2017 (5) TMI 478 - AT - Income Tax

Tribunal decisions on tax appeals: AY 2007-08 disallowed, AY 2008-09 & AY 2009-10 partly allowed.

The Tribunal disallowed the appeals for AY 2007-08 but partly allowed the appeals for AY 2008-09 and AY 2009-10. The disallowance of bad debts and service ... Deduction for bad debts under section 36 - Condition precedent of taking the debt into account in an earlier previous year - Onus of proof on the assessee to produce documentary evidence - Claiming export deduction under section 80HHC on accrual versus receipt basis - Export incentives/DEPB/drawback/DFRC - entitlement and proof for deduction - Related party service charges - 20% disallowance and rule of consistency - Ad hoc disallowance of cash expenses - requirement to point out defects before rejecting books - Remand for fresh hearingDeduction for bad debts under section 36 - Condition precedent of taking the debt into account in an earlier previous year - Onus of proof on the assessee to produce documentary evidence - Claiming export deduction under section 80HHC on accrual versus receipt basis - Claimed bad debts relating to export sales and certain freight amounts were not allowable under section 36. - HELD THAT: - The Tribunal upheld the findings of the authorities that the assessee failed to establish that the disputed amounts had been taken into account in computing income in the earlier years as required by sub section (2) of section 36. Exports for the relevant earlier years had attracted deduction under section 80HHC on an accrual basis; there was no documentary proof of non realisation or of revision of 80HHC claims when foreign exchange was not received. The long delay (about a decade) between the alleged event and the write off, absence of books/entries showing the amounts as income in earlier years, and failure to produce documents showing non receipt of export proceeds led to the conclusion that bona fides and the condition precedent under section 36(2) were not satisfied. The freight amount was not part of P&L and hence did not meet the statutory requirement for a bad debt deduction.Bad debt claims (including export related debts and freight) disallowed; first ground of appeal dismissed.Export incentives/DEPB/drawback/DFRC - entitlement and proof for deduction - Onus of proof on the assessee to produce documentary evidence - Writing off of outstanding DEPB/drawback/DFRC receivables was not allowable as a deduction for the year under appeal. - HELD THAT: - The AO and FAA required the assessee to produce documentation to show crystallisation of entitlement or any communication from the government refusing benefits. The assessee failed to produce such evidence despite specific directions at the appellate stage. Mere writing off of balances in the balance sheet, without proof of entitlement or governmental refusal, does not justify allowing the deduction. The Tribunal found no infirmity in the concurrent findings of fact and affirmed the disallowance.Claim for write off of export incentive receivables disallowed; second ground dismissed.Related party service charges - 20% disallowance and rule of consistency - Disallowance of 20% of service charges paid to a sister concern was upheld. - HELD THAT: - The Tribunal applied the rule of consistency, noting that the Tribunal had upheld a similar 20% disallowance for an earlier assessment year. The assessee failed to demonstrate any material distinction in facts between the earlier year and the year under appeal to warrant departure from the earlier decision. In absence of dissimilarity, the prior treatment was followed and the disallowance sustained.Disallowance of 20% of service charges to the sister concern confirmed.Ad hoc disallowance of cash expenses - Remand for fresh hearing - Ad hoc 15% disallowance of cash expenses (additional ground raised before FAA for AY 2008 09) was directed to be restored to the FAA for fresh adjudication. - HELD THAT: - The Tribunal noted that the FAA had not adjudicated an additional ground filed by the assessee concerning ad hoc disallowance of cash expenses. In the interest of justice the Tribunal restored the matter to the FAA for fresh hearing and decision after affording the assessee opportunity to place its case and documentary evidence.Matter restored to the FAA for fresh hearing and decision on the ad hoc disallowance ground (remanded).Ad hoc disallowance of cash expenses - Requirement to point defects in books before ad hoc rejection - Ad hoc 15% disallowance of cash expenses in AY 2009 10 was not sustained and was