""
IN THE INCOME TAX APPELLATE TRIBUNAL "K" BENCH, MUMBAI
, . . ,
Before Shri Vijay Pal Rao, JM & and Shri N.K. Billaiya, AM
./ITA No. 3123 & 3124/Mum/2012
( / Assessment Years: 2005-06 & 2006-07)
M/s. Trigyn Technologies Ltd. Income Tax Officer-8(3)-3
/
Unit 27A, SDF01, Seeps Room No. 217, Aayakar Bhavan
Andheri (W), Mumbai 400096 Vs. M.K. Road, Mumbai 400020
. / PAN - AAACL2065K
/Appellant / Respondent
./ITA No. 3011/Mum/2012
( / Assessment Years: 2005-06)
Income Tax Officer-8(3)-3 M/s. Trigyn Technologies Ltd.
/
Room No. 217, Aayakar Bhavan Unit 27A, SDF01, Seeps
M.K. Road, Mumbai 400020 Vs. Andheri (W), Mumbai 400096
. / PAN - AAACL2065K
/Appellant / Respondent
/ Assessee by: Shri Vijay Mehta & Mr. Anuj Kisnadwala
/ Revenue by: S/Shri M.K. Chand & Vivek Perampurna
/ Date of Hearing:
28.11.2014
/Date of Pronouncement: 03.12.2014
/ O R D E R
Per N.K. Billaiya, AM.
ITA No. 3123/Mum/2012 and ITA No. 3011/Mum/2012 are cross
appeals by the assessee and the Revenue against the very same order of the
CIT(A)-15, Mumbai dated 24.02.2012 for AY 2005-06 and ITA No.
3124/Mum/2012 is appeal by the assessee against the order of the CIT(A)-
15, Mumbai dated 27.02.2012 for AY 2006-07. All these appeals were heard
together and disposed of by this common order for the sake of convenience.
2 ITA No. 3123/Mum/2012
M/s. Trigyn Technologies Ltd.
ITA No. 3123/Mum/2012 AY 2005-06
2. Assessee has raised five substantive grounds of appeal. Ground No. 1
to 4 relate to the disallowance on account of interest paid to bank
amounting to `3.25 crores and ground No. 5 is on account of transfer
pricing adjustment of `3,04,96,436/-.
3. Assessee is in the business of developing software and technical
services. The return for the year was filed on 27.10.2005 declaring total
income as Nil. The return was selected for scrutiny assessment and
accordingly statutory notices were issued and served upon the assessee.
During the course of assessment proceedings assessee was asked to explain
the claim of interest debited in the Profit & Loss Account vis-a-vis section
43B of the Act. The AO noticed that the assessee has an outstanding loan of
`23.34 crores. The loan was taken in earlier years from Global Trust Bank
(now Oriental Bank of Commerce). The loan was taken sometime in 2001
and no fresh loans were taken during the year. The AO further notices that
the assessee has paid total interest of `6.78 crores. It was claimed by the
assessee that the entire interest is paid on monies borrowed for the purpose
of business. Therefore there is no issue of disallowance of any part of
interest paid on term loans.
4. On disallowance under section 43B of the Act, it was claimed that due
to the arrangement with the Bank the interest has been paid in lieu of
dividend. Therefore the interest paid is neither on account of loan nor on
borrowings. The amount is paid on investment in preference shares by the
Global Trust Bank (now Oriental Bank of Commerce). Therefore provisions
of section 43B are not applicable.
5. The AO examined this submission of the assessee and came to the
conclusion that as per assessee's own admission the amount of `3.25 crores
is not in the nature of interest but the said sum is payable in lieu of
dividend on preference shares. Thus the amount is in the nature of dividend
which is not an expense chargeable to the profit but the same is an
application of income therefore not allowable as deduction under section
3 ITA No. 3123/Mum/2012
M/s. Trigyn Technologies Ltd.
36(1)(iii) of the Act. The AO accordingly added `3.25 crores to the returned
income of the assessee.
