TMI Blog2013 (10) TMI 1455X X X X Extracts X X X X X X X X Extracts X X X X ..... The learned C.I.T.(A) erred on facts and in law in upholding disallowance of write-off of obsolete and slow-moving inventory of ₹ 68,31,255/- as per consistent practice followed by the Company. In any case he failed to appreciate that the opening stocks have also been valued at written down value and corresponding relief should have been granted by him. 2.1 Facts of the case, in brief, are that the assessee is a company engaged in the business of manufacturing, erection and commissioning of pumps etc. During the course of assessment proceedings the Assessing Officer noted that the assessee s inventory of ₹ 10,42,07,527/- as on 31-03-2005 has been arrived at after reducing an aggregate amount of provision of ₹ 68,31,255/- on account of slow moving inventory, the details of which are as under : Provision for write off/down of raw material Rs.42,66,540/- Provision for write off/down of brought out items Rs.12,18,267/- Provision for write off/down of finished goods Rs.13,46,448/- TOTAL Rs.68,31,255/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the write down of ₹ 68,31,255/- is the cumulative write down over the years and does not relate to this year alone. This year the write down of opening inventory at ₹ 36,58,089/- was reversed and therefore the write down of ₹ 68,31,255/- was made. Therefore, the addition, if at all, can be made to the extent of ₹ 31,73,166/-only. 2.5 However, the Ld.CIT(A) was also not convinced with the explanation given by the assessee and upheld the addition made by the Assessing Officer by holding as under : 6.3. The submission has been considered and is found to be devoid of any merit. As has rightly been observed by the Assessing Officer, the provisions of Income-tax law require valuation of inventory at cost or market price whichever is lower. The assessee may follow any accounting policy for the valuation of its closing stock, profits for the purpose of computing the income chargeable to tax, have to be worked out by valuing the inventory at cost or market price, whichever is lower. Although the assessee has written down the parts which have not moved for more than two years and more than three years by 50% and 100% respectively, neither at the assessment s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e valuation of inventory has to be made either at cost or market price whichever is less. We find the CIT(A) while upholding the disallowance made by the Assessing Officer has further observed that the assessee at no point of time was able to show that the market value of these parts have come down to such an extent. From the various details furnished by the assessee in the Paper Book as well as from the orders of the Assessing Officer and the CIT(A) we find nothing is coming out as to what happens when something is sold out of such slow moving /obsolete stock. It is also not known as to how long the assessee held such obsolete stock in the accounts and the treatment of the same. Under these facts and circumstances of the case, we deem it proper to restore the issue to the file of the Assessing Officer with a direction to give one more opportunity to the assessee to substantiate with evidence to his satisfaction regarding the basis of the valuation of the inventory, the period of holding of such inventory in the stock, the treatment of sale, if any, out of such stock. The AO shall also verify the past records and the treatment, if any, given in the past in scrutiny assessments. Gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder for the material is after the end of the Financial Year and the raising of the bill by the respective parties are also after the end of the Accounting Year. We, therefore, do not find any merit in the arguments of the Ld. Counsel for the assessee that the provision for the corresponding expenses was made as per the method of accounting normally followed. From the various details furnished in the Paper Book, it is clear that the expenditure relating to the subsequent year has been booked in the current year under the head provision for site expenses . We, therefore, do not find any infirmity in the order of the CIT(A) on this issue and uphold the same. This ground by the assessee is accordingly dismissed. 6. Ground of appeal No.3 by the assessee reads as under : 3. The learned C.I.T.(A) erred on facts and in law in upholding disallowance of ₹ 24,00,000/- being security deposits with customers adjusted and/or becoming irrecoverable. He failed to appreciate that the loss is a real loss incurred during normal course of business and is fully allowable u/s 28 or sec. 37 of sec. 36(1)(vii) as the case may be. 6.1 Facts of the case, in brief, are that the assessee ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany. It may be appreciated that the company is under a contractual binding to keep such security deposits for securing the orders. Thus these are in normal course of business and loss thereof is an allowable business loss u/s 28 of the Act. 6.4 However, the CIT(A) was also not convinced with the explanation given by the assessee and upheld the