TMI Blog2021 (5) TMI 677X X X X Extracts X X X X X X X X Extracts X X X X ..... l in business of fishermen to whom advances were made due to cyclone and earthquake, assessee's claim for deduction was held to be allowed. In the case of Dr. T.A. Qureshi, [ 2006 (12) TMI 91 - SUPREME COURT] held that the Explanation to section 37 has really nothing to do with the instant case as it was not a case of a business expenditure, but of business loss. Business losses are allowable on ordinary commercial principles in computing profits. Once it was found that the heroin seized formed part of the stock-in-trade of the assessee, it followed that the seizure and confiscation of such stock-in-trade had to be allowed as a business loss. Loss of stock-in-trade has to be considered as a trading loss. The Delhi Bench of the Tribunal in the case of Swastik Pipes Ltd. [ 2018 (4) TMI 985 - ITAT DELHI] while deciding the identical issue had noted that the assessee paid advance to one, SG for acquisition of a capital asset. SG did not carry out his obligation. Thus, assessee written off amount paid to SG as bad debt. Assessing Officer disallowed same. Commissioner (Appeals) noted that amount did not qualify as bad debt because it was an advance paid for acquisition of cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M/s Mahima Trading Investment Pvt. Ltd. ₹ 15,66,848 b. M/s Adani Exports Ltd. ₹ 2,50,961 c. Shri. Rajeev Chopra ₹ 4,12,786 d. M/s Ankita Imports Exports ₹ 10,00,000 e. Mr. Surjeet Singh ₹ 3,20,000 f. Mr. Deepak Bharadwaj ₹ 14,75,992 g. Mr. S.S.Jain ₹ 2,50,000 h. Mr. Mayank Jian ₹ 2,50,000 i. M/s Choudhary Consultants ₹ 5,00,000 j. Shri Satya Karan Punia ₹ 25,03,750 k. Shri. Bharat Bhushan ₹ 8,43,750 1. M/s Elite Manufacturing Pvt. Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Surjeet Singh ₹ 3,20,000 f. Mr. Deepak Bharadwaj ₹ 14,75,992 g. Mr. S.SJain ₹ 2,50,000 h. Mr. Mayank Jian ₹ 2,50,000 i. M/s Choudhary Consultants ₹ 5,00,000 j. Shri Satya Karan Punia ₹ 25,03,750 k. Shri. Bharat Bhushan ₹ 8,43,750 1. M/s Elite Manufacturing Pvt. Ltd ₹ 1,59,000 m. M/s Unique Associates ₹ 2,50,000 n. M/s Shivam International ₹ 24,82,000 o. M/s Shivalik Builders ₹ 14,75,992 p. M/s Shivalik Promoters Builders Pvt Ltd ₹ 7,00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ort order Mahima failed to refund balance outstanding. Genuineness of Transaction and Nature of Advance Not Clear Based on AO 1. Arm's Length Party. 2. Payment by Account Payee Cheque. 3. Assessment U/s 143(3) Party Transaction found genuine. 4. Balance consistently appearing in Audited Balance Sheet as Advances. 5. Balance found genuine as Advances by Assessing Officer consistently U/s 143(3). 6. Copy of Purchase bills along with Export Invoices with Bill of Lading Custom Exchange. 7. No evidence that amount paid by Cheque received back as in cash. 8. Assessee claimed write off as Trading Loss U/s 28(1)/37(1) CIT(A) disallowed claim U/s 36(1)(vii) as Bad Debts (Page 37 CIT(A) Order). 2 Deepak Bharadwaj 10,00,000 1993- 94 Advance given for procurement of Export Supplies. In Export Contracts time is the essence of supplies as if supply is not received in time danger of cancellation of LC or loss of export order. But no supply received and party not refunded the advance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. Balance consistently appearing in Audited Balance Sheet as Advances. 5. Balance found genuine as Advances by Assessing Officer consistently U/s 143(3). 6. Copy of Purchase bills along with Export Invoices with Bill of Lading Custom Exchange. 7. No evidence that amount paid by Cheque received back as in cash. 8. Assessee claimed write off as Trading Loss U/s 28(1)/37(1) CIT(A) disallowed claim U/s 36(1)(vii) as Bad Debts (Page 37 CIT(A) Order). 5 S.S jain (Krishna Finance Co.) 2,50,000 1993- 94 Advance given for procurement of Export Supplies. In Export Contracts time is the essence of supplies as if supply is not received in time danger of cancellation of LC or loss of export order. But no supply received and party not refunded the advance Genuineness of Parties, Transaction and Payments not proved. Appellant not able to prove that it is debt and trade debt. 1. Arm's Length Party. 2. Payment by Account Payee Cheque. 3. Assessment U/s 143(3) Party Transaction found genuine. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that amount paid by Cheque received back as in cash. 7. Assessee claimed write off as Trading Loss U/s 28(1)/37(1) CIT(A) disallowed claim U/s 36(1)(vii) as Bad Debts (Page 37 CIT(A) Order). 8 Ankita Imports Exports 10,00,000 1992- 93 Advance given for procurement of Export Supplies. In Export Contracts time is the essence of supplies as if supply is not received in time danger of cancellation of LC or loss of export order. But no supply received and party not refunded the advance. Genuineness of Parties, Transaction and Payments not proved. Appellant not able to prove that it is debt and trade debt. 1. Arm's Length Party. 2. Payment by Account Payee Cheque. 3. Assessment U/s 143(3) Party Transaction found genuine. 4. Balance consistently appearing in Audited Balance Sheet as Advances. 