, Admit on the following question of law:
“Whether on the facts and in the circumstances of the case and in law, the Hon’ble ITAT was justified in allowing to write off the investment made of Rs.282,01,00,000/- without appreciating the facts that the assessee has failed to furnish any evidence to show that the investments in the wholly owned subsidiaries was for the purpose of business and the investments made by the assessee in subsidiaries companies were capital in nature and not for business purpose.”
12. Further, question of law no. (ii) in Income Tax Appeal No. 940 of 2024 also requires to be admitted, having perused the reasoning of the ITAT in the impugned order. Hence, Admit on the following questions of law:
(ii) Whether on the facts and in the circumstances of the case and in law, the Hon’ble ITAT was justified in allowing to write off the advances made to M/s. Lilac Medicine Private Limited (LMPL) of Rs.5,75,I3,726/- without appreciating the facts that the advances given by the assessee were non trade advances and were capital in nature and the assessee has failed to clarify the reasons for the trade advances and how the same was for the purpose of business.”
13. Respondent waives service.
Note:
1 (2010) 323 ITR 397
