2017 (2) TMI 1340 - AT - Income Tax

Disallowance of advance written off - CIT-A deleted the addition - Held that - The conditions precedent for claiming the bad debt has laid down in S.36(2) read with S.36(1)(vii) is not satisfied. The said claim cannot be allowed as bad debt. In the balance sheet the amount appearing as advance to others for land under loans and advances , in Schedule 5 is still showing outstanding in the year, and, therefore, this amount appears to be different, hence it is not a case of bad debts. As the said amount was not being recovered and has been claimed as loss by the assessee in this year, i.e. when sale of land was made, then the same needs to be allowed as business loss because, it was incidental and linked to the purchase of stock-in-trade and was taken as part of the cost of the land in this year while determining the business income from the sale of land in this year - Decided against revenue

Summary

Issues:
Disallowance of advance written off as a business loss.

Analysis:
The appeal was filed by the Revenue against the order passed by the Ld.CIT(A)-13, New Delhi, regarding the disallowance of an advance written off amounting to ?4,32,42,500. The assessee company, engaged in real estate development, had made a payment to acquire land in Goa. The registration of the land was done for a lesser amount than the total advance paid, with the balance shown as outstanding. The assessee claimed this amount as a bad debt and appropriated it towards the cost of the land. The AO disallowed the claim, citing lack of confirmation from the payee and invoking section 79 of the Income Tax Act due to a change in shareholding. However, the Ld.CIT(A) allowed the claim, considering the amount irrecoverable and part of the business loss, relying on relevant High Court decisions.

The Ld.Counsel for the assessee argued that the amount was genuinely irrecoverable, as evidenced by ledger accounts and correspondence with tax authorities. The Revenue contended that the claim cannot be both a bad debt and a business loss. The Tribunal noted that section 79 was inapplicable as there were no brought forward losses. The assessee had intended to purchase a specific area of land through a facilitator but could only acquire a portion. The ledger accounts showed the payments made and the unrecovered amount. The assessee then made a provision for bad debts, claiming the unrecovered amount as such.

The Tribunal found the manner in which the bad debts were written off to be incorrect. The conditions for claiming bad debts under the Income Tax Act were not met. However, the unrecovered amount, treated as part of the cost of the land, was considered a business loss linked to the purchase of stock-in-trade. As it was not being recovered and claimed as a loss in the year of land sale, it was allowed as a business loss. The decision of the Ld.CIT(A) was upheld, and the Revenue's appeal was dismissed.