2023 (10) TMI 1030 - AT - Income Tax

Company wins on debt write-off under TRF Limited precedent and business promotion expenses deletion

ITAT Delhi dismissed revenue's appeal regarding debt write-off, finding assessee fulfilled conditions under TRF Limited precedent by actually writing off ... Addition on account of reversing amount - assessee has reversed bills on account of uncertainty of receiving of sale proceeds - HELD THAT:- There is no relevance and compulsion on the assessee to put any effort for recovery of the debt post amendment under the relevant provisions of the Act after 01.04.1989. All that is required is to actually write off the debt in the books of account and show that the same was considered in the income of the earlier years. As the assessee has fulfilled both the conditions, therefore, the ratio laid down in the case of TRF Limited [2010 (2) TMI 211 - SUPREME COURT] squarely applies. No interference is called for in the findings of the ld. CIT(A). Ground No. 1 of the Revenue is, accordingly, dismissed. Addition on account of additional Sales Tax - HELD THAT:- We find that the additional tax was paid as liability by the assessee for additional tax payment raised by the Sales Tax Department, which was discharged during the year under consideration. Since the deletion of the addition is after verification of evidences by the ld. CIT(A), we do not find any error or infirmity in the findings of the ld. CIT(A). Expenses towards business promotion - AO observed that these expenses were claimed to be paid through credit cards of the Directors thus element of personal expenses cannot be ruled out - CIT(A) Restricted the disallowance to 20% - HELD THAT:- Since the assessee is a limited company, there cannot be any personal element in the expenses claimed by it. If the AO is of the opinion that certain expenses may have the color of personal expenses/benefits extended to the directors of the company, then the same should be treated as perquisites in the hands of the directors but the expenses cannot be disallowed as having personal element in it. Secondly, it is difficult to ascertain which vouchers or bills pertained to personal expenses and which pertained to business promotion, as the directors of the company were entertaining customers during the Common Wealth Games. We do not find any merit in the disallowance made by the AO and restriction done by the ld. CIT(A) on the given facts. AO is directed to delete the entire addition. Additional professional charges - CIT(A) deleted the addition as found that the said party provided services of electrical engineers, draughtsman - HELD THAT:- If the AO had any doubt in his mind, he could have very well brought on record some adverse material by conducting enquiry u/s 133(6) of the Act. In the absence of any adverse material brought on record, we decline to interfere with the findings of the ld. CIT(A). Unexplained purchases - CIT(A) deleted the addition - HELD THAT:- It is an undisputed fact that the entire Common Wealth Games was surrounded by controversy/complaints and legal actions. A careful reading of the ld. CIT(A) shows that the ld. CIT(A) has factually verified the evidences in respect of each and every party and after verification of the evidences, the ld. CIT(A) has deleted the addition. Before us, the ld. DR could not point out any factual error in the findings of the ld. CIT(A) and since the ld. CIT(A) has deleted the addition on appreciation of evidences, we do not find it necessary to interfere with the findings of the ld. CIT(A). Scrap sales of carpet and fence - AO was of the opinion that scrap value of the item must have been 30% to 40% approx of the purchase price and, accordingly, estimated the scrap value and made the addition - HELD THAT:- It is true that the scrap value of the impugned items have been shown on lower side, but it is equally true that what happened during the construction of the Common Wealth Village and Sports Complex, the Government agencies were after the Organizing Committee and the participating contractors to which included CBI enquiry and other judicial enquiries. We are of the considered view that considering the distress sales surrounded by controversies, it is possible that the carpets must have been sold at throw-away prices. Considering the nature of event, we are inclined to accept the version of the ld. counsel for the assessee. The Assessing Officer is directed to delete the addition on account of scarp sales of carpets. Scrap sales of fence - No logic in the addition made by the Assessing Officer. The assessee itself has shown scrap value at Rs. 1,03,35,511/- deducting the estimated sales value of Rs. 73,27,511/-. We do not find any sense in making the addition of the balance amount of Rs. 62,79,183/- when the assessee itself has shown scrap value at Rs. 1,03,35,511/-. ISSUES PRESENTED AND CONSIDERED 1. Whether amounts reversed/written off as irrecoverable debts qualify for tax exemption as bad debts where the assessee has written off the debts in the books of account post-amendment of the law (post 01.04.1989) without pursuing contractual arbitration remedies. 