DCIT, NEW DELHI vs. M/S. ALTUS GROUP (INDIA) PVT. LTD., NEW DELHI

PER O.P. KANT, AM:

These cross appeals by the assessee and the Revenue are directed against order dated 04/01/2016 passed by the learned Commissioner of Income-tax (Appeals)-I, New Delhi [in short ‘the Ld. CIT(A)’] for assessment year 2012-13. 2. The grounds raised in the appeal of the assessee are reproduced as under: 1. Addition u/s 36 of the Income Tax Act, of Rs. 5,62,876/- for writing off irrecoverable expenses

1.1 On facts and under the circumstances of the case and in law, the Id. CIT(A) was not justified in confirming the order of the LAO in disallowing the "advances and deposit written off" amounting to Rs. 5,62,876/-. 1.2 The Id. CIT(A) has erred both on facts and law by wrongly holding that these write offs are not covered under section 37(1) and classifying the same under section 36(2) read with section 36(l)(vii) of Income Tax Act, 1961. 1.3 On facts and under the circumstances of the case, the Id. CIT(A) was unjustified in not appreciating and ignoring the fact that the management of the appellant company had decided to close down the business activities and the financial statements were prepared on the basis that the fundamental accounting assumption of going concern was no longer appropriate. 1.4 On facts and under the circumstances of the case, the Id. CIT(A) was unjustified in confirming the addition / disallowance made and has failed to appreciate the submissions of the appellant and has ignored various decisions in judicial discipline affirming the allowance of expenditure on the principle of commercial expediency. 1.5 On facts and under the circumstances of the case, the Id. CIT(A) has erred in confirming the addition u/s 36 of the Income Tax Act, 1961 whereas the appellant has claimed the expenditure u/s 37 of the Act and not under any of the provisions of section 36 of the Income Tax Act, 1961. Aggrieved with this confirmation of addition by the Id. CIT(A), the appellant prays that the addition of Rs.5,62,876/- in respect of writing off irrecoverable expenses be deleted.

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3.1 On facts and under the circumstances of the case and in law, the Id. CIT(A) was not justified in confirming the order of the LAO in disallowing the short term capital loss claimed by the appellant. 3.2 On facts and under the circumstances of the case, the Id. CIT(A) has erred in disregarding the submissions made by the appellant as well as the fact that the management of the appellant company had decided to close down the business activities and the financial statements were prepared on the basis that the fundamental accounting assumption of going concern was no longer. 3.3 On facts and under the circumstances of the case, the Id. CIT(A) was unjustified in confirming the disallowance and has failed to consider the fact that these assets were non-recoverable from the sites as the work was stopped and the customers have also filed suit against the assessee for breach of contract. 4 On facts and under the circumstances of the case, the Id. CIT(A) was unjustified in confirming the disallowance and has failed to appreciate the fact that the assets were not recoverable and the assessee had no option but to write them off in accordance with principle of commercial expediency as the assessee had decided to close down the business operations. The appellant craves leave to add, amend, alter, vary and/or withdraw any or all of the above grounds of appeal at any stage of the appellate proceedings and to make appropriate legal submissions during oral arguments.

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AGGRIEVED with the order framed by Id. CIT(A), the appellant has preferred this appeal before the tribunal having the appropriate jurisdiction to entertain and decide this appeal and prays that the additions and dis-allowances be deleted.”

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(Rs.2,86,057/-) written off, the details of which was reproduced by the Assessing Officer are extracted under: Particulars Amount Reason Deposits written Retention money forfeited by off the lessor. Amount not recoverable on vacating old lease premises. Regus Gurgaon Rs.2,86,057/- Metropolitan Business Centre Private Ltd. Total (A) »> Rs.2,86,057/-

Advances written off Grant leslie Rs.2,73,276/- Ex-Emplyee left without Radonich notice and could not be traced. Thus amount not recoverable written off. Dharma Dev Rs.3,543/- Pending advance given to Texi Service Taxi Vendor not Recoverable. Hence written off. Total (B) »> Rs.2,76,819/- Total (A + B) Rs.5,62,876/-

