Addl. CIT Vs Hiravati Marine Products Pvt. Ltd. (ITAT Rajkot)
Conclusion: Merely the payment of investigation charges to the chartered accountant firm was made by the bank on behalf of the assessee did not mean that the transaction was covered under the provisions of section 194A read with section 2(28A). As such the assessee was liable to deduct the TDS under section 194J and thus, assessee was not eligible for deduction for the expenses due to non-deduction of TDS.
Held: Assessee was under the obligation to make the payment of investigation charges carried out by the firm of chartered accountant appointed by the bank. But assessee failed to make the payment to the CA firm. Therefore, the banker had made the payment to the CA Firm on behalf of assessee which was recovered by bank from assessee by debiting its accounts in its books of accounts. AO held that there was non-deduction of TDS hence the expense was disallowed and added back to the total income of assessee. Now the issue arose whether the payment by assessee to the bank was not subject to TDS under section 194A read with section 2(28A) or 194C/194J. It was held that the primary liability of assessee was to make the payment to the chartered accountant firm. Thus merely the payment was made by the bank on behalf of the assessee did not mean that the transaction was covered under the provisions of section 194A read with section 2(28A). As such the assessee was liable to deduct the TDS under section 194J. Thus, assessee was not eligible for deduction for the expenses due to non-deduction of TDS under section 194J read with section 40a(ia). However, as per the 2nd proviso to the section 40a(ia), the expenses on account of non-deduction of TDS would not be disallowed if the recipient had included such receipts in its books of accounts and offered the same to tax. Therefore, in the interest of justice and fair play, the issue was set aside to the file of AO for fresh adjudication as per the provisions of law. AO will verify whether the recipient had included the receipt from the assessee in its books of accounts, if yes, then there would not be any disallowance on account of non-deduction of TDS under section 194J.
FULL TEXT OF THE ITAT JUDGEMENT
The captioned Cross appeals have been filed at the instance of the Revenue and Assessee against the order of the Commissioner of Income Tax (Appeals) – Jamnagar [CIT(A) in short] dated 17/03/2010 and 24/01/2013 arising in the matter of assessment order passed under s.143(3) r.w.s. of the Income Tax Act, 1961 (here-in-after referred to as “the Act”) dated 30/12/2010 relevant to Assessment Years (AYs) 2007-08 & 2008-09.
2. First, we take up ITA bearing no 947/Rjt/2010 for A.Y. 2007-08. Revenue has raised the following grounds of appeal.
1. The Id. CIT(A) has erred in law and in facts in deleting the addition of Rs.2,08,47,623/- being the disallowance on account of advances written off.
2. The Ld.CIT(A) has erred in law and facts in deleting the addition of Rs.7,68,148/- being the disallowance on account of delay in payments made to employer as well as employee’s contribution to provident fund.
3. The Id. CIT(A) has erred in law and in facts in deleting the addition of Rs.7,23,110/- being the disallowance on account of investigation expenses paid by the bank.
4. The Ld.CIT(A) has erred in law and in facts in deleting the addition of Rs.67,10,325/- being the difference in the amount with reference to the TDS certificate and that claimed as job work income.
5. That on the facts and in the circumstances of the case, the Id.CIT(A) ought to have upheld the order of the Assessing Officer.
6. It is therefore prayed that the order of the Ld.CIT(A) be set aside and that of the Assessing Officer be restored.
7. That the revenue craves leave to add, amend, alter or withdraw any | grounds of appeal.
3. The first issue raised by the Revenue is that ld. CIT-A erred in deleting the addition made by the AO on account of trading advances written off amounting to Rs. 2,08,47,623.00
4. The facts of the case are that the assessee is a company and engaged in the business of processing & exports of marine products. During the year under consideration, the assessee has claimed bad debts of Rs. 2,10,17,075/-which represented the advances written off. As such these advances written off were never booked as income of the assessee in the earlier years.
5. On the question by the AO, the assessee claimed that the impugned bad debts are a business loss on account of the advance given by it to various fishers, fisheries for procurement of raw materials. As theses advance could not be recovered over a period of time, therefore, these were written off in the profit & loss account. As such the advances written off are allowable as expenses or business loss. The assessee also claimed that its case falls under the provision of section 37/ 28 of the Act. The assessee also submitted that it is practice and business exigency to advance the money before the season commences to these persons for the procurement of the fishes. These advances have been given to various parties in period 1993-94 to 1997-98, but after that, the business of the assessee and most of these parties suffered badly due to Cyclone in 1998, and a subsequent massive earthquake.
