Neptune Polymers Pvt.Ltd.,, Ahmedabad vs Assessee

आयकर अपील सं./I.T.A. No.2074/Ahd/2011 ( नधा रण वष / Assessment Year : 2007-08) Neptune Polymers Pvt.Ltd. बनाम/ The Dy.CIT Old Dalia Building Vs. Ahmedabad Opp. Town Hall Ellisbridge - 380 006 थायी ले खा सं . /जीआइआर सं . / PAN/GIR No. : AAACN 9080 A (अपीलाथ# /Appellant) .. ($%यथ# / Respondent)

अपीलाथ# ओर से / Appellant by : Shri C.N. Shah, A.R. $%यथ# क' ओर से/Respondent by : Shri Roop Chand, Sr. D.R.

ु वाई क' तार*ख / सन Date of Hearing 02/02/2015 घोषणा क' तार*ख /Date of Pronounce ment 13/02/2015

आदे श / O R D E R

PER SHRI KUL BHARAT, JUDICIAL MEMBER :

This appeal by the Assessee is directed against the order of the Ld.Commissioner of Income Tax(Appeals)-XI, Ahmedabad ('CIT(A)' in short) dated 17/06/2011 pertaining to Assessment Year (AY) 2007-08. The Assessee has raised the following grounds of appeal:-

1. On the facts and in the circumstances of the case and in law, the Learned CIT(Appeals) erred in disallowance of bad debts in respect of Reliance Industries Ltd. to the extent of Rs.237554/- as the same ITA No.2074/Ahd/2011 Neptune Polymers Pvt.Ltd. vs. Dy.CIT Asst.Year - 2007-08 -2-

was transferred to Sundry Credit/Debit balance written off accounts instead of the account "Bad Debts Written Off".

2. The CIT(Appeals) failed to appreciate that writing off irrecoverable in the account is satisfied as account of Reliance Industries Ltd. is Credited and Sundry Credit/Debit Balance is debited which goes to expense account. Thus the condition laid down in the case of TRF Ltd. is satisfied.

3. The CIT(Appeals) ought to have appreciated that the expression "Write-Off" as defined in dictionary for accounts of by Eric L.kohar as transfer the balance of an account previously regarded as an asset to an expense a/c or to the P&L A/c is satisfied.

4. The CIT(Appeals) has objection in writing off the accounts in the middle of the year in place of at the end of the year.

5. The CIT(Appeals) should have allowed the accounts actually written off following the ratio laid down by Hon'ble Supreme Court in the case of TRF Ltd.

6. The CIT(Appeals) also erred in disallowing following accounts aggregating Rs.73674/- actually written off in party's accounts wrongly clubbed in Priyanka Carbon & Chemicals Ltd. and transferred to sundry balances Cr/Dr.written off:

Sr.No. Name Amount (in Rs.) 1. Priyanka Carbon & Chemicals Ltd. 4128/- 2. RCF Thal. 57664/- 3. R.R.Bangul Bros. 1000/- 4. Suntex. 9040/- 5. Tarpauline Traders. 1842/-

7. The appellant also relies on the decision of Ahmedabad Bench "B" of Income Tax Appellate Tribunal in the case of Neptune Textile Mills Ltd. Ahmeabad v/s. The ACIT Co. Circle 7 (5) Ahmedabad in ITA No.1788/Ahd/98 Asst.Year 1992-93 wherein ITA No.2074/Ahd/2011 Neptune Polymers Pvt.Ltd. vs. Dy.CIT Asst.Year - 2007-08 -3-

account debited to Sundry Balance Cr/Dr.Written off was allowed u/s.36(i) (vii).

8. The appellant craves leave to add, to amend or alter the above grounds as may be deemed necessary.

2. Ground Nos.1 to 7 are inter-connected. Therefore, the same are decided together. Ground No.8 is general in nature needs no independent adjudication.

2.1. Briefly stated facts are that the case of the assessee was picked up for scrutiny assessment and the assessment u/s.143(3) of the Income Tax Act,1961 (hereinafter referred to as "the Act") was framed vide order dated 03/11/2009, thereby the Assessing Officer (AO in short)made various disallowances; namely, on account of late payment of PF/ESI, on account of penalty expenditure, on account of penalty exp./late delivery and on account of disallowance out of bad debt. Against this, the assessee filed an appeal before the ld.CIT(A), who after considering the submissions and perusing the records partly allowed the appeal. While partly allowing the appeal, the ld.CIT(A) deleted the disallowance made on account of late payment of PF/ESI, disallowance made on account of interest on payment of Excise, disallowance made on account of penalty/late delivery expenses and in respect of disallowance of bad debt, the ld.CIT(A) restricted the disallowance of Rs.2,95,218/- against the disallowance of Rs.3,11,228/-. Against this, confirmation of ITA No.2074/Ahd/2011 Neptune Polymers Pvt.Ltd. vs. Dy.CIT Asst.Year - 2007-08 -4-

