1989 (5) TMI 78 - AT - Income Tax

Issues Involved:
1. Disallowance of bad debts of Rs. 30,000.
2. Disallowance of Rs. 37,468 as bonus payment.
3. Disallowance of weighted deduction under s. 35B on Rs. 42,594 paid to a foreign agent.

Detailed Analysis:

1. Disallowance of Bad Debts of Rs. 30,000:
The primary issue revolves around whether the CIT(A) erred in confirming the disallowance of bad debts of Rs. 30,000. The debtor, M/s India Tube Mills & Metal Industries Pvt. Ltd., withheld the amount citing defective design. The assessee wrote off the amount as bad debt, but the ITO disallowed the claim, stating that merely writing letters does not prove the debt became bad, and no legal action was taken.

The CIT(A) upheld the disallowance, arguing that the debtor was financially sound and the assessee did not prove the debt became bad in the relevant assessment year. The assessee contended that the debt was written off due to the debtor's refusal to pay and threats to claim damages. The assessee relied on the Gujarat High Court's decision in Sarangpur Cotton Manufacturing Co. Ltd. vs. CIT, which held that writing off the debt in the books is prima facie evidence of it being irrecoverable.

The Tribunal found that the debtor had consistently refused payment and threatened to claim damages, and the assessee had written off the amount considering these business aspects. The Tribunal disagreed with the department's argument that the debt should have been written off in the assessment year 1981-82, stating that the assessee could wait for a reasonable period for recovery. The Tribunal allowed the assessee's claim for bad debt in the year under consideration.

2. Disallowance of Rs. 37,468 as Bonus Payment:
The second issue concerns whether the CIT(A) erred in confirming the disallowance of Rs. 37,468 paid as bonus. The assessee paid this amount in addition to Rs. 48,000 as per the Bonus Act. The ITO disallowed the additional bonus, stating it exceeded the amount payable under the Bonus Act, and the CIT(A) upheld this view.

The assessee argued that the additional bonus was an ex-gratia payment as incentive or customary bonus, allowable under s. 37(1) of the Act. The Tribunal noted the Madras High Court's decision in CIT vs. Sivanandha Mills Ltd., which held that s. 36(1)(ii) applies only to bonus paid under the Bonus Act, and incentive or customary bonuses are allowable under s. 37.

The Tribunal found that the assessee had not provided clear evidence that the additional bonus was customary or incentive bonus. Therefore, the Tribunal remitted the matter back to the ITO, directing the assessee to provide evidence that the bonus falls under these categories. If proven, the claim should be allowed.

3. Disallowance of Weighted Deduction Under s. 35B on Rs. 42,594:
The final issue is whether the CIT(A) erred in upholding the disallowance of weighted deduction under s. 35B on Rs. 42,594 paid to M/s Overseas Trading Services, Colombo. The ITO disallowed the claim, stating that weighted deduction on commission paid is not allowable under cl. (iii) of s. 35B(1)(b) as it was omitted w.e.f. 1st April, 1981, and also not under cl. (iv).

The assessee argued that the payment falls under sub-cl. (iv) of s. 35B(1)(b), which allows weighted deduction for maintaining an agency outside India for sales promotion. The Tribunal found that the payment was made to an agent outside India for promoting sales, aligning with the purpose of bringing foreign currency by exporting goods from India. The Tribunal disagreed with the department's reliance on the Southern Sea Foods case, noting it was not applicable as the commission in that case was paid within India.

The Tribunal accepted the assessee's claim and directed the ITO to allow the weighted deduction on the amount of Rs. 42,594.

Conclusion:
The appeal is partly allowed, with the Tribunal reversing the disallowance of bad debts and the weighted deduction, while remitting the bonus payment issue back to the ITO for further examination.

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