2004 (9) TMI 323 - AT - Income Tax

Approval from Committee on Disputes (COD) - reserve for export market development allowance - Investment Written Off. HELD THAT - We do not see any reason as to why export market development reserve should be differently construed. We therefore find that the issue is covered in favour of the assessee and against the Revenue by the judgment of the Hon ble Bombay High Court in the case of South India Insurance Co. Ltd. 1988 (12) TMI 4 - BOMBAY HIGH COURT No contrary judgment has been brought to our notice. Hence respectfully following the aforesaid judgment of the Hon ble Bombay High Court we hold that the learned CIT(A) was justified in deleting the additions made by the AO on account of reserve for export market development allowance for asst. yrs. 1982-83 to 1984-85. We therefore reject Revenue s ground of appeal in this respect as well. Investment Written Off - On consideration of the matter we find that the entries made in the assessee s books of account in this behalf are strictly in accordance with the guidelines issued by General Insurance Corporation. These guidelines permit the assessee to book a loss which has for all practical purposes been suffered on account of depreciation in value of investments beyond any reasonable hope of recovery. In such circumstances the guidelines permitted the insurance company to book the loss in the account rather than waiting for actual realisation of loss on sale of investment. Thus the amounts claimed by the assessee are to be understood as a loss on investments suffered by the assessee. Such loss can neither be considered an expenditure nor an allowance . We find support in this view from the judgment of the Hon ble Supreme Court in the case of General Insurance Corpn. of India vs. CIT 1999 (9) TMI 3 - SUPREME COURT . In that judgment the Hon ble Supreme Court held that spending in the sense of paying out or away of money is the primary meaning of expenditure . Expenditure is what is paid out or away and is something which is gone irretrievably. In that case the Hon ble Supreme Court held that certain amount set apart which is treated to be an expenditure for the purpose of Insurance Act 1938 cannot be treated so for the purpose of r. 5(a) of the First Schedule for the reason that the amount set apart did not fall to be considered as an expenditure in the ordinary meaning of the expression. As we hold the view that write off of investments claimed by the assessee represents loss and not expenditure nor allowance we hold that the AO erred in adding back the same in the computation of assessee s income chargeable to tax and similarly the CIT(A) erred in confirming the same. In view of the discussion we direct deletion of the addition made by the AO in respect of amounts written off by the assessee on account of depreciation in the value of investments. The appeals in ITA Nos. 3607/Del/1990 7815/Del/1989 5035/Del/1998 and 3910/Del/2000 were dismissed while the other appeals were partly allowed.

Summary

Issues Involved:
1. Approval from Committee on Disputes (COD)
2. Reserve for Doubtful Debts
3. Reserve for Export Market Development Allowance
4. Entertainment Expenditure Incurred Outside India
5. Deduction of Reserve for Bad and Doubtful Debts
6. Disallowance u/s 43B
7. Interest Not Recorded
8. Investment Written Off

Summary:

1. Approval from Committee on Disputes (COD):
The assessee, a public sector undertaking, required COD approval for prosecuting appeals. The necessary approval was filed in all appeals except ITA Nos. 5035/Del/1998 and 3910/Del/2000. These appeals were dismissed due to the absence of COD approval, with liberty to refile upon obtaining approval.

2. Reserve for Doubtful Debts:
The Revenue's appeals for AYs 1984-85, 1982-83, and 1983-84 disputed the deletion of additions by the CIT(A) on account of reserve for doubtful debts. The Tribunal followed the Delhi High Court's judgment in the assessee's own case for AYs 1974-75 and 1975-76, dismissing the Revenue's grounds of appeal.

3. Reserve for Export Market Development Allowance:
The Tribunal noted that the issue was previously decided in favor of the assessee for AY 1978-79. The Tribunal found that the reserve for export market development allowance could not be added to book profits for AYs prior to 1989-90, following the Supreme Court's judgment in General Insurance Corpn. of India vs. CIT and the Bombay High Court's judgment in CIT vs. South India Insurance Co. Ltd.

4. Entertainment Expenditure Incurred Outside India:
For AYs 1982-83 and 1983-84, the assessee conceded that entertainment expenditure incurred outside India is hit by s. 37(2A). The Tribunal restored the addition made by the AO.

5. Deduction of Reserve for Bad and Doubtful Debts:
For AY 1986-87, the Tribunal followed the Delhi High Court's judgment and rejected the Revenue's ground of appeal against the CIT(A)'s allowance of deduction for reserve for bad and doubtful debts.

6. Disallowance u/s 43B:
The Tribunal held that s. 43B, incorporated in r. 5(a) of the First Schedule from AY 1989-90, could not be applied to AY 1986-87. The CIT(A) was justified in deleting the disallowance of Rs. 14,76,232 made by the AO.

7. Interest Not Recorded:
For AY 1990-91, the Tribunal followed its previous decision in the assessee's case for AY 1986-87 and deleted the addition made by the AO on account of interest not recorded.

8. Investment Written Off:
The Tribunal held that the write-off of investments, in accordance with guidelines issued by the General Insurance Corporation, represented a "loss" and not an "expenditure" or "allowance." The AO erred in adding back the same, and the CIT(A) erred in confirming it. The Tribunal directed the deletion of the addition for AY 1990-91 and allowed the assessee's contention for subsequent years.

Conclusion:
The appeals in ITA Nos. 3607/Del/1990, 7815/Del/1989, 5035/Del/1998, and 3910/Del/2000 were dismissed, while the other appeals were partly allowed.