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Income Tax Appellate Tribunal, AHMEDABAD “C” BENCH
Before: MS. SUCHITRA KAMBLE & SHRI WASEEM AHMED
PER WASEEM AHMED, ACCOUTANT MEMBER:
The appeal has been preferred by the assessee against the order of the Commissioner of Income Tax (Appeals), Gandhinagar ( ‘CIT(A)’ in short) dated 20.02.2019 arising in the assessment order dated 29.03.2016 passed by the Assessing Officer (AO) under s. 143(3) of the Income Tax Act, 1961 (the Act) concerning AY 2013-14.
ITA No. 342/Ahd/2019 2 . A.Y. 2013-14 (Uma Industries) 2. At the outset we note that, the impugned appeal has already been listed several times and the notice intimating the date of hearing of toady was also sent upon the assessee. At the time of hearing, neither the assessee appeared nor sought any adjustment. Thus, we decided to proceed to adjudicate the issue ex parte to the assessee.
The only issue raised by the assessee is that the learned CIT(A) erred in sustaining the disallowances of bad debt written off for an amount of Rs. 20,12,651/- only.
The assessee is a partnership firm engaged in the business of cotton ginning and pressing and the other business related thereto. The assessee for the year under consideration i.e. A.Y. 2013-14 has declared gross profit of Rs. 1,20,01,696/- and claimed that business will discontinued w.e.f. 1st April 2013. The assessee in profit loss account written off bad debt for Rs. 1,47,18,274/- only. On question by the AO with regard to nature of debtor and details such as ledger copies, address, PAN and proof showing effort made for recovery. The assessee in response simply relied on the judgment of Hon’ble Supreme Court in case of TRF Ltd vs. CIT (2010) 323 ITR 397 (SC).
4.1 The AO found that the assessee has not provided the nature of transaction with debtor which in necessary for allowances or disallowances of claim of bad debts. As such the write off of those bad debts are only allowable which are arising out of the ordinary course of business.
4.2 The AO further held that to write off a debt it necessary that the debt becomes bad and irrecoverable after making effort for recovery. In the case of the assessee, from the ledger copies furnished by it, it was found that amounts form the debtor were received regularly. Likewise, during the year, the assessee received an amount of Rs. 5,14,12,881/- and Rs. 1,91,46,779/- from debtor
ITA No. 342/Ahd/2019 3 . A.Y. 2013-14 (Uma Industries) namely Badresh Trading Corporation and Olam Agro India respectively but treated closing outstanding balance of Rs. 2,29,995 and 4,53,343/- as bad debt and written off in profit and loss account. Similarly, the assessee during the year made sales amounting to Rs. 11,25,000/- to M/s Shiv Ratna Caste & Co against which received payment of Rs. 9,15,000/- but still treated remaining receivable as bad and irrecoverable.
4.3 The AO further found that out of 23 debtors, whose balances were written off as bad debt, the notices under section 133(6) of the Act were issued to 10 parties but no response was received except from 2 parties namely M/s Ruchi World Wide Ltd and M/s Bhadresh Trading Corporation. Both the parties submitted that no amount was written off in their books of accounts. M/s Ruchi World Wide Ltd also submitted that there was no outstanding balance remaining as the amount of Rs. 22,969/- written off by the assessee is arising due differences in opening balance. Thereafter the AO requires the assessee to produce remaining parties for verification but the assessee denied for the same.
4.4 Therefore, the AO in view of the above finding was of the opinion that assessee knowing to fact that its business going to discontinue from immediate subsequent year deliberately written off good debtor as bad debt in the books to reduce the tax liability which is nothing but a colourable device as held by the Hon’ble supreme court in case of McDowell & Co. Ltd. reported in 154 ITR 148. Thus the AO disallowed the claim of the assessee.
