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2016 (6) TMI 1025 - GUJARAT HIGH COURT

2016 (6) TMI 1025 - GUJARAT HIGH COURT - TMI - Reopening of assessment - Claim of bad debts u/s 36 (1) (vii) - Held that:- It was only after such detailed, minute scrutiny that the Assessing Officer, in the order of assessment, had made partial disallowance of the petitioner's claim of deduction of bad and doubtful debts. For all these reasons, therefore, the Assessing Officer cannot be permitted to reopen the assessment, on this very ground, since any such reopening, would be based on mere chan .....

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ing could not have been issued. It was not the belief of the Assessing Officer that income had escaped assessment. In fact, he was compelled to go against his own legal belief and issue notice, which was wholly impermissible under law. In fact, the spirited defence put forward by the Assessing Officer before the Audit Party gives credence to the petitioner's contention that his entire claim was minutely examined by the Assessing Officer during the original assessment proceedings. - Decided in fa .....

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itioner for the Assessment Year 2010-11. 1.1. The brief facts are as under :- 1.2. The petitioner is a Company registered under the Companies Act and is engaged in the business of manufacturing specialized medical equipments. For the Assessment Year 2010-11, the petitioner had filed return of income, which was taken by the Assessing Officer for scrutiny. In the Assessment Order dated 26.03.2013, the Assessing Officer made several additions and disallowances. In order to reopen such assessment, i .....

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Loss a/c that net sales of ₹ 42,12,62,060/- was shown after deducting the provisions of sales return of ₹ 1,63,80,000/- from sales. As per I.T. Act, provision made in the accounts only for an accrued or known liability is admissible deduction. Thus, deduction allowed for provision of sales return was irregular. The same was required to be disallowed and added back in the assesse's total income. By not doing so, resulted in underassessment of income of ₹ 1,63,80,000/- . 2. A .....

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d from the computation of income that the assessee had claimed and allowed bad debt of ₹ 3,37,34,810/- . However, the assessee had written off bad debt from the provision of bad debt and doubtful debts made for earlier years i.e. instead of credit of debtor's account and assessee had credited it from provision of bad and doubt debts. Thus, the bad and debt written off of ₹ 3,37,24,810/- from provision of bad and doubtful debts was irregular. This has resulted into under assessmen .....

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tune of ₹ 8,53,30,357/- chargeable to tax has escaped assessment within the meaning of Section 147 of the I.T. Act, 1961 for A.Y. 2010-11. 2. Upon receipt of the reasons recorded by the Assessing Officer, the petitioner raised objections to the process of reopening under a communication dated 09.01.2016. Such objections, were however, rejected by the Assessing Officer by order dated 05.02.2016. Hence, the petition. 3. From the reasons recorded by the Assessing Officer, it could be gathered .....

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s not eligible in terms of Section 36(1) (viii) of the Income Tax Act (the Act for short) and (3) that the assessee had claimed doubtful debts, doubtful loans, advances etc., totalling into 3.52 crores which was not a valid claim. 3.1. On the basis of materials on record, learned counsel Shri R.K. Patel for the petitioner raised mainly two contentions; firstly, that the notice for reopening was issued under the instance of Audit Party and that therefore, there was no independent decision of the .....

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orded valid reasons for issuing notice for reopening. Notice has been issued within a period of four years from the end of Assessment Year. 5. We may advert to second and third grounds recorded by the Assessing Officer in his reasons. In so far as claim of bad debts to the extent of 3.37 crores in terms of Section 36 (1) (vii) of the Act is concerned, we may notice that during the original scrutiny of the assessment proceedings, the Assessing Officer had required the assessee to provide multiple .....

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hoc on the basis of past experience. However, all the provisions are added back to total income in computation of total income. 5.1. In a further communication dated 07.12.2012 with respect to this claim, the Assessing Officer called upon the assessee to provide the following details : 2. In this connection, you are requested to furnish the following details/ information/ explanation, which are required for completion of assessment proceedings: ( i) Furnish details of bad debts written off in th .....

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re, requested to showcause as to why the differential amount of ₹ 1,13,07,499/- should not be disallowed and added to your total income. 5.2. In response to such a query, the petitioner on 18.12.2012 wrote to the Assessing Officer as under : 1. The details of bad debts written off during the year under consideration are as under : Name and address of the Party Amount (in Rs.) Medline Surgicals, Kolkata 1, Basanta Bose Road, Kolkata - 700 026 (India) 152,100 Ruby General Hospital, Kolkata K .....