5.2 It was claimed by the assessee that all the advances were paid to vendor/employee in the ordinary course of the business operation to avail services from them and hence, their non- recovery is duly allowable deduction of business expenses under section 37 of the Act and not under section 36 of the Act. According to the Assessing Officer, there is a specific provision of section 36 for allowing advances written off and therefore, same cannot be allowed under section 37 of the Act in view of the decision of the Hon’ble Supreme Court in the case of Southern Technologies Ltd. Vs. JCIT (2010) 320 ITR 577 (SC), wherein it is held that if a provision for doubtful debt is expressly excluded

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from section 36(1)(vii) of the Act, then such provision cannot be claimed as deduction under section 37, even on the basis of ‘real income theory’. 5.3 Regarding the claim of deposits written off of ₹ 2,86,057/- the submission of the assessee has been reproduced by the learned CIT(A), which is extracted as under : “1.3 The following submission of the plaintiff before the LAO on 20.11.2014 has been erroneously ignored by the Lao in framing the assessment. “Forfeiture of security deposit of Rs.10,40,179 and Rs.446,249 totaling to Rs. 14,86,428: A security deposit of Rs. 14,86,428 was paid as per clause 12 of the lease agreement for office premises leased by the company FF-06, 4th Floor, Corporate Sewa Park, Gurgaon. A copy of the lease deed as already been submitted. The lease agreement had a lock in period of 3 years and if premises were vacated before 3 years, the lessor was entitled for compensation equal to balance period of the lease. Since, the assessee company terminated the lease agreement, within a year from the date of agreement; the lessor was entitled for compensation equal to 2 years and 10 months’ rent. However, due to severe fund problems, company made a request to the lessor and finally settles the termination by allowing him to forfeit the security deposit towards rent for remaining period. This is a business decision taken by the company to save further rent. Copy of the termination agreement has already been submitted before your good office.

The above security deposit was paid in the ordinary course of the business of the company. Further, deposit paid was not in nature of capital payments. Therefore, forfeiture of above referred security deposit is an allowable expenses u/s 37 of the Income Tax Act. This view has been duly upheld under various judicial pronouncements. Reference can be made to decision given by the Hon'ble IT AT (Delhi) in case “Fab India Overseas Pvt. Ltd. vs. ACIT, Range - 11, New Delhi.” (Refer to page no 71-72 of submission no 5 dated 20/11/2014)”

5.4 Similarly, the submission of the assessee on the advance written off of ₹ 2,76,819/-, reproduced by the learned CIT(A), is extracted as under:

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“1.4 With respect to the advance written off amounting to Rs. 2,76,819/-, the LAO has failed to appreciate the fact that these advances were for the expenses in the ordinary course of business and are covered u/s 37(1) of the income tax act 1961. As well as the aforesaid expenses are held allowable u/s 37(1) of the IT A 1961 in various judgments provided by the High Court, one of the whom is mainly [CIT vlnden Bislers(1990) 181 ITR 69(Mad)].”

5.5 The further legal submission made by the assessee in support of the claim of the above advances and deposits written off, as reproduced by the Ld. CIT(A), is extracted as under: “1.8 That the LAO in making the all the additions/disallowances while framing the impugned assessment, has also erred in law by ignoring the principal established through various judicial pronouncements that: “The list of allowances enumerated in section 30-37 of ITA 1961 is not exhaustive; an item of loss or expenditure incidental to business may be deducted in computing ‘profits and gains’ properly so called and computed on ordinary commercial principles. This is definitely established by the Privy Council case, CIT v Chitnavis,(59 IA 290,297,6ITC 453) where a bad debt was held to be an admissible deduction, though there was no special allowance for bad debts in the 1922 Act as it then stood. Lord Russell, delivering the judgment of the board, said:

“Although the Act nowhere in terms authorizes the deduction of bad debts of a business, such a deduction is necessarily allowable. What are chargeable to income tax in respect of a business are the profits and gains of a year; and in assessing the amount of the profits and gains of a year account must necessarily be taken of all losses incurred, otherwise you would not arrive at the true profits and gains."

In Badridas Daga v CIT(34, ITR 10,15) and Calcutta Co Ltd V CIT,(37 ITR 1,9)the Supreme Court quoted the observation of Lord Russell with approval and held that an item of loss or expenditure not falling within any of the express deductions may be allowed if it is deductible on ordinary principles of commercial accounting.

