2013 (7) TMI 449 - HC - Income Tax

Claim of bad debts on account of interest - loss of interest was not crystallized - Whether Tribunal was justified to reverse the order of CIT(A) in deleting the disallowance made in respect of write off of the interest claim for even though loss of interest was not crystallized during the year - Held that - The Tribunal has rightly appreciated the law on the subject and allowed the claim of the assesse - Assessing Officer has not examined whether the debt has, in fact, been written off in the accounts of the assesse - When a bad debt occurs, the bad debt account is debited and the customer s account is credited, thus, closing the account of the customer relying upon the decision of CIT Vs. Punjab Agro Industries Corporation (2001 (9) TMI 87 - PUNJAB AND HARYANA High Court) and T.R.F. Ltd. vs. CIT 323 ITR 397 , decided against the revenue.

Summary

Issues:
1. Disallowance of interest amounting to Rs.2,98,49,969/- claimed by the assessee.
2. Whether the Tribunal was justified in reversing the order of CIT(A) in deleting the disallowance made in respect of write off of the interest amounting to Rs.2,98,49,969/- claim even though the loss of interest was not crystallized during the year.

---

Issue 1: Disallowance of Interest Amount
The assessee, a State Government-owned Company, was under scrutiny assessment under section 143(3) of the Income-tax Act, 1961. The Assessing Officer added expenses of Rs.3,43,60,422/- to the income of the assessee. The CIT(Appeals) confirmed a part of the addition and deleted another part, resulting in a dispute. The Tribunal allowed the appeal of the assessee regarding the disallowance of Rs.2,98,49,969/-. The Tax Appeal raised the question of whether the Tribunal was justified in reversing the CIT(A) order regarding this disallowance.

---

Issue 2: Justification of Tribunal's Decision
The revenue argued that the deletion of the disallowance was not justifiable, citing a decision by the Madras High Court regarding deductions for expenses and losses incurred in the relevant accounting year. The senior counsel for the assessee contended that since the loss of interest was not crystallized during the year and the assessee followed the mercantile system of accounting, the write-off could be done in the year the liability crystallized. The Tribunal considered the assessee's accounting system for penal interest and held that the claim could be allowable as revenue expenses or bad debt. The Tribunal also noted certain adjustments made by the assessee under the "interest account" and concluded that the reversal of entry was not an expenditure but a reversal of income.

---

The High Court upheld the Tribunal's decision, stating that the Tribunal correctly applied the law to the facts of the case. The Court noted that the claim of interest written off by the assessee was reflected as income initially and later reversed due to various reasons. The Court referred to a case where interest waiver was allowed as a deduction for a Government Company in respect of a sick unit. Additionally, the Court cited a Supreme Court decision stating that after a certain amendment, it is not necessary for the assessee to establish irrecoverability of bad debts, but only to write off such debts in the accounts. The Court concluded that the Tribunal rightly allowed the claim of the assessee, and no contradictory evidence was presented to warrant intervention. Consequently, the Tax Appeal was dismissed.