TMI Blog2010 (11) TMI 665X X X X Extracts X X X X X X X X Extracts X X X X ..... AO with a specific direction to look into the grievance of the assessee and to take appropriate action in accordance with the law - While doing so, the AO shall keep in view and ensure that the said sum of Rs.9.16 lakhs is not subjected to be taxed twice - It is ordered accordingly. Finished product - information about the yield of finished produce, percentage of yield, shortages were not given in Annexure XVII (Clause 28(b)(A) of the Tax audit report. - Held that:- Since the AO had not brought any documentary proof to suggest the basis on which addition of Rs.5 lakhs has been made that too on an ad-hoc basis - It was well settled that no addition could be made on an ad-hoc basis which doesn't stand the testimony of law - Therefore, decided in favour of assessee. Debts written off -As per the Hon'ble highest judiciary of the land in its recent verdict in the case of T.R.F. Ltd. v. CIT (2010 -TMI - 76626 - SUPREME COURT), observed that - after the amendment of section 36(1)(vii) of the Income-tax Act, 1961, with effect from April 1, 1989, in order to obtain a deduction in relation to bad debts, it is not necessary for the assessee to establish that the debt, in fact, has become i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. The Revenue has raised five grounds, out of which, ground Nos.1 and 5 being general in nature and since no specific issues involved, they have become non-consequential. In the remaining grounds, the cruxes of the issues raised are as under: (i) the CIT(A) erred in sustaining only 50% as against 100% of disallowance on miscellaneous expenditure; (ii) the CIT(A) erred in deleting the addition of Rs.20,46,916/- made on account of compensation for delayed deliveries; and (iii) the CIT(A) erred in deleting the disallowance of Rs.9,49,328/- being part of expenditure incurred as interest charges for late payment. II. ITA No. 158/B/10 - [By the assessee] 3. The assessee company ['the assessee' in short] in its grounds of appeal had raised nine grounds in an illustrative and elaborate manner. For the sake of convenience and clarity, they are reformulated in a concise manner, as under: (i) the CIT(A) erred in confirming the disallowance of Rs.1 lakh out of total expenditure of Rs.2.24 lakhs incurred as direct cost on installation; (ii) the CIT(A) erred in sustaining the disallowance of Rs.13,47,946/- u/s 40A(2)(b) of the Act; (iii) the CIT(A) erred in s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , after due consideration of the assessee's contentions as well as the AO's remand report, had reasoned that- "24.4.................the details of Miscellaneous expenditure was provided in pages 224 to 228 of the paper book. The same were perused. In fact, it is part of schedule 20, however, the vouchers were neither produced before the AO or before me. It is pleaded that vouchers were not shown because it was not asked for which seems only a plea negated by the para 12 of the assessment order vide supra. Thus, I find still the expenditure claim has to be justified. In the absence of such justification and corroborative evidence I, on principle, accept the ratio for disallowance of the claim under this head, but, I find it excessive being almost 48% of the claim and, therefore, restrict the same to Rs.30 lakhs..." (iii) It was contended by the Ld. D.R before us, in brief, that the stand of the Ld. CIT (A) was not justified in restricting the disallowance to 50% when there was lack of documentary evidence to justify such restriction. (iv) On the other hand, the Ld. A.R was specific in his urge that after due consideration of the details submitted, the Ld. CIT (A) had res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as contended before us during the course of hearing that the CIT(A) had failed to appreciate that the addition was made due to non-furnishing of details by the assessee relating to the relevant assessment year. (iv) On his part, the Ld. A R had furnished the details of compensation for delayed deliveries as on 31.3.2001 which contained the names of the parties and the amounts [Source: P 176 of PB AR]. (v) The Hon'ble ITAT, Delhi Bench C, New Delhi in ITA NO:6920/DEL/93 dated: 5.10.2001 in the case of ACIT v. Taylor Instruments Co (I) Ltd. had recorded its finding, in an identical issue, that- "19........................we are of the view that no interference is warranted in the order passed by the CIT(A) allowing necessary deduction on account of damages claimed. As rightly held by the CIT (A), the payments were not for violation of any law, but, the payments necessarily had to be