1. The present appeal has been preferred by the Revenue against the order of the CIT(A) for the asst. yr. 1987-88. The first ground taken up by the Revenue is against allowing the claim of bad debt of Rs. 9,18,750.
2. The relevant facts are that Rajasthan Export House, Bombay entered into a contract with a Mauritius based party Salt & Allied Industries Ltd. On 10th August, 1985, for supply of 5,000 MT of salt at the rate of 40 Dollar per MT. Consequently Rajasthan Export House (REH) entered into a contract with the assessee firm on 25 November, 1985 for purchase and supply of 5,000 MT of salt at the rate of 15 Dollar per MT for the purpose of export to Mauritius. The shipment of the salt was effected by the assessee firm on or around 4th January, 1986, as per the terms of the contract. The LC opened in favour of REH could not be negotiated for want of bill of lading. The REH, therefore, could not make any payment to the assessee and the same being irrecoverable the assessee wrote off the said amount as a bad debt and claimed the same as such in the current year.
2.1 The AO having considered the facts and explanation offered has observed that the said contract with REH was not signed by anyone on behalf of REH. Further, the contract of REH with Salt & Allied Industries Ltd. (SAI Ltd.) was not assigned by anyone on behalf of the Mauritius party. The AO has further noted that ship carrying the cargo was at Mangalore port on 25th June, 1986 and caveat was filed by the captain of the ship in the local Court. Though the local Court had not been negotiated and time had expired no action was taken for arresting the ship either by the assessee or REH. The assessee also took no legal action against REH for recovery of the amount. According to the AO considering the above facts and various papers filed a doubt is raised also the genuineness of the transaction.
2.2 The entries on account of the all alleged sale of salt to REH was passed on the last day of the accounting year and accordingly REH was debited on the last day and local sale account was credited on the last day. The AO further noted that the salt exported was packed in 66,667 gani bags. The assessee had not shown any consumption of gani bags for the salt sold. The AO has further noted that there were two concerned SAI Ltd. of which Mr. Serwaz was chairman and SAI Ltd. in which Mr.
Serwaz was a partner. Copies of document furnished showed that the salt was despatched as per M. V. Golden Eagle ship but it is not clear whether the despatch was to the company or the firm.
2.3 The AO also noted that the assessee firm is one of the concerns of a bigger group engaged in manufacturing and trading of salt. The AO further noted that on number of occasions a common shipment took place for various concerns of the group and quantity and expenses were apportioned. He also noted that Western India Salt Mfg. Association (WISMA) had as its members related concern of the assessee-firm and one of their partners Shri R. P. Patel was president and employee Shri Contractor was secretary of association. Salt was a canalised export item. WISMA undertook export negotiation with State Trading Corpn.
(STC) and it allotted export quota to its members.
2.4 The AO has further pointed out that the assessee-firm failed to produce any evidence to prove the genuineness of the sale and the sale transaction resulted into not only a debt but a bad debt. Accordingly the AO rejected the claim of bad debt placing reliance on the decision of the Hon'ble Madras High Court in the case of TSPLP Chidambaram Chettiar vs. CIT (1967) 63 ITR 181 (Mad), wherein it was held whether a debt is bad is a factual matter and which depends on actual facts relevant thereto and not on the hopes, fears or judgment of the creditor himself.
2.5 As regards the alternate claim of the assessee for allowing the same as a business loss the AO observed that the alleged sale was by pure and simple volition of the assessee. He further referred to the observation made in the case of Allen V. Farqutharsan Bros. & Co.
(1932) 17 Tax Cases 59 to the effect that a loss is something different and that is not a thing which he expends or disburses that is a thing which comes upon him ab extra. According to the AO the trading loss has to fall on the assessee without his knowledge or against his will. In this view of the matter the alleged unrecovered sale proceeds were not treated as a trading loss and accordingly alternative claim made was also rejected.
3. On appeal, the first appellate authority treated the transaction of sale of 5,000 MT salt to REH and its shipment to Mauritius party through ship Golden Eagle as genuine in para 4 of his order reproduced hereunder : "I have carefully considered the submissions both oral and written.
I have gone through the copies of all the documents, letters etc.
which were filed by the appellant before the CIT during the course of assessment proceedings especially the following : (i) Papers relating to the transaction between the appellant and Rajasthan Export House.
(ii) Correspondence between WISMA and the Dy. Superintendent of Salt, Salt Test Laboratory, Adipur requesting issue of export worthiness certificate.
(iv) Correspondence between WISMA and the State Trading Corpn. of India Ltd. (v) Notice of readiness of the vessel Golden Eagle issued by Velji P. & Sons (Agencies) to the appellant.
(vi) Correspondence between WISMA and the State Trading Corpn. of India Ltd. to endorse the letters of credit.
(vii) Correspondence between the State Trading Corpn. of India Ltd. and Bank of Baroda, Bombay.
(viii) Correspondence between the appellant and the Bank of Baroda, Bombay.
(ix) Correspondence between the WISMA and the State Trading Corpn.
of India Ltd. informing that the matter was referred to Mulla & Mulla.
(x) Correspondence between the appellant and Rajasthan Export House requiring payment.
(xi) Copies of notice issued by the appellant's Advocate to Rajasthan Export House.
(xii) Copy of B Bench's letter dt. 19th September, 1986, addressed to Rajasthan Export House.
(xiii) Copy of letter dt. 9th October, 1986, addressed by Mulla & Mulla to Rajasthan Export House.
The above documents established that the transaction involving sale of 5,000 MT of salt was not only between the appellant and Rajasthan Export House but so many other authorities and parties were involved namely State Trading Corpn. of India Ltd. WISMA, Salt Test Laboratory, Adipur, Bank of Baroda, Bombay, Velji P & Sons (Agencies), Shri Murari R. Sharma, appellant's advocate, Mulla & Mulla, etc. In view of the voluminous documentary evidence available on record I fail to understand as to how even a suspicion could be cast on the genuineness of the transaction which resulted in debts of Rs. 9,18,750 to the appellant. In the assessment order the Asstt.
CIT has stated that 'looking at the invoices for this alleged shipment it is seen that alleged salt is shown to have been packed in 66,667 gunny bags'. According to the Asstt. CIT answer No. 3 of the appellant's submission dt. 20th October, 1989, did not reflect consumption of those gunny bags. Shri Choksi has pointed out that in the statement filed in response to answer No. 3 the figure of 66,667 gunny bags remained to be typed out. He pointed out that the total No. 3,81,313 in that statement included the figure of 66,667 gunny bags but it remained to be typed out inadvertently. In other words, his submission was that without the figure of 66,667 the total would not have been 3,81,313 but would have been less by 66,667 gunny bags. I have myself verified the said statement and find that what Shri Choksi says is correct. I am satisfied that there was absolutely no justification for the Asstt. CIT to cast any suspicion on the genuineness of the transaction and his observations that the transaction was not genuine beyond typing out some papers were uncalled for".
Further the learned CIT(A) considered the allowability of the bad debt claim of the assessee in paras 5 and 6 of his order and having regard to the facts and submissions made on behalf of the assessee he allowed the bad debt claim with the following observations : "I have carefully considered the submissions both oral and written.
