THE LOUIS BERGER GROUP INC,GUGAON vs. ASSISTANT COMMISSIONER OF INCOMNE TAX, INTERNATIONAL TAXATION, GURGAON

“1. That as required by law, bad debt has been written off in its books of accounts as per section 36(1)(vii) rw section 36(2) of the Act 2. The said debts could not be recovered by the assessee on account of commercial reasons 3. That M/s Louis Berger Consulting Private Limited has disclosed the written off amount as its income 4. That the company maintains accounts project wise and receivable of Rs. 11,22,24,005/- pertained to earlier projects which could not be recovered from M/s Louis Berger Consulting Private Limited.” The ld AO observed that the assessee had not given the reasons for 5. write off of such amounts even though substantial amount were continued to be paid by the assessee to the very same concern towards consultancy charges. Further, the ld AO observed that the assessee and Louis Berger Consultancy Pvt. Ltd are active business partners and observed that though the assessee had claimed that it is maintaining accounts project wise and that in respect of one particular project, a sum of Rs. 11,22,24,005/- due from LBCPL stood irrecoverable which forced the assessee to write off the same in its books of account as bad debt. Further, the ld AO observed that even if the project wise balance were maintained by the assessee still that would not prohibit the assessee to recover the amounts from the amounts payable to the very same party for different projects.

The ld AO observed that the claim of deduction has been made by 6. the assessee only to avoid taxes and hence proceeded to disallow the same in the assessment. The ld AO while making this disallowance also placed reliance on the decision of the Hon‟ble Jurisdictional High Court in the case of CIT Vs. Abhinandan Investment Ltd in wherein, it was held that it is important to understand the business purpose behind the transaction. If the said transaction was to contrive a loss, the same is to be disallowed.

We find that the assessee vide letter dated 15.09.2022 had 7. furnished a detailed justification for write off of this bad debt with documentary evidence. In the said letter, the assessee had given project wise details of amounts receivable from various parties including LBCPL, National Highway Authority of India and Director of Civil Aviation, Govt of Goa whose debts were sought to be written off. The break up of the same is as under:-

Project Party Name Amount Year in which the Remarks written off as amount written off bad debts was recognized as revenue ABQ National 644,664 FY 2014-15 and FY Project wise ledger copies 261 Highway 2015- lb of bad debts written off Authority of and project wise copies of India (NHAI) ledger of trade receivables AFI 256 Director (Civil 2,953,347 FY 2011-12 to FY 2016- evidencing the recognition Aviation 17 of revenue have already Government of been furnished vide Goa f MOP A) submission dated 07 September 2022. Sub-Total 3,598,011 The same are being ABQ 261 National 1,191,963 FY 2014-15 and FY reproduced as Artnexure 3 Highway 2015- 16 and Annexure 4 Authority of respectively. India (NHAI) AFI 256 Director (Civil 1,391,831 FY 2011-12 to FY 2016- Sample Aviation 17 communication \ letters Government of sent clients requesting to Goa (MOPA) release outstanding payments are enclosed Sub-Total 2,583,794 as Annexure 5. ABQ Louis Berger 55,959,867 Consulting FY 2014-15 and FY 262 Private Limited 2015- 16 M 1 Louis Berger 4,026,817 Various years prior to FY Consulting 2012-13 Private Limited M 2 Louis Berger 43,342,226 Consulting Private Limited Page | 4 LBC AFI Louis Berger 8,894,850 FY 2015-16 256 Consulting Private Limited Total 118,405,565 The assessee also gave detailed explanation as to why it had not 8. adjusted the receivables with the payables by stating as under:-

“At the outset, in respect of the question of knocking off trade receivables with trade payable to Louis Berger Consulting Private Limited ('LBC') as asked by your goodself in the captioned notice, the Company submits that both the conditions stipulated under the Act for allowability of bad debts written off have been complied with, by the Company. Having said the above, the LBC in the prior years used to avail services of the Company and hence, amount was receivable from LBC in the past years. However, a part of receivable was not recovered by the Company from LBC, which has been written off during the year under consideration. Currently, the Company sub-contracts the work/projects won/obtained by it to LBC and hence, LBC earns revenue and payable is appearing in the books of the accounts. Since, the Company maintains its books of accounts project wise and subsequently, consolidates the same. In the present case, though on a consolidated basis, it appears that the same should have been knocked off, however, since the receivables and payables pertain to different projects/years, accordingly, same were not considered for knocking off. Having said that, it is humbly submitted that both the conditions stipulated under the provisions of the Act have been duly fulfilled by the Company for which adequate evidence has also been provided before your goodself. Accordingly, bad debts written off aggregating to Rs. 118,405,565 should be allowed to the Company and hence, no disallowance is warranted in this regard.”