disallowance, the assessee has filed the present appeal. The ld.counsel for the assessee submitted that this issue is covered by the judgement of Hon'ble Supreme Court rendered in the case of TRF Ltd. vs. CIT reported at (2010) 230 CTR 14(SC). The ld.counsel for the assessee submitted that the authorities below were not justified in making the disallowance. He submitted that once the assessee has 'written off' the debt as irrecoverable in its accounts, i.e. sufficient for the purpose of allowing the bad debt in the light of the judgement of Hon'ble Apex Court in the case of TRF Ltd. vs. CIT(supra).

3. On the contrary, the ld.Sr.DR vehemently argued that the judgement of the Hon'ble Apex Court as relied upon by the ld.counsel for the assessee in the case of TRF Ltd. vs. CIT(supra) is not applicable on the facts of the present case. He drew our attention towards para-6.2.7 of the order of the ld.CIT(A), wherein the ld.CIT(A) has given a finding that the condition of 'writing off' is not fulfilled, therefore the benefit of bad debt 'written off' is not available to the assessee.

4. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. We find that the ld.CIT(A) has decided this issue in paras-6.1 to 6.2.7 of his order, by observing as under:-

ITA No.2074/Ahd/2011 Neptune Polymers Pvt.Ltd. vs. Dy.CIT Asst.Year - 2007-08 -5-

"6.1. In the written submissions, it is submitted by the A.R. of the appellant that the assessing officer has disallowed the bad debts on the ground that bad debt can be allowed on establishing by the assessee that the debt has become finally irrecoverable and bad.

The A.R. further submitted that according to him merely written off bad debt is not only criteria. The A.O. has ignored the law now well settled in view of the decision in the case of T.R.F. Ltd. vs. CIT (230 CTR 14)(SC) to the effect that once the debts are written off bad in the books of accounts they are to be allowed as bad debts u/s.36(i) (vii) of the I.T.Act. The A.R. argued that it is not incumbent of the appellant to prove that the debts become bad.

6.2. I have carefully considered the facts of the case and legal position as it exists for writing off the bad debts. I am inclined to agree with the A.R. that in view of TRF Ltd., case, the bad debt written off can not be disallowed solely on the ground that the debts have not become bad. However, we have to see the factual position of the debts and the same is discussed in the following paras.

6.2.1During the appellate proceedings, the A.R. has filed copy of bad debt written off account. Perusal of this account reveals that following bad debts have been written off.

Sr.No.Name Date Amt. (In Rs.) (1) Reliance Industries Ltd. 30.4.2006 Rs.2,37,554/- (2) Priyanka Carbon & 28.2.2007 Rs. 73,674/- Chemicals P.Ltd. ---------------- Total : Rs.3,11,228/-

---------------------------------------- Scrutiny of Priyanka Carbon & Chemicals P&L A/c reveals that the following amounts are written off.

ITA No.2074/Ahd/2011 Neptune Polymers Pvt.Ltd. vs. Dy.CIT Asst.Year - 2007-08 -6-

S.No. Name Amt.(In Rs.) 1. Priyanka Carbon & Chemicals Ltd. 4,128 2. RCF Thal. 57,664 3. R.R.Bangul Bros. 1,000 4. Suntex. 9,040 5. Tarpauline Traders. 1,842

The scrutiny of these accounts further reveals that the bad debts in these accounts are directly transferred to the sundry Cr/Dr B/In/ off account. However in the Sundry Cr.Dr.B'W/off account all these balances are clubbed in the name of Priyanka Carbon & Chemicals P.L. To this extent the accounts of the assessee is incorrect.

6.2.2. The accounts of RIL & RCF Thal are running accounts and the assessee has selected one entry for write off from these accounts. The accounts were kept live before as well as after this entry. In fact RIL entry was written off on 30.4.2006 and after this there are hundred of entries in that account during this year itself. The account is live in the succeeding years also. Same condition prevails with RCF Thal. The allowance of bad debts in respect of these parties is to be examined with this factual matrix.

6.2.3. As per the provisions of section 36(1)(vii) the conditions for allowance of bad debt are (1) It must be a proper debt or a part thereof.

(2) It must be of a revenue nature.

(3) It must be written off as irrecoverable in the accounts.