6. Aggrieved by this the assessee carried the matter to the CIT(A).
Assessee explained the nature of transaction with Global Trust Bank (now
Oriental Bank of Commerce). It was explained that the Bank has extended a
sum of `25 crores by subscribing to the preference shares of the assessee. It
was agreed by both the parties that compulsory payment of interest @13%
will be paid by the assessee if dividend is not declared by the assessee in
any year. It was further explained that the dividend is paid out of the
accumulated profit and since the assessee does not have any accumulated
profit the payment of 3.25 crores cannot be considered as dividend. The
CIT(A) was convinced that the amount of `3.5 crores payable is not dividend
but interest but at the same time the CIT(A) was of the opinion that the
liability of interest is towards the capital contribution by the Bank and
accordingly would fall under the realm of expenses which is capital in
nature and therefore not liable to be charged and debited in the Profit &
Loss Account. On applicability of provisions of section 43B of the Act the
CIT(A) agreed with the findings of the AO that interest has not been paid,
therefore disallowable under section 43B of the Act.
7. Aggrieved by this the assessee is before us. The counsel for the
assessee explained the nature of transaction as it was explained before the
lower authorities. It is the say of the counsel that the AO has grossly erred
in treating the liability of interest as dividend. The counsel further stated
that provisions of section 43B are also not applicable as the amount has
been borrowed from Global Trust Bank, which is not a scheduled bank
within the provisions of section 43B of the Act.
8. Per contra the learned D.R. vehemently submitted that even if the
liability is considered as interest the same is hit by the provisions of section
43B of the Act in as much as Global Trust Bank has been merged with
Oriental Bank of Commerce and Oriental Bank Commerce is a scheduled
bank. Therefore, provisions of section 43B of the Act clearly apply on the
facts of the case.
4 ITA No. 3123/Mum/2012
M/s. Trigyn Technologies Ltd.
9. We have considered the rival submission and carefully perused the
orders of the lower authorities. It is an undisputed fact that the loan from
Global Trust Bank was taken sometime in 2001 and since then the assessee
has been debiting its Profit & Loss Account by the amount of interest
payable on the borrowings. It is also an undisputed fact that in earlier years
the liability has been considered and accepted as towards interest. For the
first time the AO has changed the character of the liability from "interest" to
"dividend" which is against the rule of consistency. The AO himself has
observed that no fresh loans have been taken during the year under
consideration. Therefore the AO cannot change the nature of liability during
the year under consideration. However, at the same time we do not agree
with the contention of the learned counsel for the assessee that the liability
is not towards a scheduled bank because the amount has been borrowed
from Global Trust Bank. In our considered opinion when a bank is taken
over by some other bank then all the borrowers of the erstwhile bank have
to enter into fresh loan agreement with the new bank. Therefore, on the
facts of the case in hand once the Global Trust Bank has been merged with
Oriental Bank of Commerce the borrowings of the assessee has to be
considered as borrowings from Oriental Bank of Commerce and it is an
undisputed fact that Oriental Bank of Commerce is a scheduled bank,
therefore provisions of section 43B clearly apply on the facts of the case. The
disallowance of `3.25 crores made under section 43B of the Act is hereby
confirmed.
10. Before parting it would be pertinent to mention here that in
subsequent years, i.e. AY 2007-08 the bank has waived the loan and the
liability of interest and the assessee has shown the same as its income in AY
2007-08. If the AO finds that the same has been offered for taxation in AY
2007-08 then the same must be considered as per provisions of law. Ground
No. 1 to 4 are accordingly dismissed.
11. The next grievance of the assessee relates to transfer pricing
adjustment. During the year under consideration the assessee has entered
into the following international transactions with its associate enterprise: -
5 ITA No. 3123/Mum/2012
M/s. Trigyn Technologies Ltd.
Method
S.No. Name of the AE Nature of Transaction Amount (Rs.)
