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Facts
The assessee company engaged in civil construction filed a return declaring a loss. The Assessing Officer (AO) made additions on account of certain receivables which were debited as extraordinary items in the Profit and Loss Account. The CIT(A) upheld these additions.
Held
The Tribunal admitted additional evidence filed by the assessee, finding that it goes to the root of the matter. The Tribunal restored the issue to the Assessing Officer for fresh adjudication after considering the additional evidence.
Key Issues
Whether the amounts debited as extraordinary items in the P&L account are allowable as bad debts or business expenditure, and whether additional evidence should be admitted.
Sections Cited
143(2), 36(1)(vii), 36(2)
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Income Tax Appellate Tribunal, PUNE BENCH “A”, PUNE
Before: SHRI R. K. PANDA & MS. ASTHA CHANDRA
This appeal filed by the assessee is directed against the order dated 12.08.2024 of the Ld. CIT(A) / NFAC, Delhi relating to assessment year 2018-19.
Facts of the case in brief, are that the assessee is a company engaged in execution of civil construction and filed its return of income on 08.12.2018 declaring total loss of Rs.3,02,14,888/-. The case was selected for complete scrutiny through CASS. Accordingly, statutory notice u/s 143(2) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) was issued and served on the assessee, in response to which the assessee filed certain details.
3. During the course of assessment proceedings the Assessing Officer noted that the assessee has debited an amount of Rs.4 crores in the Profit and Loss Account in extra ordinary item. On being asked by the Assessing Officer, the assessee submitted that an amount of Rs.4 crores was receivable from Jamia Islamia Ishaat-ul-uloom Nadurbar, a charitable trust, against construction contract of IIMSR Badnapur, Dist Jalna. The above amount is said to have been denied by the debtor on the ground that the valuer reduced the amount. For this only ledger of the debtor was made available to the Auditor. Since, expenses have been claimed by the assessee in his Profit and Loss Account against the said receivables, the Assessing Officer held that the amount cannot be excluded from the total income for the year under consideration. Accordingly, the Assessing Officer made an addition of Rs. 4 Crore to the total income of the assessee under the head B&P.
The Assessing Officer further noted that an amount of Rs.1,92,79,597/- has also been debited by the assessee in the profit & loss account in extra ordinary action. On being questioned by the Assessing Officer it was explained that the assessee has undertaken civil construction work of the firm M/s Mavin Swithgers and Control Pvt. Ltd. for Rs.2,97,84,806/-. During the year under consideration an amount of Rs.1,92,79,597/- was receivable from the party as on 01-05-2017. The debtor has sent one letter that they have deleted the account of the assessee by the above amount and offered the same for taxation in their income tax return. Since, expenses have been claimed by the assessee in his Profit and Loss Account against the said receipts, the Assessing Officer held that the income cannot be excluded from the total income for the year under consideration. Accordingly, the Assessing Officer made an addition of Rs.1,92,79,597/- to the total income of the assessee under the head Income from B&P.