reversed. - HELD THAT: - The Tribunal found that the AO had made a general ad hoc disallowance of cash expenses on the basis of self made vouchers without rejecting the audited books of account or specifying defects in the method of accounting. No particular items were quantified as unverifiable and the AO had not recorded specific findings to justify the ad hoc reduction. Considering these facts the Tribunal held that the ad hoc disallowance lacked sound basis and therefore reversed the addition.Ad hoc disallowance of cash expenses (AY 2009 10) reversed in favour of the assessee.Final Conclusion: The Tribunal dismissed the appeal for AY 2007 08 (bad debts, export incentive write offs and related party service charges disallowed). For AY 2008 09 the Tribunal followed the earlier findings (bad debts and service charge disallowance dismissed) but restored the additional ground on ad hoc cash disallowance to the FAA for fresh hearing. For AY 2009 10 the service charge disallowance was affirmed while the ad hoc cash expenses addition was reversed; interest issues were left undecided as consequential. Issues Involved:1. Denial of bad debts claim.2. Disallowance of export incentives written off.3. Disallowance of 20% of service charges paid to a sister concern.4. Disallowance of 15% of certain expenses incurred in cash on an ad hoc basis.5. Levy of interest under section 234 of the Act.Issue-wise Detailed Analysis:1. Denial of Bad Debts Claim:The assessee claimed bad debts for sums outstanding from seven foreign parties and freight charges paid on behalf of Rokko Sarees and Fabrics Ltd. The bad debts pertained to AY 1994-95 to 1999-2000. The AO disallowed the claim due to lack of evidence that the amounts were taken into account in computing income for the relevant years, as required under section 36 of the Act. The assessee argued that it was entitled to claim bad debts at any time. However, the FAA upheld the AO’s decision, noting the absence of documentary evidence to support the claim and the long delay in claiming the bad debts. The Tribunal affirmed this decision, emphasizing the need for documentary evidence to support the claim and the requirement to establish that the amounts were not received.2. Disallowance of Export Incentives Written Off:The assessee claimed a deduction of Rs. 24.77 lakhs for writing off balances of DEPB/drawback/DFRC receivables related to AY 1995-96 and 1996-97. The AO disallowed the claim, noting that the receivables had been lying in the balance sheet for over 10 years and that the assessee had not paid tax on them in the respective years. The FAA upheld the disallowance, as the assessee failed to produce evidence of entitlement or communication from the government refusing the benefits. The Tribunal confirmed the FAA’s decision, stating that the assessee did not furnish any evidence to support its claim.3. Disallowance of 20% of Service Charges Paid to a Sister Concern:The AO disallowed 20% of the service charges paid to Sky Industries Ltd. (SIL), following a similar disallowance in the earlier year. The FAA upheld the disallowance, and the Tribunal affirmed this decision, noting the rule of consistency and the lack of evidence to distinguish the facts of the current year from the previous year.4. Disallowance of 15% of Certain Expenses Incurred in Cash on an Ad Hoc Basis:For AY 2008-09, the AO disallowed 15% of certain expenses incurred in cash based on self-made cash vouchers, which were difficult to verify. The FAA did not adjudicate the additional ground of appeal filed by the assessee regarding this disallowance. The Tribunal restored the matter to the FAA for fresh hearing, directing the FAA to decide the issue after hearing the assessee.For AY 2009-10, the AO disallowed 15% of cash expenses due to self-made vouchers. The FAA upheld the disallowance, noting the lack of authenticity of the vouchers. The Tribunal reversed the FAA’s decision, stating that without rejecting the books of accounts and pointing out defects in the method of accounting, audited accounts should not be rejected on an ad hoc basis.5. Levy of Interest under Section 234 of the Act:The issue of levy of interest under section 234 was deemed consequential and was not adjudicated by the Tribunal.Conclusion:The appeals for AY 2007-08 were disallowed, while the appeals for AY 2008-09 and AY 2009-10 were partly allowed. The Tribunal upheld the disallowance of bad debts and service charges but reversed the ad hoc disallowance of cash expenses for AY 2009-10 and restored the matter to the FAA for AY 2008-09.