Commissioner of Income Tax,Chennai v. M/s.Brilliant Tutorials Pvt.Ltd

IN THE HIGH COURT OF JUDICATURE AT MADRASDATED :: 29-01-2007CORAMTHE HONOURABLE MR.JUSTICE P.D.DINAKARANANDTHE HONOURABLE MRS.JUSTICE CHITRA VENKATARAMANTAX CASE (APPEAL) No.6 OF 2007Commissioner of Income Tax,Chennai....Appellant-vs-M/s.Brilliant Tutorials Pvt.Ltd.,12, Masilamani Street,T.Nagar,Chennai-600 017....RespondentsAppeal against the order, dated 18.08.2006, made in ITANo.2749/Mds/2005, on the file of Income Tax Appellate Tribunal,Madras 'A' Bench for the Assessment Year 2002-2003 against ITANo.246/2005-2006/A-III dated 24.11.2005 on the file of theCommissioner of Income Tax (Appeals)-III Chennai against PA GIRNo.Ex6-055/AABCB2768C dated 28.3.2005 on the file of the AssistantCommissioner of Income-Tax Company Circle(1) (2), Chennai. For appellant : Mr.J.NarayanaswamyJ U D G M E N T(Judgment of the Court was delivered by CHITRA VENKATARAMAN,J.)Revenue is on appeal against the order of the Tribunal.Theappeal relates to the assessment year 2002-2003.2. Following are the questions of law raised in this appeal:(1)Whether on the facts and circumstances of the case, theTribunal was right in holding that as long as the https://hcservices.ecourts.gov.in/hcservices/ assessee writes off a debt as bad debt, the questionwhether it was indeed a bad debt should not be goneinto ?(2)Whether on the facts and circumstances of the case,after the amendment of Sec.36, an assessee is entitled toclaim deduction in respect of any debt written off as bad?(3)Whether on the facts and circumstances of the case, theTribunal was right in permitting the assessee to claimexpenditure on advertisement in one year, while thematching fee receipts were spread over more years ?, and(4)Whether on the facts and circumstances of the case, theassessee is entitled to follow a system of accountingwhich is not in accordance with the matching principle ?3. The assessee is a company engaged in the business ofrunning a tutorial for professional entrance examinations. On28.03.2000, it took over the business of the company, FirstComputers. The assessee claimed a sum of Rs.51,57,365/- as baddebt, being the amount due from the franchisee of First Computers.It is stated that the main business of First Computers was to impartcomputer education and it had collected security deposits fromvarious franchisees. It is stated that the business, however, sloweddown and worsened due to the tragic incidents in USA in the yearSeptember, 2001. Faced with this situation ,and that thefranchisees had closed down their business the assessee was left withno other option except to write off the dues from the franchisees.The assessee filed a detailed statement, showing the names of thefranchisees, the amount due from them, the security deposit adjustedand the net amount written off. Such course was adopted by theassessee, on the contention that there had been a serious fall in theincome earned by these franchisees. They also felt that the closureof the business by the franchisees had also motivated them to writeoff as bad debt. 4. The assessing authority took the view that the assesseecompany had taken a unilateral decision of closing the accounts ofthe franchisees and thereby claimed the debts as bad . Hence , theassessing authority rejected the plea and disallowed the claim of baddebts, thus resulting in addition of a sum of Rs.51,57,365/- to theassessee's total income.5. Aggrieved of the above, the assessee preferred an appealbefore the Commissioner of Income Tax (Appeals) – III. In the courseof hearing before the first appellate authority, the Commissioner ofIncome Tax called for a report from the assessing officer, wherein it https://hcservices.ecourts.gov.in/hcservices/ was stated that mere writing off of the amount from the assessee'sbooks of accounts as a bad debt was not acceptable and, hence, unlessand until the assessee proved that the debt really became a bad debtand in the absence of any satisfactory proof to that extent, theclaim, as such, could not be granted. The first appellate authority,by his order, dated 24.11.2005, confirmed the order of the assessingauthority, stating that there was no considerable force in thesubmission of the assessee. 