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2014 Supreme(Mad) 3828
High Court of Judicature at Madras
R. SUDHAKAR & R. KARUPPIAH, JJ.
The Commissioner of Income Tax
Versus
M/s. Tyco Sanmar Limited
Tax Case (Appeal) No. 512 of 2014
Decided on: 27-10-2014
For the Petitioner: G. Vardini Karthik, Standing counsel for Income-Tax.
The main legal point established in the judgment is that the correction of an error in billing and the write-off of bad debt are distinct, and the real income should be taxed, not hypothetical income.
Headnote:
Tax Case - Appeal - Section 143(3) of the Income Tax Act - Summary of Acts and Sections: Section 143(3), Section 148, Section 36(2) - The court discussed the application of surcharge, rectification of invoices, bad debt write-off, and compliance with RBI Master Circular C-15. The key legal provisions interpreted include the real income concept, bad debt write-off conditions under Section 36(2), and the procedure for regularizing export sales under RBI Master Circular C-15. These provisions influenced the court's decision on the treatment of the excess billing and the nature of the transaction.
Fact of the Case:
The assessee erroneously applied surcharge on exports, rectified the mistake, and sought permission to regularize the transaction. The Revenue disallowed the claim, leading to appeals and the issue of whether the reversal of incorrect bill entries should be treated as a write-off of bad debts.
Finding of the Court:
The Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal held in favor of the assessee, emphasizing that the correction of an error in billing and the write-off of bad debt are distinct. They ruled that the excess billing did not constitute a bad debt and that the real income should be taxed, not hypothetical income.
Issues: The main issue was whether the reversal of incorrect bill entries should be treated as a write-off of bad debts under Section 36(2) of the Income Tax Act.
Ratio Decidendi: The court held that the excess billing did not constitute a bad debt and that the real income should be taxed, not hypothetical income. The correction of an error in billing and the write-off of bad debt are distinct.
Final Decision: The Tax Case (Appeal) stands dismissed, confirming the decision in favor of the assessee. No costs were awarded.
R. Sudhakar, J.
1. This Tax Case (Appeal) is filed by the Revenue as against the order of the Income Tax Appellate Tribunal for the assessment year 2005-06.
2. The respondent/assessee is engaged in the manufacturing and selling of safety relief valves. The assessee filed return of income on 26.10.2005 declaring a sum of Rs.12,64,00,710/-. During the financial year ending 31.03.2005, they sold goods to M/s.Tyco Valves and Controls, L.P. USA. In the invoice, the respondent/assessee/exporter erroneously applied surcharge for Ferry Moly in respect of certain exports, though the component did not contain Ferry Moly. In respect of other goods, higher rate of surcharge was applied erroneously. The discrepancy, on account of the erroneous levy of surcharge, amounted to Rs.1.68 crores, which was noticed by the assessee at the time of finalisation of audit for the financial year 2004-05. On noticing the discrepancy, the assessee rectified the mistake by issue of credit notes, which resulted in reinstatement of the sales and also the debtors. The error was noticed by the assessee somewhere in May, 2005 during the time of audit for the purpose of filing the returns and the correction was made in the return filed on 26.10.2005. In order to justify the rectification of the invoices on the excess of surcharge and also to comply with the requirements of Reserve Bank of India Master Circular No.C-15, the assessee obtained permission from the authorised dealer, namely, Corporation Bank for regularising the transaction, as it relates to export sales. This letter of the authorised dealer was issued on 16.11.2005.
3. The assessment in this case was completed under Section 143(3) of the Income Tax Act on 10.12.2008 and subsequently notice under Section 148 was issued on 26.3.2010 for disallowance of Rs.1.68 crores, which is relatable to the issue of excess billing made to the customer from the total sales. In response to the said notice, the assessee filed their reply. After considering the reply filed by the assessee, the Assessing Officer disallowed the claim of the assessee on the ground that under the mercantile system of accounting followed by the assessee, as and when the bills are raised, the same should be offered to tax and that any amount that could not be realised can be written off as bad debts subject to the conditions stipulated under Section 36(2) of the Income Tax Act. Further, in this case, the sale proceeds are to be realised in foreign currency and the permission to write off the above debts have been given by the Corporation Bank (authorised dealer), as per RBI Master Circular C-15, on 16.11.2005, i.e., during the financial year 2005-06, whereas the debt has been claimed by the assessee in the financial year 2004-05 by netting the bad debts from the sale proceeds, which according to the Assessing Officer is not in order.
4. Aggrieved by the order of the Assessing Officer, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals), who on considering the above fact and the plea of the assessee that the higher rate charged in the invoice on account of surcharge applied erroneously, which resulted in higher claim of Rs.1.68 crores, which was not lawfully due to the assessee and having realised the same at the time of accounting for the purpose of filing the return, they have rectified the mistake by issue of credit notes in respect of the sale invoice. According to the assessee, it is the re-instating of the credit sale value, the proper revenue due to the assessee has been set out in the return and consequently, the profit of the company for the financial year 200405 has been properly stated. The question of bad debt will arise, when there is sale of goods and the consideration of which both the parties accept and the buyer later on fails to honour the sale commitment either in part or in total. There is no dispute either by the assessee or by the overseas buyer that the error is in respect of surcharge
