Deduction U/s. 36(1)(vii) for Bad debts for income offered to tax during earlier year cannot be disallowed

Indo Nabin Projects Ltd. (Formerly Indo Power Projects Ltd.) Vs DCIT (ITAT Kolkata)

The assessee stated that M/s Andrew Yule & Co. Ltd., Central Government Undertaking had closed their project division. M/s Gridco is a State Government Undertaking, Government of Orissa. The assessee further stated that despite the efforts taken by the assessee to recover this sundry debtor dues from these three parties, the assessee could not recover the same. Accordingly, the said trade debts were duly written off in the books of accounts of the assessee during the year under consideration by duly crediting the balance outstanding to the concerned parties’ account (sundry debtors’ account).

We find lot of force in the argument of the Ld. AR that these balances were reflected under the head sundry debtors in the balance sheet of the assessee and from the very fact that the same are shown under sundry debtors itself goes to prove that they had emanated out of sales of the assessee and hence, the income relatable thereon in the form of sales and services had been duly offered to tax in the earlier years in accordance with Section 36(2) of the Act.

Respectfully following the decision of the Hon’ble Supreme Court in the case of TRF Limited reported in 323 ITR 397 (SC) and in view of the fact that the assessee had duly written off this trade debts by crediting the concerned sundry debtors accounts in its books of accounts, we direct the Ld. AO to delete the disallowance made towards bad debts. In the sum of Rs. 8,86,029/- accordingly ground no. 2 raised by the assessee is allowed.

FULL TEXT OF THE ITAT JUDGMENT

1. This appeal by the assessee arises out of the order of the Learned Commissioner of Income Tax (Appeals) -4, Kolkata [ in short the ld CITA] in Appeal No. 259/CIT(A)- 4/Circle-10/Kol/14-15 dated 19.08.2015 against the order passed by the DCIT, Circle-10, Kolkata [ in short the ld AO] under section 143(3) of the Income Tax Act, 1961 (in short “the Act”) dated 30.03.2013 for the Assessment Year 2010-11.

2. The only issue to be decided in this appeal is as to whether the Ld. CIT(A) was justified in restricting the disallowance made u/s 40a(ia) of the Act in respect of short deduction of tax at source in the facts and circumstances of the case.

3. The brief facts of this issue is that the assessee is engaged in business as an electrical contractor, supplier and services. The assessee filed its return of income for the assessment year 2010-11 on 12.10.2010 declaring total income of Rs. 5,31,46,950/-. During the course of assessment proceedings, the Ld. AO asked the assessee to furnish the detail of expenses with tax deducted at source. The Ld. AO observed that the following payments were made without deduction of tax at source by the assessee.

The assessee pleaded that the expenditure included in the aforesaid table also includes expenditures on which short deduction of tax at source were made by the assessee. The Ld. AO for want of details disallowed the aforesaid sum of Rs. 19,32,090/- u/s 40a(ia) of the Act. Before the Ld. CIT(A) the assessee submitted that there are certain payments for which tax has been duly deducted and remitted by the assessee to the tune of Rs. 7,45,200/-. The assessee submitted a statement showing party wise details together with its requisite TDS remittance, which was duly appreciated by the Ld. CIT(A) and relief was granted to the tune of Rs. 7,45,200/- by the Ld. CIT(A). The assessee further submitted that in respect of balance sum of Rs. 11,86,890/- the assessee had indeed deducted tax at source but the same is not in accordance with relevant provisions of Chapter XVIIB and accordingly the same would only fall under short deduction of tax at source. The assessee further pleaded that in respect of short deduction of tax at source the provisions of section 40a(ia) of the Act cannot be invoked in view of the decision of the Hon’ble Jurisdictional High Court in the case of CIT vs. S.K. Tekriwal in ITAT No. 183 of 2012 G.A. No. 2069 of 2012 dated 03.12.2012. The Ld. CIT(A) however did not heed to this contention of the assessee and sustained the disallowance to the tune of Rs. 11,86,890/- u/s 40a(ia) of the Act. Aggrieved the assessee is in appeal before us on the following ground:

1. Disallowance of Rs. 11,86,890/- on account of short deduction of TDS

On the facts and circumstances of the case and in law, the Ld. CIT(Appeals)-4, Kolkata was wrong in allowing only Rs. 7,45,200/- out of Rs. 19,32,090/-, thereby disallowing Rs. 11,86,890/- on account of short deduction of TDS without going through the veracity of the claim of the Appellant along with the documentary evidences and also not considering the relevant judgment cited in support of its claim. It is therefore, prayed that the Ld. Bench may kindly allow the entire expenditure of Rs. 19,32,090/-.

