2015 (2) TMI 982 - AT - Income Tax

Tribunal upholds assessee's deductions, rejects revenue's appeal under Income Tax Act

The Deputy Commissioner of Income Tax, Circle 11(2), Bangalore Versus M/s. Big Bags International Pvt. Ltd.

The Tribunal dismissed the revenue's appeal, affirming the Commissioner of Income-tax (Appeals)'s decisions on both issues, thereby allowing the ... Disallowance u/s 40(a)(ia) - Held that:- Following the decision of CIT v/s VIRGIN CREATIONS [ 2011 (11) TMI 348 - CALCUTTA HIGH COURT ] amendment to the provisions of section 40(a)(ia) of the Act, by the Finance Act, 2010 is retrospective from April 1, 2005. Consequently, any payment of tax deducted at source during the previous years relevant to and from the assessment year 2005-06 can be made to the Government on or before the due date for filing return of income under section 139(1) of the Act. If payments are made as aforesaid, then no deduction under section 40(a)(ia) of the Act can be made. Admittedly in the present case, the assessee had deposited the tax deducted at source on or before the due date for filing return of income under section 139(1) of the Act and therefore the impugned disallowance deserves to be deleted - Decided in favour of assessee. Deduction on account of bad debts written off - CIT(A) allowed the claim - Held that:- In the case of Sabra Impex Ltd. (2011 (3) TMI 1553 - ITAT MUMBAI) a consistent view has been taken that non-realisation of export proceeds from a foreign party can be considered as a bad debt and written off and claimed as a deduction. It was also held that the fact that permission of the Reserve Bank of India has not been obtained for such write off will not be a bar to claim deduction on account of such bad debts written off.As far as the issue of applicability of the Explanation to section 37(1) of the Act is concerned, we are of the view that the aforesaid Explanation will apply only when an expenditure is incurred for any purpose which is an offence or which is prohibited by law. In our view, the sale proceeds to be received from a foreign buyer which already shown as income and which is now written off as irrecoverable, cannot be said to be an expenditure incurred by the assessee for any purpose which is an offence or which is prohibited by law. - Decided against revenue. Issues Involved:1. Disallowance under Section 40(a)(ia) of the Income Tax Act.2. Deduction on account of bad debts written off.Issue-wise Detailed Analysis:1. Disallowance under Section 40(a)(ia) of the Income Tax Act:The appeal by the revenue concerns the disallowance made by the Assessing Officer (AO) under Section 40(a)(ia) of the Income Tax Act. The AO observed that the assessee had deducted tax at source (TDS) on commission paid but remitted it to the government after the due date. Specifically, a sum of Rs. 2,302 deducted in February 2003 was remitted on April 11, 2009, and another sum of Rs. 45,444 deducted in January 2009 was remitted on April 19, 2009. Consequently, the AO disallowed the gross amount of Rs. 4,41,204 related to these TDS under Section 40(a)(ia).On appeal, the Commissioner of Income-tax (Appeals) deleted the addition, noting that if the TDS is paid before the due date for filing the return of income, the deduction should be allowed. The Tribunal upheld this view, referencing the case of Santosh Kumar Shetty v. Asst. CIT, which held that the amendment by the Finance Act, 2010 to Section 40(a)(ia) operates retrospectively from April 1, 2005. This amendment stipulates that no disallowance can be made if the TDS is paid on or before the due date for filing the return of income under Section 139(1).The Tribunal also cited the legislative history and judicial interpretations, including the decision of the Calcutta High Court in Virgin Creations v. ITO, which confirmed the retrospective application of the amendment. Consequently, the Tribunal found no merit in the revenue's grounds and upheld the Commissioner of Income-tax (Appeals)'s order to allow the deduction.2. Deduction on Account of Bad Debts Written Off:The AO disallowed the assessee's claim of Rs. 1,45,96,224 as bad debts written off, arguing that the assessee had not obtained permission from the Reserve Bank of India (RBI) for the write-off or for the extension of receipt of foreign exchange. The assessee contended that the amount was offered for taxation in the assessment year 2006-07 and was unrealized due to the foreign importer's refusal to acknowledge the debit note. The assessee explained that the bad debts were related to price variance claims from previous years and provided detailed accounts to support the claim.The Commissioner of Income-tax (Appeals) directed the AO to allow the deduction, stating that the provisions under Section 36(1)(vii) read with Section 36(2) are self-contained and the assessee had fulfilled these conditions. The Tribunal upheld this decision, referencing the Mumbai Bench's decision in Sabra Impex Ltd., which held that RBI directives cannot override statutory provisions and that bad debts written off without RBI approval can be allowed as a deduction.The Tribunal also cited the Bangalore Bench's decision in Ace Designers Ltd. v. Addl. CIT, which aligned with the Supreme Court's ruling in T.R.F. Ltd. v. CIT that establishing the irrecoverability of debt is not necessary post the amendment of Section 36(1)(vii). The Tribunal dismissed the revenue's contention that the disallowance could be sustained under the Explanation to Section 37(1), clarifying that the write-off of sale proceeds is not an expenditure incurred for an offense or prohibited by law.Conclusion:The Tribunal dismissed the revenue's appeal, affirming the Commissioner of Income-tax (Appeals)'s decisions on both issues, thereby allowing the deductions claimed by the assessee.