2013 (10) TMI 1070 - AT - Income Tax

Validity of writing off bad-debts after the end of financial year - Whether the decision by the management of the debt/s becoming bad, though made subsequent to 31.03.2008, is based on evidence/s or event/s prior or subsequent thereto Held that - In the case evidence is post 31.13.2008, the assessee s claim would be valid only where the event/s enables assessment of the position as obtaining on 31.03.2008, and not otherwise. The nature of the events or the account behavior post the year-end (31.03.2008) would, therefore, require being examined to see if they have in any manner influenced the decision for the impugned write off. A decision guided by the said event/s, being after the year-end, could only be recognized after its occurring, while where it is reflective of a state of affairs as at the year-end, the entry would relate back to the year- end. Reliance in this context is drawn to Accounting Standard (AS) 4 Contingencies and Events occurring after the Balance-Sheet date issued by the ICAI, also relied upon by the assessee. Where there are no such circumstances, so that the decision for write off is based on the events up to the relevant year-end (31.03.2008), the fact of passing the entries after the said date, becomes irrelevant. Matter being essentially factual, is accordingly restored to the file of the first appellate authority to decide the same in light of our foregoing observations, by issuing definite findings of fact, and after hearing the parties, including on the satisfaction of s. 36(2) (qua the claim for bad debts).

Summary

Issues involved:
1. Appeal against the Order by the Commissioner of Income Tax for assessment years 2006-07 and 2008-09.
2. Challenge of unexplained cash credits and subsequent repayments.
3. Disallowance of audit fees, consultancy fees, and bad debts written off.

Issue 1: Appeal against CIT Order
The Appeals were directed against the Order by the Commissioner of Income Tax (Appeals) for assessment years 2006-07 and 2008-09, contesting the assessment under section 143(3) of the Income Tax Act, 1961. The Bench clarified that the Revenue was not in appeal despite substantial relief granted by the first appellant authority. The appeals raised common issues and were disposed of by a consolidated order.

Issue 2: Unexplained Cash Credits
The Assessee conceded to the addition of unexplained cash receipts for the assessment year 2006-07 but contested the addition for 2008-09. The Revenue's case lacked merit for the latter year as there was no separate material supporting the additional income. The Tribunal found no basis for sustaining the addition for 2008-09 and directed its deletion, confirming and deleting the additions for the two successive years.

Issue 3: Disallowance of Expenses
For the assessment year 2008-09, the claim for audit fees, consultancy fees, and bad debts written off was disputed. The Revenue alleged that the Assessee manipulated its accounts post-survey, leading to disallowances. The Tribunal observed that the issue was primarily factual, focusing on whether the expenses were genuinely incurred during the relevant year. The Assessee's case was that passing entries after the year-end was permissible if based on a valid basis, refuting the Revenue's allegations of malafide intentions.

The Tribunal found little merit in both parties' cases and emphasized the importance of verifying the genuineness of transactions and the timing of accounting entries. It highlighted that passing entries after the year-end was acceptable if reflecting the conditions existing at that date. The matter was restored to the first appellate authority for further examination and definitive findings on the satisfaction of section 36(2) regarding the claim for bad debts.

In conclusion, the Tribunal partly allowed the Assessee's appeals for the assessment years 2006-07 and 2008-09 for statistical purposes. The detailed analysis covered the challenges against the CIT Order, unexplained cash credits, and the disallowance of expenses, providing a comprehensive overview of the judgment's key aspects and legal implications.