Unreported Decisions – August 2019

By Ajay R. Singh

1. S. 37 – Business expenditure – commission paid to intermediating or Sole Agent for the getting the order and rendered various post sale services – The payment has arisen out of contractual obligation – allowable as business expenditure.

The assessee, a manufacturer of fencing products. During the course of assessment proceedings, the AO noticed that the assessee had claimed commission expenses of ₹ 1,13,60,951/- and out of it ₹ 92,56,287/- was paid to only one party M/s. Arab Link Equipment Trading (ALET) which is based in Dubai. On further verification, the AO found that M/s. Consolidated Contractors Co. had given the purchase order directly to ALET, who in turn gave it to the assessee. As per the AO this means that ALET is purchasing goods from the assessee, who is supplying the material to the site which was given in the purchase order and any commission payment should be substantiated by the genuineness of payment and services rendered. The AO after perusing the e-mails filed by the assessee noted that M/s. Consolidated Contractors Co. has appointed ALET as a sole agent of the present assessee. The AO thus came to a finding that M/s. Consolidated Contractors Co. has appointed ALET as the agent of the assessee and had directed the assessee to pay the difference in amount between the quoted price to ALET and hence the services rendered by ALET in getting the contract to the assessee from M/s. Consolidated Contractors Co. are not proved. As per the AO, it is M/s. Consolidated Contractors Co. who has appointed ALET to be the sole agent of the assessee in UAE. On the basis of above reasons, the AO disallowed the commission expenses of ₹ 92,56,287/- claimed by the assessee to have been paid to ALET.

The ITAT held that the letter dated 01.04.2009 written by ALET to the assessee for supply of fencing products to M/s. Consolidated Contractors Co. prove the genuineness of services rendered by ALET to the assessee. ALET is the main intermediary company for the sale by the assessee to M/s. Consolidated Contractors Co. This fact is accepted by the AO. Also ALET has procured the order and rendered various post sale services such as customs clearance at Muscat; arrange the transport from the port to the site; arrange goods for inspection; passing of the bills and getting payments released from M/s. Consolidated Contractors Co. The payment has arisen out of contractual obligation. Therefore, the appeal filed by the revenue is dismissed..

ACIT 24(1) vs. A-1 FENCE PRODUCT CO., ITA NO.: 5346/M/2016, date: 13/05/2019 (Mum.)(Trib.)


2. S. 45: Capital Gains – Gains on sale of FSI/TDR rights received has no cost of acquisition incurred – as these are generated by the plot itself – no capital gains assessable to tax:

The assessee has sold TDR/FSI development rights for ₹ 6,00,00,000/- which was claimed as exempt from tax. According to the AO the transfer of development rights clearly attracts the capital gain tax as it is a transfer of capital asset. Accordingly, the AO determined the market value of the TDR/FSI rights at ₹ 8,76,55,000/- which was the value as per stamp duty valuation as against ₹ 6,00,00,000/- declared from sale of TDR/FSI and accordingly determined the capital gain in the hands of the assessee at ₹ 3,80,00,000/- as against nil returned by the assessee.

The Ld. CIT(A) has held that the assessee has permitted the builder load FSI/TDR on the plot and construct the new building for which the assessee has received ₹ 6,00,00,000/-. The Ld. CIT(A) has further held that as the TDR rights have arisen only on account of amendment in DC Regulations 1991 and therefore there is no cost of acquisition and no capital gains tax was attracted. The Ld. CIT(A) also held that since there is no sale of land and building, the provisions of section 50C of the Act were also wrongly invoked by the AO. Finally ld. CIT(A) deleted the addition made by the AO on account of capital gain on sale of TDS/FSI rights by holding that the same is not chargeable to capital gain tax.

The ITAT upheld the order of CIT(A) relying on the Hon’ble Bombay High Court in the case of CIT vs. Sambhaji Nagar Co-op. Hsg. Society Ltd. (2015) 370 ITR 325 (Bom.) wherein it has been held that in case of sale of FSI/TDR rights by the assessee to the developers which have accrued in favour of the assessee following promulgation of Development Control Rules for Greater Mumbai, 1991 and the said developmental right were generated by the plot itself and there is no cost of acquisition and therefore not liable for any capital gain tax. Therefore, dismissed the appeal of the Revenue.

ACIT-25(2) vs. Dilip R. Shringarpure, ITA No. 6103/ Mum/2017, DOH: 26/06/2019 (Mum)(Trib)

Dilip R. Shringarpure

3. S. 36(1)(vii) : Bad debts-Law after 1989-Assessee writing off debts in its books of account – Sufficient-Not necessary for assessee to establish debt became irrecoverable.

The assessee is a company engaged in the business of manufacture and sale of gear boxes, couplings etc. and during the relevant year also had an undertaking located at Chennai engaged in development of software i.e., Computer Aided Design (‘CAD’). The assessee maintains separate sets of accounts with respect to its said two businesses. During the course of scrutiny assessment, AO found that the assessee debited an aggregate amount of
₹ 80,09,923/- in its profit & loss a/c towards bad debts written off. AO declined the claim of bad debts by observing that the assessee was not able to prove as to how the said debts have become ‘bad debt’. Onus was on the assessee to prove the “debts’ had become ‘bad debts’. AO concluded that since the assessee has failed to substantiate its claim with any document whatsoever, it cannot be allowed. The CIT(A) confirmed the action of the AO.

The Tribunal held that during the course of the assessment proceedings the assessee duly furnished details of the aforesaid amounts written off in its profit & loss a/c. for the subject year inter alia containing names of the party, amount written off and the particulars of the years in which the debts so written off were considered as income in the books and also furnished necessary explanation in this regard as desired by the A.O. It was explained to the A.O that subsequent to the amendment by the Direct Tax Laws (Amendment) Act, 1987 with effect from 1st April, 1989 the pre-conditions for allowance of a bad debts written off as per section 36(l)(vii) read with section 36(2) namely, (a) the bad debt in question must be written off as irrecoverable in the accounts of the assessee for the relevant previous year; and (b) the amount of bad debt must have been taken into account in computing the income of the assessee at any time prior to its write off in the accounts, have been satisfied in the case of the assessee. There is no condition of proving that debt has become bad during the relevant assessment year. However, for disallowing the amount, AO has relied on the judicial pronouncements which pertain to the period prior to the amendment. Thus, without appreciating the legal position in this regard, the A.O has disallowed the entire aforesaid amount of ₹ 80,09,923/- on the allegation that the assessee has not been able to prove how the debts have become ‘bad debt’. Notwithstanding the fact that no such documents were required to be furnished by him, the A.O alleged that the assessee failed to substantiate its claim with any document whatsoever and it cannot be allowed. The aforesaid action of the A.O in summarily disallowing the entire amount of ₹ 80,09,923/- is against the position in law. Thus, it directed the AO to delete the disallowance.

M/s. Flender Limited vs. DCIT-8(2)(1), ITA No. 2550/ Mum/2018, DOH: 26/06/2019 (Mum)(Trib)

M/s. Flender Limited