IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES : F : NEW DELHI
BEFORE SHRI R.S. SYAL, AM AND SHRI C.M. GARG, JM
ITA No.4041/Del/2011
Assessment Year : 2008-09
Ram Gopal, Vs. ITO,
Prop., M/s Agarwal Sugar Ward-1(1),
Company, Muzaffarnagar.
245, Town Hall Road,
Muzaffarnagar.
PAN: AATPG8476D
ITA No.4480/Del/2011
Assessment Year : 2008-09
ITO, Vs. Ram Gopal,
Ward-1(1), Prop., M/s Agarwal Sugar
Muzaffarnagar. Company,
245, Aryapuri,
Muzaffarnagar.
PAN: AATPG8476D
(Appellant) (Respondent)
Assessee By : Shri Ankit Gupta, Advocate
Department By : Shri Vikram Sahay, Sr. DR
Date of Hearing : 05.08.2015
Date of Pronouncement : 07.08.2015
ITA No.4041 & 4480/Del/2011
ORDER
PER R.S. SYAL, AM:
These two cross appeals one by the assessee and the other by the
Revenue arise out of the order passed by the CIT(A) on 29.6.2011 in
relation to the assessment year 2008-09.
2. First ground of the assessee's appeal is against confirmation of
addition of Rs.6,20,631/-, being the amount of service tax payable u/s
43B of the Income-tax Act, 1961 (hereinafter also called `the Act'). The
facts apropos this ground are that the assessee is engaged in the business
of sugar as a commission agent. The assessee raised bills of commission
with service tax. Only commission amount was credited to the Profit &
Loss Account and the amount of service tax was separately taken. The
AO observed that a sum of Rs.6,20,631/- representing service tax,
education cess and higher education cess (hereinafter cumulatively
called as `service tax' for convenience) was appearing as payable in the
assessee's balance sheet. On being called upon to explain as to why the
amount of service tax be not disallowed u/s 43B, the assessee contended
that the amount of service tax was not realized and even the
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commission bills from sugar mills on which such service tax was
charged, were yet to be recovered. It was also submitted that the amount
of service tax was not debited to the Profit & Loss Account and, as such,
there could be no question of disallowance u/s 43A. Unconvinced with
the assessee's submission, the AO made a disallowance of Rs.6.20 lac
u/s 43B of the Act towards the unpaid amount of service tax. The ld.
CIT(A) upheld the assessment order on this count. The assessee is
aggrieved against the confirmation of this addition.
3. We have heard the rival submissions and perused the relevant
material on record. The primary question before us in this regard is as to
whether the provisions of section 43B are attracted on the unpaid
amount of service tax, which was not recovered by the assessee from his
principals. Before embarking upon this question, it is relevant to note
that the assessee raised bills for commission with service tax, but, only
the amount of commission was shown as income in his Profit & Loss
Account. The amount of service tax was credited in the books of
account and on making payment after realization from sugar mills, the
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assessee was debiting the service tax account. The amount of service tax
payable in the instant case represents the amount of service tax, which
was billed by the assessee, but not realized up to the year ending. In
other words, the amount of service tax at Rs.6.20 lac for which
disallowance has been made has neither been realized by the assessee
nor claimed as deduction in the profit and loss account. The question
arises whether any disallowance u/s 43B can be made under these
circumstances. The ld. AR has brought to our notice certain direct
decisions in which it has been held that no disallowance u/s 43B of the
Act can be made in such a situation. The main thrust of the ld. AR has
been on the argument that under the service tax rules, it becomes
payable only when the payment for the same is received. Since the said
amount of service tax was not received during the year, the ld. AR
argued that no disallowance can be made on this score u/s 43B. For this
proposition, he relied on the judgment of the Hon'ble Bombay High
Court in CIT VS. Ovira Logistics (P) Ltd. (2015) 232 Taxman 240
(Bom). For similar proposition, he relied on the order passed by the
Chennai bench of the tribunal in ACIT VS. Real Image Media
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Technologies (P) Ltd. (2008) 116 TTJ 964, in which it has been held that
service-tax though billed but not received not having become payable to
the credit of the Central Government by virtue of s. 68 of the Finance
Act, 1994, r/w r. 6 of the Service-tax Rules, 1994, the same cannot be
disallowed under s. 43B. No contrary decision has been brought to our
notice by the ld. AR. Respectfully following the above precedents and
without going deep into the nuances of the issue, we hold that since the
amount of service tax in dispute was admittedly not realized by the
assessee, the same could not be disallowed u/s 43B. This ground is
allowed.
