As per sec 36(2) beddebt written off as irrecoverable is allowed if such debt taken into account in computing the income of the year in which debt is written off

IN THE INCOME TAX APPELLATE TRIBUNAL

(DELHI BENCH `D’ : NEW DELHI)

BEFORE SHRI U.B.S. BEDI, JUDICIAL MEMBER AND

SHRI B.C. MEENA, ACCOUNTANT MEMBER

ITA No.5388/Del./2011

(Assessment Year : 2008-09)

ACIT, Circle 4(1),

New Delhi.

(Appellant)

Vs.

Lex Orbis Conbsulting Pvt. Ltd.,

709-710, Tolstoy House,

15/17, Tolstoy Marg,

New Delhi-110 001.

(PAN/GIR No.AABCL0049A)

(Respondent)

Assessee by: Shri A.K. Nair, CA

Revenue by: Ms. Namita Pandey, DR

ORDER

PER U.B.S. BEDI, J.M.

This appeal of the department is directed against the order passed by the CIT(A)- VII, New Delhi, dated 06.09.2011 relevant to assessment year 2008-09 wherein following two effective grounds have been raised:

“2. On the facts and in the circumstances of the case and in law, the CIT(A) has erred in deleting the addition u/s 68 of the Act of Rs.75,00,000/- on account of interest free unsecured loan free loan, despite the fact that he assessee could not prove the creditworthiness and genuineness of the transaction. The assessee could not even provide confirmation from the payer despite several opportunities were afforded to it.

2.1 CIT(A) erred in observing that there should be material evidence to suggest that money received as unsecured loan should be directly or indirectly emanated from the assessee for the purpose of addition u/s 68 of the Act.

3. On the facts and in the circumstances of the case, the CIT(A) erred in deleting the addition on account of Rs.23,00,894/- on account of short recoveries, despite the fact that the transacting parties continued to do business regularly.

3.1 CIT(A) did not appreciate the fact that by allowing short recoveries on the lines of bad debts with regular clients the se is able to shift profits to subsequent year.

2. So far as first issue is concerned, Assessing Officer made addition of Rs.75,00,000/- on account of unsecured loan u/s 68 of I.T. Act, 1961 against which assessee took up the matter in appeal and it was submitted before CIT(A) as under:

“During the previous year ended 31.3.2008, the appellant company received unsecured loan of Rs.75 lakhs from M/s Agnus Holding Pvt. Ltd. This party had already given a loan of Rs.1.50 crores in the earlier years to the assessee and had enhanced it by Rs.75 lakhs in the previous year relevant to A.Y. 2008-09. Details of the same with assessment particulars had been given by the assessee along with copies of the bank a/c of the assessee showing the receipt of such monies through banking channels. Details of shareholding of M/s Agnus Holding Pvt. Ltd. as on 31.03.07 and 31.03.08 were also sought by the DCIT vide his letter dated 16.11.2010. There were duly submitted to him by the assessee. Copy of the relevant extract is attached herewith. This company is not related in any manner to the shareholders/directors of the appellant. In fact as pointed out during the assessment proceedings, M/s Agnus Holding Pvt. Ltd. and the appellant company are joint promoters of a BPO company called Clairvolex Knowledge Process Pvt. Ltd. and the loan had been received by the appellant company in terms of their arrangement in financing the said joint venture. The said company is based in Bangalore and there is no office in Delhi from where the details as desired by the DCIT could have been sought. The request was sent to the company to provide this information. However, since they too were busy with their tax finalization, there was a delay I the party responding to the appellant company. The confirmation of loan was however, expected from the party and on 8.12.2010, we had requested for additional time to receive the same. Our request was not acceded to by the DCIT and the assessment hearing was concluded on that date itself. The confirmation of the party with assessment particulars and their bankers confirmation showing the payment made by them is attached herewith and the appellant craves leave u/r 46A to admit the additional evidence. The unsecured loan received is a genuine loans reeived by the appellant company from an income tax assessee sho has the resources to make the payment. The delay in sending the confirmation by the party was caused due to their preoccupation with their tax cases and was not in the hands of the assessee company to remedy. Request was also made for the Department to seek direct confirmation from the party which was not done. We therefore, request that confirmation and other documents received form M/s Agnus Holding Pvt. Ltd. Be accepted and the addition u/s 68 be deleted.”