All the above mentioned conditions are to be full filled consecutively to qualify for the deductions. The onus is on assessee to prove that all these conditions are fulfilled. Reliance in this regard is placed on the decision of Tranvancore Tea Estates Co.Ltd. vs. CIT (1992) 197 ITR 528 (Ker.) ITA No.2074/Ahd/2011 Neptune Polymers Pvt.Ltd. vs. Dy.CIT Asst.Year - 2007-08 -7-

6.2.4. Evaluation of facts on record reveals that in the instant case the fulfillment of third condition is doubtful. It is a matter of record that the entries for write off were picked from a running account, and the account remained live before and after the entry was picked up for write off. I am afraid, this is not a right way to write off the debts. The expression "write off" has been defined in dictionary for accounts Eric L. Kohor as "transfer the balance of an account previously regarded as an asset to an expense a/c or to the P&L A/c."

6.2.5. Even in the case of TRF Ltd. relied upon by the assessee, it has been observed "......................... . However, in the present case, the A.O. has not examined whether the debts has, in fact, been written off in the books of the assessee. When bad debt occurs, the bad debt account is debited and the customers a/c is credited, thus closing the account of the customer....."

6.2.6. This observation of Supreme Court further supports the definition mentioned above. In fact write off mean transfer of balance amount to P&L A/c or the sundry Balances written off a/c as the case may be and closing the account of the customer. The write off in the instant case is to be examined with reference to the abovementioned definition & S.C. observations.

6.2.7. In the instant case, the balance of Reliance Industries Ltd. or RCF was never transferred to the sundry balance written off account. The assessee has only transferred one entry to the sundry balance written off a/c. Thus the "write off" condition is not fulfilled and the benefit of bad debts write off is not available to the assessee on these amount."

ITA No.2074/Ahd/2011 Neptune Polymers Pvt.Ltd. vs. Dy.CIT Asst.Year - 2007-08 -8-

4.1. We do not find any infirmity in the order of the ld.CIT(A) as he has given a finding on fact that the condition has envisaged u/s.36(1)(vii) of the Act is not complied with by the assessee and the finding of the ld.CIT(A) on fact is not controverted by the assessee by placing any material contrary on record suggesting that the conditions for 'writing off' has been fulfilled. Therefore, in our considered view, the judgement of Hon'ble Apex Court in the case of TRF Ltd. vs. CIT(supra) as relied upon by the ld.counsel for the assessee would not help to the assessee. Under these facts, we see no reason to take a different view than taken by the ld.CIT(A). Thus, ground Nos.1 to 7 raised in the assessee's appeal are rejected.

5. In the result, assessee's appeal is dismissed.

Order pronounced in the Court on Friday, the 13th of February, 2015 at Ahmedabad.

Sd/- Sd/- (एन.एस.सैनी) (कुल भारत) लेखा सद य या यक सद य ( N.S. SAINI ) ( KUL BHARAT ) ACCOUNTANT MEMBER JUDICIAL MEMBER

Ahmedabad; Dated 13/ 02 /2015

ट*.सी.नायर, व. न.स./T.C. NAIR, Sr. PS ITA No.2074/Ahd/2011 Neptune Polymers Pvt.Ltd. vs. Dy.CIT Asst.Year - 2007-08 -9-

आदे श क! " त$ल%प अ&े%षत/Copy of the Order forwarded to :

1. अपीलाथ# / The Appellant

2. $%यथ# / The Respondent.

3. संबं4धत आयकर आयु6त / Concerned CIT

4. आयकर आय6 ु त(अपील) / The CIT(A)-XI, Ahmedabad

5. 7वभागीय $ त न4ध, आयकर अपील*य अ4धकरण, अहमदाबाद / DR, ITAT, Ahmedabad

6. गाड; फाईल / Guard file.

आदे शानुसार/ BY ORDER,

स%या7पत $ त //True Copy//

उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपील य अ धकरण, अहमदाबाद / ITAT, Ahmedabad

1. Date of dictation .. 4.2.15 (dictation-pad 7- pages attached at the end of this File)

2. Date on which the typed draft is placed before the Dictating Member ..4.2.15

3. Other Member...

4. Date on which the approved draft comes to the Sr.P.S./P.S.................

5. Date on which the fair order is placed before the Dictating Member for pronouncement......

6. Date on which the fair order comes back to the Sr.P.S./P.S.......13.2.15

7. Date on which the file goes to the Bench Clerk.....................13.2.15

8. Date on which the file goes to the Head Clerk..........................................

9. The date on which the file goes to the Assistant Registrar for signature on the order..........................

10. Date of Despatch of the Order..................