The scheme of these sections is that profits and gains must be computed subject to certain express allowances and to certain express or implied prohibitions of deduction, but a deduction which is neither within the terms of the prohibition nor such that the specific allowance must be taken as the exclusive definition of its area, must be allowed if it is, on the facts of the case, a proper debit item to be charged against incomings of the trade in ascertaining the true profits. In other words, in determining whether a particular item

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(not covered by SS 30-37) may or may not be deducted from profits, it is necessary first to enquire whether the deduction is expressly or by necessary implication prohibited by the act and then, if it is not so prohibited ,to consider whether it is of such a nature that it should be charged against incomings in a computation of the ‘profits and gains’ properly so called. These principles were reaffirmed by the Supreme Court in Badridas Daga v CIT (34, ITR 10,15) and Calcutta Co. Ltd v CIT. ,(37 ITR 1,9)”

1.9 “Non -capital expenditure incurred for the purposes of business may fall to be deducted under the omnibus residuary s 37 of ITA 1961. But business losses, though they fall outside the purview of ss 30-37 are allowable ,as stated above, on ordinary commercial principles of computing profits, provided (i) the losses are of a non- capital nature and (ii) they are not merely connected with the trade but are incidental to trade itself." These principles were affirmed by the Supreme Court in Badridas Daga v CIT (34, ITR 10,15), CIT v National bank ltd 55 ITR 707 and Ramchandar Shivnarayan v CIT.

1.10 That there are numerous judgment in the order of judicial discipline wherein such deductions have been allowed.

“Deduction should be allowed under this section in respect of a loss arising from forfeiture of security deposit as a result of non performance of a trading contract. Various case laws are Narandas v CIT 35ITR 461; CIT v Inden 91 ITR 427; CIT v Sugar dealers 100 ITR 424; Thackers v CIT134 ITR 21. Forfeiture of security deposit-lt covers forfeiture of deposits given as ‘security’ for the business purposes. Forfeiture of security deposited under a contract is Thackers H.P. & Co . Vs CIT 134 ITR 21. Losses arising from payments made in advance to employees or agents would form a proper deduction if the advance payment was made with reasonable business prudence. The money lent by the managed company to the managing agents, which had become irrecoverable, is deductible as a loss incidental to the managed company’s business. Loans advanced in the course of or incidental to business are allowable, apart from s36(1)(vii),when they become irrecoverable, but not if they are on capital accounts various case laws are Lalvani V CIT 78 ITR 176;CIT v Jwalaprasad 107ITR 540;CIT v Jeya 164 ITR 318;CIT v Inden Bislers 181 ITR 69.

In view of the above submissions the plaintiff prays for the deletion of the above addition…………………”

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5.6 After considering the submission of the assessee, the l.d CIT(A), following the decision of the Hon’ble Supreme Court in the case of Southern Technologies Ltd. (supra) upheld the finding of the Assessing Officer. 5.7 Before us, the Ld. counsel of the assessee filed a paper-book containing pages 1 to 190. The learned counsel of the assessee referred to the pages 80 to 101 and submitted that advances of salary were made in the regular course of the business and therefore lost due to non-recovery of the said advances, is in the nature of business expenditure and allowable to the assessee. Regarding the deposit written off, he submitted that deposit was given for lease of the building in regular course of the business and subsequent adjustment by the owner of the building for vacating prematurely, was a loss in regular course of business. He submitted that though the losses not being falling under section 36(1)(vii) were claimed under section 37 of the Act and, therefore, has been disallowed by the lower authorities by way of wrong application of the decision of the Hon’ble Supreme Court. 5.8 The Ld. DR, on the other hand, relied on the order of the lower authorities. 5.9 We have heard rival submissions and perused the relevant material on record. The issue in dispute in the instant case is whether the advances and deposit written off by the assessee can be allowed under section 37(1) of the Act as business loss. According to the Ld. Assessing Officer and the learned CIT(A), there is a specific provision under section 36(1)(vii) of the Act for allowing the bad debt written off and thus written off of the advances and deposit cannot be allowed to the assessee under

