2017 (6) TMI 1085 - HC - Income Tax

Disallowance of bad debts in respect of write off of investment / stock - Held that - CIT(A) and the Tribunal had concurrently appreciated the accounting system. The CIT(A) has observed that the Assessing Officer has accepted that the assessee is following lower of cost or market value of closing stock. It is evident that the whole of the investment has turned bad and it does not and cannot have any market or intangible value. As such, the assessee has taken its market value as NIL in the books of account. Apex Court in the case of United Commercial Bank (1999 (9) TMI 4 - SUPREME Court) has observed that in income tax return, the valuation made at cost or market value, which ever was lower, is a valid method to be followed and the same is accepted by the Income Tax Department.

Summary

Issues:
1. Disallowance of expenses incurred in relation to earning exempt income
2. Disallowance of bad debts in respect of write off of investment/stock
3. Depreciation claim in sale and lease back transactions

Analysis:
1. The first issue pertains to the disallowance of expenses incurred in relation to earning exempt income. The department challenged the Tribunal's decision to restrict the disallowance at 1% of administrative expenses, citing a previous judgment. The Tribunal's decision was based on a reasonable basis rather than an adhoc estimation basis, as argued by the department. The Court noted that a similar issue had been addressed in a previous judgment, and the current appeal was in line with that decision. Therefore, the Court dismissed this part of the appeal.

2. The second issue involves the disallowance of bad debts concerning the write off of investment/stock. The appellant contended that the write off was merely a provision and not allowable under Section 36(1)(vii) of the Income Tax Act. However, the respondent argued that the debt was irrecoverable, constituting bad debts as per standard accounting principles. The Court upheld the Tribunal's decision, emphasizing that the investment had no market value and was correctly valued at NIL in the books of account, in line with accepted accounting practices and previous judicial precedents. Consequently, this part of the appeal was dismissed.

3. The final issue concerns the depreciation claim in sale and lease back transactions. The Tribunal had set aside this issue to the Assessing Officer based on a judgment from the Delhi High Court. The appellant argued that the facts of the cases were distinguishable. However, the Court found no substantial question of law in this regard, as the accounting system was appropriately appreciated by the CIT(A) and the Tribunal. The Court referred to a Supreme Court decision supporting the valuation method used by the assessee. Consequently, the appeal was dismissed on this issue as well.

In conclusion, the Court dismissed the appeal on all grounds, finding no substantial question of law in the issues raised. The judgment was based on the application of relevant legal principles, accounting practices, and previous judicial decisions.