Used
Trigyn Technologies Inc., Software Consulting
1 4,00,75,694 CUP
USA Services
Trigyn Technologies Software Consulting
2 17,41,818 CUP
Europe GimbH Germany Services
Reimbursement of travel
Trigyn Technologies Inc,
3 and other expenses 23,44,995 -
USA
(payable)
Reimbursement of travel
Trigyn Technologies Inc,
4 and other expenses 78,06,850 -
USA
(Receivable)
Reimbursement of travel
Trigyn Technologies
5 and other expenses 1,22,385
Europe GimbH Germany
(payable)
The case was transferred to the Transfer Pricing Officer (TPO) under section
92CA of the Act for determination of arm's length prices of the international
transactions of the assessee. During the transfer pricing proceedings the
TPO observed that the CUP method has been applied without any internal
comparables and external third party comparables. Assessee has considered
its associate enterprise as the tested party for benchmarking software
development services and considering the availability of data TNMM should
not be considered as the most appropriate method. The TPO provided an
entire search process to the assessee and final set of comparable with the
arithmetic mean of 27.31 percent. Assessee made a detailed submission
before the TPO. After considering the submissions of the assessee the TPO
came to the conclusion that the AE was performing more complex functions
that the assessee. Therefore the AE could not be selected as tested party.
The TPO rejected the CUP method applied by the assessee as according to
him the CUP method applied by the assessee was without any internal
comparables and external third party comparable. The TPO adopted TNMM
as the most appropriate method. Out of the 19 comparables mentioned in
the show cause notice issued by the TPO the following comparables were
selected: -
1. Bodhtree Consulting Ltd.
2. Akshay Software Technologies Ltd.
3. Lanco Global Systems Ltd.
4. Exensys Software Solutions Ltd.
6 ITA No. 3123/Mum/2012
M/s. Trigyn Technologies Ltd.
5. Sankhya Infotech Ltd.
6. Sasken Network Systems Ltd.
7. GebbsInfotech Ltd.
8. VJIL Consulting Ltd.
9. Fourt soft Ltd.
10. Thirdware Solutions Ltd.
11. Compulink System Ltd.
12. The TPO finally made an upward adjustment of `3,04,96,436/-.
Assessee strongly objected to this adjustment before the CIT(A) and
reiterated its claim stating that CUP is the most appropriate method. It was
explained that the price charged by the AE to the end customers being
between uncontrolled entities, can be considered as the uncontrolled price
for this purpose. It was further contended that the assessee is also entitled
to the benefit of the proviso to section 92C(2) of the Act which confers an
option of the assessee of +/- 5% from the arm's length price. According to
the assessee the actual margin earned by it, which is 80%, is out of the +/-
5% of the arm's length margin of 82% as demonstrated by the assessee
before the CIT(A).
13. After considering the fact and the submissions of the assessee the
CIT(A) was of the opinion that the assessee has clearly misled itself in
interpreting and applying the CUP method in the manner that it has
applied. The CIT(A) observed the provisions of section 92C(2) of the Act read
with Rule 10B(1) and came to the conclusion that the CUP method applied
by the assessee is without existence of the comparable uncontrolled
transactions and as such erroneous and therefore such benchmarking
cannot be considered to be proper and acceptable. The CIT(A) finally
concluded by accepting the view of the TPO in benchmarking international
transactions of the assessee by accepting TNMM as the most appropriate
method.
14. Aggrieved by this the assessee is before us. The counsel for the
assessee reiterated what has been submitted before the lower authorities.
The counsel also filed an application for admission of additional grounds of
7 ITA No. 3123/Mum/2012
M/s. Trigyn Technologies Ltd.
appeal. The counsel also brought to out notice the decision of the Tribunal
in assessee's own case for AY 2004-05 and stated that the issue relating to
applicability of most appropriate method has been set aside by the Tribunal.
Therefore, the same view should be taken in the year under consideration
also.
15. Per contra the learned D.R. strongly opposed to the admission of
additional ground of appeal. It is the say of the learned D.R. that additional
grounds raised by the assessee need verification of facts, which is against
the ratio laid down by the Hon'ble Supreme Court in the case of NTPC 229
ITR 383. On merits of the case the learned D.R. strongly supported the
findings of the lower authorities.
16. We have given thoughtful consideration to the findings of the lower
authorities. We have also the benefit of the order of the Tribunal in
assessee's own case for AY 2004-05 in ITA No. 4855/Mum/2009. The entire
dispute boils down to the application of most appropriate method on the
facts of the case. The assessee is insisting on CUP method whereas the TPO
has adopted TNMM as the most appropriate method. On identical set of fact
the Tribunal in ITA No. 4855/Mum/2009 has considered this issue qua
ground No. 2 of that appeal. The order of the Tribunal reads as under: -
"13. Ground No.2 taken by the department is as under:
"On the facts and in the circumstances of the case and in law, the Id.
