2019 (1) TMI 206 - AT - Income Tax

Tribunal backs assessee on bad debts, trading loss, and prior period expenses, citing precedent and court judgment.

The Tribunal upheld the CIT(A)'s decision in favor of the assessee in all three issues. The deletion of bad debts claimed by the assessee was allowed ... Addition on account of bad debts - condition laid down in section 36(2) of the Act was not satisfied - Held that:- Identical ground of bad debt was raised in appeal for AY 20010-11 where the issue was decided in favour of the assessee by deleting addition made on account of disallowance of bad debts. Since similar bad debts were allowed in earlier year, showing consistency the ld. CIT(A) gave relief to the assessee. As decided in SHRI SHREYAS S. MORAKHIA [2012 (3) TMI 103 - BOMBAY HIGH COURT] the requirement which has been imposed by Parliament in Section 36(2)(i) is that a deduction on account of a bad debt can be allowed only where such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of the debt is written off - The brokerage having been credited to the profit and loss account of the assessee, it is evident that a part of the debt is taken into account in computing the income of the assessee - Since both form a component part of the debt, the requirements of Section 36(2)(i) are fulfilled where a part thereof is taken into account in computing the income of the assessee - Decided in favor of the assessee. Disallowance on account of loss on trading - AO disallowed it treating the same as speculation loss as per section 73 - Held that:- The loss claimed by the assessee does not fall within the purview of section 73 of the Act. On the identical issue the decision of Ahmedabad ITAT in the case of ITO vs. Rajvi Securities Pvt. Ltd. [2012 (4) TMI 207 - ITAT AHMEDABAD] supports the contention of the assessee - Decided against revenue Addition on account of prior period expenses - such expenses are to be considered in the year in which it pertains - Held that:- CIT(A) was of the opinion that the assessee has rightly claimed the said expenditure in the year under consideration as it was crystallized in the year under consideration only and also it is following the said accounting practice consistently. Accordingly, the disallowance made by the Assessing Officer was deleted by the ld. CIT(A).- Decided against revenue Issues Involved:1. Deletion of addition on account of bad debts claimed by the assessee.2. Deletion of disallowance on account of loss on trading.3. Deletion of addition on account of prior period expenses.Issue-wise Detailed Analysis:1. Deletion of Addition on Account of Bad Debts Claimed by the Assessee:The Revenue contested the deletion of Rs. 61,26,915/- on account of bad debts claimed by the assessee, arguing that the conditions laid down in section 36(2) of the Income Tax Act were not satisfied. The assessee, a commodity broker, had written off this amount as bad debts in its books, which was the outstanding amount payable by clients for whom brokering work was done. The brokerage amount had been accounted for as income, and the balance amount, which could not be recovered, was written off as bad debt/business loss.The CIT(A) granted relief to the assessee, noting that a similar issue had been decided in the assessee's favor for the Assessment Year 2010-11. The CIT(A) followed the precedent and allowed the bad debts, citing the judgment of the Hon’ble Bombay High Court in CIT vs. Shreyas S. Morakhia, which stated that the brokerage and the value of the shares constituted a part of the debt due to the assessee and satisfied the requirements of section 36(1)(vii) read with section 36(2).The Tribunal upheld the CIT(A)’s decision, dismissing the Revenue’s appeal on this ground, as the CIT(A) had followed a consistent approach based on the earlier year’s decision and the cited judgment.2. Deletion of Disallowance on Account of Loss on Trading:The Revenue challenged the deletion of Rs. 1,81,695/- disallowed by the Assessing Officer (AO) as speculation loss under section 73 of the Act. The assessee claimed this amount as a loss on trading, which arose due to differences with parties during transactions for clients.The CIT(A) accepted the assessee’s contention that the loss did not fall within the purview of section 73, as the transactions were not for the assessee’s own purpose but on behalf of clients. The CIT(A) referred to the decision in ITO vs. Rajvi Securities Pvt. Ltd., which held that losses incurred on transactions undertaken on behalf of clients, when clients disown part of such transactions, do not constitute the business of share dealing and thus do not fall within the ambit of Explanation to section 73.The Tribunal agreed with the CIT(A)’s detailed reasoned order and dismissed the Revenue’s appeal on this ground.3. Deletion of Addition on Account of Prior Period Expenses:The Revenue disputed the deletion of Rs. 2,02,676/- on account of prior period expenses, arguing that such expenses should be considered in the year they pertain to. The assessee had paid software expenses of Rs. 8,10,705/- for the period from 01.01.2010 to 31.12.2010, and the AO disallowed 25% of this expenditure.The CIT(A) found that the assessee consistently accounted for expenses when bills were received, and the payment to Financial Technologies Limited was a recurring annual expense. The CIT(A) referred to the decision in Saurasthra Cement & Chemicals Industries vs. CIT, which held that expenses crystallized in the year under consideration should be allowed even if they relate to earlier transactions, provided the liability was determined and quantified in the relevant year.The Tribunal upheld the CIT(A)’s decision, noting that the assessee had followed a consistent accounting practice and the expenses were rightly claimed in the year under consideration.Conclusion:The Tribunal dismissed the Revenue’s appeal on all grounds, affirming the CIT(A)’s detailed and reasoned orders. The judgments were pronounced in the open Court on December 3, 2018.