TaxTMI 
TaxTMI 
2007 (10) TMI 328
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....t Rs. 249.35 crores was receivable from the KTL in respect of supply of equipments, sale of cellular exchange equipments and related services on a deferred credit basis. The KTL defaulted on the payment schedule right from the beginning. After protracted negotiations, the assessee entered into an agreement with the KTL on 7th Sept., 2000 for final settlement of the dues. In terms of this settlement, the debtor was released from its obligation from payment except for a sum of Rs. 75 crores, which was payable in two instalments of Rs. 35 crores and Rs. 40 crores before 21st Oct., 2000 and 6th Sept., 2000 respectively. Thus, the debt minus Rs. 75 crores was written off as bad debt, being the amount not recoverable from the KTL. The AO considered the submissions made before her. It was pointed out that the date of settlement was 7th Sept., 2000. The date fell in previous year relevant to asst. yr. 2001-02 and not this year. She also examined the record of the KTL and found some discrepancies for which no answer could be obtained. In the previous year relevant to asst. yr. 2000-01, the KTL showed the outstanding amount in respect of its sundry creditors at Rs. 330.04 crores, as against ....
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....ur its various contractual commitments. The management was of the view that no amount was payable to them. The liability will be adjusted with the supplier. The supplier debit note on account of services and interest were also disputed and nothing was payable. The difference between the amount of Rs. 202.38 crores in the aforesaid note and the total debt of Rs. 324.35 crores shown by the assessee was on account of the fact that certain liabilities were not accounted by the KTL, for which a reconciliation was furnished as under : "(Rs. in crores) Total amount claimed as bad debt by the appeal 249 Less : Amount not considered by KTL as per note 7(b) in Sch. O of balance sheet of KTL for the period ended 30.6.1999 (the balance sheet of KTL was obtained from the RoC) (1) Services &nbs....
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....; --- Difference 3" Thus, the findings of the learned CIT(A) were that,-(i) the correct amount of the debt was about Rs. 249.39 crores which had been shown by the assessee as income in earlier years by taking into account deferred payments to be received; (ii) the KTL could not discharge its obligation to the DoT because of which bank guarantee given to the DoT was encashed by it; and (iii) the KTL was not able to make any payment to the assessee out of the debt in financial years 1996-97 to 1999-2000. Therefore, it was held that the claim of the assessee was bona fide and the amount was allowable as bad debt. Accordingly, t....
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....ctual commitments. The management has view that no amount is payable to them. The liability will be adjusted with the supplier. (b) The supplier debit notes on account of services and interest are also disputed and nothing is payable.' The difference between Rs. 202.37 crores mentioned in the above note and the total debt of Rs. 324.35 crores shown by the appellant, is on account of the reasons mentioned in para 5.4.5.3 above. I also find myself unable to accept the view of the AO that the debt became bad only on 7th Sept., 2000 when settlement agreement was signed with KTL. Sufficient evidence has been filed by the appellant to show that the debt had become bad by 31st March, 2000. The DoT had cancelled the licence granted to KTL and also encashed the bank guarantee of Rs. 94 crores (given by KTL to DOT) well before 31st March, 2000. The director's report of KTL for the period ended 30th June, 1999 reflected huge amounts being claimed by DoT and that KTL had inadequate net assets to meet even the claims of DOT. The Note 7 in Sch. O to the balance sheet of KTL for the period ended 30th June, 1999 also supports the appellant's claim. Otherwise also, under amended s. 36(1)(v....
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.... financial year 1999-2000, and (iv) Cancellation of KTL's licence by DoT and encashment of bank guarantee of Rs. 94 crores (given by KTL to DOT) well before 31st March, 2000 and inadequacy of net assets of KTL as early as on 30th June, 1999 to meet even the claims of DOT. (v) Non-making of any payment by KTL to the appellant during the financial years 1996-97, 1997-98, 1998-99 and 1999-2000. 5.5.2 Accordingly, the claim of the appellant for write off of bad debt of Rs. 249.34 crores is hereby allowed and the addition made by the AO is hereby deleted." 3.2 Coming to the legal arguments, reliance was placed on the order of Hon'ble Tribunal, Mumbai Bench "H" (Special Bench), Mumbai in the case of Dy. CIT v. Oman International Bank, SAOG [2006] 102 TTJ (Mumbai)(SB) 207 : [2006] 100 ITD 285 (Mumbai)(SB). The Hon'ble Tribunal dealt with the expression "bad debt" used in s. 36(1)(vii) and pointed out that strict proof of establishing the debt to have become bad is unnecessary if one has regard to the plain meaning of the expression. By referring to Chamber's Twentieth Century dictionary, it was pointed out that "bad debt" means a debt that cannot be recovered. Further, referri....