same by holding as under : 9.3 After careful consideration, I find no merit in the contention of the appellant. Admittedly, the claim of write off of security deposits is not allowable u/s.36(1)(vii) of the I.T. Act. The appellant has claimed that the amount of ₹ 24,00,000/- is allowable as loss u/s 28 of the IT. Act as the deposits were kept in the normal course of business. However, for an amount to be claimed as loss u/s 28 of the I.T. Act, it needs to be established by the assesses that the amount has actually become irrecoverable and even after adequate efforts having been made in this regard, there is no chance of recovery of the amount. In the present case, not to speak of the fact of making any efforts to follow up the recovery, the assessee has not been able even to furnish the details of such security deposits. Under t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The learned C.I.T.(A) erred on facts and in law in upholding disallowance of write-off of irrecoverable advances given to M/s.Mather Platt Fire Services Limited, amounting to ₹ 2,45,21,333/-. He failed to appreciate the nature of advances and the circumstances under which the advances were written off. hi particular he failed to appreciate that the advances were given in the business interests of the assessee and the writeoff is fully allowable u/s 28. he failed to appreciate the facts and circumstances in proper perspective. 8.1 Facts of the case, in brief, are that the assessee company had claimed deduction of an amount of ₹ 2,45,21,333/- being write off of advances given to M/s Mather Platt Fire Systems Ltd. (MPFSL) as bad debts. On being questioned by the AO, the assessee vide its reply dated 06-12-2007 submitted as under which has been reproduced by the AO at Para 8.4 of his order : In this regard we have already given a detailed note which is on record. To put it briefly, both the assessee company (MPPL) and M/s Mother Platt Fire Systems Ltd. (MPFSL) were earlier divisions of M/s Mather Platt (India) Ltd. (MPIL). After the demerger of MPIL, both ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opinion of the Assessing Officer, this condition was not satisfied in the case of the assessee company in the light of the decision of Hon'ble Supreme Court in the case of M/s. A.V. Thomas Co. Ltd., 48 ITR 67. The Assessing Officer further observed that the condition envisaged u/s 36(2) that the debt or part thereof is taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year was also not satisfied in the case of the assessee since the amount of ₹ 2,45,21,333/- represented only advance given to M/s MPFSL and therefore, the question of taking into account in computation of income of the assessee for any previous year did not arise. Accordingly, the Assessing Officer disallowed assessee's claim of deduction of Rs,2,45,21,333/- as bad debts written off and made addition to the income accordingly. 8.3 In appeal the Ld. CIT(A) was also not convinced with the explanation given by the assessee and upheld the addition made by the AO by holding as under : 10.3 After careful consideration, I find no strength in the contention of the appellant. Firstly, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e advance which has subsequently been written off. He accordingly submitted that under the facts and circumstances of the case the amount claimed should be allowed as business loss u/s.28. 8.6 The Ld. Departmental Representative on the other hand heavily relied on the order of the AO and the CIT(A). He submitted that the assets of the assessee company were only kept as security but primarily the liability was of MPFSL. Financial assistance was extended to prevent MPFSL from committing default on encashment of guarantee by the customers. He submitted that both the companies are distinct entities and it was not a contractual or otherwise the liability of the assessee company. He submitted that the payment of advance to the company was a self acquired responsibility which was more in nature of gratis or application of income. Further, any liability or expenditure on account demerger or reorganization is of capital in nature and not allowable as revenue expenditure. He submitted that the assessee company was not in business of money lending and has no business dealings with MPFSL and the money was not advanced in capacity of trader for supply of goods or services. The money advanced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee and, as such, not allowable 3. K.S. JANAKIRAM vs. CIT 45 ITR 430 (Mad) : Business expenditure-Bad debt-Guarantee for loan-Assessee was a freight broker to various shipping lines including the 'A1 Lines Ltd-His business as a freight broker did not involve his engaging in transactions leading to lending monies for the purchase of vessels by or on behalf of the shipping lines-Connection between a business of freight brokerage and the business involved in securing advances to the shipping lines for the purpose of purchase of vessels is far too tenuous to support the claim that it was incidental to the business of freight brokerage-No custom as such has been set up-Tribunal rightly came to the conclusion on the materials before it that no part of the sum advanced which was guaranteed by the assessee could be treated as a bad debt. He accordingly submitted that the order of Ld.CIT(A) on this issue be upheld. 