5.1 Subsequently most of the persons to whom advances were given were not traceable. Shri babulal panjri who was looking after the main purchase passed away in 2002 and contact of the company with all these persons were also lost.
5.2 The assessee also claimed that it tried through various other brokers for recovery of these amounts but failed. Thus during the year the same was written off and claimed a deduction as a business loss. The assessee in support of its claimed filed the promissory notes and agreement letters on a sample basis for verification and ledger account of parties for the last 3 to 4 years.
5.3 However the AO observed that all the promissory note filed by the assessee are sign by the parties in Gujarati and the language of the same is common. A similar issue of bad debts is pending in appeal for AY 2006-07. All the accounts of the parties are having an opening debit balance and contain no transaction during the year under consideration. The assessee failed to prove whether any purchase transaction had taken place with these parties. In the absence of the complete address of the parties, it was not possible to establish the genuineness of the transactions with these parties. Thus the assessee has failed to prove that the advances were given in the course of business. In view of the above, the claim of the assessee for the business loss for Rs. 2,10,17,075/- was rejected and the same added to the total income of the assessee.
6. The aggrieved assessee preferred an appeal to the Ld.CIT (A) and submitted that the AO agreed that the advances to the parties were fully supported by promissory notes and agreement for the supply of the goods. The AO also agreed that these advances are old and there are opening balances with the parties.
7. The Ld.CIT (A) deleted the addition after having the reliance on the order of his predecessor in the own assessee case in the preceding assessment year.
8. Being aggrieved by the order of ld. CIT-A, the Revenue is in appeal before us.
9. The ld. DR before us submitted that the deduction claimed by the assessee for the advances written of does not represent the bona fide business transactions. It is because the assessee has not produced any documentary evidence of the parties to whom the advances were given by it. The opening balance and the closing balance shown in the ledger copies of the parties is the same. As such there was no transaction of purchases which was carried out with these parties. The amount of advances shown by the assessee are not coming in absolute figure rather these are representing the figures in fraction which is not the normal practice to give the advance in fraction of rupees. The learned DR vehemently supported the order of the AO.
10. On the contrary, the ld. AR before us filed a paper book running from pages 1 to 95 and submitted as under:
1. Appellant is in the business of seafood processing
2. Trade advances have been given to various fishermen for procurement of its raw material “on account”
3. Total trade advances written off during the year is Rs. 7,46,98,998/- most of which were very old and were given during the period 93-94 to 97-98.
4. Considering the length of time, the appellant has written off these advances in its books of accounts.
Submission:
1. Appellant is a private limited company and gets its books of accounts audited every year wherein the trade advances have been disclosed on year to year basis.
2. Throughout the trade it is a practice and business exigency that before the season commences advances are given to such suppliers for acquisition of “fish” and hence giving advance is inevitable in business of “sea food processing”
3. At the time of giving these advances, an agreement is executed which is similar to undertaking given by the person. Such people generally do not possess “permanent address”. Such advances are given only on the basis of “personal relationship” and/or verification at personal level/conduct of past.
4. Such people receive advances not only from appellant but various business houses engaged in the sea food activity.
5. The region was badly stuck by Cyclone in 1998 and thereafter a massive earthquake. In this two great national disaster, most of the business of these parties as well as of the assessee suffered badly. Therefore, most of the persons to whom advances were given have disappeared. Also as the fishing is in the mid sea, so many times the fishermen crosses national boundaries and transgresses into enemy territories and they are arrested.
6. Assessee also tried through various other brokers for recovery of these amounts. However, all efforts failed flat. Therefore, during the year same were written off and claim was made of business loss as and when appellant was certain that such amounts are not recoverable.
7. In AY 2006-07 and 2007-08 the same issue was raised by the Learned AO and the claim of the assessee was disallowed by LD AO but the same was allowed by CIT(A) stating that loss arising to the appellant is in the ordinary course of business and incidental thereto and was therefore a trading loss allowable under section 28 itself.
8. Even during the earlier years say AY 2005-06, 06-07, 07-08 the case of appellant was selected for scrutiny u/s 143(3). In none of the earlier years has the assessing officer doubted on the advances given by appellant. All such advances have been accepted in past by the then assessing officer. However, it is only at the time this amount is written off has the assessing officer raised objection and has raised question on whether such advances are bonafide.
