2017 (11) TMI 851 - AT - Income Tax

Tribunal allows appeal on bad debts, TDS revenue loss considered, AO's addition overturned

The Tribunal allowed the appeal filed by the assessee, focusing on the disallowance of bad debts. It held that the TDS amount deducted by the Government ... Disallowance on account of bad debts - tds liability on amount received on the amount from Sikkim and Bhutan Government - Held that:- In the assessee's case under consideration, the Sikkim and Bhutan govt. neither paid the said amount to the assessee nor deposited the said amount to the Central Govt. account, therefore, it is a revenue loss in the hands of the assessee company. We observe that Sikkim and Bhutan Govt. suppose to deposit the said amount to the Central Govt. account on behalf of the assessee but in fact the amount was not deposited to the Central govt. account, therefore, it is a revenue loss in the hands of the assessee company The assessee is entitled to write it off as a bad debt. Since the TDS certificate was not issued by the deductor nor any actual payment was made by them, the assessee company could not claim credit thereof against the tax liability. Therefore, when there was no possibility of TDS certificates being received from the clients, the assessee company decided to write off the TDS receivable and debited the same to the Profit &Loss account for the assessment year under consideration. We are of the view that if the loss occurred during the course of carrying on the business, it is incidental to it and hence allowable. Admittedly, in this case, the assessee suffered loss during the course of carrying on its business. Therefore, same is allowable. In the assessee's case under consideration. we note that necessary TDS certificates were not issued by the deductions/clients nor any actual payment was made by them, the assessee company could not claim credit thereof against the tax liability. Therefore, when there was no possibility of TDS certificates being received from the clients, the assessee company decided to write off the TDS receivable ot ₹ 21,72,227/- and debited the same to the profit & Loss account for the assessment year under consideration. We are of the view that in this case the assessee suffered loss during the course of carrying on its business and said loss is allowable. - Decided in favour of assessee. Issues Involved:1. Disallowance of Rs. 21,56,187/- on account of bad debts claimed by the assessee.2. Validity of assessment under sections 147/143(3) of the Income Tax Act without providing reasons for reopening the case.3. Issuance of notice under section 148 of the Income Tax Act.Detailed Analysis:1. Disallowance of Rs. 21,56,187/- on Account of Bad Debts Claimed by the Assessee:The primary issue in the appeal was the disallowance of Rs. 21,56,187/- claimed as bad debts by the assessee. The assessee, an Indian resident company engaged in construction business, had entered into a contract with the Urban Development & Housing Department, Government of Sikkim. The Government of Sikkim deducted Rs. 21,56,187/- as Income Tax at source (TDS) from the payments made to the assessee. However, the credit for this TDS was not allowed by the Income Tax Department since the TDS was not deposited in accordance with the provisions of the Income Tax Act, 1961, and no TDS certificates were issued.The assessee argued that since the TDS amount could not be recovered or adjusted against its tax liabilities, it became a bad debt. The assessee cited a Supreme Court ruling that emphasized the importance of the 1989 amendment, which states that taxpayers need not establish that debts are irrecoverable for claiming deductions. The Assessing Officer (AO) rejected this claim, stating that TDS deducted by a government authority does not qualify as a bad debt under the Income Tax Act. The AO's decision was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)], who confirmed the disallowance.The Tribunal, however, found merit in the assessee's argument. It noted that the TDS amount deducted by the Government of Sikkim was indeed a revenue loss for the assessee, as it was not deposited into the Central Government account. The Tribunal held that the loss occurred during the course of carrying on the business and was incidental to it, thus making it allowable. The Tribunal relied on precedents from the High Court of Punjab & Haryana and the Delhi Tribunal, which had allowed similar claims. Consequently, the Tribunal deleted the addition of Rs. 21,72,227/- made by the AO and confirmed by the CIT(A).2. Validity of Assessment Under Sections 147/143(3) Without Providing Reasons for Reopening the Case:The assessee had raised an issue regarding the validity of the assessment under sections 147/143(3) of the Income Tax Act, arguing that the AO did not provide the reasons recorded for reopening the case. However, this ground was not pressed by the assessee during the hearing, and therefore, it was not considered in detail by the Tribunal.3. Issuance of Notice Under Section 148 of the Income Tax Act:Similarly, the assessee had challenged the issuance of notice under section 148 of the Income Tax Act, claiming it was erroneous and bad in law. This ground was also not pressed by the assessee during the hearing and was not deliberated upon by the Tribunal.Conclusion:The Tribunal allowed the appeal filed by the assessee, primarily focusing on the issue of disallowance of bad debts. It concluded that the assessee was entitled to write off the TDS amount as a bad debt since it was a revenue loss incurred during the course of business. The Tribunal deleted the addition of Rs. 21,72,227/- made by the AO and confirmed by the CIT(A). The other grounds raised by the assessee were not pressed and hence were not adjudicated.