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.
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  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.  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.  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  2 Comp Cas 464 (PC) ;  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.  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  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]
14. We further rely on the decision of Hon Kolkata High court in case of Ashoka Marketing co P Ltd V CIT 253 ITR 460 where in during the course of assessment for the assessment year 1981-82, the Assessing Officer noticed that a sum of Rs. 2,42,006 was due from a company S and the assessee had written off that amount and claimed it as a bad debt in this year. The Assessing Officer rejected the claim of the assessee. According to him, though the assessee was an unsecured creditor of the company which had later gone into liquidation, the assessee had not produced any evidence that the official liquidator had rejected the claim of the assessee. This was upheld by the Tribunal. The Hon Curt held that:-
“Dr. Pal, learned counsel for the assessee, submits that as the debtor M/s. Shalimar Works Ltd. had gone into liquidation and wound up there was no scope for recovery. Therefore, the board has taken a decision to write off the loan which is due from Shalimar Works Ltd. He further brought to our notice in the case of Turner Morrison and Co. Ltd. v. CIT  245 ITR 724 (Cal),the financial aspect of Shalimar Works P. Ltd. has been considered and it was found that after payment of the secured loan due from Shalimar Works P. Ltd. nothing remains to be paid to the unsecured creditors. When this view has been taken by this court there is nothing wrong in the claim of the assessee as the amount due from Shalimar Works Pvt. Ltd. has become bad debt.
Page No : 0463
This court in the case of Turner Morrison and Co. Ltd. v. CIT  245 ITR 724 (Cal), comes to a finding at page No. 727 regarding the financial position of Shalimar Works P. Ltd. and what is the possibility of recovery of loan in case of an unsecured creditor the relevant finding reads as under :
“In the present case, undoubtedly Shalimar Works P. Ltd. at the relevant time was a subsidiary of the assessee and this company was wound up because of the orders passed by this court and all the assets of the company were purchased by a wholly owned company of the Government of West Bengal for a sum of Rs. 74,00,000 and the entire amount went to the secured creditor with the result that undoubtedly the assessee had no chance of recovering the amount in question from the aforesaid subsidiary.”
When this court while considering the possibility for recovery of loan in case of unsecured creditors found that the entire amount went to the secured creditors and nothing remains to be paid for unsecured creditors, there is no justification to deny the claim of the assessee. Therefore, following the aforesaid finding of this court regarding possibility of the recovery of loan of unsecured creditors when there is no chance the assessee has rightly written off that debt treating it as a bad debt.
In view of the aforesaid finding, the Tribunal has committed an error.
In the result, we answer question No. 1 in the negative, i.e., in favour of the assessee and against the Revenue.”
In view of the above submission, it is submitted that issue is squarely covered in favour of the assessee and appellant requests before your honour to delete the addition made by learned Assessing Office and confirmed by the dl CIT (A).”
11. We have heard the rival contentions and perused the materials available on record. The assessee in the instant case has written off the advances of Rs. 2,10,17,075/-only. As per the assessee, the amount of advances was given to various parties in the course of the business. Accordingly, it was claimed as a deduction under section 37(1) or 28 of the Act. However, the AO rejected the claim of the assessee by observing that there was no evidence that the advances were given in the course of the business.
11.1 However, the Ld. CIT (A) reversed the order of the AO by observing that his predecessor deleted such addition in earlier years in the own case of the assessee.
11.2 There is no dispute that the trade advances written off are allowable deduction either under section 28 or 37(1) of the Act. The allowability of the deduction in respect of trade advances written off is also covered by thejudgment of the Hon’ble supreme court in the case of CIT vs. Mysore sugar company Ltd reported in 46 ITR 649.