4. Ground No.2 is against the confirmation of addition of
Rs.7,75,650/-, being the amount of bad debts written off in the books of
account. Succinctly, the assessee claimed deduction for this sum under
the head `Bad debts.' On being called upon to explain as to how the
conditions of section 36(2) were fulfilled, the assessee stated that he
was simply a commission agent of sugar mills assisting in the sale of
sugar by them. As per the terms and conditions with the sugar mills, it
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was claimed, that the assessee was responsible for collection of dues and
in the event of non-recovery of the amount, such non-recoveries were
liable to be deducted from his commission income. The assessee
submitted that this amount of Rs.7.81 lac was deducted by sugar mills
on account of non-recoveries from the buyers. The AO disallowed a
sum of Rs.7.75 lac on the ground that the debit notes issued by M/s
Daya Sugar towards non-recoveries from their customers were not
substantiated with any evidence. The ld. CIT(A) upheld the view taken
by the AO. The assessee is aggrieved against the sustenance of
disallowance.
5. We have heard the rival submissions and perused the relevant
material on record. There is no dispute on the fact that the assessee
wrote off a sum of Rs.7.75 lac in his books of account as bad debt. The
Hon'ble Supreme Court in T.R.F. Ltd. vs. CIT (2010) 323 ITR 397 (SC)
has held that after 1.4.1989 the assessee is not required to establish that
the debt has become bad in the previous year and a deduction on account
of bad debts is permissible on a simple write off of the amount of bad
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debt. However, we find from the mandate of section 36(1)(vii) that the
deduction on account of bad debts is subject to the provisions of sub-
section (2). Sub-section (2) of section 36, in turn, provides that no
deduction of the bad debts 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 was
written off or any earlier year. To put it simply, the deduction on
account of bad debts is permissible on write off only if the amount of
debt has been taken into account in computing the income of the
assessee for the instant year or an earlier year. The question arises as to
whether a mere receipt of commission on total value of sales would
satisfy the condition of section 36(2) in respect of the amount of sales
which has become irrecoverable. The special bench of the Tribunal in
DCIT vs Shreyas S. Morakhiya (2010) 40 SOT 432 (Mum) (SB) dealt
with a case in which the assessee was a share broker and the brokerage
income was taken into account in the computation of total income.
There was some non-realisation of the sale value of the shares as a result
of which that assessee had to part with the unrealized amount of sale
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value. The question arose as to whether the crediting of brokerage to the
Profit & Loss Account would satisfy the condition stipulated u/s 36(2) in
respect of the amount of bad debt towards non-realisation of sale value
of the shares. Answering the question in affirmative, the Special Bench
held that the amount receivable by the assessee share broker on account
of brokerage is a part of debt receivable by him from his clients against
purchase of shares on their behalf and, once such brokerage is credited
to his Profit & Loss Account and the same is taken into account in
computing his income, the condition stipulated in section 36(2)(i) gets
satisfied and, therefore, the write off of the debt representing the
irrecoverable amount receivable from the clients against purchase of
shares on their behalf is allowable as bad debt. The Hon'ble Bombay
High Court in CIT vs. Shreyas S. Morakhiya (2012) 342 ITR 285 (Mum)
has approved the view taken by the Special Bench. Similar view has
been taken by the Hon'ble jurisdictional High Court in the case of CIT
vs. Bonanza Portfolio Ltd. (2010) 320 ITR 178 (Del). The facts of the
instant case are, mutatis mutandis, similar to those considered and
decided in the aforenoted judicial precedents. As such, the assessee
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deserves to succeed on this ground. It is however, made clear that any
subsequent recovery from the amount written off as bad debts, is liable
to be offered as income. Overturning the impugned order on this issue,
we order for the deletion of addition.
6. Ground nos. 3 and 4 were not pressed by the ld. AR. The same,
therefore, stand dismissed.
