2022 (10) TMI 678 - AT - Income Tax

Tribunal reverses decision on Income Tax Act application, rules in favor of assessee

M/s Indus Cityscapes Constructions Pvt. Ltd. Versus The Deputy Commissioner of Income Tax, Corporate Circle 2 (2) Chennai

The Tribunal found that the provisions of section 41(1) of the Income Tax Act were incorrectly applied by the Assessing Officer and upheld by the ... Application of provisions of section 41(1) - written off an amount as interest receivable from the assessee for the year ending 31.03.2008 as bad debt - assessee has pointed out that the assessee has not at all charged the amount to profit and loss account and not at all debited to profit and loss account, therefore, the provision of section 41(1) of the Act has no application - Only case of AO is that because M/s. V.S. Net Ltd., to whom the assessee has to pay the interest amount has written off the amount as bad debt, thereby the provision of section 41(1) of the Act as to be applied automatically - HELD THAT:- In this case, AO has invoked section 41(1) on the ground that the other party M/s. V.S. Net Ltd. has written off the interest amount as bad debt and therefore, section 41(1) of the Act has to be applied in assessee's case. As per section 41(1) assessee was not allowed deduction in respect of the loss or expenditure revenue or capital for trading liability incurred by the assessee. In the present case, the assessee has not claimed any deduction in earlier years in respect of loss or expenditure or trading liability. Assessing Officer invoked the section 41(1) of the Act presuming that the assessee has got benefit is not correct. We find that section 41(1) of the Act as no application to the facts of the assessee's case. Without considering the provision of section 41(1) of the Act, in sprit, the Ld. CIT(A) has simply confirmed the order of the Assessing Officer. Accordingly, we reverse the order passed by the Ld. CIT(A) on this issue and allow the ground raised by the assessee. Issues Involved:1. Application of section 41(1) of the Income Tax Act, 1961.2. Confirmation of addition by the Commissioner of Income Tax (Appeals).Issue-Wise Detailed Analysis:1. Application of section 41(1) of the Income Tax Act, 1961:The primary issue in this case revolves around the applicability of section 41(1) of the Income Tax Act, 1961. The assessee company, engaged in real estate and construction activities, filed its return for the assessment year 2008-09. The return was initially processed under section 143(1) and later under section 143(3), resulting in an assessed income of Rs. 6,79,89,064/-. Subsequently, a notice under section 148 was issued, leading to a reassessment under section 143(3) r.w.s. 147.The crux of the matter lies in the transaction between the assessee and M/s. V.S. Net Ltd., where Rs. 1.31 crore was written off as bad and doubtful debts by M/s. V.S. Net Ltd. The Assessing Officer (AO) issued a show-cause notice to the assessee, questioning why this amount should not be treated as income under section 41(1). The AO concluded that the assessee failed to comply with section 41(1) and added Rs. 1.31 crore to the assessee's income.The Tribunal, however, noted that the assessee did not charge this amount to the profit and loss account, nor did it claim any deduction for it in earlier years. The Tribunal emphasized that section 41(1) applies when an allowance or deduction has been made in respect of a loss, expenditure, or trading liability, which was not the case here. The Tribunal found the AO's presumption that the assessee benefited from the write-off incorrect and ruled that section 41(1) had no application in this scenario.2. Confirmation of addition by the Commissioner of Income Tax (Appeals):Upon appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, asserting that the facts of the case clearly attracted section 41(1). The CIT(A) referenced the agreement between the assessee and M/s. V.S. Net Ltd., confirming the interest payment and subsequent write-off. The CIT(A) maintained that the written-off amount constituted a benefit to the assessee, thus falling within the purview of section 41(1).However, the Tribunal disagreed with the CIT(A), pointing out that the assessee did not claim any deduction for the interest amount in previous years. The Tribunal criticized the CIT(A) for not considering the spirit of section 41(1) and reversed the CIT(A)'s order, thereby allowing the assessee's appeal.Conclusion:The Tribunal concluded that the provisions of section 41(1) were incorrectly applied by the AO and upheld by the CIT(A). The Tribunal's detailed examination revealed that the assessee did not benefit from the write-off in a manner that would attract section 41(1). Consequently, the Tribunal reversed the CIT(A)'s order and allowed the appeal in favor of the assessee. The order was pronounced on 16th September 2022 at Chennai.