2013 (10) TMI 1399 - AT - Income Tax

Claim for bad debts written-off u/s. 36(1)(vii) denied - Held that - The amounts that have been written-off, as detailed in the Paper Book, are specific bills or part of specific bills raised by the assessee, which have not been collected from such parties. Therefore, merely because assessee had dealing with that particular concern or that the concerns are otherwise financially viable does not distract from the fact that the amounts in question, which are individually of small values, were specific bills of the assessee or part thereof, which were outstanding for a long period of time and therefore considering the aforesaid aspect, on facts, the judgment of the assessee of treating them as irrecoverable cannot be faulted. Thus, in our considered opinion, the claim of the assessee for writing-off of such amounts u/s. 36(1)(vii) of the Act as irrecoverable was fair and proper.The entire claim of the assessee for write-off of bad debts u/s. 36(1)(vii) of the Act amounting to ₹ 40,89,838/- was justified and the CIT(A) ought to have allowed it, instead of restricting it to ₹ 22,56,998/- only. Disallowance of prior period expenses - Held that - Ostensibly, the expenditure in question does not pertain to the period under consideration, which is evident from the invoice raised by M/s. Safire Hotels Ltd.. There is also no material on record to show that the liability represented by the invoice of M/s. Safire Hotels Ltd. dated 20.01.2006 crystallized during the year so as to be deductible in computing assessee s income for the year under consideration following the mercantile system of accounting. In the course of hearing, it was specifically put to the learned counsel for the assessee to show as to in what manner the liability crystallized during the year and not in the preceding assessment year as sought to be canvassed by the Revenue based on the date of the invoice raised by M/s. Safire Hotels Ltd.. No satisfactory explanation has been rendered before us and therefore we deem it fit and proper to sustain the action of the lower authorities in disallowing the impugned claim being a prior period expenditure. Disallowance of legal and professional charges - Held that - The matter be re-visited by the Assessing Officer after allowing the assessee a reasonable opportunity to produce all the relevant material in support of the impugned expenditure. Needless to say, the Assessing Officer shall consider the submissions and material put-forth by the assessee on its merits and thereafter adjudicate this aspect afresh as per law. We may add here that if the Assessing Officer is not satisfied with the submissions of the assessee and proceeds to make a disallowance, the same shall not exceed a sum of ₹ 7,42,435/-, i.e. the amount sustained by the CIT(A) in the impugned order

Summary

Issues Involved:
1. Disallowance of bad debts written-off under Section 36(1)(vii) of the Income Tax Act.
2. Disallowance of prior period expenditure.
3. Disallowance of legal and professional charges.

Issue-wise Detailed Analysis:

1. Disallowance of Bad Debts Written-off under Section 36(1)(vii):

The primary issue pertains to the disallowance of bad debts written-off by the assessee amounting to Rs. 40,89,839/- for the assessment year 2007-08 and Rs. 92,50,953/- for the assessment year 2008-09 under Section 36(1)(vii) of the Income Tax Act. The Assessing Officer (AO) disallowed the claim on the grounds that the debts were from established business concerns with sound financial backgrounds and ongoing transactions with the assessee, thus questioning the honesty of the write-off. The CIT(A) partially allowed the claim, segregating the bad debts into two categories: those with no transactions during the year (allowed) and those with ongoing transactions (disallowed).

The Tribunal held that post-01.04.1989, it is not necessary for the assessee to establish that the debt has become irrecoverable; it is sufficient if the bad debt is written-off as irrecoverable in the accounts of the assessee, as per the Supreme Court's judgment in T.R.F. Ltd. vs. CIT. The Tribunal found that the amounts written-off were outstanding for recovery for periods ranging from 2 to 10 years, and thus, the judgment of the assessee in treating them as irrecoverable was justified. Consequently, the Tribunal directed the AO to delete the entire disallowance for both assessment years.

2. Disallowance of Prior Period Expenditure:

The second issue involves the disallowance of Rs. 7,34,265/- claimed by the assessee as prior period expenditure for the assessment year 2007-08. The expenditure was on account of maintenance charges paid to M/s. Safire Hotels Ltd. for office premises, with the invoice dated 28.01.2006, pertaining to the period 2003 to 2005. The AO and CIT(A) disallowed the expenditure, stating that it did not pertain to the period under consideration and that the liability was not crystallized during the year.

The Tribunal upheld the disallowance, noting that the expenditure did not pertain to the period under consideration and there was no material to show that the liability crystallized during the year. The assessee failed to provide a satisfactory explanation, leading to the sustenance of the disallowance.

3. Disallowance of Legal and Professional Charges:

The third issue concerns the disallowance of legal and professional charges amounting to Rs. 7,42,435/- for the assessment year 2007-08 and Rs. 11,94,950/- for the assessment year 2008-09. The AO disallowed the amounts due to a lack of supporting details/vouchers. The CIT(A) provided partial relief, but the assessee appealed against the remaining disallowance.

The Tribunal remanded the matter back to the AO for fresh adjudication, allowing the assessee a reasonable opportunity to produce relevant material in support of the expenditure. The AO was directed to consider the submissions and material on merits and adjudicate afresh, with the disallowance not exceeding the amounts sustained by the CIT(A).

Conclusion:

For both assessment years, the Tribunal allowed the appeals of the assessee regarding the bad debts written-off and remanded the issue of legal and professional charges back to the AO for fresh consideration. The disallowance of prior period expenditure for the assessment year 2007-08 was upheld. The appeals of the Revenue were dismissed.