5. In appeal, the Ld. CIT(A) / NFAC confirmed both the additions made by the Assessing Officer by observing as under: “4.3 I have gone through the grounds of appeal, statement of facts, assessment order and submissions of the appellant. During the course of appellate proceedings, the appellant has reiterated the facts narrated before the AO during the assessment proceedings. There is no disputed for the work carried out by the appellant. The appellant had undertaken the construction work of MBBS college and Noor hospital building at WarudiTaq. during financial year 2011 to 2018. The bills were duly raised and at the end of the financial year 2018 a sum of Rs.23,42,52,462/- was receivable. It was submitted that since the contractor has already incurred expenditure on contract work and the trading account was credited with contract account in various years as per bills raised including this amount of Rs.4,00,00,000/- and taxes also paid on total amount including this amount of Rs. 4 crores, there was no other go out but to reduce this year's profit by this amount of Rs. 4 crores. However, the appellant had not filed any documentary evidence in this regard. Similarly with regard to the amount of Rs. 19279597/- from Mavin Switchgears and control P Ltd. there is a dispute between the contractor and contractee. It is evident that merely stating a bad debt as an irrecoverable write off without the appropriate treatment in the accounts, as well as non compliance with the conditions in section 36(1)(vii), 36(2) and explanation to section 36(1)(vii) would not entitle the appellant to claim a deduction. This position was reiterated again in Catholic Syrian Bank Vs. Commissioner of Income tax, Thrissur. 4.3.1 As per the circular No. 12/2016 of the CBDT dated 3.05.2016, claim for any debt or part thereof in any previous year, shall be admissible under sec. 36(1)(vii) of the Act, if it is written off as irrecoverable in the books of accounts of the assessee for that previous year and it fulfils the conditions stipulated in sub section (2) of sub section 36(2) of the Act. 4.3.2 The conditions laid down in IT Act, 1961 u/s 36(2) should be fulfilled before any allowance for bad debts is allowed. The conditions are: the debt or loan should be for the business or profession of the assessee and the said debt or loan should be for the relevant accounting year. An assessee can take the deduction in respect of those debts only which have been included in the computation of the income tax return in the current period or any previous financial year. The appellant is obliged to prove to the AO that the case satisfies the ingredients of section 36(1)(vii) as well as section 36(2) of the IT Act. 4.3.3 As per the provisions of sub sec. (v) of sec. 36(2), where such debt or part of debt relates to advances made by an assessee to which clause (viia) of sub section (1) applies, no such deduction shall be allowed unless the assessee has debited the amount of such debt or part of debt in that previous year to the provision for bad and doubtful debts account made under that clause. 4.3.4 In view of the above reasons, I have no reason to interfere with the decision of the Assessing officer since the claim made by the appellant under the head 'bad debts' has not satisfied the conditions laid down under sec. 36(2) of the I T Act. Accordingly, I am of the considered view that the contentions of the appellant are not reasonable and not acceptable. Therefore, the addition made by the assessing officer is upheld. The ground No. 1 and 2 of the appeal are dismissed.”
6. Aggrieved with such order of the Ld. CIT(A) / NFAC, the assessee is in appeal before the Tribunal. The assessee has filed the following revised grounds:
1. 1. The Ld. CIT(A) has erred in dismissing the appellant's appeal and confirming the additions made by the AO amounting to Rs.5,92,79,597/- on the grounds that the appellant has not complied with the conditions prescribed u/s 36(1)(vii) and 36(2) of the Income Tax Act, 1961.
2. The Ld. CIT(A) has erred in confirming the additions without appreciating the following facts: (i) The debt is related to the business of the appellant. (ii) There was actually dispute between both the contractors which resulted in cancellation of the contract and therefore, the amounts of both the contracts have become irrecoverable. (iii) The amount receivable from the parties was offered to tax in earlier years.
3. The Ld. CIT(A) has erred in relying upon the decision in the case of Catholic Syrian Bank Ltd vs CIT, Thrissur as the same is distinguishable from the appellant's case.
4. Without prejudice to above, alternatively, the Ld. CIT(A) has erred in not considering the amount written off in the books of accounts as allowable deduction u/s 36(2) of the Act.
The appellant craves leave to add, alter, amend or delete any of the above grounds of appeal.
