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DCIT, Circle-4, Kolkata Versus M/s J. Thomas & Co. Pvt. Ltd.

2017 (11) TMI 382 - ITAT KOLKATA

Disallowance made towards advances written off - initiation of steps to recovery of debts - Held that:- The assessee had written off the advances given in the normal course of business to aforesaid three parties after taking necessary steps for recovery of the same and also preferring civil suits and criminal suits, wherever possible, as the case may be. The assessee had also enclosed the necessary evidences in this regard before the Ld. AO. Hence, it would be factually incorrect to state that n .....

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mal course of its business and when a loss arises due to non-recovery of such advances and when the same is irrecoverable and written off as such, the same should be allowed as a loss while computing the profit and gains of business. - Decided in favour of assessee - Disallowance of foreign travel expenditure - payment for commercial expediency - Held that:- In the instant case, the senior employees of the assessee visited foreign countries and it has generated revenue to the assessee in the .....

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.12.2011 respectively are filed by the Ld. AR in this regard. When there is no change in the facts and circumstances of the case during the year under appeal, then there is no need for the Revenue to take a different stand ignoring the principle of consistency. Reliance in this regard is placed on the decision of Hon’ble Supreme Court in the case of Radhasaomi Satsang vs. CIT (1991 (11) TMI 2 - SUPREME Court ). - Decided in favour of assessee - I.T.A Nos. 2066 /Kol/2014 And I.T.A Nos. 2071/Kol/2 .....

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r section 143(3) of the Income Tax Act, 1961 (in short the Act ) dated 21.03.2013 for the Assessment Year 2010-11. Both these appeals are taken together and disposed off by this common order for the sake of convenience. First let us take up Revenue Appeal in I.T.A. No. 2066/Kol/2014 for Assessment Year 2010-11 2. The only issue to be decided thereon is as to whether the Ld. CIT(A) was justified in deleting the disallowance made towards advances written off in the sum of ₹ 82,34,907/- in th .....

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Directors filed by the assessee did not make any mention about the settlement or court case or any other reason for writing off the debts. Accordingly, he concluded that the assessee had not established that the claim has become irrecoverable during the year under consideration and accordingly, disallowed the same. 4. The Ld. CIT(A) deleted the disallowance by observing as under: 6.2. I have carefully perused the contention of the AO and the submissions made by the appellant. It is brought to ma .....

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advances given have become bad during the relevant Assessment Year apart from Board s Resolution as alleged by the AO which has not at all considered by the AO while finalizing the order. I have gone through the documents and have found that the same rightly demonstrate that reasons for writing off the advances during the years under consideration. 6.4 My attention is further drawn to the decision of the Hon'ble Supreme Court in the case of CIT vs. Mysore Sugar Company Limited (Supra) and Ho .....

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rendered by the Apex Court and various other judicial bodies of the country wherein the principle that advance given in the course of the business is incidental to the business and its write off may be allowed as a trading loss has been clearly brought out. 6.6 Further, my attention is also drawn to the appellate order passed in appellant s own case by me in the Assessment Year 2009-10 wherein the appellant s claim has been allowed. 6.7 In the light of the above facts and judicial pronouncements .....

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pellant has filed detailed documentary evidences to prove that the advances have been validly written off during the relevant Assessment Year. However, the AO has not considered the said submission containing the evidence while finalizing the Assessment Order. Accordingly, the disallowance made by the AO to the tune of ₹ 82,34,907/- in this regard is deleted. 5. We have heard the rival submissions. We find that the assessee had debited a sum of ₹ 1,35,32,503/- in its profit and loss .....

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f accounts based on approval of the Board of Directors in the Board meeting held on 29.09.2010. We find that the assessee had during the course of assessment proceedings given its reply through its Authorized Representative s letter dated 15.03.2013 with regard to advances written off - partywise as under: Advances Written Off Daloo Tea Co. (I) Ltd.: The assessee company as a part of normal course of its business made an interest bearing advance to Doloo Tea Co on a condition that the entire sal .....

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igh Court on 1st September, 2008 for recovery of the amount given to Doloo. During pendency of the suit, Doloo agreed for an out of Court settlement on 6th February, 2009 stating that INR 5,00,000/- would be paid upfront and balance would be paid in installments INR 1 per kg of green leaf produced on a weekly basis sold from January, 2009. A copy of the out of court settlement agreement entered into by Doloo with the assessee company is enclosed for the reference of your kindself and marked as A .....

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r repeated follow ups and further, on receiving the letter from Eastern Tea Estates Ltd questioning the jurisdiction of out of court settlement made between Doloo and the assessee, the management of the assessee company had taken a decision to write off the amount of INR 71,27,069/- being the advance standing in the books of the assessee company vide Board Resolution dated 20th September, 2010. A copy of the said resolution is enclosed and marked as Annexure 'G'. Navaneeth Tea Industries .....

