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TMI Blog2021 (12) TMI 973X X X X Extracts X X X X X X X X Extracts X X X X ..... has erred. on law. and on facts, in disallowing certain bad debts written off by the Appellant in respect of revenues pertaining to the financial year 2009-2010. amounting to Rs. 81,26,232. 3. The assessee is a company engaged in the business of software maintenance after sales support services, customization of SAP software, etc. In the course of assessment proceedings under section 143(3) of the Income Tax Act, 1961 (hereinafter called 'the Act') for Assessment Year 2010-11, the AO noticed that the assessee had claimed deduction of a sum of Rs. 97,68,26,037/- as bad debts written off. The AO did not dispute the fact that the amounts that were claimed as bad debts were written off had been booked as sales and maintenance charges for the Financial Year 2009-10 (Assessment Year 2010-11). He noticed that some of the outstandings have been written off as bad debts in the very same year. The AO has given the details of some of the debts that have been written off to the tune of about Rs. 8,12,36,232/-. He found that the sums which were written off as bad debts were due from reputed companies like Infosys Ltd., Wipro Ltd., and TCS Ltd. The AO therefore called upon the assessee to expl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, in computing the income referred to in section 28-- (i) to (vi) xxxx xxxx xxxx (vii) subject to the provisions of sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year." 5. In the CBDT Circular No.551 dated 23-01-1990 (1990) 183 ITR St. 37, the provisions of Section 36(1)(vii) was explained post the amendment brought vide Direct Tax laws (Amendment)Act, 1987. The circular reads as under :- "Amendments to sections 36(1)(vii) and 36(2) to rationalise provisions regarding allowability of bad debts- The old provisions of clause (vii) of sub-section (1) read with subsection (2) of the section laid down conditions necessary for allowability of bad debt. It was provided that the debt must be established to have become bad in the previous year. This led to enormous litigation on the question of allowability of bad debt in a particular year, because the bad debt was not necessarily allowed by the Assessing Officer in the year in which the same had been written off on the ground that the debt was not established to have become bad in that year. In order to eliminate the disputes in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see took a decision to write off the amounts as bad debts. Accordingly, the assessee company wrote-off a sum of Rs. 3,66,71,850/- as bad debts on account of Shri. K. M. Viswanath and Smt. K. M. Parvathamma. The Tribunal found that the sum written off as bad debt was in fact realized by the Assessee before the date of filing of return of income and hence the tribunal did not allow the claim of the Assessee for deduction, observing as follows:- "Even though writing off a debt as bad and doubtful may be a sufficient mode of discharging the proof, the said format of statutory evidence is not an empty formality. It is not necessary for the assessee to prove that the debt has become bad. But at the same time, the assessee cannot convert any live amount into a bad debt only on the basis of the technical rule of writing off. In the present case, even though the amount was not received on the balance-sheet date, the amount was received by the assessee before filing of the return itself. In fact, the balance consideration of the sale transaction covered by the dishonour of the cheque was received by the assessee company on 30.08,2005. The assessee had filed the return of income only therea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l for Assessment Year 2009-10 is concerned, the assessee has raised 3 grounds of appeal out of which ground No.3 was not pressed. Ground No.2 is in relation to bad debt written off and is identical to grounds raised by the assessee in Assessment Year 2010-11 for the reasons stated while deciding the appeal for Assessment Year 2010-11, We allow ground No.2 raised by the assessee. 10. The only other ground that remains for adjudication is ground No.1 raised by the assessee which reads as follows: 1 Deduction under Section 80-IC of the Act a Based on the facts and circumstances of the case, the Appellant respectfully submits that the learned CIT(A) has erred. in law, and in facts. in not allowing deduction under Section 80-IC of the Act in respect of the amount added back under Section 40(a)(ia) of the Act. amounting to Rs. 116.508.888 for the 80-IC unit. b. Based on the facts and circumstances of the case. the Appellant respectfully submits that the learned CIT(A) has erred. in law, and in facts. in not allowing deduction under Section 80-IC of the Act after considering the reversal of commission expenses, amounting to Rs. 42.250 009. 11. As far as this ground is concerned, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or penalty by virtue of claiming deduction u/s 10A. As such, the real intention of the legislature by way of introducing section 40(a)(ia) will be defeated in case the assessee is entitled to claim deduction u/s WA on the same amount and thereby go scot-free without paying any tax or penalty on such disallowance. 