2014 (11) TMI 224 - HC - Income Tax

Treatment of reversal of incorrect bill entries - Whether the Tribunal was right in not treating the reversal of incorrect bill entries as write off of bad debts Held that - By correcting the sale price in the invoice and filing a return on such income on the basis of the corrected invoice, the assessee cannot claim benefit of bad debt for the same financial year, viz., 2004-05 - the sum on the excess billing by the assessee on account of the wrong application of surcharge of Ferry Moly and Nickel, which were used in the manufacture of products supplied to the customer, cannot partake the character of the bad debt - the assessee found that it had billed the purchaser incorrectly and therefore issued credit notes and reduced the bill amount and correspondingly revised the debts as well - the Tribunal was correct in holding that it is not a case of writing off a bad debt - The buyer was not legally or lawfully bound to pay the surcharge amount to the assessee and the assessee was not legally entitled to recover the same from the buyer - it cannot be said that there is an of element of bad debt, which has to be written off. The assessee had complied with the requirement of the RBI Master circular C-15 for regularising the transaction, which is an export sale - The excess amount on account of surcharge which is not lawfully recoverable has to be set right, for which, permission of the Reserve Bank of India is required in a procedure prescribed - That by itself will not make the amount of ₹ 1.68 crores a bad debt - If the assessee does not follow the procedure, it would entail consequent legal action under the relevant provisions of the Foreign Exchange laws - the assessee had noticed the error and rectified the same in the balance sheet before the return was filed - It offered to tax the actual income and deleted the income, which is relatable to the erroneous claim under surcharge - Hence, the Tribunal was justified in holding that there is no question of tax on a hypothetical income the order of the Tribunal is upheld as such no substantial question of law arises for consideration - Decided against Revenue.

Summary

Issues:
1. Disallowance of excess billing as bad debt under Section 36(2) of the Income Tax Act.
2. Rectification of billing error and treatment of excess amount as bad debt.
3. Interpretation of RBI circular C-15 in relation to the transaction.
4. Appeal against the Tribunal's decision on the treatment of billing error.

Issue 1: Disallowance of excess billing as bad debt under Section 36(2) of the Income Tax Act

The case involved the disallowance of Rs. 1.68 crores by the Assessing Officer, relating to excess billing made by the assessee to a customer. The AO disallowed the claim on grounds of the mercantile system of accounting and the need to offer income for tax purposes when bills are raised. The Commissioner of Income Tax (Appeals) allowed the appeal, stating that the excess billing was rectified through credit notes, and it did not constitute bad debt as the buyer was not legally bound to pay the excess amount. The Tribunal upheld this decision, emphasizing that the correction of billing error did not equate to a bad debt write-off.

Issue 2: Rectification of billing error and treatment of excess amount as bad debt

The Tribunal noted that the assessee rectified the excess billing error by issuing credit notes and reducing the bill amount, which was not akin to writing off bad debts. The Tribunal emphasized that the excess billing was due to an error and not a contractual obligation on the part of the buyer to pay the excess amount. The Tribunal held that taxing hypothetical income was not justified when the error was rectified, and there was no legal right to recover the excess amount from the buyer.

Issue 3: Interpretation of RBI circular C-15 in relation to the transaction

The Tribunal highlighted that the assessee obtained permission from the authorized dealer, Corporation Bank, to regularize the transaction in compliance with RBI Master Circular C-15 for export sales. The excess amount on account of surcharge was not legally recoverable, and rectifying this error did not constitute a bad debt. The Tribunal emphasized that following the RBI circular's procedure did not transform the excess amount into a bad debt requiring write-off.

Issue 4: Appeal against the Tribunal's decision on the treatment of billing error

The Revenue challenged the Tribunal's decision, arguing that the assessee could not claim the benefit of bad debt for the financial year 2004-05 due to the correction made in the return for the same year. However, the High Court upheld the Tribunal's decision, stating that the excess billing error did not amount to a bad debt as no goods were sold and delivered to support the excess amount. The Court affirmed that the Tribunal correctly ruled out the taxation of hypothetical income and found no error in the Tribunal's order.

In conclusion, the High Court dismissed the Tax Case (Appeal) as no substantial question of law arose, affirming the Tribunal's decision that the rectification of the excess billing error did not constitute a bad debt write-off. The Court emphasized that the excess amount was not recoverable and did not involve a transaction of bad debt, thereby upholding the Tribunal's decision.