CIT(A) erred in deleting the addition on account of Transfer Pricing
adjustment made by the TPO without appreciating the facts of the
case"
14. Since the assessee was having total international transactions
with the Associated Enterprises of more than Rs.5 crores, AO made
reference to Transfer Pricing Officer u/s 92CA(1) for computation of
Arm's Length Price (ALP) of the international transaction u/s 92C.
Assessee filed a report u/s 92E in respect of international transaction
entered into with the related parties/Associated Enterprises.
15. Transfer Pricing Officer vide his order dated 14.12.2006 u/s
92CA(3) of the Act proposed addition of Rs.73,92,756/- by considering
that the Transactional Net Margin Method (TNMM) is the most
appropriate method for determining ALP as against comparable
uncontrolled price method (CUP) adopted by assessee.
16. In view of above adjustment proposed by TPO, AO made
8 ITA No. 3123/Mum/2012
M/s. Trigyn Technologies Ltd.
addition of Rs.73,92,756/-. It is relevant to state that assessee filed its
objections against the proposed adjustment before AO and stated that
TPO has erroneously resorted to TNMM method for determining ALP
even though direct comparables using the Comparable Uncontrolled
Price (CUP) method were available for determining ALP and
accordingly no adjustment should have been made to the value of
transactions. It is also relevant to state that assessee also filed details
of price charged from the Associated concern, but we do not consider it
relevant to state the same in detail for the reasons to be mentioned
hereinafter. The assessee disputed the said addition made by AO of
Rs.73,27,756/- before Id. CIT(A).
17. On behalf of assessee, it was contended that TPO adopted
TNMM and selected certain comparables to arrive at arithmetic mean
of 9.92 % as against CUP method selected by assessee for determining
ALP. The submissions as made by assessee before Id. CIT(A) and the
operational arrangement between the assessee and its Associated
Enterprises are stated in paras 3.2 to 3.6 of the impugned order and
Id. CIT(A) after considering the submissions of assessee vide para 3.8
has held that international transaction of assessee with its Associated
Enterprises are at ALP and accordingly deleted the addition made on
account of transfer pricing adjustment. Hence, department is in appeal
before the Tribunal.
18. At the time of hearing, Id.DR submitted that assessee did not
furnish external CUP data before TPO and the same were furnished
before ld.CIT(A). He submitted that Id. CIT(A) accepted additional
evidence without referring to the TPO. He submitted that international
CUP data were not available at all. He further submitted that for
application of CUP method standard of comparability are stringent and
should be accurate. On the other hand, Id. AR submitted that TPO in
his order has not discussed as to why CUP method is not applicable
though the Id. CIT(A) has stated to apply CUP method. He further
submitted that the TPO did not provide any details and names of
comparables to the assessee to arrive at arithmetic means at 9.92%. It
was also submitted that the assessee had entered into the
transactions with Associated Enterprises as well as non Associated
Enterprises and TPO considered the entire sales in determining ALP of
the assessee. Thus, TPO has made comparison at entity level instead
of transactional level. Ld. AR during the course of hearing relied on the
decisions of the Mumbai Bench of Tribunal in the case of DC1T V/s
Ankit Diamonds (2011) 43 SOT 523 and DCIT V/s Starlite (2010) 40
SOT 421 (MUM.) and submitted that ALP of international transactional
value has to be only at transaction level or at a level of a class of
transaction. That law does not permit determination of ALP of
international transaction, by comparing operating margins at entity
levels, or by taking overall industry level averages. Ld. AR further
submitted that details of data to apply internal CUP method were also
furnished to AO and referred pages 81 to 84 of the paper book but AO
did not accept the same.
9 ITA No. 3123/Mum/2012
M/s. Trigyn Technologies Ltd.
19. In view of above, Id. Representatives of both parties submitted
that the matter could go back to AO to decide the issue afresh
including the applicability of method to determine ALP.
