2013 (3) TMI 438 - HC - Income Tax

Disallowance of bad debts - Postpone of claim of bad debts which had already become bad before amalgamation - ITAT deleted the disallowance - Held that - Where the amalgamating company carried certain doubtful debts which were, till date of amalgamation, not written off as bad debts and only after amalgamation, they were written off as bad debts in the succeeding year, the transferee company i.e. assessee company could write off such doubtful debts as bad debts. Once amalgamation took place, there could hardly be a matter of dispute that such debts being the liability of the company passed on to the transferee company and after the amendment, it needed to be allowed in the year it was written off in the books. As held in T.R.F. Ltd. Vs/. Commissioner of Income-tax reported in 2010 (2) TMI 211 - SUPREME COURT after the amendment of section 36(1)(vii) in order to obtain a deduction of bad debts, it is not necessary for the assessee to establish that the debt, in fact, had become irrecoverable; it is enough if the bad debts are written off as irrecoverable in the accounts of the assessee. Also in the case of CIT V.T. Veebadhrarao & K. Koteshwerarao & Co. & Co. 1974 (1) TMI 23 - ANDHRA PRADESH HIGH COURT it was opined that once firm/company is taken over by the successor-firm, the successor-firm can claim deduction of the predecessor firm under Section 36(2) of the Act. AO wrongly placed reliance on Section 72A which pertains to carry forward and set off of the accumulated loss and unabsorbed depreciation allowance in case of amalgamation of company but in the present case,this was not a case of any carry forward of loss or depreciation of the assessee company, but claiming of bad debts with respect to certain doubtful debts of the amalgamating company were written off as bad debts after amalgamation - in favour of assessee. Late payment of employees provident fund contributions u/s. 36 (1)(va)- CIT(A) deleting the addition as confirmed by ITAT - Held that - Tribunal has confirmed the view of CIT(A) under which he had directed the AO to allow the benefit, if it was paid within five days of grace period. Amount involved is also not very large, thus no reason to interfere with this question - in favour of assessee.

Summary

Issues:
1. Disallowance of bad debts amounting to Rs.35,26,374.
2. Late payment of employees' provident fund contributions.
3. Interpretation of Section 72A(7)(aa) regarding the claim of bad debts post-amalgamation.

Analysis:

Issue 1: Disallowance of Bad Debts
The appellant contested the disallowance of bad debts amounting to Rs.35,26,374 for the Assessment Year 2004-2005. The Assessing Officer argued that the appellant, engaged in the business of printing newspapers, did not qualify as an "industrial undertaking" under Section 72A(7)(aa) of the Act. However, the Commissioner (Appeals) and the Tribunal ruled in favor of the appellant, citing a previous decision in the appellant's favor for the Assessment Year 2003-2004. The Tribunal emphasized that the bad debts were written off after amalgamation and should be allowed as a deduction in the year they were written off. The Supreme Court precedent supported this view, stating that bad debts need to be written off in the accounts for deduction, regardless of their actual recoverability. The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's appeal.

Issue 2: Late Payment of Employees' Provident Fund Contributions
The Assessing Officer made an addition of Rs.2,67,960 for late payment of employees' provident fund contributions. The Tribunal upheld the CIT(A)'s direction to allow the benefit if the payment was made within the grace period of five days. Considering the small amount involved and the CIT(A)'s decision based on timely payment within the grace period, the Court found no reason to interfere with this issue.

Issue 3: Interpretation of Section 72A(7)(aa)
The primary issue revolved around the interpretation of Section 72A(7)(aa) concerning the claim of bad debts post-amalgamation. The Tribunal rejected the Revenue's appeal, emphasizing that the bad debts were written off after amalgamation, making them a liability of the transferee company. The Tribunal relied on previous decisions and Supreme Court precedents to support the allowance of bad debts in the year they were written off. The Court clarified that Section 72A pertains to accumulated loss and unabsorbed depreciation, which was not the case here. The Tribunal dismissed the Tax Appeal, affirming the allowance of bad debts post-amalgamation.

In conclusion, the High Court upheld the Tribunal's decision, allowing the deduction of bad debts and late payment of employees' provident fund contributions, and interpreting Section 72A(7)(aa) in favor of the appellant. The judgment emphasized the importance of following accounting practices and legal provisions in determining deductions and liabilities post-amalgamation.