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2015 (3) TMI 399 - AT - Income TaxDeduction on account of bad debts written off u/s. 36(1)(vii) denied - Held that - Considering the accounting principles described it cannot be the legislative intent of section 36(1)(vii) to mandate that the debit to the profit and loss account be in the same previous year in which the claim is made there under. While a debit to the profit and loss account is certainly a prerequisite for a write off, such a debit alone does not constitute a write off until the asset being written off is obliterated by a credit to its account. Where this credit has occurred in a subsequent year, the asset can be said to have been written off only in such subsequent year. There has been a write off by squaring off the debtors account only in the previous year relevant to A.Y. 2009-10. This should be sufficient for the Revenue to allow the claim of assessee us/. 36(1)(vii) of the Act. For the reasons given above, we direct the AO to allow claim of the assessee for deduction for the amount of bad debts - Decided in favour of assessee. Disallowance of payments to non-residents - deduction claimed by the assessee under the head agency commission u/s. 40(a)(i) - Held that - On applicability of Expln-2 to Sec.195(1) of the Act which was introduced by the finance Act, 2012 w.e.f. 1.4.1962, we are of the view that the said explanation is applicable only when there is accrual of income in India. When the conclusion reached is that there is no accrual of income in India, we fail to see how Expln.2 to Sec.195(1) of the Act are attracted. Thus there was no obligation on the part of the Assessee to deduct tax at source while making payment to the non-resident. Consequently, no disallowance of commission expenses paid to non-resident could be made invoking the provisions of sec.40(a)(i) of the Act. We hold accordingly and direct the AO to delete the disallowance so made. - Decided in favour of assessee.
Issues Involved:
1. Denial of deduction for bad debts written off under Section 36(1)(vii) of the Income Tax Act. 2. Disallowance of payments to non-residents under Section 40(a)(i) of the Income Tax Act. Issue-Wise Detailed Analysis: 1. Denial of Deduction for Bad Debts Written Off: The first issue is whether the revenue authorities were justified in denying the claim of the assessee for deduction on account of bad debts written off amounting to Rs. 1,33,28,670 under Section 36(1)(vii) of the Act. The facts reveal that the assessee, a partnership firm engaged in the export of furnishing fabrics, had claimed this deduction for an amount due from a customer in the USA. This debt was initially provided for as doubtful in the financial year 2006-07, but formal write-off approval from the bank was obtained only in 2009. During the assessment proceedings, the Assessing Officer (AO) disallowed the claim, stating that the debt was written off in the previous year relevant to AY 2007-08 and not in AY 2009-10. Additionally, the AO noted that the bank's approval for the write-off was dated 21.4.2009, falling within AY 2010-11, suggesting the claim should be made in that year. On appeal, the CIT(Appeals) concurred with the AO's view. However, the Tribunal, upon hearing the submissions, found that in AY 2007-08, the debt was not written off in the debtor's account but was merely provided for as doubtful. The Tribunal noted that the actual write-off in the debtor's account occurred in AY 2009-10 after obtaining the necessary bank approval. The Tribunal referenced the Supreme Court decisions in TRF Ltd. v. CIT and Southern Technologies Ltd. v. JCIT, concluding that the write-off in the debtor's account in AY 2009-10 sufficed for the deduction under Section 36(1)(vii). The Tribunal directed the AO to allow the deduction for the bad debts written off. 2. Disallowance of Payments to Non-Residents: The second issue concerns the disallowance of Rs. 25,46,796 claimed as a deduction under the head 'agency commission' under Section 40(a)(i). The assessee had made payments to various non-resident agents for procuring business, arguing that these payments were for services rendered outside India and thus not subject to tax deduction at source under Section 195. The AO held that the non-residents had a business connection in India, making the commission income chargeable to tax in India, and disallowed the deduction for failure to deduct tax at source. The CIT(Appeals) upheld this view, citing Section 9(1)(i) and Explanation 2 of Section 195, asserting that the non-residents had a business connection in India. The Tribunal, however, found that the non-resident agents rendered services outside India with no territorial nexus to India. Referencing the Supreme Court decision in Carborandum Co. v. CIT and CBDT Circulars, the Tribunal concluded that the non-residents' income did not accrue or arise in India, and thus, there was no obligation on the assessee to deduct tax at source. Consequently, the Tribunal directed the AO to delete the disallowance of the commission expenses paid to non-residents. Conclusion: The Tribunal allowed the appeal by the assessee, directing the AO to allow the deduction for bad debts written off and to delete the disallowance of commission expenses paid to non-residents.
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