20. Considering the above facts and submissions of Id.
Representatives of both parties, we agree that the issue requires
reconsideration by TPO and therefore matter be restored to AO to
determine ALP including applicability of method to be adopted. Hence,
we set aside the orders of authorities below and restore the matter to
the file of AO to determine ALP of transactions of the assessee with
Associated Enterprises afresh after giving due opportunity of hearing
to the assessee by a reasoned order and in accordance with law.
Hence Ground No.2 of the appeal taken by department is allowed for
statistical purposes."
17. Since the issue of application of most appropriate method has been
set aside by the Tribunal for reconsideration, respectfully following the
decision of the Coordinate Bench we set aside the orders of the authorities
below and restore the matter to the file of the AO to determine the ALP of
transactions afresh after giving due opportunity to the assessee. The AO is
also directed to consider any other evidence/details filed by the assessee
and the AO is also free to bring in other evidences on record after giving a
reasonable opportunity of being heard to the assessee.
ITA No. 3011/Mum/2012 AY 2005-06
18. The sole grievance of the Revenue is that the CIT(A) erred in allowing
the provision for doubtful debts of `96,11,238/- under section 36(1)(vii) of
the Act.
19. During the course of scrutiny assessment proceedings the AO noticed
that the assessee has debited `96,11,238/- under the head "other costs" as
bad debts and the provisions for doubtful debts has been simultaneously
credited. The AO was of the firm belief that the deduction is not allowable as
the amount is in the nature of provision. The AO accordingly added
`96,11,238/- to the returned income of the assessee. The assessee strongly
objected to this addition before the CIT(A). It was explained that the assessee
has debited to the Profit & Loss Account towards provisions for bad and
doubtful debts but the same is also been deducted from the debtors and
only the net debtors are reflected in the Balance Sheet. It was explained that
10 ITA No. 3123/Mum/2012
M/s. Trigyn Technologies Ltd.
the netting of debtors by the amount of provision of bad debts amounts to
writing off of the debts and therefore allowable as deduction under section
36(1)(vii) of the Act. Reliance was placed on the decision of the Hon'ble
Supreme Court in the case of Vijaya Bank vs. CIT 323 ITR 166.
20. After considering the facts and the submissions the CIT(A) was
convinced that the ratio laid down by the Hon'ble Supreme Court in the case
of Vijaya Bank (supra) squarely apply to the facts of the case and deleted the
addition made by the AO.
21. Aggrieved by this the Revenue is before us. The learned D.R. strongly
submitted that the ratio of the decision of the Hon'ble Supreme Court is that
each and every debtor's account should be closed by appropriate entries
before claiming bad debt as per the provisions of section 36(1)(vii) of the Act.
The learned D.R. explained the provisions of the relevant section and stated
that the findings of the CIT(A) are erroneous.
22. Per contra the learned counsel for the assessee reiterated what has
been submitted before the lower authorities.
23. We have carefully perused the orders of the authorities below. We
have also considered the financial statements of the assessee for the year
under consideration. We find that in Scheduled 18 under the head "other
costs" the assessee has claimed provision for doubtful debts at `96,11,238/-
We also find that in Schedule 9 under the head "sundry debtors" the total
debtors of `27,34,33,547/- have been reduced by `26,97,26,586/- and the
net debit balance of `37,06,961/- has been shown under the head "sundry
debtors" in the Balance Sheet. These factual figures clearly demonstrate that
the assessee has actually written off the debts, which is very much in line
with the decision of the Hon'ble Supreme Court in the case of Vijaya Bank
(supra). Observations of the Hon'ble Supreme Court are as under:-
"4. On the question whether it was imperative for the assessee to close
each and every individual account and its debtors in its books or a
mere reduction in the loans and advances to the extent of the provision
for bad and doubtful debt was sufficient, the answer given by the
Tribunal was that, in view of the decision of the Gujarat High Court in
the case of Vithaldas H. Dhanjibhai Bardanwala vs. CIT (1981) 21 CTR
11 ITA No. 3123/Mum/2012
M/s. Trigyn Technologies Ltd.
