High Court Of Karnataka
CIT & Anr. vs. Wipro Infotech Ltd.
Section 36(1)(vii), 80AB(5), 80-O,
Asst. Year 1990-91, 1991-92, 1992-93, 1993-94
V. Gopala Gowda & Ravi Malimath, JJ.
IT Appeal Nos. 499, 501, 504 & 510 of 2002
25th June, 2008
Counsel Appeared :
M.V. Seshachala, for the Appellants : Chandrakumar & Associates, for the Respondent
JUDGMENT
V. Gopala Gowda, J. :
These appeals are filed by the CIT and Dy. CIT questioning the correctness of the common order dt. 31st July, 2002 passed by the Tribunal in ITA Nos. 651/Bang/1994, 521, 522, 523/Bang/1997, 369, 370, 461, 462 and 538/Bang/2001 framing two substantial questions of law in the appeals by urging various grounds in support of the same and prayed to set aside the common judgment by answering the same in favour of the Revenue. The common substantial questions framed read as under :
“1. Whether the Tribunal was correct in holding that the provision made by the assessee for bad and doubtful debt is an allowable deduction ?
2. Whether the Tribunal committed an error in holding that s. 80-O deduction should be allowed on the gross income received by the assessee by ignoring the provisions of s. 80AB of the Act which contemplates granting of such a deduction on the amount of income as computed in accordance with provisions of the Act and the judgment of the Calcutta High Court reported in CIT vs. M.N. Dastur & Co. (P) Ltd. (2000) 159 CTR (Cal) 417 : (2000) 243 ITR 10 (Cal) and that of the apex Court in 239 ITR 233 (sic) ?”
2. During the course of arguments, the learned counsel for the appellants Mr. M.V. Seshachala, has reframed the substantial questions of law by filing a memo which read thus :
“1. Whether the Tribunal after having correctly held that the evidence adduced by the assessee was not sufficient to show that the bad debts was return off as irrecoverable proceeded to erroneously hold that the assessee need not prove the debt having become bad ?
Whether the Tribunal was correct in holding that the direct expenses is required to be reduced from the gross receipts out of amount released in convertible foreign exchange and over the balance deduction under s. 80-O of the Act is to be allowed as against the net income computed in accordance with the provisions of the Act as contemplated under s. 80AB of the Act ?”
In support of the aforesaid legal contentions, he has urged that the Tribunal committed an error in law in remanding the cases back to the AO to verify the claim made by the assessee for deduction of bad and doubtful debts after recording an erroneous finding that the assessee on facts was entitled to deduction in respect of provision of bad and doubtful debts. Elaborating his submissions he has placed strong reliance upon the amending provision of s. 36(1)(vii) and Explanation part of IT Act, 1961 (in short ‘the Act’) he further submits that the Tribunal has committed an error in law in holding that the assessee is not required to demonstrate that the bad debts also become bad in the previous year. He has sought to justify the concurrent finding of fact recorded by the first appellate authority; the same has been set aside by the Tribunal in the impugned judgment and remanded the case to the AO ignoring the Explanation to the aforesaid provision of the Act which clearly states that there shall not be a provision made by the assessee while claiming the benefit of deduction for the purpose of bad debt and the Tribunal has erroneously set aside the same in the absence of material particulars produced by it before the AO, first appellate authority or before it.
4. The learned counsel in support of his submission has placed reliance upon the Division Bench decision of the Allahabad High Court in the case of Jubilant Organosys vs. CIT (2004) 187 CTR (All) 574 : (2004) 265 ITR 420 (All) wherein the said Division Bench has placed reliance upon the Explanation to s. 36(1)(vii) of the Act which was inserted by the Finance Act of 2001 and held that the deduction is not permissible in respect of any provision for bad and doubtful debts made in the accounts of assessee. The said decision according to the learned counsel for the Revenue is affirmed by the apex Court by dismissing the SLP in SLP No. 3828 of 2004 filed by the assessee and he has also placed reliance upon another decision of the Madras High Court in the case of CIT vs. Micromax Systems (P) Ltd. (2005) 198 CTR (Mad) 578 : (2005) 277 ITR 409 (Mad).
