Onus to prove that debts are irrecoverable gets satisfied, once bad debts w/off in books of accounts

Brief of the Case

ITAT Ahmedabad held In the case of M/s Indu Nissan Oxo Chemical Inds. Ltd. vs. DCIT that the Hon’ble Apex Court in the case of TRF Ltd. vs. CIT reported at (2010) 323 ITR 397(SC) has held that this position in law is well-settled. After 1st April, 1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. In view of this judgment, reasoning given by lower authorities cannot be sustained. Hence disallowance of Rs.23,14,032/- on account of sundry balances written off is not maintainable.

Facts of the Case

ITA No.4518/Ahd/2003

The assessee was picked up for scrutiny assessment and the assessment u/s.143 (3) was framed vide order dated 28/03/2003. While framing the assessment, the Assessing Officer made various disallowances of Rs.1,60,631/- on account of unpaid sales-tax liability, disallowance of Rs.2,39,382/- on account of difference earned on realization of foreign currency of export sales, addition of Rs.16,94,333/- on account of non-crediting of interest accrued on FDR, disallowance of Rs.70,000/- on account of wrong claim of electricity and rent expenses, disallowance of Rs.90,583/- on account of wrong debit of prior period expenses and disallowance of Rs.5,000/- by invoking the provisions of section 40A(3). The AO also made addition on account of unexplained share capital contribution of Rs.64 lacs and also made disallowance of Rs.30 lacs being the remuneration paid to the Director of the assessee-company.

ITA No.1407/Ahd/2007

 The assessee was reopened for assessment and the assessment u/s.143 (3) rws 147 was framed vide order dated 27/02/2006. While framing the assessment, the Assessing Officer made addition on account of disallowance of employees’ contribution towards PF/ESIC of Rs.15,37,391/- u/s.36(i)(va) and also made addition on account of disallowance of employer’s contribution towards PF/ESIC of Rs.16,02,019/- u/s.43B.

ITA No.2282/Ahd/2012

The case of the assessee was picked up for scrutiny assessment and the assessment u/s.143 (3) was framed vide order dated 05/12/2008. While framing the assessment, the Assessing Officer made disallowance of Rs.1,07,700/- on account of excess rent paid u/s.40A(2)(b).The AO also made disallowance a sum of Rs.63,399/- on account of club expenditure, addition of Rs.4,055/- on account of unutilized Modvat credit. Further, the AO made disallowance of Rs.93,080/- on account of travelling expenses, disallowance of Rs.1,72,798/- on account of belated payment of PF & ESI and disallowance of Rs.23,14,032/- on account of sundry balances written off.

Contention of the Assessee

ITA No.4518/Ahd/2003

 Addition u/s 68

 The ld counsel for the assessee submitted that all the details were submitted by the assessee before the authorities below. He submitted that the authorities below were not justified in making the addition. It is submitted by the ld.counsel for the assessee that the confirmation letter of Narendra Holing Pvt.Ltd. who had raised money on behalf of the assessee is given. He drew our attention towards letter of confirmation of Narendra Holding Pvt.Ltd. dated 26/03/2003, wherein it is confirmed that the amount of Rs.64 lacs was paid to the 3rd parties on behalf of the assessee against calls in arrears and share premium. The ld.counsel for the assessee placed reliance on the judgement of Hon’ble Gujarat High Court rendered in the case of CIT vs. Chanakya Developers reported at 43 taxmann.com 91 (Guj.).

Addition u/s 40A (2) (b)

The ld.counsel for the assessee submitted that the similar disallowance was made in the AY 1997-98 in assessee’s own case by the AO and the issue travelled upto the state of this Tribunal (ITAT “B” Bench Ahmedabad) and the Tribunal in ITA No.721/Ahd/2001 vide its order dated 17/05/2013 has confirmed the deletion made by the CIT (A). He submitted that the Hon’ble High Court of Gujarat in Tax Appeal No.1071 of 2013, order dated 28th Januaray-2014 has affirmed the order of the Tribunal. Under these facts, he submitted that the disallowances deserve to be deleted.