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....n the question of allowability of bad debt in a particular year, because the bad debt was not necessarily allowed by the AO in the year in which the same had been written off on the ground that the debt was not established to have become bad in the year. In order to eliminate the disputes in the matter of determining the year in which a bad debt can be allowed and also to rationalize the provisions, the Amending Act, 1987 has amended cl. (vii) of sub-s. (1) and cl. (i) of sub-s. (2) of the section to provide that the claim for bad debt will be allowed in the year in which such a bad debt has been written off as irrecoverable in the accounts of the assessee. 6.7 Clauses (iii) and (iv) of sub-s. (2) of the section provided for allowing deduction for a bad debt in an earlier or later previous year, if the ITO was satisfied that the debt did not become bad in the year in which it was written off by the assessee. These clauses have become redundant, as the bad debts are now being straightway allowed in the year of write off. The Amending Act, 1987 has, therefore, amended these clauses to withdraw them after the asst. yr. 1988-89.' 6. The conundrum which has arisen before us had al....
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....d to pay a sum of Rs. 75 crores in two instalments in financial year 2000-01. It was pointed out that even this amount could not be recovered from the KTL. The learned CIT(A) has taken into account the fact that the KTL did not make any payment to the assessee in financial years 1996-97 to 1999-2000, the DoT had encashed bank guarantee of Rs. 95 crores given by the KTL well before 31st March, 2000 and the net assets of the KTL were not sufficient to meet even the claims of the DOT. These facts lead to a reasonable inference that the KTL was not in a position to make payment to the assessee in view of its weak financial position. Therefore, its settlement with the KTL in the immediately following year could not have been said to be a device to avoid payment of tax. Further, the finding of the learned CIT(A) was that the financial position of the KTL was precarious even on 31st March, 2000 and there was no possibility of the assessee recovering any amount from it. These facts lead to a reasonable conclusion that the write off made by the assessee was bona fide. In these circumstances, it was not required from the assessee to show that the debt had become bad in this very accounting y....
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....payment was on account of the aforesaid amendment in the terms and conditions of the purchase order. The learned CIT(A) considered the facts of the case. It was pointed out that the liquidated damages became payable in terms of amendment No. 3 dt. 25th Feb., 1997. The assessee was following mercantile system of accounting and, therefore, the contractual liability arose in asst. yr. 1997-98 and not in the instant assessment year. Therefore, the claim of the assessee was dismissed. 6. Before us, the learned counsel for the assessee pointed out that there was no dispute regarding the claim and its amount and the only dispute was the year in which the claim could be made. The details of the impugned amount and the letter of the DoT dt. 25th Feb., 1997 were placed in the paper book on pp. 435 to 437. It was his case that all the supplies had been made by the end of this year and the accounts had been reconciled. Therefore, the claim may be allowed in this year. In the alternative, it was mentioned that the claim may be allowed in asst. yr. 1997-98, the appeal for which was pending before the Tribunal. 6.1 In reply, the learned Departmental Representative pointed out that the claim....
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....atriates. Since the invoice was received in the current financial year, the liability was crystallized in this year and, therefore, it was deductible in computing the income of this year. The AO pointed out that the salary accrues on day-to-day basis irrespective of the date of its payment. The liability was in the nature of contractual liability and the amount to be paid was well defined. Thus, there was no justification for not accounting for the liability on accrual basis. It was further mentioned that the amount appears to be in the nature of adjustment between the assessee company and Alcatel CIT. There was no dispute about the amount to be paid and, therefore, there was no question of crystallization or settlement of the liability in this year. Therefore, the impugned claim was disallowed. 8.1 Before the learned CIT(A), it was pointed out that the assessee received an invoice dt, 17th Dec, 1999 from Alcatel CIT towards salaries of expatriates for rendering various services to the assessee. Therefore, the liability was entered into the books of account under the head "Salary". Since this liability crystallized in this year, it was rightly claimed in this year. In order to s....
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....respect of salary paid in France. The assessee received a debit note from its parent company on 17th Dec, 1999, which has been placed in the paper book on p. 451. The note is in respect of HE staff secondment, raising a bill of Rs. 5,90,052. Therefore, a provision was made for this liability and the same was paid through the running account of Alcatel CIT, France. 9.1 In order to support his contention that the amount was deductible in this year, reliance was placed on the decision in the case of Saurashtra Cement & Chemical Industries Ltd. It was also pointed out that the assessee incurred loss in this year as well as in all earlier years. Therefore, the delay in claiming the liability was not on account of any tax planning undertaken with a view to reduce tax liability and, thus, it was immaterial whether the liability was allowed in this year or in the earlier year. 9.2 In reply, the learned Departmental Representative pointed out that the transaction was between the holding company and the subsidiary company and it could not be said that it was at arm's length. Nothing has been brought on record to show that any dispute persisted between the holding company and the subsid....