Aggrieved assessee preferred an appeal to the learned CIT-A, who has partly allowed the appeal of the assessee by sustaining the disallowances of bad debt in case of following parties:
“(b) The appellant has written off debt of Rs.9,00,000/- to be recovered from M/s Avanita Textile Pvt. Ltd. The ledger account of this concern reflected that there were sales of Rs.68,04,918/- through sale bills dated 23.04.2011 and the amounts
ITA No. 342/Ahd/2019 4 . A.Y. 2013-14 (Uma Industries) of Rs.50,04,917/- were credited in the account of this concern in the FY ending on 31.03.2012. Surprisingly, out of outstanding balance, the appellant has considered fie amount of Rs.9,00,000/- as bad debt and remaining amount of Rs.9,00,000/- has been carried forward. Thus, the appellant considered the amount of Rs.9,00,000/- as irrecoverable which means the balance amount of Rs.9,00,000/- could be still recovered. This logic of the appellant cannot be accepted. Therefore, the amount of Rs.9,00,000/- claimed to be bad debt is not accepted. Therefore, it is held that the A.O. has rightly disallowed this sum.
(c) The appellant has written off debt of Rs.2,29,995/- to be recovered from M/s Bhadresh Trading Co. The ledger account of this concern reflected that there was opening balance of Rs.2,29,995/- as on 01.04.2011 and the appellant was selling the goods and receiving the payments regularly from this concern. The appellant has credited an amount of Rs.5,39,029/- on 31.03.2013 and also made TDS of Rs.53,903/-. Thus, it is apparent that the amount of Rs.2,29,995/- is adjusted against the credit of interest made in the ledger account as the ledger account doesn't reflect any financial transactions except the crediting of sale bills. The analysis of this account further reflected that the appellant had made total sales of Rs. 9,95,05,530/- for the two FYs and received the payments of Rs.9,94,25,518/-. Thus, it has received less payments of Rs.80,0121- only against which it has made the interest credit of Rs. 5,39,029/- and debited TDS of Rs.53,903/-. Therefore, there is no bad debt of Rs.2,29,995/- which was written off but it was short recovery of payments on which interest is charged(as there was no financial transactions in the forms of loans and advances). Considering this aspect of the case, the debt claim of Rs.2,29,995/- cannot be treated as trading debt and therefore, the disallowance of Rs.2,29,955/- made by the A.O. is required to be confirmed.
****************************************** (b) The appellant has written off debt of Rs.2,19,313/- in respect of debtor viz. M/s Mahila Karona Textile Pvt. Ltd. The copy of ledger account in respect of this concern has revealed that there was an opening balance of Rs.2,68,578/- and credit of interest of Rs.1,77,674/-during FY 2010-11. The appellant has debited the payment of Rs.2,97,334/- on account of payment received and TDS of Rs. 17,764/- . The appellant has thus drawn the credit balance of Rs.1,36,151/- as on 31.03.2011. However, the appellant has shown the opening balance as on 01.04.2011 at Rs.2,19,313/- which has been carried forward till 31.03.2013 and written off as bad debt. Further, the balance of Rs. 1,36,151/- was on account of interest credited which is an expenditure in the hands of the appellant for the FY 2010-11 and the balance amount to be recovered represented excess payment of interest as no financial transactions had taken place in the earlier year or in subsequent years. Thus, the amount of Rs.83,162/- has been found to be excessively claimed which is on account of interest. Therefore, this debt is not treated as trading debt as the trade debt has already been recovered by the appellant. Considering this aspect of this particular debtor, the disallowance of Rs.2,19,313/- made by the A.O. is confirmed.”
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ITA No. 342/Ahd/2019 5 . A.Y. 2013-14 (Uma Industries) (o) The appellant has written off debt of Rs.4,53,343/- in respect of debtor viz. M/s Olam Agro India. The copy of ledger account in respect of this concern has revealed that there were sales of Rs.3,64,23,7147-effected during FY 2011-12 and payments were received from this concern during the FYs 2011-12 & 2012-13 and such last payment of Rs.86,326/- was received on 05.09.2012. The appellant continued to make sales to this concern till 18.05.2012 and the last bill so credited was of Rs.86,326/- which was also received during the FY 2012-13. However, the appellant has treated the remaining balance of Rs.4,53,343/- as bad debt and lastly written it off on 31.03.2013. Since the appellant continued the trading of goods and received the payment of the last bill so raised in the FY 2012-13, the difference on sales and payments received cannot be treated as "BAD DEBT" as the same pertains to the current FY itself. Therefore, the debt of Rs.4,53,3437-is not required to be treated as BAD and the disallowance to the extent of Rs.4,53,343/- made by the A.O. is confirmed.”
