This is an appeal by the revenue against the order dated 13.01.2012 of the CIT(Appeals)-III, Bangalore relating to assessment year 2008-09.

2. Ground No.1 raised by the revenue is general in nature. Ground No.2 raised by the revenue reads as follows:-

2. The CIT(A) erred in allowing the bad debts written off to the P & L account, amounting to Rs.26,58,077/- which represented amount outstanding from debtors against designing and brand consultancy services rendered, even though the assessee company had not taken any effective steps to recover the amount and the genuineness of the bad debts written off was not proved by the assessee company.

ITA No.472/Bang/2012 Page 2 of 9

3. The assessee is a company. It derives income from carrying out the activity of designing advertisements. In the profit & loss account, the assessee had debited a sum of Rs.32,50,530 as bad debts written off. The sum was claimed as deduction while computing total income. The AO disallowed the claim of the assessee on the ground that the assessee had not established that the debts have become bad. Against the aforesaid decision, the assessee preferred an appeal before the CIT(Appeals). Before the CIT(Appeals), the assessee submitted as follows:-

(a) The amount of bad debts written off to the Profit & Loss Account represents amount outstanding from debtors against designing and brand consultancy services rendered; (b) The bad debts have been accounted as part of income and have entered in the quantification of total income of the assessee of the relevant years in which the corresponding invoices were raised and accounted; (c) Write off was on account of non-acceptance of the job(s) by the customers, dispute(s) regarding the bill amount(s) and after constant follow-up client did not pay. Amounts were written off based on the evaluation and honest judgement reached by the management of the Assessee after taking into account the relevant factors of the recoverability of the amount(s) involved. Personal follow-ups were made by Ms. Meeta Malhotra (Director) and Mr. Arvind Hegde (Business- Director) for recovery and after proper evaluation on non recoverability of the debts and honest judgment reached by the Management, the Management of the Assessee decided to write off the debts under reference. Since follow-ups were made personally there are no written communications by and between the Assessee and the respective Clients/s whose debts have been written as bad debts. (d) The bad debts which have been disallowed by the Ld. AO are in relation to Hindustan Lever Limited and Mumbai International Airport Limited [the said clients] amounting to ITA No.472/Bang/2012 Page 3 of 9 Rs. 14,08,077/- and Rs. 12,50,000/- respectively. The Assessee also enclosed a statement showing bill-wise break- up of the amounts written off in respect of the said clients, alongwith job description and the reasons for writing off the same. (e) The Assessee also filed Declaration of Ms. Meeta Malhotra (Director) and Mr. Arvind Hegde (Business Director) of the assessee with respect to the write off of debts due from the said clients. (f) We have charged off the debts as bad as these we(re) not recoverable from the said clients and were written off as bad debts during the year ended 31st March, 2008.

4. The CIT(Appeals) on a consideration of the submissions of the assessee, held as follows:- 3.4. I have carefully considered the issue on appeal before me. At the outset, I must mention that the premise on which the AO declared the debts to be not genuine is insufficient. Recovery efforts not having been made to an externally-expected extent does not automatically render a debt to be recoverable. The law allows this judgment to be exercised by the prudent management of a business. In the present case, the details of the debts are provided both at the assessment and appellate stages. The management have made efforts to the extent deemed commercially prudent and expedient to recover the debts, which are owed by two reputed companies. While it is no-doubt open to argument as to at which stage of the recovery process a debt should normatively be designated as bad, the caselaw on the subject is very clear. The Honble Supreme Court in the case of TRF Ltd. vs. CIT (2010), after noticing the change in law w.e.f. 1-4-89 has held that from 1.4.1989 it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. In this judgement, the Honble Court followed the ratio of earlier decisions in the case of Vijaya Bank Vs CIT [2010] 323 ITR 166 [SC] and Southern Technologies Ltd Vs JCIT [2010] 320 ITR 577 [SC] . Accordingly, this ground of appeal is allowed. ITA No.472/Bang/2012 Page 4 of 9

5. Aggrieved by the order of the CIT(Appeals), the revenue has raised ground No.2 before the Tribunal.

6. The ld. DR relied on the order of the Assessing Officer, while the ld. counsel for the assessee reiterated the submissions as were made before the CIT(Appeals).

