2019 (11) TMI 865 - AT - Income Tax

Addition u/s 36 for writing off irrecoverable expenses - disallowing the advances and deposit written off - whether the advances and deposit written off by the assessee can be allowed u/s 37(1) as business loss? - HELD THAT - In the instant case, the claim of advances and deposit have not been considered for income in the year under consideration or in the earlier year(s), such advances or deposit written off are not eligible for deduction under section 36(1)(vii). An assessee is entitled for claim under Section 36(1)(vii) , where by reason of the inability or insolvency of the debtor to pay, the money is unable to be recovered. In all other cases, the claim for allowance should have to be sustained under Section 37(1) which requires that the expenditure (not being of a capital nature) should have been wholly and exclusively incurred for the purpose of the business. In the instant case, we find that advances for salary and deposits for lease premises have been written off. Clearly, the advances which had been made by the assessee in the present case are certainly of a type which are within the contemplation of the words laid out or expended wholly and exclusively for the purposes of the business and allowable under Section 37(1). The ratio of the decision of the Hon ble Supreme Court in the case of Southern Technologies Ltd. (supra) cannot be applied in the facts of the instant case. Accordingly, we set aside the finding of the Learned CIT(A) on the issue in dispute and allow the ground of the appeal of the assessee. Addition being legal and professional charges - HELD THAT - Disallowance on the ground that the assessee failed to provide any evidence of rendering services by Sh. Amreek Singh. The onus was on the assessee to establish that Sh. Amreek Singh, rendered legal and professional services in addition to employment with the assessee. As assessee has failed to produce any evidences before the Ld. CIT(A) as well as before us, we do not find any error in the order of the CIT(A) on the issue in dispute and accordingly, we uphold the same. The ground of the appeal of the assessee is dismissed. Short-term capital loss - HELD THAT - Documents are in relation to lawsuit filed by the vendor against assessee, however, in these letters of attorney of the assessee there is no mention of any fact that asset of the assessee were lying at those customer sites, with the assessee has claimed as not recoverable. No other evidence from the client/customer of the assessee to substantiate that assets were lying at their sites, has been furnished by the assessee either before the lower authorities or before us. In the facts and circumstances of the case, we do not find any error in the order of the learned CIT(A) and accordingly, we uphold the same. Ground of the appeal of the assessee is accordingly dismissed. As far as appeal of the Revenue is concerned, we find that the tax effect involved in the issue agitated before the Tribunal, is less than ₹ 50 lakh, as prescribed by the Central Board of Direct Taxes (CBDT) vide Circular No. 17/2019, dated 08/08/2019, wherein the Revenue has been directed not to pursue those appeals. In view of the tax involved in the present appeal of the Revenue, being less than the prescribed limit of ₹ 50 lakh, the appeal of the Revenue is dismissed.

Summary

Issues Involved:
1. Addition under Section 36 of the Income Tax Act for writing off irrecoverable expenses.
2. Addition of ?6,42,365/- being legal and professional charges.
3. Addition of ?7,44,245/- for short-term capital loss.
4. Deletion of disallowance of ?45,00,000/- on account of loss on revaluation of foreign exchange on account of advance received.

Detailed Analysis:

1. Addition under Section 36 of the Income Tax Act for writing off irrecoverable expenses:

Facts and Arguments:
- The assessee claimed advances and deposits written off amounting to ?5,62,876/- as business expenses under Section 37 of the Income Tax Act.
- The Assessing Officer (AO) and the Commissioner of Income-tax (Appeals) [CIT(A)] disallowed the claim, asserting that such write-offs should be covered under Section 36(1)(vii) and not under Section 37.
- The AO referred to the Supreme Court's decision in Southern Technologies Ltd. vs. JCIT, which held that if a provision for doubtful debt is expressly excluded from Section 36(1)(vii), it cannot be claimed under Section 37.

Judgment:
- The Tribunal found that the advances and deposits written off were not considered as income in the year under consideration or in earlier years, thus not eligible under Section 36(1)(vii).
- The Tribunal held that the advances for salary and deposits for lease premises were incurred wholly and exclusively for business purposes and allowed the claim under Section 37(1).
- The Tribunal set aside the CIT(A)'s finding and allowed the assessee's appeal on this issue.

2. Addition of ?6,42,365/- being legal and professional charges:

Facts and Arguments:
- The AO disallowed ?6,42,365/- paid to Amreek Singh for legal and professional services, questioning the genuineness of the expenses due to clerical errors in the bills and the fact that Amreek Singh was also an employee of the assessee.
- The CIT(A) upheld the disallowance, noting the lack of evidence for services rendered and the improbability of repeated clerical errors.

Judgment:
- The Tribunal agreed with the CIT(A) that the assessee failed to provide sufficient evidence of services rendered by Amreek Singh.
- The Tribunal upheld the disallowance, dismissing the assessee's appeal on this issue.

3. Addition of ?7,44,245/- for short-term capital loss:

Facts and Arguments:
- The assessee claimed a short-term capital loss for assets provided at construction sites, which were not recoverable due to the sudden closure of business operations.
- The AO and CIT(A) disallowed the claim, stating that the assessee failed to produce evidence of non-recovery and had claimed depreciation on the same assets.

Judgment:
- The Tribunal found that the assessee did not provide sufficient evidence to substantiate the claim of non-recoverable assets.
- The Tribunal upheld the CIT(A)'s decision, dismissing the assessee's appeal on this issue.

4. Deletion of disallowance of ?45,00,000/- on account of loss on revaluation of foreign exchange on account of advance received:

Facts and Arguments:
- The Revenue appealed against the CIT(A)'s deletion of disallowance of ?45,00,000/- for loss on revaluation of foreign exchange on account of advance received.

Judgment:
- The Tribunal noted that the tax effect involved was less than ?50 lakh, as per CBDT Circular No. 17/2019.
- The Tribunal dismissed the Revenue's appeal due to the low tax effect.

Conclusion:
- The appeal of the assessee was partly allowed, specifically allowing the write-off of irrecoverable expenses under Section 37(1) but dismissing claims related to legal and professional charges and short-term capital loss.
- The appeal of the Revenue was dismissed due to the tax effect being below the prescribed limit.