9. Appellant further relies on the judgement of:-
i. CIT V Mysore Sugars Limited 46 ITR 649 ( Sc)
ii. CIT v Abdul Razak & Co 136 ITR 825 ( Gui)
10. Further the facts of the case are identical to the case of Mohan Meakin Ltd. reported in 348 ITR 109 (Delhi) wherein Hon. High Court has held as under:-
6. The facts of Chenab Forest Co. v. CIT [1974] 96 ITR 568 (J&K) are similar to the instant case. In this case, the assessee was engaged in exploitation of forests, i.e., felling of trees, cutting them into sizeable logs, etc. In that case, the assessee had to engage various sub-contractors, who were to be given advances before coming to the works. The advances as also the cost of rations supplied to them had to recouped from the sub-contractors, earnings during the working season. Any balance left as debit or credit wasbeing carried forwarded to the year following, when again some advances had to be made for the labour to come out to the works. The assessee for the assessment years 1964-65 filed its return claiming some amount to be deducted as bad debts. The Assessing Officer did not allow any deduction on account of the fact that the assessee had not taken any steps for realisation of those debts. The appellate authorities also agreed with the finding of the Assessing Officer. The Tribunal also did not agree with the alternate plea of the assessee that if its case was not covered under section 36, the same could be allowed under section 37. In that case also, the learned counsel appearing for the assessee conceded this position that he could not claim deduction on account of its being bad debt if it did not come within the purview of section 36(2) of the Act, and this position was also not disputed that in this reference such matter cannot be gone into which relates to facts on the question whether it was a bad debt or not as contemplated by section 36 of the Act. It was then submitted by the learned counsel that the assessee was entitled to deduction under section 28 read with section 37 of the Act since the nature of the business was such that the assessee had to keep his business going on, had to advance money to the sub-contractors because without doing so it would not have been able to get the labour in time and carry on the supplies.
7. The Division Bench of the J&K High Court has held as under (page 575) :
“In my opinion, if section 28 is read along with section 29 then it would be clear that the computation of the income as contemplated by section 28 has to be in accordance with the provisions contained in sections 30 to 43 which means that it should be also in accordance with section 37 if the case falls under section 37. In the present case, out of sections 30 to 43 the only sections which can be made appli cable are either section 36 or 37. I have already stated above that the assessee-company’s learned counsel is not relying on section 36 but is relying on section 37 and to me it appears that sections 28 and 29 read together do not show that if a case comes under section 36 then the applicability of section 37 will be taken out but rather means that a case may come either under section 36 or section 37 and a compu tation may be made under either of the sections.
It also appears that there is a clear distinction between a business expenditure and a business loss, the former is indicative of a volition but in loss it comes upon him so to speak as ab extra and I am also of opinion that non-capital expenditure incurred for the purpose of business would fall to be deducted under the omnibus residuary section 37 to which I will be now referring. Section 37(1) lays down as follows :
‘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“.’
The essential ingredients of the section are, therefore :
(i) that it should be an expenditure of the nature not described in sections 30 to 36 ;
(ii) it should not be in the nature of capital expenditure or personal expenses of the assessee ;
(iii) that it should be laid out or expended wholly and exclusively for the purposes of the business, etc.
No : 0115
The facts and the circumstances which I have stated above would in my opinion clearly show that the advances which had been made by the assessee in the present case were certainly of a type which would be within the contemplation of the^words laid out or expended wholly and exclusively for the purposes of the business’. Now, with regard to the contention whether section 37 would be applicable when section 36 is applicable in the present case, in my opinion it is important to note that the Legislature has advisedly used the word ‘described’ and not ‘covered’ in section 37. Section 37 clearly appears to be a residuary section extending the allowance to items of business expenditure and not of business losses which are deductible on the ordinary principles of commercial accounting.”
8. The facts of the case before us being similar to the case of Chenab Forest Co. [1974] 96 ITR 568(J&K), we find ourselves in complete agreement with the findings recorded by the Division Bench of the J&K High Court.