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section 37(1) of the Act in view of the decision of the Hon’ble Supreme Court in the case of Southern Technologies Ltd. (supra), wherein the Hon’ble Supreme Court, held as under: “Section 36(1)(vii) of the Income-tax Act, 1961, read with the NBFCs Prudential Norms (Reserve Bank) Directions, 1998 - Bad debts - Whether 1998 Directions deal only with presentation of NPA provisions in balance sheet of a NBFC and they have nothing to do with computation or taxability of provisions for NPAs under Income- tax Act - Held, yes - Whether provision for NPAs in terms of 1998 Directions constitutes expense on basis of which deduction can be claimed by NBFCs under section 36(1)(vii) - Held, no - Whether even applying theory of real income, a debit, which is expressly disallowed by Explanation to section 36(1)(vii), if claimed, has got to be added back to total income of assessee, because Act seeks to tax ‘real income’ which is income computed according to ordinary commercial principles but subject to provisions of Act - Held, yes Section 36(1)(vii), read with section 43D, of the Income-tax Act, 1961 - Bad debts - Whether sections 36(1)(vii) and 43D are violative of articles 14 and 19 of Constitution - Held, no Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowable as - Whether section 37 applies only to items which do not fall in sections 30 to 36; if a provision for doubtful debt is expressly excluded from section 36(1)(vii), then such a provision cannot be claimed as a deduction under section 37 even on basis of ‘real income theory’ - Held, yes.”

5.10 However, we find that the claim of bad debt written off under section 36(1)(vii) of the Act is allowable if such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year. In the instant case, the claim of advances and deposit have not been considered for income in the year under consideration or in the earlier year(s), such advances or deposit written off are not eligible for deduction under section 36(1)(vii) of the Act. An assessee is entitled for claim under Section 36(1)(vii) , where by

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reason of the inability or insolvency of the debtor to pay, the money is unable to be recovered. In all other cases, the claim for allowance should have to be sustained under Section 37(1) which requires that the expenditure (not being of a capital nature) should have been wholly and exclusively incurred for the purpose of the business.

5.11 For claiming deduction under section 37 of the Act, the essential ingredients of the section are,:

"(i) that it should be an expenditure of the nature not described in Sections 30 to 36 ; (ii) it should not be in the nature of capital expenditure or personal expenses of the assessee ; (iii) that it should be laid out or expended wholly and exclusively for the purposes of the business, etc." 5.12 In the instant case, we find that advances for salary and deposits for lease premises have been written off. Clearly, the advances which had been made by the assessee in the present case are certainly of a type which are within the contemplation of the words "laid out or expended wholly and exclusively for the purposes of the business and allowable under Section 37(1) of the Act. The ratio of the decision of the Hon’ble Supreme Court in the case of Southern Technologies Ltd. (supra) cannot be applied in the facts of the instant case. Accordingly, we set aside the finding of the Learned CIT(A) on the issue in dispute and allow the ground of the appeal of the assessee.

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6.1 The Assessing Officer observed that out of the total legal and professional expenses of Rs.52,71,892/-, amount of ₹ 6,42, 365/- was paid to one Sh Amreek Singh. The Assessing Officer found that copies of the bills of Sh. Amreek Singh had been raised almost a year after rendering professional services and he also happened to be an employee of the assessee company. According to the Assessing Officer, there can be error of the date in the single bill but it cannot be in all the bills. He rejected the contention of the assessee that the tax was deducted at source on such payment which makes expenses as genuine. The CIT (A) also upheld the disallowance.

6.2 Before us, the learned counsel of the assessee referred pages 186 to 190 of the paper book, which are copies of amended bills of Amreek Singh along with his ledger account and submitted that claim of expenses is justified, in view of the fact that expenses were incurred wholly and exclusively for the purpose of the business.

6.3 The learned DR, on the other hand, relied of the order of the lower authorities.

6.4 We have heard rival submission of the parties and perused the relevant material on record. We find that the learned CIT(A) has sustained the disallowance observing as under:

“Decision

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I have considered the submission of the appellant and the observation of the AO made in the assessment order. It is seen that the appellant has claimed expenses of Rs.6,42,365/- as paid to consultant to Shri Amrik Singh, Mr. Syed Nadeem Zaidi and Ms. Chandrika. These persons were hired for various projects sites. On verifications of the bills it was observed by the AO that Shri Amrik Singh has been paid salary of Rs.7,02,420/- on which tax of Rs.1,05,330/- has been deducted. Over and above he has been paid consultant charges for which bills were raised on 31.08.2012, 30.09.2012, 31.10.2012 and 30.11.2012. It was observed by the AO that these expenses were not pertaining to the year under considerations and same have been pertaining to the subsequent years. During the course of assessment proceedings revised bills were submitted before AO on the ground that there was a mistake in preparing the bills, however, AO observed that this mistake can happen in one or two bills but it cannot be repeated in all the bills submitted by Shri Amrik Singh. Further, the appellant failed to provide any evidence of rendering of services by Shri Amrik Singh in the year under consideration, when Shri Amrik Singh was being paid salary from the appellant company, how come he is separately being paid for the consultancy charges?. Therefore, the claim of expenses in the name of consultancy charges is not found tenable and same does not appears to be genuine expenditure. Hence disallowance made by the AO of consultancy charges of Rs.6,42,365/- was justified and the same is confirmed.”

