After the amendment in Section 36(1)(vii), the assessee is not required to demonstrate that the debt is bad

IN THE INCOME TAX APPELLATE TRIBUNAL

MUMBAI BENCH ‘I’ MUMBAI

BEFORE SHRI B.R. MITTAL (JUDICIAL MEMBER) AND

SHRI N.K. BILLAIYA (ACCOUNTANT MEMBER)

ITA Nos. 4882, 2475, 6527/Mum/2010

Assessment Years-2003-04, 2004-05 and 2005-06

The ACIT-2(1),

Aayakar Bhavan,

Mumbai-400 020

(Appellant)

Vs.

M/s. Bobcards Ltd.,

2nd Floor, Baroda House,

Behind Dewan Shopping Centre,

S.V. Road, Jogeshwari (W),

Mumbai-400 102

PAN-AAACB1989L

 (Respondent)

Appellant by: Shri Satbir Singh

Respondent by: Shri D.H. Shah

Date of Hearing: 12.06.2012

Date of pronouncement: 20.6.2012

O R D E R

PER N.K. BILLAIYA (AM):

The Revenue has filed these three appeals for assessment years 2003- 04 to 2005-06 against the orders of Ld. CIT(A)-4, Mumbai. In all these appeals, Revenue has taken common grounds except that amount of disallowances of expenses varies each year. Therefore, we heard these appeals together and dispose off the same by this common order for the sake of convenience and brevity.

2. Since common grounds are involved in all these appeals and facts are identical, we shall take up ITA No. 4882/M//2010 for A.Y. 2003-043 for our consideration.

3. Ground No. 1 is general in nature and do not require any specific adjudication.

4. Ground No. 2 relates to disallowance of bad debts amounting to Rs. 2,07,15,380/-.

5. During the course of assessment proceedings, the Assessing Officer found that in the Profit and Loss Account, the assessee has debited a sum of Rs. 2,07,15,380/- on account of bad debt. The AO was of the opinion that the assessee company being a non finance company, bad debt could not be allowed following the decisions in earlier assessment years and the AO disallowed the claim of Rs. 2,07,15,380/-.

6. Before the Ld. CIT(A) the assessee relied upon the decision of Oman International Bank 313 ITR 128 (Bom) and also pointed out that in the earlier years in assessee’s own case bad debts were allowed. Considering the facts and submissions of the assessee, the Ld. CIT(A) directed the AO to allow the claim of bad debt holding that under the amended provisions of Sec. 36(1)(VII), the assessee is not required to demonstrate that the debit is bad. Only requirement is that the debt should be written off in the books of accounts.

7. Before us, the Ld. Departmental Representative relied upon the findings of AO and submitted that the findings of the Ld. CIT(A) are erroneous. Ld AR reiterated the stand taken before the CIT [A].

8. We have heard the rival submissions. We find that the AO has not given any reason for disallowing the claim. We also find that the AO has simply followed the findings of earlier assessment years. As similar additions in earlier assessment year has been deleted by Ld. CIT(A) which has been accepted by the Revenue as Committee on Dispute declined to give permission to the department to proceed with the appeal , findings of the Ld. CIT(A) become final. As Ld. CIT(A) has rightly pointed out that after the amendment in Section 36(1)(vii), the assessee is not required to demonstrate that the debt is bad . We do not find any infirmity in the finding of Ld. CIT(A). We also draw support from the order of Tribunal in ITA No. 500/M/06 for assessment year 2002-03 in the case of very same assessee in which the Tribunal has allowed the claim of bad debt. Respectfully following the decision of the Tribunal, the claim is allowed for this year also.

9. Ground No. 3 relates to deletion of service charges of Rs. 57,10,754/-. During the course of assessment proceedings the AO found that the assessee company has been following mercantile system of accounting in respect of service charges. However from assessment year 1999-2000 onwards the company changed its policy of accounting the service charges from mercantile system to cash system. The AO did not accept the change of method of accounting for the service charges and added to the total income. The AO further pointed out that as per the Audit report u/s. 44AB of the Act for the year under consideration the auditors had marked “assessee follows mercantile system of accounting except otherwise stated elsewhere in accounts including in the accounting policies”. Thus as per Auditors Report, assessee is following mercantile system of accounting but in case of non performing accounts, the income has been recognized on actual receipt only. As this change has not been accepted by the department since assessment year 1999-2000. The AO followed the earlier year assessment, found that for the year under consideration assessee has categorized the sum of Rs. 1,66,98,110/- as non performing assets (NPA). As the assessee has not written off the debts, the AO charged interest at the rate of 2.85% per month which is the average rate of interest during the year under consideration and treated the same as income of the assessee and added to the total income at Rs. 57,10,754/-.