I agree that the entire trend of the judiciary relating to admissibility of bad debt has changed so as to say that bad debt shall be allowed in the year itself in which it is written off as irrecoverable by the assessee. Not only that legislature has also amended the relevant law relating to admissibility of the bad debt.
CBDT Circular No. 551 dt. 23rd January, 1990 explaining provisions of the Direct Tax Laws (Amendment) Act, 1987, has taken note of the unnecessary litigation on the question of allowability of bad debt in a particular year. It is true that the said CBDT circular would be applicable to a subsequent assessment year but would not mean that the objects to achieve the same in subsequent assessment year cannot be considered in the asst. yr. 1987-88, under appeal. On facts also the debt had become irrecoverable. The appellant had given legal notices to Rajasthan Export House but with no process.
Even the cheque issued by Rajasthan Export House bounced. I am, therefore, of the view that it would be in the interest of justice considering the CBDT circular No. 551 and the fact, that the impugned amount is allowed as bad debt in the accounting period relevant to asst. yr. 1987-88, under appeal. I put a specific query to Shri Choksi as to whether any amount had been recovered by the time of hearing of appeal and he informed that not a single paise was recovered. Considering the entirety of facts, therefore, I direct the Asstt. CIT to allow the impugned amount of bad debt".
The CIT(A) considered the alternative claim of the assessee for treating the said amount as a business loss in para 7 of his order and for the reasons discussed therein the said claim was not accepted. The Revenue has challenged the aforesaid finding of the CIT(A) of accepting the bad debt claim before us.
4. The learned Departmental Representative heavily relied upon the order of the AO and narrating the facts submitted that the sale of salt and its shipment to Mauritius has not been established and proved by any positive evidence and as such there was no question of allowing any bad debt on that account. The first appellate authority has allowed the claim without appreciating the facts and material available on records and accordingly the finding given by the first appellate authority deserves to be vacated.
5. The learned counsel for the assessee has given the sequence of transactions/events leading to the loss of Rs. 9,18,750 on sale of 5,000 MT salt to Rajasthan Export House as under : (1) Rajasthan Export House, Bombay, approached the assessee on 25th November, 1985 to sell them 5,000 MT salt ('Indian Marine Uncrushed Common Salt' containing Nacl 97 per cent. minimum) packed in 75 kg secondhand good gunny bags at $ 15 per MT F.O.B. Kandla to be shipped to Mauritius.
(2) Payment was to be made by Rajasthan Export House, Bombay, against shipping documents.
(3) Rajasthan Export House, Bombay, had entered into an agreement on behalf of the State Trading Corpn. of India (STC) to sell that much salt to Salt And Allied Industries, Mauritius.
(4) Western India Sale Manufacturing Association (WISMA) had allotted that much salt to Rajasthan Export House, Bombay, a member of the Association for such export to Mauritius.
(5) The salt in question was to be despatched per vessel 'Golden Eagle' against the contract dt. 10th August, 1985, between Rajasthan Export House, Bombay, and Salt and Allied Industries Mauritius.
(6) On 4th January, 1986, WISMA wrote to Dy. Superintendent of Salt, Salt Test Laboratory, Adipur, the details relating to that much salt to be supplied by the assessee and requesting the said authority to issue export worthiness certificate to Rajasthan Export House, Bombay and Shree Krishna Salt Industries (assessee) to effect the shipment to Mauritius.
(7) The Dy. Superintendent of salt, Salt Test Laboratory, issued the required certificate on 4th January, 1986 under their No. 3(1) Exp./86/9-11.
(8) On 4th January, 1986 the assessee received a notice of readiness from Velji P. & Sons (Agencies) as agent of M.V. Golden Eagle that the vessel had arrived and was ready for loading.
(9) On 20th January, 1986 WISMA wrote to the STC that Rajasthan Export House, Bombay had carried out the export of 5,000 MT of salt and requested the STC to issue a letter to the Bank of Baroda, Bombay authorising them to negotiate the documents under letter of credit and the credit deposited to the account of Rajasthan Export House, Bombay.
(10) On 20th January, 1986 STC addressed the required letter to the Bank of Baroda, Bombay.
(11) On 27th January, 1986 the assessee addressed a letter to the Bank of Baroda enclosing a copy of the letter dt. 16th January, 1986 from Rajasthan Export House, Bombay confirming to have received the material on ship and authorising to pay the assessee the FOB value of the said salt.
(12) On 8th April, 1986, WISMA addressed a letter to STC to the effect that bills of lading pertaining to the vessel 'Golden Eagle' did not issue as a result of which Rajasthan Export House, Bombay could not negotiate the documents and the matter had been referred to Mulla & Mulla, Bombay for legal action.
(13) The assessee addressed a letter dt. 12th June, 1986 to Rajasthan Export House, Bombay, to the effect that the shipment of 5,000 MT of salt had been effected per vessel Golden Eagle and the relevant documents were submitted to them for the payment to the Bank but the bank never paid the amount to the assessee. Rajasthan Export House, Bombay were, therefore, requested to pay the amount to the assessee within 15 days of the receipt of the letter.
(14) On 29th July, 1986 the assessee reminded Rajasthan Export House, Bombay about the non-payment and threatened them that drastic action would be taken.
(15) The amount was not paid to the assessee and, therefore, a notice dt. 17th/23rd September, 1986 was sent through assessee's advocate Shri Murari R. Sharma to make payment within 10 days.
(16) In the meantime Rajasthan Export House, Bombay addressed letters to the president, STC that the shipping company had committed a fraud by changing the name of the vessel from 'Golden Eagle' to 'Brahma'.
(17) Rajasthan Export House also wrote to B Bacha, Permanent Secretary to the Prime Minister Mauritius for referring the matter to the Commissioner of Police for immediate investigation etc.
(18) Rajasthan Export House sent a copy of the letter dt. 9th October, 1986, addressed by Mulla & Mulla to Rajasthan Export House in which Mulla & Mulla had given a detailed report as to how vessel 'Golden Eagle' had changed its name to 'Brahma'.
On these facts the assessee having not received the amount in question which has become irrecoverable wrote off the same to the profit and loss account as bad/business loss".
6. As regards the utilisation of ganni bags it has been submitted that there was an opening stock of ganni bags at 2,02,141 and there were also receipts of bags in December, 1985. Thus, even presuming the purchases of bags in December, were not available for packing though in fact they were available there was enough of stock available. According to the AO the assessee used 88,601 bags in December, 1985 - 21,934 bags for sales made to Punjab Alkalies on 12th December, 1985, and 66,667 bags for sale made to Rajasthan Export House whereas the assessee as on 13th November, 1985 had opening stock of 2,02,141 bags. The learned counsel has, therefore, submitted that the view taken by the AO that there were not sufficient number of ganni bags in there month of December, 1985, for packing of the Salt was not correct. As regards the vessel Golden Eagle, being at Mangalore port on 25th June, 1996, and filing of a caveat by the captain of the ship against any ex parte order the learned counsel has submitted that this by itself does not render the transaction entered into by the assessee as non-genuine because it was not for the assessee to take any action of the type suggested by the AO. The learned counsel has further submitted that the assessee incurred expenses on account of stevedoring charges at Rs. 1,55,500, local freight charges at Rs. 1,40,811, weight scale expenses at Rs. 28,390, service charges at Rs. 12,300, commission Rs. 5,000 fees for survey Rs. 5,000 etc. relating to the shipment of 5,000 MT of salt in vessel Golden Eagle, stevedoring charges were paid to OTA Kandla (P) Ltd., transport charges were paid to Sriram transport Co., etc. The AO has not doubted the expenses so incurred in shipment of the salt. This itself proves sale and shipment of the salt in Golden Eagle. The AO has not brought on record any material to controvert the facts stated and to prove the sale as well as shipment transactions as not genuine.
