ITAT allows deduction of Rs. 26 Cr  of Unbilled Revenue written off

Pennar Industries Ltd Vs DCIT (ITAT Hyderabad)

Introduction: In a recent case, Pennar Industries Ltd challenged the order dated 07.08.2023 of the CIT (A)-NFAC, Delhi, before the ITAT Hyderabad for the assessment year 2018-19. The primary contention revolved around the disallowance of Rs.26 Crores claimed by the assessee as an adjustment under ICDS-IV (Income Computation and Disclosure Standards). The crux of the matter was the treatment of unbilled revenue, which the ITAT ruled on, providing significant insights.

Detailed Analysis: The key issue centered around the disallowance of Rs.26 Crores, claimed by the assessee as a deduction in accordance with ICDS-IV. The appellant argued that the unbilled revenue was written off during the computation of total income, and therefore, it could not be considered as income. The Assessing Officer, however, contended that the claim was akin to writing off bad debts prematurely.

The Assessing Officer’s stance was that the assessee initially included the unbilled revenue in the sales while preparing the books but later claimed it as a deduction during the Tax Audit under ICDS-IV. The Assessing Officer viewed this as a premature write-off, disputing the irrecoverability of the amount, especially in light of a pending liquidation petition before the NCLT (National Company Law Tribunal).

The appellant invoked Section 36(vii) of the Income Tax Act, which allows the deduction of any bad debt or part thereof written off as irrecoverable in the accounts of the assessee for the previous year. The appellant argued that, as per the second proviso to Section 36(vii), once an amount is written off while computing income, it shall be deemed as written off for the purposes of the Act.

The ITAT sided with the appellant, highlighting that the second proviso to Section 36(vii) applied to the case. This proviso, inserted w.e.f. 1.4.2016, allows the written-off amount to be allowable in the previous year in which it becomes irrecoverable. The tribunal emphasized the significance of this proviso, overturning the Assessing Officer’s reliance on the Bombay High Court’s Taparia Tools case, which was subsequently reversed by the Supreme Court.

Conclusion: The ITAT Hyderabad, in its order dated 22nd November 2023, resolved the dispute in favor of Pennar Industries Ltd. The ruling clarified that unbilled revenue, once written off during the computation of total income, cannot be considered as income for tax purposes. The decision reinforces the importance of understanding specific provisions, such as the second proviso to Section 36(vii), which can have a significant impact on the treatment of certain deductions. This case serves as a reminder of the complexities involved in tax assessments and the need for a nuanced interpretation of relevant statutory provisions.

FULL TEXT OF THE ORDER OF ITAT HYDERABAD

This appeal filed by the assessee is directed against the order dated 07.08.2023 of the learned CIT (A)-NFAC, Delhi relating to A.Y.2018-19.

2. The effective grounds raised by the assessee read as under:

i) The learned Commissioner erred in confirming the order of the AO where a disallowance of 26,00,00,000/- is made.

ii) The learned Commissioner ought to have appreciated that the deduction claimed as per the ICDS-IV, which is recognized by the statute, therefore, erred in confirming the disallowance of Rs.26,00,00,000/-.

iii) The learned Commissioner ought to have appreciated that the NCLT approved liquidation of HDOL, the Principal Contractor, therefore, erred in confirming the disallowance made amounting to 26,00,00,000/-.

iv) The learned Commissioner ought to have appreciated that the entries in the books of account are not determinative or conclusive in determining the total income, therefore, erred in confirming the disallowance of 26,00,00,000/-.

v) The learned Commissioner ought to have appreciated that the real income theory and therefore erred in confirming the disallowance of 26,00,00,000/-.”

3. The learned AR submitted that the order passed by the lower authorities is contrary to the law and For the above said purposes, the AR submitted that the assessee has claimed unbilled revenue as deduction as per ICDS adjustment in the Tax Audit Report. However, during the 2nd computation of total income, the assessee had written off the amount of Rs.26 crores (unbilled revenue) before the Assessing Officer and for that purpose, the assessee had drawn our attention to the computation of the total income filed by the assessee which read as under:

4. It was submitted that on the basis of the above once the assessee had written off the unbilled revenue in the total income, then the “said unbilled revenue” cannot be considered as the income of the assessee and for that purpose, the learned AR drew our attention to section 36(vii) of the It was submitted that once the assessee has fulfilled the prerequisite of the written off while computing the income of the assessee, then the Assessing Officer was left with no option but to allow the same. It was further submitted that the reliance of the Assessing Officer on the judgment of the Hon’ble Bombay High Court in the case of Taparia Tools Ltd reported on 8.1.2003 was of no help, as the Hon’ble Supreme Court while hearing the appeal against Taparia Tools Ltd reported in the case of Taparia Tools Ltd v. Jt. CIT reported in 372 ITR 0606 has decided the issue against the revenue.

