2021 (12) TMI 973 - AT - Income Tax

Disallowing certain bad debts written off in respect of revenues pertaining to the financial year 2009-2010 - HELD THAT - As deduction on account of bad debt as allowed u/s 36(l)(vii) read with section 36(2), after amendment by the Direct Tax Laws (Amendment) Act 1987, envisage merely wiring off the debt as irrecoverable in the accounts of the assessee as a condition for such an allowance. Before the amendment by the DTL (Amendment) Act 1987, of course, there was a condition to establish that the debt has become bad. The Hon'ble Supreme Court in the case of T.R.F. Limited vs C.I.T 2010 (2) TMI 211 - SUPREME COURT has clearly observed that after 01.04.1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee - we are of the view that the assessee is entitled to claim deduction on account of bad debts and the AO is directed to allow claim of assessee. Deduction u/s 80-IC in respect of the amount added back under Section 40(a)(ia) - HELD THAT - There is no dispute regarding genuineness of the expenditure that was disallowed and the fact that the said expenditure is otherwise allowable as deduction in computing income from business. In such circumstances, even if the expenditure is disallowed u/s.40(a)(i) of the Act, the result will be that the disallowance will go to increase the profits of the business which is eligible for deduction u/s.80-IC of the Act and consequently the deduction u/s. 80-IC of the Act should be allowed on such enhanced profit consequent to disallowance u/s. 40(a)(i) of the Act. Hon'ble Bombay High Court in the case of CIT v. Gem Plus Jewellery India Ltd. 2010 (6) TMI 65 - BOMBAY HIGH COURT and Hon'ble Gujarat High Court in the case of ITO vs. Kewal Construction, 2013 (7) TMI 291 - GUJARAT HIGH COURT have taken the view that when disallowance u/s. 40(a)(ia) of the Act goes to enhance the profits that are eligible for deduction under Chapter VIA of the Act, the deduction under Chapter VIA should be allowed on such increased profit. In view of the aforesaid decisions and the CBDT Circular No.37/2020, we hold that the revenue authorities erred in not allowing deduction u/s.80-IC. The claim of the assessee in this regard is accepted and the AO is directed the give necessary relief to the assessee in this regard. Deduction under section 80-IC on reversal of commission expenses - Finding of the AO and the CIT(A) is that the assessee failed to produce evidence or explanation as to how the amount of commission was disallowed towards the unit claiming deduction u/s.80-IC of the Act. This finding has not been rebutted by the assessee in the proceedings before the Tribunal also. Therefore Grd.No.1 b raised by the assessee is dismissed.

Summary

Issues Involved:
1. Bad debts written off.
2. Deduction under Section 80-IC of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Bad Debts Written Off:
The primary issue in ITA No.682/Bang/2017 pertains to the disallowance of bad debts written off by the assessee amounting to ?8,12,36,232. The assessee, engaged in software maintenance and support services, claimed a deduction for bad debts written off. The Assessing Officer (AO) disallowed the claim, stating that the debts were written off arbitrarily without specific reasons, despite the amounts being booked as sales and maintenance charges. The AO referenced the Supreme Court decision in TRF Ltd. vs. CIT, which clarified that post-01.04.1989, it is sufficient for debts to be written off as irrecoverable in the accounts of the assessee without proving the debts became bad. However, the AO argued that the decision did not address the bona fide nature of the write-off. The CIT(A) upheld the AO's decision.

Upon appeal, the Tribunal reiterated the Supreme Court's stance in TRF Ltd., emphasizing that post-amendment, the mere act of writing off debts as irrecoverable suffices for deduction under Section 36(1)(vii) of the Act. The Tribunal found the facts of the case distinct from the Embassy Classic P. Ltd. vs. ACIT case cited by the CIT(A), where the write-off was deemed a delayed payment rather than a bad debt. Consequently, the Tribunal directed the AO to allow the assessee's claim for the deduction of bad debts.

2. Deduction under Section 80-IC:
In ITA No.683/Bang/2017, the assessee raised issues regarding the disallowance of deductions under Section 80-IC. The AO disallowed ?11,65,08,888 due to non-deduction of TDS, arguing that the enhanced income from such disallowance is notional and should not benefit from Section 80-IC deductions. The AO also disallowed ?58,53,925 related to unpaid Karnataka Sales Tax and ?4,22,50,009 related to commission income, citing a lack of evidence linking these to the 80-IC unit.

The Tribunal, referencing the Bombay High Court's decision in CIT v. Gem Plus Jewellery India Ltd. and Gujarat High Court's decision in ITO vs. Kewal Construction, stated that disallowances under Section 40(a)(ia) enhance business profits eligible for Chapter VI-A deductions. The Tribunal also cited CBDT Circular No.37/2016, which supports the view that disallowed expenditures related to business activities should enhance eligible profits for Chapter VI-A deductions. Therefore, the Tribunal directed the AO to allow the deduction under Section 80-IC on the enhanced profits due to disallowance under Section 40(a)(ia).

However, regarding the reversal of commission expenses of ?4,22,50,009, the Tribunal upheld the AO and CIT(A)'s finding that the assessee failed to provide evidence linking the commission to the 80-IC unit. Consequently, this claim was dismissed.

Conclusion:
The Tribunal partly allowed the appeals, directing the AO to allow the deduction of bad debts and the Section 80-IC deduction on enhanced profits due to disallowance under Section 40(a)(ia), but upheld the disallowance related to the commission expenses.