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Ram Gopal, Prop., M/s Agarwal Sugar Company, 245, Town Hall Road, Muzaffarnagar. Vs. ITO, Ward-1(1), Muzaffarnagar.
August, 11th 2015
      IN THE INCOME TAX APPELLATE TRIBUNAL
           DELHI BENCHES : F : NEW DELHI
  BEFORE SHRI R.S. SYAL, AM AND SHRI C.M. GARG, JM

                     ITA No.4041/Del/2011
                    Assessment Year : 2008-09

Ram Gopal,                      Vs. ITO,
Prop., M/s Agarwal Sugar            Ward-1(1),
Company,                            Muzaffarnagar.
245, Town Hall Road,
Muzaffarnagar.
PAN: AATPG8476D

                     ITA No.4480/Del/2011
                    Assessment Year : 2008-09

ITO,                            Vs. Ram Gopal,
Ward-1(1),                          Prop., M/s Agarwal Sugar
Muzaffarnagar.                      Company,
                                    245, Aryapuri,
                                    Muzaffarnagar.
                                    PAN: AATPG8476D

  (Appellant)                           (Respondent)

           Assessee By      :    Shri Ankit Gupta, Advocate
           Department By    :    Shri Vikram Sahay, Sr. DR

        Date of Hearing             :   05.08.2015
        Date of Pronouncement       :   07.08.2015
                                                    ITA No.4041 & 4480/Del/2011


                                 ORDER
PER R.S. SYAL, AM:
       These two cross appeals ­ one by the assessee and the other by the

Revenue arise out of the order passed by the CIT(A) on 29.6.2011 in

relation to the assessment year 2008-09.

2.     First ground of the assessee's appeal is against confirmation of

addition of Rs.6,20,631/-, being the amount of service tax payable u/s

43B of the Income-tax Act, 1961 (hereinafter also called `the Act'). The

facts apropos this ground are that the assessee is engaged in the business

of sugar as a commission agent. The assessee raised bills of commission

with service tax. Only commission amount was credited to the Profit &

Loss Account and the amount of service tax was separately taken. The

AO observed that a sum of Rs.6,20,631/- representing service tax,

education cess and higher education cess (hereinafter cumulatively

called as `service tax' for convenience) was appearing as payable in the

assessee's balance sheet. On being called upon to explain as to why the

amount of service tax be not disallowed u/s 43B, the assessee contended

that    the   amount of service tax was not realized and even the
                                    2
                                                       ITA No.4041 & 4480/Del/2011


commission bills from sugar mills on which such service tax was

charged, were yet to be recovered. It was also submitted that the amount

of service tax was not debited to the Profit & Loss Account and, as such,

there could be no question of disallowance u/s 43A. Unconvinced with

the assessee's submission, the AO made a disallowance of Rs.6.20 lac

u/s 43B of the Act towards the unpaid amount of service tax. The ld.

CIT(A) upheld the assessment order on this count. The assessee is

aggrieved against the confirmation of this addition.


3.   We have heard the rival submissions and perused the relevant

material on record. The primary question before us in this regard is as to

whether the provisions of section 43B are attracted on the unpaid

amount of service tax, which was not recovered by the assessee from his

principals. Before embarking upon this question, it is relevant to note

that the assessee raised bills for commission with service tax, but, only

the amount of commission was shown as income in his Profit & Loss

Account.   The amount of service tax was credited in the books of

account and on making payment after realization from sugar mills, the


                                    3
                                                   ITA No.4041 & 4480/Del/2011


assessee was debiting the service tax account. The amount of service tax

payable in the instant case represents the amount of service tax, which

was billed by the assessee, but not realized up to the year ending. In

other words, the amount of service tax at Rs.6.20 lac for which

disallowance has been made has neither been realized by the assessee

nor claimed as deduction in the profit and loss account. The question

arises whether any disallowance u/s 43B can be made under these

circumstances. The ld. AR has brought to our notice certain direct

decisions in which it has been held that no disallowance u/s 43B of the

Act can be made in such a situation. The main thrust of the ld. AR has

been on the argument that under the service tax rules, it becomes

payable only when the payment for the same is received. Since the said

amount of service tax was not received during the year, the ld. AR

argued that no disallowance can be made on this score u/s 43B. For this

proposition, he relied on the judgment of the Hon'ble Bombay High

Court in CIT VS. Ovira Logistics (P) Ltd. (2015) 232 Taxman 240

(Bom). For similar proposition, he relied on the order passed by the

Chennai bench of the tribunal in ACIT VS. Real Image Media
                                   4
                                                   ITA No.4041 & 4480/Del/2011


Technologies (P) Ltd. (2008) 116 TTJ 964, in which it has been held that

service-tax though billed but not received not having become payable to

the credit of the Central Government by virtue of s. 68 of the Finance

Act, 1994, r/w r. 6 of the Service-tax Rules, 1994, the same cannot be

disallowed under s. 43B. No contrary decision has been brought to our

notice by the ld. AR. Respectfully following the above precedents and

without going deep into the nuances of the issue, we hold that since the

amount of service tax in dispute was admittedly not realized by the

assessee, the same could not be disallowed u/s 43B. This ground is

allowed.





