TMI Blog2015 (2) TMI 982X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 - ITAT MUMBAI) a consistent view has been taken that non-realisation of export proceeds from a foreign party can be considered as a bad debt and written off and claimed as a deduction. It was also held that the fact that permission of the Reserve Bank of India has not been obtained for such write off will not be a bar to claim deduction on account of such bad debts written off.As far as the issue of applicability of the Explanation to section 37(1) of the Act is concerned, we are of the view that the aforesaid Explanation will apply only when an expenditure is incurred for any purpose which is an offence or which is prohibited by law. In our view, the sale proceeds to be received from a foreign buyer which already shown as income and which is now written off as irrecoverable, cannot be said to be an expenditure incurred by the assessee for any purpose which is an offence or which is prohibited by law. - Decided against revenue. - ITA No.674/Bang/2013 - - - Dated:- 21-8-2014 - SHRI N.V. VASUDEVAN AND SHRI JASON P. BOAZ, JJ. For the Appellant : Shri L.V. Bhaskar Reddy, Jt. CIT(DR) For the Respondent : Shri Narendra Sharma, Advocate ORDER N. V. Vasudevan ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the deduction of the expenditure concerned. Hence, the Assessing Officer is directed to allow deduction in respect of the two amounts mentioned above. 7. Aggrieved by the order of the Commissioner of Income-tax (Appeals), the Revenue has raised the grounds Nos. 2 to 5 before the Tribunal. 8. We have heard the rival submissions. It is not in dispute that before us that this Tribunal in the case of Santosh Kumar Shetty v. Asst. CIT in I. T. A. No. 1194/Bang/2012 by order dated July 26, 2013 has taken a view that amendment to the provisions of section 40(a)(ia) of the Act by the Finance Act, 2010 will operate retrospectively with effect from April 1, 2005. As per the aforesaid amendment, tax deducted at source, if it is paid on or before the due date for filing of return of income, then no disallowance under section 40(a)(ia) of the Act can be made. For the sake of ready reference, we reproduce below the decision rendered on a similar issue in the case of c (page 276 of 3 ITR (Trib)-OL) : 9. The legislative history of the provisions of section 40(a)(ia) of the Act is as follows : Section 40 has certain clauses providing for the amounts which are not deductibl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction, has not been paid before the expiry of the time prescribed under subsection (1) of section 200 and in accordance with the other provisions of Chapter XVII-B. It is also proposed to provide that where in respect of payment of any sum, tax has been deducted under Chapter XVII-B or paid in any subsequent year, the sum of payment shall be allowed in computing the income of the previous year in which such tax has been paid. The proposed amendment will take effect from 1st day of April, 2005 and will, accordingly, apply in relation to the assessment year 2005-06 and subsequent years. (Clause 11)' 11. Thereafter the Finance Act, 2008 made amendment to clause (a) in sub-clause (ia) in section 40 with retrospective effect from April 1, 2005. The section as amended by the Finance Act, 2008 read as under : '(ia) any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work), on which tax is deductible at source under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139. Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.' 14. From the above provision as amended by the Finance Act, 2010 with retrospective effect from April 1, 2010 it can be seen that the only difference which this amendment has made is dispensing with the earlier two categories of defaults as per the Finance Act, 2008, as discussed in the earlier para, causing disallowance on the basis of the period of the previous year during which tax was deductible. The first category of disallowances included the cases in which tax was deductible and was so deducted during the last month of the previous year but there was failure to pay such tax on or before the due date specified in sub-section (1) of section 139. The Finance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bench in the case of Virgin Creations v. ITO (I. T. A. No. 267/Kol/2009) for the assessment year 2005-06. The issue that arose for consideration was disallowance of expenses under section 40(a)(ia) claimed as deduction while computing income from busi ness being embroidery charges, dyeing charges, interest on loan and freight charges without deducting tax at source. The embroidery charges were paid between May 22, 2004 to November 30, 2004. Tax had been deducted at source but were paid to the Government only on October 28, 2005 and not within the time contemplated by section 200(1) of the Act. The dyeing charges were paid between April 5, 2004 to August 20, 2004. Tax was deducted at source but was paid to the Government only on October 28, 2005. Freight outward charges were paid without deduction of tax at source. Interest on loans were credited to the creditors account on March 31, 2005 to the extent they were paid after the due date for filing return of income under section 139(1) of the Act, the disallowance was made under section 40(a)(ia) of the Act. Before the Tribunal, the assessee contented that the amendment by the Finance Act, 2010 with retrospective effect from April 1, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court that a proviso which is inserted to remedy unintended consequences and to make the provision workable, requires to be treated as retrospective in operation so that a reasonable interpretation can be given to the section as a whole. In the present case, the amount of tax deducted at source from the freight charges during the period April 