2025 (5) TMI 1556 - AT - Income Tax

Disallowance of deduction of bad debts written off being in the nature of irrecoverable advance as business loss u/s 37(1) r.w.s. 28 - AO had initially disallowed the deduction citing the absence of a formal agreement PAN details and Tax Deducted at Source (TDS) records - HELD THAT - We find that the advance is a genuine business expense properly recorded in the accounts and it is not considered a capital expense. Here it is important to note that this amount of Rs. 27, 00, 000/- has continuously being shown in the balance sheet of the assessee as loan / advances and the Revenue has never questioned its correctness. Rather it has been taken on record year after year without being questioned. AO has raised this issue only when this amount was written off by the assessee as non recoverable. During the course of hearing Assessee drew our attention to the finding in the case of TRF Ltd. 2010 (2) TMI 211 - SUPREME COURT wherein set a clear precedent that once an amount is written off as irrecoverable no further proof or documentation is required to substantiate the claim. This principle was applied in this case where the assessee had already written off the amount as irrecoverable. After considering the facts and legal principles we are of the opinion that the order passed by the Ld. CIT(A) on this issue cannot be sustained. As a result we allow the assessee s claim for a deduction.

Summary

1. ISSUES PRESENTED and CONSIDERED

The principal issue considered in this appeal is whether the deduction claimed by the assessee of Rs. 27,00,000/- as bad debts written off, relating to an advance given for a proposed land purchase, is allowable as a business loss under Section 37(1) read with Section 28 or as a bad debt under Section 36(1)(vii) of the Income Tax Act, 1961. The secondary issue concerning the addition of Rs. 3,87,740/- on account of interest income was not pressed and thus dismissed.

2. ISSUE-WISE DETAILED ANALYSIS

Issue: Allowability of deduction of Rs. 27,00,000/- written off as bad debts or business loss

Relevant legal framework and precedents: The deduction claimed was primarily under Section 36(1)(vii) (bad debts) or alternatively under Section 37(1) read with Section 28 (business loss/expenditure). Section 36(1)(vii) requires that the debt must have been taken into account in computing income in any previous year and must have become irrecoverable during the relevant year. Section 37(1) allows deduction of any expenditure (not being capital expenditure or otherwise expressly disallowed) incurred wholly and exclusively for the purposes of the business. Section 28 defines income from business or profession.

Judicial precedents cited by the assessee included CIT v. Mysore Sugar Co. Ltd., CIT v. Inden Biselers, Khyati Realtors Pvt. Ltd. v. ACIT (ITAT Mumbai), and the Supreme Court decision in S.A. Builders Ltd. v. CIT, which recognize that advances given in the course of business, if irrecoverable, can be allowed as business losses. The CBDT Circular No. 12/2016 and the Supreme Court ruling in TRF Ltd. v. CIT were also relied upon, emphasizing that once an amount is written off as irrecoverable, further proof of irrecoverability is not required.

Court's interpretation and reasoning: The Assessing Officer (AO) disallowed the deduction on multiple grounds: the debt had never been taken into account in any previous year's income computation (contravening Section 36(2)(i)); absence of essential details such as PAN, address, and formal agreement with the recipient of the advance; no deduction of TDS on the advance; and classification of the amount as a loan/advance in the balance sheet, not consistent with money lending business, thus indicating capital expenditure rather than business loss.

The AO distinguished the precedents cited by the assessee as factually inapplicable and emphasized the lack of corroborative evidence to establish genuineness. The AO also noted that the expenditure did not relate to the assessment year but to an earlier period, which failed the requirement of incurring the expenditure in the relevant year under Section 37(1). Consequently, the AO added the amount back to income and initiated penalty proceedings for furnishing inaccurate particulars.

The Commissioner of Income Tax (Appeals) (CIT(A)) upheld the AO's order, highlighting the failure of the assessee to produce a copy of the agreement, PAN, address, and proof of TDS deduction. The CIT(A) noted that the assessee failed to prove the genuineness of the advance or meet conditions for deduction, and confirmed the addition.

Key evidence and findings: The advance of Rs. 27,00,000/- was made through banking channels on 07.04.2012 for a proposed land purchase that did not materialize due to a real estate recession. The amount was continuously shown as a loan/advance in the balance sheet and was never questioned by the Revenue until it was written off. The assessee claimed the write-off as a business loss in the relevant assessment year. No formal agreement, PAN details, or TDS deduction was furnished. Judicial precedents and CBDT Circular were cited in support of the claim.

Application of law to facts: The Tribunal noted that the amount was a genuine business expense recorded in the accounts and not capital expenditure. The continuous inclusion of the amount in the balance sheet as loan/advance without objection by the Revenue was significant. The Tribunal relied on the Supreme Court's ruling in TRF Ltd. v. CIT, which clarified that once an amount is written off as irrecoverable, no further proof is required to substantiate the claim. The Tribunal found the AO's and CIT(A)'s reliance on absence of formal agreement, PAN, and TDS to be insufficient to disallow the deduction, especially given the commercial realities of the real estate sector where advances may be based on mutual understanding rather than formal documentation.

Treatment of competing arguments: The Revenue argued non-compliance with conditions under Section 36(1)(vii) and absence of formal documentation, contending the amount was capital expenditure. The assessee argued that the advance was part of regular business operations, the loss was prudently written off, and the absence of formalities did not negate the business purpose. The Tribunal sided with the assessee, emphasizing the genuineness of the transaction, the continuous recognition of the advance in accounts, and the binding precedent of TRF Ltd. v. CIT.

Conclusions: The Tribunal allowed the claim of deduction of Rs. 27,00,000/-, deleted the addition made by the AO, and held that the amount written off was an allowable business loss under the Income Tax Act.

3. SIGNIFICANT HOLDINGS

"Once an amount is written off as irrecoverable, no further proof or documentation is required to substantiate the claim."

"The advance is a genuine business expense, properly recorded in the accounts, and not considered a capital expense."

"The absence of a formal agreement or PAN does not negate the business purpose, especially in the real estate industry where advances are often made based on mutual understanding."

"The amount of Rs. 27,00,000/- has continuously been shown in the balance sheet as loans and advances and the Revenue has never questioned its correctness until it was written off."

Core principles established include the recognition that business advances written off as irrecoverable are allowable as business losses under Section 37(1) read with Section 28, even in the absence of formal documentation, provided the transaction is genuine and recorded in the books. The ruling in TRF Ltd. v. CIT was applied as authoritative on the evidentiary requirements post write-off.

Final determination: The addition of Rs. 27,00,000/- was deleted, and the assessee's claim for deduction was allowed. The appeal was partly allowed accordingly.