11.3 It is also a fact on records that the claim for such deduction cannot be made under section 36(1)(vii) read with section 36(2) of the Act. It is because to claim the deduction under section 36(1)(vii) of the Act; it is necessary for the assessee to show such amount in the credit side of the profit and loss account as income. But in the case before us, the case does not pertain to the deduction of bad debts under section 36(1)(vii)/ 36(2) of the Act, though the assessee claimed deduction under the head bad debts. It is a settled law the treatment for any transaction in the books of accounts will not change the character of the transaction. Though the deduction for writing off the trade advances is not eligible for deduction under section 36(1)(vii) of the Act, the same cannot be denied under section 37(1) of the Act, subject to the conditions specified therein. Thus we are of the view that the deduction on account of such advances is available as a business loss. In this regard, we also find support and guidance from the judgment of the Hon’ble Supreme Court in the case of CIT Vs. Mysore Sugars Limited reported in 46 ITR 649 wherein it was held as under:
“In instant case the amount was an advance against price of one crop. The Oppigedars were to get the assistance not as an investment by the assessee-company in its agriculture, but only as an advance payment of price. The amount, so far as the assessee-company was concerned, represented the current expenditure towards the purchase of sugarcane, and it made no difference that the sugarcane thus purchased was grown by the Oppigedars with the seedlings, fertiliser and money taken on account from the assessee-company. In so far as the assessee-company was concerned, it was doing no more than making a forward arrangement for the next year’s crop and paying an amount in advance out of the price, so that the growing of the crop might not suffer due to want of funds in the hands of the growers. There was hardly any element of investment which contemplated more than payment of advance price. The resulting loss to the assessee-company was just as much a loss on the revenue side as would have been, if it had paid for the ready crop which was not delivered.”
11.4 After considering the facts as discussed above, we are of the view that the claim of the assessee is eligible for deduction under section 37(1) or 28 of the Act, subject to the conditions specified therein. As per the provisions of section 37(1) of the Act, among other things, mandates that any expenditure incurred wholly and exclusively for the business is eligible for deduction. The primary onus under section 37(1) of the Act is on the assessee to establish the fact that the expenditures were incurred wholly and exclusively for the business. In this regard, we find support and guidance from the judgment of the High Court of Bombay in the case of Umakant B Agarwal Vs. DCIT reported in 369 ITR 220 wherein it was held as under:
“The appellant has not been able to discharge the burden and it is not impossible. It is a primary onus and which was to be discharged and which has been held as not discharged by providing the requisite details. These are not matters which were to be knowledge of the Assessing Officer and the assessee was called upon to clarify them. It was a matter solely to the knowledge of the appellant. It was personal to him. It was the assertion of the appellant and which was being probed, however, in greater details. It was a clear case where the onus which was resting on the assessee in law, has not been discharged by producing the details with regard to the matters which are to the personal knowledge only of the assessee. It is assessee’s assertion that the two entities have been approached by him for procuring business not only for himself but through him for ‘G’. It is in these circumstances that the Tribunal found that the three judgments relied upon by Mr. Mistry before us will not assist the assessee any further”
11.5 In our considered view the impugned deduction claimed by the assessee does not meet the conditions as specified under section 37(1) of the Act. As such there are certain infirmities in the claim of the assessee as an enumerated below:
i. There was no address of the parties to whom the assessee gave the advances.
ii. There was no detail furnished by the assessee suggesting that the assessee was carrying regular business transactions with these parties.
iii. There was no identity proof furnished by the assessee in respect of such parties.
iv. There was no detail furnished by the assessee suggesting that the impugned advances were given through the banking channel.
In view of the above, we note that the assessee failed to discharge its primary onus as imposed under section 37(1) of the Act. However, we note certain undisputed facts which are crucial to adjudicate the issue on hand as enumerated below:
i. These advances were made in the year 1993-94 to 1997-98 and shown in the financial statements.
ii. The assessee is engaged in the business of fishing where the purchases are made mostly in cash being a disorganized sector. As such the fishermen go to the mid of the sea to catch the fish. Thus they always take some advance from the party before they go for fishing. Thus the nature of the business just cannot be brushed aside while adjudicating the issue on hand.
iii. aside, especially the entries which are more than 12 to 15 year old.
