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2025 (7) TMI 947 - AT - Income TaxDisallowance being the actual amount of advances due and written off towards principal amount and towards interest - as argued amounts advanced by the appellant to producers of movies were integral part of the appellant s business activity and the amount written off during the year under account constituted loss incurred which is eligible for deduction u/s.36 - HELD THAT - AO has not discussed any issue but the order is passed summarily accepting the returned income as declared in the revised return of income filed by the assessee. Therefore this order would not help the case of the assessee on the issue of disallowance of claim of bad debts written off. The assessee has relied upon various judgments in support of the claim and there is no quarrel that if the advances are given by the assessee in the normal course of business of the assessee and then the non-recovery of those advances leading to written off on the part of the assessee would be an allowable claim because the said loss is directly related to the business of the assessee and the interest if any on the amounts advances are offered to tax as business income of the assessee in the preceding years. Therefore to apply the analogy that the advances are given under the normal course of business of the assessee or as a commercial expediency then the writing off of such advances on becoming bad is an allowable claim. The assessee has not filed any record to show that the interest income has been offered to tax by the assessee as business income in the preceding years so as to consider the transaction of the loan and advances as directly connected with the business activities of the assessee. Accordingly we are of the considered opinion that the matter requires a proper verification and examination of the relevant facts regarding the nature of the loan given by the assessee as well as the interest if any offered by the assessee to tax as business income of the assessee. Hence the matter is remanded to the record of the Assessing Officer for fresh adjudication. Appeal filed by the assessee is allowed for statistical purposes.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Tribunal include: (a) Whether the amount of advances and interest written off by the assessee, given to film producers, qualifies as a deductible business loss under sections 28, 36, or 37 of the Income Tax Act, 1961. (b) Whether the conditions prescribed under section 36(1)(vii) read with section 36(2) of the Income Tax Act, 1961, for allowing deduction of bad debts written off, have been satisfied by the assessee. (c) Whether the advances given by the assessee to film producers are integral to the business activity of the assessee, thereby justifying the deduction claimed. (d) The validity of the Assessing Officer's and Commissioner of Income-tax (Appeals)'s disallowance of the claimed deduction on grounds of non-fulfillment of statutory conditions and contradictory submissions by the assessee. (e) The applicability of judicial precedents concerning the allowability of advances written off as business loss or bad debts. 2. ISSUE-WISE DETAILED ANALYSIS Issue (a) and (c): Deductibility of advances and interest written off as business loss under sections 28, 36, or 37 Relevant legal framework and precedents: Section 28 of the Income Tax Act includes income chargeable under the head "Profits and gains of business or profession," and losses incurred during the course of business are generally deductible. Section 36(1)(vii) allows deduction of bad debts written off, subject to conditions under section 36(2). Section 37 permits deduction of any expenditure incurred wholly and exclusively for business purposes, not covered elsewhere. Judicial precedents cited by the assessee include:
Court's interpretation and reasoning: The Tribunal observed that although the assessee is engaged in the business of providing infrastructure and facilities for film production, the advances given to film producers do not have a direct nexus with the core business activity. The advances were given as loans for film production, which is not the principal business of the assessee. The Tribunal noted contradictory submissions by the assessee regarding the nature of the amounts written off-initially claimed as bad debts and later as advances and interest. The Tribunal emphasized that for claiming deduction under section 36(1)(vii), the bad debts must have been taken into account as income in previous years, which the assessee failed to demonstrate for the principal amount of advances. Key evidence and findings: The assessee furnished ledger accounts and loan agreements showing advances and interest charged to film producers. The interest portions were claimed to have been offered to tax in earlier years, but the principal advances were not shown as income. The assessee failed to provide confirmation from debtors regarding income offered under section 41(1). The Assessing Officer and CIT(A) found that the advances written off were not routed through the profit and loss account and thus were not allowable deductions. Application of law to facts: The Tribunal applied the statutory provisions and judicial precedents to the facts, concluding that since the advances were not part of the assessee's principal business and the statutory conditions under section 36(2) were not fulfilled, the disallowance was justified. Treatment of competing arguments: The assessee argued that the advances were integral to its business of film production and thus the loss was allowable under sections 28 or 37. The Revenue contended that the