Altus Group (India) Pvt. Ltd. Vs DCIT (ITAT Delhi)
Conclusion: Deduction under section 36(1)(vii) was allowable in case money was unable to be recovered due to inability or insolvency of the debtor to pay. In all other cases, the claim for allowance should have to be sustained under Section 37(1) which required that the expenditure (not being of a capital nature) should have been wholly and exclusively incurred for the purpose of the business. Advances for salary and deposits for lease premises had been written off and the same were laid out or expended wholly and exclusively for the purposes of the business thus, allowable under Section 37(1).
Held: Assessee-company was engaged in the business of providing project management consultancy in the field of architectural services. The case of assessee was selected for scrutiny and assessment was completed under section 143(3) after making certain additions/dis allowances. Aggrieved, assessee and Revenue filed appeal before CIT(A), who partly allowed the appeal of assessee. Assessee claimed that all the advances were paid to vendor/employee in the ordinary course of the business operation to avail services from them and hence, their non-recovery was duly allowable deduction of business expenses under section 37 and not under section 36. According to AO, there was a specific provision under section 36(1)(vii) for allowing the bad debt written off and thus written off of the advances and deposit could not be allowed to the assessee under section 37(1) in view of the decision in the case of Southern Technologies Ltd. Vs. JCIT (2010) 320 ITR 577 (SC), wherein it was held that if a provision for doubtful debt was expressly excluded from section 36(1)(vii), then such provision could not be claimed as deduction under section 37, even on the basis of ‘real income theory’. It was held the claim of advances and deposit had not been considered for income in the year under consideration or in the earlier year(s), such advances or deposit written off were not eligible for deduction under section 36(1)(vii). An assessee was entitled for claim under Section 36(1)(vii) , where by reason of the inability or insolvency of the debtor to pay, the money was unable to be recovered. In all other cases, the claim for allowance should have to be sustained under Section 37(1) which required that the expenditure (not being of a capital nature) should have been wholly and exclusively incurred for the purpose of the business. In the instant case, It was found that advances for salary and deposits for lease premises had been written off and the same were within the contemplation of the words “laid out or expended wholly and exclusively for the purposes of the business and allowable under Section 37(1). The ratio of the decision in the case of Southern Technologies Ltd. (supra) could not be applied in the facts of the instant case. Moreover, the tax effect involved in the issue agitated before the Tribunal, was less than Rs.50 lakh, as prescribed by the Central Board of Direct Taxes (CBDT) vide Circular No. 17/20 19, dated 08/08/20 19, therefore, the appeal of Revenue was dismissed.
The Income Tax Appellate Tribunal, Delhi, held that the, an assessee is entitled to claim under Section 36(1)(vii) of the Income Tax Act, where the money is unable to be recovered due to inability or insolvency of the debtor to pay. In all other cases, the claim for allowance should have to be sustained under Section 37(1) which requires that the expenditure (not being of a capital nature) should have been wholly and exclusively incurred for the purpose of the business.
The Tribunal further added that the claim of bad debt written off under section 36(1)(vii) of the Act is allowable if such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year.
The ruling was made in the joined hearing of M/s. Altus Group (India) Pvt. Ltd., v. DCIT and DCIT v. M/s. Altus Group (India) Pvt. Ltd. by a bench consisting of Shri Bhavnesh Saini, and Shri O.P. Kant
Assessee Company was engaged in the business of providing project management consultancy in the field of architectural services. The assessee filed return of income and the case of the assessee was selected for scrutiny. Certain additions/disallowances were made during scrutiny assessment. Aggrieved with the order of CIT (A), who partly allowed the appeal of the assessee, both the assessee and the Revenue preferred this appeal before the Tribunal.
The Tribunal further identified essential elements of section 37 as: “(i) that it should be an expenditure of the nature not described in Sections 30 to 36 ; (ii) it should not be in the nature of capital expenditure or personal expenses of the assessee ; (iii) that it should be laid out or expended wholly and exclusively for the purposes of the business, etc.”
The tribunal further dismissed the appeal filed by the Revenue stating that “the tax effect involved in the issue agitated before the Tribunal, is less than Rs.50 lakh, as prescribed by the Central Board of Direct Taxes (CBDT) vide Circular No. 17/2019, dated 08/08/2019, wherein the Revenue has been directed not to pursue those appeals. In view of the tax involved in the present appeal of the Revenue, being less than the prescribed limit of Rs.50 lakh, the appeal of the Revenue is dismissed.”
FULL TEXT OF THE ITAT JUDGEMENT
These cross appeals by the assessee and the Revenue are directed against order dated 04/01/2016 passed by the learned Commissioner of Income-tax (Appeals)-I, New Delhi [in short ‘the Ld. CIT(A)’] for assessment year 20 12-13.
2. The grounds raised in the appeal of the assessee are reproduced as under:
1. Addition u/s 36 of the Income Tax Act, of Rs. 5,62,876/- for writing off irrecoverable expenses
1.1 On facts and under the circumstances of the case and in law, the Id. CIT(A) was not justified in confirming the order of the LAO in disallowing the “advances and deposit written off” amounting to Rs. 5,62,876/-.