iv. There were several agreements and promissory notes available in the paper book placed on pages 20 to 60. In many cases, the advances were claimed to have been paid through banking channels.
v. There was no doubt raised on the genuineness of such advances by the AO in all the years though the scrutiny assessments were framed under section 143(3) of the Act.
vi. There is also no allegation of the Revenue that the assessee has created a loss in its books to set off against the income.
vii. The Revenue has not doubted on the advance payment made by the assessee which proves that the fund has gone from the company. Now the question arises if the fund has gone from the company other than the advances to the parties as discussed above, then such fact should be brought on record. But the Revenue failed to bring anything on record contrary to the argument of the assessee.
viii. The death of the main person claimed to have controlled the purchase from such fishers cannot be ignored in the given facts and circumstances.
ix. Similarly, the downfall in the business of the assessee due to earthquake and cyclone cannot be ignored; rather it is evident from the financial statement of the assessee and NPA account of the assessee with the bank.
In view of the above facts and situations, it is crucial to consider the circumstantial pieces of evidence while adjudicating the issue on hand. In holding so, we also draw support and guidance from the order of Hon’ble High Court of Delhi in the case of CIT Vs. Raghav Behl reported in 286 ITR 134 wherein it was held as under:
“1. The Commissioner of Income-tax has recorded a clear finding of fact to the effect that although there was no documentary evidence to support the claim made by the assessee that shares had been purchased by M/s. Deepak Choudhary, HUF and Shri P.S. Kalra, HUF on behalf of the assessee, yet the circumstantial evidence sufficiently showed that such purchases were made and that since the assessee could not make the payment due to shortage of funds, the assessee was compelled to pay interest till the date the delivery of the shares was taken by him. This is evident from the following paragraph from the said order of the Commissioner .
“It is a fact that the assessee do not have any documentary evidence to support the claim but all the circumstantial evidences are there to prove that the shares were purchased by the two parties on behalf of the assessee and since the assessee could not make the payment due to shortage of funds the assessee was compelled to pay interest till the date of delivery taken by the assessee. Therefore in my considered opinion, the claim of the appellant of payment of interest of Rs. 7,30,600 each to M/s. Deepak Choudhary HUF and M/s. P.S. Kalra, HUF are to be allowed. Accordingly, the Assessing Officer is directed to allow the same.”
The above finding has been affirmed by the Tribunal in appeal in the following words .
“After hearing both the parties on this issue, we find that there is no infirmity in the finding of CIT (Appeals) as discussed above. The finding of CIT (Appeals) that both the parties were sharebrokers could not be controverted by the learned DR by filing any positive evidence, though the learned DR has commented that it seems that both the parties were not sharebrokers, however, no evidence whatsoever was filed before the Bench. Therefore, we confirm the finding of the CIT(A) by holding that this is customary in the trade of share transactions that one person buys shares on behalf of others, and as per the understanding the interest was paid and charged. As stated above, there is no dispute that interest amount was paid and there is also no dispute that both the parties have shown the interest income as their income. Therefore, in view of these facts and circumstances, and in view of the reasoning given by CIT (Appeals), we confirm his order on this point.”
2. In the light of the above concurrent finding of fact that purchase of shares by M/s. Deepak Choudhary and M/s. P.S. Kalra, HUF was for and on behalf of the assessee and that the assessee had paid interest to the said purchasers who were working as sharebrokers, the Commissioner as also the Tribunal were justified in directing the allowance of the amount paid as an allowable expenditure. No substantial question of law arises for consideration in this appeal which fails and is hereby dismissed.”
11.6 We also draw support from the order of ITAT Mumbai (Third member) bench where it was observed as under:
“When it was a mere entry on a loose sheet of paper and if the assessee claimed that it was only a planning, not supported by actual cash, then there had to be circumstantial evidences to support that this entry really represented cash of Rs. 60 lakhs. There was no such evidence found by the revenue in the form of extra cash, jewellery or investment outside the books. In such a case, the explanation offered by the assessee could not be rejected. In that view of the matter, the view taken by the Accountant Member was justified.”
