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(Fortnightly inputs for professionals and executives)
Volume XXIII Part 2 April 25, 2018
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When the accounts are finalised at the close of the year, the profit arising
consequent to accounting of deal on ‗due‘ basis is included in the profit
worked out on accrual basis of accounting.
If, later, the sum due is not realised, it becomes a loss and the profit
accounted for needs to be reversed to that extent to arrive at the actual
profit of the undertaking. Such non-realised amounts are termed as ‗bad
debts‘ in accountancy parlance.
When the accounts are finalised at the close of the year, the
profit arising consequent to accounting of deal on ‗due‘ basis
is included in the profit worked out on accrual basis of
accounting.
Section 36 of the Act titled ‗other deductions‘ vide sub-section (1) provides
that the deductions provided for in the following clauses shall be allowed in
respect of the matters dealt with therein in computing the income referred
to in section 28:
[vii] Subject to the provisions of sub-section (2), the amount of any bad debt
or part thereof, which is written-off as irrecoverable in the accounts of the
assessee for the previous year.
[3.1] The proviso and explanation to the sub-clause (vii) (supra) provide
that:-
[a] The amount of deduction shall be limited to the amount by which such
debt or part thereof exceeds the credit balance in the provision for bad and
doubtful debts made in the account books [proviso].
[b] The bad debt written off in accounts shall not include any provision for
bad and doubtful debts made in the accounts (Expl. I).
[c] For the purposes of the proviso to clause (vii) of this sub-section and
clause (v) of sub-section (2), the account referred to therein shall be only one
account in respect of provision for bad and doubtful debts under clause
(viia) and such account shall relate to all types of advances, including
advances made by rural branches.
[4] Conditions for allowability of bad debts as deduction (from the AY 1989-
90)
[ii] It should have been written off in the books of account by the assessee
as bad debt;
[4.1] If the aforesaid conditions are satisfied, the amount becoming bad
debt, can be claimed as deduction for income tax assessment by an
assessee.
This issue came in for the consideration of the Madras HC in the case of
CIT, Chennai v. Shriram Transport Finance Co. Ltd. – AY 2006-07 – (2017)
246 Taxman 89 (Madras).
[a] Facts
The case related to an NBFC, which maintained two sets of accounts, one
set in accordance with the provisions of the Companies Act and the
mandate of the RBI as applicable to an NBFC. In parallel, it maintained
books in accordance with the provisions of the Act for the purpose of
computation of income thereunder. The assessee, in finalising its corporate
accounts, made a provision in respect of debts advanced by it that were not
realisable. For the purpose of income-tax, the bad debts were written-off in
the profit and loss account and claimed as a deduction in the computation
of income in terms of section 36(1)(vii) of the Act. The claim was disallowed
by the AO but allowed by the CIT (Appeals) and the Tribunal, against which
the I.T. Dept. filed appeal to the HC.
The issue for the HC‘s consideration was whether the claim for bad debts by
The HC has upheld the Tribunal‘s order holding that the maintenance of
two separate sets of accounts, one for purposes of the Companies Act and
the other for income-tax, is perfectly in order and there is no embargo
against the same. The books maintained for the purposes of the Companies
Act, duly approved by the Board of directors and placed before the
shareholders at the annual general body meeting of the company, contain,
inter-alia, profit and loss account for the relevant previous year prepared in
accordance with the provisions of Parts-II-III of Schedule VI to the
Companies Act, 1956, will form the basis of an assessment in terms of
Chapter XII-B, Special Provisions relating to certain companies, that provide
for an assessment of minimum alternate tax (MAT). The I.T. Act requires for
the assessee to follow a parallelly consistent method of accounting in
accordance with section 145 thereof. The books maintained for the purposes
of the I.T. Act shall comply with the provisions of section 145 and shall form
the basis for an assessment thereunder. The error in the order of
assessment is the juxtaposition of the two books by the AO. The creation of
a provision for bad debts in the corporate accounts thus does not, in any
way, impact the claim of bad debt u/s 36(1)(vii) of the Act in the regular
computation of income.