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00 K.L.E.S. Heart Found, (Belgaum) Bangalore Nehru Nagar, Belgaum, Karnataka - India. 704,750 Manipal Heart Foundation, Bangalore 98, HAL Airport Road, Bangalore, KA560017 50,500 NarayanaHrudalaya, Bangalore No.258/A, Bommasandra Industrial Area, Anekaltaluk Bangalore, Karnataka-560099 157,000 Omega Pharmacy (Mangalore), Bangalore MAHAVERR CIRCLE, Mangalore, Karnataka 599,500 Shree Jayadeva Institute of Cardiology, Bangalore K.R. Hospital Campus, Mysore, Karnataka, India 464,000 Trinity Heart Fo .....

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o.35, MohajerAlley, Irashahr Street, Tehran - Iran 8,608,614 Scitech Medical Products, Brazil Rua 53, No220,Qd-B-17, Lt.22, JardimGoias Goiania Go - Brail Zip Code 74,810210. 11,984,460 SAL Hospital, Ahmedabad Opp. Doordarshan,Drive-in-Road, Ahmedabad-380 054 Gujarat, India. 525,665 Balaji Hospital, Mumbai Victoria Road, Cross Lane III, Byculla (E) Mumbai, MH 400 027 65,000 K.E.M. Hospital, Mumbai Acharya Donde Marge, Parel East, Mumbai, Maharashtra 400012 58,000 Reliance (H.N.Hospital) Mumbai P .....

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d Section. The Section 36(1) (vii), states as under : (vii) subject to the provision of subsection (2), the amount of (any bad debt or part thereof which is written off or irrecoverable in the accounts of the assessee for the previous year) . The proviso is not applicable as the same is dealt with bad debts claimed under Section 36(1) (vii) of the Act. The assessee is also not covered under Section 36(2) of the Act. Hence, for claiming expenses under bad debts u/s. 36(1) (vii) the assessee has t .....

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nk (authorised dealer) and bank inform to the RBI. In case RBI requires any clarification it also calls through bank. The assessee company has submitted the letters to the bank for writing off the debts in due course. We have also informed the bank for writing off loans and advance through letter dated June 15, 2009. The assessee company has received letter from Reserve Bank of India dated August 18, 2009 through bank. The assessee has replied the same. The copy of all correspondence regarding t .....

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ermitted to reopen the assessment, on this very ground, since any such reopening, would be based on mere change of opinion. 5.5. Regarding the third ground recorded in the reasons by the Assessing Officer, we may recall, it pertains to assessee's claim of bad debt and of doubtful loans and advances. In this context, the assessee in the letter dated 10.12.2011 to the Assessing Officer had conveyed as under : 10. Details of provision for debts, provisions for doubtful loans and advances and pr .....

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also scrutinized by the Assessing Officer in the original assessment proceedings. 6. Coming to the first ground mentioned in the reasons, we may recall, it pertains to deduction of the provision of sales return of ₹ 1.63 crores claimed by the assessee. According to the Assessing Officer, this was neither accrued nor a known liability and was therefore, not an admissible deduction. In this context, the assessee contends that even this claim had come up for consideration before the Assessing .....

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d out that the company was maintaining batch wise complete record of its products and also kept track record of the goods lying with various distributors. Upon coming to know that the material in some products was defective and was causing problem for the user, it had recalled the material on 22.03.2010 from the market. Thus, the company knew the exact quantity of the material recalled. This was thus, not estimated but known ascertained liability. Since the distributors would return the goods, t .....

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urn of ₹ 1.63 crores came up for direct discussion before the Assessing Officer during the original assessment proceedings. However, in the context of the petitioner's contention regarding audit objections, we had summoned the original file of the Department. Perusal of the file would show that on 24.09.2014, the Audit Party had discussed this claim of the assesse and had referred it as a major irregularity in granting the same. In this note prepared by the Audit Party, we notice that .....

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defective material from the market. Such material was received and destroyed because it was not safe for human use and that therefore, the liability was ascertained. 7.1. The Assessing Officer, thus, clearly did not agree to the view point of the Audit Party that the claim was irregularly granted. In fact, in his opinion, after going through the detailed explanation, the same was correctly allowed. Despite this, it appears that the Audit Party insisted upon corrective measures being taken by th .....

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the Audit Party and after giving detailed reasons, stated as under: When company recall the material, it is certain liability or known liability for which provision is made and as per the explanation [1] (c ) of Section 115JB of I.T. Act the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; , need to be added in book profit. However, the provisions made for sales return are ascertained liabilities, Therefore, the same cannot be added bac .....

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