2017 (4) TMI 602 - AT - Income Tax

Claim for bad debt written off u/s 36(1)(vii) - Held that - In relation to the decision for write off, viz the relation with the concerned trade customer on an ongoing basis; the cost - direct or indirect, of recovery, etc In fact, but for it becoming irrecoverable, there was no question of any loss to the assessee, being a debt due from the Government Rather, being due from the Government, but for the law, a claim for bad debt in its respect would ordinarily invite an objection, being almost a contradiction The irrecoverability is thus an integral aspect of the claim for bad debt written off u/s 36(1)(vii) and, thus, nothing turns on the irrecoverability having set in on the lapse of the stipulated time period for its recovery If nothing, it only proves the claim to be genuine and bona fide The impugned claim is thus only qua a bad debt liable for deduction u/s 36(1)(vii) and not qua a loss u/s 28 of the Act In view of the foregoing, the assessee shall therefore be entitled to the impugned loss subject to the satisfaction of the conditions of s 36(1)(vii) That is, the relevant debt/s a) must have become irrecoverable, i.e., the 180 day period expired qua the same as at the year-end; b) must be written off in accounts for the relevant year The matter, accordingly, is restored to the file of the AO, who shall per a speaking order give effect to this order after allowing the assessee a reasonable opportunity to exhibit it s case The assessee shall also reconcile the difference between the amount claimed ( ₹ 25.44 lacs) and that for which the order stands passed by the VAT authority ( ₹ 23.91 lacs) Further, to the extent not written off, the claim in its respect would have to necessarily await the same, i.e., a write off in accounts, a condition precedent for a claim qua the same, and which shall incidentally also ensure that there is not double claim qua the same sum.

Summary

Issues Involved:
1. Disallowance of VAT credit receivable written off as irrecoverable.
2. Determination of the year in which the loss from the VAT credit receivable should be recognized.

Detailed Analysis:

1. Disallowance of VAT Credit Receivable Written Off as Irrecoverable:
The assessee's claim for a deduction of a debt written off as irrecoverable was disallowed by the Revenue on two grounds. First, the Revenue considered the VAT credit receivable as penal in nature because the claim was made beyond the permissible time limit of 180 days from the date of the relevant export sale, as prescribed by the Tamil Nadu Value Added Tax Act, 2006. The assessee argued that the write-off was genuine and not penal, as it was due to the denial of the refund by the Sales Tax Department of the Government of Tamil Nadu. The second reason for disallowance was that the loss crystallized only in the financial year 2015-16, relevant to AY 2016-17, when the VAT authority passed the order rejecting the refund claim. The assessee contended that the loss occurred on the 181st day after the date of sale, thus there was no need to await the VAT authority's order to book the loss.

2. Determination of the Year in Which the Loss from the VAT Credit Receivable Should Be Recognized:
The Tribunal had to decide whether the assessee's claim for deduction in the impugned sum was maintainable for the current year. It was immaterial whether the loss was considered as a debt written off under Section 36(1)(vii) of the Income Tax Act, 1961, or as a business loss under Section 28. The loss arose not because the tax was paid, but due to the denial of the refund for the VAT credit, which the assessee was entitled to but failed to claim within the prescribed 180 days. The Tribunal clarified that the loss should be recognized in the year when the right to refund lapsed, i.e., on the 181st day after the relevant sale.

The Tribunal examined the provisions of the Tamil Nadu VAT Act, 2006, specifically Section 18, which outlines the conditions for zero-rating and refund of input tax credit. The right to refund accrues upon making zero-rate sales, and the claim for refund must be made within 180 days from the date of such sales. The Tribunal concluded that the loss was in the nature of a bad debt that became irrecoverable due to the lapse of the statutory time period for claiming the refund.

Conclusion:
The Tribunal held that the assessee was entitled to claim the deduction for the bad debt written off under Section 36(1)(vii) of the Income Tax Act, 1961, subject to the conditions that the debt must have become irrecoverable by the year-end and must be written off in the accounts for the relevant year. The matter was restored to the Assessing Officer (AO) to verify these conditions and reconcile the difference between the amount claimed and the amount for which the order was passed by the VAT authority. The assessee's appeal was allowed on these terms.

Order Pronounced:
The order was pronounced on April 10, 2017, at Chennai.