TMI Blog1997 (9) TMI 141X X X X Extracts X X X X X X X X Extracts X X X X ..... e wrote off the said amount as a bad debt and claimed the same as such in the current year. 2.1 The AO having considered the facts and explanation offered has observed that the said contract with REH was not signed by anyone on behalf of REH. Further, the contract of REH with Salt Allied Industries Ltd. (SAI Ltd.) was not assigned by anyone on behalf of the Mauritius party. The AO has further noted that ship carrying the cargo was at Mangalore port on 25th June, 1986 and caveat was filed by the captain of the ship in the local Court. Though the local Court had not been negotiated and time had expired no action was taken for arresting the ship either by the assessee or REH. The assessee also took no legal action against REH for recovery of the amount. According to the AO considering the above facts and various papers filed a doubt is raised also the genuineness of the transaction. 2.2 The entries on account of the all alleged sale of salt to REH was passed on the last day of the accounting year and accordingly REH was debited on the last day and local sale account was credited on the last day. The AO further noted that the salt exported was packed in 66,667 gani bags. The as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action of sale of 5,000 MT salt to REH and its shipment to Mauritius party through ship Golden Eagle as genuine in para 4 of his order reproduced hereunder: "I have carefully considered the submissions both oral and written. I have gone through the copies of all the documents, letters etc. which were filed by the appellant before the CIT during the course of assessment proceedings especially the following: (i) Papers relating to the transaction between the appellant and Rajasthan Export House. (ii) Correspondence between WISMA and the Dy. Superintendent of Salt, Salt Test Laboratory, Adipur requesting issue of export worthiness certificate. (iii) Export worthiness certificate issued by the said authority. (iv) Correspondence between WISMA and the State Trading Corpn. of India Ltd. (v) Notice of readiness of the vessel Golden Eagle issued by Velji P. Sons (Agencies) to the appellant. (vi) Correspondence between WISMA and the State Trading Corpn. of India Ltd. to endorse the letters of credit. (vii) Correspondence between the State Trading Corpn. of India Ltd. and Bank of Baroda, Bombay. (viii) Correspondence between the appellant and the Bank of Baroda, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the facts and submissions made on behalf of the assessee he allowed the bad debt claim with the following observations: "I have carefully considered the submissions both oral and written. I agree that the entire trend of the judiciary relating to admissibility of bad debt has changed so as to say that bad debt shall be allowed in the year itself in which it is written off as irrecoverable by the assessee. Not only that legislature has also amended the relevant law relating to admissibility of the bad debt. CBDT Circular No. 551 dt. 23rd Jan., 1990 explaining provisions of the Direct Tax Laws (Amendment) Act, 1987, has taken note of the unnecessary litigation on the question of allowability of bad debt in a particular year. It is true that the said CBDT circular would be applicable to a subsequent assessment year but would not mean that the objects to achieve the same in subsequent assessment year cannot be considered in the asst. yr. 1987-88, under appeal. On facts also the debt had become irrecoverable. The appellant had given legal notices to Rajasthan Export House but with no process. Even the cheque issued by Rajasthan Export House bounced. I am, therefore, of the view th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se, Bombay, and Salt and Allied Industries Mauritius. (6) On 4th Jan., 1986, WISMA wrote to Dy. Superintendent of Salt, Salt Test Laboratory, Adipur, the details relating to that much salt to be supplied by the assessee and requesting the said authority to issue export worthiness certificate to Rajasthan Export House, Bombay and Shree Krishna Salt Industries (assessee) to effect the shipment to Mauritius. (7) The Dy. Superintendent of salt, Salt Test Laboratory, issued the required certificate on 4th Jan., 1986 under their No. 3(1) Exp./86/9-11. (8) On 4th Jan., 1986 the assessee received a notice of readiness from Velji P. Sons (Agencies) as agent of M.V. Golden Eagle that the vessel had arrived and was ready for loading. (9) On 20th Jan., 1986 WISMA wrote to the STC that Rajasthan Export House, Bombay had carried out the export of 5,000 MT of salt and requested the STC to issue a letter to the Bank of Baroda, Bombay authorising them to negotiate the documents under letter of credit and the credit deposited to the account of Rajasthan Export House, Bombay. (10) On 20th Jan., 1986 STC addressed the required letter to the Bank of Baroda, Bombay. (11) On 27th Jan. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... even presuming the purchases of bags in December, were not available for packing though in fact they were available there was enough of stock available. According to the AO the assessee used 88,601 bags in December, 1985 - 21,934 bags for sales made to Punjab Alkalies on 12th Dec., 1985, and 66,667 bags for sale made to Rajasthan Export House whereas the assessee as on 13th Nov., 1985 had opening stock of 2,02,141 bags. The learned counsel has, therefore, submitted that the view taken by the AO that there were not sufficient number of ganni bags in there month of December, 1985, for packing of the Salt was not correct. As regards the vessel Golden Eagle, being at Mangalore port on 25th June, 1996, and filing of a caveat by the captain of the ship against any ex parte order the learned counsel has submitted that this by itself does not render the transaction entered into by the assessee as non-genuine because it was not for the assessee to take any action of the type suggested by the AO. The learned counsel has further submitted that the assessee incurred expenses on account of stevedoring charges at Rs. 1,55,500, local freight charges at Rs. 1,40,811, weight scale expenses at Rs. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h included export sales amounting to Rs. 67,08,512. Salt is a chanalised item for export through STC of India. WISMA made allotment for export of salts to its members and the members accordingly exported salt as per the allotments made through the channel of STC of India. 8.1 REH, Bombay, being member of WISMA was given allotment of 5,000 MT of salt for export during the year. REH, Bombay, accordingly entered into a contract on 10th Aug., 1985 with SAI Ltd. of Mauritius for export of 5,000 MT of salt packed in 75 kg. ganni bags at the rate of 40 dollar per MT and as per the terms of the agreement the salt was required to be exported during the period from 1st Dec., 1985 to 31st March, 1986. The buyers were to establish LC of 100 per cent value of the contract permitting in favour of STC of India, Gandhidham account, REH, Bombay and to advise through any bank in India in favour of sellers not later than three days before the commencement of shipment under agreement. Consequently REH, Bombay, approached the assessee-firm to give an offer for the shipment of 5,000 MT uncrushed marine common salt to be exported to Mauritius vide their letter dt. 25th Nov., 1985 and on the same date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... formed STC that REH, Bombay has carried out export of 5,000 MT salt per vessel Golden Eagle for Mauritius under the cover of LC opened in the following banks : .Bank Ship Quantity State Commercial Bank Ltd. Mauritius 3000 MT Indian Occian International Bank, Mauritius. Mauritius 2000 MT WISMA further requested the STC to endorse the above LCs in favour of REH, Bombay. STC was also requested to issue a letter addressed to Bank of Baroda, Bombay, authorising them to negotiate the documents under the above LCs and credit the proceeds to the account of REH, Bombay. The STC in its letter dt. 20th Jan., 1986 requested the Bank of Baroda, Bombay, to assign the said LCs in favour of REH, Bombay. It was also requested that on negotiation of documents a set of non-negotiable copies of documents be forwarded to them with bankers realisation certificate. On 27th Jan., 1986, the assessee-firm informed the Bank of Baroda in response to their letter dt. 2nd Jan., 1986, about the export of 5,000 MT salt and requested for payment of 75,000 dollars being cost of salt. The assessee-firm also sent a letter dt. 16th Jan., 1986 received from R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Eagle was in Mangalore being the last Indian port which was an unscheduled port and Brahma in its declaration made in Port Louis stated that its last port of call was Mangalore. Brahma had not mentioned in the bill of lading its loading port but only stated that its last port of call was Mangalore. No transhipment had taken place in Mangalore as per Agencia Ultra Marine Co. (P) Ltd., ship agents operating in Goa and Mangalore. According to Mulla Mulla the only possibility was that owners controlling both vessels Golden Eagle and Bramha had switched name from Golden Eagle to Bramha to avoid arrest in Mangalore which was threatened by REH, Bombay. It was further reported that the vessel Bramha was still in Mangalore and the exporter of salt Cargo was shown to be Ludgate Overseas, Panama, who were the registered owners of the vessel. 8.3 REH, Bombay then addressed letters to President, STC, that the shipping company had committed a fraud by changing the name of the vessel from Golden Eagle to Bramha, REH, Bombay, also wrote to Perm. Secretary to Prime Minister of Mauritius for referring the matter to the Commissioner of Police for investigation etc. and also sent a copy of the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther the firm would be entitled to deduction under s. 80HHC and he wanted advise from the CA. In the meantime the transaction turned into failure on account of the fraud committed by the shipping company. So the staff and the accountant were confused whether it be treated as business loss or bad debt. Looking to such practical problem the said entry was made on the last day of the accounting year. Even otherwise, passing entry on the last day would not make the transaction either doubtful or non-genuine when overwhelming evidence produced established the genuineness of the transaction. 9.1 According to the AO sufficient ganni bags were not available for packing the salt in 66,667 bags. It is explained on behalf of the assessee that in the first statement submitted the consumption of ganni bags in respect of present sale was not right through oversight. However, the assessee had an opening balance of 2,02,141 bags and looking to the bags utilised for sale of salt to Punjab Alkalies and to REH, Bombay, totalling to 88,601 bags, the opening stock fully covered such consumption made of ganni bags. 9.2 According to the AO the contract for supply of salt between the assessee-firm a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 986, in the name of REH, Bombay, after 5,000 MT salt was loaded in vessel Golden Eagle at Kandla Port as per the terms of the contract dt. 25th Nov., 1985. Since the assessee supplied salt FOB Kandla the assessee also incurred expenses on packing of salt in ganni bags, their transport from salt works to Kandla Port, loading of salt bags in vessel Golden Eagle and other related matters for shipment. The assessee claimed such expenses in the P L a/c and the same has been allowed by the AO treating the same as genuine. We also find that before the salt was loaded in the ship the salt was analysed