7. Having so narrated the facts the learned counsel for the assessee made a submission that the material evidence produced and available on record establishes that the transaction of sale of 5,000 MT of salt and its export to Mauritius party was genuine and it is also a fact that the assessee-firm did not receive any payment against the sale of salt either from REH or from the bank against the LC opened by the Mauritius party. The amount thus being irrecoverable the assessee wrote off the debt in its books of account and the same has rightly been claimed as a bad debt.
7.1 The learned counsel has further submitted that the assessee made detailed submissions before the AO in its letter dt. 25th February, 1988 along with voluminous documents. The AO failed to appreciate the facts relating to the transaction as well as material brought on records which resulted in the impugned addition. The first appellate authority on due consideration of the facts and material evidence on records has rightly come to a finding that the transaction was genuine.
The amount being irrecoverable, the bad debt claim has rightly been allowed. In support of the claim for bad debt the learned counsel has placed reliance on the following decisions : 1. Jethabhai Hirji Jethabhai Ramdas vs. CIT (1979) 120 ITR 792 (Bom).
8. We have considered carefully the facts, material evidence on records and rival submissions made before us. The facts are that the assessee-firm is engaged in manufacturing and sale of salt and during the year under consideration the assessee effected total sales of salt at Rs. 1,09,50,447 which included export sales amounting to Rs. 67,08,512. Salt is a chanalised item for export through STC of India.
WISMA made allotment for export of salts to its members and the members accordingly exported salt as per the allotments made through the channel of STC of India.
8.1 REH, Bombay, being member of WISMA was given allotment of 5,000 MT of salt for export during the year. REH, Bombay, accordingly entered into a contract on 10th August, 1985 with SAI Ltd. of Mauritius for export of 5,000 MT of salt packed in 75 kg. ganni bags at the rate of 40 dollar per MT and as per the terms of the agreement the salt was required to be exported during the period from 1st December, 1985 to 31st March, 1986. The buyers were to establish LC of 100 per cent.
value of the contract permitting in favour of STC of India, Gandhidham account, REH, Bombay and to advise through any bank in India in favour of sellers not later than three days before the commencement of shipment under agreement. Consequently REH, Bombay, approached the assessee-firm to give an offer for the shipment of 5,000 MT uncrushed marine common salt to be exported to Mauritius vide their letter dt.
25th November, 1985 and on the same date the assessee-firm confirmed shipment of 5,000 MT salt to Mauritius packed in 75 Kg. secondhand good ganni bags at the rate of 15 dollar per MT FOB Kandla on payment against shipping documents. The salt was to be despatched per vessel Golden Eagle to Mauritius party on 4th January, 1986, WISMA wrote to Dy. Superintendent Salt, Salt Test laboratory, Adipur, informing that 5,000 MT salt has been procured by REH, Bombay, for export to Mauritius through vessel M.V. Golden Eagle and the salt will be supplied by the assessee-firm a member of Salt Works of the Association and requested for issue of export worthiness certificate to REH, Bombay, account Shrikrishna Salt Industries to effect the said shipment. The Dy.
Superintendent of Salt in his order dt. 4th January, 1986 after having analised the salt lying at salt works of the assessee-firm certified that the said salt is fit for export and certificate of worthiness on behalf of the Salt Commissioner was issued. Further on 4th January, 1986 itself the shipping agent Velji P. & Sons notified the assessee-firm that M.V. Golden Eagle has arrived on 4th January, 1985, and is ready to commence loading in accordance with the terms and conditions set. This notice was to commence from 6th January, 1986.
Meanwhile the STC of India gave NOC on 3rd January, 1986 for export of 5,000 MT salt to Mauritius. WISMA in their letter dt. 4th January, 1986 presented shipping bill pertaining to Golden Eagle for endorsement to STC.8.2 The assessee-firm arranged transport of required salt from its salt works to Kandla Port and its loading in the ship Golden Eagle during the period from 6th January, 1986 to 18th January, 1986, and the assessee-firm incurred expenses on following counts : 1,47,911 - Paid to Sriram Transport Co. and Arihant Roadways for transport of Salt from salt 28,390 - paid to Shri Mahavir Trading Co. Gayatri Sales Corpn. and International Corpn. for 1,15,000 - Stevedoring charges paid to OTA Kandla (P) Ltd. 5,000 - paid to J. B. Boda Marine & General Survey Agencies (P) Ltd. as survey fee for attending Bank Ship QuantityState Commercial Bank Ltd. Mauritius 3000 MTIndian Occian International Bank, WISMA further requested the STC to endorse the above LCs in favour of REH, Bombay. STC was also requested to issue a letter addressed to Bank of Baroda, Bombay, authorising them to negotiate the documents under the above LCs and credit the proceeds to the account of REH, Bombay.
The STC in its letter dt. 20th January, 1986 requested the Bank of Baroda, Bombay, to assign the said LCs in favour of REH, Bombay. It was also requested that on negotiation of documents a set of non-negotiable copies of documents be forwarded to them with bankers realisation certificate. On 27th January, 1986, the assessee-firm informed the Bank of Baroda in response to their letter dt. 2nd January, 1986, about the export of 5,000 MT salt and requested for payment of 75,000 dollars being cost of salt. The assessee-firm also sent a letter dt. 16th January, 1986 received from REH, Bombay, confirming having received the material on ship and authorising to pay the FOB value to the assessee firm through draft payable at Gandhidham. On 8th April, 1986, WISMA addressed a letter to STC to the effect that bills of lading pertaining to Vessel Golden Eagle did not issue and accordingly REH, Bombay, could not negotiate the documents. On 12th June, 1986 the assessee addressed a letter to REH, Bombay, to the effect that shipment of 5,000 MT of salt had been effected per Vessel Golden Eagle and the relevant documents were submitted to them for payment of 75,000 U.S. Dollars but they failed to produce the bills of lading and hence the bank did not make payment to the assessee-firm. The assessee, therefore, required REH, Bombay, to make the payment within 15 days from the receipt of the letter. The assessee reminded REH, Bombay, on 29th July, 1986, about non-payment and also threatened to take drastic action to recover the amount. REH, Bombay, failed to make the payment within the due time.
