2020 (2) TMI 157 - AT - Income Tax

Disallowance of bad debts - advance paid for purchase of computer software - as per assessee since assessee could not get any response from the party, the advance had to be written off and since it is a trade debt, it has to be allowed as a bad debt - HELD THAT - We agree with the findings of CIT(A) that within 3 days, the assessee could not have treated the payment as a bad debt. The assessee s contention that it did not receive any reply from the party and therefore, it has been treated as a bad debit, cannot be accepted. Even if it is to be allowed as business expenditure, necessity of the payment needs to be considered. The assessee s counsel had filed additional evidence in the form of copies of the orders of civil courts wherein assessee had filed civil suit against this party for recovery of advance paid along with interest to demonstrate that this party did exist. However, on going through the same, we find that the order of the civil court was ex-parte the said party and therefore, the decrees have been passed in favour of the assessee. Admittedly, both the AO and CIT(A) are not doubting the payment made to the said party. Since the assessee has not received the product, for which it has made payment, the assessee cannot be held liable. Since the authorities have not established that the assessee has received the money back, thus, the finding of the CIT(A) that it is diversion of income or application of income is not established with evidence. However, in the interest of justice, we are inclined to admit the additional evidence filed by the assessee and remand to the AO to examine the genuineness of the transaction and if the payment is found to be genuine, only then, the same may be allowed. TDS u/s 195 - parties to whom the payments have been made are foreign parties - HELD THAT - Payments made to foreign parties in foreign exchange. AO has not questioned the genuineness of the transactions, but, disallowed it only on the ground that no TDS was made by the assessee. It is the CIT(A), who brought out that the genuineness of the transaction and the purpose of payments, is not established. Since the payments were made to the foreign parties, the provisions of section 195 would apply to the transaction. The powers of CIT(A) are coterminous with that of AO and he could do what the AO has not done. Even, the CIT(A) though has observed that it is to be disallowed u/s 195 has not brought out as to the income portion, on which, tax is to be levied in India. The case of the assessee is that the services are to be rendered outside India and since the foreign parties have no PE in India and the services are rendered outside India, section 195 would not apply. Since these factors have not been considered by the AO and CIT(A), we deem it fit and proper to remand the issue to the file of the AO for verification AY 2013-14 - violation of provisions of section 40(a)(ia) and 195 - We find that out of 9 parties, one of the party is Indian party i.e. Hemendra of ₹ 33,32,920/- and, therefore, to such transaction, the provisions of section 40(a)(ia) are clearly applicable. Since all other parties are non-residents, the provisions of section 40(a(ia) would not apply. As regards the provisions of section 195 and genuineness of the advances, we have already set aside similar issue to the file of AO for AY 2012-13 (supra) and with similar directions, this issue is also set aside to the file of AO for re-adjudication in accordance with law after giving fair opportunity of hearing to the assessee.

Summary

Issues involved:
1. Treatment of advance paid for purchase of computer software.
2. Claim of bad and doubtful debts for payments made to foreign parties.

Issue 1: Treatment of advance paid for purchase of computer software:
The assessee, engaged in software development, claimed bad debt deduction for advances paid towards computer software purchase. The AO disallowed the claim, considering it capital expenditure. The CIT(A) upheld the disallowance, stating it was not a bad debt but a diversion of income. The ITAT found the payment was written off within 3 days, questioning its bad debt nature. The ITAT admitted additional evidence of civil court orders for recovery, remanding the case to AO for further examination to determine genuineness.

Issue 2: Claim of bad and doubtful debts for payments made to foreign parties:
The assessee claimed bad debt deduction for payments to foreign parties. The AO disallowed it for non-deduction of TDS, invoking sections 40(a)(ia) and 195. The CIT(A) upheld the disallowance, citing lack of proof for transaction genuineness. The ITAT noted the payments were to foreign parties and remanded the issue to AO for verification under section 195, directing a fair hearing for the assessee.

In conclusion, both appeals were partly allowed for statistical purposes by the ITAT, emphasizing the need for further examination and verification by the AO regarding the treatment of advance payment for software purchase and the claim of bad and doubtful debts for payments to foreign parties.