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2009 (4) TMI 535 - AT - Income TaxDisallowance on bad debts and liquidity damages - debt involving the governmental agencies - assessee is under contractual obligation to make the payments on account of delayed deliveries - AO disallowed the same stating that the assessee has not filed any evidence that the said debts have become bad - the proposition that the onus is on the assessee to furnish that the relevant details when claims are made. HELD THAT - It is noticed that the liquidity charges are actually business expenditure which is in the form of enhanced cost paid by the assessee in view of the delayed delivery of the orders. So far as bad debt is concerned in our opinion it is the debt squarely covered by the Special Bench decision in the case of Oman International Bank SAOG 2006 (5) TMI 117 - ITAT BOMBAY-H . Considering the factual matrix of the ground we are of the considered opinion that the assessee must succeed on this issue. Accordingly ground 1 of the assessee is allowed. Disallowance on advances Written off - assessee failed to discharge the onus by furnishing requisite evidences - assessee has argued stating that the said amounts were advanced to the suppliers which have become bad and therefore the assessee has written them off in the books of account considering the smallness of the amounts. HELD THAT - Paper book does not contain any information as to the names of the parties involved and continuation of the business transactions with the said parties if any in the subsequent periods. We have also perused the Bombay High Court judgment in the case of Oman International Bank SAOG 2009 (2) TMI 54 - BOMBAY HIGH COURT . Thus the judgment has established the law on the issue of bad debts. Only restriction is with regard to the existence of good reason for AO to deem it otherwise. To exclude the said reason of AO the undisputed facts of the absence of the details is the limiting factor for us to decide the issue conclusively. The claim of the assessee has to be allowed once the debt involving a party is written off by the assessee in the books of account. Paradoxically the assessee cannot continue to have business transactions with the same party in respect of whom the debt is written off. We are of the considered opinion that the issue must go to the files of AO for the limited purpose of examining if the assessee continues to have business transactions with the said parties in respect of whom the debt is written off. If that finding of AO is affirmative it constitutes a good reason referred to above in the judgment of the High Court. AO shall grant opportunity of being heard to the assessee. Accordingly ground 2 is set aside. Disallowance on payments of sale commission - assessee has made the payment to M/s. Pramat Technical Services (P.) Ltd. as per the written contract between the assessee and the commission agent - AO held that the assessee failed to discharge the onus in this regard and proceeded to disallow the same treating the same as a bogus claim. HELD THAT - It is noticed that it is not the case of the revenue that the said payments are made in violation of any criminal laws such as Prevention of Corruption Act etc. Their case revolve around the discharging of the onus in matters of submitting the details as well as the details of rendering of the services. The said objection of the revenue is not bona fide in the light of the details furnished in the paper book especially enlists the duties responsibility of an agent the details of the commission and other conditions. From the contract it is evident that the commission agent is under obligation to generate the demand and also the requirements for the products of the company from the corporates such as NTPC and UPSEB and procure the orders. Accordingly the assessee got the orders through the agent and commission became payable. In the process the assessee furnished requisite basic information to AO who was not satisfied with the said information. Considering the quantum of information available with AO in the matter AO should have attempted to disprove the contents of the agency agreement or payments made through the banks are bogus or money has come back to the Assessee Company by way of cash etc. and in the process AO has not done his part of the duty in the matter. Therefore in our considered opinion the assessee has discharged the duty of furnishing the basic information. Accordingly the Apex Court judgment in the case of Kaveri Engg. Industries Ltd. 1992 (7) TMI 131 - ITAT MADRAS-B has no application to this ground. Accordingly ground 3 of the assessee is allowed. MAT - adjustment of provision for gratuity u/s 115JB - objection of the revenue is with regard to the assessee s failure to follow the AS-15 and the actuarial method referred therein and not disputed the quantification of the provision of gratuity - assessee failed to follow the actuarial valuation in regard to gratuity for determining actual liability. AO added back the same to the book profits u/s 115JB - assessee has argued stating that AO has carried away by the word provision ignoring the fact that it is an ascertained liability. HELD THAT - It is noticed that the said provision of section 115JB are code by itself and determination of the book profits has to be done only as per the provisions of section 115JB which unambiguously provides for exclusion of provisions of ascertained liabilities for the purpose of book profits . In this regard we have perused the Apex Court judgment in the case of Bharat Earth Movers 2000 (8) TMI 4 - SUPREME COURT . Thus although the provision are not allowable as deduction certain provisions which are capable of estimation with reasonable certain without quantification are allowable as they are ascertainable. On finding that the actual quantification is not a legal necessary in matters of ascertainment of the gratuity we are of the opinion that the provision of gratuity in the assessee s case is capable of being estimated with reasonable certainty and therefore it is not a contingent or unascertained liability. Thus it is a ascertained liability and the same outside scope of the provisions of clause ( c ) of the Explanation 1 to section 115JB warranting no addition to the books profits . Accordingly the ground 4 of the assessee is allowed.
