YORK PRINTS PRIVATE LIMITED,AHMEDABAD vs. NFAC DELHI PRESENT JURIS. ITO, WARD-4(1)(1), AHMEDABAD

The Assessee has raised the following grounds of appeal: 1. LD AO WARD 4(1)(1), AHMEDABAD/NFAC has erred facts and in law in making additions of Rs. 76,92,678/- which amounts if individually aggregated as shown in assessment order such addition of Rs. 21,71,454/- , Rs. 46,92,428/-and Rs. 8,24,796/- comes to only Rs. 76,88,678/- leaving difference of Rs. 4,000/-. 2. LD AO WARD 4(1) (1), AHMEDABAD/ NFAC has erred in facts and in law in disallowing bad debts of Rs. 21,71,454/- inspite of writing off Rs. 21,71,454/-as bad debts in profit and loss account according to Sec. 36(1)(viia) of IT Act, 1961 on the conditions which are not part of Sec. 36(1)(viia) of the act. 3. LD AO WARD 4(1) (1), AHMEDABAD/NFAC has failed to appreciate that impact of Rs. 46,92,428/-paid in pursuance of Gujarat Regularisation of Unauthorised Development Act, 2022 (GRUDA) being state law designed to convert eligible unauthorized constructions and building lacking B.U permission into legally sanctioned properties through payment of impact fee. 4. LD AO WARD 4(1) (1), AHMEDABAD/NFAC has failed to appreciate said GRUDA do not regularize all constructions however regularises only eligible constructions hence such payment is Statutory payment authorizing construction and building which has failed to seek B.U permission at a later date. 5. LD AO WARD 4(1)(1), AHMEDABAD/ NFAC has erred in disallowing miscellaneous expenses of Rs. 8,24,796/- by misreading contents of such expenses on the basis of details furnished during assessment and appeal hearing. 6. Appellant craves leave to add, to amend, to substitute or to insert grounds of appeal or new grounds of appeal.”

Ground of appeal no. 2 relates to disallowance of Rs. 21,71,454/- written off as bad debts in the profit and loss account.

The assessing officer disallowed the claim holding as under: “On examination of the submissions, it is noticed that the assessee has failed to demonstrate any reasonable efforts undertaken for recovery of the alleged debts, which casts doubt on the bona fides of the write-off. The claim appears to have been made without establishing that the debts had, in fact, become bad during the relevant previous year. Further, on perusal of the details/ledger accounts, it is observed that a portion of the bad debts pertains to Financial Year 2022-23, whereas the assessment under consideration relates to Assessment Year 2024-25. The assessee has failed to justify as to how such debts, which relate to an earlier period, have become bad and are allowable in the year under consideration. The timing of write-off thus remains unexplained and arbitrary. The assessee has relied upon the judgment of the Hon'ble Supreme Court in the case of TRF Ltd. vs. CIT (2010) 323 ITR 397 to contend that mere write-off in the books is sufficient for allowability. However, the reliance placed on the said judgment is misplaced and distinguishable on facts. The said decision presupposes that : the debt is genuine and has arisen in the course of business, and the same has been taken into account in computing income of earlier years. In the present case, the assessee has failed to establish these foundational facts with credible documentary evidence. Mere book entries, in the absence of substantiating material, cannot be accepted as conclusive proof of allowability. Further, the assessee has not furnished sufficient supporting documents such as invoices and evidence to demonstrate that the corresponding income was offered to tax in earlier years. In absence of such verification, the claim remains unsubstantiated and unverifiable. In view of the above facts and circumstances, it is held that the assessee has failed to discharge the onus cast upon it under the provisions of the Income-tax Act, 1961. Accordingly, the claim of bad debts amounting to Rs. 21,71,454/- is disallowed and added back to the total income of the assessee. Penalty proceedings u/s 274 r.w.s 270A(8) of the I.T Act are initiated for under reporting in consequences of mis-reporting of income.”

