Sirus Pharmaceuticals P.Ltd, Mumbai vs Assessee

The present appeal has been preferred by the assessee against the order dated 17.10.2014 of the Commissioner of Income Tax (Appeals) [(hereinafter referred to as CIT(A)] relevant to assessment year 2008-09.

2. The assessee has taken the following grounds of appeal:

"1. On the facts and circumstances of the case, the Commissioner of Income Tax (Appeals) has erred in confirming the disallowance of claim of Rs. 1,40,90,240/- u/s 37 (1) / 28 of the Act being the claim of loss suffered on account of irrecoverable of advances made for purchases and labour charges for goods manufactured.

2. On the facts and circumstances of the case, the Commissioner of Income Tax (Appeals) has erred in disallowing the above claim of loss suffered on account 2 ITA No.6859/M/2014 M/s. Sirius Pharmaceuticals Pvt. Ltd.

of irrecoverable advances u/s 37(1) / 28 of the Act on the ground that the original claim has been u/s 36 (1) (vii) of the Act towards Bad Debts and the revised claim is after thought.

3. On the facts and circumstances of the case, the Commissioner of Income Tax (Appeals) has erred in not allowing the deduction of the claim of Rs. 1,40,90,240/- being added to the income in the Profit and Loss Account which did not constitute an income.

4. On the facts and circumstances of the case, the Commissioner of Income Tax (Appeals) has erred in misinterpreting the facts of the case in respect of the above claim as an item of Expense instead of same being an item of income.

5. On the facts and circumstances of the case, the Commissioner of Income Tax (Appeals) has erred in confirming the disallowance of Rs.20,03,595/- being freight charges payable for non deduction of Tax At Source u/s 40 (a) (ia) of the Act.

6. On the facts and circumstances of the case, the Commissioner of Income Tax (Appeals) has erred in confirming the applicability of the provisions of Section 115JB of the Act though the income determined u/s 143 (3) of the Act is higher than the income chergeable u/s 115 JB of the Act.

7. On the facts and circumstances of the case, the Commissioner of Income Tax (Appeals) has erred in not allowing the claim of reduction out of Book Profit the amount of Provision for Bad Debts Written Back in term of the clause (i) of Explanation 1 to Section 115 JB of the Act."

Grounds No.1 and 2:

3. This is a second round of appeal before us. The brief facts of the case are that during the assessment proceedings the Ass es s ing Offi cer (here inaf ter refe r red t o a s the AO) observed that in the Profit& Loss account of the assessee, the amount of Rs.1,40,19,240/- was written off as bad debts. However, when the assessee was confronted to explain how this amount was allowable as bad debts u/s.36(1)(vii) of the I.T. Act as this amount was not shown as income in the earlier years, then the assessee changed its version and claimed it as business loss u/s.37(1) read with section 28 of the I.T. Act. The AO, however, hel d that though, the assessee had 3 ITA No.6859/M/2014 M/s. Sirius Pharmaceuticals Pvt. Ltd.

changed its claim for deduction from bad debts to advance not recoverable, yet, the claim of deduction u/s 37(1) as a loss on account of not recoverable advance was not acceptable because the provisions of section 37(1) of the IT. Act do not permit the claim of loss of the capital and personal nature. The AO also observed that from the confirmation of advance for labour charges for the period 1.1.2002 to 1.4.2004 the assessee company had advanced 23 amounts during the period from 21.1.2002 to 28.3.2003 totaling to Rs.58,65,884/-. He observed that it was surprising to note that during the entire period of 15 months the assessee company had advanced 23 amounts and there was no single entry of transaction of labour job work done by M/s. Thia Chem P. Ltd. He therefore was of the view that this was a story concocted by the assessee as the advances for labour charges did not at all commensurate with the facts and figures. He observed that since the assessee had not filed any evidence on the basis of w h i c h i t c o u l d e x p l a i n t h a t o u t o f t h e t o t a l a mo u n t o f Rs.5,20,30,153/- due from M/s. Thia Chem Pvt. Ltd, how the claim of write off of Rs.1,40,90,240/- was arrived. In view of these facts and circumstances the bad debts written off were held as not eligible for deduction either under section 36(1)(vii) or under section 37(1) of the I.T. Act. Therefore, the amount of Rs,1,40,90,240/- was added back to the taxable income of the assessee.