5. Per contra, the learned DR relied upon the decision of the lower authorities. However, in the written submission it was mentioned as under:

“Thus, the written submission does not throw any fresh light on the issue under consideration. The appellant computed income by relying on ICDS where unbilled revenue was deducted from taxable income. But while considering tax working under MAT provision, this was included as income. However, the element of Rs.26,00,00,000/- (not recognized as revenue) has not achieved finality.

A petition of liquidation is pending before the liquidator. Thus, unbilled revenue has not reached the finality as non-receipt. The application of Taparia Tools of Bombay High Court (TR 372 0605) is adopted only to the extent of revenue recognition under mercantile system of accounting.

The judgment of Hon’ble Supreme Court in the case of Keshav Mills vs CIT (23 ITR 230) postulates the existence of tax in so far as monies due and payable by the parties to whom they are debited. The appellant here has adopted the unbilled revenue as sales while finalizing the account at the time of tax audit and contradicting the same while adopting ICDS scheme. Hence, per se this is a case of write off of bad debts. The condition for which are prescribed under section 36(1) (vii) of IT Act.

a. The debts have to be actually in written off of the books of the accounts

b. It has to be part of the revenue in the earlier years.

c. A provision for bad debts has to be created in the books.

In the above case none of these three conditions were satisfied.

1. Reliance can be placed on the Apex Court Judgment in the case of Rajesh Jhaveri Stock Broker Pvt. Ltd. Vs. ACIT (161 Taxman 316).

2. In the instant case, the judgment of Taparia Tools Ltd. (ITR 372 0605) is The provisions of ICDS are towards accounting treatment and cannot take the provisions of the IT Act.”

6. He had also drew our attention to the following Paras of the Assessing Officer and the learned CIT (A):

6.1 In the assessment order, it was held by the Assessing Officer as under:

3.1 All the above replies of the assessee company have been considered carefully but are not found acceptable due to following reasons:-

From the above discussion, it emerges that at the time of preparing the books of accounts, the assessee company has taken into consideration the above referred amount of unbilled revenue of Rs.26 Cr. in the sales. However, at the time of Tax Audit, the assessee company requested the Auditor to claim the deduction in the computation of income taking support of newly introduced ICDS scheme, which is evident from the extract reproduced Supra. The assessee company, in the garb of adjustment under ICDS IV claimed the said amount of deduction in the computation of income. In the first place, this adjustments cannot be categorized as part of revenue recognition and thus it cannot be part of ICDS Adjustments.

In fact, this is a simple case of writing off the debts prematurely. As discussed above, the assessee stated that its principle contractor M/s Hindustan Doroliver Ltd. went into liquidation as per the order of the NCLT and therefore the assessee company opined that their dues outstanding with the said company cannot be recovered and there was no certainty of any recovery whatsoever. However, it appears that this is a premature thinking on the part of assessee company to treated this amount as irrecoverable, for the very fact that the aforesaid order of the NCLT was challenged before the appellate authority and the NCALT at the very latest stage somewhere in the year 2019, confirmed the order of the NCLT. The assessee, therefore, had made this claim in hurried manner and taking support of ICDS Revenue Recognition policy claimed the deduction and reduced the tax liability of the assessee company.

3.2 As stated above, this is the case of writing off of bad- The concept of writing off the bad-debts falls under the provisions of section 36(1)(vii) of the Act. The assessee, however, in the initial stage denies that this amount partakes the nature of bad-debts. However, as seen from the above submission in the subsequent letters, the assessee company itself mentioned that it has written off the same from the books of account in the A.Y.2020-21 and 2021-22 and the same has been added back in the computation of income of the merged company M/s Pennar Industries Ltd. Thus, it is affirmed by the assessee company that this is bad debts written off. As per the provisions of above section, there is following important and specific condition required to be satisfied for the bad-debts to be written off:-

1. The assessee is required to actually write off the debts in the books of accounts then and only then the bad-debts qualify for claiming for deduction u/s 36(1)(vii) of the I T Act.

