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2020 (3) TMI 1228 - AT - Income TaxDisallowance of bad debts u/s 36(1) - assessee had written off inventory of land - Diversion of income by overriding title - as concluded by directing the AO to restrict the addition on account of amount received through e-auction of impugned land and property by HDFC to only 5% of the receipt and recomputed income after giving benefit for amount of inventory of land written off - HELD THAT:- By no stretch of imagination it can be said that entire sum was received only against land belonging to the assessee. It is further clear from sale certificate wherein in the description of the property it has been mentioned that the same consists of immovable property being sold by way of sale of residuary right including receivable of HPGPL with step-in obligation in respect to the immovable property. Hence, it is quite evident that the receipt of e-auction by the HDFC against its finance to HPGPL did not belong to the assessee in its entirety as the same was of project as it stood as on that date. It comprised of the constructions there on as well receivable by HPGPL. Learned CIT(A) is correct in his appreciation that the assessee can be entitled to 5% which was agreed upon in the facilitation agreement between the assessee and its developer holding company i.e. HPGPL. We come to the assessee’s claim that since it has not received any amount and its land has also been e-auctioned, the assessee’s case should be treated as business loss. That it should be treated that land being trading asset of the assessee has been lost so assessee has claimed business loss. Further limb of the assessee’s submission is that since land was mortgaged to the bank for loan to HPGPL and the bank has adjusted the sale proceeds against loan to HPGPL, there is diversion of income by overriding title. The income has been diverted to HDFC by HPGPL and the assessee has not received any amount. So nothing can be attributed to the assessee’s income. We find that this limb of the assessee’s submission is also not sustainable. It is undoubted that the assessee had facilitation agreement with its holding company for development of the project on its land. As per the said agreement the assessee was entitled to 5% of the sale proceeds of the constructed property. Since in the present case holding company’s loss was adjusted upon by e-auctioned of the property for an amount of ₹ 296 crores, the assessee-company’s share out of the same as per the facilitation agreement clearly accrued to the assessee-company. If the assessee-company did not press for or forwent its claim it cannot be diversion of income by overriding title. But it will be treated as application of income. Hence, firstly assessee’s share has to be considered as income of the assessee for which necessary consequences of taxation has to follow. In this view of the matter in our considered opinion assessee’s contention that it had lost everything. That its land which was its stock-in-trade has been lost and hence assessee should be allowed loss to that extent is not acceptable as assessee’s share will be deemed to have been applied by the assessee after accrual and hence, contention of the assessee is not accepted. Sale of land by e-auction and consequent realisation of moneys are income of the assessee, as the land was a trading asset. Hence the income, which accrues to the assessee upon sale of trading asset is to be considered debt. Even Assessing Officer has recognised that the sale proceeds of land are sale receivable in the hand of the assessee. The non-realisation of debt can result in bad debt written off if the same is written off in the books. Since it is not the case that any bad debt has been written in the books the assessee’s plea fails. As per section 36(1)(vii) the allowance of bad debt is depending upon its being written off as irrecoverable in the accounts of the assessee in the previous year. Hence, in absence of this prerequisite the assessee’s claim of bad debt fails.
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