made because of non-fulfillment of terms of the contract between the parties...." (vi) For appreciation of facts, we reproduce the observations of the CIT (A) [which culminated the issue in favour of the assessee] as under: "11.2. I have carefully considered the facts of the case and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as of the view that the assessee had to pay Rs.1,27,25,000/- plus interest of Rs.18 lakhs, totaling to Rs.1,45,25,000/- whereas the assessee had claimed Rs.1.54 crores whereby there was an excess claim of Rs.9,49,328/- which was disallowed by the AO. (iii) On an appeal, the assessee had contended before the CIT(A) that it had correctly claimed the deduction for a sum of Rs.1,54,74,328/- as against Rs.1,45,25,000/- considered by the AO. The Ld. CIT (A) deleted the addition on the basis of remand report [reference: P 20 of CIT(A)'s order]. (iv) The brief submission during the course of hearing before this Bench was that the CIT (A) had erred in deleting the disallowance in spite of assessee's failure to furnish fresh evidence as regards the disallowance of Rs.9.49 lakhs being part of expenditure incurred as interest charges for late payment. (v) However, the Ld. AR was emphatic in his urge that during the course of remand (report) proceedings, the AO had in no manner controverted any of the submissions made and on the basis of which the CIT (A) deleted the said disallowance which requires to be sustained. (vi) We have diligently considered the rival submissions and al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng and accommodation charges of engineers to complete the balance job of installations. In the absence of details, the AO had disallowed Rs.1 lakh on this count. (ii) After due consideration of the contention of the assessee, remand report of the AO as well as the rejoinder of the assessee - wherein it was claimed that the entire expenditure was supported by vouchers which were produced before his predecessor - the CIT (A) was of the view that since no such vouchers were produced during the course of appellate proceedings, the disallowance was justified. (iii) It was contended during the course of hearing that as per the terms of the contract with the customer the assessee was under obligation to do installation of equipments supplied and expenditure incurred on the same was debited to direct cost of installation, jobs and services. It was, further, contended that since the expenditure was revenue in nature relating to the business of the assessee, the same requires to be allowed in full. (iv) On the other hand, the Ld. D R was of the firm view that no documentary evidence was adduced even at the stage of appellate stage to justify its claim and, thus, the stand of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s- "13.1.......................Cited case laws held that the expenditure incurred for the purpose of obtaining a loan is allowable as revenue expenditure 60 ITR 52 (1966) (SC) and the charges paid to a guarantor is also allowable as revenue expenditure 227 ITR 465 (SC) (1997). However, the documents provided in the paper book only show that M/s. ABB Holdings (South Asia) has stood as the corporate guaranteer of the appellant before the Standard Chartered Grindlays Bank, but, no paper reveals that what should be the charge for being the guarantor i.e., 1% or 0.6% as claimed in the written submission. Thus, in the absence of documentary evidence to support the claim that the charge of commission is 1% of the net balance as in case of other borrowers, the details of debit notes shown in page 108 of paper book has no evidentiary value at all. Hence, on facts, the addition is sustained...." (iii) It was vehemently contended before us by the Ld. AR that as the net worth of the assessee was negative and the bankers were charging high rate of interest for providing finance/working capital, on the basis of guarantee given by ABB Holding (South Asia) Ltd., bankers have provided loan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 87 of PB AR] (ix) The AO in his remand report had remarked that, Now the assessee has submitted copy of letter from SCGB Ltd. and copy of indemnity cum guarantee in support of its claim. Perusal of the same reveals that there is no clause of guarantee commission to be paid on the guarantee given by ABB Holdings (S.A.) Ltd.....' (x) As rightly contended by the assessee, the payment of guarantee commission was a matter of contract between the assessee and ABB Holdings (S A) Ltd and it was not the concern of the SCGB Ltd as to how much of the guarantee commission to be paid by the assessee to ABB Holdings and as such