Claim of bad debts allowable even if debts are of the same year – ITAT Mumbai

DCIT Vs Rediff.com India Limited (ITAT Mumbai)- A.O. disallowed the claim of bad debts on the ground that the transactions pertain to the current year and the same was written off by the assessee in the same year itself. According to the A.O. the bad debt claimed by the assessee has in fact not yet matured to claim it as bad and irrecoverable. We find the CIT(A) allowed the claim of bad debts on the ground that the assessee fulfilled the conditions of section 36(1)(vii) r.w.s. 36(2) of the Act. We find this issue has now been decided in favour of the assessee by the decision of Honourable Supreme Court in the case of TRF Ltd. Vs. CIT 323 ITR 397 wherein it has been held that after the amendment of section 36(1)(vii) of the I.T. Act, 1961 w.e.f. April 1, 1989, in order to obtain a deduction in relation to bad debts, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. Since the assessee has written off the amount of bad debts in the books of account, therefore, in view of the decision cited above, we do not find any infirmity in the order of the CIT(A) in allowing the claim bad debts written off.

Dy. Commissioner of Income Tax Vs. M/s Rediff.Com India Pvt. Ltd.

ITAT MUMBAI

ITA No. 905/Mum/2008

Assessment Year : 2002- 03

M/s Rediff.Com India Pvt. Ltd., Vs. Dy. Commissioner of Income tax 

ITA No. 1120/Mum/2008

Assessment Year : 2002-03

Dy. Commissioner of Income tax Vs. M/s Rediff.Com India Pvt. Ltd.,

ITA No.906/Mum/2008

Assessment Year : 2003-04

ORDER

PER BENCH

ITA No. 905/Mum/2008 & ITA No. 1 120/Mum/2008 are cross appeals and are directed against the separate orders dated 14.11.2007 of the ld. CIT(A) – VII, Mumbai relating to A.Y. 2002-03. ITA No. 906/Mum/2008 filed by Revenue is directed against the order dated 14.11.2007 of the ld. CIT(A)- VII, Mumbai relating to A.Y. 2003-04. For the sake of convenience, these were heard together and are being disposed of by this common order.

ITA No. 1 120/Mum/20-08 (By the assessee for A.Y. 2002-03)

6. In appeal, the CIT(A) confirmed the action of the A.O. by holding that the fee has been paid to restrict the promoter to compete in the line of Internet portal, which is the main business of the assessee. The payment of 32 lacs paid as non-compete fee does lead to enduring benefit as by making the payment the company has obtained an advantage in terms of a better competitive positioning by eliminating one competitor amongst various others. Aggrieved by such order of the CIT(A), the assessee is in appeal before us.

6. The ld. Counsel for the assessee, at the outset, submitted that the Tribunal in assessee’s own case in the preceding A.Y. has restored the matter to the file of the CIT(A) for passing a speaking order. Since the CIT(A) has not given any finding on the claim of the assessee that non-compete fee paid by the assessee to M/s Footforward Communications Pvt. Ltd. was a revenue expenditure and since during the impugned A.Y., the assessee has not at all claimed any expenditure in the P&L account, and, since the lower authorities have not decided the issue properly, therefore, the matter should go back to the A.O. or CIT(A) as the Bench decides, for fresh adjudication. The ld. D.R. fairly conceded that she has no objection if the matter is sent back to the file of A.O. or CIT(A) for fresh adjudication.

7. After hearing both the sides, we find merit in the submission of the ld. Counsel for the assessee that the matter should go back to the file of A.O. for fresh adjudication. Admittedly, the assessee has not claimed any expenditure on account of non-compete fee during the year since amortisation of miscellaneous expenditure of 1,87,15,371 / – claimed in the P&L account has been disallowed in the computation of total income. The A.O. shall decide the issue afresh and in accordance with law after giving due opportunity of being heard to the assessee. Ground No. 2 of assessee’s appeal is accordingly allowed for statistical purpose.

8. In ground No. 3 & 4, the assessee has challenged the order of CIT(A) in confirming the disallowance of 75,31,489/- and 6,43,07,700/- on the ground that the assessee had not deducted tax as required u/s 40(a)(i) of the Act.

9. At the outset, the ld. Counsel for the assessee submitted that the amount of 75,31,489/- has been paid towards legal and professional fees and editorial fees paid to residents of USA and UK. Similarly, the payment of  6,43,07,700/- has been paid to Rediff.Com Inc. for obtaining certain services in connection with the North American edition of the Rediff.com.website. He submitted that before the A.O. no details could be filed because the Accounts Department of the assessee company was not well organised. Before the CIT(A), all details were filed but unfortunately the CIT(A) has not at all discussed the various submissions given by the assessee. He submitted that although the details were filed before the CIT(A), the assessee, as a precaution, has also filed application for admission of additional evidence since those details were not filed before the A.O. He submitted that the matter should be restored to the file of CIT(A) for fresh adjudication of the issue in the light of the documents filed before him and in the light of the decision of Hon’ble Supreme Court in the case of G.E. Technology Centre (P) Ltd. Vs. CIT & Another 327 ITR 456 (SC).