4. We have heard the rival submissions. It is not in dispute that the sum of Rs. 11,86,890/- represents amounts of expenditures for which short deduction of tax at source has been made by the assessee. It is well settled by the Hon’ble Jurisdictional High Court in the case of CIT vs. S.K. Tekriwal in ITAT No. 183 of 2012 G.A. No. 2069 of 2012 dated 03.12.2012 wherein it has been held that disallowance u/s 40a(ia) of the Act cannot be invoked in respect of short deduction of tax at source. Hence, respectfully following the said decision we hold that no disallowance u/s 40a(ia) of the Act in the sum of Rs. 11,86,890/- could be made in the facts and circumstances of the case. Accordingly, ground no. 1 raised by the assessee is allowed.

5. The next issue to be decided in this appeal is as to whether the Ld. CIT(A) was justified in upholding the disallowance of Rs. 8,86,029/- towards bad debt, in the facts and circumstances of the case.

6. The brief facts of this issue is that the Ld. AO observed that the assessee had claimed bad debt of Rs. 6.41 crores in the computation of the income. The assessee was asked to provide the details of bad debt and provide evidences that the debts had been credited in the accounts of the assessee as income in the earlier years. The Ld. AO disallowed the claim of bad debts by observing that the assessee had not provided the details of income offered in earlier years in respect of the following three parties:

This action of the ld. AO was upheld by the Ld. CIT(A) for the same reason. Aggrieved the assessee is in appeal before us on the following grounds:

2. Disallowance of Rs. 8,86,029/- on account of Bad Debt.

On the facts and circumstances of the case and in law, the Ld. CIT(Appeals)-4, Kolkata was wrong in confirming the disallowance of the claim of Bad Debt amounting to Rs. 8,86,029.00 on the ground of non-furnishing of any detail and also non-substantiation of the claim inspite of production of necessary documents showing the irrecoverable debt. It is therefore, prayed that the Ld. Bench may kindly allow the claim of Bad Debt and set aside the order the Ld. CIT(Appeals)-4.

7. We have heard the rival submissions. We find from the details submitted by the assessee before the lower authorities in respect of each of the parties as under: (i) Andrew Yule Co. Ltd. – Rs. 6,66,862/- is outstanding from 01.04.2004. This party is sundry debtor for the assessee.

(ii) Areva T & D Ltd.- Rs. 2,10,250/- is outstanding from financial year 2007-08 for this sundry debtor.

(iii) Gridco – Rs. 8,917/- is outstanding from financial year 2000-0 1.

The assessee stated that M/s Andrew Yule & Co. Ltd., Central Government Undertaking had closed their project division. M/s Gridco is a State Government Undertaking, Government of Orissa. The assessee further stated that despite the efforts taken by the assessee to recover this sundry debtor dues from these three parties, the assessee could not recover the same. Accordingly, the said trade debts were duly written off in the books of accounts of the assessee during the year under consideration by duly crediting the balance outstanding to the concerned parties’ account (sundry debtors’ account). We find lot of force in the argument of the Ld. AR that these balances were reflected under the head sundry debtors in the balance sheet of the assessee and from the very fact that the same are shown under sundry debtors itself goes to prove that they had emanated out of sales of the assessee and hence, the income relatable thereon in the form of sales and services had been duly offered to tax in the earlier years in accordance with Section 36(2) of the Act. Respectfully following the decision of the Hon’ble Supreme Court in the case of TRF Limited reported in 323 ITR 397 (SC) and in view of the fact that the assessee had duly written off this trade debts by crediting the concerned sundry debtors accounts in its books of accounts, we direct the Ld. AO to delete the disallowance made towards bad debts. In the sum of Rs. 8,86,029/- accordingly ground no. 2 raised by the assessee is allowed.

8. The next issue to be decided in this appeal is as to whether the Ld. CIT(A) was justified in confirming the addition made on account of sundry creditors to the tune of 17,71,820/- , in the facts and circumstances of the case.