assessee was not in the business of lending money and the advances were capital in nature, not qualifying as deductible business loss or bad debts. The Tribunal found the Revenue's arguments more consistent with the facts and law. Conclusions: The advances written off do not qualify as deductible business loss or bad debts under the relevant sections of the Income Tax Act, given the absence of direct nexus with the business and failure to meet statutory conditions. Issue (b): Compliance with conditions under section 36(1)(vii) read with section 36(2) Relevant legal framework: Section 36(1)(vii) permits deduction of bad debts written off, provided the debts were previously included in income computation. Section 36(2)(i) explicitly disallows deduction of bad debts unless they have been taken into account while computing income of any previous year. Court's interpretation and reasoning: The Tribunal noted that the principal amount of advances written off was never offered as income in previous years, thus failing the statutory precondition for deduction under section 36(1)(vii). The interest portion was claimed to have been offered as income, but the assessee failed to produce documentary evidence or confirmations from debtors to substantiate this claim. Key evidence and findings: The Assessing Officer's order pointed out that the advances were not credited to profit and loss account and were not part of income computation in earlier years. The CIT(A) also observed contradictory submissions by the assessee regarding the nature of the amounts written off. Application of law to facts: Since the statutory condition under section 36(2) was not satisfied, the deduction under section 36(1)(vii) could not be allowed. Treatment of competing arguments: The assessee contended that the interest income was offered to tax in earlier years, but failed to provide confirmations from debtors. The Revenue relied on the statutory provisions to deny deduction. Conclusions: Deduction under section 36(1)(vii) is not allowable as the statutory conditions were not fulfilled. Issue (d): Contradictory submissions and evidentiary deficiencies Court's interpretation and reasoning: The Tribunal highlighted that the assessee's submissions before the Assessing Officer and CIT(A) were inconsistent-initially claiming the entire sum as bad debts, later splitting it into advances and interest, and changing the nature of the claim from bad debts to business loss. The assessee also failed to produce confirmation letters from debtors as required under the law. Application of law to facts: The contradictory stand and lack of documentary evidence undermined the assessee's claim and justified the disallowance. Conclusions: The inconsistent claims and evidentiary gaps contributed to the rejection of the deduction. Issue (e): Reliance on judicial precedents and prior assessment orders Court's interpretation and reasoning: The Tribunal noted that the assessee relied on judicial decisions supporting the allowability of advances written off as business loss if integral to business activities. However, the Tribunal distinguished the facts of the present case from those precedents, emphasizing the lack of direct nexus and failure to satisfy statutory conditions. The assessee also relied on the assessment order for the previous year (AY 2016-17), where the claim was allowed. The Tribunal found that order was passed summarily without discussion and thus was not binding or persuasive. Conclusions: The precedents cited were not applicable to the facts of the case, and prior assessment orders did not assist the assessee. 3. SIGNIFICANT HOLDINGS "As per the provisions of section 36(2)(i), no deduction towards written off debts shall be allowed unless the said debts has been taken into account in computing the income of any previous year." "The appellant company is engaged in the business of providing necessary infrastructure facilities for pre & post film production of feature films... They are not engaged in the business of money lending to claim any deduction of Advance write off." "Advance written off cannot be claimed as business loss u/s 28 of the IT Act. Advance given was a capital expenditure and the Advance written off was a capital loss." "The assessee has not filed any record to show that the interest income has been offered to tax by the assessee as business income in the preceding years so as to consider the transaction of the loan and advances as directly connected with the business activities of the assessee." "In the facts and circumstances of the case, we are of the considered opinion that the matter requires a proper verification and examination of the relevant facts regarding the nature of the loan given by the assessee as well as the interest, if any, offered by the assessee to tax as business income of the assessee. Hence, the matter is remanded to the record of the Assessing Officer for fresh adjudication after examination of the relevant record to be produced by the assessee in support of the claim." Core principles established include:
Final determinations: The Tribunal upheld the disallowance of the advances and interest written off as deduction under sections 28, 36, or 37, on the grounds that the statutory conditions were not satisfied and the advances were not integral to the business. However, the matter was remanded to the Assessing Officer for fresh examination of the relevant facts and records to ascertain whether the advances and interest were offered to tax in earlier years and whether the advances were indeed part of the business activity, thus eligible for deduction.
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