2022 (6) TMI 1060 - AT - Income Tax

Disallowance on account of bad debts - contention of ld. AR of assessee is that neither the party supplied the material nor returned the amount of advance - assessee has shown the profit @ about 32% on its sales and the amount of bad debits is comparatively a very meagre amount. The advance was made in the year 2008 - HELD THAT - We find that the Assessing Officer disallowed the claim of bad debts by taking a view that it cannot be considered as debtor as the name of party is not in the name of debtors. Before the ld. CIT(A), the assessee also raised alternative plea to allow the same u/s 28 as the advance could not be recovered for more than three years - CIT(A) upheld the order of AO on the ground that there is no sales to the party and its name is not in the list of debtors. On alternative plea, CIT(A) held that the assessee has not made any effort to recover the advance. We find that the Hon ble Jurisdictional High Court in PCIT Vs Shreno Ltd. 2021 (2) TMI 188 - GUJARAT HIGH COURT while relying upon the decision of Hon ble Supreme Court in the case of T.R.F. Ltd. 2010 (2) TMI 211 - SUPREME COURT held that where the assessee company write off outstanding interest on the advances paid to its subsidiary as a irrevocable when net worth of subsidiary eroded, the assessee s claim of bad debt was to be allowed without expecting the assessee to prove the bad debts has actually become bad. Considering the binding decision of Hon ble Jurisdictional High Court on similar ratio, we direct the AO to delete the disallowance of bad debt. Considering the fact that we have accepted the primary submission assessee and allowed the write off of advances, therefore, adjudication on the alternative plea of business loss and allowance under Section 28 of the Act have become academic.- Decided in favour of assessee.

Summary

Issues Involved:
Disallowance of bad debts under Section 36 of the Income Tax Act, 1961 for Assessment Year 2013-14.

Detailed Analysis:

1. Disallowance of Bad Debts:
The appeal was against the order confirming the disallowance of Rs. 1,31,589 on account of bad debts for the Assessment Year 2013-14. The Assessing Officer disallowed the bad debt claimed by the assessee, noting that the amount was debited on account of bad debts, specifically an advance for purchase of material to a certain party. The Assessing Officer rejected the claim as the transaction did not involve sales of goods, and there was no debtor in the name of the party, hence not qualifying as bad debts under Section 36 of the Act.

2. Appeal Before CIT(A):
The assessee contended before the CIT(A) that the disallowance was unjustified as the amount written off did not arise from sales and was not allowable under Section 36 of the Act. The assessee argued that the amount was advanced for purchasing stock in trade, not a fixed asset, and was not recovered for more than three years. The CIT(A) upheld the Assessing Officer's decision, stating that the bad debt did not arise from sales and that the assessee made no effort to recover the advance.

3. Tribunal's Decision:
The Tribunal considered the submissions and case laws presented. It noted that the amount written off was an advance for the purchase of material for stock in trade, made in the financial year 2008-09. The Tribunal found the claim of bad debts genuine and bonafide, especially considering the small amount compared to the income offered by the assessee. Relying on a decision of the Jurisdictional High Court, the Tribunal directed the Assessing Officer to delete the disallowance of bad debt, as the assessee's claim was to be allowed without proving the bad debts had actually become bad.

4. Conclusion:
The Tribunal allowed the appeal of the assessee, emphasizing that the bad debt claim was genuine and should be allowed. The decision was based on the fact that the write-off of advances for the purchase of material was legitimate, and the disallowance was unjustified. The Tribunal's decision rendered the alternative plea for business loss and allowance under Section 28 of the Act as academic, given the acceptance of the primary submission regarding the bad debts.

In conclusion, the Tribunal allowed the appeal, directing the Assessing Officer to delete the disallowance of bad debt, as the claim was found to be genuine and in line with legal precedents.