and certified fit for export by salt test laboratory. There is, therefore, sufficient evidence available on records to establish that the assessee sold 5,000 MT of salt and the same after completing various formalities at Kandla port was loaded in Golden Eagle vessel as per instructions of REH, Bombay. We also note that the AO has neither made any enquiries from any of the parties/departments involved nor he has gathered and brought on record any evidence to controvert the facts relating to sale and shipment of salt by the assessee-firm and in the absence of any such material the doubt entert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee, and (b) has been written off as irrecoverable in the accounts of the assessee for that previous year". It would be seen from above that the above provisions laid down conditions necessary for allowability of bad debt to the effect that debt must be established to have become bad in the previous year. This led to enormous amount of litigation on the question of allowability of bad debt in a particular year and with an object of rationalising the provisions relating to bad debt the aforesaid sections were amended by direct taxes Amendment Act, 1987, w.e.f. 1st April, 1989 so as to provide that the claim for bad debt will be allowed in the year in which such a bad debt had been written off as irrecoverable in the accounts of the assessee. We find that accounting year of the assessee ended in November, 1986, and by that time when fraud was detected payment was not received by REH, Bombay, from Mauritius party and the cheques issued by REH, Bombay, dishonoured and REH, Bombay, having not sufficient tangible assets the assessee wrote off the amount as a bad debt in its books of account treating the same as irrecoverable. Thus it is established that the debt became ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g loss to the tune of 29,292.700 MT which worked out to 22.487 per cent of the salt manufactured during the year at 1,30,265 MT. When required to justify the washing loss and method of valuation it was explained on behalf of the assessee that salt is manufactured on contract. Heaps of salt are then made and they are likely to be washed away during raids and also get mixed up with dust, mud, etc. The wastage is, therefore, considerable and the same has been certified by higher authorities from 25 per cent to 30 per cent and in abnormal circumstances the wastage further increased. The washing loss shown was thus claimed to be reasonable. The AO for the reasons given in his order disallowed the loss of 9,600 MT out of the washing loss claimed. The AO further noted that out of the closing stock of 25,250.365 MT of salt shown in closing stock the assessee valued 15,000 MT at the rate of Rs. 10 per MT and the balance 10,250.365 MT was valued at the rate of Rs. 32 per MT totalling to Rs. 4,78,011.68. It was claimed that 15,000 MT salt brought forward from previous year was in deteriorating condition and accordingly the same is valued at Rs. 10 per MT The AO was not satisfied with such exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of August, 1987, falling in asst. yr. 1988-89 submitted to the Salt Commissioner, Ahmedabad, and Salt Inspector, Adipur, the assessee declared the same as written off with the narration 15,000 MT old stock was lying since last one and a half to two years stock deteriorated due to mud hence, submerged in kyaras and pans. The addition therefore, made by valuing the said salt at the rate of 38.65 per MT was, therefore, claimed to be unjustified. As regards the loss claimed at 29,292 MTs, it was submitted on behalf of the assessee that salt is manufactured out of salt pans. Salt pans remain exposed to rain and washing away of salt is a regular feature every year in addition to normal loss during loading and unloading, shifting, etc. It was also claimed that the assessee maintained detailed quantitative tally and periodical statements of opening stock, production, sales and closing stock are submitted to the Salt Commissioner as required by law and in the statement submitted loss on account of washing out, etc., is also shown. Copies of monthly returns in form E as required under r. 13 during the current year were furnished before the AO so as to establish loss on account of washing ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion has also been drawn to the fact that in another concern namely Shree Kandla Salt Industries (P) Ltd. percentage of such losses accepted by the AO/appellate authorities in different assessment years were as under: Asst. yr. Percentage of loss accepted 1981-82 41% 1982-83 53% 1983-84 34% 1984-85 20% 1985-86 24% 1986-87 24% In view of the above discussion the AO is directed to delete the impugned addition of Rs. 8,68,941 and to accept the valuation of closing stock of salt as done by the appellant." 12. We have heard the representatives of the Revenue as well as the assessee and also considered the facts and material on records. We find that the assessee had been consistently adopting and following the method of valuation of closing stock at production cost and such a method has been accepted by the Department in the past. During the current year also the assessee valued the current stock of 10,250 MT at production cost at Rs. 32 per MT whereas the AO has valued such stock on a different method and the same in our opinion is not justified. 