| SooperKanoon Citation | sooperkanoon.com/70075 |
| Court | Income Tax Appellate Tribunal ITAT Cochin |
| Decided On | Apr-15-1998 |
| Appellant | Jhai NaraIn Trades |
| Respondent | Deputy Commissioner of Income Tax |
2. The first ground raised by the assessee in this appeal is against the disallowance of a sum of Rs. 1 lakh claimed as expenditure incurred for the purpose of the business as a customs house agent. During the period from June to August, 1985, the assessee issued 11 out-agency receipts in favour of Bakul Cashew Co., Quilon showing a total quantity of 1,440 cartons of cashew kernels for export. On the strength of the said receipts, Bakul Cashew Co. raised as advance from the Corporation Bank, Quilon, a total sum of Rs. 17,93,700. As Bakul Cashew Co. had not in fact delivered the goods for export the proposed shipment did not take place. The assessee could not deliver the relative bills of lading to the Corporation Bank even in spite of the reminders sent by the bank. The Corporation Bank then tried to get the money back from Bakul Cashew Co. but they did not pay back the amount. The bank then initiated legal action against Bakul Cashew Co. and also against the assessee for issuing out-agency receipts without actual delivery of cashew kernels by the other party. A suit was in fact filed before the sub-Court, Quilon as O. S. No. 238 of 1989 in which the name of the assessee firm, Jhai Narain Trades, Cochin, appears as defendant No. 9.
When the legal proceedings were pending, the assessee came to an agreement with the bank for repaying the entire amount in instalments and accordingly they paid Rs. 1 lakh in the previous year relevant for the asst. yr. 1990-91. The assessee's claim for deduction of this amount as a business expenditure or a loss incidental to business was not allowed by the AO on the view that the liability to the bank had arisen not in the normal course of the assessee's business but on account of the issue of incorrect out-agency receipts to help Bakul Cashew Co. The AO further noted that Bakul Cashew Co. had admitted their liability to pay back the amount to the assessee as evidenced by the entries in their books of accounts. The AO came to the finding that the sum of Rs. 1 lakh paid by the assessee to the bank was in the nature of an advance or remittance on behalf of their client Bakul Cashew Co. and not in discharge of any liability of the assessee as such and further the assessee was entitled to get the money back from the client. In the above circumstances, the AO held that the assessee was not entitled to deduct the sum of Rs. 1 lakh as an expenditure incurred for the purpose of its business.
3. In the assessee's appeal, the CIT (A) found that the payment to the bank could be considered as effected by the assessee on behalf of the client only who was the real debtor to the bank and also evidenced by the entries in the books of account letter acknowledging the liability.
The CIT (A) was of the view that as the assessee was entitled to receive the amount back from their client, Bakul Cashew Co., the remittance by the bank was not allowable as a deduction in computing the assessee's income.
4. On behalf of the assessee, Shri M. K. Kesavan, Advocate, submitted before us that the CIT (A) was not correct in holding that there was no liability of the assessee to pay the amount to the bank and that it was a payment made by the assessee on behalf of their client, Bakul Cashew Co. Shri Kesavan stated that though the bank first tried to recover the amount from Bakul Cashew Co., it was found that on account of their financial difficulties the amount could not be recovered and then the bank initiated legal action in the sub-Court, Quilon in 1989. A copy of the petition filed by the bank before the Court was furnished before us by the learned counsel for the assessee. In that petition Bakul Cashew Co. and its partners are shown as the defendants but the assessee-firm and also the partners are shown as defendants from No. 9 onwards. The learned counsel stated that the assessee was forced to come to an agreement with the bank to discharge the entire liability on finding that legal action by the bank would damage their reputation. It was stated that apart from taking legal action against the assessee, the Corporation Bank also threatened that through the Indian Banks Association they would advise all the banks not to accept the out-agency receipts issued by the assessee. Shri Kesavan explained that in the course of the assessee's business as a customs house agent it was necessary to issue out-agency receipts and the banks would honour such receipts to give advance to the exporters. Bakul Cashew Co. was an old client of the assessee and their exports of cashew kernel was always made through the assessee and so it became necessary for the assessee to issue out-agency certificate with a view to keep the goodwill of the client. The learned counsel submitted that normally the out-agency receipts would be levied only on actual receipts of the goods but in the case of Bakul Cashew Co. the assessee made a mistake in issuing the receipts without delivery of the goods by the exporter.
