2017 (10) TMI 1158 - HC - Income Tax

Addition on account of bad debts written off - Held that - As it has been recorded by the CIT(A) that the Assessing Officer was oblivious of the amendments made by the Finance Act w.e.f. 01.04.1989 which had been explained by the CBDT s circular dated 23.1.1990 wherein in Para 6.6 it had been mentioned that the amendment was to rationalize the provisions regarding the allowability of all debts. It was laid down that the assessee had only to write off debts as irrevocable in its account and was not required to prove that they had become bad. Thus, in view of Section 36(1)(vii) read with Section 36(2) of the Act, the disallowance was correctly deleted. Addition on account of cessation of liabilities under Section 41(1) - Held that - Apex Court in CIT Vs. Sugauli Sugar Works Private Limited, (1999 (2) TMI 5 - SUPREME Court) it was held that merely by virtue of the fact that a debt becomes time barred, the right of the creditor will not come to an end nor the liability will cease and in these circumstances, Section 41(1) of the Act was not attracted. Thus, when the liability qua the amount which was still standing in the balance sheet of the assessee, which fact had not been disputed by the Assessing Officer, the same could not be said to have ceased. Thus, the Tribunal did not interfere with the findings recorded by the CIT(A) on this issue. Addition on account of VRS expenses - deduction u/s 35DDA - Assessing Officer showed that addition had been made merely on the basis of wrong interpretation of the provisions contained in Section 35DDA - Held that - Any deduction claimed for the financial year 2000-01 in question under Section 35DDA of the Act was to be considered for the assessment year 2001-02, when undisputedly, Section 35DDA was incorporated in the statute w.e.f. 01.04.2001. Thus, the assessee was certainly entitled to get the benefit for the same. Moreover, the Assessing Officer had allowed VRS payment in the earlier year and deduction claimed in the year under consideration was only a consequential relief for the 5th year. Further, Section 35DDA of the Act did not preclude the assessing authority to consider the VRS payment as revenue expenditure. Thus, the Tribunal rightly upheld the findings recorded by the CIT(A) on this issue Decided against revenue

Summary

Issues:
1. Whether the ITAT was correct in upholding the deletion of the addition of bad debts written off by the Assessing Officer?
2. Whether the ITAT was correct in upholding the deletion of the addition made by the Assessing Officer on account of cessation of liabilities under Section 41(1) of the Act?
3. Whether the ITAT was correct in upholding the deletion of the addition made by the Assessing Officer on account of VRS expenses?

Analysis:

Issue 1: Bad Debts Written Off
The appellant-revenue challenged the deletion of the addition of bad debts written off by the Assessing Officer. The CIT(A) and the Tribunal relied on the CBDT's circular and judicial pronouncements to support their decision. They emphasized that under Section 36(1)(vii) read with Section 36(2) of the Income Tax Act, the assessee was not required to prove that the debts had actually become bad. The Tribunal upheld the decision, stating that the Assessing Officer's disallowance was incorrect. The concurrent approach of the CIT(A) and the Tribunal was found to be legally sound, and the claim for bad debts written off could not be denied by the Assessing Officer.

Issue 2: Cessation of Liabilities
Regarding the addition made by the Assessing Officer on account of cessation of liabilities under Section 41(1) of the Act, the Tribunal upheld the CIT(A)'s decision. They clarified that the mere fact that a debt becomes time-barred does not automatically cease the liability. Citing relevant judgments, including the Apex Court's ruling in CIT Vs. Sugauli Sugar Works Private Limited, the Tribunal concluded that as long as the liabilities were reflected in the balance sheet, they could not be considered ceased. The Tribunal found no reason to interfere with the findings of the CIT(A) on this issue.

Issue 3: VRS Expenses
The Assessing Officer disallowed the deduction of VRS expenses for the financial year 2000-01 under Section 35DDA, claiming it was inadmissible for a period before its insertion. However, the Tribunal found this approach to be legally flawed. They noted that any deduction claimed for the financial year 2000-01 should be considered for the assessment year 2001-02 when Section 35DDA was in effect. The Tribunal upheld the CIT(A)'s decision, stating that Section 35DDA did not prevent the assessing authority from considering VRS payments as revenue expenditure. The Tribunal found no grounds to interfere with the CIT(A)'s findings on this issue.

In conclusion, the High Court dismissed the appeal by the appellant-revenue, as no substantial question of law arose from the issues presented in the case. The decisions of the CIT(A) and the Tribunal were upheld, emphasizing the correct application of relevant legal provisions and judicial precedents in determining the tax liabilities in question.