(Guj) 190 : (1981) 130 ITR 95 (Guj), the CIT(A) was right in coming to the
conclusion that, since the assessee had written off the impugned bad
debt in its books by way of a debit to the P&L a/c simultaneously
reducing the corresponding amount from loans and advances or debtors
depicted on the asset side in the balance sheet at the close of the year,
the assessee was entitled to deduction under s. 36(1)(vii) of 1961 Act.
This view was not accepted by the High Court which came to the
conclusion by placing reliance on a relied upon judgment in the case of
CIT & Anr. vs. Wipro Infotech Ltd. [reported at (2009) 27 DTR (Kar)
102--Ed.] (see p. 5 of the paper book), that, in view of the insertion of
the Explanation vide Finance Act, 2001, w.e.f. 1st April, 1989, the
decision of the Gujarat High Court in the case of Vithaldas H.
Dhanjibhai Bardanwala (supra) no more held the field and,
consequently, mere creation of a provision did not amount to actual
write off of bad debts, hence, these civil appeals.
5. At the outset, we may state that, in these civil appeals, broadly, two
questions arise for determination. The first question which arises for
determination concerns the manner in which actual write off takes
place under the accounting principles. The second question which
arises for determination in these civil appeals is, whether it is
imperative for the assessee-bank to close the individual account of each
debtor in its books or a mere reduction in the "loans and advances
account" or debtors to the extent of the provision for bad and doubtful
debt is sufficient ?
6. The first question is no more res integra. Recently, a Division Bench
of this Court in the case of Southern Technologies Ltd. vs. Jt. CIT (2010)
228 CTR (SC) 440 : (2010) 34 DTR (SC) 11 : (2010) 320 ITR 577 (SC) [in
which one of us (S.H. Kapadia, J.) was a party] had an occasion to deal
with the first question and it has been answered, accordingly, in favour
of the assessee vide para (25), which reads as under :
"Prior to 1st April, 1989, the law, as it then stood, took the view that
even in cases in which the assessee(s) makes only a provision in its
accounts for bad debts and interest thereon and even though the
amount is not actually written off by debiting the P&L a/c of the
assessee and crediting the amount to the account of the debtor, the
assessee was still entitled to deduction under s. 36(1)(vii). [See CIT vs.
Jwala Prasad Tiwari (1953) 24 ITR 537 (Bom) and Vithaldas H.
Dhanjibhai Bardanwala vs. CIT (1981) 21 CTR (Guj) 190 : (1981) 130
ITR 95 (Guj)]. Such state of law prevailed upto and including the asst.
yr. 1988-89. However, by insertion (w.e.f. 1st April, 1989) of a new
Explanation in s. 36(1)(vii), it has been clarified that any bad debt
written off as irrecoverable in the account of the assessee will not
include any provision for bad and doubtful debt made in the accounts
of the assessee. The said amendment indicates that before 1st April,
1989, even a provision could be treated as a write off. However, after
1st April, 1989, a distinct dichotomy is brought in by way of the said
Explanation to s. 36(1)(vii). Consequently, after 1st April, 1989, a mere
12 ITA No. 3123/Mum/2012
M/s. Trigyn Technologies Ltd.
provision for bad debt would not be entitled to deduction under s.
36(1)(vii). To understand the above dichotomy, one must understand
`how to write off'. If an assessee debits an amount of doubtful debt to
the P&L a/c and credits the asset account like sundry debtor's account,
it would constitute a write off of an actual debt. However, if an
assessee debits ` provision for doubtful debt' to the P&L a/c and makes
a corresponding credit to the ` current liabilities and provisions' on the
liabilities side of the balance sheet, then it would constitute a provision
for doubtful debt. In the latter case, the assessee would not be entitled
to deduction after 1st April, 1989."