5. Balance found genuine as Advances by Assessing Officer consistently U/s 143(3). 6. No evidence that amount paid by Cheque received back as in cash. 7. Assessee claimed write off as Tradi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ense as per Agreement. Business Nexus of payment not proved. Since payment towards consultancy charges, thus it was not a trade debt. 1. Arm's Length Party. 2. Payment by Account Payee Cheque. 3. Assessment U/s 143(3) Party Transaction found genuine. 4. Balance consistently appearing in Audited Balance Sheet as Advances. 5. Balance found genuine as Advances by Assessing Officer consistently U/s 143(3). 6. Copy of Agreement with service provider. 7. No evidence that amount paid by Cheque received back as in cash. 8. Assessee claimed write off as Trading Loss U/s 28(1)/37(1) CIT(A) disallowed claim U/s 36(1)(vii) as Bad Debts (Page 37 CIT(A) Order). 12 Surjeet Singh 3,20,000 1992- 93 Advance given for procurement of Export Supplies. In Export Contracts time is the essence of supplies as if supply is not received in time danger of cancellation of LC or loss of export order. But no supply received and party not refunded the advance Genuinen ess of Transactio n an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Cheque. 3. Assessment U/s 143(3) Party Transaction found genuine. 4. Balance consistently appearing in Audited Balance Sheet as Advances. 5. Balance found genuine as Advances by Assessing Officer consistently U/s 143(3). 6. Copy of Invoices. 7. No evidence that amount paid by Cheque received back as in cash. 8. Assessee claimed write off as Trading Loss U/s 28(1)/37(1) CIT(A) disallowed claim U/s 36(1)(vii) as Bad Debts (Page 37 CIT(A) Order) . 9 . No benefit of enduring nature resulted to assessee. 10. Loss was incidental to business of assessee. 15 Golf Management Group 80,000 1997- 98 Advance for Construction of Guest House for Stay of Foreign Buyers on Land not owned by firm but by the partners Expenditure being Capital in Nature cannot be written off as Revenue Expenditure. Expense in not trading liability as such expense is capital in nature. 1. Arm's Length Party. 2. Payment by Account Payee Cheque. 3. Assessment U/s 143(3) Party Transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ound genuine. 4. Balance consistently appearing in Audited Balance Sheet as Advances. 5. Balance found genuine as Advances by Assessing Officer consistently U/s 143(3). 6. No evidence that amount paid by Cheque received back as in cash. 7. Assessee claimed write off as Trading Loss U/s 28(1)/37(1) CIT(A) disallowed claim U/s 36(1)(vii) as Bad Debts (Page 37 CIT(A) Order). GRAND TOTAL 140,55,117 7. He submitted that all those advances were shown in the balance sheet of the assessee company in the past years and the assessments have been completed u/s 143(3). The AO, after verification of the books of account has accepted such advances. Therefore, when these advances were written off during the impugned assessment year by passing a resolution by the partners, copy of which is placed at page 101 and 102 of the paper book, the AO should not have been disallowed the same and the ld.CIT(A) should not have confirmed the action of the AO. 7.1. Referring to the order of the AO as well as the ld.CIT(A), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal and dismissed the appeal filed by the Revenue where the Tribunal has upheld the order of the CIT(A) in allowing the claim of business loss. In that case, the assessee had made an entry of ₹ 66,86,974/- in its books of account towards doubtful debts/advances. The AO held that the claim of the assessee could not be allowed as no details regarding these expenses had been filed, i.e., whether these were actually trade debts incurred in the course of business and what steps were taken to recover the amount and why these had been written off. He accordingly added the amount of ₹ 66,86,974/-. The CIT(A), on the basis of the remand report and on the basis of the fact stated by the assessee that they had given advances of ₹ 66,68,000/- to D for supply of packaging material and there were other small amounts/petty balances payable by other third parties deleted the addition of ₹ 66,68,000/-. On appeal by the Revenue, the Tribunal dismissed the appeal. On further appeal by the Revenue, the Hon ble High Court dismissed the appeal filed by the Revenue holding that the claim of the assessee was to be allowed u/s 37(1) r.w. section 28(1) instead of section 36(1)(vii) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the CIT(A). He submitted that the ld.CIT(A) has given justifiable reasons as to why the same should not be allowed as bad debt since the assessee did not fulfill the conditions laid down in the provisions of section 36(1)(vii). Further, he has also held that since the expenses do not relate to the year in question, these cannot be allowed u/s 37 of the IT Act. He accordingly submitted that the order of the CIT(A) being in accordance with the law, should be upheld and the grounds raised by the assessee should be dismissed. 