7. First ground of the Revenue's appeal is against the deletion of
addition of Rs.17,99,225/- made by the AO on account of non-deduction
of tax on commission and brokerage u/s 40(a)(ia) of the Act. The facts
of this ground are that the assessee paid commission of Rs.17.99 lac.
The AO opined that the assessee was required to deduct tax at source u/s
194H on the amount of commission payment. Since no deduction of tax
at source was made, he, therefore, made disallowance u/s 40(a)(ia) of the
Act. In reaching this conclusion, the AO relied on the order passed by
him for the immediately preceding assessment year. The ld. CIT(A)
deleted the disallowance.
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8. We have heard the rival submissions and perused the relevant
material on record. Section 194H of the Act provides that any person
not being any individual or HUF, who is responsible for paying to a
resident any income by way of commission or brokerage, shall, at the
time of credit of such income to the account of the payee or at the time
of payment of such income, whichever is earlier, deduct income-tax
thereon at the specified rate. The second proviso states that an
individual or HUF, whose total sales, gross receipts or turnover from the
business or profession carried on by him exceed the monetary limit
prescribed u/s 44AB `during the financial year immediately preceding
the financial year in which such commission or brokerage is credited or
paid' shall be liable to deduct income-tax under this section. The instant
assessee is an individual. As such, he is liable to make deduction of tax
at source from commission income u/s 194H only if the condition
enshrined in the second proviso is satisfied. Such condition is that sales
or gross receipts must exceed the monetary limit (Rs.40 lac at that time)
during the financial year preceding the financial year in which
commission is paid. In other words, if the assessee in question pays
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commission or brokerage in the previous year 2007-08 relevant to
assessment year 2008-09, then, his sales, gross receipts or turnover for
the previous year 2006-07 relevant to assessment year 2007-08 must
exceed Rs.40 lac so as to make him liable for deduction of tax at source
u/s 194H of the Act. Adverting to the facts of the instant case, we find
that the total turnover of the assessee for the immediately preceding year
was Rs.26.74 lac. Since this amount of total turnover for the
immediately preceding year does not breach the limit of Rs.40 lac, there
can be no obligation on the assessee to deduct tax at source on
commission paid in the previous year relevant to assessment year under
consideration. As such, we approve the view taken by the ld. CIT(A). It
is further noticed that similar view has been taken by the tribunal in the
preceding year. This ground is not allowed.
9. The only other ground which survives for consideration is against
the deletion of addition of Rs.4,89,688/- made by the AO u/s 68 of the
Act. There were certain creditors and debtors appearing in the
assessee's balance sheet. The AO issued inquiry letters to
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creditors/debtors for confirming the balance of the assessee in their
books of account. On making a comparative study of the balance shown
by the assessee in his books of account vis-à-vis those parties showing
the assessee's balance, the AO made addition of Rs.4,97,747/-. The
assessee did not assail before the ld. CIT(A) the addition on account of
credit balance of Rs.8,059/- in the books of his debtor M/s Agarwal
Sugar and Chemicals, which addition was automatically confirmed. As
regards the remaining addition of Rs.4,89,688/-, the assessee furnished
reconciliation. The ld. CIT(A) got convinced with such reconciliation
and ordered for the deletion of addition to this extent. The Revenue is
aggrieved against such deletion.
10. After considering the rival submissions and perusing the relevant
material on record, it is noticed that the assessee furnished reconciliation
before the ld. CIT(A) in respect of balances of the parties appearing in
his books of account and the corresponding balances in the books of
such parties. The ld. CIT(A) found reconciliation in order and,
accordingly, deleted the addition. The ld. DR could not controvert any
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discrepancy in such reconciliation. Under such circumstances, we are of
the considered opinion that the ld. CIT(A) has taken an unimpeachable
view on this issue. This ground is not allowed.
11. In the result, the assessee's appeal is partly allowed and that of the
Revenue is dismissed.
The order pronounced in the open court on 07.08.2015.
Sd/- Sd/-
[C.M. GARG] [R.S. SYAL]
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated, 07th August, 2015.
dk
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT (A)
5. DR, ITAT
AR, ITAT, NEW DELHI.
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