9. We have considered the rival arguments made by both the sides, perused the orders of the Assessing Officer and the CIT(A) and the Paper Book filed on behalf of the assessee. We have also considered the various decisions cited before us. The only dispu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5,312/- the assessee has written off the amount of ₹ 2,45,21,333/- advanced to MPFSL which in our opinion is not justified. Admittedly, the assessee company was not in business of money lending nor has any business dealings with MPFSL. The amounts advanced to MPFSL was only to bail out the company which is under the same management. However, since the assets of the company were also kept as a security for existing bank guarantee to both the divisions and since the amount of bank guarantee is only for ₹ 41,75,312/-, therefore, we are of the considered opinion that in worst scenario this amount could have been recovered from assets of the company in case of non-recovery from assets of MPFSL. We, therefore, are of the considered opinion that an amount of ₹ 41,75,312/- only at best can be allowed as deduction as business loss and the balance amount has to be treated as the nature of capital advance or gratuitous payment or application of income which has no connection with carrying out business of the assessee. We accordingly partly allow this ground by the assessee. 10. Ground of appeal No.5 by the assessee reads as under : 5. The learned C.I.T.(A) erred on fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es from the customers, this Bank Guarantee was to be cancelled and returned to the assessee. However the assessee could not obtain the certificates from the customers in time and as such the guarantee was encashed by the Customs. Thus in effect, the custom duty which was earlier waived by the Customs Authorities has now been paid by the assessee. The electric motors were a raw material for the project executed by the assessee, and as such the custom duty, if paid earlier, certainly would have been an allowable expenditure. Even if it is paid now by way of encashment of the guarantee, the allowability will not suffer especially in view of sec. 37 and sec. 43B. The A.O.'s reliance on sec. 36(1)(vii) is not only wrong, but is also irrelevant. The assessee never claimed the deduction u/s 36(1)(vii) as bad debts, but has categorically submitted to the A.O. that 'since this is a normal business expenditure incurred during the year, it is fully allowable'. 11.3 Based on the arguments advanced by the assessee the Ld.CIT(A) deleted the addition by holding as under : 8.4. I have carefully considered the submission of the appellant and I find merit in it. The bank guarantee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its dues and did not have any choice but to write off the back to back debts due from the firm. It was submitted by the assessee that since the debts were actually written off in the books and had been considered as income in earlier years, the conditions of sec. 36(1)(vii) r.w.s. 36(2) were fully complied with and therefore, the deduction was fully allowable in view of the decision of Special Bench in case of Oman International Bank's reported in 100 ITD 285 (Mum SB). 12.2 However, the AO was not satisfied with the explanation given by the assessee. He noted from the records of M/s M P + Subhash that M/s M P + S was following project completion method of accounting and it was claimed in the returns that since the project was still going on, considering the system of accounting followed, no income had arisen for taxation purposes. He further observed that in respect of the write off of the amount of ₹ 4,28,77,778/- made by the assessee, M/s. M P + S had not given any effect in its books of account. According to him this was not appropriate in view of the fact that M/s. M P + S was related concern of the assessee and therefore, if a particular treatment was given by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, I am inclined to accept the contention of the appellant. The provisions of section 36(1)(vii) unambiguously mandate that the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year is allowable as deduction if such debt or part thereof has been taken into account in computing the income of the assessee of the previous year or of an earlier previous year. In the present case, there is no adverse finding by the Assessing Officer against the claim of the assessee that the amount written off in the books has been considered as income in earlier years. Therefore, the condition envisaged as per section 36(2) is satisfied and therefore, the claim of deduction u/s 36(1)(vii) becomes allowable as the amount has been written off as irrecoverable in the books of this year. The observation of the Assessing Officer that assessee's claim for deduction in respect of write off of the bad debts is not allowable because the debts have not actually become bad in this year loses significance