2016 (5) TMI 241 - AT - Income Tax

Revenue's Appeal Dismissed, Assessee's Cross-Objection Partly Allowed - Business Loss & Bad Debt Disallowed

D.C.I.T., Circle-5, Jaipur Versus M/s S.N. Kapoor Exports and M/s S.N. Kapoor Exports Versus A.C.I.T., Circle-5, Jaipur

The Revenue's appeal was dismissed, and the assessee's cross-objection was partly allowed. The Tribunal upheld the CIT(A)'s decision to treat the advance ... Addition on account of bad debts - Held that:- CIT(A) has decided this case on bad debt written off itself. No opinion has been expressed by the ld CIT(A) on business loss. We find that the assessee has advanced this money for the business purposes but this amount has not been accounted for in previous year as income. Therefore, order of the ld CIT(A) is not justified allowing the bad debt U/s 36(1)(vii) of the Act, but it is business loss as amounts were advanced for business purposes. The assessee also claimed bad debt of ₹ 2,87,930/-, which was advanced to Shri Mohiuddin, who was designer and served the firm on remuneration basis. The advance was adjusted against the salary but suddenly he left the assessee’s job and recovery could not be made out by the assessee, but there is no evidence with the assessee to demonstrate that Shri Mohiuddin was in employment and has expertise in designing carpet and also worked with the assessee. No income from this advance has been accounted for in the previous years. Therefore, we upheld the order of the ld CIT(A) for business loss to the tune of ₹ 1.45 crores and confirmed the addition of ₹ 2,87,930/- as advanced to Shri Mohiuddin and claimed as bad debt. - Decided partly in favour of assessee Disallowance under the head various expenses - CIT(A) restricted the addition @ 10% as against 15% done by AO - Held that:- It is difficult to get bill of each and every expenditure incurred by the assessee particularly taxi, rickshaw, tea etc, therefore, no reason to intervene in the order of the ld CIT(A). Accordingly, we uphold the order of the ld CIT(A) Issues Involved:1. Deletion of addition on account of bad debts/business loss.2. Non-allowance of trading advance as business loss.3. Non-allowance of bad debts in the name of an individual.4. Restriction of disallowance percentage out of various expenses.Issue-Wise Detailed Analysis:1. Deletion of Addition on Account of Bad Debts/Business Loss:The Revenue's appeal challenged the CIT(A)'s decision to delete an addition of Rs. 1,45,00,000 on account of bad debts, reduced from the original addition of Rs. 1,47,87,930 made by the Assessing Officer (AO). The assessee firm, engaged in manufacturing and trading carpets, had debited Rs. 1,47,87,930 as bad debts. The AO argued that the amount given to M/s Saraswati Exports was not disclosed as income in previous years, thus not fulfilling Section 36(1)(vii) conditions. The CIT(A) found that the advances were for business purposes, and substantial commission income was shown from this business. The Tribunal concluded that although the amount was not allowable as bad debt under Section 36(1)(vii), it was a business loss since the advances were for business purposes.2. Non-Allowance of Trading Advance as Business Loss:The assessee claimed the advance to M/s Saraswati Exports should be allowed as a business loss. The CIT(A) acknowledged the business purpose of the advances and the litigation efforts to recover the amount. The Tribunal agreed that the amount was a business loss, given the business relationship and the eventual recovery of the amount in a later assessment year.3. Non-Allowance of Bad Debts in the Name of an Individual:The assessee also claimed a bad debt of Rs. 2,87,930 advanced to Shri Mohiuddin, a designer. The CIT(A) confirmed the AO's disallowance, noting no evidence of employment or income from this advance. The Tribunal upheld this decision, agreeing that there was insufficient evidence to support the claim.4. Restriction of Disallowance Percentage out of Various Expenses:The AO disallowed 15% of various expenses amounting to Rs. 6,16,855 due to unverifiable vouchers. The CIT(A) reduced this disallowance to 10%, considering some expenses were supported by self-made vouchers. The Tribunal upheld the CIT(A)'s decision, finding no reason to intervene, as the expenses were not fully verifiable.Conclusion:The Revenue's appeal was dismissed, and the assessee's cross-objection was partly allowed. The Tribunal upheld the CIT(A)'s decision to treat the advance to M/s Saraswati Exports as a business loss but confirmed the disallowance of the bad debt claimed for Shri Mohiuddin. The restriction of disallowance on various expenses to 10% was also upheld.