Issues Involved:
1. Bad debts written off and liquidated damages. 2. Advances written off. 3. Commission paid. 4. Adjustment of provision for gratuity under section 115JB. Issue-wise Detailed Analysis: 1. Bad Debts Written Off and Liquidated Damages: The assessee claimed a deduction for bad debts written off amounting to Rs. 2,070,012, which included Rs. 590,009 as bad debts and Rs. 1,480,003 as liquidated damages. The Assessing Officer disallowed the claim due to a lack of evidence proving the debts had become bad, citing the Supreme Court's ruling in CIT v. Calcutta Agency Ltd. The CIT(A) upheld this disallowance, relying on the Madras High Court judgment in South India Surgical Co. Ltd. The assessee argued that the Special Bench decision in Dy. CIT v. Oman International Bank SAOG supported their claim. The Tribunal found that the liquidated damages were business expenditures related to delayed deliveries and that the bad debt of Rs. 590,009 was covered by the Special Bench decision. Thus, the Tribunal allowed the assessee's claim, reversing the CIT(A)'s decision. 2. Advances Written Off: The assessee claimed a deduction for advances written off amounting to Rs. 12,265, which the Assessing Officer disallowed due to insufficient evidence. The CIT(A) confirmed the disallowance. The assessee argued that these advances were to suppliers and had become bad, suggesting a remand to the Assessing Officer for verification. The Tribunal referred to the Bombay High Court judgment in Oman International Bank SAOG, which stated that once a debt is written off as bad, it should be prima facie accepted unless the Assessing Officer has good reasons to believe otherwise. The Tribunal remanded the issue to the Assessing Officer to verify if the assessee continued transactions with the suppliers in question, directing that the claim be allowed if no such transactions occurred. 3. Commission Paid: The assessee claimed a deduction for commission payments amounting to Rs. 1,793,399 to M/s. Pramat Technical Services (P.) Ltd. The Assessing Officer disallowed the claim, treating it as bogus due to a lack of evidence of services rendered. The CIT(A) upheld the disallowance. The assessee provided detailed documentation, including a written contract and evidence of services rendered, arguing that the commission was paid per the contract terms. The Tribunal found that the assessee had provided sufficient basic information and that the Assessing Officer had not disproved the claim. The Tribunal allowed the assessee's claim, reversing the CIT(A)'s decision. 4. Adjustment of Provision for Gratuity under Section 115JB: The Assessing Officer added back the provision for gratuity amounting to Rs. 3,46,107 to the book profit under section 115JB, citing the assessee's failure to follow actuarial valuation. The CIT(A) confirmed this adjustment. The assessee argued that the provision was an ascertained liability, not contingent, and should not be added back under section 115JB. The Tribunal referred to the Supreme Court judgment in Bharat Earth Movers v. CIT, which established that liabilities capable of being estimated with reasonable certainty are not contingent. The Tribunal concluded that the provision for gratuity was an ascertained liability and should not be added back under section 115JB, thus allowing the assessee's claim. Conclusion: The Tribunal partly allowed the assessee's appeal, granting relief on the issues of bad debts written off, liquidated damages, commission paid, and adjustment of provision for gratuity, while remanding the issue of advances written off for further verification by the Assessing Officer.
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