7. One point needs to be clarified. According to Shri Bishwajit
Bhattacharya, learned Addl. Solicitor General appearing for the
Department, the view expressed by the Gujarat High Court in the case
of Vithaldas H. Dhanjibhai Bardanwala (supra) was prior to the
insertion of the Explanation vide Finance Act, 2001, w.e.f. 1st April,
1989, hence, that law is no more a good law. According to the learned
counsel, in view of the insertion of the said Explanation in s. 36(1)(vii)
w.e.f. 1st April, 1989, a mere debit of the impugned amount of bad debt
to the P&L a/c would not amount to actual write off. According to him,
the Explanation makes it very clear that there is a dichotomy between
actual write off on the one hand and a provision for bad and doubtful
debt on the other. He submitted that a mere debit to the P&L a/c would
constitute a provision for bad and doubtful debt, it would not constitute
actual write off and that was the very reason why the Explanation
stood inserted. According to him, prior to Finance Act, 2001, many
assessees used to take the benefit of deduction under s. 36(1)(vii) of
1961 Act by merely debiting the impugned bad debt to the P&L a/c
and, therefore, the Parliament stepped in by way of Explanation to say
that mere reduction of profits by debiting the amount to the P&L a/c per
se would not constitute actual write off. To this extent, we agree with
the contentions of Shri Bhattacharya. However, as stated by the
Tribunal, in the present case, besides debiting the P&L a/c and
creating a provision for bad and doubtful debt, the assessee-bank had
correspondingly/simultaneously obliterated the said provision from its
accounts by reducing the corresponding amount from loans and
advances/debtors on the asset side of the balance sheet and,
consequently, at the end of the year, the figure in the loans and
advances or the debtors on the asset side of the balance sheet was
shown as net of the provision "for impugned bad debt". In the judgment
of the Gujarat High Court in the case of Vithaldas H. Dhanjibhai
Bardanwala (supra), a mere debit to the P&L a/c was sufficient to
constitute actual write off whereas, after the Explanation, the
assessee(s) is now required not only to debit the P&L a/c but
simultaneously also reduce loans and advances or the debtors from the
asset side of the balance sheet to the extent of the corresponding
amount so that, at the end of the year, the amount of loans and
advances/ debtors is shown as net of provisions for impugned bad
debt. This aspect is lost sight of by the High Court in its impugned
13 ITA No. 3123/Mum/2012
M/s. Trigyn Technologies Ltd.
judgment. In the circumstances, we hold, on the first question, that the
assessee was entitled to the benefit of deduction under s. 36(1)(vii) of
1961 Act as there was an actual write off by the assessee in its books,
as indicated above.
8. Coming to the second question, we may reiterate that it is not in
dispute that s. 36(1)(vii) of 1961 Act applies both to banking and non-
banking businesses. The manner in which the write off is to be carried
out has been explained hereinabove. It is important to note that the
assessee-bank has not only been debiting the P&L a/c to the extent of
the impugned bad debt, it is simultaneously reducing the amount of
loans and advances or the debtors at the year-end, as stated
hereinabove. In other words, the amount of loans and advances or the
debtors at the year-end in the balance sheet is shown as net of the
provisions for impugned debt. However, what is being insisted upon by
the AO is that mere reduction of the amount of loans and advances or
the debtors at the year-end would not suffice and, in the interest of
transparency, it would be desirable for the assessee-bank to close each
and every individual account of loans and advances or debtors as a
precondition for claiming deduction under s. 36(1)(vii) of 1961 Act. This
view has been taken by the AO because the AO apprehended that the
assessee-bank might be taking the benefit of deduction under s.
36(1)(vii) of 1961 Act, twice over. [See order of CIT(A) at pp. 66, 67 and
72 of the paper book, which refers to the apprehensions of the AO]. In
this context, it may be noted that there is no finding of the AO that the
assessee had unauthorisedly claimed the benefit of deduction under s.
36(1)(vii), twice over. The order of the AO is based on an apprehension
that, if the assessee fails to close each and every individual account of
its debtor, it may result in assessee claiming deduction twice over. In
this case, we are concerned with the interpretation of s. 36(1)(vii) of
1961 Act. We cannot decide the matter on the basis of
apprehensions/desirability. It is always open to the AO to call for
details of individual debtor's account if the AO has reasonable grounds
to believe that assessee has claimed deduction, twice over. In fact, that
exercise has been undertaken in subsequent years. There is also a
flipside to the argument of the Department. Assessee has instituted
recovery suits in Courts against its debtors. If individual accounts are to
be closed, then the debtor/defendant in each of those suits would rely
upon the bank statement and contend that no amount is due and
payable in which event the suit would be dismissed.