2. Whether payment of additional sales tax discharged during the year is allowable as business expenditure where documentary evidence of payment is produced. 3. Whether business promotion/entertainment expenses incurred through directors' credit cards can be disallowed in full as personal expenses, or require treatment as perquisites in directors' hands or proportionate disallowance. 4. Whether a substantial increase in professional fees, supported by bills and explanation for engagement of specific service provider, can be disallowed absent independent adverse material or enquiries under s.133(6) of the Act. 5. Whether purchases treated as unexplained on account of non-response from suppliers under s.133(6) notices can be sustained where the assessee furnishes documentary evidence of purchases, payments and TDS and the authorities verify the evidences. 6. Whether low realizations from scrap sales justify adjustments by the Assessing Officer by estimating notional scrap value, where distress sales resulted from extraordinary circumstances and documentary evidence of actual scrap realization is available. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Allowability of written-off/irrecoverable debts (bad debts) Legal framework: Post-amendment law (after 01.04.1989) requires that, for tax consequences, the assessee must actually write off debts in the books of account to claim deduction as bad debts; pre-amendment procedural requirements to pursue recovery modes under contractual arrangements are no longer mandatory for tax treatment. Precedent treatment: The Tribunal applied the binding ratio of leading Supreme Court decisions (as relied upon by the lower appellate authority) that emphasize the primacy of actual write-off in books post-amendment and the non-necessity to pursue contractual remedies for tax deduction purposes. Interpretation and reasoning: The Court examined the facts showing supply of services/materials, subsequent irrecoverability and accounting write-off in the relevant year. The Assessing Officer's reliance on the Memorandum of Understanding and arbitration clause to require pursuit of contractual arbitration was rejected as irrelevant to the statutory requirement for tax treatment. The Tribunal held that the statutory amendment changed the test from procedural recovery efforts to the accounting fact of write-off. Ratio vs. Obiter: Ratio - where the assessee writes off irrecoverable debts in the books of account post-amendment, such write-offs satisfy the statutory condition for allowability as bad debts; failure to initiate contractual/arbitral recovery is not a bar. Obiter - observations regarding prudence of pursuing contractual remedies for commercial recovery (if any) are ancillary. Conclusion: Addition disallowing the written-off debts was deleted; the Tribunal affirmed the appellate authority's deletion and dismissed the Revenue's ground on this issue. Issue 2 - Additional sales tax paid during the year Legal framework: Tax deduction/allowance for tax and statutory liabilities is governed by proof of discharge of liability in the relevant year; documentary evidence of payment is relevant and determinative. Precedent treatment: Not invoked; treated as a fact-based claim requiring documentary verification. Interpretation and reasoning: The assessee produced evidence of payment of additional sales tax. The CIT(A) verified records and accepted the claim. The Tribunal found no infirmity in the appellate authority's verification and conclusion that the liability was discharged during the year and therefore allowable. Ratio vs. Obiter: Ratio - documentary proof of discharge of tax liability makes the payment allowable; absence of contrary material precludes disallowance. Obiter - none. Conclusion: Addition disallowing additional sales tax was deleted; Revenue's ground dismissed. Issue 3 - Disallowance of business promotion/entertainment expenses paid via directors' credit cards Legal framework: Expenses of a limited company are prima facie business expenses of the company; where expenditure benefits directors personally, tax treatment as perquisites in directors' hands is the appropriate route rather than wholesale disallowance to the company absent evidence of non-business character. Precedent treatment: Treated as settled principle; no contrary authority applied by Assessing Officer. Interpretation and reasoning: The Assessing Officer disallowed entire claimed expenses on the basis that payments were made through directors' credit cards and personal element could not be ruled out. The CIT(A) restricted disallowance to 20%. The Tribunal held that a limited company's claimed expenses cannot be summarily treated as personal; if elements are personal, those are to be taxed as perquisites in the hands of directors, but not disallowed entirely to the company. Further, record-level distinction between business and personal vouchers was infeasible given the nature of customer entertainment during the