2021 (8) TMI 510 - AT - Income Tax

Bad Debts - Disallowance of amounts written being notice pay etc debited to employees at the time of their separation in the earlier years and credited to Income / expense Salaries allowances but could not be recovered - whether CIT A has erred in not deleting the Write off of amounts treated as income / credited to expense in earlier years and written off in the current as they are allowable under sections 28 and 37 of the Act? - whether all these three items would fall within the category of debt and even if they do not fall within the category of that whether such expenses are allowable as business expenditure? - contention of the assessee has been through out that the transactions have occurred during the course of business and routed through P L A/c - HELD THAT - Amounts which are recoverable from the employees under different items would certainly fall within the ambit of the debt. Undisputedly, in this case, so far item related to shortage of garments is concerned and returning of uniform, both these items are directly related to the course of business of the assessee. Therefore, the authorities below ought to have allowed the claim of the assessee. I, therefore, direct the Assessing Officer to delete the addition. However, in the case where the employees had left employment without paying mandatory notice pay, the assessee has not brought on record that what steps were taken to recover this amount to demonstrate that in fact these were recoverable from the employees. In the absence of such evidence, no interference is called for. Thus, Ground of appeal No.1 raised by the assessee is partly allowed. Disallowances made under normal provisions are not includable to book profits/ income computed u/s 115JB - HELD THAT - In agreement with the Ld. Counsel for the assessee that as per the explanation 2 of section 115JB of the Act, the amount disallowed could not have been added for the purpose of section 115JB of the Act. We therefore, direct the Assessing Officer to compute book profits as per explanation 2 of section 115JB of the Act. Thus, Ground of appeal No.2 raised by the assessee is allowed.

Summary

Issues Involved:
1. Disallowance of ?1,27,476/- written off as bad debts/advances.
2. Inclusion of disallowances in book profits under Section 115JB.
3. Charging of interest under Section 234B.

Issue-wise Detailed Analysis:

1. Disallowance of ?1,27,476/- Written Off as Bad Debts/Advances:
The assessee contested the disallowance of ?1,27,476/- made by the Assessing Officer (AO) and confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)]. The amount pertained to unrecovered notice pay, shortage of garments, and uniform expenses from ex-employees. The assessee argued that these amounts were written off as they were not recoverable and should be allowed as business expenses under Sections 28 and 37 of the Income Tax Act. The Tribunal noted that the amounts related to garment shortages and uniform expenses were directly linked to the business and should be allowed. However, for the notice pay, the assessee failed to provide evidence of efforts made to recover the amount, leading to the Tribunal upholding the disallowance for notice pay. Thus, the Tribunal directed the AO to delete the addition related to garment shortages and uniform expenses but upheld the disallowance for notice pay.

2. Inclusion of Disallowances in Book Profits Under Section 115JB:
The assessee argued that the CIT(A) erred by not directing the AO to exclude disallowances made under normal provisions from book profits computed under Section 115JB. The Tribunal agreed with the assessee, referencing Explanation 2 of Section 115JB, which specifies certain amounts to be added while computing book profits. The Tribunal directed the AO to compute book profits as per the explanation, thereby excluding the disallowances made under normal provisions from the book profits.

3. Charging of Interest Under Section 234B:
The assessee challenged the charging of interest under Section 234B. However, no specific submissions were made by the assessee to demonstrate how the interest charging was incorrect. The Tribunal noted that this issue is consequential in nature and upheld the charging of interest under Section 234B.

Conclusion:
The appeal was partly allowed. The Tribunal directed the AO to delete the disallowance related to garment shortages and uniform expenses but upheld the disallowance for notice pay. The AO was also directed to compute book profits as per Explanation 2 of Section 115JB, excluding the disallowances made under normal provisions. The charging of interest under Section 234B was upheld as no specific arguments were presented against it.