2017 (2) TMI 408 - AT - Income Tax

Depreciation @ of 25% on insurance claim received during the year against DG set - Held that - The assessee has incurred expenditure on breakdown of DG set amounting to ₹ 12,43,508/- in assessment years 2000-01 and 2001-02 and said expenses were claimed as revenue expenditure in those years. The assessee lodged its claim of ₹ 12,43,08/- with insurance company and credited the amount of claim in profit and loss account in those years. In the year under consideration, the assessee received claim of ₹ 2,68,386/- and the balance amount of claim was, therefore written off. We find that the claim received by the assessee is against the expenses claimed as revenue expenditure towards repair of the DG set, and it is not towards meeting any cost of the DG set and, therefore, provisions of section 43(1) of the Act are not attracted. The Assessing Officer in earlier year has already allowed claim of the expenditure towards DG set as revenue expenditure, and then reimbursement of the same by the insurance company cannot be held as towards cost of the DG set. Accordingly, we delete the disallowance of ₹ 67,096/- confirmed by the learned Commissioner of Income-tax (Appeals) out of the depreciation claimed on DG set. Disallowance of professional fees - Held that - We find that the main agreement between the assessee company and M/s. ARBEITEN is not clear, whether it was for revival of the assessee company or for targeting companies in the line of the business of the assessee or another lines of business, but in supplementary agreement. Part of the agreement indicates that the consultancy expenses were for the purpose of establishing a new venture and not for running of the existing business. Further, the Assessing Officer has already pointed out main agreement was not witnessed by any person. On perusal of copy of collaborator s profile we find that it is not signed by the second party. We find that the assessee has not been able to substantiate that expenses, were in respect of the existing business. In view of above facts, we are of considered opinion that the order of learned Commissioner of Income-tax (Appeals) on the issue in dispute is well reasoned . Disallowance on account of bad debts written off - Held that - It is evident from the annual report that assessee has made only provision for doubtful debt and debt has not been written off as bad in its books of accounts. Further, in note 8 of the Notes to Account, which is available on page 28 of the annual report provision for doubtful debts for current year and previous year are mentioned. In view of the facts mentioned in the annual report of the assessee, the claim of the assessee need further verification. In our opinion, it is appropriate to restore the matter back to the file of the Assessing Officer for verification of facts whether the assessee has written off the bad debts in books of accounts of the assessee. Accordingly, the ground of the appeal is allowed for statistical purpose.

Summary

Issues Involved:
1. Disallowance of ?67,096 on account of depreciation on insurance claim.
2. Disallowance of ?2,34,000 paid on account of professional fees.
3. Disallowance of ?6,00,000 paid on account of commission.
4. Disallowance of ?2,26,88,161 on account of bad debts written off.

Issue-wise Detailed Analysis:

1. Disallowance of ?67,096 on account of depreciation on insurance claim:
The assessee received an insurance claim of ?2,68,386 for the breakdown of a DG set and wrote off the balance amount. The Assessing Officer (AO) disallowed depreciation of ?67,096, arguing that the insurance claim should reduce the cost of the DG set as per section 43(1) of the Income Tax Act. The Commissioner of Income-tax (Appeals) [CIT(A)] upheld this disallowance. However, it was argued that the insurance claim was against repairs already claimed as revenue expenditure, not towards the cost of the DG set. The Tribunal found that the claim received was for repairs and not for reducing the cost of the DG set. Thus, the disallowance of ?67,096 was deleted.

2. Disallowance of ?2,34,000 paid on account of professional fees:
The assessee paid ?2,34,000 to a consultancy firm for management and collaboration services. The AO disallowed the expense, questioning the genuineness of the agreement and its relation to the assessee's business. The CIT(A) upheld the disallowance, noting the lack of evidence supporting the business purpose of the payment. The Tribunal found that the agreement was not clear about whether it was for the revival of the existing business or a new venture. Given the lack of substantiation that the expenses were for the existing business, the Tribunal upheld the disallowance.

3. Disallowance of ?6,00,000 paid on account of commission:
This ground was not pressed by the assessee and was dismissed as infructuous.

4. Disallowance of ?2,26,88,161 on account of bad debts written off:
The AO disallowed bad debts of ?2,07,07,549, noting that the parties were still in existence and had regular transactions with the assessee. However, the AO erroneously added both ?2,26,88,161 and ?2,07,07,549 in the computation of income. Upon rectification, the AO retained the disallowance of ?2,26,88,161. The CIT(A) upheld this disallowance. The Tribunal noted that under section 36(1)(vii), it is sufficient if the bad debt is written off in the accounts. The Tribunal found that the assessee had made a provision for doubtful debts rather than writing off the debts as bad. Thus, the matter was remitted to the AO for verification of whether the debts were written off in the books of accounts and to decide the issue afresh based on this verification.

Conclusion:
The appeal was partly allowed for statistical purposes, with the Tribunal deleting the disallowance of ?67,096 on depreciation, upholding the disallowance of ?2,34,000 on professional fees, dismissing the ground on commission as infructuous, and remitting the issue of bad debts back to the AO for further verification.