7. We have heard the rival submissions . Prior to 1stApril, 1989, every assessee had to establish, as a matter of fact, that the debt advanced by the assessee had, in fact, become irrecoverable. That position got altered by deletion of the word established, which earlier existed in Section 36(1)(vii) of the Income Tax Act, 1961 [`Act, for short]. For the sake of clarity, we re-produce hereinbelow provisions of Section 36(1)(vii) of the Act, both prior to1st April, 1989 and post-1st April, 1989:

Pre-1 st April, 1989 : Other deductions: 36.(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28(i) to (vi) xxxx xxxx xxxx (vii) subject to the provisions of sub-section(2), the amount of any debt, or part thereof, which is established to have become a bad debt in the previous year. Post-1 st April, 1989: Other deductions:36.(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section28(i) to (vi) xxxx xxxx xxxx ITA No.472/Bang/2012 Page 5 of 9 (vii) subject to the provisions of sub-section(2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year.

8. In TRF Limited Vs. CIT 230 CTR 14 (SC), the Honble Supreme has held that after 1st April, 1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. In view of the above, the AO was not justified in making the disallowance of claim for deduction on account of bad debts on the ground that the debts in question have not been established to have become bad.

9. Apart from the above, it is clear that the assessee had given all the details and it is not the case of the Assessing Officer that any other condition for grant of deduction u/s. 36(1)(vii) of the Act, have not been satisfied. In the circumstances, we are of the view that the order of the CIT(Appeals) does not call for interference. Consequently, ground No.2 raised by the revenue is dismissed.

10. Ground No.3 raised by the assessee reads as follows:-

The CIT(A) erred in allowing the legal and professional charges of Rs.46,00,000/- on the ground that Sec.192 of the I.T. Act, 1961 is outside the purview of Sec.40(a)(ia) of the IT. Act, 1961.

11. The assessee made a payment of Rs.46 lakhs as professional charges to Ms. Meeta Malhotra, director of the assessee company. In respect of the aforesaid payment, the assessee had deducted tax at source u/s. 194J of the Act treating the payment as a payment for professional ITA No.472/Bang/2012 Page 6 of 9 charges rendered. According to the AO, the payment was being made in the normal course of business and therefore the payment should have been considered as salary paid to an employee. The AO was of the view that there was an employer-employee relationship between Ms. Meeta Malhotra and the assessee. The AO therefore concluded that the payment in question was a salary. The AO also noticed that in the return of income filed by Ms. Meeta Malhotra, she had declared the sum of Rs.46 lakhs as professional charges received from the assessee and claimed expenditure of Rs.36,47,785 and reflected the income of only Rs.9,52,215. The AO was of the view that had the Assessee treated the payment in question as salary, then Ms. Meeta Malhotra can claim only permissible deductions under the head salaries and not a sum of Rs.36,47,785/. The AO therefore concluded as follows:- 7.11 The Assessee Company has Misrepresented the above Salary of Rs.46,00,000/- as Professional Charges and Deducted Tax at Source u/s 194J of the Income Tax Act, 1961. This has been specifically done to give an undue advantage to Ms.Meeta Malhotra who is the Director of the Assessee Company holding 5% of the same to claim Additional Expenses in her Return of Income.

7.12. Therefore, an amount of Rs.46,00,000/- is Disallowed and Added Back to the Total Income of the Assessee Company. Thus the Disallowance under this head is Rs.46,00,000/-.

