2016 (6) TMI 134 - HC - Income Tax

Claim to write off on account of advance disallowed - year in which bad-debts crystallized - mercantile system of accounting - Held that - Though the amounts relate to the period April 1998 to March 1999, the dispute of liability was ultimately crystallized during the period under consideration by the report of the Chartered Accountant referring, inter alia that the CBL has insured amount during that period and it was declared as sick industry by BIFR and any amount from such industry is not recoverable as there is prohibition contained in the Sick Industries Act. Then only the assessee has determined finally that the amount is irrecoverable from CBL and accordingly it is written off in the P&L Account under the head advances of doubtful recovery written off . This claim can never be comprehended by the scope of section 36(1)(vii) of the I.T. Act. As per the mercantile system of accounting and principles of Real Income Theory, the claim of the assessee during the period under consideration though related to the period April 1998 to March 1999 is allowable as the claim is finally crystallized during the period under consideration. In that view of the matter, the view taken by the department in disallowing the claim of the assessee is not sustainable for legal scrutiny and the same is hereby directed to be deleted. - Decided in favour of assessee

Summary

Issues:
1. Allowability of claim to write off advance as irrecoverable from another company for the assessment year 2002-03.

Analysis:
The case involved a dispute regarding the deduction of an advance amount of ?2,36,89,387 given to another company (CBL) as irrecoverable. The appellant contended that the amount was never included in its income in any previous year, not recorded in its books of accounts, and was not offered for taxation, thus making it ineligible for write-off. The demerger of divisions from CBL to the appellant led to the advance payment for administrative expenses, which was later deemed irrecoverable. The assessing officer and CIT(Appeal) denied the deduction, arguing that the expenditure related to a previous assessment year, thus disallowing it for the current year. However, the Tribunal found in favor of the appellant, considering the confirmation by CBL and the appointed chartered accountant that the amount was irrecoverable due to CBL being declared a sick industry by the BIFR. The Tribunal held that the claim was allowable under the mercantile system of accounting and Real Income Theory, as it was finally crystallized during the assessment year under consideration.

The appellant's counsel failed to provide a valid reason as to why the expenditure should not be allowed as a deduction. The argument that the amount should have been routed through the profit and loss account of earlier years to be written off as a bad debt was deemed irrelevant to the case at hand. With no substantial submissions from the appellant's side, the Court dismissed the appeal, upholding the Tribunal's decision to allow the claim for writing off the irrecoverable advance amount.