9911796707
TMI Blog2007 (10) TMI 328X X X X Extracts X X X X X X X X Extracts X X X X ..... was receivable from the KTL in respect of 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. 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctual commitments. The management was of 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 8 -- --- Balance 134 Amount written back by KTL 131 --- Difference 3" Thus, the findings of the learned CIT(A) were that,--(i) the correct amount of the debt was about Rs. 249.39 crores which had been shown by the assessee as incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plained 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 between Rs. 202.37 crores mentioned in the above note and the total debt of Rs. 324.35 crores shown by the appellant, is on account of the reasons mentioned in para 5.4.5.3 above. I also find myself unable to accept the view of the AO that the debt became bad only on 7th Sept., 2000 when settlement agreement was signed with KTL. Sufficient evidence has been filed by the appellant to show that the debt had become bad by 31st March, 2000. The DoT had cancelled the licence granted to KTL and also encashe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment 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 claims of DOT. (v) Non-making of any payment by KTL to the appellant during the financial years 1996-97, 1997-98, 1998-99 and 1999-2000. 5.5.2 Accordingly, the claim of the appellant for write off of bad debt of Rs. 249.34 crores is hereby allowed and the addition made by the AO is hereby deleted." 3.2 Coming to the legal arguments, reliance was placed on the order of Hon'ble Tribunal, Mumbai Bench "H" (Special Bench), Mumbai in the case of Dy. CIT v. Oman International Bank, SAOG [2006] 102 TTJ (Mumbai)(SB) 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sh 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 eliminate the disputes in the matter of determining the year in which a bad debt can be allowed and also to rationalize the provisions, the Amending Act, 1987 has amended cl. (vii) of sub-s. (1) and cl. (i) of sub-s. (2) of the section to provide that the claim for bad debt will be allowed in the year in which such a bad debt has been written off as irrecoverable in the accounts of the assessee. 6.7 Clauses (iii) and (iv) of sub-s. (2) of the section provided for allowing deduction for a bad debt in an earlier or later ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 years 1996-97 to 1999-2000, the DoT had encashed bank guarantee of Rs. 95 crores given by the KTL well before 31st March, 2000 and the net assets of the KTL were not sufficient to meet even the claims of the DOT. These facts lead to a reasonable inference that the KTL was not in a position to make payment to the assessee in view of its weak financial position. Therefore, its settlement with the KTL in the immediately following year could not have been said to be a device to avoid payment of tax. Further, the finding of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 was following mercantile system of accounting and, therefore, the contractual liability arose in asst. yr. 1997-98 and not in the instant assessment year. Therefore, the claim of the assessee was dismissed. 6. Before us, the learned counsel for the assessee pointed out that there was no dispute regarding the claim and its amount and the only dispute was the year in which the claim could be made. The details of the impugned amount and the letter of the DoT dt. 25th Feb., 1997 were placed in the paper book on pp. 435 to 437 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 payment. The liability was in the nature of contractual liability and the amount to be paid was well defined. Thus, there was no justification for not accounting for the liability on accrual basis. It was further mentioned that the amount appears to be in the nature of adjustment between the assessee company and Alcatel CIT. There was no dispute about the amount to be paid and, therefore, there was no question of crystallization or settlement of the liability in this year. Therefore, the impugned claim was disallowed. 8.1 Be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 liability and the same was paid through the running account of Alcatel CIT, France. 9.1 In order to support his contention that the amount was deductible in this year, reliance was placed on the decision in the case of Saurashtra Cement & Chemical Industries Ltd. It was also pointed out that the assessee incurred loss in this year as well as in all earlier years. Therefore, the delay in claiming the liability was not on account of any tax planning undertaken with a view to reduce tax liability and, thus, it was immaterial whethe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 230/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 company and the subsidiary company regarding its liability in respect of salary paid in France. Therefore, since the expatriate personnel were working for the assessee, it is natural to conclude that the liability was that of the assessee and, therefore, it ought to have been claimed from year to year, although the same was not done. On reminder from the parent company in this year, the provision was made and the liability was paid through the running account that does not mean that the disputed liability was crystallized in this year. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 CIT, France, and the customs authorities entertained doubts about the possibility of underinvoicing in respect of import made from the foreign holding company. In such cases, the authorities generally issued notices for determining the price of the goods and it is for the importer to establish before the Special Valuation Branch (SVB), who analysed the invoice value with the international price with a view to determine whether there was any underinvoicing. If the authorities are satisfied that there was no underinvoicing, the order is is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 provision contained in cl. (c) of the Explanation to s. 115JA had no application. It was further represented that the amount was specific and ascertained and, therefore, the same could not have been added back in terms of the aforesaid cl. (c). The learned CIT(A) considered the assessment order and the submissions of the assessee. It was pointed out that the AO did not assign any reason for adding back this amount. It was further pointed out that for the purpose of s. 115JA, the P&L a/c has to be prepared in accordance with the provisions of Par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 not have depreciated with time for fear of non-recovery. The assessee had no reason to believe that the goods were imported at deflated value. Therefore, the facts of the case are not on all fours with the facts of the case of Usha Martin, in which the provision was made in respect of doubtful debt, based upon the guidelines of the RBI in respect of debts which were not properly serviced. Thus, it is not a case of reduction in the value of the assets of the assessee. It is only a provision made for future customs liability and such liability was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 not liable to pay interest under ss. 234B and 234C. Thus, this ground is allowed. 20. In the result, the appeal is partly allowed. ITA No. 105/Del/2004---Asst. yr. 1998-99--Appeal of the assessee 21. The ground in this appeal is that the learned CIT(A) erred on facts and in law in holding that the assessee was liable to pay interest under ss. 234B and 234C for shortfall and deferment respectively in payment of advance tax while computing the liability under s. 115JA. The learned counsel pointed out that this issue stands covered in ITA No. 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or 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 submissions. We find that appeals for asst. yr. 2000-01, in which the claim was made and for asst. yr. 1998-99 to which the liability pertains, are pending before us. Therefore, it will be well within our right to consider the deductibility of this amount in asst. yr. 1998-99. On the basis of the facts available before us. it is seen that the quantification of the liability for this year has not been examined by the AO as the issue did not arise before him. The learned CIT(A) dismissed the ground in asst. yr. 2000-01 by stating that the liability shown i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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