10. The ld. D.R., on the other hand, submitted that the decision in the case of G.E. Technology Centre (P) Ltd. (supra) is not applicable to the facts of the present case. Since the assessee has not filed the requisite details before the A.O., the A.O. disallowed the amount which has been upheld by the CIT(A). She submitted that the additional evidences should not be admitted at this stage since the assessee has not given any valid justification as to why those details could not be filed before the A.O.

11. We have considered the rival submission made by both the sides, perused the orders of A.O. and CIT(A) and the paper book filed on behalf of the assessee. We have also considered the decision relied on by the ld. Counsel for the assessee. There is no dispute to the fact that the assessee has not filed any details before the A.O. for justifying non-deduction of tax on account of payment to residents of USA and UK. We find that although various details were furnished before the CIT(A), it is not clear from his order as to whether he has accepted or rejected those additional evidences filed before him. He has not at all considered the details filed before him. Therefore, in the interests of justice, we deem it proper to restore the above issues to the file of CIT(A) for fresh adjudication. The CIT(A) shall decide the issue in the light of the documents submitted by the assessee and in accordance with law after giving due opportunity of being heard to the assessee. We hold and direct accordingly. Grounds of appeal No. 3 & 4 are accordingly allowed for statistical purpose.

12. In grounds of appeal No. 5(a) and 5(b) the assessee has challenged the order of CIT(A) in confirming the addition of 64,60,337/- made by the A.O. as prior period expenses.

13. Facts of the case, in brief, are that the A.O. during the course of assessment proceedings noted from the details furnished before him that the assessee has paid expenses pertaining to earlier year to the extent of 64,60,337/- and also received income relating to earlier year to the extent of 9,35,780/- and has debited the net amount of 55,24,557/- in the P&L account as prior period expenses. According to the A.O., the legal position is that income pertaining to earlier years is taxable on receipt basis u/s 41 of the Act but expenses pertaining to earlier year are not allowable as they are not pertaining to the year under consideration. He further noted that the assessee company has not filed any documentary proof in support of its claim that the prior period expenses actually crystallised during the year under consideration. Rejecting the various explanation given by the assessee and relying on a couple of decisions, the A.O. treated the receipt of 9,35,780/- as income of the year. He, however, disallowed the claim of 64,60,337/- and added to the total income of the assessee.

14. In appeal, the CIT(A) confirmed the addition made by the A.O. by holding as under:–

“The argument of the appellant fact of the case have been considered. In the assessment order it has been mentioned that the appellant has claimed the expenses pertaining to earlier year to the extent of 64,60,337/- and the appellant has also received income relating to earlier year to the extent of 9,35,780/- . The appellant has adjusted these two amounts, which has not been allowed by the A.O. The income pertaining to the earlier year is taxable u/s 41 of the Act. While the expenses incurred for the prior period is not allowable unless it is established that the liability to pay the amount actually crystallized during the year. The AO had provided the appellant an opportunity to explain the position. However, the appellant had not filed any documentary proof in support of its claim that the prior period expenses have crystallised during the year. Even during the appellate proceeding the appellant has mentioned a number of the case laws, however, no effort is made to produce any documentary evidence to show that the expenses actually crystallised during the year. Hence the disallowance made by the A.O. on this account is quite justified. The disallowance is, therefore confirmed.”

15. Aggrieved by such order of the ld. CIT(A), the assessee is in appeal before us.

16. After hearing both the sides, we do not find any infirmity in the order of the CIT(A). It is the settled proposition of law that for claiming any expenditure as allowable deduction, the onus is always on the assessee to substantiate with evidence to the satisfaction of the A.O. that the same is genuine business expenditure. Undoubtedly, the assessee in the instant case has failed to justify the allowability of claim of prior period expenses of 64,60,337/- during the year before the A.O. & CIT(A) by showing that the expenditure has crystallised during the year. Even before us also the assessee could not substantiate that the expenses have crystallised during the year under consideration. Therefore, the addition of 64,60,337/- made by the A.O. and sustained by the CIT(A) is justified. We do not find much force in the submission of the ld. Counsel for the assessee that the same should have been netted off and the balance only could have been disallowed as a deduction during the relevant previous year. In our opinion, the addition of prior period income of 9,35,780/- is governed by provisions of section 4 1(1) whereas the allowability of prior period expenses of 64,60,337/- is governed by the provisions of section 37(1) of the Act. Further, the A.O. had also given a finding that the prior period expenses have not been incurred for earning the prior period income. Nothing has been brought on record to controvert the finding given by the A.O. In this view of the matter we do not find any infirmity in the order of the ld. CIT(A) and uphold the same. The grounds raised by the assessee are accordingly dismissed.

