2009 (8) TMI 54 - HC - Income Tax

Bad Debts u/s 36(1)(vii) - Bad Debts written off included incomes not received Application of provisions of Section 14A - The assessee is engaged in manufacturing and export of engineering goods. The Assessing Officer disallowed claim for bad debts under Section 36(1)(vii) on the ground that the assessee had claimed deductions under Section 80HHC and in such a situation claim for bad debts will be hit by Section 14A of the Act. The CIT(A) partly upheld the claim of the assessee ITAT upheld the order of CIT(A) Held that - On perusal of Section 80HHC and Section 14A, it is clear that expenditure incurred from export income cannot be held to be for earning income which does not form part of total income, which concept is dealt with under Section 10 of the Act. Section 80HHC deals with deduction of the element of profit from export from taxable income Deduction allowed.

Summary

Issues:
Interpretation of Section 14A of the Income Tax Act, 1961 regarding the disallowance of bad debts claimed under Section 36(1)(vii) in relation to deductions under Section 80HHC for the assessment year 2005-06.

Analysis:
The case involved an appeal by the revenue under Section 260A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal, Chandigarh Bench (B), Chandigarh. The primary issue was whether the Tribunal was justified in restricting the addition of Rs.8,37,978 instead of Rs.29,25,622 made by the Assessing Officer in view of the provisions of Section 14A of the Act, concerning the disallowance of bad debts written off under Section 36(1)(vii) due to the claim of deductions under Section 80HHC by the assessee in the respective years.

The assessee, engaged in manufacturing and export of engineering goods, had its claim for bad debts under Section 36(1)(vii) disallowed by the Assessing Officer on the grounds that the claim conflicted with deductions under Section 80HHC, invoking Section 14A of the Act. The CIT(A) partially upheld the assessee's claim, emphasizing that the bad debts written off were not related to income not forming part of the total income and thus could not be disallowed under Section 14A. The Tribunal supported this view.

Upon review, the Court noted that Section 80HHC and Section 14A clarified that expenditure incurred from export income should not be considered for earning income not forming part of the total income as per Section 10 of the Act. Section 80HHC specifically addressed the deduction of export profit from taxable income. Consequently, the Court found no substantial question of law in the matter and dismissed the appeal.

In conclusion, the judgment clarified the interplay between Sections 14A, 36(1)(vii), and 80HHC of the Income Tax Act, 1961 in the context of disallowing bad debts claimed by an assessee engaged in manufacturing and export activities. The decision emphasized that bad debts written off were not to be disallowed under Section 14A if they were not related to income outside the total income scope, as in the case of export sales income.