3. During the appellate proceedings, copies of (a) the audited financial of the unsecured loan creditor namely Agnus Holdings (P) Ltd. for the previous year relevant to assessment year 2008-09, (b) confirmation from the aforementioned loan creditor and (c) the bank statement of the account maintained by the appellant with Standard Chartered Bank wherein the receipt of the loan amount was reflected, were furnished on behalf of the appellant. The copies of the above-mentioned documents were sent to the A.O. in order to give opportunity to him in terms of Rule-46A(3) of the LT. Rules, 1962. Needless to mention here that considering the facts that they were not filed before the A.O. during the assessment proceedings, the evidences filed during the appellate proceedings were treated as additional evidences: In its response a report was submitted by the A.O. on 11.07.2011 through Addl. CIT, Range-4, New Delhi. The relevant portion of the said report is reproduced below for ready reference:-

4. During the course of assessment, it was observed that during the year under consideration the unsecured loans has increased by an amount of Rs. 75,00,000/-. The assessee was asked to file the confirmation of loans which the assessee could not file during the course of assessment despite ample opportunity allowed to it.

5. The assessee during the appellate proceedings has submitted copy of confirmation from Agnus Holding Pvt. Ltd. for Rs. 75,00,000/- during the financial year 2007-08. The assessee has also submitted copy of bank accounts maintained with Standard Bank wherein the following receipts have been reflected.

                                  S. No.       Amount          Date of deposit

                                      1.        Rs. 25,00,000/-     18.06.2007

                                      2.        Rs. 50,00,000/-     13.08.2007

The assessee has also submitted confirmation of transfer of the above amounts from Axis

Bank Limited.

6. During the course of assessment vide questionnaire dated 30.09.2010 along with notice under section 142(1), the assessee was asked to furnish details and confirmations of unsecured loans giving, name, address, bank details and IT particulars of parties. No response from the assessee was received, therefore, a show cause notice dated 26.10.2010 was issued to the assessee calling for attendance with details on 01.11.2010. On that date the Authorized Representative of the assessee company attended and filed the details of unsecured loans. The AR was requested to furnish confirmation of the party and details of his bank account and IT particulars. As per details /is Agnus Holding Pvt. Ltd has advanced interest free loan of Rs. 75,00,000/- to the assessee. Thereafter; the case was attended several times i.e. on 12.11.2010, 24.11.2010, 01.12.2010, 06.12.2010 & finally on 08.12.2010 but confirmation from M/s Agnus Holding Pvt. Ltd and other details like bank account of the creditor and copy of acknowledgment/or filling of return of income were not filed Under these circumstances the Assessing Officer held that the assessee failed to prove the genuineness of the credit entry with the documentary evidence and disallowed the entire amount of Rs.75,00,000/- as unexplained credit as per the provisions of section 68 of the Income Tax Act, 1961.

7. Even during the course of appellate proceedings, the assessee has not submitted copy of acknowledgment for filling return of income.

8. It is evident from the above that despite ample opportunity allowed to the assessee, the assessee did not submit the confirmations during the course of assessment. Thus, the part evidences submitted during the course of appellate proceedings should not be admitted Hence, the appeal of the assessee needs to be dismissed on this issue.

9. Copy of the report of the Assessing Officer was handed over to the Ld.AR of the assessee by the CIT(A), who in response to which submitted a rejoinder on 5.8.2011 as under:

“The Ld. ACIT vide his Remand report has acknowledged the fact that the confirmation from Agnus Holding Pvt. Ltd Reflects the receipt of Rs. 25,00,000 on 18.6.2007 and Rs. 50,00,000 on 13.8.2007, which had been stated by the Assessee themselves during the assessment proceedings itself. He has also mentioned that during the appellate proceedings, a copy of acknowledgement of filing the return of income of the lender has not been submitted We respectfully submit that the lender had given his assessment particulars in the confirmation filed by him. However, as desired by the Ld. ACIT, we are submitting the copy of the acknowledgement of filing the return of income for A.Y. 2008-2009 by the Assessee. We further submitted that the lender being busy with their own assessment proceedings had delayed in sending the confirmation to the Assessee for submission to the Ld ACIT. This fact had been duly brought to the notice of the Ld. ACIT, with a request for more time to submit this detail on 8.12.2010. As you would observe, the lender is a credible party, the transaction has been duly confirmed by them, their bankers have also given independent confirmation and the amount outstanding is also reflected in the Annual accounts of the lender, in the name of the Assessee. The transaction being a genuine transaction, the additional evidence filed should be admitted as in the alternative the Assessee would be penalized for no fault of theirs. We therefore submit that the confirmation filed be accepted and the demand deleted .”