In view of the above and having regard to the entire facts of the case including the circumstantial evidence as well as the very old advances claimed in the course of the business, we are of the considered view that the cognizance of the circumstantial evidence is essential.
11.7 Admittedly In the present case, the advances were given by the assessee to the parties long time ago as evident from the submission of the assessee which was not disputed by the authorities below. Thus in the instant case if the direct pieces of evidence are not available with the assessee, then in such a situation, the circumstantial pieces of evidence are required to be considered while adjudicating the issue on hand. These circumstantial pieces of evidence can be categorized as under:
i. The advances given by the assessee were duly disclosed in the financial statements, and this fact was not disputed.
ii. There is no evidence/allegation of the revenue for the diversion of the fund other than the advances given by the assessee. There is also no allegation that the directors of the company have diverted/misused the fund by claiming the deduction on account of such advances.
iii. The nature of business of the assessee which is mainly based on cash purchases especially from the fishermen and without involving any middleman.
iv. The downfall in the business due to the cyclone and the earthquake.
v. The banking facility of the assessee has become NPA.
vi. The death of the main person who was looking after the purchases of the company.
vii. The advances are vey old but duly disclosed in all the years in the audited financial statements.
11.8 In the subsequent year also, i.e. 2008-09, we note that the addition was made on account of writing off such advances which was subsequently confirmed by the ld. CIT-A for the following reasons:
i. The trading advances do not qualify the test for the deduction under the provisions of section 36(1)(vii) and 36(2) of the Act.
ii. No details of the parties to whom the assessee gave the advances.
iii. The impugned advances written off in the year under consideration represents the prior period expenses which cannot be allowed in the year under consideration.
11.9 It is an undisputed fact the advances written off by the assessee as discussed above cannot be categorized as bad-debts under the provisions of section 36 (1)(vii) and 36(2) of the Act. However, it is established law that the advances given in the course of the business are eligible for deduction under section 37(1)/ 28 of the Act. This fact has already been elaborated in detail in the preceding paragraphs. Thus we are of the view claim of the assessee cannot be just rejected merely on the ground that the deduction has been claimed under the wrong section.
11.10 We also note that the assessee has failed grossly to provide the direct pieces of evidence in support of his contention that the amount written off represents the advances in the course of the business. However, in the peculiar facts and circumstances, we are of the view that the circumstantial pieces of evidence as discussed above cannot be ignored while adjudicating the issue on hand. These circumstantial pieces of evidence have already been elaborated in the preceding paragraph. We also note that the learned CIT-A has agreed in his finding that the assessee in some of the cases has shown transactions with the parties. But the learned CIT-A ignoring this fact has rejected the entire claim of the assessee for the advances written of which is contrary in the given facts and circumstances. In our considered view the learned CIT-A should have granted deduction at least in respect of such parties where the assessee is having regular business transactions.
12. Regarding the treatment of such advances written of as prior period expenses, we are unable to agree with the contention of the learned CIT-A. It is because the assessee has written of such advances in its profit and loss account in the year under consideration. It means that the assessee did not treat such advances as business loss till the year under consideration. It was the judgment of the assessee to treat such advances as a business loss in the year under consideration. Therefore the learned CIT (A) cannot occupy the armchair of the assessee and decide the fact about the writing of impugned advances. Indeed these advances were given in the earlier years but that does not mean that it should be written off in that year only. As such the assessee has written off such advances in its books of accounts when it finds that such advances are not recoverable. It is also important to note that there should not be any dictate/ direction from any superior authority for the writing off such advances. The decision of the assessee is in itself sufficient to claim the deduction for such advances by the writing off in the books of accounts subject to the conditions as specified under section 37(1)/ 28 of the Act. Thus we disagree with the contention of the learned CIT-A.