This finding of the assessing office was upheld by the Ld.CIT(A) who held as under: “During the course of assessment proceedings, it was observed by the AO that the assessee claimed deduction of Rs.21,71,454/- on account of bad debts written off. The assessee was required to furnish complete details along with supporting evidences to substantiate the claim. On examination of the submissions, it was noticed by the AO that the assessee failed to demonstrate any reasonable efforts undertaken for recovery of the alleged debts, which casts doubt on the bona fides of the write-off. The claim appears to have been made without establishing that the debts had, in fact, become bad during the relevant previous year. Further, on perusal of the details/ledger accounts, it was observed that a portion of the bad debts pertains to Financial Year 2022-23, whereas the assessment under consideration relates to Assessment Year 2024-25. The assessee failed to justify as to how such debts, which relate to an earlier period, became bad and were allowable in the year under consideration. The timing of write-off thus remains unexplained and arbitrary. In the present case, the assessee failed to establish these foundational facts with credible documentary evidence. Mere book entries, in the absence of substantiating material, could not be accepted as conclusive proof of allowability. Further, the assessee did not furnish sufficient supporting documents such as invoices and evidence to demonstrate that the corresponding income was offered to tax in earlier years. In absence of such verification, the claim remains unsubstantiated and unverifiable. Thus, it was held that the assessee failed to discharge the onus cast upon it under the provisions of the Income-tax Act, 1961. Accordingly, the claim of bad debts amounting to Rs.21,71,454/- was disallowed by the AO and added back to the total income of the assessee.” 3

In the course of hearing, the Ld. A.R. Shri A.P. Nanavaty submitted the various details that the assessee had filed before the A.O. and CIT(A). Our attention was drawn to the assessee’s letter filed in the course of assessment wherein assessee had submitted complete party-wise details of the debts written off, including PAN of the parties, Nature and head of Income originally offered, year in which the income was offered to tax, year-wise ledger accounts evidencing actual write off and evidence to show that the debts have been written off in the books of account as irrecoverable by debiting the bad debts accounts and crediting the respective debtor account. The assessee had also cited before the A.O. and the CIT(A) the decision of the Supreme Court in TRF Ltd. Vs. CIT [2010] 323 ITR 397 (SC) wherein the Hon’ble Supreme Court had held that it was enough that if the bad debt was written off in the books and it was not necessary to establish that the same had become irrecoverable.

The Ld. A.R. has taken us through a summary statement containing names of the debtors, the amounts recoverable, the year in which the invoice amounts were included in the income and the ledger account of each of the parties where the amount has actually been written off from the party’s ledger.

In view of the facts of the case as submitted by the assessee it is clear that the assessee had included the total invoice amounts in the respective years in which the invoices were raised and when a part of the invoiced amount remained unpaid for some years, the assessee had actually written off the amount in its own books of account. In view of the provisions of Section 36(1)(vii) as amended with effect from 01-04-1989, the mere act of writing off the debt in the accounts of the assessee for the previous year is sufficient for the claim to be allowable for the assessment year relevant to that previous year. In the present case, the assessee has sufficiently demonstrated the debts to have been written off in its books of account for the financial year 2023-24 relevant to the assessment year under appeal. The Ld. CIT(A) therefore erred in holding that the debts pertained to a different year and therefore the write off was not was an allowable for the year under appeal. Further the assessee has also demonstrated that the income from the invoices raised on the customers was offered as income in the preceding years. Nothing has been brought on record by the A.O. or the CIT(A) to controvert this fact.

On these facts, we have no hesitation in deleting the disallowance made on account of bad debts written off. Ground of appeal no. 2 is allowed.

Ground of appeal no. 3 & 4: the assessee has challenged the disallowance of Rs. 46,92,428/- paid as “impact fee” in pursuance of Gujarat Regularization Unauthorised Development Act, 2022.

The Assessing Officer had disallowed this amount holding as under: “The submission of the assessee has been duly considered and found not acceptable. The assessee has claimed an expenditure towards payment of "Impact Fee of Rs. 46,92,428/- for regularization of unauthorized development. On perusal of the provisions of the Gujarat Regularization of Unauthorized Development Act, 2022, it is evident that such payment arises only in cases where the assessee has carried out construction or development in violation of applicable laws. As per Section 5 of the said Act, notices/orders for removal or alteration of unauthorized construction are initially issued under relevant laws, which are only kept in abeyance to provide an opportunity for regularization, Further, Section 6 clearly provides that the Designated Authority, upon satisfaction, may allow regularization subject to payment of prescribed fees, failing which the original notice/order for removal 5 stands revived and the unauthorized development becomes liable for demolition. Thus, it is evident that: The very basis of levy of such fee is existence of an illegal/unauthorized act, and The payment is a condition precedent to condonation of such violation, and not a normal business levy. The so-called "Impact Fee" is therefore not a routine statutory charge but a one-time payment made to compound or regularize an offence/infraction of law. The nomenclature used in the Act does not alter the true character of the payment, which is intrinsically linked to a breach of statutory provisions. In view of the above, the expenditure square/falls within the ambit of Explanation 1 to Section 37(1) of the Income-tax Act, 1961, which prohibits allowance of any expenditure incurred for a purpose which is an offence or which is prohibited by law. The assessee, by undertaking unauthorized development, has acted in violation of law, and the subsequent payment made for its regularization is nothing but a consequence of such violation. Allowing such expenditure would defeat the intent of the statute by indirectly permitting deduction of amounts paid for unlawful acts.”