As discussed above, the assessee in this case, has not written off these bad debts from the books. It only claimed the deduction in the computation of income under the so- called revenue recognition adjustment under ICDS. The ICDS policy is a new scheme for the tax payers as well as the department. There are too many grey areas as to which transactions actually are covered under this ICDS policy. As said earlier the abovementioned adjustment to the income as has been claimed by the assessee cannot be part of ICDS in support of this it is pertinent to mention that in the clarifications by the Board on ICDS the following points have been emphasized:-

A. It is applicable to all taxpayer (corporate/non-corporate or resident/non-resident) irrespective of the turnover or income

B. It will not have any impact on the minimum alternate tax (MAT) for corporate assessees as it will be based on the book profits to be determined as per the current applicable It will only be applicable for computation of income chargeable under the head “Profits and gains of business or profession” or “Income from other sources”

C. It is applicable only on the computation of the income and not for maintenance of the books. If there is any conflict, then the Income Tax Act will prevail over ICDS

D. Income Tax Authorities have the power to assess the income on best judgment basis on non-compliance of ICDS

E. All ICDS (except VII relating to Securities) contains transitional provisions which in general provide for recognition of outstanding contracts and transactions as on 1st April, 2015 in accordance with it after taking into account income/expenditure/loss already incurred in the There is no ‘grandfathering’ for outstanding contracts or transactions as on 31st March, 2015

F. It does not provide any explanations or illustrations like It only lays down the principles to be adopted for computing Income

G. Revenue or Expenses on which there is no ICDS will continue to be governed by existing AS.

As can be seen from the above that “ if there is any conflict, then the Income Tax Act will prevail over ICDS. Therefore in this case, the provisions of section 36(i)(vii) shall prevail over the assessee’s claim of ICDS claim of adjustments. Having said that it is undoubtedly clear that the assessee’s claim of deduction of Rs.26 Cr is not admissible and accordingly the same is hereby disallowed. Therefore, amount of Rs.26 Cr is disallowed and added to the total income of the assessee. Penalty proceedings u/s 270A of the act is being initiated separately.

4) Subject to the above the total income of the assessee company assessed as under:-

5. Income of the assessee company is assessed u/s 143(3) of the Income Tax Act, 1961 on total income of Rs.351634030/- Charge interest accordingly. Issue demand notice and challan etc. Penalty proceedings u/s 270A is initiated separately as per Law.”

6.2 The learned CIT (A) in the appeal order observed as under:

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7. We have heard the rival arguments and perused the material available on Section 36(vii) provides as under:

“36(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:

Provided that in the case of an assessee to which clause (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause:

Provided further that where the amount of 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 becomes irrecoverable or of an earlier previous year on the basis of income computation and disclosure standards notified under sub- section (2) of section 145 without recording the same in the accounts, then, such debt or part thereof shall be allowed in the previous year in which such debt or part thereof becomes irrecoverable and it shall be deemed that such debt or part thereof has been written off as irrecoverable in the accounts for the purposes of this clause.

Explanation 1.—For the purposes of this clause, any bad debt or part thereof written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee;

Explanation 2.—For the removal of doubts, it is hereby clarified that for the purposes of the proviso to clause (vii)of this sub-section and clause (v)of sub-section (2), the account referred to therein shall be only one account in respect of provision for bad and doubtful debts under clause (viia) and such account shall relate to all types of advances, including advances made by rural branches.” (emphasis supplied by us).

7. From a reading of section 36(vii) reproduced herein above, it is abundantly clear that once the assessee has written off any amount or part thereof while computing the income of the previous years in which the amount of such debt or part thereof has become irrecoverable without recording the same into account , then such debt or part thereof shall be allowable in such previous Undoubtedly, in the present case, the assessee has disallowed the unbilled amount while computing the total income of the assessee and being irrevocable, therefore, the provisions of section 36(vii) – 2nd proviso are squarely applicable to the facts of the present case. The above said fact have not been disputed by the Revenue while filing their written submission and they have not given any comments with respect to the above facts. On the contrary, the learned DR relied upon the condition mentioned in section 36(vii) of the Act and has not made any comments with respect to the 2nd proviso of the Act which was brought to the statue w.e.f. 1.4.2016. However, the assessment year involved in the instant case is 2018-19 and therefore, the said 2nd proviso is squarely applicable. The reliance of the Assessing Officer in the case of the Hon’ble Bombay High Court in the case of Taparia Tools is of no help to the Revenue, firstly the Hon’ble Supreme Court had reversed the decision of the Hon’ble Bombay High Court and secondly the 2nd proviso to section 36(vii) was inserted in the statute books thereafter whereby permitting to “written off” of the amount in computation of income. In our view, once the proviso to the Act is applicable to the facts of the case which in fact is an exception to the main rule, then the same is required to be applied with full force. Accordingly, we have no hesitation in deleting the addition made by the Assessing Officer. Hence the appeal of the assessee is liable to be allowed and we allow the same.

8. In the result, appeal filed by the assessee is Order pronounced in the Open Court on 22nd November, 2023.