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Magan Electro Castings Ltd. v/s Assistant Commissioner of Income-tax, Circle-I (1), Coimbatore

    IT Appeal No. 267 (Mds.) of 2012

    Decided On, 13 May 2015

    At, Income Tax Appellate Tribunal Chennai

    By, THE HONOURABLE MR. A. MOHAN ALANKAMONY
    By, ACCOUNTANT MEMBER & THE HONOURABLE MR. CHALLA NAGENDRA PRASAD
    By, JUDICIAL MEMBER

    For the Appellant: Vikram Vijayaraghavan, Advocate. For the Respondent: A.V. Sreekanth, JCIT, DR.



Judgment Text

A. Mohan Alankamony, Accountant Member

1. This appeal is filed by the Assessee, aggrieved by the order of the Learned Commissioner of Income Tax(A)-I, Coimbatore, dated 02.12.2011 in ITA No.305/10-11 passed under section 143(3) read with section 250 of the Act.

2. The assessee has raised three elaborate grounds in its appeal; however the crux of the issues is that the Ld. CIT (A) had erred in upholding the order of the Ld. A.O. wherein he had disallowed Rs. 44,83,941/- invoking the provision of Section 40(a)(ia) of the Act and also by treating the expenditure incurred towards debit notes raised by with M/s. S & V Industries Inc., USA as unexplained and not genuine.

3.1 The brief facts of the case are that the assessee is engaged in the business of manufacturing of iron castings and Generation of power through wind mill, filed its return of income for the assessment year 2008-09 on 24.09.2008 admitting its total income as Rs.7,42,04,490/-. Subsequently, the case was taken up for scrutiny under CASS and the assessment was completed on 29.12.2010 u/s.143 (3) of the Act wherein the Ld. AO invoked the provisions of Section 40(a)(ia) of the Act and disallowed the expenditure relating to the debit notes raised by M/s. S&V Industries Inc., USA and also by treating the same as unexplained expenditure.

3.2 During the course of assessment proceedings, it was noticed by the Ld. Assessing Officer that the assessee had made payment to M/s. S & V Industries Inc. USA towards re-work and other manufacturing expenses on account of supply of defective castings. It was explained by the assessee that these payments were made outside the country for the services rendered overseas and therefore the tax was not deducted at source. However, the Ld. Assessing Officer invoked the provisions of section 40(a)(ia) of the Act since the assessee had not brought on record to prove that the work has been carried out abroad, though it was evident that the invoices raised against the assessee was in foreign currency. The assessee had also not produced the terms and agreements between the Assessee Company and M/s. S & V Industries Inc. USA. It was also noticed that debit notes were raised by M/s. S & V Industries Inc. USA against the assessee after M/s. S & V Industries Inc. USA had sold the products to other companies based in USA with whom the assessee did not have any transactions. Further it was observed by the Ld. Assessing Officer that, even if such expenses were allowable as deduction they pertained to assessment year 2007-08 and not for the assessment year 2008-09 because all the invoices were dated during the assessment year 2007-08.

3.3 On appeal, the Ld. CIT (A) also arrived at the conclusion that the exact nature of transaction was not known and therefore, the details of the work carried out by M/s. S & V Industries Inc., USA is not on the basis of terms and agreements between the assessee and M/s. S & V Industries Inc., USA and accordingly confirmed the order of the Ld. Assessing Officer.

4. Before us, the Ld. A.R submitted a paper book containing 1 to 46 pages being the same documents produced before the Ld. Assessing Officer and the Ld. CIT (A) and reiterated the submissions that were advanced before the Revenue authorizes on the earlier instances. He further submitted that the assessee had exported the goods to USA. The foreign buyer had carried out minor repairs on the products exported by the assessee and raised debit notes against the assessee. Though the assessee has disputed against the debit notes raised, the foreign buyer viz., M/s. S & V Industries Inc., USA agreed to pay the sale proceeds only after deducting the same. Hence the amount of sale proceeds to the extent of the debit note raised by M/s. S & V Industries Inc., USA had to be written off. The Ld. A.R. also placed reliance in the case T.R.F. Ltd. v. CIT [2010] 323 ITR 397/190 Taxman 391 (SC) and also the decision of case CIT v. De Beers Minerals India (P.) Ltd [2012] 346 ITR 467/208 Taxman 406/21 taxmann.com 214 (Kar.) and CIT v. Aktiengesellschaft Kuhnle Kopp & Kausch W. Germany by BHEL [2003] 262 ITR 513/[2002] 125 Taxman 928 (Mad.) wherein it was held that similar expenditure written off in the books of accounts is an allowable deduction while computing the profits of the assessee.

