Determining Nature of Expenditure is Beyond CPC's Jurisdiction: ITAT upholds Deletion of Bad Debts Disallowance [Read Order]

The Delhi Bench of the Income Tax AppellateTribunal (ITAT) ruled that determining the nature whether capital or revenue expenditure was beyond Centralized Processing Centre (CPC) and upheld the deletion of bad debts disallowance.

M. M. Healthcare Ltd. (assessee), engaged in the medical and healthcare services business, had claimed a deduction for bad debts totaling ₹7,32,38,717. The primary component of this claim, amounting to ₹7.30 crores, originated from advances given to JMD Oil Pvt. Ltd. starting in July 2015.

The two entities had entered into a joint venture to manufacture generic medicines at a unit in Gandhi Dham, Gujarat. However, the project did not materialize as JMD Oil Pvt. Ltd. went into liquidation, leading the assessee to write off the amount as irrecoverable bad debts in its books of account.

During the processing of the return under Section 143(1), the CPC disallowed the claim. The Revenue contended that the disallowance was justified under Section 143(1)(a)(ii) as an "incorrect claim" apparent from information in the return.

Aggrieved by the CPC’s adjustment, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) deleted the adjustment stating that the CPC acted beyond the jurisdiction. Aggrieved by the CIT(A)’s deletion, the Revenue appealed before ITAT.

The Revenue argued that the advance was capital in nature for setting up a new business and did not meet the conditions of Section 36(1)(vii) read with Section 36(2), which requires the debt to have been taken into account in computing income in earlier years.

The two-member bench, comprising Satbeer Singh Godara (Judicial Member) and Manish Agarwal (Accountant Member), upheld the first appellate authority's decision to quash the CPC's adjustment. The tribunal observed that the CPC's power to make adjustments is strictly confined to six specific categories, such as arithmetical errors or patent inconsistencies.

The tribunal held that determining whether an expenditure is "capital" or "revenue" requires a deeper examination of facts and law that goes beyond the automated, mechanical scope of Section 143(1) of the Act.

The tribunal noted that the assessee's return did not explicitly state that the bad debts represented a capital expenditure. The tribunal noted that the claim could not be deemed "incorrect" based solely on the face of the return.

Following the Supreme Court's principle in Commissioner vs. Dilip Kumar, the tribunal highlighted a strict interpretation of taxing statutes. The tribunal held that since the disallowance did not fall under any of the six permissible categories for summary adjustment, the CPC had overstepped its jurisdiction.

The tribunal concluded that while the Revenue might have grounds to challenge the allowability of the bad debts in a regular scrutiny assessment, it could not do so through the summary processing route of Section 143(1). The tribunal upheld the deletion of the ₹7,32,38,703 addition and rejected the Revenue's appeal. The appeal of the Revenue was dismissed.

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