2014 (7) TMI 513 - AT - Income Tax

Claim of bad debts discount - settlement of invoice value - AO disallowed the same as shame transaction Held that - CIT(A) rightly of the view that a sum of ₹ 10,83,639/- debited to the P & L account was actually a bad debt which has arisen in the course of business transaction and it is to be allowed as a deduction - assessee had made sale of valves to Mawana Sugar Mill group of concerns by three sales invoices during the financial year relevant to A.Y. 2007-08 - The assessee had filed the contract entered by it with Mawana group before the AO - assessee had also filed before the AO the account copies of both the assessee and Mawana group, wherein, the details of sales of valves during the AY 2007-08 and the amounts outstanding from Mawana group as on 31.3.2008 are clearly depicted - revenue has not disputed the one time settlement entered between the assessee and Mawana group of concern as a sham agreement - the write off of ₹ 10,83,639/- has arisen in the course of assessee s business transaction and necessarily, it is to be allowed as bad debt or business loss - the CIT(A) order is correct and in accordance with law and there was no infirmity in the order Decided against Revenue.

Summary

Issues:
Whether the CIT(A) was justified in deleting the addition made by the AO amounting to Rs. 10,83,639.

Analysis:
The appeal was against the CIT(A) order dated 4.6.2012 for the assessment year 2009-10. The main issue was the deletion of an addition of Rs. 10,83,639 made by the AO. The assessee, a company engaged in the manufacture and sale of valves, had debited this amount to the P & L account under "LD deducted by Mawana Group." The AO rejected the contention that it was a bad debt and added it back to the total income. The assessee argued that the amount was written off as a bad debt due to non-payment by Mawana Group, affecting its financial position. The CIT(A) held that the amount was indeed a bad debt arising from business transactions and allowed it as a deduction.

The CIT(A) considered the facts and submissions, noting that the AO had questioned the year of the sale and its inclusion in the income. The appellant provided details of sales to Mawana Group, the outstanding amount, and the one-time settlement agreement. The settlement resulted in a loss of Rs. 10,83,639, which was debited to the profit & loss account. The CIT(A) found that the debt had become irrecoverable as per section 36(1)(vii) of the Act and allowed the deduction. The appellant's compliance with the amended provisions of section 36(1)(vii) was considered sufficient for claiming the deduction under section 28 of the Act.

Upon hearing both parties, the tribunal observed that the sale of valves to Mawana Group was part of the total turnover for the relevant year. Despite efforts, an outstanding amount of Rs. 39,75,639 remained unpaid, leading to a one-time settlement where Rs. 28,92,000 was paid, and the balance of Rs. 10,83,639 was written off. The tribunal found that the write-off was a result of business transactions and should be allowed as a bad debt or business loss. As the revenue did not dispute the settlement's validity, the tribunal upheld the CIT(A) order, dismissing the appeal filed by the revenue.

In conclusion, the tribunal upheld the CIT(A) decision to delete the addition of Rs. 10,83,639, considering it a bad debt arising from genuine business transactions. The tribunal found no grounds for interference, affirming the CIT(A) order as correct and in accordance with the law.