there was no mention or any clause of guarantee commission to be paid on the guarantee given by ABB Holdings in the said Indemnity-cum-guarantee. The reasoning of the AO to deny the claim of the assessee was not on the sound footing and it was rather hypothetical. Any prudent businessman or a company, as the case may be, will not stand guarantee for another company for securing credit facility for a whopping sum of Rs.150 millions without any guarantee commission and the charging of guarantee commission of 0.6% by ABB Holdings was quite reasonable, considering the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hence, no decision is given thereon....' (iii) It was contended before us by the Ld. A R that the said amount has been provided for the liability for the AY 99-00 which was disallowed as contingent expenditure and this stand of the AO was subsequently upheld by higher authorities for that year; that taxing the same now would result in taxing it twice. It was, therefore, submitted that the same requires to be deleted. (iv) We have considered the submission of the assessee and also perused the relevant records. The AO in his impugned order had stated that the assessee's appeal [including the subject matter] for the AY 99-00 was pending before the Tribunal and that the outcome of the Hon'ble Tribunal has not been brought to the reference of this Bench by either party. The assessee pleaded before us that the said amount has been provided for the liability for the AY 99-00 which was disallowed as contingent expenditure and this stand of the AO was subsequently upheld by higher authorities for that year; that taxing the same now would result in taxing it twice. However, it was not made explicitly clear whether the stand of the AO has since been sustained by the Hon'ble Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terials consumed, quantitative details of finished goods and also gross profit/turnover ratio wherein, the material consumed/finished goods produced at 84.45% comparing to the percentage obtained at 85% for the AY 2000-01 [Source: P 90 of PB AR]. However, the assessee had explained in a note that considering the nature of business and as per accounting practice followed in the business, information with regard to the yield of finished produces, percentage of yield, shortage of raw materials and furnished goods and percentage thereof was not practicable to furnish. (v) It was maintained by the assessee's counsel during the hearing before us that this Note was a regular feature in the assessee's account in the past years and at no point of time had the AO made any addition to the assessee's income based on the same. It was, further, contended that the current year's gross profits ratio was higher than the GP of the earlier years. (vi) On a glimpse of the remand report of the AO, we find that the AO had remarked that, 'since the assessee has not filed any fresh evidence in its submission on this issue, therefore, the addition was rightly made on protective basis'. However, on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt of any bad debt or part thereof, which was written off as irrecoverable in the accounts of the assessee for the previous year. The assessee having written off the amount as irrecoverable in its accounts for the previous year was entitled to deduction of the amount of the bad debt. ...." (b) The Hon'ble High Court of Himachal Pradesh in the case of Suresh Gaggal v. ITO (2009) 222 CTR (HP) 96 had held that - "Once the assessee writes off the debt as irrecoverable, his claim for deduction cannot be rejected on the ground that the debt has not been established to have become irrecoverable. The aforesaid position is also supported by the amendment made to s.36(2) w.e.f. 1st April, 1989 and any doubt, if remaining, has been clarified by Circular No.551 dated: 23rd January, 1990. (c) The Hon'ble Bombay High court, in the case of CIT v. Star Chemicals (Bombay) P. Ltd. (2009) 313 ITR 126 (Bom), in its wisdom had held that 'under section 36(1)(vii) of the Income-tax Act, 1961 and Circular No.551 dated January, 23, 1990 if the assessee had written off the debt as a bad debt that would satisfy the purpose of the section." (d) The Hon'ble highest judiciary of the land in its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs.3,65,054/- for which payments were made during the AY under consideration. Moreover, the assessee, in its rejoinder to the remand report of the AO, asserted that the corresponding income has been offered to tax in the current year, though the dates of bills pertain to earlier year. However, this assertion of the assessee has not been examined