9. During the course of assessment proceedings, the assessee furnished the details of sundry creditors together with names and address of the parties thereon before the Ld. The Ld. AO sought to verify one such party M/s Anvil Cables Pvt. Ltd. (among others), u/s 133(6) of the Act. The said party directly furnished the confirmation before the Ld. AO. From the same, the Ld. AO observed that there is a difference in closing balance of Rs. 17,71,820/- vis-а-vis the balance sheet of the assessee in its books. The assessee in response to the show cause given by the Ld. AO furnished reconciliation as under:

Closing amount as per party ledger – Rs. 28,90,864/-

Add: Bill No. 76 raised by party but not considered in its account – Rs. 17,71,820/-

Closing amount as per assessee’s ledger – Rs. 46,62,684/-

The assessee also replied that the entire purchase documents in this regard were routed through bank in respect of letter of credit facilities (L/C facility) availed by the party. Since, the documents had been received through banks by the assessee, the assessee proceeded to book the purchases for Rs. 17,71,820/- on 30.03.2010 relevant to assessment year 2010-11 and credited the parties’ account to that extent. The assessee further pleaded that since these materials were not actually received by the assessee, the assessee had duly reversed these purchases during the financial year 2010-11 relevant to assessment year 2011-12 by passing journal entry in its books on 31.03.2011. This journal entry goes to prove that the assessee had reversed the purchases and accordingly offered the income to the tune of Rs. 17,71,820/- in Asst Year 2011-12. The ld AO however, proceeded to bring to tax the difference in party balances in the sum of Rs 17,71,820/- in the assessment. The said action of the Ld. AO was upheld by the Ld. CIT(A). Aggrieved, the assessee is in appeal before us on the following grounds:

3. Disallowance of Rs. 17,71,820/- on account of Sundry Creditors

On the facts and circumstances of the case and in law, the Ld. CIT(Appeals)-4, Kolkata was wrong in confirming the disallowance of Rs. 17,71,820/- on the alleged ground of non-submission of any confirmation of the party without understanding the facts of the matter and basic principles of double entry system of book-keeping. It is therefore, prayed that the Ld. Bench may kindly allow the claim and set aside the order of the Ld. CIT(Appeals)-4.

10. We have heard the rival submissions. From the material available on record and from the submissions made by the Ld. AR, we are convinced of the treatment given by the assessee in its books of accounts during the assessment year 2010-11 i.e. the year under consideration and in the immediately succeeding year i.e Asst Year 2011-12. We are in agreement with the argument advanced by the Ld. AR that if this addition is sustained in assessment year 2010-11, then it would amount to double addition of the very same amount as admittedly the assessee had voluntarily offered the sum of Rs. 17,71,820/- by way of reversal of the purchases in Asst Year 2011-12. Moreover, we find that the Ld. AO had simply disregarded the explanation of the assessee and had placed more reliance on the statement of account submitted by other party i.e. M/s Anvil Cable Pvt. Ltd obtained u/s 13 3(6) of the Act. The assessee duly explained by way of reconciliation before the Ld. AO itself. We find that this is a case wherein the other party M/s Anvil Cables Pvt. Ltd. having made sales to the assessee and having sent all the requisite documents through bank pursuant to L/C limits, had not recorded the sales in its books of accounts. Instead of passing on of this information to the Ld. AO of the supplier M/s Anvil Cables Pvt. Ltd for necessary action to be taken in accordance to law in the hands of the said supplier, the Ld.AO of the assessee had accepted the statement of account of that supplier as sacrosanct and proceeded to make addition in the hands of the assessee by disbelieving the reconciliation statement and explanation given by the Hence, in these circumstances, we have no hesitation in directing the Ld. AO to delete the addition made on account of sundry creditors in the sum of Rs. 17,71,820/- in the facts of the case. Accordingly, ground no. 3 raised by the assessee is allowed.

11. The last ground to be decided in this appeal is with regard to non-granting of rebate of tax paid u/s 90/9 1 of the Act to the tune of Rs. 12,90,662/-. The assessee claimed rebate in respect of taxes paid in full u/s 90/9 1 of the Act to the tune of Rs. 48,43,541/- The Ld. AO granted rebate only to the extent of Rs. 35,52,919/- in the assessment and did not give credit for the remaining sum of Rs. 12,90,622/- in the assessment. The assessee had raised a specific ground in this regard vide ground no. 5 before the Ld. CIT(A) and had also filed submissions before him. The Ld. CIT(A) had not adjudicated this ground at all in his order even though, this ground is also reproduced in his order. Hence, we deem it fit and appropriate to remand this issue to the file of the Ld. Ld. CIT(A) for adjudication of the same on merits and based on the evidences filed by the assessee and dispose off this ground in accordance with law. Accordingly, ground no. 4 raised by the assessee is allowed for statistical purposes.

12. The ground no. 5 is general in nature and does not require any specific adjudication.

13. In the result, the appeal of the assessee is allowed for statistical purposes. Order pronounced in the Court on 08.12.2017