1. Bad debt – Honest judgement made by the assessee – Claim of deduction under section 36(1)(vii) could not be rejected

CIT vs. Brilliant Tutorials (P) Ltd. [2007] 210 CTR 49 (Mad).

The assessee before the Hon’ble Madras High Court was a company engaged in the business of running a tutorial for professional entrance examination. The assessee had also taken over the business of one company namely First Computers. The main business of First Computers in to impart computer education and it had collected security deposits from various franchisees. Due to tragic incidents in USA in the year September, 2001 the business of the First Computers had been slowed down. Faced with this situation and that the franchisees had closed down their business, the assessee had written off the amount due from the franchisee of First Computers amounting to Rs. 51,57,365/- as bad debt. The Assessing Officer disallowed the claim of the assessee by observing that the assessee had taken a unilateral decision of closing the accounts of the franchisees and thereby claimed the debts as bad.

On an appeal the CIT(A) rejected the claim of the assessee for deduction 36(1)(vii) by holding that for claiming the deduction the assessee should have proved that the debt really became a bad debt and in the absence of any satisfactory proof to that extent the claim could not allowed.

Aggrieved by the above order of CIT(A) the assessee preferred an appeal before the Tribunal. The Appellate Tribunal allowed the assessee’s appeal by pointing out: (a) that there was huge fall in the business and thus there was a clear cut case of bad debts and after the amendment of section 36(1)(vii), writing off such bad debt would entitle the assessee to claim deduction, (b) that an assessee was not required to prove anything beyond the honest judgement on the part of the assessee to sustain the claim. Under these circumstances the tribunal held that the assessee is entitled to get the benefit of deduction under section 36(1)(vii). The Department being aggrieved by the Appellate Tribunal’s Order preferred an appeal before Hon’ble High Court under section 260A of the Act.

The Hon’ble Court upheld the order of the Appellate Tribunal with the observations that assessee having written off the dues from its franchisees after the latter closed down their business in the wake of steep fall in the receipts, claim for deduction under section 36(10(vii) was allowable.

CIT vs. Brilliant Tutorials (P) Ltd. [2007] 210 CTR 49 (Mad).

The Assessing Officer had rejected the claim of the assessee on the ground that the advertisement expenses claimed by the assessee did not match the receipts. Hence he took the view that a portion of the expenditure relating to the advertisement expenses should be allowed only in the year in which the receipts had been booked.

On an appeal the CIT(A) confirmed the disallowance made by the assessing officer by holding that the assessee did not fit into the matching concept of income and expenditure.

Aggrieved by the above order of CIT(A) the assessee preferred an appeal before the Tribunal. The Appellate Tribunal allowed the assessee’s appeal by holding that the expenditure is laid out exclusively for the purpose of business and that expenditure being revenue in character, the mere fact that the assessee might have derived benefit in future years could not stand in the way of granting the relief on the expenditure incurred on advertisement. The Department being aggrieved by the Appellate Tribunal’s Order preferred an appeal before Hon’ble High Court under Section 260A of the Act.

The Hon’ble Court upheld the order of the Appellate Tribunal with the observations that expenditure incurred by the assessee on advertisement being for the purpose of business, it is allowable as deduction in the relevant year itself irrespective of the fact that possible benefit thereof might accrue in future.

Meghalaya Plywood Ltd. vs. Commissioner of Income Tax [2007] 210 CTR (Gau) 144

The Assessing Officer has made Assessment Orders for the Assessment Years 1994-95, 1995-96 and 1996-97 on 9th June, 1997 and 31st March, 1997 treating transport subsidy as not taxable. The Assessing Officer had based his decision on the law as interpreted by Hon’ble Gauhati High Court in the case of CIT vs. Assam Asbestos Ltd. (1995) 215 ITR 847 (Gau) holding that transport subsidy is not a taxable item. Subsequently, the apex court in Sahney Steel & Press Works Ltd. vs. CIT (1997) 142 CTR (SC) 261 was called upon to decide as to among others whether a subsidy received by an assessee on the power consumed for production in the accounting year relevant to a particular Assessment Year was taxable as revenue receipt or not. In this case the subsidy in question was not given as in aid of setting up of the industry of the assessee held the apex court, it was an operational subsidy and therefore, exigible to tax.

