TMI Blog2007 (10) TMI 328X X X X Extracts X X X X X X X X Extracts X X X X ..... f supply of equipments, sale of cellular exchange equipments and related services on a deferred credit basis. The KTL defaulted on the payment schedule right from the beginning. After protracted negotiations, the assessee entered into an agreement with the KTL on 7th Sept., 2000 for final settlement of the dues. In terms of this settlement, the debtor was released from its obligation from payment except for a sum of Rs. 75 crores, which was payable in two instalments of Rs. 35 crores and Rs. 40 crores before 21st Oct., 2000 and 6th Sept., 2000 respectively. Thus, the debt minus Rs. 75 crores was written off as bad debt, being the amount not recoverable from the KTL. The AO considered the submissions made before her. It was pointed out that the date of settlement was 7th Sept., 2000. The date fell in previous year relevant to asst. yr. 2001-02 and not this year. She also examined the record of the KTL and found some discrepancies for which no answer could be obtained. In the previous year relevant to asst. yr. 2000-01, the KTL showed the outstanding amount in respect of its sundry creditors at Rs. 330.04 crores, as against the amount of Rs. 324.35 crores involved in the settlement a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the view that no amount was payable to them. The liability will be adjusted with the supplier. The supplier debit note on account of services and interest were also disputed and nothing was payable. The difference between the amount of Rs. 202.38 crores in the aforesaid note and the total debt of Rs. 324.35 crores shown by the assessee was on account of the fact that certain liabilities were not accounted by the KTL, for which a reconciliation was furnished as under : "(Rs. in crores) Total amount claimed as bad debt by the appeal 249 Less : Amount not considered by KTL as per note 7(b) in Sch. O of balance sheet of KTL for the period ended 30.6.1999 (the balance sheet of KTL was obtained from the RoC) (1) Services 31 (2) Interest 76 107 -- --- Less : 142 Difference between exchange fluctuation as per appellant's balance sheet as on 31.3.2000 28 As per KTL's balance sheet as on 30.6.1999 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation by KTL by observing as under : 'Secondly in the P L a/c for the year 2001-02, a sum of Rs. 130.81 crores has been offered for taxation under s. 41 of the IT Act, 1961 being remission of liability of Alcatel. Therefore, as against Rs. 249.35 crores claimed by the assessee as bad debts in the asst. yr. 2000-01, a sum of only Rs. 130.81 crores has been offered for taxation by KTL in asst. yr. 2001-02. The balance of Rs. 118.54 crores has totally escaped the tax net.' The mismatch has been explained by the appellant in para 5.4.5.3 above. Further, the balance sheet of KTL for the period ended 30th June, 1999 (obtained by the appellant from RoC) admits the debt in Note 7 in Sch. O as under : '7(a) Observing the prudent accounting policies, the company had created the liability of Rs. 20,237.98 lakhs for equipment supplied and capitalized. The supplier Alcatel Modi Network Systems Ltd. had failed to honour its various contractual commitments. The management has view that no amount is payable to them. The liability will be adjusted with the supplier. (b) The supplier debit notes on account of services and interest are also disputed and nothing is payable.' The difference b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on by auditors in the audited financial statements for the year ended 31st Dec, 1999 : '3......Had the company made full provision against these receivables at 31st Dec, 1999, deferred receivables and the profit for the year then ended would be reduced by Rs. 3,216 million.' (ii) Note 7 in Sch. O to the balance sheet of KTL for the period ended 30th June, 1999 which reads as under : '7(a) Observing the prudent accounting policies, the company had created the liability of Rs. 20,237.98 lakhs for equipment supplied and capitalized. The supplier Alcatel Modi Network Systems Limited had failed to honour its various contractual commitments. The management has view that no amount is payable to them. The liability will be adjusted with the supplier. (b) The supplier debit notes on account of services and interest are also disputed and nothing is payable.' (iii) Non-payment of any advance tax by the appellant during the financial year 1999-2000, and (iv) Cancellation of KTL's licence by DoT and encashment of bank guarantee of Rs. 94 crores (given by KTL to DOT) well before 31st March, 2000 and inadequacy of net assets of KTL as early as on 30th June, 1999 to meet even the claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces the previous practice of having to establish that a debt has become bad in the previous year, which generated enormous litigation. For the sake of ready reference, the relevant portions of the judgment of the Hon'ble High Court are reproduced below : "5. A conjoint reading of s. 36(2) and s. 36(1)(vii) makes it clear that the assessee would be entitled to a deduction of the amount of any bad debt which has been written off as irrecoverable in its accounts for the previous year. Any lingering doubt would vanish on a careful reading of Circular No. 551, dt. 23rd Jan., 1990 [(1990) 82 CTR (St) 325], the relevant portion of which reads as follows : '6.6 The old provisions of cl. (vii) of sub-s. (1) r/w sub-s. (2) of the section laid down conditions necessary for allowability of bad debts. It was provided that the debt must be established to have become bad in the previous year. This led to enormous litigation on the question of allowability of bad debt in a particular year, because the bad debt was not necessarily allowed by the AO in the year in which the same had been written off on the ground that the debt was not established to have become bad in the year. In order to elimi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of allowability of bad debt in a particular year. The circular expressed the hope that this litigation would be eliminated by permitting a debt to be treated as a bad or irrecoverable no sooner it was written off in the books of the assessee concerned." 