2015 (9) TMI 1238 - AT - Income Tax

Tribunal allows bad debt deduction, denies set-off for late tax return filing.

M/s. Alwarpet Benefit Fund Ltd. Versus Deputy Commissioner of Income Tax, Company Circle 1 (1), Chennai

The Tribunal upheld the reopening of the assessment under Section 148 of the Act, allowing the deduction for bad debts subject to verification of certain ... Reopening of assessment u/s.148 - Held that:- The fact that the assessee had changed its method by treating the accrued interest on cash basis as against mercantile basis came to light only during the assessment proceeding for the assessment year 2007-08. Therefore, there was a valid reason for the Assessing Officer to believe that the certain income had escaped assessment. In these circumstances, we find that the Ld. CIT (A) was justified to reopen the assessment of the assessee invoking the provisions of section 147 & section 148 of the Act. - Decided against assessee. Disallowance of bad debts - Held that:- The assessee is entitled to the claim of deduction on account of bad debts even for the loss incurred due to irrecoverable loans and advances made during the course of money lending business of the assessee. Therefore respectfully following the decision of the in the case All Growth Finance & Investment Pvt Ltd., Vs. CIT [2011 (5) TMI 920 - DELHI HIGH COURT] we hereby direct the Ld. Assessing Officer to allow deduction to the assessee for its claim of bad debts on account of irrecoverable interest income which was treated as the income of the assessee during the earlier years and loss incurred due to irrecoverable loans and advances made by the assessee during the course of its money lending business subject to verification of the fact that the interest income were actually offered to the income of the assessee during the earlier years and the loans and advances were made during the course of the money lending business of the assessee. Accordingly, this issue is remitted back to the file of the Ld. Assessing Officer. - Decided in favour of assessee for statistical purposes. Disallowance of the claim of set-off of unabsorbed business losses of the earlier year - Held that:- From the provisions of Section 80, Section 32(2) and Section 72(2) of the Act, it is evident that loss of the earlier years other than the unabsorbed depreciation shall not be allowed to be carry forward unless the return of income is filed within the due date specified U/s.139(3) of the Act - Decided against assessee. Issues Involved:1. Reopening of assessment under Section 148 of the Act.2. Disallowance of rebate allowed to customers, treated as bad debts.3. Denial of the set-off of business losses due to non-filing of returns before the due date.Issue-wise Detailed Analysis:1. Reopening of Assessment under Section 148 of the Act:The Assessee challenged the reopening of the assessment for the assessment year 2003-04. The reopening was based on observations during the assessment proceedings for the year 2007-08, where it was revealed that the Assessee had stopped crediting accrued interest on unrealizable loans and adopted a cash method for recognizing such interest income. The Assessing Officer (AO) believed that the income chargeable to tax had escaped assessment due to the Assessee not disclosing material information. The Commissioner of Income Tax (Appeals) [CIT (A)] upheld the reopening beyond four years, citing various judicial precedents and emphasizing the AO's prerogative to verify the correctness of the claim. The Tribunal agreed with the CIT (A), finding that the AO had valid reasons to believe that certain income had escaped assessment and thus, upheld the reopening of the assessment.2. Disallowance of Rebate Allowed to Customers (Bad Debts):The Assessee, a non-banking financial company, claimed bad debts on accrued interest (Rs. 2,32,15,838) and principal amount (Rs. 1,62,43,282) written off in the books of accounts. The AO disallowed the claim, stating that rebates and discounts on loans are capital in nature and, since the interest on loans was offered to tax on a cash basis, the rebate on such interest was not allowable. The CIT (A) agreed with the AO, stating that the waiver of amounts in the balance sheet should be adjusted from that account only and not eligible as expenditure in the Profit & Loss account. The Tribunal, however, found merit in the Assessee's contention that if the accrued interest was credited in the books and subsequently found irrecoverable, it could be written off as bad debts. The Tribunal directed the AO to allow the deduction for bad debts, subject to verification that the interest income was actually offered in earlier years and the loans and advances were made during the course of the money lending business.3. Denial of Set-off of Business Losses:The Assessee faced denial of carry forward and set-off of business losses for not filing returns within the time limit prescribed under Section 139(3) of the Act. The CIT (A) allowed the set-off of unabsorbed depreciation but denied the business losses due to late filing. The Tribunal upheld this decision, stating that Section 80 of the Act restricts the carry forward and set-off of losses unless the return is filed within the due date. However, unabsorbed depreciation is allowed as per Section 32(2) of the Act. The Tribunal found no scope for relaxing these provisions even considering the peculiar circumstances of the Assessee's case.Conclusion:The Tribunal partly allowed the Assessee's appeal for statistical purposes, upholding the reopening of the assessment, directing the AO to allow the deduction for bad debts subject to verification, and confirming the denial of set-off of business losses due to non-filing of returns within the due date.