The CIT after taking cue from the aforesaid decision invoked his powers under section 263 of the Act for suo motu revision of the aforesaid assessment order in accordance with the law laid down therein. According to him the subsidy in question, namely, transport subsidy, in this case was in the nature of operational subsidy and was, therefore, taxable. Being aggrieved by the suo motu revision proceedings, the appellant preferred an appeal before the Tribunal. However, the Tribunal rejecting the prayer for adjournment dismissed the said appeal vide its order dated 25th August, 2000.

The assessee being aggrieved by the order passed by the Hon’ble ITAT preferred an appeal before Hon’ble High Court under section 260A of the Act. The Hon’ble High Court has allowed the appeal of the assessee by observing that if the assessment order of the AO is made on the basis of the operating decision of jurisdictional High Court, it cannot be held that such an assessment order is erroneous, and the fact that the apex court had subsequently pronounced a contrary ruling cannot be a ground for invoking the
suo motu revisional power of the CIT under
s. 263.

CIT vs. Suresh Chand Goyal 209 CTR (MP) 410

In this case the assessee returned the gains on the transfer of land received as gift from his mother as capital gains. The land was agricultural land and same was converted into non-agricultural prior to sale.

The A.O. had disallowed the claim of expenditure of the respondent after observing that apart from the approval of map, deposit of tax and other activities for developing them into the plots like making of roads, etc. was also taken up and in two out of three assessment years, expenditure has been claimed for such development activity.

The respondent being aggrieved by the above order of the A. O. preferred an appeal before the CIT(A). The first appellate authority had upheld the order of the A. O. The CIT(A) was carrying on business in real property and it was a business venture.

The respondent assessee being aggrieved by the above order preferred an appeal before Appellate Tribunal. The Appellate Tribunal held that the gain arising out of the sale was not business activity, therefore, the same is not assessable income from business. The amount of sale proceeds received out of the sale of the plots is the income in the form of ‘capital gain’ and not from adventure in the nature of trade and allowed the appeal and set aside the judgment of AO as well as that of CIT(A).

Being aggrieved by the above order of the ITAT, the revenue has filed an appeal before the Hon’ble Madhya Pradesh High Court under section 260A of the Act. The Hon’ble High Court upheld the order of the Appellate Tribunal and held that isolated activity of sale of plots after converting agricultural land into non-agricultural land and developing the same with a view to secure better price cannot come within the purview of adventure in the nature of trade and therefore, the surplus on sale of land was in the nature of capital gain.

CIT vs. Kuldip Industrial Corporation [2007] 209 CTR (P&H) 400

The issue in dispute in this case was continuation of registration. The Learned CIT(A) granted the registration on the ground that the certain evidence has not been properly appreciated by the Assessing Officer. The Assessing Officer preferred appeal before Appellate Tribunal on the ground that the relief has been granted after admitting evidence in breach of provisions Rule 46A of the I. T. Rules, 1962. The Appellate Tribunal overruled the objection of the Assessing Officer. The matter was carried before the High Court.

Hon’ble High Court held that the AO, who was present at the time of furnishing of additional evidence before the CIT(A) having raised no objection, the opportunity envisaged under rule 46A stood satisfied.

Agro Engineering (MP) (P) Ltd. vs. CIT [2007] 209 CTR (MP) 417

The assessee before the Hon’ble Madhya Pradesh High Court was in the business of securing contracts from the Government Departments for tube well boring. For the Assessment Year
1995-96, the assessee filed the return of income indicating total income of Rs. 77,451, out of gross receipt of Rs. 6,92,06,049. The books of account of the assessee were duly audited. The AO, however, rejected the books of account of the assessee and proceeded to determine the income under s. 144 of the Act. The AO, therefore, estimated the net profit at the rate of ten per cent on gross receipts and determined the income at Rs. 69,02,605.

On an appeal CIT(A), Indore, had partly allowed the appeal of the assessee and brought down the percentage of net profit to 7.75 per cent. He also allowed the claim of the assessee for reduction of the amount of depreciation on plant and machinery.

Being aggrieved by the above order of the CIT(A) both the assessee as well as revenue had filed an appeal before the ITAT. Pending the appeals before the Appellate Tribunal during the assessee find declaration under the Kar Vivad Samadhan Scheme, the declaration was accepted. However, the Appellate Tribunal decided the appeals.

Being aggrieved by the above order of the ITAT the assessee filed an appeal before the Hon’ble Madhya Pradesh High Court u/s. 260A of the Act. Hon’ble High Court held that once declaration under KVSS was accepted by revenue, Tribunal had no jurisdiction to proceed to decide appeal filed by assessee or revenue.