6.5 We find that the learned CIT(A) sustained the disallowance on the ground that the assessee failed to provide any evidence of rendering services by Sh. Amreek Singh. The onus was on the assessee to establish that Sh. Amreek Singh, rendered legal and professional services in addition to employment with the assessee. As assessee has failed to produce any evidences before the Ld. CIT(A) as well as before us, we do not find any error in the order of the learned CIT(A) on the issue in dispute and accordingly, we uphold the same. The ground of the appeal of the assessee is dismissed.

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7.1 It was claimed by the assessee that as part of the business operation of the assessee, certain assets were provided at construction sites for ongoing projects which were for tenure of 3- 5 years. It was submitted by the assessee that during the year, when the management of the company decided to close down business operations suddenly by terminating employees and project contracts, it could not get support from ex-employees and clients to trace various assets provided at the client sites and thus loss was booked on these assets, which was claimed as short-term capital loss under the provisions of the Act. The assessee provided a list of items, which have been reproduced by the Assessing Officer in the assessment order. However, the assessee could not produce any evidence in support of its claim for non-recovery of the assets from clients. The Assessing Officer also observed that on one side assessee claimed depreciation on those very assets and another side it was claiming as loss of assets. The Ld. CIT(A) also upheld the disallowance.

7.2 Before us, the learned counsel of the assessee referred to pages 167 to 178, which are copies of letters issued by the attorney of assessee confirming status of the cases filed by the customer against assessee. According to the assessee, these law suits filed by the customer are evidences that assets lying at the customer site were not recoverable and the assessee had no option but to write off after taking into consideration commercial expediency.

7.3 The Ld. DR, on the other hand, relied on the order of the lower authorities.

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7.4 We have heard rival submission of the parties and perused the relevant material on record. We find that the learned CIT(A) confirmed the addition observing as under:

“Decision I have considered the submission of the appellant and the observation of the AO made in the assessment order. It is seen that the appellant has claimed short term capital loss of Rs.7,44,245/- on account of loss of assets which could not be recovered from the different sites. The AO has given a chart of the assets which could not be recovered by the appellant from the client’s site and loss occurred on account of such loss of assets has been claimed as short term capital loss by the appellant by writing off such assets from the books of account. During the course of assessment proceedings the appellant did not submit any evidence of providing computers, office equipments and furniture to any person. The appellant has also failed to prove whether it has billed such loss occurred on account of non recovery of the assets from the client’s site to the clients. It is also observed by the AO that appellant has claimed depreciation on such assets which were not in existence in the F.Y. 2010-11. Therefore, the submission of the appellant is appears to be contradictory. The AO has discussed this issue at length from page 9 to 13 of his order and has given status of the assets and disallowance of such claim of the short term capital loss. I fully agree with the justification given by the AO and the disallowance of the short term capital loss is upheld.” 7.5 We have also perused documents filed in the paper book from page 167 to 178. These documents are in relation to lawsuit filed by the vendor against assessee, however, in these letters of attorney of the assessee there is no mention of any fact that asset of the assessee were lying at those customer sites, with the assessee has claimed as not recoverable. No other evidence from the client/customer of the assessee to substantiate that assets were lying at their sites, has been furnished by the assessee either before the lower authorities or before us. In the facts and circumstances of the case, we do not find any error in the order of

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the learned CIT(A) and accordingly, we uphold the same. Ground of the appeal of the assessee is accordingly dismissed.

Order is pronounced in the open court on 14th November, 2019.

Sd/- Sd/- (BHAVNESH SAINI) (O.P. KANT) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 14th November, 2019. RK/-(D.T.D.) Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR

Asst. Registrar, ITAT, New Delhi