in view of CBDT Circular no. 551 dated 23.1.1990 which reads as follows: The old provisions of clause (vii) of sub-section (1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ier years could not be controverted by the Ld. Departmental Representative. The Hon ble Supreme Court in the case of TRF Ltd. (Supra) has held that after 01-04- 1989 the assessee has to only establish that debt was written off and it is not necessary to establish that the debt infact has become irrecoverable. Since the assessee in the instant case has fulfilled the conditions laid down in section 36(1)(vii) read with section 36(2), therefore, in view of decision of Hon ble Supreme Court cited (Supra) and considering the submissions made before CIT(A) which has not been controverted by the revenue we find no infirmity in the order of Ld.CIT(A) deleting the addition on account of write off of bad debt. The same is accordingly upheld. This ground by the revenue is accordingly dismissed. 14. Ground of appeal No.3 by the Revenue reads as under : On the facts and circumstances of the case, and in law the Ld.CIT(A) erred in deleting the disallowance made u/s.40(a)(i) of the Act on account of payment made to a non-resident without deducting tax at source and also without ascertaining the non-residents business connections in India . 14.1 Facts of the case, in brief, are that duri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... record to show that at least part of the payment made to the Iraqi commission agent was chargeable to tax under the provisions of I.T Act, 1961 so as to attract the provisions of section 195(2). On the contrary, considering the fact that the payment of ₹ 1,69,32,093/- has been made by the appellant company to Mr. Kheddar Al Saadi (non-resident) for services provided outside India, the amount was not chargeable to tax in the hands of Mr. Kheddar Al Saadi under the provisions of IT. Act, 1961. As such, there was no question of deducting tax before making the payment. Since tax is not deductible on the amount paid, the provisions of section 40(a)(ia) could not be invoked. I, therefore, hold that, on the facts of the case, the Assessing Officer is not justified in disallowing the amount of ₹ 1,69,32,093/- u/s. 40(a)(ia) of the IT. Act. The disallowance is deleted. 14.4 Aggrieved with such order of CIT(A) the Revenue is in appeal before us 15 We have considered the rival submissions made by both the sides and perused the orders of the AO and CIT(A). We have also considered the Paper Book filed on behalf of the assessee. We find the assessee had entered into a contrac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble under the Act. 15.2 In the present case, in our opinion, no income is taxable at all in the hands of M/s. Kheddar Al Saadi in India. Moreover, M/s. Kheddar Al Saadi was only a liasoning agent to facilitate clearance of all documents for early release of payments and to make efforts for getting the payment at the earliest from the Iraqi Government and payment was merely a commission for rendering the above services which were outside India. The amount paid to M/s. Kheddar Al Saadi is not covered u/s.9(1) (v), (vi) or (vii), i.e. royalty or for technical services. There is no treaty between India and Iraq u/s.90 of the Income Tax Act and hence we have to examine the taxability of the payment made to M/s. Kheddar Al Saadi under the normal provisions of the Income Tax Act. Nowhere, it is the case of the AO that M/s. Kheddar Al Saadi is a resident of India or otherwise also the services are rendered in India. So far as amendment to Explanation below Section 9 by the Finance Act, 2010 is concerned the said Explanation is applicable in respect of income covered under clause (v), (vi) or (vii) of section 9(1) of the I.T. Act. As we have held that the payment made to M/s. Kheddar Al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ind above ground is identical to ground of appeal No.3 in ITA No.368/PN/2009. We have already decided the issue and the ground raised by the Revenue has been dismissed. Following the same ratio, this ground by the Revenue is dismissed. ITA No.1000/PN/2012 (By Assessee) (A.Y. 2006-07) : 17. The only effective ground raised by the Revenue reads as under : The Ld.CIT(A) erred on facts and in law in upholding disallowance of write-off of obsolete and slow-moving inventory of ₹ 13,79,920/- as per the consistent practice followed by the Company. The Company carried out a detailed analysis of all slow-moving and obsolete inventory and writes down their value in the books in order to present a true and fair view of its state of affairs. The parts which have not moved for more than one year and less than two years are written down by 50% and those which have not moved for more than two years are written down fully . 17.1 After hearing both the sides, we find above ground is identical to ground of appeal No.1 in ITA No.351/PN/2009. We have already decided the issue and the ground raised by the assessee has been restored to the file of the AO for fresh adjudication with ..... X X X X Extracts X X X X X X X X Extracts X X X X
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