2022 (8) TMI 787 - AT - Income Tax

Allowability of business expenditure incurred outside India which pertains only to the Indian Business - Disallowance of business expenses incurred outside India - Expenditure attributable to the Appellant s business operations in India or not? - CIT(A) confirmed the addition merely on the grounds that the assessee has not brought any evidence in support of the claim that the expenses were incurred exclusively for the Indian business - HELD THAT - We have gone through the certificate provided by the assessee of KPMG which has been accepted by the AO for Head Office General Charges but ignored the costs directly pertaining to Indian business. The costs directly pertaining to Indian business are not subjected to the provisions of Section 44C of the Act and hence, appeal of the assessee on this ground is allowed. Early Retirement Scheme- (ERS) - Assessee claimed being 1/5th of such expenditure as deduction u/s.35DDA - AO disallowed expenses on the ground that the assessee did not furnish evidence of persons who retired during the year and given compensation under separation scheme - HELD THAT - The audit report cannot be taken as a sacrosanct document to be relied upon for the business purposes like banking operations/loans and for statutory obligations like taxation. All the financials scams and tax evasion cases had their genesis in the window dressing of the balance sheets and the other related financial statements. When an item of the financial statements which is to be examined and verified by the tax authorities for allowing any deduction, it is incumbent upon the assessee to provide the basic backup details based on which the auditors have certified that such expenses is true to their knowledge. In the absence of any supporting evidences, the claim of the assessee cannot be allowed by the tax authorities. In case, the bank takes a position that owing to the scattering of retired employees all over India and inability to provide such details for their own benefit points to the efficient functioning of the bank itself. When the bank itself cannot be organized their own affairs, it will be very difficult to gain the public trust to part and park their hard earned amounts with the bank. Since, no details have been submitted so far and as the ld. Counsel has argued that the details are being collated, the matter is being referred to the file of the Assessing Officer to examine the issue afresh after the assessee submits the list of eligible employees of the retirement scheme and to take a decision in accordance with the Income Tax Act. Allowability of Bad debts - AO disallowed the assessee s claim for bad debts written off in books on the grounds that these should be set-off against provision made under section 36(1)(viia) - HELD THAT - The key provisions are the bad debts has to be written off as irrecoverable, in the case of the assessee (i.e. bank) the amounts shall be limited to the amount by which such date are part thereof exceeds of credit balance in the provision for bad debts, As per the provisions of Section 36(1)(viia), the amount allowable is 5% of the amount of the profits determined. The facts relevant to applicability of the above provisions to the assessee assessee claimed bad debts, amount of profit determined, 5% of profit was Rs.10,78,12,465/- credit balance available u/s 36(1)(viia) was Rs.10,78,12,465/-. The specific provisions would have precedence over the generic provisions. Hence, we hold that, as per the provisions of the Act, the deduction allowable is Rs.1,88,87,531/-.

Summary

Issues:
1. Allowability of business expenditure incurred outside India directly attributable to Indian business operations.
2. Disallowance of 1/5th expenses incurred on Early Retirement Scheme u/s.35DDA.
3. Disallowance of bad debts written off in the accounts.

Analysis:

Issue 1: Allowability of business expenditure incurred outside India directly attributable to Indian business operations:
- The Assessing Officer disallowed expenses for Indian business outside India under section 44C, but the expenses were directly related to operations in India post-merger.
- The CIT(A) upheld the disallowance due to lack of evidence supporting exclusive incurrence for Indian business.
- The Tribunal allowed the appeal, considering costs directly related to Indian business not subject to section 44C provisions.

Issue 2: Disallowance of 1/5th expenses incurred on Early Retirement Scheme u/s.35DDA:
- The AO disallowed the deduction under section 35DDA due to lack of evidence of employees retiring under the scheme.
- The Tribunal noted that the auditors verified the expenses, but emphasized the need for supporting evidence for tax deductions.
- The matter was referred back to the AO for re-examination upon submission of eligible employees' list for the retirement scheme.

Issue 3: Disallowance of bad debts written off in the accounts:
- The AO disallowed the bad debts claim, citing set-off against provision under section 36(1)(viia).
- The Tribunal clarified the provisions of Section 36(1)(vii) and 36(1)(viia) and determined the allowable deduction based on profit percentage.
- The Tribunal held the deduction allowable as per specific provisions, overriding generic provisions.

Additional Points:
- The Tribunal directed the AO to re-compute interest under Section 234B and Section 234D as per the Act.
- The appeal of the assessee was allowed based on the Tribunal's analysis and findings.

This judgment addresses the specific issues of business expenditure, Early Retirement Scheme expenses, and bad debts disallowance, providing detailed reasoning and legal interpretation for each aspect, ultimately allowing the appeal of the assessee based on the Tribunal's comprehensive analysis and conclusions.