6. The aggrieved assessee preferred a further appealbefore the Tribunal. The Tribunal considered the decision relied onby the Revenue in the case of CIT v. Micromax Systems Pvt.Ltd., (277ITR 409 (Mad), and South India Surgical Co.Ltd. v. ACIT, (153 Taxman491), and pointed out that as against the total receipts from thefranchisees at Rs.51,47,980/- in the year 2000-2001, there was aconsiderable fall in the year 2001-2002 at Rs.11,63,247/-; thatconsidering such a huge fall in the business, there was a clear cutcase of bad debts and after the amendment of Section 36 (1) (vii),writing off such bad debt would entitle the assessee to claimdeduction that an assessee was not required to prove anything beyondexcept the honest judgment on the part of the assessee to sustainthe claim. Under the circumstances, the Tribunal allowed the plea ofthe assessee. On the second aspect regarding the expenditureincurred on advertisement in one year and the matching fee spreadover for more than one year as well as the question of the system ofaccounting, which is not in accordance with the matching principle,the Tribunal noted that the assessee was collecting the fee inadvance and the receipts were split over the duration of the entirecourse. The Assessing Officer observed that the entire expenditurerelating to advertisement expenses should be allowed only in a year,in which the receipts had been booked, which should be in accordancewith the matching principle. The Tribunal held that the decision ofthe Apex Court in the case of Madras Industrial InvestmentsCorporation Limited v. CIT., 225 ITR 802 (Mad), could not be appliedto the facts herein and the benefit of expenditure on advertisementwould not be available on a specified future period. The Tribunalfurther held that the benefit would be available for a long period oftime, but such period of time could not be defined by any method.The Tribunal also rejected the reliance placed on the assessee's owncase for the earlier years, on the ground that the assessee wasfollowing the cash system then. Going by the language of Section 37(1) it is clear that it does not impose any condition except thosethat are explicitly set out in the provision that the expenditure islaid out exclusively for the purpose of business and that expenditurebeing revenue in character, the mere fact that the assessee mighthave derived benefit in future years could not stand in the way ofgranting the relief on the expenditure incurred on advertisement.The Revenue has preferred this appeal on this ground also. https://hcservices.ecourts.gov.in/hcservices/

7. Learned Standing Counsel appearing for the Revenuesubmitted that the view of the Tribunal that the assessee would beentitled to the relief on the claim of bad debt by a mere writing offwithout any evidence to support the same would be totallyunsustainable in law. He further submitted that amendment to Section36 does not empower the assessee to write off any amount to claim itas an automatic deduction as a bad debt. He also submitted thatwhile the assessee had been spreading the income over the years, thededuction is claimed in the year of expenditure itself. It is alsostated that the assessee neither followed the mercantile system norcash system of accounting and that after 1997-98, the option is onlyeither cash system or mercantile system. Under the circumstances,the learned Standing Counsel prayed for rejection of the view of theTribunal. 8. Section 36 (1) (vii) was amended w.e.f. 01.04.1989. Therelevant provision reads as follows :"subject to the provisions of sub-section (2), the amount of any bad debt or partthereof which is written off as irrecoverable inthe accounts of the assessee for the previousyear." (emphasis supplied)9. A perusal of the order of the assessing authority showsthat as a matter of fact there had been a fall in the receipts ofincome through franchisees. Referring to the details of the income,it was stated that the assessee had been receiving sufficient amountby way of advance in the form of security deposits and, hence, therewas no reason for the assessee to have bad debts for the assessmentyear 2002-2003 of such a huge magnitude. It was further stated thatafter the take over of First Computers, the assessee company hadwithdrawn from the business and took a unilateral decision of closingtheir accounts and claimed it as bad debts. 10. A perusal of the details given before the AssessingOfficer shows that there had been an actual fall in the receipts,which is said to be due to the crash in the USA, having a seriousimpact on the business carried on. A commercial decision to closedown the business was taken and thereby the account closed as part ofthe decision. There is no denial of this fact from the revenue. Assuch, factually there is nothing for the revenue to suspect themotive for writing off the debt. Quite apart from this, by reasonof the Direct Tax Laws Amendment Act 1987, the question as to whetherthe debt has become bad or doubtful is a factual one. With theamendment that is brought in w.e.f. 01.04.1989, even taking the viewthat the benefit could not be claimed as an automatic concomitant ofwriting off, an honest judgment made at that time when the assesseewrote off the debt, in the light of the events leading to that stage, https://hcservices.ecourts.gov.in/hcservices/ could not be found fault with. Under the circumstances, the claimmade in terms of Section 36 (1) (vii) can not be rejected. 