ITA 905/Mum/2008 (By the Revenue for A.Y. 2002-03)

17. Grounds of appeal No. 1 & 2 reads as under:-

“1. On the facts and in the circumstances of the case and in la, the CIT(A) erred in directing the Assessing Officer to verify whether ‘software usage expenses’ of 68,45,718/- had been included in disallowance of ‘Software & Product Development expenses’ of 4,24,37,733/- and if so, rectify the assessment order without appreciating the fact that under sec. 251(1) of the I.T. Act the CIT(A) himself ought to have verified and quantified the relief and ought to have given direction accordingly.”

2. On the facts and in the circumstances of the case and in la, the CIT(A) erred in directing the Assessing Officer to verify whether ‘fixed assets’ purchased by the assessee of 23,00,000/- has been already capitalised by the assessee as ‘Fixed assets’ and if so, rectify the assessment order without appreciating the fact that under sec. 251(1)of the I.T. act the CIT(A) himself ought to have verified and quantified the relief and ought to have given direction accordingly.”

18. As can be seen from the above grounds, the grievance of the Revenue is that the CIT(A) has no power u/s 251(1) to set aside the matter to the file of the A.O. for verification.

19. Both the sides have fairly agreed that although the CIT(A) has no power to set aside the issue, however, the Tribunal has the power to set aside the issue to the file of the A.O. for verification and adjudication of the issue in accordance with law. We, therefore, restore the above two issues to the file of the A.O. for verification and fresh adjudication in accordance with law after giving due opportunity of being heard to the assessee. We hold and direct accordingly. The grounds of appeal No. 1 & 2 are accordingly allowed for statistical purpose.

20. Grounds of appeal No. 3 reads as under:–

“On the facts and in the circumstances of the case and in law, the CIT(A) erred in directing the Assessing Officer to allow the assessee’s claim of bad debts of 3,54,984/- without appreciating the fact that bad debt pertained to the current year under consideration and the assessee could not fulfil the basic conditions laid down u/s 36(1)(vii) r.w.s. 3692) of the I.T. Act, 1961.”

20.1 After hearing both the sides, we find the assessee company had debited bad debts written off amounting to 3,54,984/-. We find after going through the full details filed by the assessee, the A.O. disallowed the claim of bad debts on the ground that the transactions pertain to the current year and the same was written off by the assessee in the same year itself. According to the A.O. the bad debt claimed by the assessee has in fact not yet matured to claim it as bad and irrecoverable. We find the CIT(A) allowed the claim of bad debts on the ground that the assessee fulfilled the conditions of section 36(1)(vii) r.w.s. 36(2) of the Act. We find this issue has now been decided in favour of the assessee by the decision of Hon’ble Supreme Court in the case of TRF Ltd. Vs. CIT 323 ITR 397 wherein it has been held that after the amendment of section 36(1)(vii) of the I.T. Act, 1961 w.e.f. April 1, 1989, in order to obtain a deduction in relation to bad debts, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. Since the assessee has written off the amount of bad debts in the books of account, therefore, in view of the decision cited above, we do not find any infirmity in the order of the CIT(A) in allowing the claim bad debts written off. The ground raised by the Revenue is accordingly dismissed.

21. Grounds of appeal No. 4 being general in nature is dismissed.

22. The only ground raised by the Revenue reads as under:-

“On the facts and in the circumstances of the case and in law, the CIT(A) erred in directing the Assessing Officer to revised the depreciation on 33,57,040/- representing various software acquired by the assessee during the year under consideration @ 60% as against 25% allowed as per I.T. rules by the Assessing Officer without appreciating the fact that rate of 60% is effective only from A.Y. 2004-05.”

23. After hearing both the sides, we are of the considered opinion that the issue has to go back to the file of the A.O. for fresh adjudication of the issue in the light of the ratio of the decision of the Special Bench of the Tribunal in the case of Amway Enterprises vs. DCIT reported in 301 ITR (AT) 1 (Del SB) Accordingly, we deem it proper to restore the issue to the file of the A.O. for fresh adjudication in the light of the decision cited above and in accordance with law after providing due opportunity of being heard to the assessee. The ground of appeal raised by the Revenue is accordingly allowed for statistical purpose.