By TIOL News Service

BANGALORE, JUNE 03, 2016: THE issue is - Whether as soon as exports are made, exports incentives are to be accounted for and offered to tax on mercantile basis. YES is the answer.

Facts of the case

The assessee is a Company incorporated under the Companies Act, 1956 and is engaged in the business of manufacturing and job work of PP-FIBC bags. The return of income for AY 2010-11 was taken up for scrutiny and amount on account of unrealized export benefits were added back. AO observed that assessee had claimed deduction of such amount on the ground that this income had not accrued to it though accounted as income in the books of account. A claim of bad debts written off was also disallowed by AO on the ground that the claim does not fall within the ambit of provisions of sec.36(1)(vii) read with sec.36(2) as the amounts were written off without permission of the RBI as required under the provisions of the FERA and accordingly he brought the amount to tax. Assessee preferred an appeal to CIT(A). CIT(A) rejected the claim of the assessee-company that no income has accrued during the year but allowed the deduction on account of bad debts. However, he set aside the ground to verify the claim of the assessee that out of total amount of export incentive for AYs 2009-10 & 2010-11, some amount could not be realised and the same was added back to the total income of AY 2009-10. The remaining realised amount was added back to the total income of AY 2010-11 and so the amount which was realized during the previous year relevant to the AY 2010-11 was included in the total income. Thus, assessee contends that it amounts to double taxation. The CIT(A) observed that no evidence was furnished by assessee in support of contention of double taxation and matter was set aside for due verification by AO. Aggrieved revenue prefers an appeal.

After hearing parties, Tribunal held that,

++ the claim of double taxation was not made before the AO. Even before the CIT(A) it appears that the assessee had not filed any evidence in support of double taxation in respect of export incentive. However, this claim was made for the first time before the CIT(A). In our considered opinion, this ground of appeal does not emanate from the assessment order. In the grounds of appeal filed by the assessee this claim should have been allowed only as additional ground as it does not emanate from the assessment order. This additional ground was apparently admitted by the CIT(A) without calling for remand report. Since the issue was restored to the file of the AO to adjudicate this issue in accordance with law, revenue is not aggrieved by this direction. Hence, this ground of appeal by the revenue is dismissed.

++ the amounts written off represent the claim made by the assessee by raising debit notes against its customers to meet the extra input cost on account of adverse foreign exchange variation. Admittedly these amounts were offered to tax in the earlier assessment year and the claims were not accepted by the respective customers, hence, reversed. Going by the facts as marshaled by the assessee during the assessment proceedings, income to the extent of such additional claim made by the assessee-company had not accrued. Thus, going by the submissions of the assessee, there was never any debt/debts. A bad debt presupposes the existence of a debt and therefore, the provisions of sec.36(1)(vii) are not applicable to the facts of this case. In such cases, question of invoking provisions of sec.36(1)(vii) of the Act does not arise. In the case of Mohandass Moolchand, the Rajasthan High Court held that if the income had not accrued, as claimed by the assessee in the respective years, remedy is available to the assessee under other provisions of the Act to seek relief but deduction cannot be allowed as bad debts and to this extent, the decision of the CIT(A) is reversed. The addition made by AO is upheld.

(See 2016-TIOL-938-ITAT-BANG)