2010 (2) TMI 18 - HC - Income Tax

Bad debts section 36(1)(vii) power of the Tribunal - the assessee had written off an amount of Rs 14.79 lacs by way of subsidy not received, which had been shown in the earlier year as a receivable, as per the mercantile system of accounting followed by it. The assessee claimed this amount as a bad debt under Section 36(1)(vii) of the said Act - The Assessing Officer did not agree with the view taken by the assessee and came to the conclusion that the said amount did not fall within the purview of Section 36(1)(vii) of the said Act inasmuch as it did not amount to a bad debt. The Assessing Officer took the view that the assessee did not have a legal right to claim the subsidy and, therefore, could not take the matter to court by way of a suit to claim the same. As such, it was not a bad debt in the terms described in Section 36(1)(vii) of the said Act CIT(A) confirmed the order of AO ITAT reversed the order of AO and CIT and allowed the deduction u/s 37(1) held that - . It is true that the subsidy was given by the government to the assessee, who was in the business of selling fertilizers so that fertilizers were available at a lower price to the farmers. The assessee had calculated the subsidy in the earlier year provisionally on the basis of the claim made. However, when the final rates of the subsidy were communicated by the Fertilizer Industry Coordination Committee (FICC), the same were sought to be adjusted as subsidy not received. We agree with the learned counsel for the appellant/ revenue that the assessee had wrongly claimed it as a bad debt under Section 36(1)(vii) of the said Act. ITAT is empowered to allow the claim as bad debt or as expenditure u/s 37(1)

Summary

Issues:
1. Tribunal's findings on the allowance of claimed amount as a bad debt under Section 36(1)(vii) of the Income Tax Act, 1961.
2. Tribunal's decision on the allowance of the claimed amount as an expenditure under Section 37(1) of the Income Tax Act, 1961.

Analysis:
1. The appeal before the High Court concerned the Tribunal's order regarding the allowance of an amount of Rs 14.79 lacs claimed by the assessee as a bad debt under Section 36(1)(vii) of the Income Tax Act, 1961. The Revenue contended that the Tribunal erred in holding this amount as a bad debt. The Assessing Officer had disallowed the deduction, stating that the amount did not qualify as a bad debt as the assessee did not have a legal right to claim the subsidy. The High Court agreed with the Revenue that the subsidy was not a debt as there was no debtor-creditor relationship established, and thus, it could not be considered a bad debt under the Act.

2. The second issue revolved around whether the claimed amount could be treated as an expenditure under Section 37(1) of the Income Tax Act, 1961. The Tribunal, while not definitively determining if it was a bad debt, allowed the amount as an expenditure for the business under Section 37(1). The Revenue argued that the Tribunal should have remanded the matter to the Assessing Officer for further examination. However, the High Court upheld the Tribunal's decision, citing precedents like CIT v. Mahalaxmi Textile Mills Ltd and CIT v. Rose Services Apartment India Pvt. Ltd, which empowered the Tribunal to decide on the allowability of the amount as an expenditure under Section 37(1).

In conclusion, the High Court dismissed the appeal filed by the Revenue, affirming the Tribunal's decision to allow the claimed amount as an expenditure under Section 37(1) of the Income Tax Act, 1961. The Court found no substantial question of law to consider and upheld the Tribunal's authority in determining the allowability of the amount.