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he above firm and its partners under the provisions of section 138 of the Negotiable Instrument Act. A copy of the notice and a copy of the petition filed before the Hon'ble Judicial Magistrate of Coonoor are enclosed and collectively marked as Annexure 'H'. Subsequently, a settlement was entered into between the assessee and Navneeth Tea Industries to withdraw the case filed before the Hon'ble Judicial Magistrate of Coonoor by paying INR 5,00,0001- upfront. As the settlement was .....

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crop would be exclusively sold through the assessee. Thus, your kindself may kindly note that in order to secure the business of the assessee company, the advance was made to Manjamalai Tea Factory. However, since the factory remained closed and the firm could not resume their business, the aforesaid advance could not be collected I recovered. Further, during the year under consideration, the assessee company was informed by the Banker, namely, M/s Union Bank, that substantial amounts were due t .....

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at the assessee had written off the advances given in the normal course of business to aforesaid three parties after taking necessary steps for recovery of the same and also preferring civil suits and criminal suits, wherever possible, as the case may be. The assessee had also enclosed the necessary evidences in this regard before the Ld. AO. Hence, it would be factually incorrect to state that no legal steps were taken by the assessee for recovery of the dues. The relevant evidences with regard .....

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of ₹ 82,34,907/-. The Assessing Officer disallowed this claim of bad debts on the ground that the assessee could not establish as to the legal efforts taken to recover the debts and also on the ground that the assessee could not demonstrate that these amounts were taken as the income of the assessee in the earlier year. Before the Ld. CIT(Appeals), the Ld. Counsel for the assessee submitted that these were trade advances made to various tea companies, which were written off in the year un .....

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siness and as the monies were advanced for the purpose of its business. These three companies had financial and certain other difficulties and consequently the agreements could not be executed. Thereafter settlements were arrived between the assessee and these companies, wherein, certain dues were paid to the assessee-company and the balance was written off. The Board of Directors of the assessee- company had recorded these business developments and passed resolution accepting the settlements. F .....

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- Abdullabhai Abdulkadar reported in 41 ITR 545. Reliance was also placed on the decision of the Kolkata Bench of this Tribunal in case of DCIT -vs.- ITC Limited in ITA No. 157/KOL/1996, order dated 30.04.2001. The Id. CIT(Appeals) agreed with the contentions of the Id. counsel for the assessee and granted relief. We find no infirmity in this order of the Id. CIT(Appeals). The advances were given by the assessee in the normal course of its business and when a loss arises due to non-recovery of s .....

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f section 36(1)(vii) of the Act, by may well be regarded as one eligible for deduction incurred in the course of carrying on business will come under that category and will naturally enter into computing the net total income as the real profit chargeable to tax cannot be arrived at without setting off legitimate trading loss. 7. Applying the proposition laid down in this case law to the facts and circumstances of the case, we uphold the finding of the first appellate authority and dismiss this g .....

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facts and circumstances of the case. 8. The brief facts of this issue is that during the previous year relevant to assessment year under consideration, the Chairman, Vice Chairman, Managing Director, Deputy Managing Director and Directors of the assessee had visited Australlia, New York, UK, Dubai and Bangkok for the purpose of the business of the assessee and had incurred a total expenses of ₹ 27,73,244/-. The assessee had claimed the said expenses as allowable business expenses in the r .....

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avel expenses incurred during the relevant year along with the purpose of visit. The Ld. AO had further asked the assessee to provide a brief note on justification of foreign travel. In reply to the same, the assessee, vide its letter dated 15.03.2013 had filed its detailed reply justifying the claim. 9. The Ld. AO observed that the assessee is not engaged in the manufacture and sale of tea. Instead it is only acting as Tea Auctioneer, which is a platform through which, tea could be purchased an .....

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vation, he disallowed the same in the assessment. The Ld. CIT(A) also upheld the action of the Ld. AO. Aggrieved, the assessee is in appeal before us on the following grounds: 1.(a) That on the facts and circumstances of the case and in law, the Learned Commissioner of Income Tax (Appeals) [hereinafter referred to as Ld. CIT(A) ] has erred in confirming the action of the Assessing Officer [hereinafter referred to as the AO ] in adding back an amount of INR 27,73,244/- on the alleged ground that .....

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n by the Hon'ble Supreme Court of India wherein it has been stated that an expenditure should be allowed even if results in directly facilitating the carrying on the business of the appellant. 2. That the appellant craves leave to add and/or amend, alter, modify or rescind the grounds hereinabove before or at the time of hearing of the appeal. 10. We have heard the rival submissions. We find that the Ld. AR argued that the Senior Officials of the assessee viz. Chairman, Vice Chairman, Managi .....

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by the assessee. On such sale of tea through auction, revenue is generated to the assessee in the form of brokerage and it is a major source of revenue of the assessee. 10.1. The Ld. AR argued that the assessee earns brokerage income when various parties purchase/sell tea through tea auctions , the said brokerage is computed on the basis of value of tea auctioned by the assessee. The parties who participate in auction are mainly two folds: 1) Who purchase tea from tea auction and 2) the parties .....