9. The case of CIT v. Mysore Sugar Co. Ltd. [1962] 46 ITR 649(SC) related to claim of bad debts under the Act of 1922. In that case also, the case of the assessee-company was changed from one section (section 10(2)(xi) corresponding to section 36(l)(vii) and section 36(2) of the 1961 Act) to another (section 10(1) and section 10(2)(xv) corresponding to section 28(1) and section 37 of the 1961 Act) from time to time. In that context, the hon’ble Supreme Court observed that they did not wish to emphasise the nature of the question posed, because the central point to decide is whether the money which was given up represented a loss of capital, or must be treated as revenue expenditure. The Supreme Court held as under (page 652) :
“The tax under the head ‘Business’ is payable under section 10 of the Income-tax Act. That section provides by subsection (1) that the tax shall be payable by an assessee under the head ‘Profits and gains of business, etc.’ in respect of the profits or gains of any business, etc., carried on by him. Under sub-section (2), these profits or gains are computed after making certain allowances. Clause (xi) allows deduc tion of bad and doubtful business debts. It provides that when the assessee’s accounts in respect of any part of his business are not kept on the cash basis, such sum, in respect of bad and doubtful debts, due to the assessee in respect of that part of his business is deductible but not exceeding the amount actually written off as irrecoverable in the books of the assessee. Clause (xv) allows any expenditure not included in clauses (i) to (xiv), which is not in the nature of capital expenditure or personal expenses of the assessee, to be deducted, if
Page No: 0116
laid out or expanded wholly and exclusively for the purpose of such business, etc. The clauses expressly provide what can be deducted ; but the general scheme of the section is that profits or gains must be calculated after deducting outgoings reasonably attributable as busi ness expenditure but so as not to deduct any portion of an expenditure of a capital nature. If an expenditure comes within any of the enumerated classes of allowances, the case can be considered under the appropriate class ; but there may be an expenditure which, though not exactly covered by any of the enumerated classes, may have to be considered in finding out the true assessable profits or gains. This was laid down by the Privy Council in CIT v. Sir S. M. Chitnavis [1932] 2 Comp Cas 464 (PC) ; [1932] LR 59 IA 290 (PC) and has been accepted by this court. In other words, section 10(2) does not deal exhaustively with the deductions, which must be made to arrive at the true profits and gains.
To find out whether an expenditure is on the capital account or on revenue, one must consider the expenditure in relation to the business. Since all payments reduce capital in the ultimate analysis, one is apt to consider a loss as amounting to a loss of capital. But this is not true of all losses, because losses in the running of the business cannot be said to be of capital. The questions to consider in this connection are : for what was the money laid out ? Was it to acquire an asset of an enduring nature for the benefit of the business, or was it an outgoing in the doing of the business ? If money be lost in the first circumstances, it is a loss of capital, but if lost in the second circumstances, it is a revenue loss. In the first, it bears the character of an investment, but in the second, to use a commonly understood phrase, it bears the character of current expenses.”
10. Applying the principles of law as regards the interpretation of sections 28, 29, 36(l)(vii), 36(2) and section 37 of the Act as enunciated by the Division Bench of theJ&K High Court and the apex court in the aforecited cases, we are of the considered view that it was in the totality of overall situation of the matter that the assessee decided to write off the advances made to M/s. Kanpur Boot House as bad debt. The reason as given by the assessee was apparently well-founded and was abruptly rejected by the Assessing Officer and the Tribunal. They did not appreciate the fact that the continuity of supply was essential to honour the agreement with the corporation and that it was to continue the business without any break that the advances were made to the manufacturer, M/s. Kanpur Boot House. It was only on account of non-recovery of the huge amount from the
Page No : 0117
corporation that the work had to be cancelled and the supplies had to be abruptly stopped by the assessee and consequently production was necessarily required to be stopped. It is known practice that usually manufacturer gives advances to the workers which are adjusted or carried forward in the coming times against the works done by them. This was not an unusual practice which was liable to be outrightly rejected by the Department. When the assessee had written off the dues recoverable from the corporation and the same were accepted by the Department and it had also so written off, the advances made to M/s. Kanpur Boot House in its books of account, what else could proof with the assessee for its being unable to recover the same. The other reason for writing off was the demise of the proprietor, Bhagwan Das, of M/s. Kanpur Boot House and the assessee in its wisdom did not choose to take the matter to the court apprehending counter-claim and this decision of the assessee seems to be well reasoned. In any case, the Revenue could not compel the assessee to have recourse to litigation to recover the amount against the dead person or his legal heirs when in the given circumstances, the same may not be recoverable. The Commissioner of Income-tax (Appeals) rightly recorded that the debt had become bad and not recoverable and it would be a futile exercise to take any action against the legal heirs of the deceased. In view of the discussion as made by the Division Bench of the J&K High Court and the hon’ble Supreme Court, as quoted above, that the advances made by the assessee in the case were certainly of a type which would be within the contemplation of the words “laid out or expended wholly and exclusively for the purposes of the business”. As no portion of the said advances could be stated to be loss of capital expenditure, but it being a plain case of business loss, it would certainly be allowable to be deducted under the provisions of section 37 of the Act.