4.   Ground No.2 is against the confirmation of addition of

Rs.7,75,650/-, being the amount of bad debts written off in the books of

account. Succinctly, the assessee claimed deduction for this sum under

the head `Bad debts.' On being called upon to explain as to how the

conditions of section 36(2) were fulfilled, the assessee stated that he

was simply a commission agent of sugar mills assisting in the sale of

sugar by them. As per the terms and conditions with the sugar mills, it


                                   5
                                                     ITA No.4041 & 4480/Del/2011


was claimed, that the assessee was responsible for collection of dues and

in the event of non-recovery of the amount, such non-recoveries were

liable to be deducted from his commission income. The assessee

submitted that this amount of Rs.7.81 lac was deducted by sugar mills

on account of non-recoveries from the buyers. The AO disallowed a

sum of Rs.7.75 lac on the ground that the debit notes issued by M/s

Daya Sugar towards non-recoveries from their customers were not

substantiated with any evidence. The ld. CIT(A) upheld the view taken

by the AO.      The assessee is aggrieved against the sustenance of

disallowance.

5.   We have heard the rival submissions and perused the relevant

material on record. There is no dispute on the fact that the assessee

wrote off a sum of Rs.7.75 lac in his books of account as bad debt. The

Hon'ble Supreme Court in T.R.F. Ltd. vs. CIT (2010) 323 ITR 397 (SC)

has held that after 1.4.1989 the assessee is not required to establish that

the debt has become bad in the previous year and a deduction on account

of bad debts is permissible on a simple write off of the amount of bad


                                     6
                                                     ITA No.4041 & 4480/Del/2011


debt. However, we find from the mandate of section 36(1)(vii) that the

deduction on account of bad debts is subject to the provisions of sub-

section (2). Sub-section (2) of section 36, in turn, provides that no

deduction of the bad debts be allowed unless such debt or part thereof

has been taken into account in computing the income of the assessee of

the previous year in which the amount of such debt or part thereof was

written off or any earlier year. To put it simply, the deduction on

account of bad debts is permissible on write off only if the amount of

debt has been taken into account in computing the income of the

assessee for the instant year or an earlier year. The question arises as to

whether a mere receipt of commission on total value of sales would

satisfy the condition of section 36(2) in respect of the amount of sales

which has become irrecoverable. The special bench of the Tribunal in

DCIT vs Shreyas S. Morakhiya (2010) 40 SOT 432 (Mum) (SB) dealt

with a case in which the assessee was a share broker and the brokerage

income was taken into account in the computation of total income.

There was some non-realisation of the sale value of the shares as a result

of which that assessee had to part with the unrealized amount of sale
                                     7
                                                   ITA No.4041 & 4480/Del/2011


value. The question arose as to whether the crediting of brokerage to the

Profit & Loss Account would satisfy the condition stipulated u/s 36(2) in

respect of the amount of bad debt towards non-realisation of sale value

of the shares. Answering the question in affirmative, the Special Bench

held that the amount receivable by the assessee share broker on account

of brokerage is a part of debt receivable by him from his clients against

purchase of shares on their behalf and, once such brokerage is credited

to his Profit & Loss Account and the same is taken into account in

computing his income, the condition stipulated in section 36(2)(i) gets

satisfied and, therefore, the write off of the debt representing the

irrecoverable amount receivable from the clients against purchase of

shares on their behalf is allowable as bad debt. The Hon'ble Bombay

High Court in CIT vs. Shreyas S. Morakhiya (2012) 342 ITR 285 (Mum)

has approved the view taken by the Special Bench. Similar view has

been taken by the Hon'ble jurisdictional High Court in the case of CIT

vs. Bonanza Portfolio Ltd. (2010) 320 ITR 178 (Del). The facts of the

instant case are, mutatis mutandis, similar to those considered and

decided in the aforenoted judicial precedents. As such, the assessee
                                    8
                                                   ITA No.4041 & 4480/Del/2011


deserves to succeed on this ground. It is however, made clear that any

subsequent recovery from the amount written off as bad debts, is liable

to be offered as income. Overturning the impugned order on this issue,

we order for the deletion of addition.

6.   Ground nos. 3 and 4 were not pressed by the ld. AR. The same,

therefore, stand dismissed.

