The Commissioner Of Income Tax, Chennai v. M/S.tyco Sanmar Limited 9 Cathedral Road, Chennai - 600 086

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 27.10.2014 CORAMTHE HONOURABLE MR.JUSTICE R.SUDHAKARANDTHE HONOURABLE MR.JUSTICE R.KARUPPIAH Tax Case (Appeal) No.512 of 2014 The Commissioner of Income Tax, Chennai. ...AppellantVs. M/s.Tyco Sanmar Limited9 Cathedral Road,Chennai - 600 086. ...Respondent APPEAL under Section 260A of the Income Tax Act against theorder dated 31.01.2012 made in I.T.A.No.1831/Mds/2011 on the fileof the Income Tax Appellate Tribunal, Madras 'D' Bench preferredagainst the order of the Commissioner of Income Tax (Appeals)-VI,Chennai, dated 29.08.2011 emantes from the order dated 31.12.2010passed by the Assistant Commissioner Income Tax, Company Circle -III (2), Chennai - 34. For Appellant : Mrs.G.Vardini Karthik Standing counsel for Income Tax J U D G M E N T (Delivered by R.SUDHAKAR,J.) This Tax Case (Appeal) is filed by the Revenue as against theorder of the Income Tax Appellate Tribunal for the assessment year2005-06. 2. The respondent/assessee is engaged in the manufacturing andselling of safety relief valves. The assessee filed return ofincome on 26.10.2005 declaring a sum of Rs.12,64,00,710/-.During the financial year ending 31.03.2005, they sold goods toM/s.Tyco Valves and Controls, L.P. USA. In the invoice, therespondent/assessee/exporter erroneously applied surcharge forFerry Moly in respect of certain exports, though the component didnot contain Ferry Moly. In respect of other goods, higher rate ofsurcharge was applied erroneously. The discrepancy, on account ofthe erroneous levy of surcharge, amounted to Rs.1.68 crores, whichhttps://hcservices.ecourts.gov.in/hcservices/was noticed by the assessee at the time of finalisation of audit for the financial year 2004-05. On noticing the discrepancy, theassessee rectified the mistake by issue of credit notes, whichresulted in reinstatement of the sales and also the debtors. Theerror was noticed by the assessee somewhere in May, 2005 during thetime of audit for the purpose of filing the returns and thecorrection was made in the return filed on 26.10.2005. In order tojustify the rectification of the invoices on the excess ofsurcharge and also to comply with the requirements of Reserve Bankof India Master Circular No.C-15, the assessee obtained permissionfrom the authorised dealer, namely, Corporation Bank forregularising the transaction, as it relates to export sales. Thisletter of the authorised dealer was issued on 16.11.2005. 3. The assessment in this case was completed under Section 143(3) of the Income Tax Act on 10.12.2008 and subsequently noticeunder Section 148 was issued on 26.3.2010 for disallowance ofRs.1.68 crores, which is relatable to the issue of excess billingmade to the customer from the total sales. In response to the saidnotice, the assessee filed their reply. After considering thereply filed by the assessee, the Assessing Officer disallowed theclaim of the assessee on the ground that under the mercantilesystem of accounting followed by the assessee, as and when thebills are raised, the same should be offered to tax and that anyamount that could not be realised can be written off as bad debtssubject to the conditions stipulated under Section 36(2) of theIncome Tax Act. Further, in this case, the sale proceeds are to berealised in foreign currency and the permission to write off theabove debts have been given by the Corporation Bank (authoriseddealer), as per RBI Master Circular C-15, on 16.11.2005, i.e,during the financial year 2005-06, whereas the debt has beenclaimed by the assessee in the financial year 2004-05 by nettingthe bad debts from the sale proceeds, which according to theAssessing Officer is not in order. 4. Aggrieved by the order of the Assessing Officer, theassessee preferred an appeal before the Commissioner of Income Tax(Appeals), who on considering the above fact and the plea of theassessee that the higher rate charged in the invoice on account ofsurcharge applied erroneously, which resulted in higher claim ofRs.1.68 crores, which was not lawfully due to the assessee andhaving realised the same at the time of accounting for the purposeof filing the return, they have rectified the mistake by issue ofcredit notes in respect of the sale invoice. According to theassessee, it is the re-instating of the credit sale value, theproper revenue due to the assessee has been set out in the returnand consequently, the profit of the company for the financial year2004-05 has been properly stated. The question of bad debt