The assessee, therefore, through a notice dt. 23rd September, 1986, sent through its advocate Shri Murari R. Sharma required REH, Bombay, to make the payment within 10 days. Meanwhile REH, Bombay, sought legal opinion from Mulla & Mulla. Mulla & Mulla in their letter dt. 9th October, 1986, addressed to REH, Bombay, intimated that since the vessel was stated to have left Mangalore around 29th June, 1986, declaring Port Louis as destination and since the Vessel never arrived at Port Louis at the expected time enquiries were made through Lloyds and through Ireland Freser Co. Ltd., Port Louis, who are the Lloyds Agents in Port Louis. As ship owners were a Singapore company they also made enquiries through surveyors in Singapore relating to the vessel owned and controlled by Esmaco Shipping Co. P. Ltd. They also made enquiries through Perfect Lambert & Co., Investigators in London. It is further stated to have learnt that Golden Eagle Vessel never arrived in Port Louis and curiously a vessel named Brahma owned by Ludgate Overseas Inc., having the same address as Esmaco and agents being Arya Shipping arrived in Port Louis with identical quantity of 5,000 MT of salt. SAI Ltd. the original consignee purchased the said quantity of salt and the same was being discharged from vessel Brahma. Both vessels had identical GRT/NRT. It is further reported by Mulla & Mulla that Golden Eagle was in Mangalore being the last Indian port which was an unscheduled port and Brahma in its declaration made in Port Louis stated that its last port of call was Mangalore. Brahma had not mentioned in the bill of lading its loading port but only stated that its last port of call was Mangalore. No transhipment had taken place in Mangalore as per Agencia Ultra Marine Co. (P) Ltd., ship agents operating in Goa and Mangalore. According to Mulla & Mulla the only possibility was that owners controlling both vessels Golden Eagle and Bramha had switched name from Golden Eagle to Bramha to avoid arrest in Mangalore which was threatened by REH, Bombay. It was further reported that the vessel Bramha was still in Mangalore and the exporter of salt Cargo was shown to be Ludgate Overseas, Panama, who were the registered owners of the vessel.
8.3 REH, Bombay then addressed letters to President, STC, that the shipping company had committed a fraud by changing the name of the vessel from Golden Eagle to Bramha, REH, Bombay, also wrote to Perm.
Secretary to Prime Minister of Mauritius for referring the matter to the Commissioner of Police for investigation etc. and also sent a copy of the letter received from Mulla & Mulla. They also took up the matter with Finance Ministry, Reserve Bank, Bank of Baroda, Mauritius Ministry pointing out the fraud committed and requested for co-operation in realising the amount involved.
8.4 The captain of the ship Golden Eagle apprehending legal action filed a caveat in the Mangalore Court stating that REH/Srikrishna Salt Industries are likely to file a suit in the Court against them and moved for an ex parte order. They are entitled to be heard before any orders are passed against them. It was, therefore, prayed that the Court may order notice of such suit against them before any orders are passed thereon. Such caveat was filed on 25th June, 1986.
8.5 We also note that the assessee-firm in its letter dt. 15th October, 1987, informed REH, Bombay, that their cheque dt. 14th September, 1987, drawn on Bank of Baroda, Bombay, for Rs. 8,38,500 has been dishonoured twice by the bank due to insufficient fund in the account and the Central Bank of India to when the cheque was presented for collection rather charged Rs. 2,012 from the assessee-firm. The assessee in this letter required REH, Bombay, to make necessary arrangement for the payment within 7 days failing which suitable legal action would be taken.
8.6 It is evident from the facts given that Singapore Shipping Co.
unloaded the cargo at Mauritius from vessel Bramha and delivered the same to the original consignee on payment at the rate of $ 30 per MT.On account of such fraud committed REH, Bombay, could not get the payment against the shipment of salt made and in turn the assessee failed to receive the sale amount from REH, Bombay. Under the circumstances the assessee finally had written off the loss as bad debt/business loss.
9. The first question that arises is whether sale as well as shipment of salt was a genuine transaction. The AO has doubted the genuineness of the transaction on various accounts. According to the AO the statement submitted to the salt department shows export sale of 5,000 MT in the month of January, 1986, but no local sale is accounted for.
In the later entries on account of alleged sale to REH, Bombay was passed on the last day of the accounting year. The assessee was not confronted about this. It has however been explained that the transaction related to the export through REH, Bombay, and as such the accountant was not clear whether the firm would be entitled to deduction under s. 80HHC and he wanted advise from the CA. In the meantime the transaction turned into failure on account of the fraud committed by the shipping company. So the staff and the accountant were confused whether it be treated as business loss or bad debt. Looking to such practical problem the said entry was made on the last day of the accounting year. Even otherwise, passing entry on the last day would not make the transaction either doubtful or non-genuine when overwhelming evidence produced established the genuineness of the transaction.
9.1 According to the AO sufficient ganni bags were not available for packing the salt in 66,667 bags. It is explained on behalf of the assessee that in the first statement submitted the consumption of ganni bags in respect of present sale was not right through oversight.
However, the assessee had an opening balance of 2,02,141 bags and looking to the bags utilised for sale of salt to Punjab Alkalies and to REH, Bombay, totalling to 88,601 bags, the opening stock fully covered such consumption made of ganni bags.
9.2 According to the AO the contract for supply of salt between the assessee-firm and REH, Bombay, and REH, Bombay, and Mauritius party were not duly signed. It is explained in reply that the contracts were duly signed by the concerned parties. Moreover, none of the parties involved disowned this contract rather each one acted upon the contracts made. The deficiency thus pointed out by the AO in regard to the genuineness of the contracts has, therefore, no relevance on significance.
9.3 According to the AO the assessee took no legal action for recovery of the amount from REH, Bombay. It is explained in this behalf that on rigorous efforts made by the assessee-firm certain cheques were issued by REH, Bombay, but unfortunately the same were dishonoured and bounced back. As soon as the cheques were dishonoured the assessee made enquiries about the assets and wealth of REH, Bombay, through their relatives staying in Bombay and they found that there were no assets worthy of need in the name of REH, Bombay, or in the name of proprietor. Further it was thought that stamp duty not less than Rs. 1.25 lakhs coupled with advocate's fees made have to be incurred immediately by the assessee-firm particularly when the business was not doing well and there being no tangible assets even after decree the amount would not be recoverable. Moreover the circumstances being unfavourable the assessee-firm was frustrated running here and there from Bombay to Gandhidham and various other organisations. Meanwhile the matter was also taken up with various authorities such as CHI, Enforcement Directors and Department of Economic Affairs who were looking into the matter. Under the circumstances it was not considered advisable to go to the Court for recovery of the amount.