7.   First ground of the Revenue's appeal is against the deletion of

addition of Rs.17,99,225/- made by the AO on account of non-deduction

of tax on commission and brokerage u/s 40(a)(ia) of the Act. The facts

of this ground are that the assessee paid commission of Rs.17.99 lac.

The AO opined that the assessee was required to deduct tax at source u/s

194H on the amount of commission payment. Since no deduction of tax

at source was made, he, therefore, made disallowance u/s 40(a)(ia) of the

Act. In reaching this conclusion, the AO relied on the order passed by

him for the immediately preceding assessment year. The ld. CIT(A)

deleted the disallowance.




                                     9
                                                    ITA No.4041 & 4480/Del/2011


8.   We have heard the rival submissions and perused the relevant

material on record. Section 194H of the Act provides that any person

not being any individual or HUF, who is responsible for paying to a

resident any income by way of commission or brokerage, shall, at the

time of credit of such income to the account of the payee or at the time

of payment of such income, whichever is earlier, deduct income-tax

thereon at the specified rate.     The second proviso states that an

individual or HUF, whose total sales, gross receipts or turnover from the

business or profession carried on by him exceed the monetary limit

prescribed u/s 44AB `during the financial year immediately preceding

the financial year in which such commission or brokerage is credited or

paid' shall be liable to deduct income-tax under this section. The instant

assessee is an individual. As such, he is liable to make deduction of tax

at source from commission income u/s 194H only if the condition

enshrined in the second proviso is satisfied. Such condition is that sales

or gross receipts must exceed the monetary limit (Rs.40 lac at that time)

during the financial year preceding the financial year in which

commission is paid. In other words, if the assessee in question pays
                                    10
                                                    ITA No.4041 & 4480/Del/2011





commission or brokerage in the previous year 2007-08 relevant to

assessment year 2008-09, then, his sales, gross receipts or turnover for

the previous year 2006-07 relevant to assessment year 2007-08 must

exceed Rs.40 lac so as to make him liable for deduction of tax at source

u/s 194H of the Act. Adverting to the facts of the instant case, we find

that the total turnover of the assessee for the immediately preceding year

was Rs.26.74 lac.       Since this amount of total turnover for the

immediately preceding year does not breach the limit of Rs.40 lac, there

can be no obligation on the assessee to deduct tax at source on

commission paid in the previous year relevant to assessment year under

consideration. As such, we approve the view taken by the ld. CIT(A). It

is further noticed that similar view has been taken by the tribunal in the

preceding year. This ground is not allowed.

9.     The only other ground which survives for consideration is against

the deletion of addition of Rs.4,89,688/- made by the AO u/s 68 of the

Act.    There were certain creditors and debtors appearing in the

assessee's balance sheet.        The AO issued inquiry letters to


                                    11
                                                      ITA No.4041 & 4480/Del/2011


creditors/debtors for confirming the balance of the assessee in their

books of account. On making a comparative study of the balance shown

by the assessee in his books of account vis-à-vis those parties showing

the assessee's balance, the AO made addition of Rs.4,97,747/-. The

assessee did not assail before the ld. CIT(A) the addition on account of

credit balance of Rs.8,059/- in the books of his debtor M/s Agarwal

Sugar and Chemicals, which addition was automatically confirmed. As

regards the remaining addition of Rs.4,89,688/-, the assessee furnished

reconciliation. The ld. CIT(A) got convinced with such reconciliation

and ordered for the deletion of addition to this extent. The Revenue is

aggrieved against such deletion.

10.   After considering the rival submissions and perusing the relevant

material on record, it is noticed that the assessee furnished reconciliation

before the ld. CIT(A) in respect of balances of the parties appearing in

his books of account and the corresponding balances in the books of

such parties.    The ld. CIT(A) found reconciliation in order and,

accordingly, deleted the addition. The ld. DR could not controvert any


                                     12
                                                          ITA No.4041 & 4480/Del/2011


discrepancy in such reconciliation. Under such circumstances, we are of

the considered opinion that the ld. CIT(A) has taken an unimpeachable

view on this issue. This ground is not allowed.

11.       In the result, the assessee's appeal is partly allowed and that of the

Revenue is dismissed.

          The order pronounced in the open court on 07.08.2015.

               Sd/-                                              Sd/-

    [C.M. GARG]                                      [R.S. SYAL]
 JUDICIAL MEMBER                                 ACCOUNTANT MEMBER

Dated, 07th August, 2015.
dk
Copy forwarded to:
     1.   Appellant
     2.   Respondent
     3.   CIT
     4.   CIT (A)
     5.   DR, ITAT

                                                    AR, ITAT, NEW DELHI.




                                         13

 
 
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