2020 (2) TMI 1272 - AT - Income Tax

Benefit of deduction u/s. 80IC - assessee is a company engaged in telecommunication software development and trading in telecommunication hardware required mainly to run their software that are being supplied to the prospective consumers - HELD THAT - Conclusive to hold that there were two segments or verticals and is contrary to the Agreements under which the Assessee had to perform certain obligations to BSNL in the form of supply of software, hardware, installation and maintenance thereof. As we have already seen, the agreement with ZTE is very clear that the supply of software and hardware necessary to support the software supply, installation commissioning as well as rendering support services were to be done on a turnkey basis. Though the services agreement is separately entered into by the assessee, it has a direct nexus and connection with the agreement for supply of software. In these circumstances, the decisions cited by the ld. counsel for assessee, clearly supports the case of the assessee. We are therefore of the view that the claim made by the assessee for deduction u/s. 80IC of the Act ought to have been allowed by the AO/CIT(A) and they fell into an error in not allowing the said claim. We therefore hold that the assessee is entitled to claim deduction u/s. 80IC of the Act on service charges Deduction u/s 36(1)(viii) on account of bad debts written off - HELD THAT - Claim of assessee for deduction ought to have been allowed by the revenue authorities. It is clear from the order of AO that AO never doubted that the sum written off as bad debts was already included as income of assessee in the earlier previous years. There is no condition laid down in section 36(1)(vii) that the sum which is written off as bad debts should have suffered tax and if that income is claimed as exempt or deduction is claimed, then deduction on account of bad debts written off should not be allowed. We are also satisfied that the assessee has established that the sum written off as bad debts was in fact offered to tax in the earlier previous years as income and included while computing total income. The requirement of establishing that the debt has become bad and irrecoverable is no longer necessary after the decision of the Hon'ble Supreme Court in the case of TRF Ltd. 2010 (2) TMI 211 - SUPREME COURT . We are therefore of the view that none of the reasons assigned by the revenue authorities to deny the benefit of deduction on account of bad debts written off are sustainable. - Decided in favour of assessee

Summary

Issues Involved:
1. Deduction under Section 80-IC of the Income Tax Act.
2. Disallowance of bad debts written off.

Issue-wise Detailed Analysis:

1. Deduction under Section 80-IC of the Income Tax Act:

The primary grievance of the assessee was against the revenue authorities' denial of the deduction under Section 80-IC. The assessee, engaged in telecommunication software development and trading in telecommunication hardware, claimed a deduction of ?4,93,84,285 for AY 2014-15. The AO denied this claim, computing the gross total income at a negative figure and excluding other income and service charges from the total eligible turnover. The AO's computations and reasons for denial included the exclusion of ?6,38,13,310 as 'other income' and ?3,75,22,701 as net income from services, which were considered unrelated to manufacturing activities.

Upon appeal, the CIT(A) upheld the AO's decision, concluding that income from services was not eligible for deduction under Section 80-IC as it was not derived from manufacturing or production of any article or thing. The CIT(A) referred to the assessee's financial statements, which showed two revenue streams: income from product sales and service fees, and concluded that service fees were not integral to manufacturing and thus not eligible for deduction.

The Tribunal, however, found that the services rendered were linked and had a nexus with the supply of software and hardware, making the entire receipts interlinked and eligible for deduction. The Tribunal cited various judicial pronouncements supporting the view that income from services incidental to manufacturing is eligible for deduction under Section 80-IC. The Tribunal also noted that the AO's observation regarding the inclusion of other income in the deduction claim was incorrect. Consequently, the Tribunal allowed the assessee's claim for deduction on service charges of ?3,75,22,701.

2. Disallowance of Bad Debts Written Off:

The assessee claimed a deduction of ?7,47,94,151 for bad debts written off, which the AO disallowed on the grounds that the income had not suffered tax due to the deduction claimed under Section 80-IC. The AO argued that the bad debts had not been taken into account in computing the income of the assessee in the previous year or an earlier year, as required by Section 36(2). The CIT(A) upheld the AO's decision, adding that the assessee failed to prove the debt was included as income in previous years and that the debt had actually become bad.

The Tribunal, however, found that the AO did not doubt the inclusion of the debt as income in earlier years and that there is no requirement under Section 36(1)(vii) for the debt to have suffered tax. The Tribunal also referenced the Supreme Court decision in TRF Ltd., which held that a mere write-off in the books of accounts is sufficient to claim a deduction for bad debts. The Tribunal concluded that the assessee had established that the debt was included as income in earlier years and that the reasons for disallowance by the revenue authorities were unsustainable. The Tribunal directed that the claim for bad debts written off be allowed.

Conclusion:

The Tribunal allowed the appeal by the assessee, granting the deduction under Section 80-IC for service charges and allowing the claim for bad debts written off. The judgment emphasized the interlinked nature of services with manufacturing and the sufficiency of write-off in books for bad debts deduction.