Case Law Details
Elite International (P.) Ltd. Vs ACIT(ITAT Mumbai)
In the instant case Upon perusal of financial statements we find that the assessee has claimed the said expenditure of Rs. 530.47 Lacs under the head ‘Provision for doubtful advances’ and this provisions has been reduced from the figures of Advances recoverable in cash or in kind or for value to be received under the head Other current Assets, Loans & Advances in the Balance Sheet for impugned AY. A perusal of Debit notes / ledger extract of the suppliers placed in the paper-book reveals that the assessee has raised these debit notes between AY 2003-04 to 2008-09 against various suppliers / parties and made the provisions against doubtful advances for Rs.530.47 Lacs during impugned AY and claimed the same by way of debit to Profit & Loss Account and the same has been disallowed by the revenue treating the same as mere provisions and hence not an eligible expenditure. We find strength in the argument of Ld. DR that the issue under dispute is not at all covered by the provisions of Section 36(i)(vii) as this section deals with ‘bad debts written off’ by the assessee qua sundry debtors, which is not the case here.
As we are dealing with admissibility of expenditure u/s 37 and not u/s 36(i)(vii) according to which, there must be an expenditure at the first instance which has crystallized during the impugned AY as against deduction u/s 36(i)(vii) which is allowable to the assessee the moment bad debt is written off in the books of accounts, notwithstanding the fact that whether the same has actually become bad or not.
Therefore, to conclude, we hold that the impugned expenditure, being mere provisions, were not allowable to the assessee which results into dismissal of all grounds of assessee’s appeal.
FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-
1. The captioned appeal by assessee for Assessment Year [AY] 2009-10 assails the order of Ld. Commissioner of Income Tax (Appeals)-12 [CIT(A)], Mumbai dated 11/03/2014 qua confirmation of disallowance of Rs.530.47 Lacs treating the same as provision. The assessee has raised additional grounds of appeal and the same being alternative grounds which do not require appreciation of new facts and therefore, taken on record. The final grounds of appeal reads as under:-
1.1 The commissioner of Income Tax-12, Mumbai erred in confirming the disallowance of Rs. 5,30,47,066/- made u/s 36 of the IT Act on the ground that only bad debt is allowable under the above provision and the provision for the doubtful debt made in account is not allowable.
1.2 The appellant submits that, no amount is recovered out of the above debt for which the provision was made even till today and hence the said amount of provision should have been allowed as business loss/ bad debt u/s 36/37 of IT Act.
1.3 The Ld. CIT(A) erred in treating losses written off during the year as provision on account of bad debts.
1.4 The Ld. CIT(A) erred in not allowing losses of Rs. 5,30,47,066/- which are written off during the year on account of damages during the process of cloth by process house and finally not recoverable.
2. Facts leading to the dispute are that the assessee, being resident corporate assessee engaged in the business of manufacturing & Export of Textile made-ups & handloom products, was assessed for impugned AY u/s 143(3) at loss of Rs.10,87,20,428/- vide Assessing Officer [AO] order dated 28/11/2011 as against returned loss of Rs.16,17,67,494/- e-filed by assessee on 30/09/2009. The sole addition suffered by assessee was for Rs.530.47 Lacs against provision for certain doubtful debts u/s 36(i)(vii), as the same being, in the opinion of Ld. AO, mere provision for doubtful advances and hence not allowable.
3. Aggrieved, the assessee contested the same without any success before Ld. CIT(A) vide impugned order dated 11/03/2014, where the assessee provided the break-up of the provision along with ledger accounts thereof and admitted that the impugned amounts were provision for doubtful debts. After perusing various contentions / submissions made by the assessee, Ld. CIT(A) confirmed the said disallowance with following observations:-
“I have carefully considered the oral submissions of the learned A. R. of the appellant and also the facts averred by the A.O. and the grounds of appeal raised by the appellant. On being asked during the appellate proceedings, the learned AR fairly informed that the impugned amounts are in the nature of “provisions” only. On verification of ledger accounts filed by the learned A. R. during the appellate proceedings, it is seen that the impugned amounts are not written off and still outstanding in the books of the appellant company. Thus, it has now become clear that the impugned amounts represent ‘provisions’ only. As per Explanation to Section 36(i) (vii) of the Act, “for the purpose of this clause, any bad debts or part thereof written off as irrecoverable shall not include any provision for bad and doubtful debts made in the accounts of the assessee.” As such, the assessee’s claim u/s 36(i) (vii) is not tenable. Moreover, it is also not established that the impugned amounts were disclosed as income of the appellant in the previous year or years prior thereto as is the requirement laid down in section 36(2) of the Act. As stated hereinabove, the impugned amounts are not written off even. In view of these facts and also the legal position discussed heretofore, the appellant’s claim is not tenable in the eyes of law from any angle. Therefore, the grounds of appeal raised by the appellant in Form No. 35 stand dismissed and the A.O. ’s action of making disallowance on this count stands confirmed.”
Aggrieved, the assessee is in appeal before us.
