Commissioner of Income Tax vs Makpar Exports Pvt. Ltd.

Shri Sanjay Lal, counsel for the appellant. This appeal is directed against an order dated October 20, 2011, passed by the income tax Appellate Tribunal ("the ITAT") in I.T.A. Nos. 622 to 624/Ind/2010, the assessment years 2004-05 to 2006-07 by which an appeal preferred by the Department was dismissed in so far as the deletion of the addition of Rs. 24,59,783 on account of bad debts and the addition of Rs. 20,19,600 made on account of the expenses debited under the head of quality rejection by the Assessing Officer. Learned counsel appearing for the appellant submitted that the Commissioner of income tax (Appeals) ("the CIT(A)") and the income tax Appellate Tribunal have erred in directing the deletion of the aforesaid additions made by the Assessing Officer. The provisions as contained u/s 36(1)(vii) of the income tax Act were not applicable and in the light of section 36(2)(i) of the Act, the aforesaid additions were rightly made by the Assessing Officer.

We have considered the aforesaid contentions of the appellant. The factual position in the case is that the original return of income was filed by the respondent on August 26, 2008, for the assessment year 2003-04. The Assistant Commissioner of income tax-2(1) by an assessment order dated December 31, 2009, directed an addition of Rs. 24,59,873 by disallowing the bad debts u/s 36(2)(i) and also directed an addition of Rs. 20,90,600 which was claimed by the assessee on account of quality rejections. This order was assailed by respondent before the Commissioner of income tax. (Appeals), Bhopal, in Appeal No. CIT(A)-I/BPL/IT-242/2009-10. The Commissioner of income tax (Appeals) had considered the matter and found that no cogent reasons were given by the Assessing Officer for directing the addition of the aforesaid amount. The Assessing Officer though had recorded that no reasons were given for writing off the bad debts in the books of account, but in the opinion of the Assessing Officer it was not correct.

The Commissioner of income tax (Appeals) found that u/s 36(1)(vii) of the income tax Act it was not necessary for the assessee to give reasons and writing off the amount itself was sufficient. Reliance was placed by the income tax Appellate Tribunal to the judgment of the apex court in TRF (T.R.F.) Limited Vs. Commissioner of Income Tax, Ranchi,

In so far as the addition of Rs. 20,19,600 which was directed by the Assessing Officer towards quality rejection, the Commissioner of income tax (Appeals) had held that the correspondence between the respondent and M/s. Raduja International Ltd. were the part of the record and authenticity of the debit note, filed by the respondent was not questioned or challenged by the Assessing Officer. Even the rejection of the material was not negated by the Assessing Officer. The documents filed by the respondents were clearly showing that part of the material supplied was rejected by the authorities in Ukraine. The reasons given was that the aforesaid material was found to be unfit for human consumption in Ukraine and if the aforesaid material was found unfit for human consumption in Ukraine, then it was also unfit for human consumption in India and, therefore, disallowance was set aside and the claim of the assessee was allowed. This order of the Commissioner of income tax (Appeals) was assailed by the Revenue before the income tax Appellate Tribunal, Indore. In the aforesaid appeal the Tribunal had reconsidered the matter and found that so far as bad debts are concerned, in view of the provisions as contained in section 36(1)(vii) and section 36(2)(i), it was not necessary with effect from April 1, 1989, for the assessee to explain the reason of bad debt and it was sufficient for the aforesaid amount to be written off as irrecoverable in the accounts book.

Reliance was placed by the Tribunal on various authorities of various High Courts including the judgment of TRF (T.R.F.) Limited Vs. Commissioner of Income Tax, Ranchi, and other cases. So far as the deletion of the addition of Rs. 20,19,600 is concerned, the Tribunal had reiterated the reasons recorded by the Commissioner of income tax (Appeals) that the goods which was found unfit for human consumption in the country, namely, Ukraine, the same goods was also unfit for human consumption in India. And on this ground the Tribunal had recorded its finding that the aforesaid deletion was rightly made by the Commissioner of income tax (Appeals).

Sections 36(1)(vii) and 36(2)(i) of the income tax Act are relevant and are reproduced, which reads as under:

36.(1)(vii) subject to the provisions of sub-section (2), 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:

Provided that in the case of an assessee to which clause (viia) applied, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause.

Explanation.--For the purpose of this clause, any bad debt or part thereof written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful debts made in the account of the assessee.

36.(2)(i) no such deduction shall be allowed unless such debt or part thereof has been 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, or represents money lent in the ordinary course of the business of banking or money lending which is carried, on by the assessee.

The aforesaid provisions relates to claiming of bad debt by an assessee.

The apex court in the case of TRF (T.R.F.) Limited Vs. Commissioner of Income Tax, Ranchi, considered the legal position and held that after April 1, 1989, it was not necessary for the assessee to establish that the debt in fact has become irrecoverable. The apex court considered the provisions contained in section 36(1)(vii) of the Act and held thus:

This position in law is well settled. After April 1, 1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. However, in the present case, the Assessing Officer has not examined whether the debt has, in fact been written off in the accounts of the assessee. When a bad debt occurs, the bad debt account is debited and the customers account is credited, thus, closing the account of the customer. In the case of companies, the provision is. deducted from sundry debtors. As stated above, the Assessing Officer has not examined whether, in fact, the bad debt or part thereof is written off in the accounts of the assessee. This exercise has not been undertaken by the Assessing Officer. Hence, the matter is remitted to the Assessing Officer for de novo consideration of the above mentioned aspect only and that too only to the extent of the write off.

In view of the settled position in the case of TRF (T.R.F.) Limited Vs. Commissioner of Income Tax, Ranchi, the Commissioner of income tax (Appeals) and the income tax Appellate Tribunal have rightly set aside the addition made by the Assessing Officer in so far as it relates to the bad debt claimed by the assessee.

So far as the second contention of the appellant in respect of the deletion of the addition towards the goods rejected in Ukraine because of quality rejection is concerned, it is the concurrent finding recorded by both the authorities that the goods were found to be unfit for human consumption in Ukraine and if the same goods could have been brought to India then it cannot have been found to be fit for human consumption. Goods which were unfit for human consumption in Ukraine will remain unfit for human consumption in India also. In view of the aforesaid, we do not find any reason for interference in the findings recorded by the Commissioner of income tax (Appeals) and the income tax Appellate Tribunal. This appeal does not involve any substantial question of law and is accordingly dismissed at the admission stage with no orders as to costs.