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2019 (12) TMI 907 - AT - Income TaxDisallowance in respect of bad debts - bad debts comprising of settlement of claims and appended a note no. 31 to financial statements to that effect and not acknowledged by Reliance entities as debts - AO rejected the claim of the assessee by holding that the amounts written off were sham transactions and was a methodology to reduce tax liability in the hands of the assessee - CIT(A) partly allowed the appeal of the assessee - HELD THAT - Revenue has not disputed the dealings by the assessee company with Reliance entities which have been offered by the assessee to tax. We are also not in agreement with the findings of the CIT(A) that the said transactions were sham transactions especially when the revenue offered by the assessee has accepted by the Revenue authorities. Moreover, the issue is squarely covered by the decision of the Hon'ble Supreme Court in the case of T.R.F. Ltd. 2010 (2) TMI 211 - SUPREME COURT wherein held that once the debts are written off as irrecoverable, that is sufficient and assessee is not required to prove that the debt has actually become bad during the year. Thus order of the learned CIT(A) cannot be sustained as the assessee has written off the bad debts as same have been offered to tax by the assessee in the earlier year and accepted by the Revenue - Decided in favour of assessee.
Issues Involved:
1. Disallowance of ?30,66,21,626/- in respect of bad debts. 2. Interpretation of Section 36(1)(vii) read with Section 36(2) of the Income Tax Act. Issue-wise Detailed Analysis: 1. Disallowance of ?30,66,21,626/- in respect of bad debts: The assessee, engaged in the business of operations, management, and maintenance of telecommunication networks, had debited ?38,34,42,562/- as bad debts, which included ?22,21,54,111/- on account of settlement of claims and ?17,00,00,000/- not acknowledged by Reliance entities as debts. Despite efforts, the assessee could not realize the said bills from Reliance Communication Ltd. and Reliance Telecom Ltd., leading to a settlement agreement where ?38,34,42,562/- was agreed not to be paid. The AO concluded that these bad debts were sham transactions influenced by the assessee's shareholders and added the amount to the income of the assessee. The CIT(A) upheld the disallowance but corrected the figure to ?30,66,21,626/- and allowed relief of ?7,68,20,936/-. 2. Interpretation of Section 36(1)(vii) read with Section 36(2) of the Income Tax Act: The CIT(A) and AO believed that the bad debts were a method to reduce tax liability, influenced by the relationship between the assessee and Reliance entities. The CIT(A) cited the Supreme Court judgment in the case of Sovereign Securities Pvt. Ltd., which dealt with the issue of bad debts claimed to avoid tax liability. The assessee argued that the debts were genuine, supported by the fact that services were rendered, and the revenue from these transactions was accepted by the Revenue authorities. The assessee cited the Supreme Court decision in T.R.F. Ltd. vs. CIT, which held that once debts are written off as irrecoverable, it suffices for deduction under Section 36(1)(vii). Tribunal's Decision: The Tribunal observed that the assessee's transactions with Reliance entities were genuine, as the revenue from these transactions was accepted by the Revenue authorities. The Tribunal disagreed with the CIT(A)'s finding that the transactions were sham, noting that the revenue from these services was offered to tax and accepted by the Revenue. The Tribunal emphasized the Supreme Court's ruling in T.R.F. Ltd. vs. CIT, which states that writing off debts as irrecoverable in the accounts is sufficient for claiming bad debts under Section 36(1)(vii). The Tribunal found the Revenue's reliance on the case of Sovereign Securities Pvt. Ltd. inapplicable, as the conditions of Section 36(1)(vii) r.w.s. 36(2) were satisfied in the present case. Consequently, the Tribunal set aside the CIT(A)'s order and directed the AO to delete the disallowance. Conclusion: The appeal filed by the assessee was allowed, and the Tribunal directed the AO to delete the disallowance of ?30,66,21,626/-. The Tribunal's decision was pronounced in the open court on 17th December 2019.
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