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....y of the assessee had seconded employees for the work of the assessee company over a period of time. The assessee was debiting salaries paid in India as well as deducting tax on the global salaries. There is no evidence on record to show that there was any dispute between the parent company and the subsidiary company regarding its liability in respect of salary paid in France. Therefore, since the expatriate personnel were working for the assessee, it is natural to conclude that the liability was that of the assessee and, therefore, it ought to have been claimed from year to year, although the same was not done. On reminder from the parent company in this year, the provision was made and the liability was paid through the running account that does not mean that the disputed liability was crystallized in this year. The liability did not depend upon any demand made by the parent company and accepted by the assessee. Thus, the ratio of the decision in the case of Saurashtra Cement & Chemical Industries is not applicable to the facts of this case. We are also not in agreement with the argument that it is immaterial whether the liability was claimed in the earlier year or in this year a....
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....me Court. In these circumstances, the aforesaid provision was held to be not deductible in computing the income of the assessee. 13.1 Aggrieved by this order, the assessee moved an appeal before the CIT(A). It was represented before him that the assessee imported components from Alcatel CIT, France, and the customs authorities entertained doubts about the possibility of underinvoicing in respect of import made from the foreign holding company. In such cases, the authorities generally issued notices for determining the price of the goods and it is for the importer to establish before the Special Valuation Branch (SVB), who analysed the invoice value with the international price with a view to determine whether there was any underinvoicing. If the authorities are satisfied that there was no underinvoicing, the order is issued to accept the price and thus, no extra levy is imposed. On receipt of the order from SVB, the importer can claim refund of the extra import duty already paid on the bill of entry. It was further represented that the assessee had paid provisionally the customs duty and filed claims of refund after receipt of the order of SVB. The assessee had filed such claims....
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....income under s. 115JA of the Act. Since the impugned amount was not deducted by the AO in computing the total income, he disallowed the same while computing the deemed income also. It was represented before him that the provision for doubtful advance was not a liability and, therefore, the provision contained in cl. (c) of the Explanation to s. 115JA had no application. It was further represented that the amount was specific and ascertained and, therefore, the same could not have been added back in terms of the aforesaid cl. (c). The learned CIT(A) considered the assessment order and the submissions of the assessee. It was pointed out that the AO did not assign any reason for adding back this amount. It was further pointed out that for the purpose of s. 115JA, the P&L a/c has to be prepared in accordance with the provisions of Part II and Part III of Sch. VI to the Companies Act, 1956. The provision made by the assessee could not have been made under the said Schedule. It was also mentioned that the customs authority had not rejected the claim of refund by the end of the year, which was done on 26th Feb., 1998. Therefore, the ground taken by the assessee in appeal before him was re....
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....ng this year, but were not entertained by the Customs Department. The assessee filed appeal before CEGAT, who allowed the claims. Thus, it cannot be said that the value of these advances depreciated in any manner. In any case, the amount was lying with a Government Department and its value could not have depreciated with time for fear of non-recovery. The assessee had no reason to believe that the goods were imported at deflated value. Therefore, the facts of the case are not on all fours with the facts of the case of Usha Martin, in which the provision was made in respect of doubtful debt, based upon the guidelines of the RBI in respect of debts which were not properly serviced. Thus, it is not a case of reduction in the value of the assets of the assessee. It is only a provision made for future customs liability and such liability was unascertained for the reason that there was no ground for the assessee to entertain a reasonable belief that the goods were imported at less than fair market value. As the subsequent event showed, the claim of the assessee was allowed and refunds were received. These refunds were not offered for tax. Thus, it is held that the provision was an advanc....
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....s. 207, 208, 209 and 210 cannot be made applicable until and unless the accounts are audited and the balance sheet is prepared. The ratio of this case will apply mutatis mutandis in respect of tax on deemed income under s. 115JA. Respectfully following this decision, it is held that the assessee was not liable to pay interest under ss. 234B and 234C. Thus, this ground is allowed. 20. In the result, the appeal is partly allowed. ITA No. 105/Del/2004--Asst. yr. 1998-99-Appeal of the assessee 21. The ground in this appeal is that the learned CIT(A) erred on facts and in law in holding that the assessee was liable to pay interest under ss. 234B and 234C for shortfall and deferment respectively in payment of advance tax while computing the liability under s. 115JA. The learned counsel pointed out that this issue stands covered in ITA No. 104/Del/2004, in which it was argued by him that interest under these sections cannot be levied in view of the decision of Hon'ble Supreme in the case of Kwality Biscuits Ltd. This judgment was delivered under s. 115J and it was pointed out that the entire exercise of computing income can only be done at the end of the financial year and, thus,....