TMI Blog2018 (1) TMI 244X X X X Extracts X X X X X X X X Extracts X X X X ..... tion at source are not applicable in such cases. As further clarified by the CBDT, where payments are made to shipping agents of non-resident shipping owners for carriage of passengers etc. shipped at a port in India, the agents step into the shoes of the principal and accordingly the provision of section 172 shall apply and not the provisions of Section 194 and 195. The issue in the present case relating to the disallowance u/s 40(a)(ia) thus is squarely covered by the CBDT Circular No. 723 dated 19.09.1995 and even the Ld. DR has not been able to dispute this position. We therefore, find no infirmity in the impugned order of the Ld. CIT(A) deleting the disallowance made by the AO u/s 40(a)(ia) by relying on the said circular issued by the CBDT and upholding the same, we dismiss the ground no. 2 of the Revenue appeal. Addition on account of bad debts written off - AO held that it was a back dated entry made by the assessee company in its books of accounts and the actual decision to write off the bad debts having been taken only in the previous relevant Assessment year 2012-13 - Held that:- The relevant bad debts were written off by the assessee company in its books of accounts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ission expenses relating to assessment year 2010-11. 3. The assessee in the present case is company which is engaged in the business of manufacturer of lead, lead oxides and allied products trading of lead/lead alloy. The return of income for the year under consideration was filed by it on 26.09.2011 declaring total income of ₹ 14,99,20,648/-. In the profit and loss account filed along with said return a sum of ₹ 26,61,183/- was debited by the assessee on account of commission and salary to the Directors. On verification, it was found by the AO during the course of assessment proceedings, that the said amount was claimed a sum of ₹ 10,85,214/- paid by the assessee company to its Managing Director on account of commission for the financial year 2009-10 relevant to assessment year 2010-11. It was seen that the assessee has followed a mercantile system of accounting, AO held that the said expenditure pertaining to earlier year could not be allowed in the year under consideration. He accordingly disallowed the claim of the assessee on account of commission to the Directors to the extent of ₹ 10,85,214/-. 3.1. The disallowance made by the AO on account of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pon making a demand its acceptance by the assessee and such liability has been actually claimed and paid in the later previous years, it cannot be disallowed as deduction merely on the basis that the accounts are maintained on mercantile basis and that it related to a transaction of the earlier year . In another case of CIT vs. Phalton Sugar Works Ltd. [1986] 162 ITR 622 (Bom), the Hon ble Bombay High Court held that where a liability arising out of a contractual obligation is disputed, the assessee is entitled, in the assessment year relevant to the previous year in which the dispute is finally adjudicated upon or settled, to claim a deduction in that behalf. In view of the facts of the case, and the principle of law laid down in the cases cited supra, I am of the considered view that the Assessing Officer was not justified in making the impugned disallowance. His apprehension that the claim of expenditure relating to two different assessment years in a single assessment year when receipts are accounted for in different assessment years on the basis of real income theory in mercantile system of accounting is not based on correct principle of law. Further, on the same analog ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company on account of ocean freight to the different shipping lines without deduction of tax at source. According to the AO, the agents of the said foreign shipping lines were its dependent agents and the foreign shipping lines thus having agency PEs in India, the assessee was liable to deduct tax at source from the payments made to them on account of ocean freight. He therefore, disallowed the ocean freight of ₹ 28,76,896/- paid by the assessee to the foreign shipping lines u/s 40(a)(ia) of the Act for non-deduction of tax at source. 5.2. The disallowance made by the AO u/s 40(a)(ia) of the Act was challenged by the assessee in appeal filed before the Ld. CIT(A) and after considering the submission made by the assessee as well as the material available on record, the Ld. CIT(A) deleted the said disallowance for the following reasons given in paragraph no. 5.3.3 of his impugned order. 5.3.3. I have carefully considered the facts of the case and the submissions of the AR. I am inclined to accept the submissions of the appellant. In the case of shipping business of non-residents, the provisions of section 172 are to apply, notwithstanding anything contained in other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the deletion by the Ld. CIT(A) of the addition of ₹ 73,66,430/- made by the AO on account of bad debts written off. 8. While examining the claim of the assessee for deduction on account of bad debts written off amounting to ₹ 73,66,430/-, it was noted by the AO that the decision to write off the relevant debt as bad was taken on 12.04.2011 i.e. not in the year under consideration. Although it was submitted on behalf of the assessee company that the relevant bad debts were written off in its books of accounts for the year under consideration, the AO held that it was a back dated entry made by the assessee company in its books of accounts and the actual decision to write off the bad debts having been taken only in the previous relevant Assessment year 2012-13 the assessee was not entitled for deduction u/s 36(1)(vii) in the year under consideration. Accordingly, he disallowed the claim of the assessee for bad debts written off. 8.1. The disallowance made by the AO on account of bad debts written off were challenged by the assessee in the appeal filed before the Ld. CIT(A) and after considering the submissions made by the assessee as well as material available on r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tortion of profits that the Department can insist on substitution of the existing method: CIT v. Bilahari Investment' P. Ltd [2008] 299 ITR 1. In cases where the Department wants to tax an assessee on the ground of liability arising in a particular year, it should always ascertain the method of accounting followed by the assessee in the past and whether the change in the method of accounting was warranted on the ground that profit being under-estimated under the impugned method of accounting. If the Assessing Officer comes to the conclusion that there is under-estimation of profits, he must give facts and figures in that regard to demonstrate that the impugned method of accounting adopted by the assessee results in underestimation of profits and is therefore rejected. Otherwise the presumption would be that the entire exercise is revenue neutral as held in CIT v. Realest Builders and Services Ltd. [2008] 307 ITR 202. In the case of CIT v. Woodward Governor India P. Ltd [2009] 312 ITR 202, it has been held that under the mercantile system of accounting, what is due is brought into credit before it is actually received; it brings into debit an expenditure for which a legal liabil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the Assessing Officer was not justified in disallowing the amount of ₹ 73,66,430/- holding that the bad debts to the tune of ₹ 73,66,430/- were not written off in the books as on 31.03.2011. The disallowance is hereby deleted. This grounds of appeal is accordingly allowed. 9. We have heard the arguments on both the sides and also perused the material available on record. The Ld. DR has contended that the disallowance to write off the relevant bad debt having been taken by the management of the assessee company only after the end of the year under consideration, it is not understandable how the entry to write off the bad debts was made in its books of accounts for the previous year. He had contended that the said entry made by the assessee company was clearly a back dated entry and its claim for bad debts written off was rightly disallowed by the AO. However as submitted by the ld. counsel for the assessee there was a proposal to write off the relevant bad debts in the month of March, 2011 itself and approval for the same was sought and obtained in the month of April, 2011 after closing of the financial year. Moreover, the fact that remains to be seen is that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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