12.1 Thus after considering the facts in totality, we are of the view that The Assessing Officer had emphasized on the fact that the assessee failed to produce the necessary details of the parties. Indeed such details of the parties were one of the corroborative factors which would eliminate the doubts, but in the absence of that agreement, the other circumstances ought to have been evaluated, which could lead the adjudicating authority towards a firm conclusion. In view of the above and after considering the facts in totality, we hold that no disallowance is warranted for advances written off as bad debts. Thus Considering the circumstantial evidence, the conclusions drawn by the Commissioner (Appeals) were to be upheld. Hence the ground of appeal of the Revenue is dismissed.
13. The second issue raised by the Revenue is that “Ld.CIT(A) erred in law and in facts in deleting the addition of Rs. 7,68,148/- being the disallowance on account of delay in payments made to the employer as well as employee’s contribution to provident fund.
13.1 The assessee in the year under consideration has claimed a deduction for the employees and employer contribution to provident fund amounting to Rs. 3,72,841/- and Rs. 3,95,307/- only which was paid after the due date prescribed under the relevant Act. Therefore, the same was disallowed by the AO and added to the total income of the assessee.
14. Aggrieved assessee preferred an appeal to the Ld.CIT (A) who has deleted the addition made by the AO.
15. Being aggrieved by the order of the Ld.CIT (A) the Revenue is in appeal before us.
16. The Ld. DR before us submitted that the assessee cannot claim the deduction in respect of its contribution towards the provident fund which was paid after the due date. The Ld. DR vehemently supported the order of the AO.
17. On the other hand the Ld. AR before us conceded the fact that the assessee is not eligible for deduction on account of employee’s contribution towards the provident fund in view of the judgment of Hon’ble Gujarat High Court in the case of CIT Vs. GSRTC reported in 366 ITR 170. However, the Ld. AR further submitted that the employee’s contribution which has been paid within the grace period should be allowed as deduction.
18. The Ld.AR further submitted that the employer contribution towards the provident fund was paid before the filing of income tax return. Therefore there was no contravention to the provisions of section 43B of the Act. The Ld. AR vehemently supported the order of the Ld.CIT (A).
19. We have heard the rival contentions and perused the materials available on record. The issue regarding the employee’s contribution towards the provident fund after the grace period as specified under the relevant Act is not eligible for deduction under section 43B of the Act, in view of the judgment of Hon’ble Gujarat High Court in the case of the GSRTC (supra).
19.1 However, the employee’s contribution towards the provident fund within the grace period is eligible for deduction under section 43B of the Act. In this regard, we place our reliance on the order of ITAT Mumbai Bench in case of DCIT Vs. Saraswat co-operative bank Ltd reported in 79 taxmann.com 305 wherein it was held as under:
“It is the admitted and undisputed position between the rival parties that there was delay in deposit of employee’s contribution to PF authorities by the assessee which was not paid within the due date prescribed by PF authorities but were paid within grace period allowed by PF statute and in any case, the same were paid prior to the due date of filing of return of income as prescribed under section 139(1) with the revenue. The issue is decided in favour of the assessee and no disallowance under section 43B, read with sections 2(24)(x) and 36(1)(va), is warranted in the instant case in view of the afore-stated decisions, as the assessee in the instant case paid the employees contribution towards PF within grace period as allowed by PF statute and in any case the employee contribution to PF was deposited with PF authorities before the due date prescribed under section 139(1) for filing of the return of income with the revenue”
20.Regarding the employer’s contribution towards the provident fund, we note that the employer deposited the same before the due date of filing the income tax return as specified under section 139(1) of the Act. Thus, we are of the view that the assessee has complied with the provision of section 43B of the Act. Accordingly, we do not find any reason to interfere in the order of the Ld.CIT (A).
20.1 In view of the above, the ground of appeal of the Revenue is partly allowed.
21. The third Issue relates to the non-deduction of TDS on the payment made for investigation expenses of Rs. 7,23,110/-.
22. During the year under consideration, the assessee has made payment of Rs. 7,23,110/- to M/s Nissom & co. for the investigation expenses without the deduction of TDS thereon. On a question, the assessee admitted its mistake for non-deduction of TDS. However, the assessee further submitted that the bank paid the impugned expense and the same was debited in its account. As such it is the fault of the bank for non-deduction of the TDS.