10. Before the Ld. CIT(A) the assessee challenged this addition. The main contention of the assessee was that assessee being a non banking finance company is bound to follow the guidelines of Reserve Bank of India according to which Non banking finance company are not required to credit  interest on NPA on accrual basis as the interest is required to be credited only on receipt basis. The ld. CIT(A) was convinced that NBFC are governed by Reserve Bank of India guidelines and according to such guidelines interest income on NPA is required to be credited on actual receipt basis and not on accrual. Accordingly the Ld. CIT(A) allowed the appeal by deleting the addition.

11. The Ld. Departmental Representative relied upon the order of AO. The Ld. Counsel for the assessee reiterated the submissions made before Ltd. CIT(A).

12. We find that as per RBI guidelines vide Non-Banking Financial Companies Prudential Norms (Reserve Bank) Directions, 1998, no interest income is to be booked on accrual basis on NPA and the same should be recognized only on cash basis and as the assessee is a non banking finance company it is bound to follow the guidelines issued by Reserve Bank of India. We therefore do not find any error or infirmity in the order of Ld. CIT(A) accordingly we confirm the same.

13. The fourth ground relates to deletion of the disallowance of Rs. 36,37,533/- being amount deducted as TDS on payments in respect of charges for services provided by Visa/Mastercard International.

14. During the course of assessment proceedings, the AO found that during the year under consideration assessee has made payments to Visa/Master Card International on account of their charges for the services provided by them to the assessee. The TDS was deducted by the assessee on such payments was to the tune of Rs. 36,37,533/- which was claimed by the assessee as deduction in the Profit & Loss Account. The AO sought explanation from the assessee and pointed out why this sum being TDS should not be disallowed as the same is not a liability of the assessee. The assessee pointed out that as per agreement with Visa & Master Card International, the assessee was required to bear the tax liability of these companies. However, this contention of the assessee did not find favour with AO who was of the opinion that this payment was not an expenditure of the assessee as the same is not incurred for the assessee’s business.

15. When the matter was agitated before the Ld. CIT(A), CIT(A) after considering the submissions and agreement held that this amount is allowable in view of the decision in the case of CIT Vs Standard Polygraph Machines Pvt. Ltd 243 ITR 788 and accordingly deleted the addition and allowed the appeal.

16. Aggrieved by the order of Ld. CIT(A), Revenue is in appeal before us.

17. Before us, the Ld. Departmental Representative reiterated the submissions made by AO. The Ld. Counsel for the assessee relied upon the decision of CIT Vs Standard Polygraph Machines Pvt. Ltd (supra) and the decision of S. Takenaka Vs CIT 237 ITR 212 (Karnataka)

18. We have heard the rival submissions and perused the orders of lower authorities and also the orders relied upon by the Ld. Counsel. We find that on identical facts, Hon’ble Madras High Court in the case of CIT Vs Standard Polygraph Machines Pvt. Ltd (supra) has allowed the claim holding that amount paid was only to the discharge of the liability which liability the assessee had taken to pay as part of the agreement entered into. The amount so paid as tax has been held to be the amount payable between the collaborator and the assessee. The Tribunal decided that the amount so paid by the assessee was only in discharge of a liability which it had undertaken in

terms of the agreement. Similar view has been taken by Hon’ble Karnataka High Court in the case of S. Takenaka Vs CIT 237 ITR 212 (supra). We find that the facts and issues are identical with those of the above cited cases therefore respectfully following the decisions of Hon’ble High Courts cited herein above, this ground raised by the Revenue is dismissed.

19. In the result, all the appeals filed by the Revenue are stand dismissed as pointed above that common grounds and issues are involved in all three appeals for three assessment years viz , ITA Nos. 4882/2475/6527/ Mum/2010 for Assessment Years-2003-04, 2004-05 and 2005-06.

.

Order pronounced on this 20th day of June, 2012

                                                                    Sd/-                    Sd/-

                                                        (B.R. MITTAL)   (N.K. BILLAIYA)

                                                        Judicial Member   Accountant Member

Mumbai, Dated 20th June, 2012

Rj

Copy to:

1. The Appellant

2. The Respondent

3. The CIT-concerned

4. The CIT(A)-concerned

5. The DR ‘I’ Bench

True Copy

By Order

Asstt. Registrar, I.T.A.T, Mumbai