2021 (10) TMI 1094 - AT - Income Tax

Loss incidental to business - non-recovery of certain business advances made to certain parties in the normal course of its business - Whether such loss incidental to business, upon being written off in the Books of the Appellant is a claimable deduction allowable u/s 28 r.w.s. 37 of the Income Tax Act, 1961? - AO and the CIT(A) held that the deduction claimed on account of advances written off was a claimable deduction only u/s 36(l)(vii) r.w.s.36(2) - HELD THAT - Even though assessee might have claimed as a bad debt in the profit and loss, but before the AO as well as ld. CIT(A) the assessee claimed that it was actually a business loss in the normal course of carrying on business, as the advances were given to aforementioned parties during the course of business in the earlier years for the reasons mentioned above as business advance and then it was duly explained the circumstances in which these advances could not be recovered either due to dispute or for different various reasons as discussed above, and therefore, it was claimed as business loss while computing the profit and loss account for the year under consideration. Firstly in the case of Govinda Infraproperty Pvt. Ltd. (Govinda) in whose account the assessee has written off the advance of ₹ 3,92,00,000/-, there was an agreement between the assessee and the said party for the purpose of developing the assessee s security business across the India wherein the assessee was required to pay service fee of 10% of the business value that service provider would generate for the assessee - it cannot be held that there was no business advance or there can be any iota of doubt that such advance had become irrecoverable which assessee has written off. Once, during the course of carrying out business any advance has been given for the business purpose and the same was not being recovered or it had become irrecoverable due to dispute, then if it has been written off by the assessee, then such a loss has to be allowed in the computation of profit and loss account. It is a decision of the company or the businessman to write off such an advance. There are cogent reasons for non recovery and consequently any loss arising from such writing off cannot be questioned nor the prudence of the businessman and can be questioned - All the submission and explanation by the ld. counsel incorporated above are not only plausible explanation but also fully supported by documentary evidences filed before the authorities below. We are thus in tandem with the submission of the Ld. Counsel and accordingly, the loss claimed on such an advance given to Govinda Infraproperty is accepted and same is directed to be allowed. Advance written off in the case of Linton Distributors Pvt. Ltd.loss claimed in this year cannot be held to be non genuine. Even the inquiry and observations made by the AO u/s.133(6) had already been explained by the assessee in detail as incorporated above and also each and every observation of the AO in the remand report which has no adverse inference. Neither the AO nor ld. CIT (A) can question the credibility of assessee whether the said party was capable of complying with the said order or did not had any experience or there is any inquiry leading to any finding that said party was itself bogus. Again the wisdom and the business prudence of the assessee cannot be questioned to test the said transaction on preponderance of probability when there is no adverse material against the assessee with regard to business dealing of the assessee with the said party. The reasoning given by the ld. CIT(A) for disallowing the said claim of loss cannot be accepted and the explanation and the submission given by the assessee with the documentary evidence as discussed above are accepted and hence the loss claimed with regard to advance paid to this party is allowed as business loss. In the case of Om Sai Assotech Pvt. Ltd., again it was on account of works contract awarded by the appellant executed by M/s. Environ Energy Pvt. Ltd. for comprehensive operations and maintenance of sites in Rest of West Bengal (ROWB) circle maintained by VIOM Networks discovered that due to certain defaults and short comings of Om Sai in the execution of the work Environ Energy had made certain deduction for which the assessee after making repeated request and series of discussion managed to get the said deduction/penalty reduced. The assessee also realized that certain excess payments were made by the appellant on behalf of Om Sai as discussed above. The assessee requested and duly informed Om Sai about the proposed deduction and liability towards the sub-contractor which were discharged by the assessee on its behalf, however, Om Sai failed to settled the accounts and there arose a dispute between the assessee and Om Sai. There is a letter written by the assessee raising a final demand notice on 01.04.2014 calling upon it to make a payment of ₹ 1,56,64,000/- towards the excess amount towards deductions proposed by Environ Energy - said party did not make the payment. The assessee has also filed the suit against the High Court claiming the amount along with interest and OM Sai has filed a counter claim before the High Court against the assessee for recovery of sum of ₹ 9.30 crores against the appellant. Thereafter, the assessee finally considered that there is no point going through for protracted litigation and took a business decision to write off the amount in its books. Such write off of loss is incidental to the business operation; therefore, we do not find any reason as to why such loss can be disallowed. With regard to Metro Railways Kolkata entire detail and discussion about the manner in which the dispute had arisen and why the assessee was forced to write off the said deposit paid to the KMR has been discussed in detail in the foregoing paragraphs. The matter had also reached to stage of an arbitration as per the Hon ble Kolkata High Court order and the consequence of written off had already been stated above. In a nutshell, there is no dispute that either the assessee s explanation is not correct or the transaction entered with KMR was not genuine. Once assessee had any business transaction with any party during the course of which if assessee had incurred any loss and for which detailed justification and explanation has been given with documentary evidences, we failed to understand as to why such a loss can be disallowed once there is no controversial material or inquiry denied by the said party. Simply rejecting the explanation on flimsy grounds without any inquiry cannot be sustained. Accordingly, we do not find any reason to uphold such findings. Accordingly, the entire claim of advance written off is allowed. Disallowance u/s 14A - HELD THAT - It is an undisputed fact that assessee has earned exempt income against which assessee had made suo moto disallowance of ₹ 1,418 u/s.14A whereas the Assessing Officer has proceeded to make disallowance of ₹ 1,87,024/- once since exempt income itself is ₹ 6,525/-, the disallowance u/s.14A cannot exceed more than exempt income as held in the case of Cheminvest Ltd. 2015 (9) TMI 238 - DELHI HIGH COURT which has also been followed in the case of GVK Project Ltd. 2018 (5) TMI 1786 - DELHI HIGH COURT . Thus, the disallowance made by the Assessing Officer is restricted to ₹ 6,525/- and balance is deleted.