10. CIT(A) after considering the provisions of Rule 46A of the I.T. Rules, 1962 has concluded to delete the addition as per para.4.4 of his order which is reproduced as under:

“4.4 I have carefully gone through the assessment order, the written and oral submission(s) of the appellant, the remand report of the A.O and the facts on record. It is observed that the assessee company has raised fresh unsecured loans of Rs.75,00,000/- from Agnus Holdings (P) Ltd during the year under consideration. Since the addition has been made as unexplained cash credit, it is considered necessary to examine the case in the light of the provisions of section 68 of the Act. Section 68 of the Act provides that where any sum is found credited in the books of accounts of the assessee for any previous year the same may be charged to income tax as the income of the assessee of the previous year if he offers no explanation about the nature & source thereof or the explanation offered by him is not satisfactory in the opinion of the Assessing Officer, the sum so

credited may be charged to income tax as the income of the assessee of the relevant previous year. The entire burden is upon the assessee and the assessee has to prove the following three conditions:-

(i) identity of the creditor;

(ii) capacity of such creditor to advance money

(iii) genuineness of the transaction.

If all the aforesaid three conditions are proved the burden shifts on the Revenue to prove that the amount belonged to the assessee.[CIT vs. United Commercial & Industrial Co. (P) Ltd. (1991) 187 ITR 596 (Cal.); M.A. Unneri Kutty vs. CIT (1992)198 ITR 147 (Ker.); CIT Vs. Precision Finance P. Ltd. (1994) 208 ITR 495(Cal.). In respect of the loan creditor, namely, Agnus Holdings (P) Ltd, all the three conditions, referred to above, can be said to have been fulfilled on the facts and circumstances of the present case. When the assessee had filed the confirmation letter giving the details such as permanent account number (PAN), copy of Income tax return, balance sheet and profit & loss account and copy of bank statements, the primary onus of proof has been discharged by it. However, the A.O. cannot be precluded from further investigation for the purpose of finding the genuineness of transaction and creditworthiness of the creditors. There is no indication in the assessment order or in the remand report that the A.O. has made any enquiry from (a) the banks from where the cheques (corresponding to the loans) were issued and cleared; (b) the Assessing Officer of the loan creditor, for the verification of the loans before arriving at the conclusion that the loan remained unexplained. There is no evidence or material to' even suggest, as pointed out on behalf of the assessee" that the money directly or indirectly emanated from the assessee so that it could be said that the assessee's own money was brought back in the guise of loan. The present case does not appear to be a case where the creditworthiness of the lender and the genuineness of the loan transaction in respect of the aforementioned loan could be called in question. In these circumstances, the Assessing officer is directed to delete the addition of Rs.75,00,000/- u/s 68 of the Act. As a result, Ground of appeal No.2 is allowed.”

11. Aggrieved by this order of CIT(A), department has come up in appeal and raised ground No.2 and 2.1 in this regard and pleaded that since additional evidence ahs been admitted and without providing further opportunity to the Assessing Officer to verify such additional evidence, CIT(A) has deleted the impugned addition which is in gross violation of Rules 46A(3) and 46A(4) of the Rules. Therefore, in all fairness, order of CIT(A) should be set aside in this regard and matter should be restored back on the file of the Assessing Officer for re-consideration and to this plea of the Ld.DR, Ld.Counsel for the assessee did not object and submitted that he has no objection if the case is restored back on the file of the Assessing Officer for reconsideration afresh.

12. We have heard both the sides, considered the material on record and find that the assessee filed certain additional evidence before the CIT(A) and applied for admission of such additional evidence under Rule 46A of the I.T. Rules, 1962 on which report was obtained from the Assessing Officer by CIT(A), who objected to admission of such evidence and supplying copy of such report to the assessee’s Ld.AR and considering the rejoinder filed by the Ld.AR of the assessee with regard to the admission of additional evidence, CIT(A) has deleted the impugned addition. It is not in dispute that against  admission of additional evidence, CIT(A) has called for report form the Assessing Officer, but after having admitted the additional evidence while considering the report of the Assessing Officer and rejoinder of the assessee , no further report to verify the additional evidence has been obtained and recently jurisdictional High Court in the case of CIT, Central-I vs. Manish Buildwell Pt. Ltd. I.T. Appeal No.928 of 2011 vide order dated 15.11.2011 has specifically held while considering the provisions of entire Rule 46A of the I.T. Rules, 1962 that in such circumstances, matter should go back to CIT(A) for complying with the provisions of Rule 46A of the Rules. In this case, both the sides have agreed and submitted that matter should go back to the Assessing Officer for consideration afresh. We set aside the order of the CIT(A) and restore the matter back on the file of the Assessing Officer for consideration afresh after giving opportunity to the assessee. We hold and direct accordingly.

