2022 (7) TMI 1476 - AT - Income Tax

Disallowance of bad debts in respect of six Government undertakings - As submitted that the assessee was incapacity on account of the fact that the assessee was a non function company and the record of the assessee companies are not available at that time, therefore the requisite details were not filled before the lower authority - HELD THAT - These six companies happens to government companies and dues pertains to supply of electricity to these companies, we deem it appropriate to remand back the matter to the file of the AO with the direction to pass a fresh assessment order, after affording opportunity giving to the assessee. Needless to say that the assessee shall produce all the documents in support of the claim at the first hearing and shall not take any undue adjournment in the matter. Disallowance u/s 14A - disallowances, was confirmed by the CIT(A) by applying the formula given in Rule 8D(iii) r.w.s 14A @0.5% of the average value of investment in respect for which is exempt from the tax - HELD THAT - Recently, in the case of Williamson Financial Services Ltd. 2022 (7) TMI 451 - ITAT GAUHATI had the occasion to examine the above said provision and also the aspect whether the recent amendment in section 14A was clarificatory in nature and hence, have a retrospective applicability. After examining the details, the co-ordinate Bench had came to the conclusion that the amendment to section 14A was clarificatory in nature and therefore, it is required to be applied retrospectively even to the pending appeals before the Tribunal. The amendment in section 14A is retrospective, hence matter is restored back to the file of Assessing Officer with a view to re-examine the issue in the light of newly amended Section 14A read with applicable rules and decide accordingly. Appeal of the assessee is allowed for statistical purposes.

Summary

Issues Involved:
1. Disallowance of Bad Debts
2. Disallowance under Section 14A of the Income Tax Act

Issue-wise Detailed Analysis:

1. Disallowance of Bad Debts:

The assessee challenged the disallowance of bad debts amounting to Rs. 31,41,61,877/-, which were written off in the books of accounts. The debts were owed by six government undertakings, and the assessee contended that all necessary details were provided to the lower authorities as per Section 36(1)(vii) of the Income Tax Act. The assessee argued that the amounts, primarily from power corporations, were not recoverable and were written off in compliance with the legal provisions.

The Revenue countered that despite multiple opportunities, the assessee failed to demonstrate that the amounts written off had been accounted for as part of the turnover in any previous year, a prerequisite for claiming deduction under Section 36(1)(vii). The Tribunal noted that the assessee did not provide evidence that the bad debts were included in the income of earlier years.

Given the circumstances, the Tribunal decided to remand the matter back to the Assessing Officer (AO) for a fresh assessment. The assessee was directed to produce all relevant documents to substantiate the claim, and the AO was instructed to provide an opportunity for the assessee to present their case.

2. Disallowance under Section 14A of the Income Tax Act:

The second issue involved the disallowance of Rs. 16,31,331/- under Section 14A, read with Rule 8D of the Income Tax Rules. The assessee argued that since no exempt income was earned during the year, the provisions of Section 14A should not apply. However, the lower authorities, including the CIT(A), upheld the disallowance, stating that the expenditure incurred in relation to earning exempt income must be disallowed, even if no such income was earned during the year.

The Tribunal referred to a recent decision by the Guwahati Bench, which clarified that the amendment to Section 14A introduced by the Finance Act, 2022, is retrospective in nature. This amendment specifies that the provisions of Section 14A apply even if the exempt income has not been earned during the financial year. Consequently, the Tribunal remanded the matter back to the AO to re-examine the issue in light of the amended Section 14A and applicable rules.

Conclusion:

The Tribunal allowed the appeal for statistical purposes, remanding both issues back to the AO for fresh consideration. The assessee was instructed to provide all necessary documentation, and the AO was directed to reassess the claims in accordance with the legal provisions and recent judicial interpretations. The order was pronounced in the open court on 14th July, 2022.