Deduction u/s 36(1)(vii) allowed for sales tax component of bad debts written off in the books of accounts

Deduction u/s 36(1)(vii) allowed for sales tax component of bad debts written off in the books of accounts. in any event the deduction has to be allowed u/s 28-ITAT

ABCAUS Case Law Citation:
ABCAUS 2201 (2018) (02) ITAT

Brief Facts of the Case:
The Petitioner assessee was a company. The assessee had claimed a deduction u/s 36(1)(vii) of the Income Tax Act, 1961 (Act) .on account of bad debts written off in the books of accounts.

The Assessing Officer (AO) noted that the bad debts written off comprised of component of sales tax also. The AO was of the view that the sales tax component of the bad debts written off could not be allowed as deduction as bad debts written off because it was not a debt arising from the trading transaction between the assessee and its customer.

According to the AO, it was a liability of the customer to pay sales tax to the Government. And therefore the sales tax component should not be allowed as deduction because the sales tax component was not credited as part of the sales when sale was recorded by the assessee in his books of accounts.

The AO was of the view that sales tax could be allowed as deduction only on payment basis in view of the provision of section 43B of the Act. For the above reasons the AO disallowed the claim of deduction on account of bad debts.

The assessee agitated the issue of the aforesaid addition before Disputes resolution Panel (DRP) which confirmed the order of the AO.

Contentions made on behalf of the Petitioner Assessee:
The assessee submitted that sales tax is part of the trading or business receipts of the assessee It was pointed out that the Hon’ble Supreme Court had held that sales tax collected is part of the trading receipt of an assessee. It was also submitted that sales tax charged in the invoice was routed through profit and loss account and therefore a trade receipt and writing off such amount should be considered as in the nature of bad debts written off.

Observations made by the Tribunal:
The Tribunal noted that admittedly the trading receipts of the assessee recorded in the books of accounts also included amount of sales tax. The assessee could not claim deduction of the aforesaid sum without payment in view of the provision of section 43B of the Act.

The ITAT opined that if the assessee had made the payment of sales tax then the debtor of the assessee had to pay back the said amount to the assessee and therefore it would assume the character of a debt in the hands of the assessee. Thus, if ultimately the customer fails to pay this amount to the assessee, it has to be regarded as bad debt written off and allowed as deduction u/s 36(1)(vii) of the Act.

The ITAT opined that in any event the deduction has to be allowed u/s 28 of the Act as a loss incidental to the business.

Decision/ Conclusion/Held:
Claim of the assessee was allowed.