4. The Ld. CIT(A) however allowed the clai m of the assessee holding it to be a business loss under section 28 of the Act b y wa y of a non-spe aki ng order. The order of the Ld. CIT(A) dated 29.07.2011 was set aside by the this Tribunal vide order 12.6.2014 and the matter was again restored to the file of Ld. CIT(A) for passing a speaking and reasoned order. In the set-aside 4 ITA No.6859/M/2014 M/s. Sirius Pharmaceuticals Pvt. Ltd.

proceedings, the assessee made the following submissions before the Ld.CIT(A):

"The company had advanced the sum of Rs.5,20,30,153/- to Thia Chem India Pvt. Ltd (THIA CHEM) over a period of last three years. The copy of the account for the three years were submitted to the assessing officer.

The company is an exporter of bulk drugs & intermediates. It procures the products from prime manufacturers and also gets manufactured on job work basis and exports the same to their b u y e r s . T h e c o m p a n y t i e d u p w i t h T H I A C H E M f o r manufacture of their products from time to time. Thia Chem has their own premises which the company desired to have it on lease arrangement to smoothen their production line. Thia Chem being sick company, the assessee company first approached their bankers for approval of the arrangement to be entered into.

The company used to get their product manufacture from them from time to time. The company entered into the arrangement with them for supply of material and get the manufacturing activity done on job work basis. As Thia Chem was a company who have borrowed funds from bank and were not in a position to repay as scheduled, the appellant company had approached their bankers seeking clearance for this type arrangement explaining them that this would also result in clearing the outstanding of the bank. The account of the Thia Chem would shown that some of the payment due to Thia Chem on account of labour charges have been made to their bankers. Based upon bankers assurances, the appellant had proceeded with regular business of getting their manufacturing carried out in their premises and accordingly the appellant went on advancing funds to Thia Chem for meeting their day to day expenses. Subsequently their bankers reversed their decision of allowing this type of activity and went for recovery of their dues and auctioned of all the assets belonging to Thia Chem to recover their dues.

The copy of the agreement and some of the letters addresses to their bankers were submitted to the assessing officer in support of the claim. The total amount due from Thia Chem was Rs.5,20,30,153/-. The company maintained two accounts of Thia Ch em o ne w as a d v an c e a cco u nt w hi ch sh o ws t h e o u t sta n di ng am o u n t a t Rs.3,72,07,221/- which was to be adjusted against the purchases of raw material and another one was advance account against the labour job carried out which shows amount outstanding at Ps.1,48.22,9321-. Out of these two accounts the sum of Rs. 1,40,19,2401- has been claimed as amount not recoverable, hence, written off.

The amount of Rs.1,40,19,240/- has been claimed by way of Bad Debts in accounts which is due from Thia Chem. Though the accounting 5 ITA No.6859/M/2014 M/s. Sirius Pharmaceuticals Pvt. Ltd.

terminology used in accounts was a Bad Debts Written Off, the claim was made u/s 28/37(1) of the Act being the loss suffered on account of non recovery of advances made in the course of the business and for the purpose of business which does not amount to capital or personal expenditure.

In view of the above, as all arrangements and negotiation were made in the normal course of the business activity and business transaction which is prudent business man would carry out in the best interest of the business, the gain or loss arising there from would constitute business income or loss. Moreover the directors of the company acted prudently in the interest of the company. However due to unfortunate circumstances, the deal did not materialize and the loss was occurred to the company. This loss being not of the capital nature, your appellant has claimed the said amount as not recoverable. Thus the claim of the appellant is justifiable."

5. The Ld CIT(A) however did not agree with the contentions made by the assessee and therefore rejected the claim of the assessee observing as under:

"2.3 I have considered the submissions of the assessee and facts of the case carefully. It is noticed that in the Profit and Loss Account the assessee has written off Rs.1,40,90,240/- as bad debts. However, when the AO has confronted during the assessment proceedings to explain the allowability of ba d de bts u /s.36( 1) ( vi i) of t he IT Act th en t he AR o f the a ssessee has changed its stand and made claim u/s.37(1) of the I.T. Act. In the A.Y.2007-08 the assessee had made provision for doubtful debts amounting to Rs.5,47,67,653/- out of which the assessee had written off Rs.1,40,90,240/-when the AO has asked the basis fo r writing off this amount then the AR has failed to explai n the same. The AO has also held that nowhere M/s. Thia Chem Pvt. Ltd has refused to pay the sum advanced by the assessee. The assessee has not produced any correspondence made with M/s. Thia Chem Pvt. Ltd. for recovery of the amounts. Since the assessee has not fulfilled the conditions of section 36(1)(vii) because this amount was not shown as income in the earlier years therefore not eligible for the claim of bad debts u/s.36(1)(vii) and even the AO has held that the provisions of section 37(1) of the I.T. Act does not permit the claim of loss of the capital and personal nature. Therefore, was not eligible for claiming deduction u/s. 37(1) of the I.T. Act."

