2011 (2) TMI 724 - AT - Income Tax

Tribunal allows bad debts deduction but remits irrecoverable advances for further review. Dismisses interest charges.

The Tribunal partly allowed the appeal, upholding the deduction of bad debts on export bills under section 36(1)(vii) of the Income Tax Act. However, the ... Disallowance - Bad debts on export bills - It is a settled law that when the assessee arrives at a decision that certain debts have become bad and accordingly writes off the same in the books of accounts, section 36(1)(vii)of the Act provides for a deduction - Section 41(1) of the Act provides that if such bad debts written off is recovered during the subsequent assessment years, it shall be treated as income of that year - the assessee is justified to claim deduction u/s. 36(1)(vii) of the Act with respect to the unrealized bills from export turnover. As regards the advances made to corporates for Rs.35 lakhs the assessee has stated that these advances were made pursuant to an agreement for contractual work - No such agreements were produced before us for substantiating such claim - Further, from the assessment order and ld.CIT(A)'s order, no such facts emanate - The findings of the ld. Assessing Officer is that the loan had been given to a sister concern and not for the business of the appellant - This fact has not been disproved before the ld. CIT(A) - Hence, matter be remitted back to the file of ld. CIT(A) in order to grant one more opportunity to the assessee to establish the bonafide of its claim. Issues:1. Disallowance of bad debts on export bills.2. Disallowance of irrecoverable advances written off.3. Disallowance of interest and penal charges.Issue 1: Disallowance of Bad Debts on Export Bills:The appellant, an Indian software development company, filed an appeal against the disallowance of bad debts on export bills amounting to Rs.1,94,99,064 for the A.Y. 2003-04. The Assessing Officer (AO) disallowed the claim as the requisite approval from appropriate authorities was not obtained. The CIT(A) upheld the disallowance citing lack of strength in the appellant's arguments. The Tribunal observed that the appellant had not obtained necessary approval for write-off as per the Foreign Exchange Management Act. However, relying on legal precedents, the Tribunal held that the appellant was justified in claiming the deduction under section 36(1)(vii) of the Income Tax Act for the unrealized bills from export turnover.Issue 2: Disallowance of Irrecoverable Advances Written Off:The AO also disallowed Rs.35 lakhs for irrecoverable advances made to sister concerns, stating they were not allowable as per section 36(2) of the IT Act. The CIT(A) upheld this disallowance, emphasizing the lack of business nexus between the appellant and the recipients of the advances. The Tribunal noted that no agreements were produced to substantiate the claim that the advances were made pursuant to contractual work. While the AO's findings were not disproved, the Tribunal decided to remit the matter back to the CIT(A) to provide the appellant with another opportunity to establish the bonafide of its claim.Issue 3: Disallowance of Interest and Penal Charges:The AO disallowed interest and penal charges amounting to Rs.6,21,401, which the CIT(A) upheld. However, during the hearing, the appellant did not press for this ground, leading to its dismissal by the Tribunal.In conclusion, the Tribunal partly allowed the appeal for statistical purposes, upholding the deduction of bad debts on export bills but remitting the matter of irrecoverable advances back to the CIT(A) for further consideration. The dismissal of the interest and penal charges disallowance ground was confirmed.