The assessee was hoping to get the goods delivered by the client within one or two days but unfortunately, the client failed to deliver the goods and so the assessee had no alternative but to compensate the bank for the loss incurred by them on the advance given to Bakul Cashew Co.
It was the contention of the learned counsel that when the assessee was compelled to make the payment to the bank in discharge of the liability which had arisen in the course of their business as a customs house agent, the same was allowable either as an expenditure incurred for the purpose of the business or as a loss incidental to the business falling under s. 37 of the IT Act.
5. Shri Shaji P. Jacob, Departmental Representative, on the other hand, supported the order of the CIT (A) and submitted that the payment which the assessee had made to the bank could not be considered as an expenditure incurred for the purpose of the business nor was it a loss in incidental to the business. He stated that as a customs house agent the assessee might be issuing out-agency receipts to enable the clients to raise advance from the banks. Normally the receipts issued by the customs house agent would be accepted by the banks who would give advances to the exporters on the genuine belief that goods as certified by the agent had already reached the customs house. In the present case, according to the learned Departmental Representative, the assessee had issued out-agency receipts with the full knowledge that goods had not been delivered by their clients Bakul Cashew Co. It was stated that it was not a case of genuine mistake committed by the assessee with the hope that the clients would deliver the goods in the next two or three days. Shri Shaji submitted that the assessee was systematically issuing bogus certificates to Bakul Cashew Co. for nearly three months from June to August, 1985. It was the contention of the learned Departmental Representative that issuing one or two out-agency receipts without actual delivery of the goods might be a case of genuine mistake but issuing 11 incorrect receipts one after the other during a period of three months could not be considered as a mistake or an act of negligence on the part of the assessee. Shri Shaji vehemently argued that issuing bogus certificates to enable the clients to raise loans from the banks was not the normal activity of a customs house agent and so if the assessee incurred any expenditure or loss on account of issue of bogus out-agency receipts, such amounts would not quality for deduction under s. 37 of the IT Act. According to him, such malpractice of issuing wrong out-agency receipts by a customs house agent would threaten the banking system of the country and so allowing deduction for such payments for income-tax purpose would be against public policy. The Departmental Representative further stated that as soon as the Corporation Bank initiated legal action against Bakul Cashew Co., though the assessee was shown only as one of the defendants, the assessee had wisely came to a compromise and decided to make good the loss suffered by the bank. According to him, the eagerness with which the assessee had agreed to pay the total sum of Rs. 17,93,700 would show that the assessee did not want the entire matter to be exposed in the Court proceedings. He expressed the view that the assessee must have been colluding with their client Bakul Cashew Co. to get money from the Corporation Bank without delivery of cashew kernels as otherwise there was no reason why legal action against Bakul Cashew Co. was not allowed to proceed. According to the learned Departmental Representative, the evidence clearly pointed to the fact that the assessee had been issuing a number of bogus out-agency receipts to their clients to enable them to get huge amounts from the banks and in the process if the assessee had to pay heavy price, such payment would not fall within the ambit of s. 37 of the IT Act as an eligible deduction in computing the income under the head 'business'.
