2015 (12) TMI 560 - AT - Income Tax

Loss while carrying on of the business activities - whether allowable under sections 28 and 29 and / or 37 of the Act - whether the provisions of section 36(1)(vii) of the Act are not applicable since it is not the claim of bad debts i.e. write off of any debtors on account of raw material or machinery? - Held that - The claim of the assessee has to be seen from the angle of the provisions of section 37(1) of the Act wherein it is provided that all expenditure relating to carrying on of the business is to be allowed as deduction while computing the income chargeable under the head profit from business or profession where the expenditure is not in the nature described in sections 30 to 36 of the Act and not being in the nature of capital expenditure. The provision made by the assessee in its books of account on account of non-recovery of advance made for the purchase of machinery cannot be said to be a provision made on account of bad debts and hence the provisions of section 36(1)(vii) of the Act are not attracted. The said advance though was for the purchase of a capital asset but since the capital asset never came into existence the bar envisaged in section 37(1) of the Act do not apply. The expenditure claimed by the assessee is not covered by any of the provisions of sections 30 to 36 of the Act and being not a capital expenditure and having been incurred for the purpose of carrying on of the business is eligible for deduction under section 37(1) of the Act. The advance made by the assessee for the purchase of equipments which in turn was to be used in the line of business carried on by the assessee and in the absence of machinery having been delivered to the assessee and also because of Insolvency proceedings filed where there is no chance of recovery of advance made by the assessee we find merit in the claim of the assessee in writing off of the said advance as business loss in its hands. Non-claiming of a loss in original Return of Income - whether is not an omission or wrong statement which entitles an assessee to file a Revised Return of Income? - Held that - The CIT(A) was of the view that the revised return of income filed by the assessee does not fulfill the conditions laid down under section 139(5) of the Act. It may be considered at this juncture that in the original return of income the assessee had not made any claim of deduction on account of write off of the advance paid to Italian company such claim was made only in the revised return of income. In case the revised return of income is not accepted then how can the issue be so elaborately decided on merits? Once the merits of deduction have been considered by both the Assessing Officer and CIT(A) which admittedly was claimed only in the revised return of income we find no merit in the order of CIT(A) in this regard and accordingly we allow the ground of appeal No.2 raised by the assessee. Further the perusal of the assessment order itself reflects that the working of income is as per the revised return of income Rs. 15.97 crores and in these circumstances there is no merit in rejecting the revised return of income filed by the assessee.

Summary

Issues Involved:
1. Disallowance of loss on account of unrecoverable advance.
2. Application of provisions under sections 28, 29, 36, and 37 of the Income-tax Act.
3. Validity of the revised return of income.

Issue-wise Detailed Analysis:

1. Disallowance of Loss on Account of Unrecoverable Advance:
The primary issue revolves around the disallowance of a loss amounting to Rs. 43.35 lakhs, which the assessee claimed as a business loss due to an unrecoverable advance paid for machinery. The assessee had advanced EUR238,400 to an Italian company for purchasing machinery, which was never delivered due to the company's insolvency. The assessee argued that this loss was not a bad debt under section 36 of the Act but a business loss allowable under sections 28, 29, and/or 37.

The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] disallowed the claim, treating it as a capital loss. The CIT(A) further held that the provision for the loss was made on an ad-hoc basis and was unascertained, thus not allowable under section 37(1) of the Act.

The tribunal, however, found merit in the assessee's claim, citing the Rajasthan High Court's decision in CIT Vs. Anjani Kumar Co. Ltd., which allowed a similar loss as a business loss when no capital asset came into existence. The tribunal concluded that since the machinery was never delivered, the loss incurred was a business loss and should be allowed as a deduction under section 37(1).

2. Application of Provisions under Sections 28, 29, 36, and 37:
The tribunal considered whether the loss could be claimed under sections 28, 29, and/or 37 of the Act. The assessee contended that the loss was incurred in the course of business and should be deductible under these sections. The AO and CIT(A) had rejected this claim, interpreting the loss as a capital loss and not a trading loss.

The tribunal disagreed with the lower authorities, holding that the provisions of section 36(1)(vii) were not applicable as the loss was not related to bad debts. It was determined that since the capital asset (machinery) never came into existence, the loss was not capital in nature but a business loss. Thus, the tribunal allowed the deduction under section 37(1), emphasizing that the expenditure was incurred for the purpose of business and was not capital expenditure.

3. Validity of the Revised Return of Income:
The assessee filed a revised return of income to claim the loss, which was not claimed in the original return. The CIT(A) held that the revised return did not meet the conditions of section 139(5) of the Act, which allows revised returns only in cases of omission or wrong statements in the original return.

The tribunal found that the AO had computed the income based on the revised return, indicating acceptance of the revised return. The tribunal noted that the merits of the deduction were considered by both the AO and CIT(A), which would not have been possible if the revised return was not accepted. Therefore, the tribunal rejected the CIT(A)'s view and upheld the validity of the revised return.

Conclusion:
The tribunal allowed the appeal partly, directing the AO to allow the deduction of the loss as a business loss under section 37(1). The tribunal also upheld the validity of the revised return, dismissing the CIT(A)'s objection. The tribunal's decision emphasizes the principle that business decisions and losses should be evaluated based on the factual matrix and the purpose of expenditure, rather than rigid interpretations that do not align with the business realities.