4. The Ld. Counsel for assessee [AR], while drawing our attention to paper book, contended that the assessee presently being a sick company, for the purpose of export, procured raw material and got them processed from third parties on contractual basis. However, since the ratio of wastage was very high during processing, the assessee raised debit notes against those parties who, in turn, refused to pay the outstanding amount which led the assessee to write-off these amounts and hence, allowable as business loss u/s 37 / 28(i) of the Income Tax Act, 1961. The debit notes were issued on account of loss of stock / process loss of goods for which the assessee has already paid higher charges to the processing parties. The assessee has actually written off the said amount in the books of accounts under the head ‘Provision for doubtful advances’ and therefore the same are allowable u/s 37 / 28(i) of the Income Tax Act. Reliance has been placed on following judicial pronouncements for various contentions:-
(i) Vijaya Bank Vs. CIT [SC 323 ITR 166 2010]
(ii) Southern Technologies Ltd. Vs. JCIT [SC 320 TR 577]
(iii) CIT Vs. Tainwala Chemicals & Plastics India Ltd. [Bombay HC 215 Taxmann 153]
(iv) CIT Vs. Newanagar Co-operative Bank Ltd. [Gujarat HC 54 com28]
(v) CIT Vs. Abdul Razak & Co. [Gujarat High Court 1982 136 ITR 825]
(vi) ACIT Vs. Hi-Lines Pens Pvt. Ltd. [Delhi Tribunal ITA No. 2925/Delhi/2012]
(vii) Minda (HUF) Limited Vs. JCIT [Delhi Tribunal 101 ITD 191]
5. Per contra, DR placed reliance on the findings of Ld. CIT(A) and contended that no deduction could be allowed against provisions for advances and therefore, not allowable. Moreover, the assessee’s case was not at all covered by the provisions of Sec. 36(i)(vii) as it was not a case of ‘debts being written off’ but a matter of claim of business expenses u/s 37 and therefore, reliance placed by the assessee on the judicial pronouncements was misconceived.
6. We have heard the rival contentions and perused the relevant material on record including the cited case laws. First of all, upon perusal of financial statements we find that the assessee has claimed the said expenditure of Rs. 530.47 Lacs under the head ‘Provision for doubtful advances’ and this provisions has been reduced from the figures of Advances recoverable in cash or in kind or for value to be received under the head Other current Assets, Loans & Advances in the Balance Sheet for impugned AY. A perusal of Debit notes / ledger extract of the suppliers placed in the paper-book reveals that the assessee has raised these debit notes between AY 2003-04 to 2008-09 against various suppliers / parties and made the provisions against doubtful advances for Rs.530.47 Lacs during impugned AY and claimed the same by way of debit to Profit & Loss Account and the same has been disallowed by the revenue treating the same as mere provisions and hence not an eligible expenditure. We find strength in the argument of Ld. DR that the issue under dispute is not at all covered by the provisions of Section 36(i)(vii) as this section deals with ‘bad debts written off’ by the assessee qua sundry debtors, which is not the case here. In the instant case, the assessee is claiming expenditure against debit notes raised by him against various suppliers, which, in his opinion, have become doubtful and hence allowable. Therefore, the admissibility of impugned expenditure is covered by the provisions of Section 37(1) which reads as follows:-
37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 [***] and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession” .
Upon perusal of statutory provisions, we find that any expenditure laid out or expended wholly and exclusively for the purposes of business shall be allowed provided that same is not personal expenditure or capital expenditure and not of the nature covered by Section 30 to 36. However, prime condition to claim the same is that the expenditure, at the first instance, must have crystallized during the impugned AY before which the same could be claimed by the assessee and this factor, in our opinion, is missing in the instant case. Upon perusal of documents placed on record, we find that the assessee could not produce any evidence to show that the suppliers refused to pay the outstanding amount or denied their liability in any manner which can lead to a conclusion that the impugned provision crystallized during the year. The relevant ledger extract reveals that the assessee himself has written off the same during Financial Year 2013-14. It is also noted that the relevant portion of ‘Note No. 15’ of ‘Notes forming part of account’ attached to financial statements of impugned AY reads as under:-
“15(a) The Company has raised claims of Rs.6,99,57,965/- on the processing units for the rejections / damages to the fabrics. The company was in negotiation with parties to recover the amount. However, the company is of the opinion that Rs.5,30,47,066/- is doubtful of recovery. Accordingly, provisions is being made in the books of accounts.”
The above observation of the assessee in notes to the account coupled with treatment of the same in the books of accounts and an analysis of other documents placed in the paper book lead us to form an opinion that the impugned expenditure, being mere provisions, did not crystallized during the year and hence not allowable to the assessee. The expenditure to be admissible, at the threshold, must be capable of being classified as an expenditure at the first instance and deduction of mere provisions / estimation could not be allowed to the assessee unless provided by the statute. On the same analogy, the same is not admissible either under Section 28(i).
7. The assessee has placed reliance on the judgment of Hon’ble Supreme Court rendered in Vijaya Bank Vs. CIT [supra] for the contention that deduction of provisions on aggregate basis in the Balance Sheet amounts to actual write-off. However, the same principle do not apply in the instant case as we are dealing with admissibility of expenditure u/s 37 and not u/s 36(i)(vii) according to which, there must be an expenditure at the first instance which has crystallized during the impugned AY as against deduction u/s 36(i)(vii) which is allowable to the assessee the moment bad debt is written off in the books of accounts, notwithstanding the fact that whether the same has actually become bad or not. Similarly, the decision in Southern Technologies Ltd. Vs. JCIT [supra] & CIT Vs. Tainwala Chemicals & Plastic India Ltd. [supra] & CIT Newanager Co-operative Bank Ltd. [supra] was rendered in the context of Section 36(i)(vii). In the case of CIT Vs. Abdul Razak & Co. [supra] & ACIT Vs. Hi-Lines Pens Pvt. Ltd. [supra] & Minda (HUF) Limited Vs. JCIT [supra], there was no dispute as to the crystallization of expenses and those cases dealt with a situation where the expenditure itself, incurred by the assessee, was not in question and therefore, distinguishable with the present case in hand.
8. Therefore, to conclude, we hold that the impugned expenditure, being mere provisions, were not allowable to the assessee which results into dismissal of all grounds of assessee’s appeal.
9. In nutshell, the assessee’s appeal stands dismissed.
Order pronounced in the open court on 07th June, 2017.
