2017 (11) TMI 1747 - AT - Income Tax

Disallowance on account of bad debt u/s 36(1)(vii) - Held that - As noticed that assessee has given advances to its sister concerns viz Shah Engineers & M/s. Tetra Tract. The assessee has charged interest of ₹ 32,04,890/- and ₹ 21,83,870/- respectively for the financial year 2001-2002 to 2002-2004. The interest income was reflected in the books of account of the assessee in the aforesaid years. The assessee had received interest of ₹ 26,37,064/- out of the outstanding interest of ₹ 32,04,890/-from its sister concern M/s. Shah Engineers and interest of ₹ 7,53,704/- out of the outstanding interest of ₹ 21,83,870/- from the other sister concern M/s. Tetra Tract. The assesse had included the above interest received of Rs. ( 26,37,064 7,53,704) in the amount claimed as bad debt. The Ld. CIT (A) has restricted the quantum of bad debt to the extent the debt on account of interest income remains unrecovered . Therefore, the total unrecoverable interest income from the above of Rs. (5,67,826 14,30,166) ₹ 19,97,992/-) and the amount of ₹ 13,02,182/- on account of customer balances was allowed as bad debt by the ld. CIT(A) - no reason to decline with the detailed findings of the Ld. CIT(A) - decided against revenue Disallowance on account of interest on loans to Associate Concern - Held that - In assessment year and subsequent years, assessee has stopped charging interest and accounting it in the income on accrual basis. This is not a sound accounting policy as at outset it should have been recognized the same as income on accrual basis and thereafter would have given the deduction of claim of bad debt which the assessee failed in these years. Further, when we visualize this situation as a whole traveling from three assessment years, then, it is observed that interest income was recognized on accrual basis and thereafter claimed as a bad debt of its non-realization, this has been allowed by ld. CIT(A). If we remit the issue to the file to assessing officer in subsequent years by holding that income is to be recognized on accrual basis and thereafter, it is to be claimed as bad debt whether allowable or not, then, to our mind, it will be an academic and futile exercise because in reality assessee has not received any interest income from its sister concern. It is to be recognized that in all the aforesaid three years the income from interest on accrual basis remained unrecoverable which was allowed as a bad debt. Thus, in order to avoid multiplicity of the proceedings, we allow the appeal of the assessee Disallowance on account of general expenses on estimated basis - Held that - Referring to claim of the assessee that all the transactions were duly supported by documentary evidences. In view of above and after considering that the ld. assessing officer has verified the entire books of accounts, bills, vouchers etc. and not pointed out any discrepancy in unaccounted sale, expenditure etc. Therefore, we restrict the disallowance out of general expenses to ₹ 10,000/- only. In the result the appeal of the assessee is partly allowed on this issue.

Issues Involved:
1. Disallowance on account of bad debts.
2. Disallowance on account of interest on loans to associate concerns.
3. Disallowance on account of general expenses on an estimated basis.
4. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act.
5. Charging of interest under sections 234A, 234B, 234C, and 234D of the Income Tax Act.
6. Restriction of the claim of brought forward and set off of unabsorbed business losses.

Issue-wise Detailed Analysis:

1. Disallowance on Account of Bad Debts:
The assessee filed returns declaring an income of ?15,160 and claimed a bad debt of ?66,90,942. The assessing officer disallowed this claim on the grounds that the assessee failed to prove that the debt became bad in that particular year. The CIT(A) allowed part of the relief by permitting bad debts of ?13,02,182 on account of customer balances and ?19,97,992 as unrecovered interest income, totaling ?33,00,174. The remaining disallowance of ?33,90,768 was confirmed. The Tribunal upheld the CIT(A)'s decision, noting that the assessee had written off the debt as irrecoverable in its accounts, and the decision was in line with the Supreme Court's ruling in TRF Limited vs. CIT.

2. Disallowance on Account of Interest on Loans to Associate Concerns:
The assessing officer charged notional interest of ?16,00,763 on loans given to sister concerns, arguing that the assessee used interest-bearing funds for these advances. The CIT(A) reduced this amount to ?12,04,742 after excluding interest on customer balances. The Tribunal found that the assessee had stopped charging interest due to non-recovery in previous years and had followed a mercantile system of accounting. The Tribunal allowed the assessee's appeal, noting that recognizing interest on an accrual basis and then claiming it as a bad debt would be a futile exercise since the interest was never realized.

3. Disallowance on Account of General Expenses on an Estimated Basis:
The assessing officer made a lump sum addition of ?50,000 due to inadequate evidence supporting general expenses. The CIT(A) reduced this to ?25,000, stating the disallowance was made without a solid foundation. The Tribunal further restricted the disallowance to ?10,000, acknowledging that the assessee's transactions were supported by documentary evidence and no discrepancies were found in the accounts.

4. Initiation of Penalty Proceedings under Section 271(1)(c):
The Tribunal did not adjudicate this issue, considering it of general and consequential nature.

5. Charging of Interest under Sections 234A, 234B, 234C, and 234D:
Similar to the penalty proceedings, the Tribunal did not adjudicate this issue, considering it of general and consequential nature.

6. Restriction of the Claim of Brought Forward and Set Off of Unabsorbed Business Losses:
For the assessment year 2010-11, the CIT(A) directed the assessing officer to determine the claim of brought forward and set off of unabsorbed business losses after giving effect to the appellate order. The Tribunal restored this matter to the assessing officer for fresh examination and decision per the law.

Conclusion:
The Tribunal partly allowed the assessee's appeals, upholding the CIT(A)'s decisions on bad debts and interest on loans to associate concerns while providing partial relief on general expenses. The issues of penalty proceedings and interest charges were not adjudicated, and the matter of unabsorbed business losses was remanded for fresh examination. The order was pronounced in the open court on 27-11-2017.

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