5. In support of the second substantial question of law, he has contended that the Tribunal has erroneously proceeded to hold that deduction claimed by the assessee under s. 80-O of the Act is admissible on the gross profits of the assessee without taking into consideration the expenses incurred to earn that gross income ignoring definition., of gross total income as defined under s. 80AB(5) of the Act to arrive at the net income claimed by the assessee for deduction under s. 80-O of the Act, ignoring the concurrent finding of fact recorded by the first appellate authority, wherein he has concurred with the finding of fact recorded by the AO, the expenses incurred by the assessee should be taken into account in accordance with the provisions of s. 80AB(5) of the Act for the purpose of claiming deduction, therefore, he submits that in the absence of furnishing the details of expenses incurred by the assessee to earn the total gross income which amount shall be deducted as provided under s. 80AB(5) of the Act for the purpose of claiming the benefit under s. 80-O of the Act, the assessee is not entitled for the benefit which he has claimed. The assessee for the purpose of working out its right regarding the Explanation ‘direct expenses’ contained in the Explanation to s. 80-O towards the transfer of salary at Rs. 7,61,699 which was taken into account for the purpose of producing software out of which the gross income earned is taken as 40 per cent of the income at Rs. 9,85,152 on the basis of consequential net income worked out over the balance amount of deduction which claim of the assessee is refused by the first appellate authority by treating expenses towards travelling and salary of Rs. 7,61,686 at 10 per cent worked to Rs. 2,46,200 at 40 per cent as held by the AO is set aside by the Tribunal which decision of it is contrary to the provisions of s. 80AB sub-s. (5) of the Act. Hence, he has pleaded that the order passed by the Tribunal is bad in law and therefore the second substantial question reframed is required to be answered in favour of the Revenue.
In support of this submission, he has placed reliance upon the Division Bench decision of this Court in the case of Asstt. CIT vs. Abcon Engineering & Systems (P) Ltd. (2007) 208 CTR (Kar) 146 : (2006) 287 ITR 201 (Kar) which has been followed by another Division Bench of this Court (to which V.G.G., J. was a Member) in IT Appeal Nos. 438-444 of 2002 c/w IT Appeal Nos. 3047 of 2005 and 6 of 2004 dt. 21st Sept., 2007. He has also placed reliance upon the Division Bench decision of Bombay High Court in the case of CIT vs. Asian Cable Corporation Ltd. (2003) 180 CTR (Bom) 293 : (2003) 262 ITR 537 (Bom), wherein the Bombay High Court has interpreted s. 80-O r/w s. 80AB(5) and s. 80-O of the Act, claiming the benefit under the above provision of the Act and came to the conclusion that it is the net income after deducting the expenses incurred by the assessee to earn the gross income upon which the benefit of deduction in the returns can be claimed under s. 80-O of the Act. Further it is contended by the learned counsel for the Revenue that the Tribunal has committed an error in law in setting aside the order regarding deduction of 10 per cent of the expenses out of gross income claimed by the assessee by placing reliance upon the decision of reported in M.N. Dastur & Co. Ltd. vs. Dy. CIT (1997) 58 TTJ (Bang) 748 : (1997) 62 ITD 113 (Bang), further on the basis of the said decision approved by this Court in CP No. 58 of 1998 (IT) disposed on 4th June, 2001 without taking into consideration the provisions of s. 80AB(5) of the Act which provisions are interpreted by the apex Court in Distributors (Baroda) (P) Ltd. vs. Union of India & Ors. (1985) 47 CTR (SC) 349 : (1985) 155 ITR 120 (SC) which decision is followed by the Division Benches of this Court referred to supra.
The learned counsel for the assessee in all these cases has sought to justify the correctness of the findings and reasons recorded by the Tribunal in the impugned judgment on both the aspects regarding the claim made by the assessee under s. 36(1)(vii) which are irrecoverable, written off, bad and doubtful debts written by the assessee for the previous years by showing the same in the books of accounts applying ‘mercantile method of accounting’ which method of accounting is permissible under the IT Act read with Companies Act. The learned counsel for the assessee further submits that the AO and the first appellate authority have disallowed the claim of the assessee without examining the provisions applicable to it for giving deductions under s. 36(1)(vii) of the Act for the assessment years in question on the basis of annual report made available and without verifying the item wise particulars available on record. Further it is urged that the AO and first appellate authority on erroneous assumption came to the wrong conclusion and held that the deduction claimed by the assessee regarding irrecoverable debt and bad debt is only a provision made by it in its books of accounts, therefore, they have wrongly held that it is not permissible for the assessee to claim the benefit of deduction of the same in view of Explanation to s. 36(1)(vii) of the Act. Therefore, he submits that both the orders passed by both the authorities suffer from error in law for the reason that merely because nomenclature of the provisions mentioned in the annual report submitted by the assessee before the AO is not the criteria to find out and accept the claim with reference to entries made in the books of accounts, where the same are actually treated as incidental, bad and doubtful debts written off under various items as stated at para 3.7 of the Tribunal judgment. The Tribunal after referring to the facts and rival legal contentions urged on behalf of the parties has examined the correctness of the concurrent finding of fact recorded by the first appellate authority in its order at para 6 on the contentious point that arose for his consideration with reference to the legal submissions made on behalf of the assessee’s counsel that the AO without verifying the particulars made available before him has passed the assessment order.