9.4 As regards the allegation made that chain of transactions are shown merely by way of typing out some papers and no independent and corroboration evidence has been produced to prove the genuineness of the sale transaction, we find that there was a written agreement with REH, Bombay, for supply of 5,000 MT salt for export purpose at the rate of 15 U.S. Dollars per MT FOB Kandla. None of the parties to the contract has disowned this document. Further, the assessee had sufficient stock of salt in its books of accounts and in the statement submitted to the Salt Commissioner for the month of January, 1986, salt export of 5,000 MT had been shown. The assessee also issued a sale bill on 15th January, 1986, in the name of REH, Bombay, after 5,000 MT salt was loaded in vessel Golden Eagle at Kandla Port as per the terms of the contract dt. 25th November, 1985. Since the assessee supplied salt FOB Kandla the assessee also incurred expenses on packing of salt in ganni bags, their transport from salt works to Kandla Port, loading of salt bags in vessel Golden Eagle and other related matters for shipment. The assessee claimed such expenses in the P&L a/c and the same has been allowed by the AO treating the same as genuine. We also find that before the salt was loaded in the ship the salt was analysed and certified fit for export by salt test laboratory. There is, therefore, sufficient evidence available on records to establish that the assessee sold 5,000 MT of salt and the same after completing various formalities at Kandla port was loaded in Golden Eagle vessel as per instructions of REH, Bombay. We also note that the AO has neither made any enquiries from any of the parties/departments involved nor he has gathered and brought on record any evidence to controvert the facts relating to sale and shipment of salt by the assessee-firm and in the absence of any such material the doubt entertained by the AO about the genuineness of the chain of transactions related to the sale and shipment of the salt is without any foundation. Having considered all the facts and circumstances discussed above we are of the view that the transactions relating to the sale of salt and its shipment in Golden Eagle vessel are genuine.
10. The next issue that arises is whether the said amount is allowable as a bad debt. It is evident from the facts discussed above that the assessee-firm sold 5,000 MT salt to REH, Bombay, as per the contract dt. 25th November, 1985 and its shipment was made in vessel Golden Eagle. Golden Eagle later on called at Mangalore port on June, 1986.
The same consignment of salt was reported to have been unloaded at Mauritius from vessel Bramha and it was sold and delivered by the shipping company to the original consignee at the rate of 30 US Dollars per MT. The shipping company thus committed the fraud and on that account REH, Bombay/assessee-firm could not realise the sale proceeds.
Though the matter was taken-up with the Prime Minister of Mauritius and it was also reported to the CHO, Enforcement Directorate etc. but nothing said to have come out of that REH, Bombay, had no tangible assets and the cheque issued by them in favour of the assessee of the sale amount was dishonoured by the bank on account of insufficient funds in the account. The assessee looking to the substantial amount of expenses involved in the litigation decided not to file a suit in the Court against REH, Bombay, as even on obtaining decree the amount would not have been recovered. The assessee, therefore, treating the amount as a bad debt wrote off in the books of accounts during the current year itself and claimed the same in the return filed. The debt is allowable as deduction as per cl. (vii) of sub-s. (1) of s. 36 which then reads as under : "Subject to the provisions of sub-s. (2), the amount of any debt or part thereof which is established to have become a bad debt in the previous year".
"(i) No such deduction shall be allowed unless such debt or part thereof - (a) has been taken into account in computing the income of the assessee of that previous year or an earlier previous year or represents money lent in the ordinary course of the business of banking or moneylending which is carried on by the assessee, and (b) has been written off as irrecoverable in the accounts of the assessee for that previous year".
It would be seen from above that the above provisions laid down conditions necessary for allowability of bad debt to the effect that debt must be established to have become bad in the previous year. This led to enormous amount of litigation on the question of allowability of bad debt in a particular year and with an object of rationalising the provisions relating to bad debt the aforesaid sections were amended by direct taxes Amendment Act, 1987, w.e.f. 1st April, 1989 so as to provide that the claim for bad debt will be allowed in the year in which such a bad debt had been written off as irrecoverable in the accounts of the assessee. We find that accounting year of the assessee ended in November, 1986, and by that time when fraud was detected payment was not received by REH, Bombay, from Mauritius party and the cheques issued by REH, Bombay, dishonoured and REH, Bombay, having not sufficient tangible assets the assessee wrote off the amount as a bad debt in its books of account treating the same as irrecoverable. Thus it is established that the debt became bad in the previous year and the same was also written off in the books of account of the assessee-firm.
10.1 In the case of Jethabhai Hirji and Jethabhai Ramdas (supra) the Hon'ble Bombay High Court while considering the question of allowability of bad debt observed as under : "Bad debt - when debt becomes bad depends on facts of each case - infalliable proof, not essential - date on which assessee wrote off debt is a material circumstances but not conclusive - effect of subsequent conduct of the assessee - institution of a suit to recover debt does not mean that debt was not bad - Department in possession of evidence that debtors was financially weak - cannot complain that assessee had not discharged onus on him - IT Act, 1961, s. 36(1)(vii).
Reference - When High Court can interfere with findings of Tribunal - points taken before Tribunal for first time - High Court can interfere where Tribunal finding is not based on full material on record - Question whether property was used in business - contention by assessee that "use" includes "passive use" cannot be raised by assessee in High Court for first time - controversy did not arise from order of Tribunal - High Court can reframe question referred only in interest of justice - IT Act, 1961, ss. 256 & 260." Further, in the case of Sarangpur Cotton Mfg. Co. Ltd. (supra) the Hon'ble Gujarat High Court held that the write off of the amount in a particular year is a prima facie evident that the amount became irrecoverable in the year. The Hon'ble Gujarat High Court following its judgment in the case of Sarangpur Cotton Mfg. Co. Ltd. (supra) held similar view in the case of Kamla Cotton Co. vs. CIT (supra). In present case the sufficient evidence exists to establish that the debt became bad during the year and the assessee-firm holding such a Bona fide belief wrote off the debt in its books of account treating the same as irrecoverable. Considering the facts, material on records, ratio of the decisions cited supra and amended provisions of s. 36 we hold that the amount was allowable as bad debt during the current year and accordingly we see no infirmity in the order of the first appellate authority.
11. The second ground raised by the Revenue is against deleting the addition of Rs. 8,68,941 on account of disallowance of washing loss and valuation of closing stock. The assessee had shown closing stock of salt at Rs. 25,250.365 Mts. The assessee also claimed washing loss to the tune of 29,292.700 MT which worked out to 22.487 per cent. of the salt manufactured during the year at 1,30,265 MT. When required to justify the washing loss and method of valuation it was explained on behalf of the assessee that salt is manufactured on contract. Heaps of salt are then made and they are likely to be washed away during raids and also get mixed up with dust, mud, etc. The wastage is, therefore, considerable and the same has been certified by higher authorities from 25 per cent. to 30 per cent. and in abnormal circumstances the wastage further increased. The washing loss shown was thus claimed to be reasonable. The AO for the reasons given in his order disallowed the loss of 9,600 MT out of the washing loss claimed. The AO further noted that out of the closing stock of 25,250.365 MT of salt shown in closing stock the assessee valued 15,000 MT at the rate of Rs. 10 per MT and the balance 10,250.365 MT was valued at the rate of Rs. 32 per MT totalling to Rs. 4,78,011.68. It was claimed that 15,000 MT salt brought forward from previous year was in deteriorating condition and accordingly the same is valued at Rs. 10 per MT. The AO was not satisfied with such explanation. He rather worked out the value of the closing stock of 25,250 MT shown in closing stock and 9,600 MT not accepted as washing loss at the rate of Rs. 38.65 per MT thereby valuing the total stock of 34,850 MT at Rs. 13,46,952 against the value disclosed at Rs. 4,78,011. This gave a difference in the valuation of closing stock at Rs. 8,68,941 and the AO made an addition to this extent in the income of the assessee.
