2012 (12) TMI 685 - AT - Income Tax

Bad debt claim - disallowance on no description as to why the debts had gone bad - Held that - As decided in T.R.F. LTD. Versus CIT 2010 (2) TMI 211 - SUPREME COURT after the amendment of section 36(1)(vii) w.e.f. 01.04.1989, 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. It is enough of the bad debt is written off as irrecoverable in the accounts of the assessee - thus bad debts claim of the assessee as written off as bad in its books of account as irrecoverable is upheld - in favour of assessee. Leave Encashment disallowance as not paid before the due date for filing of the return - Held that - Following the decision in case of M/s Bharat Earth Movers Ltd. vs CIT 2000 (8) TMI 4 - SUPREME COURT provision made for leave encashment cannot be taken as a contingent liability and hence it is an ascertained liability. However, the legislature by way of amendment restricts such deduction in the case of leave encashment unless it is actually paid in that particular financial year - order of the CIT(A) is set aside and restore the issue to the file of the AO to verify whether the amount has been paid before filing of the return or not - in favour of assessee for statistical purposes. LIC Group Gratuity Scheme payments disallowance as payments not made to an irrecoverable trust for the exclusive benefit of the employees - Held that - Following the decision of court in case of Metal Box Company of India Ltd. Vs. Their Workmen 1968 (8) TMI 53 - SUPREME COURT an amount paid towards an unapproved gratuity fund can be deducted u/s 37 though not u/s 36(1)(v) - order of CIT(A) set aside and claim of deduction being the amount paid to the LIC towards LIC Group Gratuity Scheme is allowed - in favour of assessee. Remission of loan Held that - Provisions of sec. 41(1) do not apply to the facts of the case - CIT(A) ought to have held that the said sum does not represent the income of the appellant - restore this issue to the file of the CIT(A) for adjudication de-novo - appeal of the assessee allowed for statistical purposes.

Summary

Issues:
1. Disallowance of bad debts claimed by the assessee.
2. Disallowance of deduction for provision made towards leave encashment.
3. Disallowance of deduction for amount paid towards LIC Group Gratuity Scheme.
4. Dispute regarding remission of a loan and its treatment under sec. 41(1) of the Act.

Analysis:

Issue 1: Disallowance of bad debts claimed by the assessee
The Revenue appealed against the CIT(A)'s decision to allow the bad debts claim of the assessee. The AO had disallowed the claim as the debts were not described as bad in the ledger extracts. However, the CIT(A) directed the AO to allow the claim, stating that there was no evidence to prove the debts were not bad. The ITAT upheld the CIT(A)'s decision, citing the Supreme Court's ruling in TRF Ltd. Vs. CIT, which stated that writing off bad debts in the accounts is sufficient for deduction, regardless of actual recovery. The appeal of the Revenue was dismissed.

Issue 2: Disallowance of deduction for provision made towards leave encashment
The AO disallowed the deduction for provision made towards leave encashment as it was not paid before the due date for filing the return of income. The CIT(A) upheld the disallowance, but the ITAT referred to the Supreme Court's decision in M/s Bharat Earth Movers Ltd., stating that leave encashment provision is an ascertained liability. The ITAT set aside the CIT(A)'s order and remanded the issue to the AO to verify payment before deciding further.

Issue 3: Disallowance of deduction for amount paid towards LIC Group Gratuity Scheme
The AO disallowed the deduction for the amount paid towards LIC Group Gratuity Scheme as the scheme was not approved by the CIT. The CIT(A) confirmed the disallowance due to lack of evidence. However, the ITAT referred to a previous decision in the assessee's own case, allowing a similar deduction. Following the precedent, the ITAT allowed the deduction for the amount paid towards the LIC Group Gratuity Scheme.

Issue 4: Dispute regarding remission of a loan
The CIT(A) wrongly referenced a previous order in relation to the remission of a loan, which led to confusion. The ITAT found no such issue in the mentioned order and remanded the matter to the CIT(A) for a fresh decision. The appeal of the assessee was allowed for statistical purposes.

In conclusion, the ITAT dismissed the Revenue's appeal regarding bad debts and allowed the assessee's appeals for leave encashment provision and LIC Group Gratuity Scheme deduction. The matter of remission of a loan was remanded for reconsideration.