2018 (4) TMI 993 - AT - Income Tax

Disallowance of sales tax demand - allowable busniss expenditure - Held that - We are of the opinion that the amount of sales tax is not in the nature of penalty and is allowable as business expenditure . As relying on Chemical Constructions case 1998 (11) TMI 52 - MADRAS High Court we are of the opinion that sales tax so levied on assessee is not in the nature of penalty and is an allowable expenditure as per the provisions of the Act. AO is directed to allow the amount. - Decided in favour of assessee Disallowance of bad debts written off - AO disallowed the amount stating that assessee has not taken any genuine effort in collecting the outstanding debts like - writing letters to the above Debtors frequently and sending legal notices - Held that - The orders of the authorities cannot be upheld on this issue. The provisions of Section 36(1)(vii) have been amended w.e.f. 01-04-1989. The provision has been amended to state that any amount of bad debt or part thereof which is written off as irrecoverable in the accounts of assessee for the previous year is allowable as a deduction. See case of T.R.F. Ltd. Vs. CIT 2010 (2) TMI 211 - SUPREME COURT - since the amount is written off in the books of account as irrecoverable we direct the AO to allow the amount.- Decided in favour of assessee Addition towards bad debts provision written back - MAT computation - Held that - Neither the AO nor the CIT(A) has examined the issue in the correct perspective. If the provision for bad and doubtful debts is not allowed as a deduction in the year in which the provision was made the same cannot be considered as income in the year in which the provisions were written back. The accounting under the company law stands on a different footing from the computation of income in the income tax proceedings. Since the statement given by assessee and extracted above has not been examined by the AO and CIT(A) even though they are provided before them we are of the opinion that this aspect should be examined by the AO and in case the provisions are not allowed in the respective years in the respective computations as explained before us then AO is directed not to treat the amounts as income in the year under consideration to that extent. The issue under MAT provisions also is directly covered by Explanation-1 of Section 115JB. Therefore AO is directed to exclude the amounts from both normal computation and MAT computations subject to verification that so much of the amount has not been allowed in the year of making the provision. Ground is considered allowed for statistical purposes.

Summary

Issues Involved:
1. Disallowance of sales tax demand.
2. Disallowance of bad debts written off.
3. Addition of bad debts provision written back.

Issue-wise Detailed Analysis:

1. Disallowance of Sales Tax Demand:
The assessee contested the disallowance of a sales tax demand of ?18,53,329/- raised for earlier years but paid during the year. The AO treated this payment as a 'penalty' due to the assessee's failure to submit sales tax declaration forms and disallowed it as a deduction from business profits. The CIT(A) upheld this disallowance, noting that the AR could not satisfactorily rebut the AO's conclusions. The assessee argued that the amount was not a penalty but a legitimate business expenditure allowable under Section 43B, citing judicial precedents. The Tribunal, after considering the rival contentions, concluded that the sales tax payment was not a penalty and should be allowed as business expenditure, directing the AO to allow the amount.

2. Disallowance of Bad Debts Written Off:
The AO disallowed ?2,66,236/- claimed as bad debts written off, stating that the assessee did not make genuine efforts to collect the debts and failed to provide evidence that the debts had become bad. The CIT(A) upheld the AO's disallowance. However, the Tribunal noted that the provisions of Section 36(1)(vii) had been amended to allow any bad debt written off as irrecoverable in the accounts of the assessee. Citing the Supreme Court's decision in T.R.F. Ltd. vs. CIT, the Tribunal held that it was sufficient for the bad debt to be written off in the accounts. Since the amount was written off, the Tribunal directed the AO to allow the amount, criticizing the CIT(A) for ignoring the Supreme Court's decision.

3. Addition of Bad Debts Provision Written Back:
The assessee claimed a deduction of ?21,23,257/- for bad debts provision written back, arguing that the provision was made in earlier years but not allowed as a deduction, hence the write-back should not be considered income. The AO and CIT(A) rejected this claim, with the CIT(A) noting the lack of evidence rebutting the AO's conclusions. The Tribunal examined the issue and found that if the provision for bad and doubtful debts was not allowed as a deduction in the earlier years, it should not be considered income in the year it was written back. The Tribunal directed the AO to verify whether the provisions were not allowed in the respective years and, if so, to exclude the amounts from both normal and MAT computations. The Tribunal relied on decisions from Kochi Refineries Ltd. vs. DCIT and Dy.CIT vs. Mcleod Russel India Ltd.

Conclusion:
The appeal of the assessee was allowed for statistical purposes, with directions to the AO to re-examine certain aspects and allow the disputed amounts based on the Tribunal's findings. The order was pronounced in the open court on 18th April 2018.