11.1 The first appellate authority noted that the addition made was in fact on account of the following : to this step was 10,250 MT x Rs. 6.65 68,151B. Against the value of Rs. 10 per MT of was 15,000 MT x Rs. 28.65, i.e.
4,29,750C. As per the books of account of the step thus was 9,600 x 38.65 3,71,040 -------------- It was claimed before the CIT(A) about the valuation of 10,250 MT salt that the closing stock was valued at the rate paid per MT as production charges and such basis of valuation has been accepted by the Department in the past. If the method of valuation has been consistently followed and accepted by the Department the same cannot be rejected. As regards the valuation of 15,000 MT salt valued at the rate of Rs. 10 per MT, it was claimed that the salt had deteriorated in quality over a period of time and this stock was available in the closing stock for the asst.
yr. 1986-87 and the same was valued at the rate of Rs. 10 per MT. This was brought forward as an opening stock for the current year and was valued at the same rate as closing stock. It was also pointed out that the value of salt was written off in the books of account for the asst.
yr. 1988-89 and the same has also been accepted by the Department while completing the assessment for 1988-89. It was also claimed that the monthly statement submitted for the month of August, 1987, falling in asst. yr. 1988-89 submitted to the Salt Commissioner, Ahmedabad, and Salt Inspector, Adipur, the assessee declared the same as written off with the narration 15,000 MT old stock was lying since last one and a half to two years stock deteriorated due to mud hence, submerged in kyaras and pans. The addition therefore, made by valuing the said salt at the rate of 38.65 per MT was, therefore, claimed to be unjustified.
As regards the loss claimed at 29,292 MTs, it was submitted on behalf of the assessee that salt is manufactured out of salt pans. Salt pans remain exposed to rain and washing away of salt is a regular feature every year in addition to normal loss during loading and unloading, shifting, etc. It was also claimed that the assessee maintained detailed quantitative tally and periodical statements of opening stock, production, sales and closing stock are submitted to the Salt Commissioner as required by law and in the statement submitted loss on account of washing out, etc., is also shown. Copies of monthly returns in form E as required under r. 13 during the current year were furnished before the AO so as to establish loss on account of washing out of salt from time to time. It was also claimed that during the year the total quantity of salt handled was 1,57,124.743 MT and wash out and incidental loss was 29,292.710 MT. The percentage of loss was worked out to 18.64 per cent. against loss claimed in the preceding asst. yr.
1986-87 at 18.72 per cent. which was accepted by the Department. It was, therefore, claimed that the loss claimed in the current year was reasonable. The first appellate authority having regard to the facts and circumstances explained deleted the addition made of Rs. 8,68,941 with the following observations : "I have carefully considered the arguments both oral and written. I agree that the method of valuation of the closing stock at the rate paid per MT as production charges was being followed consistently and accepted by the AO it could not be rejected in asst. yr. 1987-88 under appeal. Consequently, there was no justification for addition of Rs. 68,151. I also agree that the closing stock of 15,000 MT of salt would not have been valued at more than Rs. 10 per MT at which rate that much stock of salt was valued in the opening stock for asst. yr. 1987-88. Besides, there was clear evidence on record to show that that much of salt had deteriorated in quality and had ultimately to be written off in asst. yr. 1988-89. The addition of Rs. 4,29,750 cannot, therefore, be sustained. I am also of the view that there was no justification for the AO to allow the washing and other incidental loans of salt less by 9,600 MT and to include the same in the closing stock and to value it at Rs. 38.65 per MT and adding Rs. 3,71,040 on this score. I find that in asst. yr. 1987-88 under appeal, the percentage of washing out and incidental loss was 18.64 per cent. against the comparative percentage of loss of 18.72 per cent. in asst. yr. 1986-87 which was accepted by the AO. I do not find any force in the remarks of the AO that the Kutch District did not have rains during the period covered in asst. yr. 1987-88.
The fact that there was rain in the months of June and July, 1986 is borne out by the monthly returns sent by the appellant to the Salt Commissioner, Ahmedabad and the Salt Inspector, Adipur. The Salt Department has prescribed returns under relevant rules and that Department keeps a regular watch and check over the salt position. I find that never in past the AO disallowed any such loss. My attention has also been drawn to the fact that in another concern namely Shree Kandla Salt Industries (P) Ltd. percentage of such losses accepted by the AO/appellate authorities in different assessment years were as under : In view of the above discussion the AO is directed to delete the impugned addition of Rs. 8,68,941 and to accept the valuation of closing stock of salt as done by the appellant." 12. We have heard the representatives of the Revenue as well as the assessee and also considered the facts and material on records. We find that the assessee had been consistently adopting and following the method of valuation of closing stock at production cost and such a method has been accepted by the Department in the past. During the current year also the assessee valued the current stock of 10,250 MT at production cost at Rs. 32 per MT whereas the AO has valued such stock on a different method and the same in our opinion is not justified.
12.1 We further note that the assessee valued 15,000 MT of salt at the rate of Rs. 10 per MT. The salt was shown in the closing stock in the preceding year at the same rate of Rs. 10 per MT and it was brought forward in the opening stock of the current assessment year. The reason given for valuation of such stock at Rs. 10 per MT is on account of deterioration of its quality on account of mixing of mud, etc., and this fact has been reported by the assessee to Salt Commissioner in the monthly statutory report submitted. The assessee ultimately wrote off this stock in the following asst. yr. 1988-89 and the same has been accepted by the Department. This shows that the opening stock it is valued at the rate of Rs. 10 per MT whereas the closing stock the Revenue has valued it at the rate of Rs. 38.65 per MT and on account of method so followed the net profit arrived at would give a distorted picture. To arrive at a correct profit in the year, same method of valuation should be followed both for opening stock and closing stock.
We also note that there is a very valid reason at the rate at Rs. 10 per MT in the past year as closing stock. The Revenue has not controverted these facts by bringing on record any material evidence.
In this view of the matter the valuation made of 15,000 MT salt at Rs. 10 per MT is held to be justified.
12.2 As regards the salt loss claimed at 29,292 MT, we find that the assessee-firm had maintained quantitative records relating to opening stock, production, sales and closing stock and its stock position had been reported to the Salt Commissioner each month in a statement statutorily required under the Salt Act. The AO has not pointed out any discrepancy in the stock records. Moreover, the loss claimed in the current year at about 18 per cent. compares favourably with that of the preceding asst. yr. 1986-87. We also note that in another case of salt manufacturer Shri Kandla Salt Industries (P) Ltd., the loss claimed ranging from 20 per cent. to 53 per cent. during the asst. yrs. 1981-82 to 1986-87 and the same has been accepted by the Department. The loss claimed at 18 per cent. in the case of the assessee during the current year is therefore, not considered to be unreasonable.
12.3 Having regard to all the facts and circumstances discussed we see no merit in the addition made of Rs. 8,68,941 and the first appellate authority was fully justified in deleting the same.
