2018 (5) TMI 1480 - AT - Income Tax

Disallowance of bad debts due to failure of rental payments - disallowance of amount paid on out of court settlement by the assessee on behalf of the subsidiary company - set off and carry forward of unabsorbed depreciation- Held that - assessee is a NBFC and was advancing loans to its customer as one of its objects - the decision of the assessee to write off ₹ 4. 71 crores was a commercial/business decision - The AO cannot question the business prudence of an assessee - thus the transaction is a business transaction and therefore loss suffered by the assessee has to be allowed as deduction u/s 36 - decided in favor of assessee. Amount paid on out of court settlement on behalf of subsidiary company - Held that - assessee paid the amount on behalf of the subsidiary company and thus incurred an expenditure - assessee has not acquired any capital asset - relying upon the case of Madras Auto Services Private Ltd 1998 (8) TMI 1 - SUPREME COURT - decided in favor of assessee Unabsorbed depreciation - Held that - As per the decision of Gujarat High Court in General Motors India Pvt. Ltd. v. Deputy CIT reported in 2012 (8) TMI 714 - GUJARAT HIGH COURT - any unabsorbed depreciation would be dealt with in accordance with the provisions of section 32(2) - thus the amount of business loss and unabsorbed depreciation to be carried forward for the set of against income of the subsequent years - decided in favor of assessee.

Summary

Issues:
1. Disallowance of bad debts written off by the assessee.
2. Disallowance of amount paid for reaching an out-of-court settlement.
3. Set off and carryforward of unabsorbed depreciation and business loss.

Issue 1: Disallowance of Bad Debts:
The assessee, an NBFC company, filed an appeal challenging the disallowance of bad debts of ?4.71 crores written off during the year. The AO disallowed the claim as the amounts were not justified under section 36(1)(vii) of the Income-tax Act, stating they did not qualify as revenue expenditure. The FAA upheld the AO's decision, stating the amounts were not bad debts but un-realized hire charges. However, the ITAT held that the bad debts were a commercial decision by the assessee, allowable as business loss under section 28 of the Act, and allowed the appeal in favor of the assessee.

Issue 2: Disallowance of Out-of-Court Settlement Amount:
The AO disallowed ?10 lakhs paid for an out-of-court settlement, considering it a capital expenditure. The FAA also upheld this decision, stating the payment was not for direct business activities. The ITAT reversed this decision, noting that no capital asset was acquired by the payment, and allowed the claim as revenue expenditure, citing the case of Madras Auto Services Private Ltd.

Issue 3: Set Off and Carryforward of Unabsorbed Depreciation:
The AO did not quantify the amount of business loss and unabsorbed depreciation to be carried forward for set off against subsequent years' income. The ITAT referred to the case of Hindustan Unilever Ltd and other cases where similar issues were decided in favor of the assessee. Following the precedent, the ITAT directed the AO to quantify the amount of business loss and unabsorbed depreciation for set off against future income, allowing the appeal.

In conclusion, the ITAT ruled in favor of the assessee on all three issues, allowing the disallowed deductions for bad debts and out-of-court settlement, and directing the AO to quantify the unabsorbed depreciation and business loss for set off in subsequent years.