ITA No.1407/Ahd/2007

Ground No.2 is against disallowance of employees’ contribution towards PF/ESIC. The ld.counsel for the assessee submitted that this issue has been decided against the assessee by the judgement of Hon’ble High Court of Gujarat rendered in the case CIT vs. Gujarat State Road Transport Corporation reported at (2014) 366 ITR 170(Guj)::(2014) 41 Taxmann.com 100 (Guj.). However, the Hon’ble High Court of Delhi in the case of CIT vs. Aimil Ltd. reported at (2010) 321 ITR 508 (Del) has decided the issue in favour of the assessee. Hence, there are divergent views on this issue.

ITA No.2282/Ahd/2012

The ld.counsel for the assessee reiterated the submissions as were made before the CIT(A). The ld.counsel for the assessee submitted that the appellant had debited the amount in the AY 2006-07 in the Profit & Loss account as sundry balances written off. The amount is debited into Profit & Loss account as per provisions of section 37(1). The appellant is eligible to get the deduction in the year under consideration. The ld.counsel for the assessee submitted that out of disallowance of Rs.23,14,032/-, assessee submitted break-up of the same. For a sum of Rs.10,50,000/- due to discontinuous of the project, the loan facility was not availed and commitment charges paid become irrecoverable. Hence the same amount of Rs.10,50,000/- is written off. Commitment charges payable by a party on the unused portion for the loan which has not been drawn, has to be taken as an expenditure laid out wholly and exclusively for the purposes of the business and, therefore, permissible as a revenue deduction under section 37(1).

For a sum of Rs.4,50,000/-, regarding Security Deposit Gujarat State Fertilizers & Chemical Limited (GSFC), the ld.counsel for the assessee submitted that due to financial difficulty of the assessee-company, GSFC has accepted one time settlement of payment of Rs.75,97,500/- against old outstanding, which shall be payable in 15 equal monthly installment. Since GSFC has accepted one time settlement scheme, the assessee company has written back of Rs.29,19,246/- in the books of account in the FY 2002-03. Therefore, security deposit is also not receivable from GSFC as per one time settlement scheme. Hence, such expenditure of Rs.4,50,000/- is also allowable as business expenditure u/s.37(1).

For a sum of Rs.2,16,052/- regarding Ingersoll Rand India Ltd., the ld.counsel for the assessee submitted that Ingersoll Rand India Ltd. was supplier of the assessee-company. Due to shut down of the plant, company has not purchase the material of the balance amount. Since the amount is not fully recoverable the balance amount is written off. For a sum of Rs.5,00,000/- regarding Six Steel Pvt.Ltd., the ld.counsel for the assessee submitted that the assessee company has paid advance to Six Steel Pvt.Ltd. for purchase of spareparts. However, since further amounts could not be paid and hence the balance amount of Rs.5,00,000/- is written off.

The ld.counsel for the assessee submitted that in view of the above, assessee requests to allow the sundry balance written off of Rs.23,14,032/- u/s.37(1).

Contention of the Revenue

ITA No.4518/Ahd/2003

 Addition u/s 68

On the contrary, ld counsel of the reveune submitted that the assessee was required to submit confirmation from the parties who have received money from Narendra Holding Pvt.Ltd. on behalf of assessee. The assessee has not placed any material on record and also the letter issued by M/s.Narendra Holding Pvt.Ltd. does not mention the names of the parties to whom the payments were made. Under these facts, the authorities below were justified in making the addition.

Addition u/s 40A (2) (b)

On the contrary, the ld counsel of the revenue submitted that every assessment year is an independent year. He submitted that the expenditure is claimed by the assessee on account of the remuneration paid to its Director. The assessee was required to demonstrate the services rendered by the Director to ascertain the reasonableness of the payment made to the Director. He submitted that the assessee failed to provide the information with regard to the services rendered by the Director to whom the remuneration has been paid.

ITA No.1407/Ahd/2007

On the contrary, the ld counsel of the revenue supported the orders of the authorities below and submitted that this issue has been decided by the Hon’ble Jurisdictional High Court in favour of the Revenue in the case of CIT vs. Gujarat State Road Transport Corporation 2014) 366 ITR 170(Guj.)::(2014) 41 Taxmann.com 100 (Guj.). Therefore, this issue may be decided in favour of the Revenue. He submitted that the judgement of the Hon’ble Jurisdictional High Court would be binding precedent.

Held by CIT (A)

ITA No.4518/Ahd/2003

The CIT (A) after considering the submissions of the assessee, dismissed the appeal.