willarise, when there is sale of goods and the consideration of whichboth the parties accept and the buyer later on fails to honour thesale commitment either in part or in total. There is no disputeeither by the assessee or by the overseas buyer that the error ishttps://hcservices.ecourts.gov.in/hcservices/in respect of surcharge and not otherwise. It is, therefore, not a case of bad debt relatable to goods sold and delivered. It is alsonot a case of the Department that the amount in issue is inrelation to the actual value of goods sold and delivered. Inotherwords, the Department accepts excess amount in invoice onaccount of erroneous claim on surcharge. Therefore, the assesseepleaded that when there is no case of debt on sale, the question ofwriting off the bad debt will not arise. 5. The Commissioner of Income Tax (Appeals) agreed with theplea of the assessee and allowed the appeal holding as follows: "8. The contentions of the AR have beenconsidered carefully. For making disallowance ofRs.1.68 crore the AO relied only on the fact thatCorporation Bank being the authorized dealer issuedpermission to issue credit notes for US dollar 515929towards the amounts excess charged on M/s Tyco Valvesand Controls, Stafford, USA and to write off at theappellant's end as per RBI circular. AO has notdisputed the contention of the appellant thataccounting of sales of Rs.1.68 crores to M/s.TycoValves & Controls, USA is on account of error. It iswell settled that what is to be taxed is the realincome unless the purpose of the transaction is todefeat the fundamental principal of the Act (State Bankof Travancore Vs. CIT 158 ITR 102 (SC), which in myopinion is not the case given the facts of the case ofthe appellant. It does not result at all, there cannotbe tax, even though in book-keeping an entry is madeabout a 'hypothetical income' which does notmaterialize [CIT Vs. Shoorji Vallabhdas & Co. 461 ITR144 (SC)]. In the case of the appellant, the book-keeping entry is due to error of commission and hencethe judgement is more relevant. Therefore, I am of theconsidered view that the AO is directed to allow theclaim." 6. As against the order of the Commissioner of Income Tax(Appeals), the Revenue went on appeal before the Income TaxAppellate Tribunal. The Tribunal opined in favour of the assesseeand held that when the assessee recognised the mistake, it hadreversed the entries; the error was rectifiable only at the end ofthe financial year and if there was no real income for the purposeof tax, no tax could be imposed on hypothetical income.Accordingly, the Tribunal dismissed the appeal filed by theRevenue. The Tribunal held as follows: "6. We have perused the orders and heard therival submissions. There is no dispute that assesseehad excess billed its customers for a sum of Rs.1.68Crores on account of wrong application of surchargehttps://hcservices.ecourts.gov.in/hcservices/on Ferro Moly and Nickel which were used in "6. We have perused the orders and heard therival submissions. There is no dispute that assesseehad excess billed its customers for a sum of Rs.1.68Crores on account of wrong application of surchargehttps://hcservices.ecourts.gov.in/hcservices/on Ferro Moly and Nickel which were used in manufacture in the products supplied by it to itscustomers. No doubt, assessee became aware of erroronly at the time of audit which was after the end ofthe year. In our opinion, correction of an error inbilling and effecting a write-off of bad debt areentirely different. Any businessman with goodreputation will not bill his customers in excess ofwhat is legitimately due as per contracts. Whenassessee found that it had billed somethingincorrectly, it passed credit notes and reduced thebill amount and correspondingly reduced the debtsalso. This cannot, in our opinion, be equated with abad debt write -off. The customers were not legallyand lawfully bound to pay such excess amount to theassessee and when there is no legal right vested onthe assessee to recover the amount from thecustomers, there cannot be any debtors at all. Whenthe assessee itself had recognized the mistake, itpassed reversal entries. Just because assessee hadcome to know of the error only after the end of yearwill not mean that it should be taxed on amountswhich were never its income. As noted by the ld. CIT(Appeals), endeavour of the Revenue should be to taxreal income and not hypothetical income. We are ofthe opinion that ld. CIT(Appeals) was well justifiedin deleting the addition. No interference is calledfor." 