6. On the other hand the AR of the assessee has submitted that the company is a exporter of bulk drugs and intermediates. It procures the products from prime manufacturers and also gets manufactured on job 6 ITA No.6859/M/2014 M/s. Sirius Pharmaceuticals Pvt. Ltd.

work basis and exports the same. The assessee company had tied up with M/s. Thia Chem Pvt.Ltd for manufacturing of their products from time to t i me. M /s . Thia Chem Pv t. Lt d has their own premises which the company desired to have it on lease arrangement to smoothen their production line. M/s. Thia Chem Pvt. Ltd. being a sick company the assessee company first approached their bankers for approval of their arrangement to be entered into. The company had entered into an agreement for supply of material and getting the manufacturing activity done on job work basis. The assessee had also approached their bankers seeking clearance for this type of arrangement. But later on the banker had auctioned the assets belonging to Thia Chem Pvt. Ltd to recover their dues. The total amount due from Thia Chem Pvt. Ltd was Rs.5,20,30.153/-.

The company has maintained two accounts of M/s. Thia Chem Pvt. Ltd one was advance account which shows the outstanding amount of Rs.3,72,07,221/- which was to be adjusted against the purchase of raw material and other one was advance account against the labour job carried out which was shown outstanding of Rs.1,48,22,932/- out of these two amounts, the sum of Rs.1,40,90,240/- was claimed as not recovered hence written off. This amount was claimed as bad debts in accounts. Though the accounting terminology used was a bad debt written off the claim was made u/s.28/37(1) being loss suffered on account of non recovery of advances. Thus the claim of the assessee was justifiable. The AR of the assessee has also relied on the decision of Hon'ble J & K High Court in the case of Chinav Forest Co. v. CIT.

From the perusal of the submissions and facts of the case it is noticed that the assessee has made provision for doubtful debts of Rs.5,47,67,653/- in F.Y.2006-07 i.e. A.Y.2007-08 out of which the assessee has written off Rs.1,40,90,240/- during the year under 7 ITA No.6859/M/2014 M/s. Sirius Pharmaceuticals Pvt. Ltd.

consideration. The AO has also observed that this amount was in the nature of advance given to M/s. Thia Chem Pvt. Ltd and has not fulfilled the conditions of section 36(1)(vii) of the I.T. Act for claiming of debts, because the assessee has to fulfilled the conditions that it is written off in the books of accounts and secondly it should have shown as income in the earlier years. But in the present case the assessee has failed to prove that this amount was shown as income in the earlier years. Therefore, the claim of the assessee u/s 36(1)(vii) is not acceptable. To strengthen the view of the AG reliance is placed on the decision of Hon'ble Supreme Court in the case of Birla Brothers v. CIT 77 ITR 75 where it is held that the assessee guaranteeing loan to selling agents and selling agents compelling to pay the same and no circumstances showing that the assessee was under obligation to provide such guarantee the amount was held not to be deductible as bad debt. in case of CIT vs. Producin Ltd 197 Taxmann it was held that provision made for bad and doubtful debts is not covered under section 36(1)(vii) of the I.T. Act. Thus the Tribunal was not right in allowing the claim. In the case of Kerala Trading Co v. CIT 156 Taxmann 327 it was held that where the said amount could not be considered as bad debts due to assessee within the meaning of section 36(2) and assessee could not be entitled to claim deduction of said amount u/s.36(2) held, yes. In view of these facts and decision of Honorable Courts that the assessee has not fulfilled the conditions of section 36(1)(vii) r.w.s. 36(2) of the I.T. Act. Therefore, the claim of bad debts of Rs.1,40,97,240/- is not allowable. Secondly although the AR of the assessee has claimed the amount of Rs.1,40,90,240/- as bad debts but during the assessment proceedings it was admitted that the conditions of section 36(1)(vii) were not fulfilled. Therefore, the assessee has changed its stand and claimed 8 ITA No.6859/M/2014 M/s. Sirius Pharmaceuticals Pvt. Ltd.