13. The next ground relates to disallowance of Rs. 2,65,400 claimed under the head commission and service charges on exports. The assessee claimed steamer commission paid to Deepa Clearing Agency at Rs. 2,65,440 at the rate of Rs. 18.65 per MT on 14,000 MT salt exported through steamer Barbanicos. The AO called for necessary details for the services rendered for which such commission was paid and the assessee produced a copy of the bill raised by Deepa Clearing Agency. Deepa Clearing Agency carried on business of shipping and stevedoring which meant transfer of goods from berth to ship and vice versa and it also rendered services connected with cargo. The AO summoned the managing partner of Deepa Clearing Agency Shri Pankaj Mehta and he was examined.
He noted from the copy of account of the assessee-firm in the books of Deepa Clearing Agency that the amount was debited to Jeevan Products account, Krishna Salt Industries. Shri Mehta in his statement denied having rendered any commission agency services to any party. He also submitted that they incurred certain expenses in respect of the ship Barbanicos and the same were supposed to be collected from Jeevan Products. The amount was, therefore, debited to Jeevan Products account, Krishna Salt Industries. The AO further noted from the account of Jeevan Products in the books of Deepa Clearing Agency that expenses on account of steamer Barbanicos debited separately under various heads such as local freight, kanta majuri, miscellaneous expenses, service charges to STC, service charges to WISMA, clearing and forwarding charges, stevedoring and clearing charges totalling to Rs. 7,82,884 and there being no commission services rendered the commission amount of Rs. 2,65,400 claimed was not found genuine and the same was disallowed.
14. On appeal, it was claimed that the said statement of Shri Mehta was recorded at the back of the assessee. He further explained that Deepa Clearing Agency was contacted by the assessee through Jeevan Products who had main account with Deepa Clearing Agency and it was for that reason that in the books of Deepa Clearing Agency there was a main account of Jeevan Products and another account of Jeevan Products account Krishna Salt Industries. It was also submitted that managing partner of Deepa Clearing Agency made it clear that they had provided services as shipping agents. It was also explained that in export business the service charges for shipment at port are termed as commission and it was for that reason that the bill raised by Deepa Clearing Agency it mentioned the amount as commission. He also claimed that apart from the said payment Deepa Clearing Agency also charged further expenses actually incurred by them on the cargo. The payment of Rs. 2,65,400 were paid for the services rendered in addition to incurring expenses on the cargo and recovery of the same. He also claimed that an amount of Rs. 1,37,000 out of the total amount of Rs. 2,65,400 were made by the assessee by account payee cheque in the current year and the payment of the balance amount was made in the subsequent assessment years. The first appellate authority deleted the disallowance made of Rs. 2,65,400 with the following observations : "I have carefully considered the submissions both oral and written and have also carefully gone through the statement of the partner of Deepa Clearing Agency recorded by the AO on 15th February, 1990. I must say that I find nothing in that statement which could lead to any inference that the impugned amount was not genuinely paid to Deepa Clearing Agency and no genuine services were rendered by them to the appellant. As a matter of fact, the books of account of Deepa Clearing Agency extracts from which have been placed by the AO on the assessment order, themselves establishes that the payments were genuine. Bill dt. 30th May, 1986, of Deepa Clearing Agency also proved that services were genuinely rendered by them to the appellant. No doubt the bill records the amount as commission but as explained by the appellant in the terminology of the appellant's business the service charges for shipment are termed as commission.
Simply because the bill terms the amount as commission it cannot mean that the payments were not made as service charges. It is settled law that what is seen is the substance and not the form. I am satisfied that the impugned payments were made by the appellant to Deepa Clearing Agency as service charges over and above the reimbursement of expenses incurred on behalf of the appellant. I am satisfied that the payment of service charges to Deepa Clearing Agency at the rate of Rs. 18.65 per MT was also not at all alarming because another amount of Rs. 49,451 paid as such to Chandrasen Govindji by the appellant was for 2,300 MT which came to more than 21 per MT. The impugned payments were genuinely made for genuine services rendered by Deepa Clearing Agency to the appellant and were clearly admissible. The AO is directed to delete the disallowance." 15. We have heard the learned representative of the Revenue as well as the assessee and also considered the facts and material on record. We find that the assessee-firm exported 14,000 MT of salt through vessel Barbanicos Kandla to Dara-E-Salam and the assessee made a payment of Rs. 2,65,440 to Deepa Clearing Agency. Deepa Clearing Agency were shipping agents rendering services in relation to export of goods. They rendered necessary services relating to 14,000 MT of salt loaded from Kandla Port. We also find that as per copy of accounts taken from the books of Deepa Clearing Agency that there was a main account of Jeevan Products and another account. Jeevan Products account Krishna Salt Industries. In the Jeevan Products account Krishna Industries there are credit entries of Rs. 40,000, 45,000, 40,000, 12,000 on 7th April, 1986, 12,000 in May, 1986, 16,000 in May, 1986 and 16,000 in June, 1986 respectively totalling to Rs. 1,37,000 and the account was debited as per the bill credit dt. 31st October, 1986 of Rs. 2,65,440 and the balance amount as carried forward is shown at Rs. 1,28,440. The main account of Jeevan Products also contained these entries apart from certain other entries of debits and credits. We also note that managing partner of Deepa Clearing Agency denied having rendered any commission services to any party during the year but he admitted rendering shipping agency services to the assessee and he nowhere denied the bill raised of Rs. 2,65,440 and services rendered for shipment of 14,000 MT of salt. We also note that during the year the assessee-firm made total export sales of Rs. 67,33,697 and incurred shipping expenses in the nature of stevedoring, clearing and forwarding, survey fee, kanta majuri, etc., totalling to Rs. 14,15,121. The assessee also claimed commission and service charges on exports of Rs. 5,52,287 constituting of the following :Commission to WISMA 46,650Commission to others 4,25,242Service charges to STC 80,395 Commission to others claimed at Rs. 4,25,242 included the payment made to Deepa Clearing Agency at Rs. 2,65,440. The claim made on account of commission and service charges paid to others has been accepted by the Revenue. The payment made to Deepa Clearing Agency as admitted by the managing partner of that concern was for rendering services related to shipping agency. There is no material brought on record by the Revenue to controvert the claim made or to prove that the payment made was not incidental to export business. In the absence of any such material evidence and having regard to the facts and material on record we see no justification in disallowing the claim made and the first appellate authority was fully justified in rejecting the addition made on that account.
16. The next ground raised is against deleting the disallowance of interest of Rs. 95,906. The AO found on scrutiny of the accounts, the assessee paid interest on bank loans and other deposits during the year at Rs. 95,906. He, however, noted that the capital accounts of the partners had shown a debit balance of Rs. 12,85,134 at the close of the year. The AO noted that partners' huge negative capital was not on account of accumulated losses but on account of huge withdrawals made by them for investments in other business or for expenses on personal account. The assessee-firm did not charge any interest from partners.
