2017 (5) TMI 198 - AT - Income Tax

ITAT grants relief on bad debts & WIP issues, directs reassessment for fair taxation

The ITAT allowed relief to the assessee on the disallowance of bad debts issue, finding their claim valid under the project completion method. Regarding ... Disallowance of bad debts -Held that:- As the assessee demonstrated in writing that the assessee follows project completion method. Regarding interest receipts, it is the submission of the assessee that the interest received from the debtors was reduced from the total expenses and balance is considered as WIP thereby the said interest receipts are assessed to tax under the head “profits and gains from business or profession”. On examining the WIP accounts of the assessee for various years, we find the claim of the assessee is proper and the assessee entitled to relief on this part of the bad debts too. We direct the AO grant relief as per the law - Decided in favour of assessee Adjustment to the WIP account - DR opposed the admittance of the additional ground and the papers filed before us - Held that:- We are of the view that it is in the interest of justice the assessee must not be put to difficulty for no mistake of him. In our view it is the duty of the AO to make proper assessment. AO should have examined the past assessments for the details of the altered WIP figures before he complete the current assessment. Considering the above, we are of the view that the AO must remove the mistakes in the assessment and adopt the correct WIP considering the changes made in the past to the said account. In the remand proceedings, AO shall grant reasonable opportunity of being heard to the assessee. Accordingly, relevant grounds and additional grounds are allowed, in principle, for statistical purpose. Taxation of the exempt Share Income - Held that:- In the computation of income, there is mistake and the said income is not claimed as exempt. Such income is exempt as per the provisions of section 10(2A) of the Act. In the assessment the AO charged such exempt income tax ignoring the said provisions. In this back ground of these facts, the assessee raised the said additional ground. On hearing both the parties, we find that the assessment order of the AO is not sustainable on merits. Who can AO subject such exempt income to tax? No failure from assessee side shall justify such decision of the AO. AO is under statutory obligation to make proper assessment granting all eligible deductions and exemptions as the case may be. Admitting the additional ground considering the principles of natural justice, we direct to AO to examine the claim on this share income amend the assessment if the same is improper Issues:1. Disallowance of bad debts2. Set off of brought forward losses3. Determination of closing value of work in progress4. Consideration of opening work in progress in determining taxable income5. Taxation of income from partnership firm6. Consideration of assessed work in progress in earlier assessment years7. Taxation of exempt share incomeIssue 1 - Disallowance of Bad Debts:The assessee appealed against the CIT(A)'s order confirming the addition of Rs. 21,13,519 made on account of disallowance of bad debts. The AO disallowed a portion of the claimed bad debts for lack of details. The FAA confirmed the disallowance attributing the failure to the assessee for not demonstrating that the sum was claimed in the P&L account in the past. The ITAT found the assessee's claim valid as they followed the project completion method, where interest receipts were considered as WIP and assessed under the head 'profits and gains from business or profession.' Relying on relevant case law, the ITAT allowed relief on this issue.Issue 2 - Adjustment to the WIP Account:The assessee, a builder and developer, followed the project completion method, maintaining a WIP account. The AO ignored the closing WIP amount of Rs. 9,44,22,760/- and adopted a lower amount, causing a disadvantage to the assessee. The CIT(A) rejected the assessee's plea for correction. The ITAT held that the AO should rectify the assessment by adopting the correct WIP figures from past assessments, ensuring justice for the assessee. The AO was directed to amend the assessment order after thorough examination and grant a fair hearing to the assessee.Issue 3 - Taxation of Exempt Share Income:The assessee earned Rs. 57,06,478/- as share income, which was mistakenly taxed by the AO despite being exempt under section 10(2A) of the Act. The ITAT found the AO's decision unsustainable and directed a reassessment to rectify the taxation of exempt income. The AO was instructed to grant a fair opportunity for the assessee to present their case in the remand proceedings.The ITAT partially allowed the appeal for statistical purposes, admitting additional grounds raised by the assessee and directing the AO to rectify the assessment errors and grant necessary hearings to the assessee. The judgment highlighted the importance of proper assessment procedures and adherence to legal provisions for fair taxation outcomes.