6. We have given due consideration to the submissions on both sides and gone through the facts of the case. As a customs house agent the assessee would be issuing out-agency receipts to their clients when their goods are received in the customs house for export. The clients would then present the out-agency receipts before the banks and normally the banks would honour the receipts and give advance to the exporter. The assessee issued out-agency receipts to Bakul Cashew Co.
in the months of June to August, 1985, without actual delivery of goods by them. Bakul Cashew Co. produced those receipts before Corporation Bank and received a total sum of Rs. 17,93,700 as advance. According to the learned counsel for the assessee in the course of the business, the assessee had to issue out-agency receipts to enable the clients to receive advances from the banks. If the banks were not able to recover the amounts from the exporter, the assessee would have to make good the loss incurred by the bank. According to the learned counsel for the assessee, Kesavan, the position of the assessee was similar to that of a guarantee for raising a loan from the bank. Relying on the decision of the Kerala High Court in the case of CIT vs. Smt. Thressiamma Abraham (1997) 227 ITR 802 (Ker), the learned counsel for the assessee contended that the payment made by the assessee to compensate the loss incurred by the Corporation Bank was incidental to the business and so allowable as a deduction under s. 37 of the IT Act. In the case decided by the Kerala High Court the assessee, Smt. Thressiamma Abraham stood guarantee for repayment of the loan from Kerala Financial Corporation and had also mortgaged certain property belonging to her in favour of the Corporation. In exercise of its rights under the document of mortgage, the Corporation sold the property and appropriated the entire proceeds towards discharge of the loan. The question before the High Court was whether the capital gains arising out of the sale proceeds could be brought to tax under the IT Act. It was held that as the assessee had received no amount as a result of the transfer under consideration, there could not be said to have been any income to the assessee, much less any capital gain. The above decision regarding the liability to capital gains has no relevance to the facts of the present case. In this context, the learned counsel submitted that the expression "for the purpose of the business" in s. 37 is wider in scope then the expression "for the purpose of earning profit". Kesavan contended that such expenses would include measures for the preservation of the business and for the protection of its assets and would comprehend many other acts incidental to the guarantee of the business. Reference was also made to the decision of the Supreme Court in the case of CIT vs. Malayalam Plantations (1964) 53 ITR 140 (SC).
The learned counsel argued that the assessee was compelled to make the payment to the bank when there was the threat by the bank to black list the assessee through the bankers' association and that the payment by the assessee was an expenditure incurred for the preservation of the business as the assessee could not have carried on the business without banking facility. It was the contention of the learned counsel that the assessee wanted to avoid the threat by the bank at any cost as that would have seriously damaged its business and in that sense, it was expenditure incurred for the purpose of the business and so eligible for the deduction under s. 37. There can be no dispute about the fact that the expression "for the purpose of business" is wider in scope and any expenditure laid out wholly and exclusively for the purpose of the business would be eligible for deduction under s. 37 in computing the income under the head 'business'. But here the question to be considered is whether the payment made by the assessee to the bank was a measure for the preservation of the business or for the protection of its interests. The learned counsel also referred to the decision of the Supreme Court in the case of CIT vs. Delhi Safe Deposit Co. Ltd. (1982) 133 ITR 756 (SC). The case decided by the Supreme Court is distinguishable on facts as in that case the assessee had incurred an expenditure by way of payment to the managed company of which the managing agency was a firm comprising of the assessee and two others.
At the instance of a partner of the managing agency firm, large sum of money was advanced by the managed company to another firm at Calcutta.
When the demand for repayment was made, the Calcutta firm repudiated the claim and out of the loss incurred by the managed company, a part was agreed to be paid by the assessee. The Supreme Court held that the assessee incurred the expenditure to avoid any adverse effect on its reputation, to protect the managing agency which was an income earning apparatus and for retaining it. In the present case the facts are entirely different in the sense that the advances to Bakul Cashew Co.
were not given by the bank at the instance of the assessee or on the strength of any certificate issued by the assessee in the course of its normal business. It is difficult to believe that it is the normal practice of the assessee to issue wrong or bogus certificates to the clients to enable them to raise loans from the banks.
