2022 (11) TMI 1199 - AT - Income Tax

Additions of unexplained cash credit u/s 68 - Adjustment of Bad debts under the provision of section 36(1)(vii) - Addition made by the authorities below to the extent under the provisions of section 68 - HELD THAT - The amount of unexplained cash credit was adjusted by the assessee against the debtors meaning thereby the debtors in the books of accounts of the assessee were written off on account of such adjustment. The authorities below treated the sum as unexplained cash credit u/s 68. Thus, there remains no ambiguity to the fact that assessee has made its debtors at NIL value and accordingly the assessee is entitled to claim the deduction by way of writing off bad debts of these sundry debtors within the meaning of the provision of section 36(1)(vii) - Thus, we set aside the order of the CIT(A) and direct the AO to allow the deduction for the bad debts only. Thus, ground of appeal of the assessee is partly allowed.

Summary

Issues:
1. Reopening of assessment challenge
2. Compliance with specific requirements for order validity
3. Addition under section 68 of the Act
4. Eligibility for deduction under section 36(1)(vii)

1. Reopening of Assessment Challenge:
The appeal was filed against the order of the Commissioner of Income Tax, challenging the reopening of the assessment under section 143(3) r.w.s. 147 of the Income Tax Act for the Assessment Year 2004-2005. The appellant did not press ground Nos. 1 to 3 attached with the appeal memo, leading to their dismissal as not pressed.

2. Compliance with Specific Requirements for Order Validity:
The appellant contended that the Assessing Officer (AO) did not comply with the specific requirements outlined by the Supreme Court in GKN Driveshafts (India) Ltd. vs ITO, resulting in an order without adherence to the prescribed standards. However, this ground was dismissed as not pressed along with other grounds.

3. Addition under Section 68 of the Act:
The appellant's appeal primarily revolved around the addition of Rs. 22,43,329 under section 68 of the Act, related to unexplained cash credit. The appellant, a private limited company engaged in shipbreaking, failed to substantiate the credit entries' legitimacy and creditworthiness of the parties involved. Both the AO and the CIT(A) confirmed the addition, leading to the appellant's appeal before the Tribunal.

4. Eligibility for Deduction under Section 36(1)(vii):
The key issue in the appeal was the appellant's claim for deduction under section 36(1)(vii) for bad debts amounting to Rs. 22,43,329. The appellant argued that a portion of the amount was received from debtors and should be allowed as a deduction under the Act. The CIT(A) rejected this claim, stating that the appellant's stance was contradictory and not permissible under the Act. However, the Tribunal disagreed with the CIT(A) and allowed the deduction for bad debts amounting to Rs. 16,43,329, as the appellant had adjusted this amount against the outstanding debtors, effectively writing off the debts.

In conclusion, the Tribunal partially allowed the appeal, directing the AO to permit the deduction for bad debts of Rs. 16,43,329. This decision was based on the adjustment made by the appellant against the debtors, leading to their write-off and entitlement to claim the deduction under section 36(1)(vii) of the Act.