13. As regards second issue, Assessing Officer made an addition of Rs.23,00,894/- on account of short recoveries. Assessee took up the matter in appeal and it was submitted before first appellate authority:

“During the appellate proceedings, it was submitted on behalf of the an amount of Rs. 23,01,134 was written off as short & excess representing bad debts of the Appellant Company being written off in the books of accounts of the Assessee. Of this amount, Rs. 23,00,894 pertained to one party Mis Patrie Mirandah Co., Singapore. /is Patrie Mirandah Co. are leading Patent registration attorney in Singapore. The Appellant Company is engaged in providing patent registration for all global brands in India and for this purpose, they are engaged by overseas Companies or Patent Attorneys from overseas to do such work in India forthem.Mls Patrie Mirandah Co. has generated the following revenues for the Appellant Co.:

A.Y 2007- 08 2,41,67,905

A.Y 2008- 09 2,58,18,990

Of the above income, an amount of Rs. 23,00,895 was disputed by the Party and they refused to pay the said amount. The amount is 4.60% of the total revenue generated by the Company from this one source. As they are one of the leading market players in the patent registration field and the Appellant Company is a recent entrant in this field, it was not advisable to antagonize them by taking them to court and instead the Appellant Company decided to adopt a softer route of negotiating with them to recover such amounts. In the meantime, before recovery of such amounts, the Company decided to write off such an amount in the books of accounts of the Company as there were clear indications from the client that the amount would not be paid by them. However, negotiations continued and the Appellant Company was ultimately successful in convincing the Client to pay such a disputed sum. In fact, in the very next year itself, the Appellant Company was able to recover Rs.17. 60 lakhs from this party out of the sum of Rs. 23 lakhs disputed with the Party and has offered this amount to tax in AY 2009-10. The Ld. DCIT was informed of this fact. A copy of our submission dt. 8.12.2010 is attached showing the various exchange of emails between the parties in this regard showing the dispute and the fact that ultimately a sum of Rs.17. 60 lakhs was recovered against this amount. A copy of the Balance Sheet for the year ended 31.03.2009 is also attached showing recovery of such balance written off. The addition of Rs.23,00,894 was not justified as these represented bad debts of the Assessee, the income of which had already been offered for taxation in the earlier years. Hence the same should be allowed to the Appellant Company. Thus, the Assessee was in accordance with law and following prudential accounting practice, correct in writing off such accounts as bad debts in the current assessment year which should be allowed to them. The Ld. ACIT has objected to such write off on the ground that no legal action was initiated and the nsofter route of negotiation was taken with the party to recover the bad debts. The decision whether to take legal action or adopt negotiation is one that only the businessman can decide and is not an option which is required by law. We reiterate again that of this amount of Rs.23,00,895 written off during A. Y 2008-09, an amount of Rs.17,60,000/- was subsequently recovered in AY 2009- 10 and has been taxed by the Ld.ACIT in that year itself. Thus the Appellant should be granted the right to be able to write off debts deemed to be bad as not only were these offered to ti)in earlier years but even the subsequent recovery has also been taxed "

14. CIT(A) while considering and accepting the plea of the assessee has concluded to delete the impugned addition as per para. 5.1 of his order as under:

 “5.1 I have carefully considered the submissions made on behalf of the appellant, the findings of the Assessing Officer in the assessment order and the facts and circumstances of the case. The position in law is well-settled as far as the provisions of section 36(l)(vii) read with section 36(2) of the Act is concerned. 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, subject to the provisions of section 36(2) that such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year. As the appellant has shown the amount of Rs.23,00,894/- (claimed as short recoveries or bad debts written off) as its income in assessment years 2007-08 & 2008-09, the conditions laid down in the provisions of section 36(1 )(vii) read with section 36(2) of the Act have been fulfilled by the appellant. In these circumstances, it is held that the contention of the appellant is correct. The Assessing officer is accordingly directed to delete the addition ofRs.23,00,894/-. As a result, Ground of appeal No.3 is allowed.”

15. Aggrieved by this order of CIT(A), department has come up in appeal and raised ground Nos.3 & 3.1 with regard to deletion of the impugned addition and while relying upon ground as raised, it was pleaded for setting aside the order of CIT(A) and restoring that of the Assessing Officer, whereas Ld.Counsel for the assessee relied upon the order of CIT(A) and pleaded for its confirmation.

16. We have heard both the sides and considered the material on record and find that the basis and reasoning as given by CIT(A) in deleting the impugned addition (as reproduced in earlier paras. of the order) are sound and convincing. No infirmity of law has been pointed out by the Ld.DR or noticed by us. Therefore, while concurring with the finding and reasoning as given by the CIT(A), we uphold his order and dismiss this ground of appeal of the Revenue.

17. As a result the appeal of the department gets partly accepted for statistical purposes.

Order pronounced in open court on 13.02.2012.

                                                     Sd/-                                          Sd/-

                                        (B.C. MEENA)                          (U.B.S. BEDI)

                              ACCOUNTANT MEMBER     JUDICIAL MEMBER

Dated: February 13, 2012

SKB

Copy of the order forwarded to:-

1. Appellant

2. Respondent

3. CIT

4. CIT(A)-VII, New Delhi.

5. CIT(ITAT)                                                                                Deputy Registrar, ITAT