7. It may be noted that the assessee issued the first out-agency receipt in question to Bakul Cashew Co. on 19th June, 1985, certifying that 150 cartons of cashew kernels for export had been received from them. Bakul Cashew Co. produced the out-agency receipt in the Corporation Bank and raised advance from the bank. The assessee has in all issued 11 such out-agency receipts without delivery of goods for export by Bakul Cashew Co. The wrong out-agency receipts issued by the assessee helped Bakul Cashew Co. to raise total advance of Rs. 17,93,700 from the Corporation Bank. The details of the out-agency receipts issued by the assessee to Bakul Cashew Co. during the period from June to August, 1985, are given below :----------------------------------------------------------------------No. & date Marks Quantity Packingof out-agency----------------------------------------------------------------------O.A. 899/19-6-1985 Bakul/STC/Sydney/Lot-1-6 150 Cts.
320 SO.A.V. 6/21-6-1985 Bakul/STC/Sydney/Lot-1-6 120 Cts.
320 SO.A.V. 23/25-6-1985 Bakul/HTC/N. York 75 Cts.
240 S 200 Cts.
320 SO.A.V. 36/27-6-1985 Bakul/HTC/NY 25 Cts.
320 SO.A.V. 29/28-6-1985 Bakul/HTC/NY 50 Cts.
SWO.A.V. 40/28-6-1985 Bakul/STC/Sydney/Lot 200 Cts.
320 SO.A.V. 67/4-7-1985 Bakul/W. 320/4222/O.A.V. 248/9-8-1985 Bakul/4222/Hamburg/ITTCSSR 75 Cts.
SWO.A.V. 209/14-8-1985 Bakul/4222/Hamburg/ITTCSSR 75 Cts.
320 SO.A.V. 276/16-8-1985 Bakul/HTC/NY (C. No. 22505) 75 Cts.
320 S 45 Cts.
SW On behalf of the assessee it was submitted before us that the assessee had committed a genuine mistake in issuing the receipts without actual delivery of the goods by Bakul Cashew Co. It was submitted that the worst inference that could be drawn against the assessee was that they were either negligent or not vigilant enough to make sure about the delivery of the goods before issuing the certificate to the clients.
The learned counsel for the assessee submitted that normally when out- agency receipts were issued, the goods would be delivered within two- three days but Bakul Cashew Co. had not issued the goods and the loss had arisen because of the default on their part.
According to Kesavan in the business as customs house agent, the assessee had to rely on their clients and when the clients promised that the goods would be sent in two-three days, the assessee believed their word and acted bona fide in issuing the out-agency receipt. We are not able to say it as a case of genuine mistake or of negligence.
The assessee might be issuing one or two out-agency certificates without the actual delivery of the goods by the exporter with the hope that the goods would be sent within next two or three days. Evidently, Bakul Cashew Co. did not send the goods even after the assessee issued the first out-agency receipt O. A. 811 of 19th June, 1985. A mistake would have happened once or twice. If the same mistake was repeated 11 times during a period of next two-three months we do not think that it could be viewed as a genuine mistake. It is also difficult to believe that it was out of negligence that the assessee had been issuing incorrect certificates one after the other with a view to help the client to raise loans from the bank. On 4th July, 1985, the assessee issued out-agency receipt O. A. V. 67 certifying that 150 cartons of cashew kernels marked as Bakul/W. 320/4222/Hamburg/ITTCSSR had arrived.
When that receipt was issued the assessee must have known that in respect of 7 receipts issued by them earlier, the goods had not yet been received from the clients. Still the assessee continued to issue more such receipts on 13th July, 1985, 9th Aug., 1985, 14th Aug., 1985, and also on 16th Nov., 1985. These certificates also showed the marks as also the port of destination. As customs house agent the assessee was well aware of the fact that the client would be presenting the out-agency receipts before banks and raising loans on the strength of the incorrect receipts issued by them. Still the assessee continued to issue the receipts even though the goods had not been delivered by the client.
