Bad debts; Advance deposits; Finality of assessment; Wholly; Exclusively; Necessarily; Reasonably

Western Soudan Exporters, a corporate body, was a trader in groundnuts, hides and skin, which often made advance deposits to middlemen to purchase these products. This was the practice in the trade to induce customers to buy. At the end of each year, some of the money advanced would prove irrecoverable and the company would make fresh deposits to middlemen. The company was of the opinion that the deposits, which proved irrecoverable, should be written off against the profits as bad debts. The taxpayer prepared his accounts for some years on this basis, and wrote off the un-recovered portion of the deposits against the profits. The accounts had been agreed to before by the tax authority. At a later date, however, the Revenue re-opened the issue, disallowed the bad debts written off, and raised assessments and additional assessments based on the amount disallowed. The case highlights that the advancement of money to middlemen in the business of groundnuts, hides and skin was a custom of the trade. It acted as an incentive to bring in more produce and although it might have its abuses in the hands of unscrupulous middlemen, it was an accepted usage of the trade. The advance deposits were not capital expenditure but revenue expenditure and they were allowable under the Companies Income Tax Act, CITA (2004). The money was therefore wholly, exclusively and necessarily incurred in the production of the profits, and thus allowable based on CITA. Also the case shows that the finality and conclusiveness of an assessment should not work against the taxpayer alone as the Companies Income Tax Act, 2004 also brought the tax authority within the ambit of finality