12.1 We further note that the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13. The next ground relates to disallowance of Rs. 2,65,400 claimed under the head commission and service charges on exports. The assessee claimed steamer commission paid to Deepa Clearing Agency at Rs. 2,65,440 at the rate of Rs. 18.65 per MT on 14,000 MT salt exported through steamer Barbanicos. The AO called for necessary details for the services rendered for which such commission was paid and the assessee produced a copy of the bill raised by Deepa Clearing Agency. Deepa Clearing Agency carried on business of shipping and stevedoring which meant transfer of goods from berth to ship and vice versa and it also rendered services connected with cargo. The AO summoned the managing partner of Deepa Clearing Agency Shri Pankaj Mehta and he was examined. He noted from the copy of account of the assessee-firm in the books of Deepa Clearing Agency that the amount was debited to Jeevan Products account, Krishna Salt Industries. Shri Mehta in his statement denied having rendered any commission agency services to any party. He also submitted that they incurred certain expenses in respect of the ship Barbanicos and the same were supposed to be collected from Jeevan Products. The amount wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o genuine services were rendered by them to the appellant. As a matter of fact, the books of account of Deepa Clearing Agency extracts from which have been placed by the AO on the assessment order, themselves establishes that the payments were genuine. Bill dt. 30th May, 1986, of Deepa Clearing Agency also proved that services were genuinely rendered by them to the appellant. No doubt the bill records the amount as commission but as explained by the appellant in the terminology of the appellant's business the service charges for shipment are termed as commission. Simply because the bill terms the amount as commission it cannot mean that the payments were not made as service charges. It is settled law that what is seen is the substance and not the form. I am satisfied that the impugned payments were made by the appellant to Deepa Clearing Agency as service charges over and above the reimbursement of expenses incurred on behalf of the appellant. I am satisfied that the payment of service charges to Deepa Clearing Agency at the rate of Rs. 18.65 per MT was also not at all alarming because another amount of Rs. 49,451 paid as such to Chandrasen Govindji by the appellant was for 2,300 M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made on account of commission and service charges paid to others has been accepted by the Revenue. The payment made to Deepa Clearing Agency as admitted by the managing partner of that concern was for rendering services related to shipping agency. There is no material brought on record by the Revenue to controvert the claim made or to prove that the payment made was not incidental to export business. In the absence of any such material evidence and having regard to the facts and material on record we see no justification in disallowing the claim made and the first appellate authority was fully justified in rejecting the addition made on that account. 16. The next ground raised is against deleting the disallowance of interest of Rs. 95,906. The AO found on scrutiny of the accounts, the assessee paid interest on bank loans and other deposits during the year at Rs. 95,906. He, however, noted that the capital accounts of the partners had shown a debit balance of Rs. 12,85,134 at the close of the year. The AO noted that partners' huge negative capital was not on account of accumulated losses but on account of huge withdrawals made by them for investments in other business or for exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 7,11,169 which consisted of bank loan of Rs. 5,65,151 and balance loan was from two individuals. The assessee had assets as on the closing date to the tune of Rs. 10,85,896. We also note that there was export business reserve of Rs. 5 lakhs, unsecured deposits of Rs. 3,23,387 and sundry creditors of Rs. 36,30,415 whereon no interest was payable. Moreover, there is no material brought on record to establish that the interest-bearing funds were diverted for interest-free loans advanced and there being no nexus proved and the amount of loan having been found as used in the business of the assessee and the disallowance of interest in the preceding assessment year having been allowed in appeal on similar circumstances we see no merit in the disallowance of the interest claimed and the first appellate authority was fully justified in allowing the same. 19. The next ground taken by the Revenue is against deleting the disallowance of Rs. 3,09,330 under s. 40A(2). The AO noted that the assessee made purchase of salt 3,000 MT at the rate of 145.36 per MT from its sister-concern, Urvakunj Nicotine Inds. and Kandla Salt Industries. According to the AO partners or the relatives had in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visaged in s. 40A(2) were not satisfied the purchase made from the company were also not covered by s. 40A(2). 19.2 It was also contended that export quality of salt contained specified chemical contents and looking to the specified required quality 3,000 MT was purchased as the same was not immediately and readily available with the assessee-firm. The first appellate authority having appreciated the facts so given, deleted the addition made of Rs. 3,09,830. 20. We have heard the learned representatives of Revenue as well as the assessee and also considered the facts. We on the appreciation of facts and circumstances explained, see sufficient merit and substance in the case of the assessee. Moreover, the Revenue has neither disputed nor has brought on record any material to controvert the facts given. Considering the facts that the salt required for export was of specified quality, it was purchased at Kandla port under compelling circumstances and the transactions are not covered by the provisions of s. 40A(2). We see no justification in making the impugned addition and the first appellate authority was fully justified in deleting the same. 21. The last ground raised by th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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