8. From the facts as stated above and considering the circumstances in which the assessee had been issuing 11 wrong out-agency receipts one after the other to Bakul Cashew Co. to enable them to raise advances from the Corporation Bank. We do not accept the plea that it was a case of a genuine mistake committed by the assessee in the normal course of its business. It is difficult to believe that in the normal course of the business of the assessee, the assessee was required to issue untrue or bogus out-agency receipts to enable the clients to take loans from banks without actual receipt of the goods in the customs house.
Further, we also take note of the fact that as soon as the bank had initiated legal action the assessee readily agreed to make the payment even though the bank could have proceeded with the recovery again against Bakul Cashew Co. We find force in the contention of the learned Departmental Representative that the assessee wanted to avoid exposure of their role in the entire transactions through the proceedings before the Court and that was why the eagerness on the part of the assessee to pay the amount to the bank. Definitely the adverse publicity would have affected the assessee's business. The action by the bank to blacklist the assessee would have adversely affected the interests of their business. But then the assessee alone was responsible for the adverse publicity associated with the illegal action on its part to issue untrue out- agency receipts to their clients. The assessee cannot claim that issuing bogus certificates without actual receipt of the goods for export in the customs house was a normal activity connected with its business. The assessee could have, nay the assessee should have carried on the business without issuing untrue or bogus out-agency receipts. In fact, as observed by the Supreme Court in Maddi Venkataraman & Co. (P) Ltd. vs. CIT (1998) 229 ITR 534 (SC) s. 37 of the IT Act promises that trade would have to be carried on lawfully. It is not enough if the payments are made in the course of or arises out of or are connected with the trade. No deduction can be allowed if the expenses fell on the assessee in some character other than that of a trader.
If a sum has to be paid by the assessee because in conducting the business he had acted in a manner which had rendered him liable for action for the illegal transaction, it could not be claimed as a deduction. In Maddi Venkataraman & Co. (P) Ltd. (supra) the assessee was carrying on the business of tobacco. According to the assessee, in the course of carrying on its business, it had accumulated substandard quality of tobacco which it could not export. Since the accumulated stock was of substandard quality, it could not be sold at the floor price fixed by the Govt. of India. According to the assessee, it had no alternative but to sell the tobacco at a discount of 20 per cent to a Singapore party. On paper the full sale price was paid by the Singapore party but in reality 20 per cent of the price paid by the party was remitted back to him through one 'S'. In pursuance of this agreement tobacco was sold and the full sale price was received by the assessee from the Singapore party. The assessee paid a sum of Rs. 2,28,000 to 'S' who remitted the equivalent amount in Singapore currency to the Singapore party. Thus, according to the assessee, it had no alternative but to enter into such a transaction with a view to dispose of the said unsold stock of inferior quality tobacco. The High Court held that the agreement being illegal and contrary to law could not be recognised by a Court of law nor could entering into such a transaction be a normal incidence of carrying on business. Dismissing the assessee's appeal, the Supreme Court observed as under : "..... that the assessee had indulged in transactions in violation of the provisions of the Foreign Exchange (Regulation) Act. The assessee's case was that it would have incurred a loss. This cannot be a justification for contravention of law. The assessee was engaged in tobacco business. The assessee was expected to carry on the business in accordance with law. If the assessee contravened the provisions of the Foreign Exchange (Regulation) Act to cut down its losses or to make larger profits while carrying on the business, it was only to be expected that proceedings would be taken against the assessee for violation of that Act. The expenditure incurred for evading the provisions of the Act and also the penalty levied for such evasion could not be allowed as deduction. Moreover it would be against public policy to allow the benefit of deduction under one statute, of any expenditure incurred in violation of the provisions of another statute or any penalty imposed under another statute. If the deductions claimed by the assessee were allowed, the penal provisions of the Foreign Exchange (Regulation) Act would become meaningless. It has also to be borne in mind that evasion of law cannot be a trade pursuit. The expenditure in this case could not be allowed as wholly and exclusively laid out for the purpose of the assessee's business." In the present case the assessee's claim is that it was compelled to make good the loss incurred by the bank by giving advance on the out- agency receipt issued to Bakul Cashew Co. No doubt, any legal action by the bank against the assessee would have adversely affected its business interests but then the assessee alone has to be blamed for the loss suffered by the bank as the bogus or untrue out-agency receipt had been issued by none else than the assessee. We are of the view that considering the principle laid down by the Supreme Court in the case of Maddi Venkataraman & Co. (P) Ltd. (supra) it would be against public policy to allow the benefit of deduction under s. 37 of the IT Act for an expenditure incurred in connection with the issue of untrue or bogus out-agency receipt by the assessee to enable the client to raise loans from the bank.