Therefore, he has submitted that the concurrent finding recorded by the first appellate authority is erroneous for non-consideration of material evidence on record and urged that the Tribunal after referring to the same and extracting the itemwise claim made by the assessee with reference to the bad and doubtful debts for the deduction claimed by it under s. 36(1)(vii) of the Act has been rightly set aside by the Tribunal and remanded the matter back to the AO to reconsider the same by recording its reasons at para 3.11 in the impugned judgment. Therefore, the finding recorded by the Tribunal in the impugned judgment for setting aside the concurrent finding of the first appellate authority is neither erroneous nor error in law. Therefore, the learned counsel submits that the first substantial question of law reframed as extracted above, does not arise for consideration in this appeal and therefore requested this Court to dismiss the appeal. In support of the above legal contention, the learned counsel has placed reliance upon the Division Bench decision of Gujarat High Court in the case of Vithaldas H. Dhanjibhai Bardanwala vs. CIT (1981) 21 CTR (Guj) 190 : (1981) 130 ITR 95 (Guj) wherein that Court with reference to the repealed provisions of IT Act of 1922 examined the method of written off and its meaning of posting the debit entries in the P&L a/c and credit entries in the bad debt reserve account is sufficient or not to claim the benefit under s. 36(2)(b) of the repealed Act, which provisions are pari materia with s. 36(1)(vii) of the Act and also placed reliance upon another decision of the apex Court in the case of Amarchand Sobhachand vs. CIT (1971) 82 ITR 591 (SC) in support of his submission that the finding of fact recorded by the Tribunal is justified and the same need not be interfered with by this Court in exercise of its appellate jurisdiction unless it is shown that the substantial question of law framed in the appeal by the Revenue would arise in the case; he further submits that the Tribunal has set aside the concurrent finding of the first appellate authority holding that the same is erroneous for non-consideration of material evidence on record, therefore the first substantial question of law does not arise.
11. In support of the above legal submissions he has placed reliance upon the following decisions : (a) CIT vs. Jwala Prasad Tiwari (1953) 24 ITR 537 (Bom); (b) CIT vs. Kerala State Industrial Development Corporation Ltd. (2007) 209 CTR (Ker) 371 : (2007) 289 ITR 238 (Ker); (c) CIT vs. Vallabh Leasing & Finance Co. (P) Ltd. (2004) 187 CTR (MP) 20 : (2004) 265 ITR 1 (MP). The learned counsel for the assessee has rebutted the legal submission made on behalf of the Revenue on the second substantial question of law reframed in these appeals contending that the Tribunal on careful perusal of the record has examined the material particulars available and found fault with both the orders of assessing authority and the first appellate authority to deduct the amount towards the expenses incurred by the assessee for the purpose of earning gross income as provided under s.
80AB(5) of the Act, for exporting the software to claim the benefit of deduction under s. 80-O of the Act by the assessee for the assessment years in question. The Tribunal has recorded a finding of fact on the basis of material particulars furnished by the assessee which are on the record to show that no expense was incurred by the assessee, therefore, there was no need for it to deduct expenses out of gross income earned upon by the assessee for the manufacture of software exported as provided under s. 80AB(5) of the Act in respect of the assessment years and therefore the learned counsel submits that the Tribunal has rightly set aside the concurrent findings of first appellate authority in exercise of its appellate jurisdiction and power, therefore, he submits that the second substantial question of law referred to above does not arise for consideration of this Court in these appeals and requested to answer the same against the Revenue. After hearing these appeals at length and on careful consideration of rival legal contentions urged on behalf of the parties, we answer substantial question of law No. 1 in favour of the assessee by assigning the following reasons : (i) In all these appeals the assessee has claimed the benefit of deduction under s. 36(1)(vii) with regard to provisions of debt/advances in regard to Item No. 1 and so far as Item No. 2 in respect of bad or doubtful debt which is irrecoverable amount for different assessment years before the AO for which deduction under the above provisions of the Act is claimed by the assessee. The said claim is disallowed by the assessing authority treating the same for different assessment years is only a provision made by the assessee which is not permissible in law in view of the Explanation to cl. (vii) of s. 36(1) of the IT Act. The Explanation is provided by way of amendment to the said clause by Finance Act, 2001, which provision has been given retrospective effect from 1st April, 1989.