23. However, the AO disregarded the contention of the assessee by holding that there was no contra confirmation from the bank for the non-deduction of TDS. Hence the expense was disallowed and added back to the total income of the assessee.
24. The aggrieved assessee preferred an appeal to the Ld.CIT (A) and submitted that the provision of section 194C/J is not applicable for the expenses paid by the Canara bank and debiting the same in its loan a/c. As such the fees paid to the CA firm is an interest within the meaning of section 2(28A) of the Act.
25. The Ld. CIT(A) observed that Canara bank informed the assessee that its account had become NPA, and accordingly the CA firm appointed to conduct stock/ receivable audit of its accounts for the past three years.
25.1 But the assessee vide letter dated 17-12-2005 to Canara bank expressed its inability to meet the investigation expenses. Accordingly, the amount was paid by the bank by debiting the same to the assessee’s loan a/c.
25.2 These expenses were incurred for the restructuring of account of various credit facilities of the assessee. Accordingly the same was deleted as interest within the meaning of section 2 (28A) of the Act.
26. Being aggrieved by the order of ld. CIT-A Revenue is in appeal before us. Both the parties before us relied on the order of authorities below as favorable to them.
27. We have heard the rival contentions and perused the materials available on record. There is no dispute that the assessee was under the obligation to make the payment of the investigation charges carried out by the firm of chartered accountant appointed by the bank. But the assessee failed to make the payment to the CA firm. Therefore, the banker has made the payment to the CA Firm on behalf of the assessee which was recovered by the bank from the assessee by debiting its accounts in its books of accounts. Now the issue arises whether the payment by the assessee to the bank is not subject to TDS under section 194A read with section 2(28A) or 194C/194J of the Act.
27.1 In this regard, we note that the primary liability of the 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 does not mean that the transaction is covered under the provisions of section 194A read with section 2(28A) of the Act. As such the assessee is liable to deduct the TDS under section 194J of the Act. Thus in our considered view the assessee is not eligible for deduction for the expenses due to non-deduction of TDS under section 194J read with section 40a(ia) of the Act.
27.2 However, as per the 2nd proviso to the section 40a(ia) of the Act, the expenses on account of non-deduction of TDS will not be disallowed if the recipient has included such receipts in its books of accounts and offered the same to tax. Therefore, in the interest of justice and fair play, we are inclined to set aside the issue to the file of AO for fresh adjudication as per the provisions of law. The AO will verify whether the recipient has included the receipt from the assessee in its books of accounts, if yes, then there will not be any disallowance on account of non-deduction of TDS under section 194J of the Act. Hence, the ground of appeal of the Revenue is allowed for statistical purposes.
28. The fourth ground raised by the Revenue is in relation to the difference in income declared in return and shown in form 16A.
29. The assessee has claimed the TDS concerning job charges received of Rs. 8,53,57,142/- but in the books of account the assessee has claimed/ shown job work income at Rs. 7,86,46,817/- only. On a question, the assessee claimed that the party M/s Indepesca Overseas Pvt ltd. (for short IPOL) had deducted TDS two times on certain payment at the time of the advance and actual bill accounted in the books. Therefore there was the difference between the income as discussed above.
30. However, the AO found that there is no sum and substance in the argument of the assessee that the TDS was deducted twice on certain payment. Accordingly, the AO made the addition of Rs. 67,10,325/- being the amount of difference as discussed above to the total income of the assessee.