9. The CIT (A) has found that Bakul Cashew Co. had accounted for the liability to the assessee in their books of account and also agreed to repay the amount to the assessee. In a letter addressed to the ITO, Bakul Cashew Co. stated as under : "Due to our inability to repay any amount against this loan Jai Narain Trades had paid to bank in instalments amount totalling to Rs. 16,93,700. As we are liable to repay Jai Narain Trades we have treated them our creditors to the extent of the payment made by them on our behalf." Apart from the fact that Bakul Cashew Co. had admitted their liability to repay the amount to the assessee, they have in fact paid a total sum of Rs. 3,01,882 to the assessee. In the course of the hearing before us, the learned counsel for the assessee filed a statement showing receipt of Rs. 2,25,000 by the assessee in the year ending 31st March, 1994, and a further sum of Rs. 76,882 in the year ending 31st March, 1997. It was also stated that the assessee would be admitting these two amounts as income under s. 41 of the IT Act in the respective assessment years. We are not inclined to accept the plea of the learned counsel that whatever amount the assessee had paid to the bank should be first allowed as a deduction under s. 37 of the IT Act as expenditure incurred for the purpose of the business and then the amount recovered in turn from Bakul Cashew Co. should be brought to tax as deemed income under s. 41(1) of the IT Act in the respective years of receipt. In view of our finding that the assessee is not entitled to deduct amounts paid to the bank as expenditure incurred for the purpose of the business under s. 37, we hold that offering the amounts recovered from Bakul Cashew Co. in the subsequent years would not alter the position regarding the allowability of the claim as expenditure incurred wholly and exclusively for the purpose of the business under s. 37.
10. Having regard to the facts and circumstances of the case, we uphold the order of the CIT (A) to the effect that the assessee is not entitled to deduct the sum of Rs. 1 lakh under s. 37 of the IT Act as expenditure laid out wholly and exclusively for the purposes of the business.
11. In this appeal the assessee has also raised another ground that the CIT (A) erred in confirming the disallowance of Rs. 54,298 under s. 43B as outstanding liability towards bonus. The AO had disallowed the claim on the ground that payment of bonus was not made before the due date for filing the return of income. This was upheld by the CIT (A).
12. Before us it was submitted by the learned counsel for the assessee that a large portion of the bonus liability was discharged before 31st Oct., 1990, and that the unpaid bonus as on that date was only Rs. 21,956. He also filed before us a statement showing the details of the provision for bonus and actual payment of bonus in respect of various employees. As per this statement, as against total sum of Rs. 54,298 as provision for bonus, there was actual disbursement of Rs. 30,000 and the balance outstanding as on 31st Oct., 1990 was Rs. 24,956. It appears that this statement showing the provision in respect of each employee and the actual disbursement was not placed before the AO. The CIT (A) had also no occasion to go through the statement to verify whether the entire provision of Rs. 54,298 was outstanding on the date on which the return of income was due. In the circumstances of this case, we find it necessary to remit the matter back to the AO to verify the actual amount of bonus out of the provision for the previous year which was disbursed before the due date for filing the return of income. The AO will verify the disbursement and then restrict the addition under s. 43B to the amount outstanding as on the due date for filing the return of income. The assessment will be revised accordingly.