********************************************** (t) The appellant has written off debt of Rs.2,10,000/- in respect of debtor viz. M/s Shiv Ratna Caste & Co. The copy of ledger account in respect of this concern has revealed that there were sales of Rs. 15,19,620/- effected during FY 2012-13 and payments were received from this concern during the same FY 2012-13 and such last payment of Rs. 15,000/- was received on 07.09.2012 and closing balance of Rs.2,10,000/- was drawn as on 31.03.2013 and the same has been written off on 31.03.2013. Since the appellant has been receiving payments from this concern and the debt was due to be recovered within FY 2012-13 thus it cannot be said to be "Bad" or "Irrecoverable". Therefore, the disallowance of Rs. 2,10,000/- made by the A.O. is required to be confirmed.”
Being aggrieved by the order of the learned CIT-A, the assessee is in appeal before us.
The learned DR before us vehemently supported the order of the authorities below.
We have heard the learned DR and perused the materials available on record. The provisions of section 36(1)(vii) read with section 36(2) of the Act deals with the deduction of the bad debts. As per the provisions Section 36(1)(vii) any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year, is deductible subject to the condition prescribed under subsection 2 to section 36. The provision of section 36(2) prescribe that, no deduction shall be allowed unless such debt or part thereof has
ITA No. 342/Ahd/2019 6 . A.Y. 2013-14 (Uma Industries) been taken into account in computing the income of the assessee in the year of write off or in an earlier previous year. And it must represent the amount due from the party for supplies made (goods or services) or represents money lent in the ordinary course of the business of banking or money lending carried on by the assessee.
8.1 Generally, the bad debts claimed by the assessee are allowed as deduction in the manner as provided by the Hon’ble Supreme Court in the case of TRF Ltd vs. CIT (supra) wherein it was held as under:
“This position in law is well-settled. After 1-4-1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the baddebt is written off as irrecoverable in the accounts of the assessee.”
8.2 However, the facts of the present case are peculiar in the sense that it was alleged by the authorities below that the assessee has adopted colorable device to escape the tax liability by manipulating the provisions of law. The Hon’ble Supreme Court in the case of McDowell & Co. Ltd. 154 ITR 148 has held that the colorable device adopted by the assessee in order to avoid the payment of tax is not permissible. The relevant extract of the order is reproduced as under:
“So far as the contention that it is open to every one to so arrange his affairs as to reduce the brunt of taxation to the minimum, was concerned, the tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by restoring to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges. Courts are now concerning themselves not merely with the genuineness of a transaction, but with the intended effect of it for fiscal purposes. No one can now get away with a tax avoidance project with the mere statement that there is nothing illegal about it.”
8.3 In view of the above, if the assessee was to avail the benefit of the provisions of law by using the colorable device, the same cannot be allowed to the assessee. In the given facts of the case, admittedly the assessee has closed down the business and there was no information available on record what treatment has been given by the assessee with respect to the subsequent recovery of the bad
ITA No. 342/Ahd/2019 7 . A.Y. 2013-14 (Uma Industries) debts, if any. In the absence of any contrary information available on record, we do not find any defect in the order of the learned CIT-A. Accordingly, the ground of appeal of the assessee is hereby dismissed.
In the result, appeal filed by the assessee is dismissed.
Order pronounced in Open Court on 24 - 08- 2022
Sd/- Sd/- (SUCHITRA KAMBLE) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad: Dated True Copy S. K. Sinha Copy of the Order forwarded to:- 1. The Appellant. 2. The Respondent. 3. The CIT (Appeals) – 4. The CIT concerned. 5. The DR., ITAT, Ahmedabad. 6. Guard File. By ORDER
Deputy/Asstt.Registrar ITAT, Ahmedabad