Summary

Issues Involved:
1. Disallowance of advances written off as business loss.
2. Disallowance under Section 14A of the Income Tax Act, 1961 read with Rule 8D(2) of the Income Tax Rules, 1962.

Detailed Analysis:

1. Disallowance of Advances Written Off as Business Loss:

Govinda Infraproperty Pvt. Ltd.:
The assessee entered into an agreement with Govinda for business development services, agreeing to pay a refundable advance of ?4,15,00,000. Disputes arose regarding Govinda's performance, and the assessee only recovered ?23,00,000. The remaining amount was written off due to irrecoverability. The Tribunal found the transaction genuine and supported by documentary evidence, rejecting the CIT(A)'s reasoning and allowing the loss as a business expenditure.

Linton Distributors Pvt. Ltd.:
The assessee issued a purchase order to Linton for uniforms and shoes, paying an advance of ?1,17,50,000. Due to substandard materials and non-delivery, the assessee terminated the order and wrote off the advance. The Tribunal accepted the genuineness of the transaction, noting the extensive documentation and disputes, and allowed the loss as a business expenditure.

Om Sai Assotech Pvt. Ltd.:
The assessee subcontracted work to Om Sai, making payments on its behalf. Disputes and excess payments led the assessee to file a suit for recovery, which was countered by Om Sai. Considering the protracted litigation and irrecoverability, the assessee wrote off ?1,56,77,731. The Tribunal found the transaction genuine and supported by evidence, allowing the loss as a business expenditure.

Metro Railways, Kolkata:
The assessee entered into a contract with Metro Railways, paying a retention security deposit of ?71,21,634. Due to non-performance by Metro Railways and outstanding dues, the assessee wrote off the deposit. The Tribunal found the transaction genuine, noting the extensive documentation and disputes, and allowed the loss as a business expenditure.

2. Disallowance under Section 14A:

The assessee earned exempt dividend income of ?6,525 and made a suo moto disallowance of ?1,418. The Assessing Officer disallowed ?1,87,024 under Section 14A read with Rule 8D(2). The Tribunal restricted the disallowance to ?6,525, in line with the Delhi High Court's decision in Cheminvest Ltd. vs. CIT, holding that disallowance under Section 14A cannot exceed the exempt income.

Decision:
The Tribunal allowed the assessee's appeal, accepting the write-off of advances as business loss and restricting the disallowance under Section 14A to the amount of exempt income earned.