7. Aggrieved by the order of the Tribunal, the present TaxCase (Appeal) has been filed. The Revenue canvassed the issue onthe following substantial question of law:"Whether in the facts and circumstances of thecase, the Tribunal was right in not treating thereversal of incorrect bill entries as write off ofbad debts?" 8. Learned Standing counsel appearing for the Revenuesupporting the findings of the Assessing Officer contended thatwhen the assessee sought permission through the authorised dealer -Corporation Bank seeking to write off the above bad debt, which wasgranted on 16.11.2005, in the financial year 2005-06, the assesseecould not claim benefit for the financial year 2004-05. Therefore,Section 36(2) of the Income Tax Act gets attracted. In any event,by correcting the sale price in the invoice and filing a return onsuch income on the basis of the corrected invoice, the assesseecannot claim benefit of bad debt for the same financial year, viz.,2004-05 (assessment year 2005-06). Even as per the letter dated16.11.2005 issued by the Corporation Bank, they can claim such abenefit for the financial year 2005-06, viz., assessment year 2006-07 and not 2005-06. Hence, the order of the Tribunal has to be setaside.https://hcservices.ecourts.gov.in/hcservices/ 9. Though this argument appears to be appealing at the firstblush, on going through the facts, as has been discussed by theCommissioner of Income Tax (Appeals) and the Income Tax AppellateTribunal, it is clear that the sum of Rs.1.68 crores, on the excessbilling by the assessee on account of the wrong application ofsurcharge of Ferry Moly and Nickel, which were used in themanufacture of products supplied to the customer, cannot partakethe character of the bad debt. When admittedly the liability tosurcharge did not accrue with the sale of the goods during thefinancial year ending 31.3.2005 and the error in the bill came tobe noticed by the assessee at the time of audit at the end of thefinancial year, which occasioned the correction of the error in thebilling, it cannot be equated to that of writing off bad debt,which calls for totally a different nature of transaction. Ifgoods have been actually sold and the sale proceeds are notrealised, then the question of bad debt would arise. In this case,no goods to the value to support the value of Rs.1.68 crores weresold and delivered, to become due or bad debt. The assessee foundthat it had billed the purchaser incorrectly and therefore issuedcredit notes and reduced the bill amount and correspondinglyrevised the debts as well. Hence, the Tribunal was correct inholding that it is not a case of writing off a bad debt. The buyerwas not legally or lawfully bound to pay the surcharge amount tothe assessee and the assessee was not legally entitled to recoverthe same from the buyer. Therefore, it cannot be said that thereis an element of bad debt, which has to be written off. 10. The next question that would arise is whether the letterof the authorised dealer dated 16.11.2005 would clothe thistransaction in the manner in which the Revenue wants to do. We areafraid that such a position may not arise in the present case, asthe assessee in this case had complied with the requirement of theRBI Master circular C-15 for regularising the transaction, which isan export sale. The excess amount on account of surcharge which isnot lawfully recoverable has to be set right, for which, permissionof the Reserve Bank of India is required in a procedure prescribed.That by itself will not make the amount of Rs.1.68 crores a baddebt. If the assessee does not follow the procedure, it wouldentail consequent legal action under the relevant provisions of theForeign Exchange laws. In this case, the assessee had noticed theerror and rectified the same in the balance sheet before the returnwas filed. It offered to tax the actual income and deleted theincome, which is relatable to the erroneous claim under surcharge.Hence, the Tribunal was justified in holding that there is noquestion of tax on a hypothetical income. We find no error in theorder of Tribunal. 11. Accordingly, we find no question of law much less anysubstantial question of law arises for consideration in thisappeal. The order of the Income Tax Appellate Tribunal standsconfirmed and this Tax Case (Appeal) stands dismissed. No costs. Sd/-Assistant Registrar(T&P)//True Copy//Sub Assistant RegistrarslTo1. The Income Tax Appellate Tribunal, Madras 'D' Bench. 2. The Commissioner of Income Tax (Appeals) VI, Chennai.3. The Assistant Commissioner of Income Tax, Company Circle-III(2),Chennai - 600 034.1 CC to Mr.T.Ravikumar, Advocate SR.No. 50375T.C.(A) No.512 of 2014GGK (CO)PSI (25.11.2014)