11. Having regard to the scope of Section 36 (1) (vii) andthe commercial decision, which persuaded the assessee to write off,we do not find any question of law arising from the order of theTribunal, for admission. 12. Learned counsel appearing for the Revenue placedreliance on Commissioner of Income-Tax v. Micromax Systems P.Ltd.,(2005) 277 ITR 409 (Mad), a decision of this Court, relating to theassessment year 1997-98. While considering the amendment, this Courtheld that after 01.04.1989, it is a mandatory condition thatdeduction actually written off and not just made as a provision,would be allowed as a bad debt. 13. Explaining the amendment, the Board issued a CircularNo.551, dated 23rd January,1990, which read as follows:"The old provisions of clause (vii) of sub-section (1) read with sub-section (2) laid downconditions necessary for alllowability of baddebts. It was provided that the debt must beestablished to have become bad in the previousyear. This led to enormous litigation on thequestion of allowability of bad debt in aparticular year, because the bad debt was notnecessarily allowed by the Assessing Officer inthe year in which the swsame had been written offon the ground that the debt was not establishedto have become bad in that year. In order toeliminate the disputes in the matter ofdetermining the year in which a bad dent can beallowed and also to rationalise the provisions,the Amending Act 1987, has amended clause (vii)of sub-section (I) and clause (i) of sub section(2) of the section and to provide that the claimfor bad debt will be allowed in the year in whichsuch a bad debt has been written off asirrecoverable in the accounts of the assessee. "Hence, given the understanding by the Board to the provisionsalso, this appeal fails.14. On the second issue regarding the advertisementcharges, it is seen that the assessee had changed its accountsmaintenance from cash system to mercantile system. The AssessingOfficer rejected the claim, on the ground that the advertisementexpenses claimed by the assessee did not match the receipts. Hence, https://hcservices.ecourts.gov.in/hcservices/ he took the view that a portion of the expenditure relating to theadvertisement expenses should be allowed only in the year in whichthe receipts had been booked. Such method would be a perfect matchof accounting the income and expenditure. 15. The first appellate authority, however, held that thestand of the assessee did not fit into the matching concept ofincome and expenditure and, hence, confirmed the disallowance. Asfar as this claim is concerned, it is not denied that the expenditureincurred was for the purpose of business and the possible benefit infuture does not mitigate the claim for expenditure in present time.Hence, considering the scope of Section 37, the Tribunal correctlyheld that the assessee was entitled to the deduction sought for.16. When once it is admitted that the expenditure is ofrevenue in nature and incurred fully and exclusively in the business,a further enquiry as to whether the income has flown thereon fromthe expenditure, would not be a justifiable ground for rejection. Onthe other hand, an expenditure satisfying the character as revenueexpenditure should be allowed in the assessment. 17. In the decision in Commissioner of Income-Tax v.Southern Roadways Ltd., reported in (2006) 282 ITR 379 (Mad), thisCourt, to which one of us was a party (Justice P.D.D), referring to adecision of the Division Bench in CIT v. Southern Roadways Ltd.,reported in (2004) 265 ITR404, considered the scope of Section 37and held that any expenditure not being in the nature of capitalexpenditure or personal expenses but laid out or expended wholly andexclusively for the purpose of business or profession, should beallowed.18. As to the third question raised, the Revenue had not made aspecific issue before the Tribunal, except to contend that the claimof expenditure in one year and spreading over the income in futureyears would amount to a hybrid system of accounting not in accordancewith the matching principles. However having regard to our decisionas stated above, we do not find any justification to admit thisappeal.19. In view of what is discussed above, this appeal isdismissed at the threshold.Sd/Asst.Registrar/true copy/Sub Asst.Registrar dixit https://hcservices.ecourts.gov.in/hcservices/ To1. THE ASSISTANT REGISTRAR,INCOME TAX APPELLATE TRIBUNAL,RAJAJI BHAVAN,BESANT NAGAR, CHENNAI.2. THE COMMISSIONER OFINCOME TAX, CHENNAI.3. THE COMMISSIONER OF INCOMETAX (APPEALS-III),CHENNAI.4. THE ASSISTANT COMMISSIONEROF INCOME TAX COMPANY CIRCLE(1)(2) CHENNAI.+1cc to M/s.Pushya Sitaraman, Sr.Standing Counsel, Advocate Sr 5621KLT (CO)km/14.3.T.C.(A) No.6 OF 2007