2016 (3) TMI 54 - AT - Income Tax

Tribunal grants relief on bad debts & advances, dismisses Revenue's appeal under CBDT Circular

Mr. Satish B. Kaushik Versus The Asst. Commissioner of Income Tax – 11 (1), Mumbai

The Tribunal partly allowed the assessee's appeal, deleting the addition of Rs. 4,38,395 for bad debts written off, disallowance of the advance received ... Irrevocable bad debt - whether allowable as revenue expenditure - Held that:- The assessee has made efforts to recover the amount but could not recover the same for which necessary evidences are placed on record by the assessee in the paper book filed with the Tribunal. This amount has been considered to be bad debt by the assessee and has been written off in the books of account in the current assessment year under appeal. In the opinion of the assessee, the said amount has become irrecoverable and has been written off in the books of accounts maintained by the assessee. In our considered view , the assessee has fully satisfied the conditions laid down in section 36(1)(vii) of the Act read with Section 36(2) of the Act and the said amount written off by the assessee as irrevocable as bad debt is allowable as revenue expenditure. Hence, The addition made by the A.O. and as sustained by the CIT(A) is hereby ordered to be deleted. - Decided in favour of assessee Advance receipts - Held that:- In the instant case, the amount has been held by the assessee on behalf of Tips Industries Ltd. and is not being held by the assessee in his own right as the assessee can be deemed to hold the said amount in his own right on commencement of the film. No income is being generated or earned even under the cash system of accounting followed by the assessee as in the instant case the film has not commenced as per agreed terms and the amount has become refundable to Tips Industries Limited which is stated to be asking for refund of their advance. In our considered view, the addition made by the A.O. is not sustainable in law because the amount is being still held by the assessee on behalf of the Tips Industries Ltd and not on his own right as per the agreed terms of conditions as agreed vide mutual understanding dated 05-02-2008 as the assessee will be deemed to appropriate the said amount or hold the said amount in his own right only on the commencement of film and till then the assessee is holding the said amount on behalf of Tips Industries Limited which is refundable in case of non-starting of the film as per agreed terms as per mutual understanding dated 05-02-2008. The addition made by the A.O. as confirmed by the CIT(A) is hereby ordered to be deleted - Decided in favour of assessee Disallowance of depreciation on assets not used for the purposes of business - Held that:- We have observed that the A.O. is insisting on the commercial electricity use as evidence for allowing the claim of the business user of the premises of the assessee, which in our view, no-doubt is a vital document/evidence to claim that the premises are used for commercial / business purposes but it is not the only/sole evidence to prove that the afore-stated premises are used by the assessee for the purposes of his business rather the assessee can prove the same by bringing other cogent material / evidences to prove his contentions that these premises were used for business purposes of the assessee. The assessee is also directed to bring on record cogent material/evidences to prove his contentions of business user of the afore-stated premises. The A.O. is directed to admit evidences furnished by the assessee in de-novo proceedings in his defense and the AO should consider the necessary evidences submitted by the assessee before deciding the matter on merit.Needless to say that proper and adequate opportunity of hearing in accordance with law shall be granted to the assessee by the AO before deciding the issue on merits in denovo proceedings. Treating three properties namely ‘Evershine Greens’, ‘Saidwar’ and ‘Tranquil Treat’ as deemed to be let out properties - Held that:- The assessee’s claim is that all the three properties were being used for the personal use of profession hence it should not be treated as deemed let out properties. We find that the assessee also claimed depreciation on furniture and fixture and computers installed at these properties whereby we have set aside the matter of allowability of depreciation on furniture and fixtures and on computers to the file of A.O. and directed the assessee to produce cogent evidence/material to substantiate his claim of business user of the afore-stated properties and the A.O. shall examine the same for deciding the issue of claim of depreciation and we apply the same principle in this issue also, hence, we set aside this issue to the file of A.O. for de-novo determination of issue after considering the cogent material/evidences brought on record by the assessee in his defense in denovo proceedings . The A.O. is directed to admit evidences furnished by the assessee in de-novo proceedings Issues Involved:1. Addition of Rs. 4,38,395/- on account of bad debts written off.2. Disallowance of advance received from Tips Industries of Rs. 25,00,000/-.3. Disallowance of depreciation claimed of Rs. 2,12,184/-.4. Treatment of three properties as deemed to be let out.5. Validity of orders of the CIT(A) and AO.Issue-wise Detailed Analysis:1. Addition of Rs. 4,38,395/- on Account of Bad Debts Written Off:The assessee claimed Rs. 4,38,395/- as bad debts written off under 'Direct and Indirect Expenses' related to a joint venture with Prachi Narmada Films Pvt. Ltd. (PNF) for the distribution of the film 'Nayak'. The AO disallowed this claim, stating it did not meet the provisions of Section 36(1)(vii) read with Section 36(2) of the Income Tax Act, 1961, as the amount was shown as an investment and not as a debt taken into account in computing the income of any previous year. The CIT(A) upheld the AO's decision, noting the amount was a capital loss, not a revenue loss. However, the Tribunal found that the conditions under Section 36(1)(vii) read with Section 36(2) were satisfied, as the loss was offered for taxation in the assessment year 2002-03 and the amount was written off as irrecoverable. Thus, the Tribunal ordered the deletion of the addition.2. Disallowance of Advance Received from Tips Industries of Rs. 25,00,000/-:The AO treated the advance received from Tips Industries Ltd. as income, arguing that the assessee followed the cash system of accounting. The assessee contended that the advance was refundable if the film did not commence and was not towards remuneration. The CIT(A) upheld the AO's decision. The Tribunal, however, noted that the advance was clearly stated as refundable and not remuneration, and since no film had commenced, the amount was refundable to Tips Industries Ltd. The Tribunal ordered the deletion of the addition, stating the amount was held on behalf of Tips Industries Ltd. and not as income.3. Disallowance of Depreciation Claimed of Rs. 2,12,184/-:The AO disallowed depreciation on furniture, fixtures, and computers installed in four properties, arguing that the properties were not used for business purposes. The CIT(A) upheld this decision. The Tribunal set aside the matter for de-novo determination, directing the AO to admit evidence furnished by the assessee to prove the business use of the properties and decide the issue on merit after granting the assessee an opportunity of hearing.4. Treatment of Three Properties as Deemed to Be Let Out:The AO treated three properties (Evershine Greens, Saidwar, and Tranquil Treat) as deemed let out and calculated the annual letting value (ALV) at 10% of the book value. The CIT(A) directed the AO to recalculate the ALV at 8% of the book value. The Tribunal set aside the issue for de-novo determination, directing the AO to consider the evidence provided by the assessee regarding the business use of the properties and decide the issue in accordance with the guidelines laid down by the Hon'ble Bombay High Court in the case of Tiptop Typography.5. Validity of Orders of the CIT(A) and AO:The Tribunal addressed the validity of the orders passed by the CIT(A) and AO, particularly focusing on the issues of bad debts, advance received, depreciation, and deemed let out properties. The Tribunal provided directions for de-novo determination and proper consideration of evidence, ensuring that the assessee is granted an opportunity of hearing.Revenue Appeal (ITA No. 5601/Mum/2012):The Tribunal dismissed the Revenue's appeal, noting that the tax effect involved was less than Rs. 10 lakhs, making the appeal not maintainable as per the latest CBDT Circular No. 21/2015.Conclusion:The appeal filed by the assessee was partly allowed, and the appeal filed by the Revenue was dismissed. The Tribunal provided detailed directions for de-novo determination of certain issues, ensuring proper consideration of evidence and adherence to legal principles.