The negative capital at the close of the year excluding the losses of the current year was at Rs. 6,14,714. The AO also noted that there was non-business purpose advance made to related concerns as under :Hardik Hotels (P) Ltd. 8,41,894P. L. Patel Trust 33,000 The assessee did not charge any interest on such advances made. When required it was explained on behalf of the assessee that there was no direct nexus which could be established between the borrowings and interest-free advances and since the borrowings were for the purpose of business the interest claimed is fully allowable. The AO further noted that interest to the tune of Rs. 77,000 was paid on cash credit loan account maintained with Central Bank of India and it has also not been denied by the assessee that the advance made to Hardik Hotel (P) Ltd. at Rs. 6 lakhs was for non-business purposes. With such observations the AO disallowed interest claimed at Rs. 95,906.
17. On appeal, it was contended that the entire funds on which interest was paid were used for business purposes. The AO failed to bring on record any material to show that the funds taken on loan were used for withdrawal from accounts of the partners. He also cited decision in the case of Budhichandra vs. ITO 27 Taxation Planning 335 (Bom) wherein it was held that only if the borrowing is actually in illusory and colourable transaction the assessee cannot be allowed benefit of any deduction under s. 36(1)(iii). He also submitted that for similar reasons the AO disallowed interest of Rs. 96,562 for asst. yr. 1986-87 but the same was deleted by the CIT(A) for the reason that the AO failed to prove any nexus between interest-bearing funds borrowed and interest-free advances made. The assessee-firm was having huge interest-free funds available not less than Rs. 42 lakhs and against the interest-bearing funds of Rs. 7.24 lakhs, there were huge amount of business assets of not less than 16.81 lakhs. The first appellate authority following his order for the asst. yr. 1986-87 deleted the disallowance made.
18. We have heard the representatives of the Revenue as well as the assessee and also considered the facts and material on record. We find that the assessee paid interest on total borrowings of Rs. 7,11,169 which consisted of bank loan of Rs. 5,65,151 and balance loan was from two individuals. The assessee had assets as on the closing date to the tune of Rs. 10,85,896. We also note that there was export business reserve of Rs. 5 lakhs, unsecured deposits of Rs. 3,23,387 and sundry creditors of Rs. 36,30,415 whereon no interest was payable. Moreover, there is no material brought on record to establish that the interest-bearing funds were diverted for interest-free loans advanced and there being no nexus proved and the amount of loan having been found as used in the business of the assessee and the disallowance of interest in the preceding assessment year having been allowed in appeal on similar circumstances we see no merit in the disallowance of the interest claimed and the first appellate authority was fully justified in allowing the same.
19. The next ground taken by the Revenue is against deleting the disallowance of Rs. 3,09,330 under s. 40A(2). The AO noted that the assessee made purchase of salt 3,000 MT at the rate of 145.36 per MT from its sister-concern, Urvakunj Nicotine Inds. and Kandla Salt Industries. According to the AO partners or the relatives had interest in these concerns. The AO noted that the assessee's production cost was at Rs. 32 per MT whereas average sale price of salt was Rs. 42 to 45 per MT and the assessee purchased the said salt at excessive rate from sister-concerns specially when the assessee had its own huge stocks.
The AO, therefore, disallowed the excessive amount paid at the rate of Rs. 103.11 per MT which worked out to Rs. 3,09,330 invoking the provisions of s. 40A(2).
On appeal, it was submitted on behalf of the assessee that the assessee received an order for supply of 17,000 MT of salt to World Trade Corpn.
Ltd., London, to be despatched on 15th May, 1986, but by that date the assessee could arrange to send only 14,000 MT of salt at Kandla Port.
The assessee, therefore, had no other alternative but to purchase the remaining 3,000 MT salt from others to be delivered at Kandla Port. The said two concerns were willing to supply the remaining 3,000 MT salt and they supplied it at the rate of 145.36 per MT and, therefore, on purchasing 3,000 MT salt the assessee could execute the order for supply of 17,000 MT salt by 15th May, 1986. Had the assessee not been able to load 17,000 MT of salt within due time the assessee would have suffered huge damage charges and other penalties for not executing the order. The assessee's reputation would have also suffered. It was also submitted that the production cost was Rs. 32 per MT and the local sales were made at Rs. 32.25 per MT but in local salt the purchasers took delivery at salt pans and they incurred expenses themselves on loading and unloading, handling, transportation, etc. The salt meant for export had to be taken to Kandla Port and all the incidental expenses upto Kandla Port had to be borne by the assessee. The purchase rate of Rs. 145.36 per MT at Kandla Port, therefore, could not be compared with the sale rate of the salt pan. It was also contended that the position was orally explained to the AO during the course of assessment proceedings but he failed to have appreciation and the disallowance was made without any justification.
19.1 It was also claimed that the partners of the firm Urvakunj Nicotine Inds. were not related to the partners of assessee firm in any way. It was also explained that this company was paying higher rate of taxes and belonged to a group different from that of the assessee-firm.
As both the motives as envisaged in s. 40A(2) were not satisfied the purchase made from the company were also not covered by s. 40A(2).
19.2 It was also contended that export quality of salt contained specified chemical contents and looking to the specified required quality 3,000 MT was purchased as the same was not immediately and readily available with the assessee-firm. The first appellate authority having appreciated the facts so given, deleted the addition made of Rs. 3,09,830.
20. We have heard the learned representatives of Revenue as well as the assessee and also considered the facts. We on the appreciation of facts and circumstances explained, see sufficient merit and substance in the case of the assessee. Moreover, the Revenue has neither disputed nor has brought on record any material to controvert the facts given.
Considering the facts that the salt required for export was of specified quality, it was purchased at Kandla port under compelling circumstances and the transactions are not covered by the provisions of s. 40A(2). We see no justification in making the impugned addition and the first appellate authority was fully justified in deleting the same.
21. The last ground raised by the Revenue is against deleting the disallowance of Rs. 14,375 made under s. 37(2). The assessee claimed hotel expenses at Rs. 19,375. The AO treating these expenses in the nature of entertainment disallowed Rs. 14,375 invoking the provisions of s. 37(2).
22. On appeal, it was explained that the expenses were incurred for stay of auditors and salt brokers from time to time and the understanding given by the assessee to the auditors and salt brokers was that the expenses incurred on their stay would be borne by the assessee. Had this not been done the auditors and salt brokers would have billed this to assessee separately for such expenses and in that case the expenses would not have been debited as a hotel expenses. It was also claimed that the hotel expenses were incurred wholly and exclusively for the purpose of business and not on entertainment. The first appellate authority was satisfied with the explanation so offered and held that the expenditure claimed is not covered by the provisions of s. 37(2) and the disallowance made was deleted.
23. We have heard the learned representative of the Revenue as well as the assessee and also considered the facts. It is evident from the facts given that the assessee paid hotel expenses of Rs. 19,375 for stay of auditors and salt brokers during the year. Obviously the expenditure incurred was on hospitality provided to the auditors and salt brokers during their stay and that also included charges on food, beverages, etc. The expenses incurred are clearly caught by the mischief of Expln. 2 to sub-s. (2A) of s. 37 of the IT Act. The AO has thus made the disallowance rightly. This view is supported by the decision of the Hon'ble Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. & Ors. (1995) 215 ITR 165 (SC). In this view of the matter we vacate the order of the first appellate authority and restore that of the AO.