2010 (8) TMI 695 - AT - Income Tax

Claim as Bad debt - Money Advanced for purchasing goods become non recoverable - In context of bad debts the material thing is the writing off in the books of account and not the date of passing of resolution for the same.Once the debt are written off as bad in books assessee is entitled for exemption. - Decided in favor of assessee. Cessation or remission for trading liability - Held that - Where liability was generated due to receipt of loan and not due to any trading transaction the same cannot be held to fall within the purview of section 41(1) of the Act. - Decided in favor of assessee.

Summary

Issues:
1. Addition under section 41(1) for outstanding balance to M/s. Filtrona India Ltd.
2. Addition under section 41(1) for amount payable to M/s. Spider Impex Ltd.
3. Addition on account of sundry balances written off.
4. Disallowance of bad debt amounting to Rs. 47,94,08,790.

Issue 1: Addition under section 41(1) for outstanding balance to M/s. Filtrona India Ltd.

The appellant contested the addition of Rs. 20,68,21,770 under section 41(1) by the Assessing Officer, which was upheld by the Commissioner of Income-tax (Appeals). The Assessing Officer argued that the liability to M/s. Filtrona India Ltd. was not acknowledged, triggering section 41(1). However, the appellant demonstrated that the liability arose from a loan received by the assessee from Triad Construction P. Ltd., not a trading transaction. The loan was then transferred to M/s. Filtrona India Ltd., both being part of the same group. The Tribunal noted that as the liability was not a trading liability but a loan, it did not fall under section 41(1). Therefore, the addition was deemed unsustainable, and it was ordered to be deleted.

Issue 2: Addition under section 41(1) for amount payable to M/s. Spider Impex Ltd.

The appellant challenged the addition of Rs. 18,21,770 under section 41(1) for the amount payable to M/s. Spider Impex Ltd. The Tribunal observed that the outstanding balance was due to trading transactions that became non-payable, thus falling under the purview of section 41(1). Consequently, the addition was upheld, and this ground was partly allowed.

Issue 3: Addition on account of sundry balances written off

The appellant contested the addition of Rs. 15,90,882 for sundry balances written off during the year. The Tribunal noted that the appellant failed to prove the amount as a bad debt under section 36(2) or as a business loss under section 37(1). The explanation provided for the written-off amounts was insufficient, especially regarding M/s. Manav International and other creditors. As a result, the Tribunal upheld the addition, and this ground was not allowed.

Issue 4: Disallowance of bad debt amounting to Rs. 47,94,08,790

The appellant disputed the disallowance of bad debt amounting to Rs. 47,94,08,790. The Assessing Officer rejected the claim due to procedural discrepancies, such as the timing of the board resolution for writing off the debt. However, the Tribunal found that the debt was genuinely written off as bad debt during the relevant year, satisfying the conditions of section 36(2). Referring to a Supreme Court judgment, the Tribunal ruled that the deduction for bad debt should be allowed once written off in the books, regardless of the resolution date. Therefore, the disallowance was overturned, and the addition was deleted. This ground was allowed.

In conclusion, the Tribunal partly allowed the appeal, deleting the additions under section 41(1) for the outstanding balance to M/s. Filtrona India Ltd. and the bad debt disallowance, while upholding the addition under section 41(1) for the amount payable to M/s. Spider Impex Ltd. and the addition on account of sundry balances written off.