[ci] HC‘s displeasure
The HC expressed displeasure on the I.T. Dept.‘s departure from the similar
past practices followed by the assessee and accepted by the I.T. Dept. from
the year 1994 onwards up to the AY 2005-06. It felt that departure from the
accepted position in the past should have been supported by some reasons
and objection should not have been taken in an arbitrary manner. The HC‘s
observations in this context are worth reproduction in this write-up:
―As would be apparent from the orders of the Tribunal dated 16.12.2010
and 21.4.2006, the assessee has been consistent in the methodology
followed both in respect of maintenance of books as well as the treatment of
bad debts. The SC in the case of CIT v. Excel Industries Ltd. (2013) 358 ITR
295/219 Taxman 379/38 taxmann.com 100, reiterates the proposition that
an issue consistently decided in the assessee‘s favour for several years
These Corporations control liquor sales in the respective state and have
special privilege under the State Excise Act, i.e., exclusive rights to
wholesale foreign made foreign liquor (FMEL), Indian made foreign liquor
(IMFL) and beer in the State. The operations are governed by liquor sourcing
policy. The modus operandi is like this - manufacturer/ supplier places an
offer to supply liquor, based on the demand prevailing in the respective
locations. Thereafter, an order for supply (OFS) is issued to the
manufacturer/ supplier. Goods invoiced and supplied against OFS are
stored in depots of the Corporation. However, risk reward of such stocks
vest in the supplier, though Corporation gets such stocks insured at its own
cost. Manufacturer/ suppliers undertake the responsibility for creating
demand for the goods supplied to the Corporation. Payment for the stocks
supplied by the manufacturer/ suppliers is made only after such stocks are
sold. Stocks remaining unsold after a specified period are subject to levy of
inactive stock penalty charges or margin on drain out/ return to distilleries
at rates specified in the Liquor Sourcing Policy (LSP). This income is
recognised in the books of accounts of Corporation.
The illustrative list of income heads, apart from trading margin (sales) are
generally in the following form –
Scarp sales
Demurrage
Handling charges
Prior to 1st July, 2012 when negative list approach was introduced in service
(iv) procurement of goods or services, which are inputs for the client; or
Explanation: For the removal of doubts, it is hereby declared that for the
purposes of this sub-clause, ―inputs‖ means all goods or services intended
for use by the client;
and includes services as a commission agent, but does not include any
activity that amounts to manufacture of excisable goods.
In the above definition, ‗commission agent‘ meant any person who acts on
behalf of another person and causes sale or purchase of goods, or provision
or receipt of services, for a consideration, and includes any person who,
while acting on behalf of another person—
Revenue assumed that the appellant had provided the taxable business
auxiliary service (BAS) to manufacturers of liquor/ distilleries and issued
the show cause notice dated 11-7-2008, in substance alleging that the
appellant had provided the taxable BAS and had willfully suppressed
information regarding liability to service tax by failing to file returns,
disclosing the income received and failing to remit service tax, with an
intent to evade payment of service tax. The show cause notice proposed
assessment and levy of service tax, interest and penalties. The show cause
notice proposals were confirmed by the adjudication order, after a due
process of considering the appellant‘s response, analysis of the material on
record and hearing the appellant.
The court tested the taxability in given facts of the case on two grounds,
viz., (a) whether the transaction of purchase and sale of liquor falls within
the ambit of business auxiliary services, and (b) whether, if even if it is held
to be service, it is a service of the kind mentioned in various clauses of
section 65(19) which defines business auxiliary services. The court relied
upon and followed the decision in following two cases:
―9. It is not disputed that if the Corporation was engaged in sale and
purchase of liquor for the State, then no service tax was payable.
10. The Tribunal has recorded a finding of fact that the Corporation was
engaged in purchase and sale of liquor and could not be considered as
clearing and forwarding agent for the State Government. It is finding of fact.
No illegality in the finding has been pointed out.‖
Hindustan Coca Cola Beverages Pvt. Ltd. v. CIT-III Jaipur decided by the
Rajasthan High Court on 11.07.2017 (DB ITA No. 205 of 2005) also covered
the similar controversy.
Based on these facts, legal provisions and precedents, the High Court has
decided in favour of beverage Corporation and against the revenue.
However, the CBIC may move to the Supreme Court where the verdict is
against the Government. This has been indicated in Circular No. 39 dated
03.04.2018 wherein it is has been hinted in relation to resolution of struck
TRAN-1 and filing of GSTR-3B that the Government has not accepted
blanket opportunity to file TRAN-1 but only in cases where technical
glitches crept in. It has advised the departmental officers that courts may be
suitably informed and if needed review or appeal may be filed.
Here are a few more judicial pronouncements for information and guidance
of various stakeholders. It is expected that the litigation is bound to go up
as time passes by.
In J.J. Fabrics v. Kerala Authority for Advance Ruling Kerala State Goods &
Service Tax [2018] 91 taxmann.com 402 (Kerala) ; (2018) 4 TMI 203
(Kerala), where no action on part of revenue had been taken to decide Ext.
P1 application preferred by assessee for advance ruling, therefore,
competent authority was directed to take a decision on said application
after affording an opportunity of hearing.
Reckoning time limit for investment under section 54EC: The assessee
entered into a development agreement and as per the terms of the
agreement, the possession of the property to be given after receipt of entire
consideration. Hence, even if the deed was executed the time limit of 6
Volume XXIII Part 2 April 25, 2018 16 Business Advisor
months for making investment must be reckoned from the date of giving the
possession to the developer (CIT v Dr Arvind S. Phake (2018) 401 ITR 96
(Bom)).
Two agreements, viz. for supply of plant/ equipment and another for
supervision of installation: There are two separate agreements, viz. one for
supply of plant and equipment for which the customs duty was paid by the
Indian company and another agreement provides for supervision of
installation. Technicians of non-resident visited India for short duration and
were paid for services after deduction of tax at source. The supply of plant