4. We have considered the facts of the case and rival submissions. The AO had made comments about the discrepancy between the amount shown as debt by the assessee and the KTL. The learned CIT(A) reconciled the difference, as mentioned above and, therefore, there is no controversy that the amount involved in question was Rs. 2,49,39,41,578. It has been pointed out by him that this amount was taken into account as income in the earlier year, which included not only the payment due in the relevant years but also payment becoming due in subsequent years. The amount was computed after taking into account the settlement agreement, under which the KTL was required to pay a sum of Rs. 75 crores in two instalments in financial year 2000-01. It was pointed out that even this amount could not be recovered from the KTL. The learned CIT(A) has taken into account the fact that the KTL did not make any payment to the assessee in financial ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned CIT(A) mentioned that the DoT had issued purchase order No. 117-10/94-MND/AMNS, dt. 8th May, 1996 for supply of automatic telephone exchange equipments of the value of Rs. 65.87 crores to the assessee. However, the assessee received an amount of Rs. 65,27,47,578 only in respect of the aforesaid supply of the equipments and the balance amount of Rs. 59,58,422 was not received. The DoT did not pay this amount on account of delay and shortage in the supply of the equipments. Therefore, the amount was written off in the books of the assessee. It was explained to him that the DoT had issued an amendment dt. 25th Feb., 1997 to the aforesaid order, which contemplated the imposition of liquidated damages in case the supplies were effected not in time but during the extended delivery schedule, and in such cases only 98.46 per cent of the rate indicated in the purchase order was to be paid. The impugned short payment was on account of the aforesaid amendment in the terms and conditions of the purchase order. The learned CIT(A) considered the facts of the case. It was pointed out that the liquidated damages became payable in terms of amendment No. 3 dt. 25th Feb., 1997. The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that appeal for asst. yr. 1997-98 is also pending before us, in which an additional ground on the aforesaid issue has been taken up by the assessee and admitted by the Tribunal for adjudication. The issue will be decided on merits in that appeal. Thus, these grounds are dismissed. 8. The ground Nos. 3 and 4 are to the effect that the learned CIT(A) erred on facts and in law in confirming the disallowance of salaries amounting to Rs. 5,18,44,248 as prior period expenditure. It is also mentioned that the learned CIT(A) erred in not directing the AO to allow the impugned amount in the year under appeal. In this connection, it is mentioned in the assessment order that as per tax audit report, a sum of Rs. 5,18,44,248 had been debited in respect of salaries as prior period expenses. It was submitted that the assessee company received invoice dt. 17th Dec, 1999 from Alcatel CIT, France towards salary of expatriates. Since the invoice was received in the current financial year, the liability was crystallized in this year and, therefore, it was deductible in computing the income of this year. The AO pointed out that the salary accrues on day-to-day basis irrespective of the date of its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry paid to the expatriate personnel. These by themselves do not imply that the liability was crystallized in this year. It was pointed out that since the assessee deducted tax and deposited the same, it was all along aware that the liability in respect of the whole of the salary was on it in respect of expatriate employees deputed by its parent company, Alcatel CIT. Therefore, it was held that the assessee was not entitled to deduct the impugned amount in computation of income of this year. 9. Before us, the learned counsel for the assessee pointed out that Alcatel CIT was the parent of the assessee company and it had seconded its employees to work for the assessee company. The salary was partly paid in India by the assessee company and partly by its parent company in France. Although the tax was deducted on the global salary, there was no agreement in force regarding the liability of the assessee in respect of salary paid in France. The assessee received a debit note from its parent company on 17th Dec, 1999, which has been placed in the paper book on p. 451. The note is in respect of HE staff secondment, raising a bill of Rs. 5,90,052. Therefore, a provision was made for this l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n appeal which it thinks fit for the disposal of the appeal. This meant that the only limitation to give direction or finding in respect of another assessment year is that such direction etc. was necessary for disposal of the appeal and not merely incidental to it. Therefore, the Tribunal was well within its right to give directions for another year which were necessary for disposal of the appeal. He also relied on the order of the Hon'ble Tribunal, Delhi Bench "G", New Delhi in the case of dt. CIT v. H.M.A. Udyog Ltd. in ITA No. 2230/Del/1999 for asst. yr. 1994-95 dt. 11th March, 2004, in which a direction was given that the claim of bad debt may be allowed in the year in which it is written off in accordance with the law. In this case, the order in the case of Perfect Equipments was followed. 10. We have considered the facts of the case and rival submissions. The facts are that the parent company of the assessee had seconded employees for the work of the assessee company over a period of time. The assessee was debiting salaries paid in India as well as deducting tax on the global salaries. There is no evidence on record to show that there was any dispute between the parent comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o. 278/Del/2004. 