31. The aggrieved assessee preferred an appeal to the Ld.CIT (A) and filed the contra confirmation from M/s IOPL explaining the difference due to TDS deduction twice, once on advance money and again on billing. The assessee in support of his claim filed the reconciliation of account with IOPL. Accordingly the ld. CIT-A deleted the addition made by the AO by observing as under:
‘’I have carefully considered the submission of the appellant. Appellant stated that there is no mistake in accounting but it is because of double deduction of tax at sources once at the time of payments of money and another at the time of booking of the bills by the principal. In support of his claim he submitted that full reconciliation of account of the appellant was submitted that with M/s Indepesca Overseas Private Limited from 1-4-2006 to 31-3-2007 where on page no. 327 of the paper book only three Indepesca Overseas Private limited are seen. The total of these three entries is Rs.1,53,073.62 which is Rs.1,29,756.56 being freight paid by Indepesca on behalf of appellant, minor difference of Rs.0.06 and Rs.23,317/- on account of excess DEPB sales credit given to that partly by the appellant. In view of contra confirmation with reconciliation of the accounts of the appellant with the principal there is no reason that addition to the income of the appellant is made based on TDS certificate when M/s Indespecsa Overseas is the only party whose job work is done by the appellant. Hence I delete the addition of Rs.67,10, 325/- on account of difference of job work income as per TDS certificate and gross amount paid/payable as per TDS certificates.”
32. Being aggrieved by the order of ld. CIT-A the Revenue is in appeal before us.
33. Both the parties before us relied on the order of authorities below as favorable to them.
34. We have heard the rival contentions and perused the materials available on record. The issue in the instant case relates to the difference observed by the AO between the income shown by the assessee in its books of accounts viz a viz income shown in form 16A issued by IPOL. Therefore, the addition was made by the AO on account of such difference amounting to Rs. 67,10,325/-. However, the ld.CIT (A) deleted the addition made by the AO by observing that IPOL has deducted the TDS twice on the advance money given to the assessee as well as on the actual bill of the assessee.
34.2 However, we note that assessee has shown job work charges from IOPL in its books for Rs. 7,86,46,817.00 which was also confirmed by the party as evident from the details available on the paper book.
34.3 We also note that the AO without finding out any defect in the reconciliation filed by the assessee has relied on form 16 by observing as under:
‘’9. The assessee has actually claimed the TDS 8,53,57,142/- but in the books of accounts the assessee has claimed/ shown job work income at Rs.7,86,46,817/- so this discrepancy was thoroughly discussed with the internal auditor of the assessee and he has agreed to this mistake of accounting and the issue, an addition of Rs.67,20,325/- being made for the under reporting of the job receipts. The assessee has received job charges from M/s. Indepesca Overseas Private Ltd. during the year under consideration but the AR has supplied the reason that M/A IPOL has deducted TDS on advance money so given since it is a submissions but the revenue is bound by the from No.16A and the assessee has claimed that TDS certificate for the purpose of the TDS so there is no sum and substance in this pleading that it was the advance which was considered twice hence the receipts are under reporting of job receipts is being made in the returned income.”
From the above, it is clear that the AO action for the addition was based on the form 16A only which is not correct as per the provision of law. The AO should have pointed out the specific defect in the submission of the assessee before making the disallowance. In view of the above, we do not find any infirmity in the order of learned CIT-A. Hence the ground of appeal of the revenue is dismissed.
34.4 In the result, the appeal of the revenue is partly allowed for statistical purposes.
35. Coming to the assessee appeal in ITA bearing no. 306/RJT/2013 for A.Y. 2008-09.
36. The assessee has raised the following grounds of appeal:
1. Learned AO erred in law and well as on facts in making disallowance of Rs.7,46,98,998/- being amount of bad debt written off u/s28 and Hon’ble CIT(A) erred in confirming the same.”
37. At the outset, we note that the issue raised by the assessee is identical to the issue raised by the Revenue in ITA number 947/RJT/2010 which has been decided by us in favor of the assessee and against the Revenue vide paragraph number 8 of this order. Therefore, respectfully following the same, we reverse the order of authorities below. Hence the ground of appeal of the assessee is allowed.
37.1 In the result, the appeal of the assessee is allowed.
38. In the combined result the appeal of the revenue is partly allowed for statistical purposes whereas the appeal of the assessee is allowed.
Order pronounced in the Court on 05/03/2019 at Ahmedabad.