ITA No.1407/Ahd/2007

The CIT (A) after considering the submissions of the assessee, dismissed the appeal.

ITA No.2282/Ahd/2012

 CIT (A) partly allowed the appeal of the assessee. It was held that the assessee has failed to submit any substantial evidence in support of its claim of bad debts. There has to be a prima facie case that the debt has become bad. It was discussed with the authorized representative that in the absence of details and documentary evidences which were required to establish the veracity of the circumstances by which the debts have purportedly become bad, it was not possible for revenue to accept the statement of the assessee merely on fact value. It has been held by Hon’ble Gujarat High Court in the case of Dhall Enterprises and Engineers P Ltd. Vs. CIT 207 CTR (Guj) 729 that the assessee should also prove that the debt has become had in that particular year. Mere debiting the amount is not sufficient.

 Held by ITAT

 ITA No.4518/Ahd/2003

 Addition u/s 68

The assessee has claimed the expenditure on account of calls in arrears and share premium. The contention of the assessee is that by providing the confirmations of M/s.Narendra Holding Pvt. Ltd., the initial onus has been discharged by the assessee and the AO has not brought on record anything contrary to the contention of the assessee. We find that letter issued by Narendra Holding Pvt. Ltd. describes the payment through banking channel but has not mentioned the names of the 3rd parties in whose account such amount has been credited. Moreover, the assessee has also not placed any material on record suggesting that those payments were made to 3rd parties on account of calls in arrears and share premium as there is no mention of the names, addresses, etc. of the parties to whom the assessee was liable to pay calls in arrears and share premium. In the absence of such material evidences which were required to be placed on record by the assessee in support of its claim of expenditure, we do not see any reason to interfere with the orders of the authorities below, the same are hereby confirmed. Thus, this ground of assessee’s appeal is rejected.

Disallowance u/s 40A (2) (b)

It is settled position of law that the provisions of section 40A(2)(b) can be invoked in the event where assessee incurs any expenditure in respect of which payment has been paid or is to be made to any person referred to in clause (b) of section 40A(2) and the Assessing Officer is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him there from, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction. Therefore, the AO has first to determine the reasonableness or excessiveness having regard to the fair market value of the services rendered. In the case in hand, the AO has made disallowance on the basis that no verifiable record was placed before the AO which could indicate the fact that Director, namely Shri Mehool N.Bhuva imparted any technical services to the assessee-company. The AO was of the opinion that mere holding of qualification does not lead to inference that he has indeed rendered any services. There is no dispute with regard to the fact that the issue in question is identical as was raised in the AY 1997-98.

Further the Tribunal in ITA No.721/Ahd/2001 for AY 1997-98, in assessee’s own case, vide it order dated 17/05/2013 allowed the appeal of the assessee. The Revenue has not placed any material on record suggesting that there is change into the facts and circumstances in the present year. Therefore, taking a consistent view, we hereby direct the AO to delete the disallowance. Thus, this ground of assessee’s appeal is allowed.

ITA No.1407/Ahd/2007

There is no dispute with regard to the fact that the Hon’ble Jurisdictional High Court in the case of CIT vs. Gujarat State Road Transport Corporation reported at (2014) 366 ITR 170(Guj.)::(2014) 41 Taxmann.com 100 (Guj.) has decided this issue in favour of the Revenue. In view of this judgement of the Hon’ble Jurisdictional High Court, we do not find any reason to interfere with the orders of the authorities below, the same are hereby upheld. Thus, this ground of assessee’s appeal is rejected.

ITA No.2282/Ahd/2012

The Hon’ble Apex Court in the case of TRF Ltd. vs. CIT reported at (2010) 323 ITR 397(SC) has held that this position in law is well-settled. After 1st April, 1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. The AO has not examined whether, in fact, the bad debt or part thereof is written off in the accounts of the assessee. This exercise has not been undertaken by the AO. Hence, the matter is remitted to the AO.

In view of the above judgment of the Hon’ble Supreme Court, the reasoning given by the authorities below for making the disallowance cannot be sustained. Hence, the grounds raised by the assessee are allowed. The AO is directed to delete the disallowance. Thus, grounds of appeal are allowed.

Accordingly all appeals disposed of.