9. Before concluding, we may refer to an argument advanced on behalf
of the Department. According to the Department, it is necessary to
square off each individual account failing which there is likelihood of
escapement of income from assessment. According to the Department,
in cases where a borrower's account is written off by debiting P&L a/c
and by crediting loans and advances or debtors accounts on the asset
side of the balance sheet, then, as and when in the subsequent years if
the borrower repays the loan, the assessee will credit the repaid
amount to the loans and advances account and not to the P&L a/c
14 ITA No. 3123/Mum/2012
M/s. Trigyn Technologies Ltd.
which would result in escapement of income from assessment. On the
other hand, if bad debt is written off by closing the borrower's account
individually, then the repaid amount in subsequent years will be
credited to the P&L a/c on which the assessee-bank has to pay tax.
Although, prima facie, this argument of the Department appears to be
valid, on a deeper consideration, it is not so for three reasons. Firstly,
the head office accounts clearly indicate, in the present case, that, on
repayment in subsequent years, the amounts are duly offered for tax.
Secondly, one has to keep in mind that, under the accounting practice,
the accounts of the rural branches have to tally with the accounts of the
head office. If the repaid amount in subsequent years is not credited to
the P&L a/c of the head office, which is ultimately what matters, then,
there would be a mismatch between the rural branch accounts and the
head office accounts. Lastly, in any event, s. 41(4) of 1961 Act, inter
alia, lays down that, where a deduction has been allowed in respect of
a bad debt or a part thereof under s. 36(1)(vii) of 1961 Act, then, if the
amount subsequently recovered on any such debt is greater than the
difference between the debt and the amount so allowed, the excess
shall be deemed to be profits and gains of business and, accordingly,
chargeable to income-tax as the income of the previous year in which it
is recovered. In the circumstances, we are of the view that the AO is
sufficiently empowered to tax such subsequent repayments under s.
41(4) of 1961 Act and, consequently, there is no merit in the contention
that, if the assessee succeeds, then it would result in escapement of
income from assessment.
10. For the afore-stated reason, we uphold the judgment of the Tribunal
dt. 31st July, 2003, and set aside the impugned judgment of the High
Court. Consequently, the assessee's appeals stand allowed with no
order as to costs."
24. As the facts of the case in hand are identical to the facts considered by
the Hon'ble Supreme Court the CIT(A) has rightly followed the ratio laid
down by the Hon'ble Supreme Court. Therefore no interference is called for.
Appeal filed by the Revenue is accordingly dismissed.
ITA No. 3124/Mum/2012 AY 2006-07
25. In this appeal the assessee has raised four substantive grounds of
appeal. Ground No. 1 to 3 relate to the disallowance of `3.25 crores on
account of interest paid to the bank and ground No. 4 relates to the transfer
pricing adjustment of `39,32,900/-.
26. The issue in dispute in this appeal are identical to the issues
considered by us in ITA 3123/Mum/2012 hereinabove where we have given
detailed findings. For similar reasons and for similar findings ground No. 1
15 ITA No. 3123/Mum/2012
M/s. Trigyn Technologies Ltd.
to 3 of this appeal are dismissed and ground No. 4 is treated as allowed for
statistical purposes by respectfully following our own finding given in ITA
No. 3123/Mum/2012.
27. In the result, ITAT No. 3123 & 3124/Mum/2012 are partly allowed for
statistical purpose and ITA No. 3011/Mum/2012 is dismissed.
/
Order pronounced in the open court on 3rd December, 2014.
03.12.2014
Sd/- Sd/-
(Vijay Pal Rao) (N.K. Billaiya)
/ Judicial Member / Accountant Member
Mumbai, Dated: 3rd December, 2014
Copy to:
1. /The Appellant
2. /The Respondent
3. ()/The CIT(A) 15, Mumbai
4. /The CIT 8, Mumbai City
5. , , The DR, "K" Bench, ITAT, Mumbai
6. / Guard file.
/By Order
//True Copy//
Registrar
Assistant
, ITAT, Mumbai Benches, Mumbai
n.p.
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