2021 (6) TMI 718 - AT - Income Tax

Disallowance on account of bad - debts written-off - assessee had failed to prove that amount was actually trading liability - AO disallowed the above claim that the assessee has not produced the relevant details of old outstanding debts, therefore, he disallowed the same - CIT-A deleted the addition holding that when the assessee has written off the above sum, debts are already taken into income in earlier years, it is allowable - HELD THAT - Nothing new was argued by the ld DR and the ld AR also reiterated the arguments before the ld CIT(A). We find that when the assessee has written off a debt in its books of account, which was taken into computation of income in earlier years, it satisfied all the characteristic of allowable bad debt u/s 36(2) of the Act. In view of this we do not find any infirmity in the order of the ld CIT(A) in allowing the claim of bad debt written off. Nature of expenditure - miscellaneous expenditure on working of NEZ PMC - revenue or capital expenditure - HELD THAT - All the expenditures have been incurred by the assessee on the project and corresponding income of that project has already been offered for taxation. In view of this, the ld CIT(A) held that the above expenditure of the assessee is of revenue in nature and hence deleted the disallowances. We find that the assessee is a contractor, who according to terms of the contract was to acquire the land, create electricity infrastructure thereon and then handover the project after execution to Ministry of Home Affairs with respect to Indo Bangladesh border. The corresponding revenue received for execution of this work was already credited to the project income amount and taxed. The acquisition of land and payment of electricity charges were on account of above project and it did not create any asset in the hands of the assessee but assessee was merely a contract for construction of border outpost on behalf of Ministry of Home Affairs. We find that ld CIT(A) has correctly held that in the hands of the contractor, assessee the above expenditure was merely project expenditure and has note created any capital assets , hence, not a capital expenditure. Disallowances on account of provision of written back - AO made the addition holding that assessee has failed to give the information . - Claim of the assessee is that above provision which is written back during the year cannot be charged to taxed for the reason that the year in which the provision was created , it was already disallowed and in that year the assessee did not claim the above provision as allowable expenditure - CIT-A allowed the claim - HELD THAT - CIT(A) also examined the details of the provision written back. The complete details as well as the justification is reproduced at para 3.3.2 of his order which clearly shows that the provision made by the assessee in earlier years was never claimed/ allowed to the assessee. The ld CIT(A) also verified the same with respect to the computation of the total income of the assessee for earlier years. Before us the ld DR could not show that these provisions have already been allowed to the assessee in earlier years and therefore, they are required to be taxed in this year u/s 41(1) of the Act. In view of this we do not find any infirmity in the order of the ld CIT(A) in deleting the addition. Disallowance with respect to the book profit u/s 115JB - provision made for ascertain liability - AO made the addition stating that this is merely a provision and it is for unascertained liability - CIT-A deleted the addition - HELD THAT - The assessee submitted four different annexure to show that these provisions are for liability incurred by the assessee and are ascertained, accrued provision. The ld CIT(A) examined the list of account along with supporting documents and held that these are not contingent or provision made on ad hoc basis or to cover any uncertain liabilities. He held that the provisions are defined, ascertain, and incurred during the year. The LD DR could not controvert the finding of the LD CIT (A). Revenue appeal dismissed.

Summary

Issues:
1. Disallowance of bad debts written off
2. Treatment of PMC expenditure as capital expenditure
3. Disallowance of provision written back
4. Disallowance in book profit under section 115JB of the Income Tax Act

Analysis:

1. Bad Debts Written Off Disallowance:
The revenue challenged the deletion of disallowance of ?2,72,49,141 on account of bad debts written off. The assessee provided unit-wise details and evidence to support the write-offs, arguing that the debts were already included in earlier income computations. The CIT(A) allowed the claim citing the Supreme Court decision in TRF Ltd Vs. CIT, emphasizing that when a debt is written off and included in previous income computations, it qualifies as an allowable bad debt under section 36(2) of the Act. The ITAT upheld the CIT(A)'s decision, stating that the debts satisfied the criteria for allowable bad debts, dismissing the revenue's appeal.

2. PMC Expenditure Treatment:
The revenue disputed the deletion of ?113,50,15,591 expenditure disallowance by the CIT(A), arguing that it should be treated as capital expenditure. The expenditure was related to land acquisition and service connection charges for a project awarded by the Ministry of Home Affairs. The CIT(A) held that the expenditure was revenue in nature as it was incurred by the assessee as a contractor for the project, not creating any capital assets. The ITAT agreed with the CIT(A), emphasizing that the expenditure was project-related and did not result in asset creation, thus dismissing the revenue's appeal.

3. Provision Written Back Disallowance:
The revenue contested the deletion of ?12,20,71,176 disallowance on account of provision written back. The assessee argued that the provision, previously disallowed, should not be taxed again when written back. The CIT(A) examined the details and confirmed that the provision was never claimed or allowed in earlier years. The ITAT upheld the CIT(A)'s decision, stating that the provision was not previously allowed, thus dismissing the revenue's appeal.

4. Book Profit Disallowance under Section 115JB:
The revenue challenged the deletion of disallowances in book profit under section 115JB of the Income Tax Act. The CIT(A) found that the provisions were for ascertained liabilities, not contingent or ad hoc, and directed the deletion of the addition to book profit. The ITAT agreed with the CIT(A), dismissing the revenue's appeal.

In conclusion, the ITAT upheld the CIT(A)'s decisions on all grounds, dismissing the revenue's appeal in its entirety.