12. We have considered the rival arguments made by both the sides, perused the orders of the AO and the CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find, the AO, in the instant case, disallowed an amount of ₹ 1,45,21,079/- out of the claim of ₹ 1,61,37,879/- under the head write off/bad debt. While doing so, the AO held that the assessee could not explain the genuineness of the transaction and the nature of advances is not clear. Further, the assessee had not filed any document proving that efforts were made to recover the amount in case of certain parti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... they cannot be allowed under section 37. The ground is therefore dismissed. 14. A perusal of the assessment order as well as the order of the CIT(A) and the various submissions filed before them categorically show that the assessee was all along been claiming the deduction as business loss/trading loss and not claimed the same as bad debt written off. So far as the allegation of the AO that the genuineness of the transaction and nature of advances are not clear is concerned, we find from the various pages of the paper book that such balances were consistently appearing in the audited balance sheet as advances and such balances were found genuine as advances by the AO consistently in the orders passed u/s 143(3) of the Act. Further, the assessee, during the course of original assessment proceedings in those years had filed the relevant details which were accepted after due verification and no adverse view has been taken. We find, the Hon ble Delhi High Court in the case of ACIT vs. Jay Engineering Works Ltd. (supra) has held that income-tax authorities could rely on the report of the auditors if detailed information of the claims were not available. Since, in the instant cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lhi House and Mercantile House at New Delhi. The assessee is also the promoter and developer of Heritage City at Gurgaon, in respect of which the profit has been shown under the head business or profession . During the year 1990-91, the asessee company entered into an agreement with M/s. Gulmohar Estate Ltd for the purchase of three properties at Garden Estate, Gurgaon for the total consideration of ₹ 44,28,000/- as per the agreement dated 27.07.1990. The assessee made the total payment to M/s Gulmohar Estate Ltd. in the year 1990- 91. Inspite of making full payment, no physical possession was handed over by the purchaser to the assessee. Since no physical possession was received by the assessee, the property proposed to be purchased by the assessee were not shown as stock in trade in the books of assessee as per the normal accounting practice. The assessee had debited the amount of ₹ 44,28,000/- in the books of accounts and shown under the head loans and advances . Thereafter, in the year 2003-04, M/s. Gulmohar Estage Ltd. locked their offices and it was found that the property purchased by the assessee were fraudulently sold to some other people also. District ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also be mentioned here that the appellant has not claimed such written off as business loss either in the return of income filed or during the course of assessment proceedings or appellate proceedings before me that the advance was made for the purchase of stock in trade or the amount was advanced in the ordinary course of business. It is also observed from the Assessment Order that appellant has made investment in properties and has shown long term capital gain on sale of such property. In view of these facts, appellant's claim that he amount written off may be treated as business loss is also rejected. From the said observation of the ld.CIT(A), we find that the Id. CIT(A) was of the view the assessee failed to produce any evidence that the advance was made for the purpose of stock in trade or the amount was advanced in the ordinary course of business, which in our considered opinion, is not correct in the light of the submissions of the assessee made before the Id. CIT(A), which has been reproduced by the Id. CIT(A) in his order at para 5 of his order. In the aforesaid submission made before the Id. C1T(A), the assessee categorically stated that the assessee was a con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... find that the assessee's intention to purchase three flats in housing complex by making total payment in advance was to do business of real estate or otherwise transaction was undertaken for the purpose of business ordinarily carried on by the assessee. 6. The aforesaid reasoning given by the tribunal is factual in nature. It cannot be said that the findings recorded by the tribunal are unreasonable or perverse. 7. In view of the aforesaid factual findings recorded by the tribunal, the answer to the question has to be in affirmative, i.e. in favour of the assessee and against the Revenue. 