the deduction u/s.36(1)(vii) of the I.T. Act. From the facts of the case it is clear that the assessee has advanced loan to M/s. Thia Chem Pvt. Ltd for the purchase of machinery and in personal capacity for labour etc. As per the provisions of section 37(1) only the revenue expenditure wholly and exclusively incurred for the business purpose is an allowable deduction. But in the present case the assessee has advanced this loan to M/s. Thia Chem Pvt. Ltd for the purchase of machinery and in personal capacity to help the sick unit which is not allowable as per the provisions of section 37(1) of the I.T. Act. To strengthen the view of the AO reliance is placed on the decision of Hon'ble Madras High Court in the case of Scenvi Traders Pvt. Ltd vs. CIT 221 ITR 410, in case of "Hassi Marg Industrial Ltd v. CIT" 230 ITR 927 and in case of "Tulip Star Hotels Ltd v. CIT" 316 ITR 340 (AT) where it is held that that money advanced to acquire capital asset is not allowable u/s.36(1)(vii) of the I.T. Act. In case of Pitnie Boos India Ltd vs. CIT 17 taxmann.com 116 it is held that the expenditure incurred by the assessee for non-competing fee is to be disallowed being of capital nature and not eligible for deduction u/s.37(1) of the I.T.Act. Since in the present case the AR of the assessee has taken the argument that if the deduction is not allowable u/s.36(1)(vii) then it should be allowed as business loss u/s.37(1) is also not acceptable in view of these facts that personal expenditure advanced and advance given for the purchase of capital asset is not allowable u/s.37(1) of the I.T. Act. The decisions relied on by the AR of the assessee in case of "Chinav Forest Co. vs. CIT" and other decisions are not applicable to the facts of the present case because capital expenditure and personal expenditure is not allowable deduction u/s.37(1) of the I.T. Act, hence not helpful to the assessee. In totality of facts and circumstances it is held that assessee is not eligible for claiming bad debts u/s.36(1)(vii) and also 9 ITA No.6859/M/2014 M/s. Sirius Pharmaceuticals Pvt. Ltd.

business loss u/s.37(1) of the I.T. Act of Rs.1,40,90,240/-. Thus the disallowance made by the AO is upheld and the ground of appeal is dismissed."

Being aggrieved by the order of the CIT(A) on this issue, the assessee has come in appeal before us.

7. We have considered the rival contentions and have also gone through the records. The Ld. AR of the assessee has brought our attention to the various clauses of the "TOLL MANUFACTURING AGREEMENT" dated 6th Feb, 2006 entered into between the assessee and Thai Chem India Pvt. Ltd. It has been mentioned in the agreement that Thai Chem India Pvt. Ltd has a manufacturing facility at Mahad, District Raighad; The assessee has proposed to take on lease a plant machinery thereon and has installed new equipment at its cost and has agreed to invest additional capital necessary for equipment and for funding working capital requirements to manufacture products; Thai Chem has agreed to securities all SIRUS investments; Thai in the past has taken substantial loans from Sirus and has agreed to repayments from the revenue obtained by Thai from others and as well from the agreement with Sirus; The machinery installed by SIRUS shall remain its exclusive property; Thai Chem has agreed to repair and maintain in proper condition the Manufacturing facility; Thai Chem shall manufacture products for and on behalf of SIRUS; SIRUS shall supply raw material and packaging material to the Thai Chem and such raw material and packaging material shall remain the exclusive property of SIRUS; SIRUS shall maintain a separate Bank Account wherein it shall deposit the requisite amount that will be payable by SIRUS to Thai Chem as manufacturing expenses as detailed in Annexure V; All payments will be subject to TDS; Manufacturing Expenses shall mean all expenditure incurred by Thai Chem in the manufacturing of the product including labour and 10 ITA No.6859/M/2014 M/s. Sirius Pharmaceuticals Pvt. Ltd.

personal salaries, office supply, lease rents, repair of maintenance, interest, loan repayments etc. etc. The ld. AR of the assessee has further relied upon confirmation of accounts by the Thai Chem as standing in the books of accounts of the Thai Chem. It is the contention of the assessee that it has maintained two accounts of M/s. Thia Chem Pvt. Ltd one was advance account which shows the outstanding amount of Rs.3,72,07,221/- which was to be adjusted against the purchase of raw material and other one was advance account against the labour job carried out which was shown outstanding of Rs.1,48,22,932/- out of these two amounts, the sum of Rs.1,40,90,240/- was claimed as not recovered hence written off.

8. We find that earlier the Ld. CIT(A) had allowed the claim of the assessee without examining the nature and individual details of advances given by the assessee to Thai Chem by way of a non-speaking order. The Tribunal has remanded the matter to re-examine the issue and pass a speaking order. However this time again the Ld. CIT(A) without examining the item wise details of advances/ expenses has disallowed the claim by observing that personal expenditure advanced and advance given for the purchase of capital asset is not allowable u/s.37(1) of the I.T. Act. The Ld. CIT(A) has failed to give finding as to which part of the advance was on capital account and which part of money was advanced or used for personal purposes. He has also failed to examine the claim of the assessee as regards the nature of the advances which were given for business/working capital purposes. The order of the Ld. CIT(A) on this issue therefore cannot be said to be a reasoned order as the same suffers from ambiguities, hence not sustainable in the eyes of law. We accordingly set aside the order of the Ld. CIT(A) on this issue and restore the issue to the file of the AO with a direction to examine the item wise details of advances given by the assessee to Thai 11 ITA No.6859/M/2014 M/s. Sirius Pharmaceuticals Pvt. Ltd.

