Disallowance of bad debts and advances written off pre-amalgamation set aside; capital write-offs remitted for fresh verification

Disallowance of bad debts and advances written off in the books of pre-amalgamation entities cannot be added as income in the hands of the post-amalgamation assessee for an assessment year prior to the effective date of amalgamation; the AOs additions based solely on a statement rather than seized documentary material were set aside, resulting in deletion of the disallowance for that year. Separately, write-offs characterized as capital (land advance) require documentary proof to establish revenue expenditure; the matter was remitted to the assessing officer for de novo verification of newly produced evidence.

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Issues: (i) Whether write-offs recorded in the books of amalgamating transferor companies prior to the effective date of amalgamation can be disallowed and added to the income of the transferee company in assessments completed under section 153A; (ii) Whether the additions were based on seized/incriminating material found during search or on non-seized material such as statements/financials; (iii) Whether additional evidence filed for A.Y. 2019-20 should be admitted and the matter remitted for fresh adjudication.

Issue (i): Whether write-offs in the books of Citygold Farming Pvt Ltd and Heddle Knowledge Pvt Ltd made prior to the effective date of amalgamation (01/04/2018) could be disallowed in the hands of the assessee in assessments completed under section 153A.

Analysis: The impugned write-offs appear in the financial statements of the transferor companies for periods prior to the NCLT effective date. The transferor companies retained distinct legal status up to 31/03/2018 and were separately issued notices under sections 153A/153C. The assessment years in question (2016-17 and 2017-18) are prior to the amalgamation effective date; therefore the entries belong to the transferor entities or, if assessed, only in a representative capacity. The tribunal applied these facts to the statutory scheme of assessments for search cases under section 153A.

Conclusion: In favour of the Assessee. The disallowances referring to write-offs in the transferor companies for years prior to the amalgamation effective date are not sustainable in the hands of the transferee and are deleted for A.Y. 2016-17 and A.Y. 2017-18.

Issue (ii): Whether the additions were based on seized/incriminating material found during the course of search.

Analysis: The Assessing Officer relied on financial statements and a summoned statement of a third party; there is no record of seized incriminating material forming the basis of these specific disallowances. The tribunal examined the nature of material relied upon and distinguished seized material from statements summoned post-search.

Conclusion: In favour of the Assessee. The additions which were based on non-seized material/statements are not sustainable as additions grounded on seized material for the years before amalgamation.

Issue (iii): Whether additional evidence filed for A.Y. 2019-20 should be admitted and whether the matter should be remitted to the Assessing Officer.

Analysis: The additional evidence pertains to the core factual issue supporting the revenue/nature of the write-offs for A.Y. 2019-20 and was not examined by lower authorities. Allowing the evidence is necessary for proper adjudication on merits.

Conclusion: In favour of the Assessee. The additional evidence is admitted and the matter for A.Y. 2019-20 is remitted to the Assessing Officer for de novo verification; the appeal is allowed for statistical purposes.

Final Conclusion: Appeals for A.Y. 2016-17 and A.Y. 2017-18 are allowed by deleting the disallowances; the appeal for A.Y. 2019-20 is remitted for fresh adjudication after admission of additional evidence and is allowed for statistical purposes, producing a partly favourable result for the assessee overall.

Ratio Decidendi: Pre-amalgamation entries recorded in the books of transferor companies belong to those entities and cannot be treated as income of the transferee company in assessments under section 153A for years prior to the NCLT effective date; additions must be based on seized/incriminating material to be treated as arising from search-linked material, otherwise assessment requires appropriate evidentiary basis and, where new evidence is material, remand for de novo verification is warranted.

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