12. In the result, the appeal is partly allowed. ITA No. 104/Del/'2004 Asst. yr. 1997-98 Appeal of the assessee 13. Ground No. 1 is against the finding of the learned CIT(A) that the assessee was not entitled to deduct a sum of Rs. 50 lakhs in computing the income in respect of provision for doubtful advances. In this connection, it is mentioned in the assessment order that the impugned amount was debited to P L a/c and it represented extra payment of customs duty demanded by the Customs Department on account of the possibility of underinvoicing of import. It was explained that the assessee had filed a claim for refund of this amount, but the same was rejected by the Customs Department. However, subsequently the Central Excise and Gold (Control) Appellate Tribunal (CEGAT) accepted the claim of the assessee, against which the Customs Department filed appeal before the Supreme Court. In these circumstances, the aforesaid provision was held to be not deductible in computing the income of the assessee. 13.1 Aggrieved by this order, the assessee moved an appeal before the CIT(A). It was represented before him that the assessee imported components from Alcatel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs. In view thereof, it was fairly conceded that this ground has become infructuous because of subsequent events. In reply, the learned Departmental Representative merely stated that the amount was refunded to the assessee, which showed that it was not the liability fastened on the assessee. We have considered the facts of the case and rival submissions. We find that the assessee had made only a provision and the amount was not written off in the books of account, which is a requirement for claiming bad debt under s. 36(2)(i). In any case, the claims of refunds were due and made, and refunds were granted. Thus, on merits also, this amount could not have been deducted in computing the income. Thus, this ground is dismissed. 15. Ground No. 2 is against the finding of the learned CIT(A) that the assessee was not entitled to deduct the aforesaid amount of Rs. 50 lakhs in computing the deemed income under s. 115JA of the Act. Since the impugned amount was not deducted by the AO in computing the total income, he disallowed the same while computing the deemed income also. It was represented before him that the provision for doubtful advance was not a liability and, therefore, the prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ility was a contingent liability and as a matter of fact there was no liability on the assessee as the amount was refunded to the assessee in the previous years relevant to asst. yrs. 2001-02 and 2005-06. 17. We have considered the facts of the case and rival submissions. The facts are that in regard to imports made from a related party, the goods were cleared at a value being 105 per cent of the invoice price. The amount equivalent to 50 per cent of the incremental duty was deposited with the customs authority without admission that there was any underinvoicing. The assessee was entitled to receive the amount as refund on proof that there was no underinvoicing. Thus, the payment was not in the nature of a liability but it was in the nature of an advance, which could be claimed as refund by proving before the SVB that there was no underinvoicing in the imports. Such claims were made during this year, but were not entertained by the Customs Department. The assessee filed appeal before CEGAT, who allowed the claims. Thus, it cannot be said that the value of these advances depreciated in any manner. In any case, the amount was lying with a Government Department and its value could n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee as income because of the amendment in the supply contract, this amount could not have been taken as sale proceeds even if it was shown as sale proceeds in the books of account. Therefore, the assessee was entitled to reduce the sale consideration by the impugned amount in this year. Thus, this ground is allowed. 19. Ground No. 3 is against levy of interest under ss. 234B and 234C for shortfall and deferment respectively for payment of advance tax. The issue stands covered by the decision of Hon'ble Supreme Court in the case of CIT v. Kwality Biscuits Ltd. [2006] 205 CTR (SC) 122 : [2006] 284 ITR 434 (SC), in which it was pointed out that interest under ss. 234B and 234C cannot be levied in respect of tax on deemed income under s. 115J, since the entire exercise of computing income under the said section can only be done at the end of the financial year and the provisions of ss. 207, 208, 209 and 210 cannot be made applicable until and unless the accounts are audited and the balance sheet is prepared. The ratio of this case will apply mutatis mutandis in respect of tax on deemed income under s. 115JA. Respectfully following this decision, it is held that the assessee was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the apex Court. 23. The assessee moved an additional ground to the effect that on the facts and in circumstances of the case and in law, the assessee was entitled to deduction for salary of Rs. 2,62,09,920 paid to expatriate employees on which tax was deducted at source in the relevant assessment year. 23.1 It was explained that the assessee received a debit note dt. 17th Dec, 1999 from its parent company towards salary paid by it to the expatriate employees, out of which Rs. 2,19,45,920 pertained to this year. The said debit note was accounted for in the books of account in the previous year relevant to asst. yr. 2000-01. This amount was not allowed by the AO and the learned CIT(A) in that year by holding it to be prior period expenditure. Therefore, it was contended that since the appeals of both these years are pending before the Tribunal, this expenditure may be allowed to be deducted in computing the income of this year. 23.2 In reply, the learned Departmental Representative fairly stated that the liability for salary arose from year to year and could be allowed in the year in which the expenditure was incurred. 24. We have considered the facts of the case and rival ..... X X X X Extracts X X X X X X X X Extracts X X X X
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