2021 (11) TMI 1213 - AT - Income Tax

Revision u/s 263 - Allowability of bad debts - HELD THAT - In the instant case the assessee has been regularly showing the income under the head profits from the business and hence dwelling into the issue of speculation doesn t arise. The similar issue has been ad judicated in the case of M/s U.K. Paints India Ltd. 2020 (12) TMI 440 - ITAT DELHI with specific reference to the NSEL losses. The issue of allowability and claim of bad debts has been adjudicated by the Hon ble Supreme Court in the case of TRF Ltd. 2010 (2) TMI 211 - SUPREME COURT and also in the case of CIT Vs. Sunbeam Auto Ltd. 2009 (9) TMI 633 - DELHI HIGH COURT by the Hon ble Jurisdictional High Court. The only reason for resorting to provisions of Section 263 by the ld. PCIT was that the CBDT has directed not to allow the bad debts in view of the recovery proceedings out of liquidation. The CBDT has also informed the field authorities that 10% of the outstanding amounts have already been received by the brokers and hence the bad debts may not be allowed. We hold that the assessee cannot be forced to wait till the recoveries are made. The assessee is liable to treat the recoveries and offer the same as income in the year and the bad debts are recovered. The CBDT which had a list of 744 brokers who have claimed the deduction can also monitor the recoveries from the liquidator effectively from time to time and intimate the field authorities who in turn can examine whether the amounts recovered are duly offered to tax or not. This would aid in garnering accurate revenues without infringing the judgment of Hon ble Apex Court in the case of TRF Ltd. 2010 (2) TMI 211 - SUPREME COURT . The incurring of loss and the interplay between Section 36(2)(ii) and Section 28 have been dealt by this Tribunal in the case of U.K. Paints 2020 (12) TMI 440 - ITAT DELHI Since the order of the AO is not erroneous and pre judicial to the interest of revenue we hereby hold that the order passed u/s 263 is liable to be obliterated - Decided in favour of assessee.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment include:

1. Whether the Principal Commissioner of Income Tax (Pr. CIT) had the jurisdiction to invoke Section 263 of the Income Tax Act, 1961, to set aside the assessment order passed under Section 143(3) as erroneous and prejudicial to the interests of the revenue.

2. Whether the claim of bad debts by the assessee for the amount of Rs. 56,97,379/- was justified and allowable under the Income Tax Act, considering the circumstances surrounding the National Spot Exchange Limited (NSEL) crisis.

3. Whether the assessee's claim of bad debts was premature given the ongoing recovery process monitored by the High Court Committee and other agencies.

ISSUE-WISE DETAILED ANALYSIS

1. Jurisdiction under Section 263 of the Income Tax Act

Relevant legal framework and precedents: Section 263 of the Income Tax Act empowers the Pr. CIT to revise an assessment order if it is erroneous and prejudicial to the interests of the revenue. The court referenced past judgments, including the Supreme Court's decision in TRF Ltd., to understand the applicability of bad debt claims.

Court's interpretation and reasoning: The Tribunal examined whether the Pr. CIT had valid grounds to invoke Section 263, focusing on whether the original assessment was indeed erroneous and prejudicial to the revenue.

Key evidence and findings: The Pr. CIT argued that the Assessing Officer (AO) accepted the assessee's claim without proper verification, especially given the ongoing recovery efforts by NSEL.

Application of law to facts: The Tribunal found that the AO's acceptance of the bad debt claim was based on the assessee's books and the prevailing legal standards, which do not require proving the irrecoverability of debts for them to be written off.

Treatment of competing arguments: The Tribunal considered the Pr. CIT's reliance on CBDT instructions and the ongoing recovery process but ultimately found these insufficient to justify the invocation of Section 263.

Conclusions: The Tribunal concluded that the Pr. CIT's order under Section 263 was not justified, as the original assessment was neither erroneous nor prejudicial to the interests of the revenue.

2. Allowability of Bad Debt Claims

Relevant legal framework and precedents: The Tribunal referred to the Income Tax Act's provisions on bad debts, particularly Section 36(1)(vii), and relevant case law, including the Supreme Court's decision in TRF Ltd., which clarified that it is sufficient for a debt to be written off in the books for it to be claimed as a bad debt.

Court's interpretation and reasoning: The Tribunal emphasized that the assessee had correctly written off the debt in its books, and the legal requirement to establish irrecoverability was not applicable post-1989.

Key evidence and findings: The Tribunal noted that the assessee had engaged in regular business transactions with NSEL, and the debt arose from these transactions.

Application of law to facts: The Tribunal applied the legal principles to conclude that the assessee's claim of bad debts was allowable, as it had been duly written off in the accounts.

Treatment of competing arguments: The Tribunal considered the Pr. CIT's argument about the ongoing recovery process but found that the potential for future recoveries did not negate the current claim of bad debts.

Conclusions: The Tribunal held that the assessee's claim for bad debts was justified and should be allowed.

SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning: "We find ourselves in agreement with this pivotal contention on behalf of the assessee that it is not necessary for the taxpayer to establish that the debt has become irrecoverable for allowance of deduction."

Core principles established: The Tribunal reaffirmed the principle that for claiming bad debts, it is sufficient for the debt to be written off in the books, and the taxpayer is not required to prove irrecoverability.

Final determinations on each issue: The Tribunal determined that the Pr. CIT's order under Section 263 was not sustainable, and the assessee's claim for bad debts was allowable. Consequently, the appeal by the assessee was allowed, and the order under Section 263 was set aside.