2021 (10) TMI 1477 - AT - Income Tax

Bad-debt deduction restored under s.36(1)(vii) read with s.36(2) as no-securities letter rebutted AO and addition set aside

ITAT allowed the appeal and reversed the disallowance of bad-debt claims under s.36(1)(vii) read with s.36(2). The tribunal held the assessee's letter ... Addition being bad debts claimed u/s 36(1)(vii) r/w section 36(2) - disallowance was confirmed on the ground that assessee has not filed any information before the AO for verification of these bad debts - HELD THAT:- We find merit in the contention of the Ld. A.R. that when the assessee is not holding any share it has rightly filed a letter dated 04.10.2013 before the appellate authority claiming that there are security held by the assessee and hence there could not have been any adjustment from the debtors of any proceeds of sales of security/shares. In our opinion, the bare statement on the part of assessee is enough to strengthen its claim made towards claim of bad debts. The Ld. CIT(A) has not stated what type of evidences the assessee could have produced before the CIT(A) except mere mentioning by way of letter dated 04.10.2013 submitting therein that assessee is not holding any securities on behalf of its clients. In our opinion the claim of the assessee is as per the provisions of section 36(1)(vii) read with section 36(2) of the Act. Accordingly, ground No.2 is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the assessee was rightly denied relief on account of bad debts written off where the Assessing Officer and Commissioner (Appeals) recorded non-production of documentary confirmations and security details after remand directed by the Tribunal. 2. Whether a bare statement by the assessee that it did not hold securities on behalf of clients (and hence no recoverable amount from sale of securities) suffices to claim deduction of bad debts under section 36(1)(vii) read with section 36(2) of the Act, in the absence of further documentary evidence during assessment/remand proceedings. 3. Whether the matter relating to a specific figure of loss (Rs.9,03,12,515/-) purportedly arising from an order giving effect to the Tribunal's directions was properly adjudicated without serving that order on the assessee, and whether the issue requires restoration to the Assessing Officer for determination of how the figure was arrived at. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2 (grouped): Entitlement to deduction for bad debts written off under section 36(1)(vii) read with section 36(2) when the Revenue records non-compliance with directions to produce confirmations and details of securities Legal framework: Deduction for bad debts is governed by section 36(1)(vii) read with section 36(2) of the Income-tax Act, which permits deduction of amounts written off as bad debts subject to satisfaction of statutory conditions and factual proof of irrecoverability. Where earlier adjudication (Tribunal) has remanded for a limited enquiry (e.g., to determine amounts recoverable from sale proceeds of securities held on behalf of debtors), the Assessing Officer must examine recoverable part and the assessee must be afforded opportunity to furnish relevant particulars to substantiate that no securities exist or no recoverable value arises. Precedent treatment: The Tribunal in an earlier order recognized that trading debts due from clients of a share broker may qualify as bad debts and remanded the matter to determine any recoverable portion after adjusting proceeds from sale of securities. The subsequent assessment disallowed the bad debts on the ground of non-production of confirmations and details despite multiple opportunities; the Commissioner (Appeals) upheld that disallowance citing utter non-compliance. The present Tribunal examined those facts afresh. Interpretation and reasoning: The Tribunal observed that where the assessee affirmatively states (by letter) that no securities are held on behalf of clients and therefore no adjustment from sale proceeds is possible, such a contemporaneous assertion strengthens the claim for deduction. The Court reasoned that the assessing authorities did not specify what additional evidence was realistically available or required beyond the assessee's representation denying possession of securities. Given the limited scope of the remand (to ascertain recoverable amounts from sale of securities, if any), a prima facie denial that no securities were held was found sufficient to support the claim unless the AO identifies specific contrary material. The Tribunal placed burden on the AO to indicate what further particularized evidence was lacking and rejected the presumption that mere non-production in long remand proceedings conclusively negatives entitlement when a direct statement of non-possession was on record. Ratio vs. Obiter: Ratio - A bare but clear contemporaneous statement by the assessee that it did not hold securities on behalf of clients can be sufficient to sustain deduction of bad debts under section 36(1)(vii)/36(2) where the remand was limited to ascertaining any recoverable proceeds and the Revenue fails to demonstrate specific contrary material or to indicate what additional evidence could be produced. Obiter - Observations on the number of opportunities given ('as many as 20 times') and the presumption that nothing exists to defend the claim, while evidentially relevant, are not treated as conclusive law beyond the facts of the case. Conclusion: The Tribunal allowed the ground relating to bad debts and directed that the bad debt deduction claimed be accepted on the basis of the assessee's letter denying possession of securities, finding the requirement under section 36(1)(vii) read with section 36(2) satisfied on the materials before it. The earlier disallowance by the AO and its confirmation by the Commissioner (Appeals) for non-production of further particulars was set aside insofar as it negated the bad debt claim. Issue 3: Restoration to the Assessing Officer to determine the genesis and correctness of a specific figure of loss stated to arise from an order giving effect to the Tribunal's directions Legal framework: When an assessing figure or computation is challenged on grounds of non-service of an order giving effect to appellate directions, fairness and the right to be heard require that the assessee be provided with the order or remitted to the AO for explanation and re-computation with opportunity to respond. The AO must show how a particular loss figure is derived and the assessee must be afforded reasonable opportunity to contest the computation. Precedent treatment: The Commissioner (Appeals) had upheld the AO's computation referencing a figure of loss purportedly reflecting giving effect to Tribunal directions. The assessee contended non-service of that giving effect order and lack of ascertainability of how the loss figure was computed. The authorised representative conceded restoration was appropriate. Interpretation and reasoning: The Tribunal found it appropriate to restore the issue to the AO to ascertain and explain how the loss figure of Rs.9,03,12,515/- was arrived at, directing that the assessee be given reasonable opportunity of hearing. The Tribunal treated absence of service of the order giving effect and lack of clarity on computation as material defects warranting fresh consideration rather than deciding the matter on the record before it. Restoration was ordered to enable the AO to produce the computation and to permit the assessee to meet it. Ratio vs. Obiter: Ratio - Where a specific quantification of loss alleged to follow from an order giving effect to appellate directions is not served upon the assessee and the genesis of the figure is not transparent on record, the matter should be restored to the Assessing Officer for fresh determination with opportunity to the assessee. Obiter - None materially expressed beyond the remedial direction to restore for determination. Conclusion: The Tribunal restored the ground concerning the asserted loss figure to the file of the AO for determination of how the figure was calculated, with a direction to afford the assessee a reasonable opportunity of hearing; the ground was allowed for statistical purposes and the appeal was otherwise allowed on the bad debts issue.