2023 (7) TMI 933 - AT - Income Tax

Write off of outstanding dues - Bad debts claimed u/s 36(1)(vii) - Fresh claim before ITAT, in alternative, as business expenditure u/s 37(1) - as per AO Advance payment cannot be claimed as bad debts u/s 36(1)(vii) because the said advance was not included as income of the appellant in any of the previous years - HELD THAT - Here is no doubt that within the provisions of Section 36(1)(vii) of the Act the deduction was not allowable. A perusal of the submissions of assessee before CIT(A) and the grounds raised in the first appeal before CIT(A) show that assessee had not made any specific claim that instead of provisions of Section 36(1)(vii) of the Act, Ld. AO should have invoked Section 37 and allowed the write off as an expenditure. There is no material on record to show as to what was the nature of agreement or transaction entered into and how though services which were sought were related to the purpose of business of assessee. In fact as the advances were paid in the year 2010-11 then in the relevant previous year 2014-15, the recovery of amount for non-provision of service, would also become time barred and which also needed the examination on facts. The assessee at this stage cannot seek relief to allow the claim u/s 37 of the Act merely because some relief has been given by Ld. CIT(A) in regard to other addition. Thus, ground no. 1 is decided against the assessee. Write off of the outstanding due balance of Hughes Communications Ltd - HELD THAT - Tax Authorities have failed to appreciate that the amount was in fact not an advance but was received mistakenly and which under a Court decree had to be returned with interest. If interest was allowable u/s 37 of the Act, then the principal amount returned by virtue of order of the Court was also allowable, as both formed the composite money decree. Accordingly, the findings of Ld. CIT(A) in regard to ground no.2 are not sustainable, the same is allowed. The Ld. AO shall allow the whole of the amount as allowable deduction u/s 37 of the Act. Consequently, the appeal of assessee is allowed partly.

Summary

Issues involved:
The appeal involves issues related to the disallowance of write-offs of outstanding dues and the confirmation of additions made by the Assessing Officer.

Issue 1: Write-off of outstanding due from Sh. Sanjay Aggarwal
During the financial year 2020-21, the assessee claimed to have made an advance of Rs. 4,00,000 to Sh. Sanjay Agarwal, a practicing Chartered Accountant, for services related to loans Syndication and enhancement of working capital limits. The amount was later written off and claimed as expenditure. The Assessing Officer disallowed the expenditure, stating that it cannot be claimed as bad debts under section 36(1)(vii) of the Income Tax Act. The appellant argued that even if the wrong section was cited, the advance should have been allowed as expenditure under section 37. The Tribunal noted that the claim was not made for allowance under section 37 before the lower authorities. The Tribunal held that the deduction was not allowable under section 36(1)(vii) and denied relief under section 37. The appeal was decided against the assessee on this ground.

Issue 2: Write-off of outstanding due balance of Hughes Communications Ltd
The appellant also sought to write off the outstanding due balance of Rs. 6,71,417 returned to Hughes Communications Ltd. following court cases. The Assessing Officer disallowed the expenditure under section 36(1)(vii) but allowed interest payment under section 37. The Tribunal found that the amount received from Hughes Communications was not an advance but was received mistakenly and had to be returned under a court decree. The Tribunal held that if interest was allowable under section 37, the principal amount returned by court order should also be allowed as a deduction under section 37. Therefore, the findings of the lower authorities regarding this issue were not sustainable, and the appeal was allowed partly.

Separate Judgment:
The order was pronounced by Sh. Anubhav Sharma, Judicial Member, on 20th July, 2023.