2013 (12) TMI 294 - AT - Income Tax

Bad debts written off Held that - Prior to April 1, 1989, the assessee had to establish the debts have become bad and cannot be recovered in any case but after amendment to section 36(1)(vii) The word establish has been deleted - Following T. R. F. LTD. v. CIT 2010 (2) TMI 211 - SUPREME COURT - The assessee need not to establish that the debt has become irrecoverable. It is enough that the bad debt is written off as irrecoverable in the accounts of the assessee The assessee has filed all the details showing break-up of amounts written and the services rendered to them - Decided against Revenue. Legal and professional charges paid to director of company Held that - There was a consultancy agreement and the payment in question prima facie is a payment for professional services rendered and could not be treated as a payment of salary - Once commercial expediency of a payment is accepted and TDS has been effected, the deduction will have to be allowed The provisions of section 192 being outside the purview of section 40(a)(ia) - Decided against Revenue.

Summary

Issues Involved:
1. Allowance of bad debts written off.
2. Allowance of legal and professional charges.

Issue-wise Detailed Analysis:

1. Allowance of Bad Debts Written Off:

The Revenue challenged the Commissioner of Income-tax (Appeals) [CIT(A)]'s decision to allow the bad debts written off amounting to Rs. 26,58,077. The assessee, a company deriving income from designing advertisements, had debited Rs. 32,50,530 as bad debts written off in its profit and loss account and claimed it as a deduction. The Assessing Officer (AO) disallowed this claim on the grounds that the assessee had not established that the debts had become bad.

Upon appeal, the assessee argued that:
- The bad debts represented amounts outstanding from debtors for designing and brand consultancy services rendered.
- The bad debts had been accounted for as part of income in the relevant years.
- The write-off was due to non-acceptance of jobs by customers, disputes regarding bill amounts, and non-payment despite follow-ups.
- Personal follow-ups were made by the company's directors, and the write-off decision was based on an honest judgment of non-recoverability.
- Specific debts written off were related to Hindustan Lever Ltd. and Mumbai International Airport Ltd.

The CIT(A) held that the AO's premise that the debts were not genuine was insufficient. The law allows the management of a business to exercise judgment regarding the recoverability of debts. The CIT(A) referenced the Supreme Court ruling in T.R.F. Ltd. v. CIT, which clarified that post-April 1, 1989, it is sufficient for the bad debt to be written off as irrecoverable in the accounts of the assessee without the need to establish that it has become bad. Consequently, the CIT(A) allowed the assessee's claim.

The Tribunal, agreeing with the CIT(A), noted that the AO was not justified in disallowing the claim for deduction on account of bad debts. The Tribunal dismissed the Revenue's ground, affirming that the assessee had met all conditions for the deduction under section 36(1)(vii) of the Income-tax Act, 1961.

2. Allowance of Legal and Professional Charges:

The Revenue also contested the CIT(A)'s decision to allow legal and professional charges of Rs. 46,00,000 paid to Ms. Meeta Malhotra, a director of the assessee-company. The assessee had deducted tax at source under section 194J, treating the payment as professional fees. The AO, however, considered the payment as salary due to an employer-employee relationship and disallowed the deduction, arguing that the payment should have been taxed under section 192.

The assessee contended that:
- Ms. Meeta Malhotra rendered services as a consultant, not as a salaried employee.
- The payment was made for professional services and was supported by a consultancy agreement.
- The expenditure was incurred wholly and exclusively for business purposes.
- Even if the payment was construed as salary, section 40(a)(ia) would not apply to salaries, and the deduction should still be allowed.

The CIT(A) found that the commercial expediency of the payment was not questioned, and TDS was effected. The consultancy agreement's genuineness was not contested, and the CIT(A) noted that the AO had allowed similar charges in the subsequent assessment year without objection. Thus, the CIT(A) deleted the disallowance, stating that the addition was unsustainable.

The Tribunal upheld the CIT(A)'s decision, emphasizing that once the commercial expediency of a payment is accepted and TDS is effected, the deduction must be allowed. The Tribunal agreed that the payment was for professional services and not salary, and the disallowance by the AO was without basis.

Conclusion:

The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decisions on both issues. The bad debts written off and the legal and professional charges were allowed as deductions, with the Tribunal emphasizing the proper application of relevant legal provisions and the sufficiency of the assessee's actions in both cases.