12. In coming to the above conclusions, the AO placed reliance on the decision of the Hon'ble ITAT, Ahmedabad Bench 'C, in the case of DC1T, Circle-2(2) Vs. Ramesh 8hai C. Prajapathi (29 Taxmann.com 64) wherein it is held that amount disallowed u/s 40(a)(ia) cannot be taken into account to determine profits of business for the purpose of computing deduction u/s 80IB. 13. The AO further noticed from the computation of income eligible for deduction under 80-IC unit, that the Assessee had disallowed a sum of Rs. 58,53,925/- with a narration: "unpaid Karnataka Sales Tax u/s 43-B". Thus the deduction u/s.80-IC of the Act was claimed on the sum as enhanced by unpaid sales tax liability. The AO noted that the 80-IC unit was located in the State of Uttarakhand and it has no nexus with Karnataka State Sales Tax. The AO therefore called upon the assessee to furnish the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ems of expenses debited under each unit. However, even after availing adequate opportunities, the assessee did not furnish the requisite information. The AO also observed that the assessee has even failed to furnish the computation of total income as per the provisions of the Act in respect of each unit separately. After availing repeated opportunities also, the AR did produce working only in respect of 2 tax-exempt units, 10A unit at Bangalore and 80- IC unit at Dehradun. According to the AO therefore it was very difficult to arrive at the income of various units as per the provisions of the Act. In this background, the AO held that the following three components which have been added back to the total income under 80-IC unit would not be entitled to deduction. Accordingly, disallowance made u/s 80-IC unit was worked out as under: Total Profits of 80-IC unit 42,77,77,145. Less Disallowance in respect of amount relating to non-deduction of TDS 11,65,08,888 16,46,12,822 Disallowance of unpaid Karnataka Sales Tax 58,53,925 Disallowance pertaining to commission income 4,22,50,009 Total amount disallowed from the profits of 80-IC unit Deduction allowed 26,31,64,323 17. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he deduction u/s. 80-IC of the Act should be allowed on such enhanced profit consequent to disallowance u/s. 40(a)(i) of the Act. In this regard, we find that two High Courts viz., Hon'ble Bombay High Court in the case of CIT v. Gem Plus Jewellery India Ltd. (2010) 194 Taxman 192 (Born) and Hon'ble Gujarat High Court in the case of ITO vs. Kewal Construction, 354 ITR 13 (Gui) have taken the view that when disallowance u/s. 40(a)(ia) of the Act goes to enhance the profits that are eligible for deduction under Chapter VIA of the Act, the deduction under Chapter VIA should be allowed on such increased profit. This position has also been now confirmed by the CBDT in its Circular No.37/2016 dated 02.11.2016 wherein the Board has observed as follows:- "3. In view of the above, the Board has accepted the settled position that the disallowances made under sections 32, 40(a)(ia), 40A(3), 43B, etc. of the Act and other specific disallowances, related to the business activity against which the Chapter VI-A deduction has been claimed, result in enhancement of the profits of the eligible business and that deduction under Chapter VI-A is admissible on the profits so enhanced by the dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ious one. However, the courts have generally held that if the expenditure disallowed is related to the business activity against which the Chapter VI-A deduction has been claimed, the deduction needs to be allowed on the enhanced profits. Some illustrative cases upholding this view are as follows: [i] If an expenditure incurred by assessee for the purpose of developing a housing project was not allowable on account of non-deduction of TDS under law, such disallowance would ultimately increase assessee's profits from business of developing housing project. The ultimate profits of assessee after adjusting disallowance under section 40[a][ia] of the Act would qualify for deduction under section 80IB of the Act. This view was taken by the courts in the following cases: [a] Income-tax Officer-Ward 5[1] vs. Keval Construction, Tax Appeal No.443 of 2012, December 10 2012, Gujarat High Court [b] Commissioner of Income-tax-IV, Nagpur vs. Sunil Vishwambharnath Tiwari, IT Appeal No.2 of 2011, September 11 2015, Bombay High Court [ii] If deduction under section 40A[3] of the Act is not allowed, the same would have to be added to the profits of the undertaking on which the assessee woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The contention of the Revenue that in computing the deduction under Section 10A the addition made on account of the disallowance of the Provident Fund / ESIC payments ought to be ignored cannot be accepted. No statutory provision to that effect having been made, the plain consequence of the disallowance made by the Assessing Officer must follow. The second question shall accordingly stand answered against the Revenue and in favour of the assessee." 23. In view of the aforesaid decisions and the CBDT Circular No.37/2020, we hold that the revenue authorities erred in not allowing deduction u/s.80-IC of the Act on a sum of Rs. 11,65,08,888/-. The claim of the assessee in this regard is accepted and the AO is directed the give necessary relief to the assessee in this regard. 24. As far as the claim for deduction under section 80-IC of the Act on reversal of commission expenses of Rs. 4,22,50,009/- is concerned, the finding of the AO and the CIT(A) is that the assessee failed to produce evidence or explanation as to how the amount of commission was disallowed towards the unit claiming deduction u/s.80-IC of the Act. This finding has not been rebutted by the assessee in the proceeding ..... X X X X Extracts X X X X X X X X Extracts X X X X
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