Tribunal overturns disallowance of bad debts & addition of deemed dividend, citing Income Tax Act & precedents

The Tribunal allowed the appeal filed by the assessee, ordering the deletion of both the disallowance of Rs. 27,99,953/- representing bad debts written off and the addition of Rs. 34,22,140/- as deemed dividend. The Tribunal's decision was based on the interpretation of relevant sections of the Income Tax Act, judicial precedents, and CBDT circulars, emphasizing the nature of the transactions and the legislative intent behind the provisions.

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Issues Involved:

1. Disallowance of Rs. 27,99,953/- representing bad debts written off and debited under the head provision for liquidated damages.
2. Addition of Rs. 34,22,140/- being alleged deemed dividend brought to tax by invoking section 2(22)(e) of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Disallowance of Rs. 27,99,953/- Representing Bad Debts Written Off:

The assessee, M/s. Triune Energy P. Ltd., sought to set aside the disallowance of Rs. 27,99,953/- representing bad debts written off and debited under the head provision for liquidated damages. The Assessing Officer (AO) disallowed the amount on the ground that the liability for this expenditure had not crystallized during the year under assessment. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this disallowance, stating that the claim of bad debts under section 36(1)(vii) read with section 36(2) of the Income Tax Act was an afterthought and the conditions laid down under these sections were not fulfilled.

The Tribunal noted that the nature of the amount due, which became unrecoverable from customers against various jobs performed by the assessee, was not in dispute. The amounts written off pertained to short payments by Indian Oil Corporation, Oil Indian Ltd., and HPCL, which were deemed irrecoverable and written off in the financial year 2012-13. The Tribunal referred to the Supreme Court's decision in T.R.F. Ltd. vs. CIT, which stated that after 1st April 1989, it is sufficient for the bad debt to be written off as irrecoverable in the accounts of the assessee.

The Tribunal also cited a CBDT Circular dated 30.05.2016, which clarified that the legislative intention behind the amendment to section 36(1)(vii) was to eliminate litigation by doing away with the requirement for the assessee to establish that the debt had become irrecoverable. The Tribunal concluded that the amount written off by the assessee was eligible for deduction under section 36(1)(vii) as it was written off in the books of accounts during the year under assessment.

Regarding the nature of liquidated damages, the Tribunal held that these were business expenditures incurred on account of contractual default and could not be treated as penal liabilities. The Tribunal cited the Punjab and Haryana High Court's decision in CIT vs. S.A. Builders (P) Ltd. and the Supreme Court's decision in Prakash Cotton Mills Ltd. vs. CIT, which established that compensatory payments incurred due to contractual obligations are allowable as deductions.

Consequently, the Tribunal ordered the deletion of the addition made by the AO and sustained by the CIT(A).

2. Addition of Rs. 34,22,140/- as Deemed Dividend:

The AO added Rs. 34,22,140/- as deemed dividend under section 2(22)(e) of the Income Tax Act, which was upheld by the CIT(A). The AO noted that Shri Binoy Jacob, a common director with substantial interest in both the assessee company and Triune Project Pvt. Ltd. (TPPL), had received the amount from the assessee company.

The assessee contended that the amount was not a loan but the sale proceeds of plant and machinery sold by TPPL to the assessee company. The Tribunal examined the related party disclosure in the audited financial statements, which confirmed that the amount was for the purchase of fixed assets from TPPL.

The Tribunal referred to CBDT Circular No. 19/2017, which clarified that trade advances in the nature of commercial transactions do not fall within the ambit of section 2(22)(e). The Tribunal noted that the amount paid by the assessee company to TPPL was a commercial transaction and not a loan, and therefore, section 2(22)(e) was not applicable.

The Tribunal concluded that the amount was a business transaction and not an advance, and hence, the provisions of section 2(22)(e) were not attracted. The addition made by the AO and sustained by the CIT(A) was ordered to be deleted.

Conclusion:

The Tribunal allowed the appeal filed by the assessee, ordering the deletion of both the disallowance of Rs. 27,99,953/- representing bad debts written off and the addition of Rs. 34,22,140/- as deemed dividend. The Tribunal's decision was based on the interpretation of relevant sections of the Income Tax Act, judicial precedents, and CBDT circulars, emphasizing the nature of the transactions and the legislative intent behind the provisions.

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