Chem and give a specific finding as which part of the amount was advanced or utilized for capital purposes or personal purposes and which part for revenue purposes. Whether the amount advanced was secured by Thai Chem as per the terms of the agreement and whether any part of the same has been recovered by the assessee. The AO after examining the evidences and details presented on the file shall decide the issue a fresh as per provisions of the law. It is made clear the amount advanced/ utilized for business/revenue purposes will be allowable as business loss under section 28 read with section 37(1) of the Act. Needless to say that the AO will give proper opportunity to the assessee to furnish the required details and present its case.

Ground No.3 &4and 6&7:

9. The assessee has claimed that an another amount of Rs.1,40,90,240/-

had been credited to the P&L account under the head 'Sundry balances Written Off'. It has been claimed that said amount was part of the provision of doubtful advances amounting to Rs.5,47,67,653/-which was debited to the P&L account in the previous year but the same has been disallowed in the computation of income for the previous year AY 2007-08. This amount therefore has been credited into the P&L account as an accounting entry and can not be treated as an item of income. The Ld. CIT(A) however has observed that the AO has not made any separate addition of this amount while assessing the income of the assessee for the year under consideration.

The Ld. AR ,before us, has submitted that the this issue had been restored by the Ld. CIT(A) to the file of the AO for verification of the claim of the assessee vide order dated 19.07.2011 in the first round of litigation. He has further submitted that above stated issue has not been set aside by the Tribunal to the Ld. CIT(A) for adjudication a fresh as the revenue had not taken this 12 ITA No.6859/M/2014 M/s. Sirius Pharmaceuticals Pvt. Ltd.

issue in its grounds of appeal before the Tribunal during first round of litigation.

10. We have considered the contention of the Ld. AR. We find from the assessment order that though no separate addition has been made by the AO in the assessment order, yet he has disallowed the claim of the assessee in respect of provision for diminution in value of Plant and machinery of Rs.67,19,604/- and of provision for doubtful advances of Rs.13,09,306/- totalling Rs.80,28,910/-, while computing the book profits under section 115JB. While disallowing the said claim, the AO observed that the assessee had no where written that the said amount was on account of provision of doubtful advances debited last year which was disallowed in computation and had been written back during the year under consideration. We further find that the issue relating to the disallowance of the claim of the assessee in respect of provision for diminution in value of Plant and machinery of Rs.67,19,604/- and of provision for doubtful advances of Rs.13,09,306/- while computing the book profits under section 115JB has been raised by the assessee before the CIT(A). The Ld. CIT(A) vide para nos. 6 to 6.3 of the impugned order has dealt with the issue and has confirmed the disallowance holding that the AO has rightly added the said amount of Rs.80,28,910/- to the book profits as per explanation (1) of clause(i) of section 115JB. We further find that the assessee vide Ground No. 6 of the appeal, before us, has contested the applicability of the provisions of section 115 JB of the Act and further vide Grounds No.7 of the appeal has raised the issue of disallowance of provision of bad debts written back while computing the income of the assessee u/s 115 JB. We find that the two separate issues have been intermingled by the lower authorities and that separate findings are required to be given in relation to the issues raised vide Grounds No. 3&4 and Ground Nos.6 &7 respectively. We therefore restore the 13 ITA No.6859/M/2014 M/s. Sirius Pharmaceuticals Pvt. Ltd.

above issues to the file of the AO to separately examine the issues raised vide Grounds No.3 &4 and 6& 7 respectively and decide the same as per the provisions of law.

Ground No.5

11. The Ld. AR of the assessee has stated at bar that as per instructions of his client, he does not press ground No. 5 of the appeal. He has also noted and signed in this respect on the appeal memo. The ground No.5 is therefore dismissed being not pressed.

12. In the result, the appeal of the assessee is partly allowed for statistical purposes.

Order pronounced in the open court on 24.06.2015.

Sd/- Sd/- (R.C. Sharma) (Sanjay Garg) ACCOUNTANT MEMBER JUDICIAL MEMBER

Mumbai, Dated: 24.06.2015. * Kishore, Sr. P.S.

Copy to: The Appellant The Respondent The CIT, Concerned, Mumbai The CIT (A) Concerned, Mumbai The DR Concerned Bench //True Copy// [

By Order

Dy/Asstt. Registrar, ITAT, Mumbai.