INCOME TAX ACT, 1961

Section 36(1)(vii)

Business deduction under section 36(1)(vii) - Bad debt - Advance paid for purchase of computer software -

The assessee company was engaged in the business of developing the computer software/hardware, embedded software etc. The AO noticed that the assessee has debited an amount as bad and doubtful debts, out of which, a sum of Rs. 51,05,623 was paid to M/s. Y Inc. as advances towards purchase of computer licence. The assessee justified bad debt claim, stating that the assessee has paid advances towards purchase of computer licence, but since it did not get any response from the party, it was written off and claimed as a deduction. The assessing officer observed from the copy of the invoice that the amount of Rs. 51,05,623 was paid for supply chain management products with customisations and, therefore, he held that it was capital in nature and cannot be allowed as revenue expenditure. AO also observed that advance was paid on 28-3-2012 and within 3 days, the assessee could not have treated the payment as a bad debt. Held: Advance was paid on 28-3-2012 and within 3 days, the assessee could not have treated the payment as a bad debt. The assessee's contention that it did not receive any reply from the party and therefore, it has been treated as a bad debit, cannot be accepted. Even if it is to be allowed as business expenditure, necessity of the payment needs to be considered. The assessee had filed additional evidence in the form of copies of the orders of civil courts wherein assessee had filed civil suit against this party for recovery of advance paid along with interest to demonstrate that this party did exist. However, in the interest of justice, additional evidence filed by the assessee is admitted and matter remanded to the assessing officer to examine the genuineness of the transaction and if the payment is found to be genuine, only then, the same may be allowed.

REFERRED :

FAVOUR : Matter remanded.

A.Y. : 2012-13 & 2013-14

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