2020 (12) TMI 51 - HC - Income Tax

Exemption u/s 10A - payments made to sub contractors who have separately exported and have been issued foreign inward remittance certificate - whether the appellate authority were correct in holding that maintenance of separate accounts for STP units and non STP units was only directory and not mandatory in accordance with RBI conditions, Government Notification and Income Tax Act? - expenses like freight, telephone charges and insurance attributable to the delivery of articles or things on computer software outside India reduced from export turnover should be reduced from total turnover while computing deduction under Section 10A - HELD THAT - Issue decided in favour of assessee as relying on own case 2020 (11) TMI 379 - KARNATAKA HIGH COURT - Substantial questions of law Nos.1 to 3 are answered against the revenue and in favour of the assessee. Disallowance of bad debts written off - Whether the tribunal was correct in allowing the write off as bad debt in the facts and circumstances of the present case, when invoices were raised few months prior to the write off of the debtors were reputed companies including Government undertakings and business was continued with the debtors by the assessee without establishing the debt has become bad and recorded a perverse finding? - HELD THAT - Once the assessee had written off debts as irrecoverable in his / its accounts, the assessee need not be required to prove that they have become bad etc. See LAWLYS ENTERPRISES P. LTD. VERSUS COMMISSIONER OF INCOME-TAX 2008 (7) TMI 373 - PATNA HIGH COURT . Accordingly, we hold that the bad debts written off by the assessee in its books of account shall be allowed as a deduction. It is ordered accordingly. From perusal of the aforesaid relevant extract of the order passed by the tribunal, it is axiomatic that the tribunal has not recorded any specific finding whether the assessee has written off bad debt in the books of accounts as irrecoverable. Therefore, the order passed by the tribunal to the extent it records the finding with regard to the bad debts is hereby quashed and the matter is remitted to the tribunal to decide the issue afresh after recording a specific finding whether or not the assessee has written off the bad debt in the books of accounts as irrecoverable. Accordingly, substantial question of law Nos.4 and 5 are answered.

Issues:
1. Maintenance of separate accounts for STP units and non STP units
2. Double deduction under Section 10A of the Income Tax Act
3. Treatment of certain expenses while computing deduction under Section 10A
4. Write off of bad debts before they become bad
5. Allowance of bad debt write off in specific circumstances

Analysis:

1. Maintenance of Separate Accounts: The first issue revolves around whether maintaining separate accounts for STP units and non STP units is mandatory or merely directory. The tribunal's decision was challenged, arguing that it was not necessary to establish the irrecoverability of debts after an amendment to Section 36(1) of the Act. However, the tribunal did not confirm if the bad debts were written off as irrecoverable in the accounts. Citing precedents, the court held that the matter needed further examination to determine if the bad debts were indeed written off as irrecoverable, remitting the issue back to the tribunal for a specific finding.

2. Double Deduction under Section 10A: The second issue concerns payments made to subcontractors who have separately exported and claimed deductions under Section 10A. The tribunal allowed double deduction, which was contested. The court referenced judgments and upheld the tribunal's decision, emphasizing the need for the assessee to show bad debts were written off as irrecoverable in the accounts, aligning with legal provisions and circulars.

3. Treatment of Expenses for Section 10A Deduction: The third issue involves whether certain expenses like freight, telephone charges, and insurance should be reduced from export turnover while computing deductions under Section 10A. The tribunal's decision was challenged, but the court upheld it, emphasizing the need for specific findings on the write-off of bad debts in the accounts before allowing deductions.

4. Write off of Bad Debts: The fourth issue pertains to the write-off of a substantial sum as bad debts before they actually became bad. The tribunal allowed the write-off, which was disputed. The court, after analyzing precedents and the tribunal's order, found that a specific finding on whether the bad debts were written off as irrecoverable was necessary. The matter was remitted to the tribunal for further examination.

5. Allowance of Bad Debt Write off: The final issue questions whether the write-off of bad debts was permissible in the given circumstances, especially when the debtors were reputed companies and the business continued without establishing the debts as bad. The tribunal's decision was challenged, leading to a detailed analysis by the court, which emphasized the importance of specific findings on the write-off of bad debts before allowing deductions. The court remitted the matter to the tribunal for a fresh decision after recording such findings.

In conclusion, the judgment addressed various complex issues related to income tax assessments, emphasizing the importance of specific findings on the write-off of bad debts and the adherence to legal provisions and precedents in determining deductions and allowances.

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