2013 (2) TMI 324 - AT - Income Tax

Non-recoverable balance written off disallowed - allowed either as bad debt under section 36(1)(vii) or as business expenses under section 37 - assessee following a method of Cash System Accounting - Held that - Such an expenditure cannot be allowed as bad debt under section 36(1)(vii) r/w section 36(2). Once the assessee has incurred expenditure on behalf of its principal and after making its efforts could not recover the said expenditure, this will result into a loss only and such a loss can be claimed in the year when the assessee was quite ascertained that the same could not be recovered. The party herein this case from whom the amount has to be recovered was in financial stringency and so much so that the joint venture agreement through which the said company (Motex) was formed got terminated in this year. It was due to this reason that the assessee can be said to have incurred the loss in this year only. Even when the assessee is following the method of Cash System of Accounting ,such a loss which is on account of trading or business cannot be disallowed. Such a loss cannot be treated as a business expenditure in the present year for the reason that the assessee is mainly carrying out agency business for various machinery component and accessories from which it gets certain percentage of income and any expenditure relating to agency business can be claimed in relation to such income. For claiming such expenses, the year of incurring of expenses is important in the method of Cash System Accounting , therefore, such a loss which has been recognized in this year due to above facts, has to be allowed as a business loss. Thus, the amount of Rs. 14,35,644, though cannot be allowed as bad debt written-off but can definitely be allowed as a business loss - in favour of assessee. Computation of capital gains - sale consideration u/s. 50C being value adopted by the Stamp Duty Authority (SDA) OR actual sale consideration adopted by the appellant - Held that - The provisions of clause (a) of sub-section (2) of section 50C, provides that where the assessee claims before the Assessing Officer that the value adopted or assessed by the stamp valuation authority under sub-section (1) exceeds the fair market value of the property as on the date of transfer, the AO may refer the valuation of the capital asset to a valuation officer and once such a reference is made, the Assessing Officer is bound by such a valuation in terms of provisions of section 16A(1). In the present case, the assessee has objected to such valuation adopted by the stamp valuation authority and has also filed the copy of valuation report by an approved valuer. Therefore, the AO was required to make a reference to the valuation officer in terms of sub-section (2) of section 50C. Accordingly, the matter is restored back to the file of the Assessing Officer who shall make a reference to the Valuation Officer and to get an estimate of fair market value for determining the valuation of the asset which is the subject matter of sale - in favour of assessee for statistical purposes. Addition u/s 68 - Held that - The addition made by the AO is wholly erroneous as the assessee has filed a copy of sale agreements in respect of sale of flats wherein it has been mentioned that the said property has been sold for a total sale consideration of Rs.13,80,000. Once the money has been received by way of sale of a property duly mentioned in the sale agreement, it cannot be held that the same remains unexplained. Even the Commissioner (Appeals) has not cared to go through the order passed under section 154, wherein the AO has rejected this contention on the ground that the matter is sub-judice before the Commissioner (Appeals) - addition made by AO stands deleted - in favour of assessee.

Summary

Issues Involved:
1. Disallowance of non-recoverable balance written off.
2. Computation of capital gains by adopting sale consideration as per Stamp Duty Authority.
3. Addition of unexplained cash credit under section 68.

Issue 1: Disallowance of Non-Recoverable Balance Written Off

The assessee challenged the disallowance of Rs. 14,35,644, claimed as non-recoverable balance written off, either as bad debt under section 36(1)(vii) or as business expenses under section 37 of the Income Tax Act, 1961. The Assessing Officer disallowed the claim, noting that the assessee followed the "Cash System of Accounting," which does not account for sundry debtors and creditors. The Commissioner (Appeals) upheld this disallowance, stating there was no written agreement obliging the assessee to incur these expenses on behalf of the principal.

Upon review, the Tribunal noted that the expenditure was incurred during the course of business and was part of the business practice. The Tribunal held that such a loss, even under the "Cash System of Accounting," should be allowed as a business loss in the year it was determined irrecoverable due to the financial instability of the associated concern. Therefore, the Tribunal allowed the amount of Rs. 14,35,644 as a business loss.

Issue 2: Computation of Capital Gains by Adopting Sale Consideration as per Stamp Duty Authority

The assessee contested the computation of capital gains for the sale of property by adopting the sale consideration at Rs. 5,40,99,000 as per the Stamp Duty Authority, instead of the actual sale consideration of Rs. 4,30,00,000. The Assessing Officer and Commissioner (Appeals) upheld the higher valuation, citing the mandatory nature of section 50C.

The Tribunal found that once the assessee objected to the stamp duty valuation and provided a valuation report from an approved valuer, the Assessing Officer was required to refer the matter to a valuation officer under section 50C(2). The Tribunal restored the matter to the Assessing Officer to make this reference and determine the fair market value, thus allowing the ground for statistical purposes.

Issue 3: Addition of Unexplained Cash Credit under Section 68

The assessee challenged the addition of Rs. 13,80,000 under section 68, which was treated as unexplained cash credit. The Assessing Officer added this amount, claiming the assessee failed to provide evidence that it was from the sale of property. The Commissioner (Appeals) dismissed the assessee's contention, referencing rectification proceedings under section 154.

The Tribunal found that the assessee had provided a sale agreement showing the property sale for Rs. 13,80,000, and thus the amount could not be considered unexplained. The Tribunal deleted the addition made by the Assessing Officer, allowing the ground.

Conclusion:

The assessee's appeal for assessment year 2003-04 was allowed, and the appeal for assessment year 2005-06 was allowed for statistical purposes.