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₹ 4,37,49,885/-. In this regard, the Ld. AR filed a statement showing partywise details of purchases made by various customers through auctions conducted by the assessee and brokerage earned thereon by the assessee, as an additional evidence for which a separate application under Rule 18(4) read with Rule 29 of the ITAT Rules, for filing the additional evidence was preferred. This application contained the reasons for admission of the same by mentioning that the assessee could not quantif .....

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ent years in the scrutiny proceedings. We find that the said statement contains the name of the exporters who bought tea in auction, quantity of tea bought by parties, value of tea bought by parties, buying brokerage earned by the assessee, selling brokerage earned by assessee, and total brokerage earned by assessee. This statement merely contains details of tea purchased by exporters through auctions and brokerage earned by the assessee thereon to the tune of ₹ 4,37,49,885/-. The Ld. AR f .....

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naging Director and Directors of the assessee have specialized knowledge and experience in the area of tea manufacturing and export, and so they can convince the potential importer of various countries to import good quality tea in substantial quantity from India. After coming back from the foreign countries, they pass on the information regarding requirements of importers to the clients of the assessee who have the license for exports. Thus, functions performed by the Chairman, Vice Chairman, M .....

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manufacturing and marketing, the details of prospective foreign buyers with their requirement of grade/quantity of tea are being noted and this information is being given to the clients of the assessee who have export licenses which in turn help the auction buyers to buy the quantity required to meet the demands of the foreign buyers. It helps the assessee to generate revenue in the form of brokerage from tea auctions. The Ld. AR further submitted that by visiting the foreign countries for the .....

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kets abroad, the assessee is helping the clients to export huge quantity of tea by purchasing the same through auctions which also directly helps the assessee to generate more revenue in the form of brokerage. In view of the same, the foreign travel expense should be regarded as expenses incurred directly for the benefit of the business of the assessee. Thus, the revenue of the assessee is directly dependent on the volume of tea sold through auction conducted by the assessee. Hence, foreign trav .....

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d he placed reliance on the decision of Hon ble Supreme Court in the case of CIT vs. Indian Bank Ltd. reported in 1965 AIR 1473 (SC) wherein it was held that: In allowing a deduction which is permissible the question arises: Do we look behind the expenditure and see whether it has the quality of directly or indirectly producing taxable income? The answer must be in the negative for two reasons: First, Parliament has not directed us to undertake this enquiry. There are no words in sec. 10(2) to t .....

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ssumes that most types of expenditure which are laid out wholly and exclusively for the purpose of business would directly or indirectly produce taxable income, and it is not worth the administrative effort involved to go further and trace the expenditure to some taxable income. 10.4. In response to all these arguments, the Ld. DR vehemently relied on the orders of the lower authorities. We find that the Hon ble Gauhati High Court in the case of CIT vs. Williamson Tea Assam Ltd. reported in 38 T .....

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usiness, is that it is incurred by the assessee as incidental to its trade for the purpose of keeping its trade going on and that the expenditure must be incurred by the assessee as a trader and not in any other capacity. The word wholly refers to the quantum of expenditure and the word exclusively refers to the motive, objective and purpose of the expenditure. The expression wholly and exclusively , appearing in section 37, does not mean necessarily. It is important to note, in this regard, tha .....

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in the case of CIT vs. Dhanrajgirji Raja Narasingirji (1973) 91 ITR 544 (SC) wherein it was held that it is not open to the Department to prescribe what expenditure an assessee should incur and in what circumstances he should incur the expenditure. Every businessman knows his business best. 10.5. We find that the ld. CIT(A) had upheld the disallowance of foreign travel expenses on the contentions that it is the entire responsibility of the parties purchasing tea and coffee from the assessee thro .....

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ttled that it is irrelevant if a third party is benefitted by incurrence of a particular expenditure by an assessee. What is to be seen is only whether the expenditure was incurred out of commercial expediency and once the same is proved, then it would be allowed as deduction. It is also well settled that the businessman knows his interest best. The conditions for allowability of an expenditure u/s 37(1) of the Act is : (i) It should not be capital in nature. (ii) It should not be personal in na .....

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C) wherein it was held : It has to be observed here that the expression wholly and exclusively used in section 10(2)(xv) of the Act does not mean necessarily . Ordinarily it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction under section 10(2)(xv) of the Act even t .....

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the purposes of the business or profession shall be allowed. The introduction of the word necessarily in the above section resulted in public interest. Consequently, when section 37 was finally enacted into law, the word necessarily came to be dropped. The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction u/s 10(2)(xv) of the Act if it satisfies otherwise the tests laid down by law. We f .....

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the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its profit. The income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. As already stated above, we have to see the .....

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how that the expenditure was a profitable one or that in fact any profit was earned. (c) It is enough to show that the money was expended not a necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the ground of commercial expediency, and in order indirectly to facilitate the carrying on of the business ; (d) beyond that, no hard and fast rule can be laid down to explain what is meant by the word solely . Further, in the case of Williamson Tea (Assam) L .....

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