5. The DR on the other hand vehemently argued in support of the orders of the Revenue authorities. He further submitted that since the exact nature of transaction were not brought to the knowledge of the revenue authorities with cogent evidence; they did not have any other option but to disallow the expenses.

6. We have heard both the parties and carefully perused the materials available on record. It is apparent from the order of the Ld. Assessing Officer that the assessee had debited the manufacturing expenses account and credited the parties account viz., M/s. S & V Industries Inc., USA for the debit note raised by them. The assessee has explained that the debit notes raised was due to the minor expenses incurred by M/s. S & V Industries Inc., USA towards repairs of the goods supplied by the assessee, which they wanted to recover. The invoices were also raised by the assessee against M/s. S & V Industries Inc., USA for the sales made by the assessee as observed by the Ld. Assessing Officer in his order para-4 as follows:-

"4. A Perusal of the invoices produced by the assessee revealed that the invoices are dated 12/11/2006, 20/12/2006, 19/01/2007, 27/12/2006, 15/01/2007, 22/01/2007 and also in foreign currency."

Consequently the assessee would have debited the party M/s. S & V Industries Inc., USA and credited sales account. The apprehensions of the Revenue was that it is not clear as to where the services were rendered by M/s. S & V Industries Inc., USA, ie., in India or abroad and what was the nature of service rendered for which they were paid or their accounts credited because no agreements or relevant documents were produced. Therefore, the Revenue made the following presumptions & observations:-

(i) The expenditure incurred by the assessee due to the debit notes raised by M/s. S & V Industries Inc., USA, is not genuine or not explained with cogent evidence.

(ii) The services rendered by M/s. S & V Industries Inc., USA against which its accounts were credited, is not made clear as to where the service was rendered, i.e., either in India or abroad.

(iii) The nature of transactions is not known in the absence of details, since they were not furnished by the assessee.

With these presumptions/observations the Revenue was of the view that for the services rendered by M/s. S & V Industries Inc., USA against which its account was credited by the assessee, Tax ought to have been deducted at source and remitted to the Government Treasury as per the provisions of the Act. Since Tax was not deducted at source, the Revenue arrived at the conclusion that the provisions of section 40(a)(ia) of the Act would be attracted. The Revenue further opined that even if the provisions of section 40(a)(ia) of the Act is not attracted, since the nature of expenses and its genuiness is not established, the expenses incurred by the assessee has to be disallowed. Accordingly the Ld. Assessing Officer disallowed the expenditure incurred by the assessee towards repairs/services charges payable to M/s. S & V Industries Inc., USA, which was further confirmed by the Ld. CIT (A).

7. However, on perusal of the facts it is crystal clear that M/s. S & V Industries Inc., USA had raised the debit notes against the assessee for whatever reasons it may be and it has become extremely difficult for the assessee to recover its entire sales proceeds. In order to keep good business relationships, the assessee had conceded to the debits notes raised by M/s. S & V Industries Inc., USA and preferred to accept a lesser amount than what was invoiced. In these

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circumstances, the debit notes raised by the assessee will either relate to the expenses reimbursable by the assessee to its client or the debt that has become bad which the assessee has written off in its books of accounts. From these facts, it is crystal clear that the assessee is forced to incur the expenditure or accept the same as bad debt. Apparently the assessee has also debited the expenditure account and credited M/s. S & V Industries Inc., USA account, thereby satisfying the conditions laid by the Hon'ble Apex Court in the case T.R.F. Ltd. (supra) as pointed out by the Ld. A.R. Therefore, we do not have any hesitation to accept the contention of the Ld. A.R and accordingly we hereby delete the addition of Rs. 44,83,941/- made by the Ld. Assessing Officer which was further sustained by the Ld. CIT (A). 8. In the result, the appeal of assessee is allowed.
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