by the CIT (A), but, went ahead in turning down its request. (viii) On perusing the records and hearing the arguments put forth before us, it is abundantly clear that the Revenue has not disputed the bonafide of the expenditure. The only grouse of the Revenue is that this expenditure pertains to prior period. However keeping in mind the concept of materiality, we are of the opinion that the denial of expenditure for Rs.3,65,054 being too meagre comparing to the operations of the company is unwarranted. It is ordered accordingly. Ground No.7: Disallowance of Rs.30 lakhs out of Rs.1,25,42,482/- being misc. expenditure: As per Schedule 20, the assessee had claimed Misc. expenses of Rs.1,25,42,482/- under the head 'other expenses'. According to the AO, the assessee had claimed expenses on entertainment, legal expenses, software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were forth-coming, the loss suffered by the assessee was a dead loss of the nature of capital loss arising from nonbusiness consideration and, accordingly, disallowed the entire claim. (ii) It was contended before the Ld. CIT (A) that the assessee had made certain trade investments by acquiring the equity shares of a company known as Gujarat Instruments Ltd which used to manufacture instruments and there was tremendous synergy between the instruments manufactured by that company and that of the assessee as they complemented each other. There was a due of Rs.1,29 crores towards unpaid price for instrument supplied by the assessee. The assessee had from time to time made advances to enable that company to meet certain expenses incurred by it on day-to-day business activities which was claimed as a deduction; however, AO took a view that the same represented a capital loss. It was contended by the assessee that these investments were made in the course of the trade, the loss arising therefrom had to be allowed as a revenue deduction. Citing the finding of the Tribunal in the case of ABB Ltd. and on an analogy of reasoning the amounts recoverable from Gujarat Instruments Ltd. havin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there was a due of Rs.1,29,5,620/- towards unpaid price for instrument supplied by the assessee to GIL and that the assessee had from time to time made advances to GIL to enable it to meet certain expenditure by it on its day-today business activities. During the year under dispute, the assessee had written off Rs.3.50,81,381/- representing advances and dues from GIL as irrecoverable as GIL, according to the assessee, had gone in liquidation. Notes to accounts (Tax Audit) [source: P 25 of PB] No.7, it has been stated that "Loans and advances and sundry debtors include Rs.2,21,29,761 and Rs.1,29,5,620/- (previous year Rs.2,20,50,830/- and Rs.1,29,51,620/-) due from the associate company, Gujarat Instruments Limited, which has gone under liquidation. In view of this, the management considers the said amounts as not recoverable and accordingly has charged off the same in the profit and loss account in the current year and disclosed under exceptional items in Schedule 21...." (vii) The assessee had taken a view that the loans, advances and sundry debtors amounting to Rs.3.50 crores due from its associate company - GIL - which had gone in liquidation and there was no trace of r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore us, it was vehemently argued that the assessee made the investment for the promotion of its business with GIL and since GIL had gone into liquidation it was realized that nothing could be recovered from the investment so made, the assessee had made the provision. It was, therefore, pleaded that the same may be treated as business expenditure and be allowed the same as a deduction. In the alternative, it was pleaded that if the expenditure claim of Rs.32.25 lakhs were to be disallowed, the same be considered as capital loss and the benefit of carry forward of loss be extended to the assessee. The Ld. D R present was duly heard. (v) We have duly considered the rival submission, diligently perused the relevant records as well as the paper book furnished by the Ld. A.R. (vi) It was submitted before the Ld. CIT (A) that, '...had the AO given an opportunity in the course of remand proceedings to adduce such evidence which he had considered necessary, the comments made in the remand report would not have been necessary.' In its rejoinder too, the assessee's averment was that 'nowhere in the course of the remand proceeding did the assessing officer ask us to produce any furth ..... X X X X Extracts X X X X X X X X Extracts X X X X
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