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2022 (12) TMI 676 - AT - Income TaxDisallowance of bad debts written off - Addition of bad debt written off under the head other expenses on the ground that assessee does not fulfill the conditions prescribed u/s.36(2) - HELD THAT - On a pointed query raised by the Bench as to whether the expenditure was incurred during the impugned financial year, the ld.cousnel for the assessee submitted that these were incurred in the past years and does not relate to this year. To another query raised by the Bench as to what is the date of the Arbitration Award, the ld.counsel for the assessee submitted that the arbitrator gave his award on 18.05.2016. Thus a perusal of the award given by the arbitrator shows that the arbitrator gave his award on 18.05.2015, which falls under FY 2015-16 i.e relevant to AY 2016-17. We, therefore, do not agree with the argument of the ld. counsel for the assessee that the same should have been allowed as business loss during this year. In our opinion, when the assessee is not entitled to claim the same as bad debt, the assessee cannot claim the same as business loss as per his sweet will. The law is well settled on this aspect and business loss, if any, can be claimed by the assessee in the year of incurring of the expenditure and not as per his sweet will. In this view of the matter, the order of the ld.CIT(A) sustaining the addition of Rs.29,30,000/- is upheld and the grounds raised by the assessee on this issue are dismissed. Direction of the ld.CIT(A) to bring to tax the amount received by the assessee on the basis of the award by the Arbitration Court - As we find first of all the same is not emanating from the assessment order. Further, the ld. DR could not bring on record any evidence to show that the ld.CIT(A) has given any enhancement notice, which is required as per law to be issued to the assessee before making an enhancement. Thirdly, the amount was already shown by the assessee in the balance sheet as receivable from Mr.Prabir Ghose and therefore, once the arbitrator gives the award for refund the same cannot be brought to tax in the hands of the assessee. We, therefore, set aside the order of the ld.CIT(A) on this issue and the grounds raised by the assessee on the second issue are allowed.
Issues Involved:
1. Disallowance of bad debts written off amounting to Rs. 29,30,000 considering the same as capital in nature. 2. Enhancement of income by directing the AO to tax the compensation awarded amounting to Rs. 55,00,000. Issue 1: Disallowance of Bad Debts Written Off The assessee, a company engaged in trading minerals and ceramics processing, claimed an expenditure of Rs. 36,46,500 towards 'bad debts written off' under 'other expenses'. The AO observed that the bad debts written off included advances to three parties, with Rs. 29,30,000 advanced to Mr. Prabir Ghosh for a lease of china clay mines being capital in nature. Since this advance was not offered as income in previous years, the AO disallowed it under section 36(2) of the Income Tax Act. The CIT(A) upheld the AO's decision, noting that the agreement for the lease was between Mr. Prabir Ghosh and M/s. RAK Minerals Pvt. Ltd., not the assessee. The compensation received from Mr. Prabir Ghosh was considered a 'return of expenses' and the bad debt was deemed a capital expenditure, not eligible for deduction. The Tribunal examined the arguments and found that the expenditure was incurred in past years and related to the acquisition of a mine, thus capital in nature. The Tribunal upheld the CIT(A)'s decision, denying the claim as a business loss during the impugned financial year. Issue 2: Enhancement of Income by Taxing CompensationThe CIT(A) directed the AO to verify and tax the compensation of Rs. 55,00,000 awarded to the assessee by the Arbitration Court. The assessee argued that this amount was shown as receivable in the balance sheet, and taxing it would result in double taxation. The Tribunal noted that the CIT(A)'s direction was not based on the assessment order and lacked an enhancement notice as required by law. Additionally, the amount was already shown as receivable, and taxing it upon receipt would be unjust. The Tribunal set aside the CIT(A)'s order on this issue, ruling in favor of the assessee and disallowing the taxation of the compensation amount. Conclusion:The Tribunal upheld the disallowance of Rs. 29,30,000 as bad debts but ruled against the CIT(A)'s direction to tax the compensation of Rs. 55,00,000, resulting in a partial allowance of the assessee's appeal.
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