2017 (1) TMI 998 - AT - Income Tax

Disallowance & enhancement of Bad debt claim - Allowability of bad debts in terms of section 36(1)(vii) r.w.s. 36(2) - scope for estimation for determining eligibility of claim - Held that - We note that the AO has resorted to estimate disallowance of bad debt at ₹ 2,58,046/- being 10% of the total bad debts claimed. We totally fail to understand the rationale for such estimation. Clearly, the AO has acted in a non challant and mechanical manner without any accord with the purport of the provisions of section 36(1)(vii) r.w.s.36(2) of the Act. The allowance for bad debt is either allowable or not allowable based on evaluation of facts objectively. There is no scope for estimation for determining eligibility of such claims. Such uncalled for action cannot be thus sustained at all. On facts, the AO has admitted that party-wise break-up of the bad debt has been provided by the assessee for his consideration. The sole basis for rejection of the bad debt is lack of justification towards genuineness of bad claim without any elaboration. The CIT(A), on the other hand, has resorted to enhancement on the ground that requisite details have not been filed. The stand of the AO for disallowance and that of CIT(A) are on a mutually contradictory footing. We note that there is no quarrel to the fact that the assessee has written off the debt as irrecoverable in its financial account. It is well settled that the Department cannot insist on demonstrative and infallible proof that a debt has turned bad. There is no requirement in law for the assessee to establish that the impugned debt in fact has become bad in the view of the decision in the case of TRF Ltd. vs. CIT (2010 (2) TMI 211 - SUPREME COURT ). As per the scheme of the Act, the aforesaid claim of the assessee is admissible for deduction either in the form of bad debt or alternatively in the form of business loss and thus cannot be denied in wholesome without any sound basis. Both the authorities have failed to pinpoint any justifiable cause for drawing adverse inference. Thus, the action of the CIT(A) cannot be validated and requires to be reversed. As a result, appeal of the Assessee is allowed.

Summary

Issues Involved:
1. Disallowance of credit notes claimed on a provisional basis.
2. Disallowance and enhancement of bad debt claims.
3. Charge of interest under sections 234-B and 234-C of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance of Credit Notes Claimed on a Provisional Basis:
The Revenue's appeal contended that the Commissioner of Income-tax (Appeals) [CIT(A)] erred in deleting the disallowance of credit notes amounting to ?18,93,666, which were claimed on a provisional basis. The Revenue argued that this provision for credit notes constituted a contingent liability and was not allowable on an accrual basis. However, the appeal was dismissed in limine based on the Central Board of Direct Taxes (CBDT) Circular No. 21 of 2015, which mandates the dismissal of appeals where the tax effect does not exceed ?10 lakhs. The Revenue admitted the applicability of this circular, resulting in the dismissal of their appeal.

2. Disallowance and Enhancement of Bad Debt Claims:
The Assessee's appeal involved the disallowance and enhancement of bad debt claims. The CIT(A) not only confirmed the disallowance of ?2,58,046 made by the Assessing Officer (AO) but also enhanced the disallowance to ?11,14,090. The CIT(A) held that the amounts claimed as bad debts did not wholly fall within the category defined under sections 36(1)(vii) and 36(2) of the Income Tax Act. The CIT(A) issued show-cause notices and concluded that the bad debt claims related to short payments, bills raised twice, new bills raised against old bills, and advertisement cancellations did not qualify as bad debts under the relevant sections. The CIT(A) relied on judgments from the High Court and Tribunal, emphasizing the necessity for the taxpayer to provide detailed support for their bad debt claims. The Tribunal found the AO's estimation of disallowance at 10% to be unjustified and mechanical. The Tribunal noted that the CIT(A) and AO failed to provide a sound basis for their adverse inferences and reversed the CIT(A)'s decision, allowing the Assessee's appeal.

3. Charge of Interest under Sections 234-B and 234-C:
The Assessee also contested the CIT(A)'s confirmation of interest charges under sections 234-B and 234-C of the Income Tax Act, amounting to ?3,42,063 and ?33,654, respectively. The CIT(A) held these charges to be automatic. The Tribunal did not provide a separate detailed analysis on this issue, but the overall result of the Assessee's appeal being allowed implies that the charges under these sections were also contested successfully.

Conclusion:
In summary, the Tribunal dismissed the Revenue's appeal due to the applicability of the CBDT Circular No. 21 of 2015. On the other hand, the Assessee's appeal was allowed, reversing the CIT(A)'s disallowance and enhancement of bad debt claims, and implicitly addressing the interest charges under sections 234-B and 234-C.