18. We find, the Hon ble Rajasthan High Court in the case of CIT vs. Anjani Kumar Co. Ltd. (supra) has allowed the claim of write off of advances as business loss by observing as under:- During the assessment year 1979-80, the Assessing Officer noticed that a sum of ₹ 52,489 was written off on account of advance made to the agriculturist for purchase of. agricultural land. The intention of the assessee, of course, was to acquire the land to set up a boiler factory, but ultimately that did not materialise. The agriculturist refused to refund the amount. The asses-s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the agricultural land to set up a factory, but when the agricultural land was not acquired, no capital asset came into existence, therefore, there is no question of allowing depreciation on such asset. If any asset is acquired and if it is a benefit of enduring nature, then, of course, the assessee cannot get deduction of the amount for acquisition of land as revenue expenditure. When land was not acquired, no capital asset has been acquired and therefore, the payment of ₹ 52,489 is to be allowed as a business loss. 5. We agree with the view taken by the Tribunal. No interference is called for. 6. In the result, we answer the question in the affirmative, i.e., in favour of the assessee and against the Revenue. 19. In the case of EKL Appliances Ltd. (supra) the assessee had made an entry of ₹ 66,86,974 in its books of account towards doubtful debts/advances - Assessing Officer held that claim of assessee could not be allowed as no details regarding these expenses had been filed, i.e., whether these were actually trade debts incurred in course of business, and what steps were taken to recover amount and why these had been written off - Hence amount of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, rejected assessee's claim - Whether, despite all efforts assessee was unable to recover debt it rightly wrote off same as bad debts and its decision not to take matter to court apprehending counter claim was well reasoned - Held, yes - Whether, therefore, assessee's claim of bad debt was to be allowed - Held, yes. Section 28(i) read with section 37(1) of the Income-tax Act, 1961 - Business loss/deduction - Allowable as - Assessment year 1986-87 - Whether in view of facts stated under heading 'Bad debts' non-recovery of trade advances amounted to business loss and were to be allowed as deduction under section 28(i) and section 37(1) - Held, yes 21. In the case of Minda (HUF) Ltd. (supra) the coordinate Bench of the Tribunal noted that during course of its business, assessee gave advances to vendors for supply of raw materials, etc. Said advances became irrecoverable due to either material was not supplied or defective material was supplied. Assessee wrote off said amount as advance irrecoverable and claimed deduction thereof. It was held that assessee's claim of deduction was allowable as trading loss under section 37(1). 22. We find, the Mumba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earthquake, assessee's claim for deduction was held to be allowed. 25. In the case of Dr. T.A. Qureshi, vide Civil Appeal No.5635 of 2006, order dated 6th December, 2006, the Hon ble Apex Court held that the Explanation to section 37 has really nothing to do with the instant case as it was not a case of a business expenditure, but of business loss. Business losses are allowable on ordinary commercial principles in computing profits. Once it was found that the heroin seized formed part of the stock-in-trade of the assessee, it followed that the seizure and confiscation of such stock-in-trade had to be allowed as a business loss. Loss of stock-in-trade has to be considered as a trading loss. [Para 17j 26. The Delhi Bench of the Tribunal in the case of Swastik Pipes Ltd. (supra) while deciding the identical issue had noted that the assessee paid advance to one, SG for acquisition of a capital asset. SG did not carry out his obligation. Thus, assessee written off amount paid to SG as bad debt. Assessing Officer disallowed same. Commissioner (Appeals) noted that amount did not qualify as bad debt because it was an advance paid for acquisition of capital asset. However, am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . R.B. Rungta Co. [1963] 50 ITR 233 upheld the finding of the Tribunal that the loss could be allowed on general principles governing computation of profits under section 10 of the Indian Income-tax Act, 1922, which is similar/identical to section 28 of the 1961 Act. The revenue in that case urged that the assessee having claimed deduction as a bad debt the benefit of the general principle of law that all expenditure incurred in carrying on the business must be deducted to arrive at a profit cannot be extended. This submission was negatived by the Court and it was held that even where the debt is not held to be allowable as bad debts yet the same would be allowable as a deduction as a revenue loss in computing profits of the business under section 10(1) of the Indian Income-tax Act, 1922. [Para 12] Therefore, the amount of ₹ 44.98 lakhs, which was held to be not deductible as bad debts in view of the provisions of section 36(2), could be considered as an allowable business loss. [Para 13] 28. In view of the above discussion and relying on the decisions cited (supra), we are of the considered opinion that the claim of the assessee has to be allowed as business lo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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