1.2 The Id. CIT(A) has erred both on facts and law by wrongly holding that these write offs are not covered under section 3 7(1) and classifying the same under section 36(2) read with section 36(l) (vii) of Income Tax Act, 1961.
1.3 On facts and under the circumstances of the case, the Id. CIT(A) was unjustified in not appreciating and ignoring the fact that the management of the appellant company had decided to close down the business activities and the financial statements were prepared on the basis that the fundamental accounting assumption of going concern was no longer appropriate.
1.4 On facts and under the circumstances of the case, the Id. CIT(A) was unjustified in confirming the addition / disallowance made and has failed to appreciate the submissions of the appellant and has ignored various decisions in judicial discipline affirming the allowance of expenditure on the principle of commercial expediency.
1.5 On facts and under the circumstances of the case, the Id. CIT(A) has erred in confirming the addition u/s 36 of the Income Tax Act, 1961 whereas the appellant has claimed the expenditure u/s 37 of the Act and not under any of the provisions of section 36 of the Income Tax Act, 1961.
Aggrieved with this confirmation of addition by the Id. CIT(A), the appellant prays that the addition of Rs.5,62,876/- in respect of writing off irrecoverable expenses be deleted.
2. Addition of Rs.6,42,365/- being legal and professional charges
2.1 On facts and under the circumstances of the case and in law, the Id.CIT(A) was not justified in confirming the disallowance of legal and professional charges to the tune of Rs. 6,42,365/-.
2.2 On facts and under the circumstances of the case, the Id. CIT(A) has failed to appreciate the submissions made by the appellant and was unjustified in concluding that the appellant has failed to provide any evidence.
2.3 On facts and under the circumstances of the case and in law, the Id. CIT(A) was unjustified in confirming the disallowance merely because of clerical error in the bills and has failed to consider the judicial precedent in this regard.
2.4 On facts and under the circumstances of the case, the Id. CIT(A) has grossly erred on facts and has failed to substantiate the allegation that claim of expenses in the name of consultancy charges was untenable and not genuine.
Aggrieved with this confirmation of addition by the Id. CIT(A), the appellant prays that the addition of Rs. 6,42,365/- in respect of legal and professional charges be deleted.
3. Addition of Rs. 7,44,245/- for short term capital loss
3.1 On facts and under the circumstances of the case and in law, the Id. CIT(A) was not justified in confirming the order of the LAO in disallowing the short term capital loss claimed by the appellant.
3.2 On facts and under the circumstances of the case, the Id. CIT(A) has erred in disregarding the submissions made by the appellant as well as the fact that the management of the appellant company had decided to close down the business activities and the financial statements were prepared on the basis that the fundamental accounting assumption of going concern was no longer.
3.3 On facts and under the circumstances of the case, the Id. CIT(A) was unjustified in confirming the disallowance and has failed to consider the fact that these assets were non-recoverable from the sites as the work was stopped and the customers have also filed suit against the assessee for breach of contract.
4 On facts and under the circumstances of the case, the Id. CIT(A) was unjustified in confirming the disallowance and has failed to appreciate the fact that the assets were not recoverable and the assessee had no option but to write them off in accordance with principle of commercial expediency as the assessee had decided to close down the business operations.
The appellant craves leave to add, amend, alter, vary and/or withdraw any or all of the above grounds of appeal at any stage of the appellate proceedings and to make appropriate legal submissions during oral arguments.
AGGRIEVED with the order framed by Id. CIT(A), the appellant has preferred this appeal before the tribunal having the appropriate jurisdiction to entertain and decide this appeal and prays that the additions and dis-allowances be deleted.”
3. The grounds raised in the appeal of the Revenue are reproduced as under:
1. On the facts and in the circumstances of the case, the learned CIT(A) has erred in deleting disallowance of Rs.45,00,000/- on a/c of loss on revaluation of foreign exchange on account of advance received.
2. The appellant craves leave for reserving the right to amend, modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal.
4. Briefly stated facts of the case are at that the assessee company was engaged in the business of providing project management consultancy in the field of architectural services. For the year under consideration, the assessee filed return of income on 30/09/2012 declaring total loss of ₹ 55,56,593/-, which was subsequently on 18/03/20 14 revised to ₹ 67,65,567/-. The case of the assessee was selected for scrutiny and scrutiny assessment was completed under section 143(3) of the Income-tax Act, 1961 (in short ‘the Act’) after making certain additions/disallowances made and loss was assessed at ₹ 35,560/-. Aggrieved, the assessee filed appeal before the learned CIT(A), who partly allowed the appeal of the assessee. Aggrieved, both the assessee and the Revenue are in appeal before the Tribunal raising the grounds as reproduced above.
5. In ground No.1 of the appeal, the assessee has challenged addition of Rs.5,62,876/- for advances and deposits written off.
5.1 During assessment proceedings, the Assessing Officer observed claim of advances (Rs.2,76,8 19) and deposit (Rs.2,86,057/-) written off, the details of which was reproduced by the Assessing Officer are extracted under:
