TaxTMI 
TaxTMI 
2021 (12) TMI 973
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....the Appellant respectfully submits that the learned CIT(A) has erred. on law. and on facts, in disallowing certain bad debts written off by the Appellant in respect of revenues pertaining to the financial year 2009-2010. amounting to Rs. 81,26,232. 3. The assessee is a company engaged in the business of software maintenance after sales support services, customization of SAP software, etc. In the course of assessment proceedings under section 143(3) of the Income Tax Act, 1961 (hereinafter called 'the Act') for Assessment Year 2010-11, the AO noticed that the assessee had claimed deduction of a sum of Rs. 97,68,26,037/- as bad debts written off. The AO did not dispute the fact that the amounts that were claimed as bad debts were written off had been booked as sales and maintenance charges for the Financial Year 2009-10 (Assessment Year 2010-11). He noticed that some of the outstandings have been written off as bad debts in the very same year. The AO has given the details of some of the debts that have been written off to the tune of about Rs. 8,12,36,232/-. He found that the sums which were written off as bad debts were due from reputed companies like Infosys Ltd., Wipro Ltd., an....
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.....(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28-- (i) to (vi) xxxx xxxx xxxx (vii) subject to the provisions of sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year." 5. In the CBDT Circular No.551 dated 23-01-1990 (1990) 183 ITR St. 37, the provisions of Section 36(1)(vii) was explained post the amendment brought vide Direct Tax laws (Amendment)Act, 1987. The circular reads as under :- "Amendments to sections 36(1)(vii) and 36(2) to rationalise provisions regarding allowability of bad debts- The old provisions of clause (vii) of sub-section (1) read with subsection (2) of the section laid down conditions necessary for allowability of bad debt. It was provided that the debt must be established to have become bad in the previous year. This led to enormous litigation on the question of allowability of bad debt in a particular year, because the bad debt was not necessarily allowed by the Assessing Officer in the year in which the same ha....
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....ed against the defaulters. As on the date of the finalization of the balance-sheet, the realization of the balance money was doubtful and the assessee took a decision to write off the amounts as bad debts. Accordingly, the assessee company wrote-off a sum of Rs. 3,66,71,850/- as bad debts on account of Shri. K. M. Viswanath and Smt. K. M. Parvathamma. The Tribunal found that the sum written off as bad debt was in fact realized by the Assessee before the date of filing of return of income and hence the tribunal did not allow the claim of the Assessee for deduction, observing as follows:- "Even though writing off a debt as bad and doubtful may be a sufficient mode of discharging the proof, the said format of statutory evidence is not an empty formality. It is not necessary for the assessee to prove that the debt has become bad. But at the same time, the assessee cannot convert any live amount into a bad debt only on the basis of the technical rule of writing off. In the present case, even though the amount was not received on the balance-sheet date, the amount was received by the assessee before filing of the return itself. In fact, the balance consideration of the sale tran....
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....ition made by the Revenue authorities cannot be sustained and the same is directed to be deleted. 9. ITA No. 683/Bang/2017 (AY 2009-10): As far as this appeal for Assessment Year 2009-10 is concerned, the assessee has raised 3 grounds of appeal out of which ground No.3 was not pressed. Ground No.2 is in relation to bad debt written off and is identical to grounds raised by the assessee in Assessment Year 2010-11 for the reasons stated while deciding the appeal for Assessment Year 2010-11, We allow ground No.2 raised by the assessee. 10. The only other ground that remains for adjudication is ground No.1 raised by the assessee which reads as follows: 1 Deduction under Section 80-IC of the Act a Based on the facts and circumstances of the case, the Appellant respectfully submits that the learned CIT(A) has erred. in law, and in facts. in not allowing deduction under Section 80-IC of the Act in respect of the amount added back under Section 40(a)(ia) of the Act. amounting to Rs. 116.508.888 for the 80-IC unit. b. Based on the facts and circumstances of the case. the Appellant respectfully submits that the learned CIT(A) has erred. in law, and in facts. ....
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.... of claiming deduction u/s 10A on such amount disallowed. Otherwise, it would lead to an absurd situation wherein, even after disallowance of huge amount for non-deduction of TDS, the assessee will not pay any tax or penalty by virtue of claiming deduction u/s 10A. As such, the real intention of the legislature by way of introducing section 40(a)(ia) will be defeated in case the assessee is entitled to claim deduction u/s WA on the same amount and thereby go scot-free without paying any tax or penalty on such disallowance. 12. In coming to the above conclusions, the AO placed reliance on the decision of the Hon'ble ITAT, Ahmedabad Bench 'C, in the case of DC1T, Circle-2(2) Vs. Ramesh 8hai C. Prajapathi (29 Taxmann.com 64) wherein it is held that amount disallowed u/s 40(a)(ia) cannot be taken into account to determine profits of business for the purpose of computing deduction u/s 80IB. 13. The AO further noticed from the computation of income eligible for deduction under 80-IC unit, that the Assessee had disallowed a sum of Rs. 58,53,925/- with a narration: "unpaid Karnataka Sales Tax u/s 43-B". Thus the deduction u/s.80-IC of the Act was claimed on the sum as enhance....
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.... 16. The AO also observed in his order that during the course of assessment proceedings, the assessee was asked to furnish unit-wise books of account maintained by the assessee along with evidences in support of various items of expenses debited under each unit. However, even after availing adequate opportunities, the assessee did not furnish the requisite information. The AO also observed that the assessee has even failed to furnish the computation of total income as per the provisions of the Act in respect of each unit separately. After availing repeated opportunities also, the AR did produce working only in respect of 2 tax-exempt units, 10A unit at Bangalore and 80- IC unit at Dehradun. According to the AO therefore it was very difficult to arrive at the income of various units as per the provisions of the Act. In this background, the AO held that the following three components which have been added back to the total income under 80-IC unit would not be entitled to deduction. Accordingly, disallowance made u/s 80-IC unit was worked out as under: Total Profits of 80-IC unit 42,77,77,145. Less Disallowance in respect of amount relating to non-deduction of TDS 11,6....
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.... business. In such circumstances, even if the expenditure is disallowed u/s.40(a)(i) of the Act, the result will be that the disallowance will go to increase the profits of the business which is eligible for deduction u/s.80-IC of the Act and consequently the deduction u/s. 80-IC of the Act should be allowed on such enhanced profit consequent to disallowance u/s. 40(a)(i) of the Act. In this regard, we find that two High Courts viz., Hon'ble Bombay High Court in the case of CIT v. Gem Plus Jewellery India Ltd. (2010) 194 Taxman 192 (Born) and Hon'ble Gujarat High Court in the case of ITO vs. Kewal Construction, 354 ITR 13 (Gui) have taken the view that when disallowance u/s. 40(a)(ia) of the Act goes to enhance the profits that are eligible for deduction under Chapter VIA of the Act, the deduction under Chapter VIA should be allowed on such increased profit. This position has also been now confirmed by the CBDT in its Circular No.37/2016 dated 02.11.2016 wherein the Board has observed as follows:- "3. In view of the above, the Board has accepted the settled position that the disallowances made under sections 32, 40(a)(ia), 40A(3), 43B, etc. of the Act and other spe....
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....ted 02.11.2016 issued by the Central Board of Direct Taxes, Department of Revenue, Ministry of Finance, Government of India, relating to the subject: Chapter VI-A deduction on enhanced profits, is quoted hereunder: "The issue of the claim of higher education on the enhanced profits has been a contentious one. However, the courts have generally held that if the expenditure disallowed is related to the business activity against which the Chapter VI-A deduction has been claimed, the deduction needs to be allowed on the enhanced profits. Some illustrative cases upholding this view are as follows: [i] If an expenditure incurred by assessee for the purpose of developing a housing project was not allowable on account of non-deduction of TDS under law, such disallowance would ultimately increase assessee's profits from business of developing housing project. The ultimate profits of assessee after adjusting disallowance under section 40[a][ia] of the Act would qualify for deduction under section 80IB of the Act. This view was taken by the courts in the following cases: [a] Income-tax Officer-Ward 5[1] vs. Keval Construction, Tax Appeal No.443 of 2012, December 10 ....