The AO had no benefit of this provision for his consideration at the time of passing assessment order as the assessment order was passed on 11th March, 1993, prior to the Finance Act of 2001. To appreciate the above legal contention it is necessary for us to extract s. 36(1), cl. (vii) and Explanation which reads thus : “subject to the provisions of sub-s. (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 : Provided that in the case of an assessee to which cl. (viia) applies, the amount of the deduction relating to anysuch debt or part thereof 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 account made under that clause. Explanation—For the purposes of this clause, any bad debt or part thereof written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee : (Underlined emphasis, italicised in print, made by the Court) (ii) We have also perused the concurrent finding of the first appellate authority in its order and the impugned judgment in these appeals passed by the Tribunal wherein it has set aside the order of the first appellate authority, (iii) The learned counsel appearing for the assessee has invited our attention to the relevant para of the judgment passed by the appellate authority. We have also considered the legal contentions urged before us in all the appeals on behalf of the assessee that the assessing authority has not considered the material evidence on record before him to justify the claim under the aforesaid provisions of the Act under two items viz., provision of debts/advances by debiting to the books of account for the assessment years in question in respect of different items though the same are not written off against each individual debtor, but, the same is written off as bad and doubtful debt which is permissible in law. Merely because, the nomenclature of bad and doubtful debts is used in the annual returns, the AO was required to examine as to whether on fact and in law the same is in respect of various items claimed by the assessee for deduction in all these appeals is shown as provision as stated in the Explanation to cl. (vii) of s. 36(1) of the Act. On careful consideration of the accounts and appreciating the material facts he has recorded a finding of fact holding that it is only a provision but not written off from books of accounts as the debt is irrevocable from its debtors.
The said finding is challenged by the assessee before the first appellate authority as erroneous in law urging same legal grounds which contention of it is rejected and concurred with the findings of the assessing authority. (iv) The learned counsel for the appellants has submitted that the Tribunal while examining the correctness of the concurrent finding of the first appellate authority has come to the conclusion with reference to the entries made in the annual returns and the deductions claimed by the assessee by furnishing the particulars and extracting various items in respect of deduction claimed under the aforesaid statutory provision. The Tribunal has set aside the order and remanded the matter to the AO with a direction to reconsider the claim of the assessee in the light of the material particulars furnished under the item found on all debts/advances, bad and doubtful debts shown in the P&L a/c with reference to the entries made in the annual returns is bad in law; the Tribunal while setting aside the order has directed the assessee to produce additional material evidence before the AO, this portion of the order is questioned by the learned counsel for the Revenue. The submission made on behalf of the assessee that the AO has not applied his mind to the material particulars available before him and came to the wrong conclusio regarding bad and doubtful debts which is concurred with by the first appellate authority. Therefore, it is contended by the learned counsel that the Tribunal is justified in setting aside that portion of the order and remitting back the matter for reconsideration of the AO after perusal of material evidence that may be produced by the assessee holding that neither the AO nor the first appellate authority have referred to the material particulars furnished by the assessee which are available on record and consideration of the same is very much required. (v) The learned counsel for the appellant has sought to annul the findings recorded on this aspect by the Tribunal contending that the substantial question of law which would certainly arise for the reason that the claim made by the assessee with regard to irrevocable debt, bad debt and written off debt is only the provision made by it. On a perusal of the Explanation to s. 36(1)(vii) of the Act, the submissions may be tenable but the assessing authority is required to consider and examine the claim of the assessee on the basis of the facts stated and material available before him, that has not been done either by the assessing authority or by the first appellate authority. Therefore, the Tribunal is perfectly justified in setting aside the concurrent finding of the first appellate authority on that contentious point; in the absence of additional evidence the Tribunal must have come to the conclusion that the matter requires reconsideration, hence the same was remanded back to the assessing authority to give an opportunity to the assessee which is in compliance with the principles of natural justice. Therefore, we are of the view that the first substantial question of law framed in this appeal placing reliance on the various provisions of the Act and decisions referred to in the earlier para of this judgment by the learned counsel for the appellant does not arise for our consideration for the reason that we have to accept the conclusions arrived at by the Tribunal in its judgment on the contentious point that arose for its consideration for remanding the matter to the AO. We are in respectful agreement with the finding of fact recorded by the Tribunal with regard to bad debt and therefore, the remand order is justified.
