2017 (10) TMI 1568 - AT - Income Tax

Disallowing of bad debts - deduction under the head bad debts written off in the books of accounts - HELD THAT - In the case of the assessee the explanation offered cannot be simply overlooked without looking into each and every event occurred between both the parties. The argument of the Ld.AR that when the assessee had suffered loss due to irrecoverable of advances made during the course of its business the same has to be allowed as deduction U/s.28 of the Act has merits. Loss arising from business has also to be set off from the profits of the business. Further the ratio laid down in the case TRF Limited vs. CIT 2010 (2) TMI 211 - SUPREME COURT is applicable in the case of the assessee wherein has held that After 1st April 1989 it is not necessary to establish that the debt in fact has become irrecoverable Thus the loss written off by the assessee is genuine and has to be set off from the profit earned by it. Further the case cited by the Revenue has no relevance considering the facts and circumstance of the assessee s case before us. Hence we hereby direct the Ld.AO to grant deduction being the loss suffered by the assessee as irrecoverable advances with respect to real estate business and thereby delete the addition. Disallowance u/s 40(a)(ia) - Disallowance of interest paid - Whether the provisions of Section 40(a)(ia) shall be attracted when the amount is not payable to a contractor or sub-contractor but has been actually paid? - HELD THAT - As relying on M/S. PALAM GAS SERVICE VERSUS COMMISSIONER OF INCOME TAX 2017 (5) TMI 242 - SUPREME COURT if the assessee in not deemed to be an assessee in default under the first proviso to sub-section(1) of section 201 then Section 40(a)(ia) of the Act will not be attracted w.e.f. 1-4-2013 i.e. from the assessment year 2012-13. Hence we hereby remit the matter to the file of the Ld.AO to examine the issue with respect to the applicability of the provisions of Section 40(a)(ia) of the Act in totality and thereafter decide this issue afresh in accordance with law and merits. Appeal of the assessee is partly allowed for statistical purpose.

Summary

Issues Involved:
1. Disallowance of bad debt claim of Rs. 5 crores.
2. Disallowance of interest paid to M/s. Religare Finvest Limited by invoking Section 40(a)(ia) of the Act amounting to Rs. 27,87,184/-.

Issue-wise Detailed Analysis:

1. Disallowance of Bad Debt Claim of Rs. 5 Crores:

The assessee, a firm engaged in motor racing, rallying, and real estate business, claimed a deduction of Rs. 5 crores as bad debts written off in its books of accounts. The amount was an advance given to Mrs. Sandhya Mulchandani for purchasing residential property in New Delhi. Initially, the assessee stated it was an interest-free loan, later changing its stance to claim it was a short-term advance to a commission agent and real estate broker. However, the assessee failed to provide evidence supporting this claim.

The Assessing Officer (AO) disallowed the claim, stating that bad debts under Section 36(1)(vii) of the Act can only be claimed if the amount was offered as income in earlier years, which was not the case here. The amount was deemed an advance given in good faith rather than a business debt. The CIT(A) upheld the AO's decision, noting that the firm was not engaged in money lending and the transaction was not a business transaction. The CIT(A) also referenced several case laws, including CIT v. Girish Bhagwat Prasad and TRF Ltd., which did not support the assessee's claim.

Upon appeal, the Tribunal acknowledged that the assessee was involved in the real estate business. It inferred that the advance was for participating in gains from the purchase and sale of property, considering the absence of any written agreement. The Tribunal concluded that the loss suffered by the assessee was genuine and should be set off from the profits of the business under Section 28 of the Act. The Tribunal directed the AO to grant the deduction of Rs. 5 crores as a loss suffered in the real estate business and delete the addition.

2. Disallowance of Interest Paid to M/s. Religare Finvest Limited:

The assessee claimed an expenditure of Rs. 27,87,184/- on account of interest paid to M/s. Religare Finvest Limited without deducting tax at source. The AO invoked Section 40(a)(ia) of the Act and disallowed the interest expenditure. The CIT(A) upheld the AO's decision, referencing judicial pronouncements and a CBDT Circular. The CIT(A) noted that the second proviso to Section 40(a)(ia) inserted by the Finance Act 2012, effective from April 1, 2013, was prospective and not applicable to the assessment year in question.

The Tribunal found the issue covered by the Hon’ble Apex Court's decision in M/s. Palam Gas Service vs. Commissioner of Income Tax, which held that Section 40(a)(ia) applies to amounts paid as well as payable. However, the Tribunal noted the third proviso to Section 40(a)(ia), effective from April 1, 2013, which states that if the assessee is not deemed to be in default under Section 201(1), Section 40(a)(ia) will not be attracted. The Tribunal remitted the matter to the AO to examine the applicability of this proviso and decide the issue afresh.

Conclusion:

The appeal was partly allowed for statistical purposes, with directions for the AO to grant the deduction of Rs. 5 crores as a business loss and to re-examine the disallowance of interest paid to M/s. Religare Finvest Limited in light of the third proviso to Section 40(a)(ia).