2017 (9) TMI 460 - AT - Income Tax

Disallowance of bad debts u/s 36 - Held that - The assessee company received interest and offered same for taxation. He urged that it was a genuine business transaction and cannot be treated as a colourable device to avoid tax liability. We have given our thoughtful consideration to the fact of the present case, if we accept this contention of the assessee it would lay a wrong precedence. In every case the assessee would advance money to its sister concern and after some help in winding up of sister concern by waiving of the debt. A good debt cannot be allowed to be given colour of bad debt. Therefore, we do not see any reason to disturb the finding of the lower authorities. The ground of the assessee s appeal is dismissed.

Issues Involved:
1. Disallowance of ?19,72,993/- as bad debts.
2. Applicability of Section 36(1)(vii) and Section 36(2) of the Income Tax Act, 1961.
3. Nature of the advance given to M/s. Alwar Farmers Machinery House Pvt. Ltd.
4. Relationship between the companies and the implication on the claim.
5. Status of M/s. Alwar Farmers Machinery House Pvt. Ltd. and the recovery of the amount.
6. Classification of the expense as revenue expense under Section 28 of the Income Tax Act.
7. Consideration of judgments of higher courts.
8. Allegation of arbitrary and capricious order by CIT (Appeals).
9. Consideration of pleas and submissions by the appellant.

Detailed Analysis:

1. Disallowance of ?19,72,993/- as bad debts:
The primary issue revolves around the disallowance of ?19,72,993/- claimed as bad debts by the assessee. The Assessing Officer (AO) disallowed this claim, which was subsequently upheld by the Commissioner of Income Tax (Appeals) [CIT (A)]. The Tribunal noted that the AO had conducted extensive inquiries and provided detailed reasons for the disallowance, emphasizing that the transaction was not genuine and was aimed at avoiding tax liability.

2. Applicability of Section 36(1)(vii) and Section 36(2) of the Income Tax Act, 1961:
The assessee contended that the bad debt should be allowed under Section 36(1)(vii) and that the conditions of Section 36(2) were fulfilled. However, the Tribunal observed that the transaction was collusive and not genuine, thus not meeting the criteria for allowance under these sections. The Tribunal supported the AO's view that the transaction was a colorable device to avoid taxes.

3. Nature of the advance given to M/s. Alwar Farmers Machinery House Pvt. Ltd.:
The assessee claimed that the advance of ?18,40,000/- was given for setting up a service station, which was not realized due to the debtor company's insolvency. The Tribunal, however, found that the debtor company did not actually become insolvent but voluntarily applied for winding up under the Simplified Exit Scheme. The advance was not used for the intended purpose, and the debtor company used the funds for other purposes, further supporting the AO's conclusion of a collusive transaction.

4. Relationship between the companies and the implication on the claim:
The Tribunal highlighted that both companies had common directors and shareholders, indicating a close relationship. This relationship raised doubts about the genuineness of the transaction. The Tribunal agreed with the CIT (A) that the claim of bad debt was a tool designed to avoid tax liability, given the family-owned nature of both companies.

5. Status of M/s. Alwar Farmers Machinery House Pvt. Ltd. and the recovery of the amount:
The Tribunal noted that the debtor company had not become insolvent but had voluntarily applied for winding up. The assessee had waived off the debt, which contradicted the claim of it being a bad debt. The Tribunal supported the CIT (A)'s finding that the waiver was a voluntary action and not due to insolvency, thus not justifying the bad debt claim.

6. Classification of the expense as revenue expense under Section 28 of the Income Tax Act:
The assessee argued that the expense should be classified as a revenue expense. However, the Tribunal found that the advance was not related to sales and was not booked as sales in the profit and loss account. Therefore, the loss on account of non-receipt could not be considered a revenue expense.

7. Consideration of judgments of higher courts:
The assessee contended that the CIT (A) did not consider relevant judgments of higher courts. The Tribunal, however, found that the case laws cited by the assessee were distinguishable on facts and not applicable to the present case.

8. Allegation of arbitrary and capricious order by CIT (Appeals):
The assessee alleged that the CIT (A)'s order was arbitrary and capricious. The Tribunal, after examining the material on record, found that the CIT (A) had conducted a thorough analysis and provided detailed reasons for upholding the disallowance, thus rejecting the allegation.

9. Consideration of pleas and submissions by the appellant:
The assessee argued that the CIT (A) did not consider its pleas and submissions. The Tribunal found that the CIT (A) had indeed considered the submissions but found them unconvincing in light of the evidence and the nature of the transaction.

Conclusion:
The Tribunal upheld the disallowance of ?19,72,993/- as bad debts, agreeing with the findings of the AO and CIT (A) that the transaction was not genuine and was aimed at avoiding tax liability. The appeal of the assessee was dismissed.

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