12. Before the CIT(A), the assessee pointed out that the Assessing Officer had issued summons to Ms. Meeta Malhotra by invoking the provisions of Section 131 of the Act. Based on her Return of Income for the ITA No.472/Bang/2012 Page 7 of 9 year ended 31st March 2008, the Learned AO has observed and come to the following conclusions: (a) Ms. Meeta Malhotra was rendering services to the Assessee as a consultant and not as a salaried employee (observation); (b) However, except for receipt of Professional Charges of Rs. 46,00,000/- from the Assessee, she has no other professional receipts; (c) On the aforesaid Professional Receipts, she has, claimed expenditure of Rs. 36,47,785/- and consequently, has offered net income of Rs.9,52,215/- to tax; (d) The services are rendered on a monthly basis; and (e) There exist an Employer-Employee relationship whereby Ms. Meeta Malhotra has not rendered consultancy services but was under direct supervision control of the Assessee.

13. It was also submitted that though the AO has not spelt out the reason for making the disallowance, the apparent reason was that the assessee ought to have deducted tax at source u/s. 192 of the Act, treating the payment in question as a salary. If it is construed as salary, then Ms. Meeta Malhotra could not have claimed expenses, except standard deduction. The assessee further submitted that the question whether it is salary or professional income in the hands of Ms. Meeta Malhotra, will have no bearing on the allowability of deduction in the hands of the assessee. It was submitted that the AO has not disputed the fact that the expenditure in question has been incurred wholly & exclusively for the purpose of business of the assessee and therefore deduction ought to have been allowed. It was also pointed out that even if a higher rate of tax ought to have been deducted treating the same as salary (u/s. 192 of the Act), even ITA No.472/Bang/2012 Page 8 of 9 then a disallowance of the expenses u/s. 40(a)(ia) of the Act could not have been made as those provisions do not apply to payment of salaries.

14. The CIT(Appeals), on a consideration of the above submissions, held as follows:-

4.2. Having examined the ratio adopted by the AO and the grounds relied upon by the appellant, I find that once the commercial expediency of a payment is not questioned, and the TDS is actually effected, the question of a perceived misapplication of the particular TDS provision becomes academic. The appellant has accepted its liability to deduct the tax at source. A consultancy agreement exists, and its genuineness is not contested y the AO with any rigour. Various courts have held that it is not for the Department to dictate the operations of an assessees business, or dictate to him the extent of commercial expediency to be pursued. The technical contribution of the consultant to the appellant company is not contested. I also agree with the defence of the appellant that the provisions of Sec 192 being outside the purview of Sec 40(a)(ia), the AO has put himself into a conundrum where the addition cannot be made under the latter section once Sec 192 is invoked. It is also curious to see that the very same AO in the order for the AY 2009-10 has allowed the same charges without demur. All this is reflective of the fact that the addition under appeal before us was not made with proper application of mind and based on sufficient evidence. I find the addition made to be unsustainable, and accordingly delete the same.

15. Aggrieved by the order of the AO, the revenue has preferred ground No.3 before the Tribunal.

16. We have heard the submissions of the ld. DR, who relied upon the order of the Assessing Officer. We are of the view that the order of the CIT(Appeals) does not call for any interference. As rightly pointed out by him, once commercial expediency of a payment is accepted and TDS has been effected, the deduction will have to be allowed. We also find that ITA No.472/Bang/2012 Page 9 of 9 there was a consultancy agreement and the payment in question prima facie is a payment for professional services rendered. The AO seems to have proceeded on a misapprehension that the nomenclature given to a payment by the payer will be conclusive in the hands of the payee. As rightly held by the CIT(Appeals), the payment in question was a payment for professional services rendered and could not be treated as a payment of salary. In any event, the disallowance of this legitimate business expenses in the hands of the assessee is without any basis and cannot be sustained. We therefore dismiss ground No.3 raised by the revenue.

17. In the result, the appeal by the revenue is dismissed. Pronounced in the open court on this 11 th day of January, 2013. Sd/- Sd/- ( JASON P. BOAZ ) ( N.V. VASUDEVAN ) Accountant Member Judicial Member Bangalore, Dated, the 11 th January, 2013. Ds/- Copy to:

1. Appellant 2. Respondent 3. CIT 4. CIT(A)

5. DR, ITAT, Bangalore. 6. Guard file By order Senior Private Secretary ITAT, Bangalore.