ITAT Delhi Sends Back Advance Write-Off and MAT Credit Disputes for De Novo Examination — Federal Mogul Goetze (India) Ltd.

Background and Procedural History

The Delhi Bench of the Income Tax Appellate Tribunal took up two appeals filed by Federal Mogul Goetze (India) Ltd. pertaining to Assessment Year 2011-12. The litigation history in the first appeal is itself noteworthy, having passed through multiple rounds before the Tribunal and the Delhi High Court before the core corporate tax grounds could be adjudicated.

ITA No. 1909/Del/2016 was directed against the assessment order dated 30.01.2016 framed by the learned ACIT, Circle-9(1), New Delhi under Section 143(3) read with Section 144C of the Income Tax Act, 1961. That order, passed in furtherance of directions issued by the Dispute Resolution Panel (DRP) on 23.12.2015 under Section 144C(5), incorporated:

  • An arm's length price (ALP) adjustment of Rs. 5,24,63,542/- under Section 92C
  • A disallowance of advances written off amounting to Rs. 52,53,000/-

ITA No. 3186/Del/2017 challenged a subsequent rectification order dated 27.03.2017 passed by the learned JCIT, Special Range-3, New Delhi under Section 154 read with Section 143(3) and Section 144C of the Income Tax Act, 1961. Through this rectification order, an addition of Rs. 10,40,25,237/- was made by invoking Section 40(a)(i) — an amount that the Assessing Officer had inadvertently omitted to incorporate in the original assessment order dated 30.01.2016, despite the DRP having directed its inclusion.

How the First Appeal Reached This Stage

In the earlier round, the assessee had approached the Tribunal seeking withdrawal of ITA No. 1909/Del/2016 on the ground that it had concluded an Advance Pricing Agreement (APA) with the CBDT. The Tribunal, vide order dated 9th January, 2019, allowed the withdrawal. However, additional grounds (Ground Nos. 6 & 7) relating to the write-off of advances and MAT credit — which were corporate tax grounds independent of transfer pricing — had been raised before the Tribunal and inadvertently got swept along with the withdrawal.

The assessee filed a Miscellaneous Application (MA No. 555/Del/2019), which the Tribunal dismissed on 23rd September, 2020, holding that the powers under Section 254(2) are confined and do not permit the Tribunal to review its own order for mistakes or omissions attributable to counsel. The assessee then filed WP(C) 11330/2021 before the Hon'ble Delhi High Court. Vide order dated 22nd October, 2021, the Delhi High Court quashed the Tribunal's order in the MA and directed the Tribunal to adjudicate Ground Nos. 6 & 7 specifically. Pursuant to that direction, the Tribunal fixed the matter for hearing before the Division Bench, leading to the present adjudication.

Issue 1: Disallowance of Advances Written Off — Ground No. 6

Nature of the Claim

The assessee, engaged in the manufacture of automotive components including pistons and piston rings, contended that it had extended advances, earnest money deposits (EMDs), and security deposits to various vendors during the ordinary course of its business operations. When these amounts proved irrecoverable, they were written off by debiting the Profit and Loss Account.

The assessee sought deduction of Rs. 52,53,000/- either:

  1. As bad debts under Section 36(2) of the Income Tax Act, 1961, or
  2. Alternatively, as a business loss under Section 37(1) of the Income Tax Act, 1961

Reliance was placed on the Supreme Court decision in T.R.F. Ltd. v. CIT [2010] 323 ITR 397 (SC).

Revenue's Position

The learned CIT-DR pointed out that during the assessment proceedings — including the stage at which the DRP had directed the Assessing Officer to re-examine the matter — the assessee had not placed complete details of the advances, EMDs, and security deposits on record. The Assessing Officer had recorded that adequate opportunity of hearing had been extended to the assessee to furnish particulars, but the assessee had not complied. On that basis, the Revenue contended that the assessee had not discharged its burden of establishing that the amounts were advanced for business purposes.

Notably, both parties agreed before the Tribunal that the matter could be restored to the Assessing Officer for fresh examination.

Tribunal's Analysis and Direction

The Tribunal examined the competing submissions and observed the following:

The primary onus rests squarely on the assessee to demonstrate that the advances, EMDs, and security deposits in question were made for business purposes and that their recovery had become impossible — only upon establishing these facts can a claim be pursued under Section 36(2) or Section 37(1).