1, 2005 to February 28, 2006 was paid by the assessee in the month of July and August 2006, i.e., well before the due date of filing of its return of income for the year under consideration. This being the undisputed position, we hold that the disallowance made by the Assessing Officer and confirmed by the learned Commissioner of Income-tax (Appeals) on account of freight charges by invoking the provisions of section 40(a)(ia) is not sustainable as per the amend ments made in the said provisions by the Finance Act, 2010 which, being remedial/curative in nature, have retrospective application', we find no reason to deviate from the decisions of the Income-tax Appellate Tribunal's Mumbai Bench and Ahmedabad Bench, in the absence of a contrary view, except the other benches decisions or any other High Court. Therefore, respectfully follo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of the assessee payments were so made before the said due date and in terms of the decision of the hon'ble Calcutta High Court no disallowance could be made by the Assessing Officer under section 40(a)(ia) of the Act. 19. The question now is as to whether to follow the decision of the hon'ble Special bench which has taken the view that the amendment by the Finance Act, 2010 to the provisions of section 40(a)(ia) of the Act is prospective and not retrospective from April 1, 2005 or the decision of the hon'ble Calcutta High Court taking a contrary view. On the above question, learned counsel for the assessee brought to our notice the decision of the Income-tax Appellate Tribunal Delhi in the case of Tej International P. Ltd. v. Deputy CIT [2000] 69 TTJ (Delhi) 650, wherein it was held that in the hierarchical judicial system that we have in India, the wisdom of the court below has to yield to the higher wisdom of the court above, and therefore, once an authority higher than this Tribunal has expressed its esteemed views on an issue, normally, the decision of the higher judicial authority is to be followed. The Bench has further held that the fact th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the sum of ₹ 1,45,96,224 to tax. 11. Aggrieved by the order of the Assessing Officer, the assessee preferred appeal before the Commissioner of Income-tax (Appeals). Before the Commissioner of Income-tax (Appeals) the assessee contended that the amount which was claimed as bad debts had been offered for taxation for the assessment year 2006-07 and the same was unrealised on account of the refusal of the foreign importer to acknowledge the debit note. The assessee pointed out that during the course of its business it had made exports of the finished goods being HDPE products to various foreign customers who are the importers, at the consideration agreed to through a contract. For the manufacture of the above products, the assessee had to import raw materials. Due to heavy fluctuation in the foreign exchange rate, the assessee had to remit excess cost in terms of Indian rupee towards such imports. Thus, such heavy cost incurred by the assessee had resulted in loss in its business and in order to contain the loss the assessee had made/raised debit notes to its customers being the importers of the products, for increasing the sale price and such excess consideration requested t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this regard and the Assessing Officer's reasoning is not justifiable. The provisions under section 36(1)(vii) read with section 36(2) are self-contained code and the assessee fulfilled these conditions. Under similar circumstances, the hon'ble Income-tax Appellate Tribunal, Mumbai Bench in the case of Sabra Impex Ltd. [2011] 141 TTJ (Mumbai) 11 (UO) held that the Reserve Bank of India Directives cannot override the statutory provisions of the Explanation to section 36(1)(vii) of the Act and, therefore, the assessee's claim for write off of bad debts pertaining to foreign party could not be disallowed merely for want of Reserve Bank of India approval. In the instant case also, the income arising on account of the exports was admitted by the appellant in the assessment year 2006-07 and all the conditions as required under section 36(1)(vii) read with section 36(2) of the Act are fulfilled. Respectfully following the said decision, the Assessing Officer is directed to allow the deduction of bad debts written off by the appellant during the period under consideration. 14. Before us, the learned Departmental representative pointed out that in the grounds of appeal, the D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the debtor. In such circumstances, we are of the view that the claim of the assessee for deduction has to be allowed. With regard to the permission of the Reserve Bank of India which has not been obtained for the period relevant to the previous year, we are of the view, that the decision of the hon'ble Delhi High Court in the case of CIT v. Sawhney Exports [2008] 304 ITR 93 (Delhi) will be squarely applicable. Admittedly, there was approval of the Reserve Bank of India in the subsequent assessment year and therefore, this would be sufficient. We are also of the view that the claim for deduction under the Act, will have no relevance to permission by the Reserve Bank of India. Thus, ground Nos. 5 to 7 by the assessee are allowed. 17. The fact that the aforesaid decision has not been accepted by the Revenue will not be relevant. Following the decisions of the Tribunal referred to above, we uphold the order of the Commissioner of Income-tax (Appeals). 18. As far as the issue of applicability of the Explanation to section 37(1) of the Act is concerned, we are of the view that the aforesaid Explanation will apply only when an expenditure is incurred for any purpose which i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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