2016 (5) TMI 706 - AT - Income Tax

Tribunal allows appeal on bad debts & sec 14A disallowance, dismisses sham business activity claim

Mulye Engineering and Consultancy Pvt. Ltd. Versus The Income Tax Officer, Ward 11 (1), Pune

The Tribunal partially allowed the appeal, overturning the disallowance of Rs. 68,750 as bad debts and Rs. 1,67,295 under section 14A of the Income-tax ... Disallowance of written off as bad debts under section 36(1)(vii) - AO had denied the claim on the ground that the debt had not become bad and also that the assessee was otherwise dealing with the said concern - Held that:- The assessee has placed copy of the ledger account of the said party in its books at page 6 of the Paper Book. The Assessing Officer had denied the claim on the ground that the debt had not become bad and also that the assessee was otherwise dealing with the said concern. The learned Departmental Representative for the Revenue during the course of hearing pointed out that write off was premature as sum of ₹ 1 lakh was received by the assessee in the next year. The assessee had written part of the specific bill which was due from M/s. Goodwill Engineering Services. The assessee was otherwise engaged in the business of manufacturing, hiring and trading activities and had only sold one machinery to M/s. Goodwill Engineering Services on 30.11.2005 i.e. during the preceding year. However, the payment against the said machinery could not be realized by the assessee in full and only sum of ₹ 1 lakh after negotiations was paid by the said concern that too in assessment year 2008-09. At the close of the year, the assessee had written off of ₹ 68,750/- i.e. amount in question by treating it as irrecoverable and such act of write off of irrecoverable amount cannot be faulted with and the claim of assessee against writing off of such amount is to be allowed as deduction under section 36(1)(vii) of the Act. See Nichrom India Limited case [2016 (3) TMI 317 - ITAT PUNE ] - Decided in favour of assessee Disallowance made under section 14A - Held that:- The assessee has filed on record the copy of Balance Sheet as on 31.03.2007, in which the said investment is reflected at ₹ 2,80,000/- and even as on 31.03.2006, the investment was ₹ 2,80,000/-. Admittedly, the aforesaid investment has not been made in instant assessment year and is brought forward from the preceding year. In the earlier years, no disallowance under section 14A of the Act was made in the hands of assessee. The assessee admittedly, has not received any income on the said investment which is exempt from tax. The year under appeal before us is assessment year 2007- 08 and the provisions of Rule 8D of the Income Tax Rules, 1962 were not on Statute in the said assessment year. In view thereof, we find no merit in the aforesaid disallowance made under section 14A of the Act - Decided in favour of assessee Issues Involved:1. Disallowance of Rs. 68,750 as bad debts under section 36(1)(vii) of the Income-tax Act, 1961.2. Disallowance of Rs. 1,67,295 under section 14A of the Income-tax Act, 1961.3. Disallowance of Rs. 6,49,798 on the grounds of being a sham business activity.Issue-wise Detailed Analysis:1. Disallowance of Rs. 68,750 as Bad Debts:The assessee had written off debts amounting to Rs. 68,750 from M/s. Goodwill Engineering Services under section 36(1)(vii) of the Act. The Assessing Officer (AO) disallowed this claim, arguing that the debts had not been proven to be bad, merely writing them off in the books was insufficient. The CIT(A) upheld this view, stating that the debt had not been shown to be irrecoverable, especially since there was no evidence of the debtor refusing payment.The Tribunal, however, referred to the Supreme Court's decision in TRF Limited, which clarified that post-01.04.1989, it is not necessary for the assessee to establish that the debt has become irrecoverable; it suffices if the bad debt is written off as irrecoverable in the accounts of the assessee. The Tribunal found that the assessee had written off the debt as irrecoverable and allowed the claim, overturning the CIT(A)'s decision.2. Disallowance of Rs. 1,67,295 under Section 14A:The AO disallowed Rs. 1,67,295 under section 14A, which pertains to expenses incurred in relation to income not includible in total income. The assessee contended that the investment of Rs. 2,80,000 was made in a sister concern for business purposes and no exempt income was received from it. The Tribunal noted that the investment was carried forward from previous years, during which no disallowance under section 14A was made. Additionally, Rule 8D of the Income Tax Rules, 1962, was not applicable for the assessment year 2007-08. Consequently, the Tribunal found no merit in the disallowance and deleted the addition of Rs. 1,67,295.3. Disallowance of Rs. 6,49,798 on Sham Business Activity:The assessee's ground of appeal regarding the disallowance of Rs. 6,49,798 on the grounds of being a sham business activity was not pressed. Therefore, this issue was dismissed as not pressed.Conclusion:The Tribunal allowed the appeal of the assessee in part. The disallowance of Rs. 68,750 as bad debts and Rs. 1,67,295 under section 14A were both overturned, while the issue regarding the disallowance of Rs. 6,49,798 was dismissed as not pressed. The appeal was thus partly allowed.