event. Consequently, full disallowance or partial arbitrary restriction was unjustified. Ratio vs. Obiter: Ratio - in absence of specific adverse evidence, expenses of a company incurred for business promotion cannot be fully disallowed merely because payment was routed through directors; any personal benefit should be treated as perquisite in the directors' hands. Obiter - guidance that assessing authority should identify and segregate specific non-business items rather than blanket disallowance. Conclusion: Entire addition was deleted; assessee's appeal on this point allowed (Revenue's corresponding ground dismissed; assessee's ground on this issue allowed in its appeal). Issue 4 - Substantial increase in professional charges Legal framework: Assessing Officer may probe non-genuine or unexplained expenses; statutory power under s.133(6) allows issuing notices to third parties to verify transactions; absence of adverse material from such inquiries weakens the basis for disallowance. Precedent treatment: No express precedent overruled; the Tribunal emphasized investigatory procedures expected of assessing authorities. Interpretation and reasoning: The assessee produced bills and documentary support showing engagement of a service provider for specific services that had not arisen in the preceding year. The CIT(A) examined documents and deleted the addition. The Tribunal noted that, if in doubt, the Assessing Officer could have pursued enquiries under s.133(6) to produce adverse material; absent such material and given documentary support, disallowance could not be sustained. Ratio vs. Obiter: Ratio - where payments are supported by bills and explanations and no adverse material is produced through statutory enquiries, additions based on quantum increase alone are unsustainable. Obiter - investigative steps expected of AO include recourse to third-party verifications when necessary. Conclusion: Addition disallowing professional charges was deleted; Revenue's ground dismissed. Issue 5 - Purchases treated as unexplained due to non-response to s.133(6) notices Legal framework: Purchases may be disallowed as unexplained if corroboration is absent; however, the assessee may discharge onus by producing documentary evidence of purchases, payments, and TDS, and appellate authorities may examine such evidence. Precedent treatment: Application of standard evidentiary principles where factual verification by appellate authority is decisive. Interpretation and reasoning: The Assessing Officer treated large purchases as unexplained after non-response from suppliers to s.133(6) notices. The assessee furnished purchase invoices, payment proofs and TDS evidence; the CIT(A) examined each item and deleted the addition after factual verification. The Tribunal observed the extraordinary context (controversies and legal actions surrounding the event) that made suppliers non-cooperative, accepted the detailed factual verification undertaken by the CIT(A), and noted absence of any pointed factual error urged by Revenue. Ratio vs. Obiter: Ratio - where the assessee furnishes adequate documentary evidence and the appellate authority, on appreciation of such evidence, accepts the genuineness of purchases, additions based on non-response to s.133(6) cannot be sustained in absence of contrary material. Obiter - contextual factors (investigations, hostility of suppliers) may explain non-cooperation with statutory notices. Conclusion: Addition for unexplained purchases deleted; Revenue's ground dismissed. Issue 6 - Valuation of scrap sales and estimation of notional scrap value Legal framework: Income/shortfalls arising from sale of assets is a factual question; Assessing Officer may estimate values where records are deficient, but actual sale realizations supported by evidence are generally conclusive, particularly where distress sales arise from exceptional circumstances. Precedent treatment: No specific precedent applied; the Tribunal relied on factual appreciation and reasonableness principles. Interpretation and reasoning: The Assessing Officer estimated higher scrap values and made additions for carpets and fencing. The assessee demonstrated that post-event controversies, statutory enquiries and time-bound removal requirements led to distress sales at throw-away prices; documentary evidence of actual realizations was produced. The Tribunal found the Assessing Officer's speculative estimation unreasonable, accepted the distress sale explanation, and directed deletion of the additions. In respect of fence scrap, the Tribunal also found internal inconsistency in the AO's computation and deleted the addition. Ratio vs. Obiter: Ratio - where actual sale realizations are substantiated and distress/extraordinary circumstances explain depressed values, speculative upward estimation by AO is unsustainable. Obiter - authorities should avoid internally inconsistent computations and should consider contextual evidence before making notional additions. Conclusion: Additions for scrap sales of carpet and fence were deleted; assessee's grounds allowed.