11. Learned counsel for the Revenue also half-heartedly submitted that this alternative plea of the applicability of section 28 and section 37 was not raised by the assessee before the authorities below and so could not be raised before this court in the present appeal. The learned counselfor the assessee submitted otherwise and relied upon CIT v. Mahalakshmi Textile Mills Ltd. [1967] 66 ITR 710(SC). In this case, it was held that the right of the assessee to relief was not restricted to the pleas raised by him before the Departmental authorities or before the Tribunal. It was held that if for reasons recorded for the Departmental authorities in respect of the contention raised by the assessee, grant of relief to him on another ground is justified, it would be open to the Departmental authorities and the Tribunal, and indeed they would be under a duty to grant that relief. It was also
Page No: 0118
held that there was nothing in the Income-tax Act which restricts the Tribunal to determine all questions raised before the Departmental authorities and that all questions, whether on law or facts, which relates to the assessment of the assessee may be raised before the Tribunal.
12. Merely because the claim was not made out under one particular provision of the Act, but was so made out under another provision of law, we failed to understand as to how the assessee could be debarred to raise such legal question. Having regard to all this, we are of the considered view that it was legally permissible to raise question of deduction under section 37 of the Act even if it was not raised before the authorities below.
13. In view of our discussion as made above, we answer the question in the affirmative and allow the appeal.”
11. Recently Hon. Tribunal has allowed expenses as business loss in case of trade advance written off:-
i. DCIT Vs. Kalpataru Power Transmission Ltd. (82 com340) (2017)(Ahmedabad Trib.)
ii. DCIT Vs. J Thomas & co. P Ltd. (87 com250) (2017) (Kolkata Trib.)
iii. ACIT vs. M/s OSN Infrastructure (ITA No. 346/Del/2015) (Date of order 20.4.2018) (Delhi Trib.)
iv. Today Homes & Infrastructure (P) Ltd. vs DCIT (88 taxmann.com 391) (2017) (Delhi Trib.) v. Smita Conductors Ltd. vs DCIT (41 taxmann.com 514)(2014) (Mumbai Trib.)
12. Further regarding Hon. CIT (A)’s contention that the expenditure is “prior period” we rely on the judgement of Hon. Cochin Tribunal in case of Harrison Malayalam Ltd. vs ACIT (2008) (19 SOT 363) wherein it was held that :-
“The opinion of the Commissioner (Appeals) was that the expenditure could not be allowed in this year as the advances were made in the earlier year. The nature of the claim of the assessee was to be considered that there was non-supply of seeds by the farmers, and that could be ascertained by the assessee only in the previous year relevant to the assessment year 1998-99. As otherwise the facts were not disputed, the entire claim of loss towards the advances to the farmers and distributors for procuring seeds, was an allowable expenditure in the assessment year 1998-99. Therefore, the order of the Commissioner (Appeals) on this issue was to be set aside and the Assessing Officer was directed to allow the loss claimed by the assessee.”
13. Further we also rely on decision of HonTDle Bombay High Court in the case of Harshad J. Choksi vs CIT reported in (2012) 25 com567 (Bom). The question raised before the HonTDle Bombay High Court and the decision rendered thereon is reproduced below:-
“Questions: • Whether if an amount is held to be not deductible as a bad debt in view of non-compliance of the condition precedent as provided under section 36(2), could the same be considered as an allowable business loss? • Whether, therefore, the amount of Rs. 44.98 lakhs could be considered as an allowable business loss?
Held: • Section 28 imposes a charge on the profits or gains of business or profession. The expression ‘Profits and gains of business or profession’ is to be understood in its ordinary commercial meaning and the same does not mean total receipts. What has to brought to tax is the net amount earned by carrying on a profession or a business which necessarily requires deducting expenses and losses incurred in carrying on business or profession. The Supreme Court in the case of Badridas Daga v. CIT [1958] 34 ITR 10 has held that in assessing the amount of profits and gains liable to tax, one must necessarily have regard to the accepted commercial practice that deduction of such expenses and losses is to be allowed, if it arises in carrying on business and is incidental to it. [Para 10]
