2018 (12) TMI 1490 - AT - Income Tax

Appellate Tribunal ruling on bad debts provision, royalty expenses, and undisclosed income additions.

The Appellate Tribunal partially allowed the revenue's appeal, upholding the addition of provision for bad debts to the book profit while confirming the ... Addition as undisclosed income ignoring the provisions of sec. 199 - assessee has declared income far exceeding the income shown in ITS details - Held that:- The assessee had shown total turnover of ₹ 54,91,34,241/- whereas the total income as per ITS details was only to the tune of ₹ 23,43,57,693/- and thus we note that assessee has declared income far exceeding the income shown in ITS details. CIT(A) has correctly appreciated the facts that the assessee has accounted for the income shown in ITS details which is part of the income shown by the assessee in its P&L Account. We note that the assessee’s only income is from transportation and rental charges of vehicles and if the payee/deductee of TDS has wrongly deducted tax or mistakenly filled up the return in no way affect the nature of services rendered by the assessee. Since the amount of mis-match taken note by the AO is part of the income shown by the assessee which has been offered to tax by the assessee in its return of income, we agree with the Ld. CIT(A)’s view on this issue and confirm his action and dismiss the ground of appeal of the revenue. Addition under the head ‘royalty expenses’- Held that:- We note that in this year the basis of royalty computation has been changed with retrospective effect from 01.04.2003 arising out of a policy decision and the additional expenditure on account of royalty has been actually determined during the year under consideration before us. CIT(A) has clearly made a finding of fact that this liability was determined this year and this liability crystallized during the current year. This finding of fact has not been challenged by the revenue before us. Therefore, when the liability has crystallized in this year, it cannot be called as prior period expenditure and since the additional expenditure on account of royalty has been determined and has crystallized during the year under consideration, it is an allowable business expenditure and so we find no infirmity in the order of the CIT(A) and we confirm the same. This ground of appeal of revenue is dismissed. Addition of provision for bad debts to assessee’s book profit ignoring the provisions of item (c) of Explanation 1 below section 115JB - Held that:- At the time of hearing Ld. AR fairly conceded that this issue needs to be held against the assessee. We note that the Hon’ble Delhi High Court in the case of CIT Vs. ILPEA Paramount P. Ltd. (2010 (2) TMI 45 - DELHI HIGH COURT) with the introduction of the said amendment with retrospective effect from April 1, 1998, the provision for doubtful debts and the provision for doubtful advances, which are nothing but provision for diminution in the value of asset, are specifically covered under clause (g) of the said Explanation. Consequently, the question in so far as it relates to provision for doubtful debts and provision for doubtful advances, requires to be answered in favour of the Revenue and against the assessee. It is so answered - decided in favour of revenue Issues:1. Addition of undisclosed income under sec. 199 of the Income-tax Act, 1961.2. Deletion of royalty expenses.3. Addition of provision for bad debts to book profit under section 115JB of the Act.Issue 1: The first issue pertains to the addition of undisclosed income by the Assessing Officer (AO) and its subsequent deletion by the Commissioner of Income Tax (Appeals) [CIT(A)]. The AO added an amount as undisclosed income based on discrepancies between the Income Tax System (ITS) details and the assessee's books of account. The AO rejected the assessee's explanation and added the amount to the income. However, the CIT(A) allowed the appeal, stating that the mismatch was due to errors by the payees deducting TDS. The Appellate Tribunal noted that the assessee had declared income exceeding the ITS details, confirming the CIT(A)'s decision.Issue 2: The second issue involves the deletion of royalty expenses by the CIT(A). The AO disallowed a portion of the royalty payment as it pertained to earlier years. However, the CIT(A) found that the liability was determined and crystallized in the current year, making it an allowable business expenditure. The Appellate Tribunal upheld the CIT(A)'s decision, stating that the liability crystallized in the current year and was not a prior period expenditure.Issue 3: The final issue concerns the addition of provision for bad debts to the book profit under section 115JB of the Act. The AO added the provision for doubtful debts to the book profit, which the CIT(A) deleted. However, the Appellate Tribunal reversed the CIT(A)'s decision based on a retrospective amendment in the Act, following the decision of the Hon'ble Delhi High Court in a similar case. The Tribunal upheld the AO's order on this issue.In conclusion, the Appellate Tribunal partially allowed the revenue's appeal, upholding the addition of provision for bad debts to the book profit while confirming the deletion of royalty expenses and undisclosed income additions. The judgment provides a detailed analysis of each issue, considering legal provisions and precedents to reach a decision.