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2021 (10) TMI 976 - HC - Income TaxAddition of bad debts and advances - no information was furnished by the assessee with regard to the bad debts for the purpose of claiming as expenditure in computation of profits - tribunal considering trade of the credit as claimed by the assessee being revenue in nature allowed the claim - HELD THAT - Revenue has placed reliance on the judgment of Vijaya Bank 2010 (4) TMI 46 - SUPREME COURT wherein it has been explained that after the explanation vide Finance Act, 2001, in Section 36(1)(vii) with effect from 01.04.1989, the assesee (s) is now required not only to debit the profit and loss account but simultaneously also reduce loans and advances or the debtors from the asset side of the balance sheet to the extent of the corresponding amount so that, at the end of the year, the amount of loans and advances/debtors is shown as not of provisions for impugned bad debt. There is some force in the said arguments advanced by the Revenue. None of the authorities have examined the issue in this angle in deciding the matter relating to substantial questions of law No.1. Hence, we remand the matter to the Tribunal to reconsider the matter in the light of the judgment of the Hon ble Apex Court in the case of Vijaya Bank. Foreign exchange fluctuation loss - AO disallowed the same holding that the assessee had not established the nexus for utilization of the funds raised in FNCR are used for the business purposes - HELD THAT - The assessee has demonstrated before the Tribunal that increase in investments from ₹ 102.92 crores to ₹ 380.32 crores was on account of investment of ₹ 287 crores in 8% redeemable preference shares of Phipso Distillery Ltd., which was made on 31.03.2005 i.e., on the last day of the year and therefore the working capital obtained on various dates between 02.04.2004 and 31.03.2005 could not have been utilized from the same. It was also pointed out that the interest paid on the loans were allowed by the Assessing Officer himself as a deduction, however no loss in connection thereto was allowed. The action of the Assessing Officer accepting the Foreign Exchange but disallowing the loss appears to be erroneous. It is apt to refer to the decision of the Hon ble Apex Court in Commissioner of Income-tax, Delhi vs. Woodward Governor India (P.) Ltd ., 2009 (4) TMI 4 - SUPREME COURT wherein it has been enunciated that the loss suffered by an assessee on account of foreign exchange difference as on the date of balance sheet is an item of expenditure under Section 37(1) of the Act. The view of the Assessing Officer and the CIT (A) that the investments were made on, from the FNCR loans is not based on any supporting material and is only a presumption. Hence, confirming the view of the Tribunal, we answer this question in favour of the assessee and against the revenue. Disallowance of research and development expenses - whether it is expended by the assessee relates to the business activity in terms of Section 37 1 - AO disallowed the expenses of Research and Development expenses on the ground that the said expenditure was not connected to the business of the assessee as it was in the business of manufacture and trading of beer and the details of research and development had not been furnished - HELD THAT - As could be seen from the material on record, the Assessing Officer as well as the CIT (A) has disallowed the R D claim made by the assessee mainly for the reason that no documents were placed on record to establish the same. But the Tribunal has proceeded to allow the claims made by the assessee on the ground that the same is not double deduction or weighted deduction. We are not convinced with the reasoning of the Tribunal in allowing this deduction for want of material evidence and lack of proper reasoning. Hence, we remand the matter to the Tribunal to reconsider on this issue sans answering this substantial question of law.
Issues Involved:
1. Deduction of Bad Debts 2. Deduction of Foreign Exchange Loss 3. Deduction of Research and Development Expenses Detailed Analysis: 1. Deduction of Bad Debts: The primary issue was whether the assessee was entitled to write off bad debts as a deduction. The Assessing Officer (AO) rejected the claim due to insufficient information provided by the assessee. The Tribunal allowed the claim, noting that similar expenses were allowed in previous assessment years (1996-97, 1997-98). The Tribunal's decision was challenged by the Revenue, citing the Supreme Court's judgment in Vijaya Bank vs. Commissioner of Income-tax (2010) 323 ITR 166 (SC), which requires debiting the profit and loss account and reducing loans and advances from the asset side of the balance sheet. The matter was remanded to the Tribunal for reconsideration in light of this judgment. 2. Deduction of Foreign Exchange Loss: The assessee claimed a deduction for foreign exchange fluctuation loss. The AO disallowed this, assuming the funds were used for investments rather than business purposes. The Tribunal, however, found that the loss was related to working capital loans and allowed the deduction. The Tribunal's decision was supported by the Supreme Court's judgments in Taparia Tools Ltd. vs. Joint Commissioner of Income Tax (2015) 372 ITR 605 (SC) and Commissioner of Income Tax vs. Reliance Industries Ltd. (2019) 102 taxmann.com 52 (SC), which emphasize that the treatment in the books of accounts is not conclusive. The High Court confirmed the Tribunal's view, noting that the AO's assumption lacked supporting material and was merely a presumption. 3. Deduction of Research and Development Expenses: The AO disallowed the R&D expenses, stating they were not connected to the assessee's business of manufacturing and trading beer, and that no details were provided. The Tribunal allowed the claim, but the High Court found this reasoning unconvincing due to the lack of material evidence. The matter was remanded to the Tribunal for reconsideration, emphasizing the need for proper documentation and reasoning. Conclusion: - ITA No.37/2010: The appeal was allowed in part. The substantial question of law regarding foreign exchange loss was answered in favor of the assessee. The issues regarding bad debts and R&D expenses were remanded to the Tribunal for reconsideration. - ITA No.548/2015: Following the decision in ITA No.37/2010, the substantial question of law was answered in favor of the assessee, and the appeal was dismissed.
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