2017 (9) TMI 798 - AT - Income Tax

Tribunal directs deletion of Rs. 1.20 crore disallowance for securities write-off, emphasizing tax-neutral nature.

The Tribunal set aside the ld.CIT(A)'s decision and directed the AO to delete the disallowance of Rs. 1.20 crores for 'Securities written off,' ... Loss on account of “Securities written off” disallowed - claim of bad debts - Held that:- The undisputed facts of the case are that the writing off of this amount was not in challenge but the year in which the amount was to be written off and the year in which it has to be allowed by the authorities. We find merit in the contention of the ld.AR that the writing off of the said amount in neither of the assessment year i.e. 2010-11 or 2011-12 is tax neutral as is clear from the computation of total income filed as the in that both the years the taxable income of the assessee was NIL. In the first year, the assessee sustained loss of ₹ 46,80,427/-. In the next year income after adjustment of the brought forward losses to the tune of ₹ 77,17,152/- is turned out to be NIL. In the case of Vishnu Industrial Gases Pvt Ltd [2008 (5) TMI 636 - DELHI HIGH COURT] held that where the rate of tax remained same in both the assessment years then the issue of whether the tax is leviable in one year or other year is immaterial. In the present case, also in both the assessment year the income of the assessee is not assessable to tax at all. We also find that the assessee has decided to write off when it finds that the further investment in the said securities would be loss making propositions considering the adverse market conditions. Moreover, it is the assessee who can take decision to write off of the amount which became bad in particular year and the revenue cannot dictate the terms of writing off the bad debts or how to run the business in the ordinary course of business. On this count also the deciding of writing off the bad debts deserved to be allowed. We, therefore, set aside the order of the FAA and direct the AO to delete the disallowance. - Decided in favour of assessee. Issues Involved:1. Confirmation of addition by ld.CIT(A) for not allowing the loss on account of 'Securities written off' of Rs. 1.20 Crores.2. Determination of whether the amount of Rs. 1.20 Crores was a bad debt and allowable as it was not part of the income in earlier years.3. Assessment of whether the 'securities written off' pertained to AY 2011-12 and its addition to the book profit under section 115JB.Issue-wise Detailed Analysis:1. Confirmation of Addition by ld.CIT(A) for Not Allowing the Loss on Account of 'Securities Written Off' of Rs. 1.20 Crores:The assessee filed a return of income declaring NIL under normal provisions and Rs. 3,09,71,107/- under MAT. The assessee, engaged in investment and dealing in shares, wrote off Rs. 1.20 crores under 'Securities written off' due to withdrawal from 'Kotak India Growth Fund-II'. The AO disallowed the claim, stating the forfeiture occurred in FY 2009-10, relevant to AY 2010-11, and should not be claimed in AY 2011-12. The ld.CIT(A) upheld the AO's decision, emphasizing the distinct nature of each assessment year and the need to adhere to the principles of prudence and accrual in accounting.2. Determination of Whether the Amount of Rs. 1.20 Crores Was a Bad Debt and Allowable as It Was Not Part of the Income in Earlier Years:The assessee argued that the decision to withdraw from the fund was due to adverse market conditions, and the write-off was justified in AY 2011-12. The ld.CIT(A) noted that the forfeiture occurred on 27th October 2009, and no evidence was provided to extend the revised due date or enforce rights beyond this date. The AO and ld.CIT(A) concluded that the write-off should have been claimed in AY 2010-11, not AY 2011-12, as the liability did not pertain to the latter year.3. Assessment of Whether the 'Securities Written Off' Pertained to AY 2011-12 and Its Addition to the Book Profit Under Section 115JB:The ld.CIT(A) observed that the assessee follows the mercantile system of accounting, and the concept of prudence and accrual requires recognizing liabilities and losses in the period they relate to. The disallowance of Rs. 1.20 crores was affirmed as it did not pertain to FY 2010-11. The assessee's argument that the write-off was tax-neutral, as both years had NIL taxable income, was considered. The Tribunal found merit in the assessee's contention, referencing the Delhi High Court's decision in CIT vs. Vishnu Industrial Gases Pvt Ltd, which held that the year of tax liability is immaterial if the tax rate remains the same and the income is not assessable in either year.Conclusion:The Tribunal set aside the order of the ld.CIT(A) and directed the AO to delete the disallowance, emphasizing the tax-neutral nature of the write-off and the assessee's discretion in deciding the timing of the write-off. The appeal of the assessee was allowed, and the issue raised in ground no.3 was dismissed as academic.Order Pronounced in Open Court on 21st June, 2017.