The first appellate authority at the time of reconsidering the claim of the appellant in the light of the material particulars that are going to be placed on record shall strictly examine the same keeping in view the Explanation to cl. (vii) of s. 36(1) of the Act and the Division Bench judgment of Allahabad High Court in the case of Jubilant Organosys vs. CIT (supra).
15. With regard to substantial question No. 2, the same has to be answered in favour of the Revenue for the following reasons : (i) The learned counsel for the Revenue Mr. Seshachala has rightly placed reliance upon the Division Bench judgment of this Court in the case of Asstt. CIT vs. Abcon Engineering & Systems (P) Ltd. (supra) wherein the Division Bench of this Court after referring to ss. 80-O, 80AB(5) of the IT Act and referring to various decisions of the apex Court particularly in Motilal Pesticides (I) (P) Ltd. vs. CIT (2000) 160 CTR (SC) 389 : (2000) 243 ITR 26 (SC) has clearly laid down the law with regard to deduction under ss. 80-O and 80AB(5) of the Act at para 19 p. 207 which relevant para of the said judgment is extracted as hereunder : “Two ss. 80AA and 80AB of the IT Act, 1961 were introduced by the Finance (No. 2) Act, 1980. While s. 80AA was to have retrospective effect from 1st April, 1968, s. 80AB was to have operation w.e.f. 1st April, 1981. Sec. 80AA had the effect of effacing the decision of the Supreme Court in Cloth Traders (P) Ltd. vs. CIT (1979) 10 CTR (SC) 393 : (1979) 118 ITR 243 (SC) which had interpreted s. 80M. Sec. 80AB was made applicable to all the sections in Chapter VI-A except s. 80M. In Distributors (Baroda) (P) Ltd. vs. Union of India & Ors. (1985) 47 CTR (SC) 349 : (1985) 155 ITR 120 (SC), however, the Supreme Court specifically overrurled its earlier decision in Cloth Traders (P) Ltd. vs. CIT (supra) and held that deduction is to be allowed only on the net dividend income and not on the gross income. With reference to s. 80AB, the Supreme Court said that it was merely of a clarificatory nature. In H.H. Sir Rama Varma vs. CIT (1994) 116 CTR (SC) 55 : (1994) 205 ITR 433 (SC), the Supreme Court observed that on a parity of reasoning with s. 80AA as given in Distributors (Baroda) (P) Ltd. vs. Union of India (supra), it must be held that s. 80AB was enacted to declare the law as it always stood in relation to the deductions to be made in respect of the income specified under the head ‘C’ in Chapter VI-A of the Act. The special deduction under s. 80HH is allowable on the net income and not the gross income.”
16. The above-referred judgment is followed by this Court in its subsequent unreported decision in IT Appeal Nos. 438-444 of 2002 c/w IT Appeal Nos. 3047 of 2005 and 6 of 2004 disposed of on 21st Sept., 2007. In the instant case, on perusal of the order passed by the first appellate authority after careful examination of the concurrent finding of fact recorded by it is that the assessee has preferred claim without furnishing the details with regard to expenses incurred for earning gross income for the assessment years in question. In the absence of non- furnishing of particulars by the assessee to claim the benefit before the AO for the purpose of s. 80-O, the same cannot be accepted by us. The said finding of fact recorded by the first appellate authority has been set aside by the Tribunal following the earlier decision in the case of M.N. Dastur vs. Dy. CIT (supra) which decision was rendered prior to amending the s. 80AB(5). No doubt this Court in CP No. 580 of 1998, without noticing the provisions of s. 80AB(5) of the Act and decision of the apex Court has rejected the review petition, therefore, the reliance placed by the Tribunal on the said decision to set aside the concurrent finding of the first appellate authority is erroneous in law. Therefore, the substantial question of law referred to supra would certainly arise for our consideration and accordingly we answer the same in favour of the Revenue and to that extent the judgment of the Tribunal is hereby set aside.
17. The appeals are partly allowed as indicated above.
[Citation : 323 ITR 151]