The assessee also furnished the income recognized in respect of all 9. these parties in earlier years to satisfy the compliance of provisions of Section 36(2) of the Act by stating as under:-

Financial Year Revenue recognized (in INR) FY 2009-10 28,376,989 FY 2010-11 13,715,308 FY 2011-12 55,239,693 FY 2012-13 27,819,319 FY 2013-14 39.301,999 FY 2014-15 22.527.546 FY 2015-16 10,819.598 FY 2016-17 475.349 We find that the assessee had duly complied with all the conditions 10. prescribed in Section 36(2) read with section 36(1)(vii) of the Act to claim deduction on account of bad debts. The assessee is not required to prove that a particular debt had become bad debt in order to claim deduction on account of bad debt written off pursuant to the amendment made u/s 36(1)(vii) of the Act after 01.04.1989. This issue is no longer res integra in view of the decision of Hon'ble Supreme Court in the case of TRF Ltd reported in 323 ITR 397 (SC) , wherein, it was held as under:-

“4. 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 bad debt is written off as irrecoverable in the accounts of the assessee. However, in the present case, the Assessing Officer has not examined whether the debt has, in fact, been written off in accounts of the assessee. When bad debt occurs, the bad debt account is debited and the customer's account is credited, thus, closing the account of the customer. In the case of companies, the provision is deducted from sundry debtors. As stated above, the Assessing Officer has not examined whether, in fact, the bad debt or part thereof is written off in the accounts of the assessee. This exercise has not been undertaken by the Assessing Officer. Hence, the matter is remitted to the Assessing Officer for de novo consideration of the above-mentioned aspect only and that too only to the extent of the write off.”

Similar was the view taken by the Hon‟ble Jurisdictional High Court 11. in the case of CIT Vs. Autometers Ltd reported in 292 ITR 345 (Del) as under:-

“6. Section 36(1)(vii), as it stands w.e.f. 1st April, 1989, reads as follows:

Ground Nos. 7 and 8 raised by the assessee are challenging the 13. disallowance of loans and advances given to the employees in the sum of Rs. 82,54,126/- which was written off by the assessee.

We have heard the rival submissions and perused the material 14. available on record. The assessee during the year under consideration wrote off loans and advances of Rs. 82,54,126/-. The assessee was asked to provide details of the same along with copy of contract/ agreement. The assessee submitted vide reply dated 07.09.2022 with regard to loans and advances which were written off relate to advances given to employees of the company. The ld AO observed that the assessee failed to provide documentary evidence to support the same and accordingly issued a show cause notice as to why the same should not be disallowed in the assessment. The assessee gave the detailed reply on 15.09.2022 stating that the loans and advances given to the employees in the normal course of business and they had a direct nexus with the business of the assessee. It was pointed out that it is routine business activity carried out and the same had to be construed as an activity incidental to the business activity of the assessee. The ld AO however did not heed to these contentions of the assessee and observed that if employees are advanced loans and advances over and above their salaries, such loans cannot be construed as having advanced for business purpose. With these observations, the ld AO proceeded to disallow the claim of deduction on account of write off of loans and advances in the sum of Rs. 82,54,126/-.

In our considered opinion, advance of loan by a company to its 15. employees are certainly done in the normal course of any business and for whatever reason if those loans given become irrecoverable, the same would become a business loss to the assessee in terms of Section 28 of the Act and the same would be squarely allowable as deduction to the assessee. Reliance in this regard is placed on the decision of the Hon‟ble Jurisdictional High Court in the case of CIT Vs. Triveni Engineering and Industries Ltd reported in 343 ITR 245 (Del) as under:-

“10. Mr. Ajay Vohra, learned counsel appeared on behalf of the respondent-assessee and supported the decision rendered by the CIT(A) as affirmed by the Tribunal. His submission was that under Section 28/37(1) of the Act, deduction is admissible for trading loss/loss incidental to business. The only test to be satisfied is that the loss must arise from/spring directly from the carrying on of business. In other words, the loss must be incidental to the trade itself, there must be some nexus between the trade and loss which should have been incurred by the assessee in the course of trade. In order that loss occasioned from non-realization of advances can be allowed, the loss should have been incurred by one in the character of trader and the same should fall on the assessee in that character. He relied upon the decision of the Supreme Court in the celebrated case of Badridas Daga( supra), wherein the Court while allowing the claim for loss on account of embezzlement by an employee, observed as under: "7. The result is that when a claim is made for a deduction for which there is no specific provision in section 10(2), whether it is admissible or not will depend on whether, having regard to accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business and to be incidental to it. If that is established, then the deduction must be allowed, provided of course there is no prohibition against it, express or implied, in the Act."

Ground No. 9 raised by the assessee is challenging the disallowance 17. of interest paid on late deposit of indirect taxes in the sum of Rs. 2,81,945/-.

We have heard the rival submissions and perused the material 18. available on record. The ld AO observed that the assessee had incurred interest on late payment of GST and service tax and claimed the same as deduction on the ground that it is compensatory in nature. The ld AO however held that the same would be penal in nature and not allowable as deduction in view of Explanation 1 of Section 37 of the Act. We find that the issue as to whether interest on delayed payment of GST and service tax could be construed as penal in nature was the subject matter of consideration by the Hon'ble Supreme Court in the case of Lachmandas Mathuradas Vs. CIT reported in 254 ITR 799 (SC), wherein, it was held that interest payment on arrears of sales tax is compensatory in nature Page | 11 and would be allowable as deduction while computing the business income. Respectfully following the same, the Ground No. 9 raised by the assessee is hereby allowed.

Order pronounced in the open court on 15/10/2024.