This view was upheld by the Ld. CIT(A) who held that the impact fee was not a routine statutory charge but a one-time payment made to compound or regularize an offence/infraction of law. The nomenclature used in the Act, it was held, did not alter the true character of the payment, which was intrinsically linked to a breach of statutory provisions. Hence, it was held, the expenditure squarely falls within the ambit of Explanation 1 to Section 37(1) of the Income Tax Act.

The Ld. A.R. drew our attention to the Gujarat Regularization of Unauthorized Development Ordinance, 2022 and submitted that this ordinance was passed to extend the Ordinance already in force with the objective of providing relief to a large number of people who were likely to face hardship on account of removal and pulling down of unauthorized structures into which common men have invested their hard earned savings. Under section 7 of the said Ordinance, the State Government shall specify by notification in the Official Gazette, the fees payable under this Ordinance and the mode of calculation of such fee for regularization of any unauthorized development in respect of the matters specified in section 10. Section 10 on the other hand authorizes the Designated Authority to regularize any unauthorized development in respect Margins, Built up area, Height of building, Change of use, Parking, etc. Section 8 of the said Ordinance specifies circumstances in which unauthorized Development shall not be regularized.

From the above, it is seen that the Government in its wisdom has taken a view to be strict in cases of unauthorized development in various situations but take a more sympathetic view where the regularization is considered to be beneficial to the common people while not validating any serious violations. Upon being satisfied about the eligibility for regularization, the fee is calculated and on payment of the said fee, the unauthorized development is regularized.

The nature of the fee as laid down in the Ordinance and as described in the payment receipts issued by the Ahmedabad Municipal Corporation clearly shows that it is a payment for regularization under statutory mandate. Explanation 1 to section 37(1) seeks to prohibit any claim for deduction in expenditure incurred “for any purpose which is an offence or which is prohibited by law”. On a plain reading, it is evident that the purpose for which the payment is made must be an offence or something prohibited by law. The payment made by the assessee 7 in this case is clearly a payment that is mandated by law and not prohibited. Explanation 1 to Section 37(1) is therefore not applicable to such a payment . This view has already been held by the ITAT Ahmedabad Bench in the case of DCIT Circle-1(3), Ahmedabad vs. The Kalupur Commercial Cooperative Bank Ltd. and the decision of ITAT Ahmedabad Bench “D” in the case of ITO vs. Yadunandan Corporation in ITA No. 92/Ahd/2009.

In view of our conclusion, which also finds support from the decisions of the Co-ordinate Benches cited above, we delete the disallowance of Rs.46,92,428/-. Grounds of Appeal No. 3 & 4 are allowed.

Ground of Appeal No. 5: The assessee has challenged the disallowance of Misc. expenses of Rs.8,24,796/-. The assessee has filed the details of Misc. expenses of Rs.8,24,796/- which is the aggregate of various small expenses such as discount expenses which are integral to sale transactions, internet expenses which are routine business expenses, investment written off and MODVAT credit written off.

The A.O. disallowed this claim on the ground that mere submission of ledger account etc., was not sufficient to establish the claim for expenses and onus was on the assessee to substantiate the claim of expenditure with credible evidence. The Ld. CIT(A) confirmed the disallowance repeating the same findings of the assessing officer.

We have heard the Ld. A.R. and note that the amount claimed as Misc. expenses are aggregate of various small expenses. The assessee is a Company whose accounts are regularly audited and 8 also subject to statutory tax audit. Under the circumstances, the claim for expenses, unless pointed out as disallowable by the tax auditors or flagged as contentious, such expenses claimed in the P & L account should ordinarily be considered allowable. The disallowance made by the authorities below, merely putting the onus of proving the expenses to the satisfaction of the assessing officer without pointing out any specific errors in the books of accounts submitted before the assessing officer, cannot be sustained. The disallowance is deleted and assessee’s Ground of appeal no. 5 is allowed.

In the result, the appeal of the assessee is allowed.