The Ld. Counsel for the assessee at the outset submitted that the assessment was completed during the Covid period and the assessee could not furnish certain details. He filed an application for admission of additional evidences under Rule 29 of the ITAT Rules, 1963, the contents of which are as under: “APPLICATION FOR ADMISSION OF ADDITIONAL EVIDENCE UNDER RULE 29 of the INCOME TAX (APPELLATE TRIBUNAL) RULES, 1963 MAY IT PLEASE YOUR HONOUR- The appellant in the above-referred appeal, respectfully submits this application under Rule 29 of the Income Tax (Appellate Tribunal) Rules, 1963, seeking admission of additional evidence in support of its contentions in the present appeal. 1. Details of Additional Evidence Being Submitted The following documents which were not produced before the lower authorities during the assessment and first appellate proceedings, are now being submitted as additional evidence to present a true and fair view of the appellant's financial position: Sr. No. of Paper Particulars Page no. of the Book Index Paper Book 3 Copy of Balance Sheet along with notes to 18-34 accounts for F.Y. 2017-18 4 Copy of Profit and loss A/c along with notes 35-44 to accounts for F.Y. 2017-18 5 Copy of Statutory Audit Report for F.Y. 45-51 2017-18 6 Copy of agreement with Jamia Islamia Ishat 52-53 Uloom Trust 7 Copy of agreement with Mavin Switchgears 54-60 and Control Pvt. Ltd. 8 Copy of ledger extracts for F.Y. 2017-18 61-63 9 Copy of letter from Mavin Switchgears 64 regarding cancellation of the contract dated 23.05.2017
2. Justification for Admission of Additional Evidence: The appellant respectfully submits that there was a reasonable cause for the non- submission of these documents before the lower authorities. The omission was neither intentional nor meant to withhold relevant facts but occurred due to the following reasons: • The documents were not specifically called for during the assessment or appellate proceedings. • The appellant was under a bona fide belief that the information already on record was sufficient for adjudication. • These documents are crucial to establish the correctness of the entries in the books of accounts, particularly in relation to the amounts written off and the true financial position of the appellant. Since these documents directly impact the adjudication of the issues under appeal, their non-consideration would cause undue hardship to the appellant and result in a failure of justice.
The appellant places reliance on the following judicial pronouncements, which support the admission of additional evidence when it is essential for rendering justice: Smt. Prabhavati S. Shah v. CIT [231 ITR 1 (Bom)] - The Hon'ble Bombay High Court held that if certain documents are necessary for determining the true state of affairs, the first appellate authority should have admitted them even without a specific request. Keshav Mills Co. Ltd. v. CIT [56 ITR 365 (SC)] - The Hon'ble Supreme Court ruled that an appellate authority does not exceed its jurisdiction by admitting additional evidence if it is necessary for complete and effective adjudication. Dwarka Prasad v. ITO [63 ITD 1 (Patna) (TM)] - It was held that additional evidence should be admitted when it is crucial for rendering substantial justice.
4. Prayer: In view of the above, the appellant respectfully prays that Your Honour may kindly: Allow the admission of the additional evidence listed above under Rule 29 of the Income Tax (Appellate Tribunal) Rules, 1963. Consider these documents while adjudicating the present appeal, in the interest of justice and fair play.
In view of above, we request Your Honour to kindly admit the above documents as additional evidence under Rule 29 of the Income Tax (Appellate Tribunal) Rules, 1963 and oblige. Yours Truly, For Ellora Construction Pvt. Ltd. Sd/- Authorized Representative”
The Ld. Counsel for the assessee referring to the same submitted that all these additional evidences go to the root of the matter for deciding the issue on hand. He accordingly submitted that these evidences should be admitted and the matter may be restored to the file of the Assessing Officer for deciding the issue afresh.
Ld. DR on the other hand heavily relied on the orders of the Assessing Officer and the Ld. CIT(A) / NFAC.
We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and Ld. CIT(A) / NFAC and the paper book filed on behalf of the assessee. We find the assessment in the instant case was completed on 23.04.2021 which was during Covid period for which he could not file certain documents to substantiate its case. Further, the assessee has filed certain additional evidences along with an application under Rule 29 of the ITAT Rules for admission of the same. Since these evidences now filed before the Tribunal, go to the root of the matter, therefore, we admit the same and deem it proper to restore the issue to the file of the Assessing Officer with a direction to decide the issue afresh and in accordance with law after affording a reasonable opportunity of being heard to the assessee. We hold and direct accordingly. The grounds raised by the assessee are accordingly allowed for statistical purposes.
In the result, the appeal filed by the assessee is allowed for statistical purposes.
Order pronounced in the open Court on 5th March, 2025.