TMI Blog2016 (4) TMI 564X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of the I.T.Act, where reserves and surplus of assessee was much more than the advances. - Decided in favour of assessee. - ITA No.129/Mum/2014 - - - Dated:- 4-3-2016 - SHRI R.C.SHARMA, AM AND SHRI PAWAN SINGH, JM For The Assessee : Shri Vijay Mehta For The Revenue : Shri K.V.Narsimhacharya ORDER PER R.C.SHARMA (A.M): This is an appeal filed by the assessee against the order of CIT(A)-Mumbai, dated 1-11-2013, for the assessment year 2009-10, in the matter of order passed u/s.143(3) of the I.T.Act, wherein following grounds have been taken by the assessee :- Being aggrieved by the order of the learned Commissioner of Income Tax (Appeals)-12, Mumbai, this appeal petition is submitted on the following grounds: 1) Disallowance of bad debts of ₹ 10 crores a. On the facts and circumstances of the case and in law, the learned CIT (A) erred in confirming disallowance of bad debts of ₹ 10 crores by holding that the Appellant is not engaged in money lending business and therefore, not entitled to claim loss on account of irrecoverable loan/ advance. Disallowance being bad in law, needs to be deleted. b. Without prejudice to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the advance was made during the course of business and, hence, write off of advance was allowable u/s.36(1)(vii) of the Act. Before the CIT(A) the assessee vide letter dated 5-12-2011 had submitted as under :- As part of our regular business activity, the company in order to purchase certain commercial premises had made reservation by way of bookings in the upcoming project at Old Mumbai Pune Highway, Khapoli, which was to be developed by M/s C. Bhansali Developers Pvt Ltd. In order to confirm the reservation I booking of said commercial premises, builder insisted for advance of ₹ 10 crores. Accordingly, the company had advanced ₹ 10 crores on 06.03.2007 towards reserving! booking of the commercial premises in the said project ... Since the said advance was for purchase of commercial property, there was no question of charging interest thereon ... However, further development about the said project of the builder is that the builder after taking advances from us did not proceed in this matter and possibly siphoned the money for other purposes. On coming to know about their non-proceeding in the development of the said project, we had a number of meetings w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 36(2)(i). 2.10. The relevant extract of section 36(2) of the Act is reproduced below: In making any deduction for a bad debt or part thereof, the following provisions shall apply- (i) no such deduction shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year, or represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee. 2.11. Since the Appellant is squarely covered under the statutory provision, the advances written off in the ordinary course of business should be allowed as a deduction under section 36(1 )(vii) read with section 36(2) of the Act. 2.12. Further, we wish to inform your Honour that it is well settled that money lent in the course of money lending business is incidental to the business of the assessee and therefore, such debt on becoming bad is allowable as a deduction. According to section 36(2)(i), restriction for accounting of debt as income in the earlier year is not applicable where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble as a business loss. b. Chenab Forest Co. V CIT [1974] 96 ITR 568 (J. K.) Assessee, a forest lessee advanced money to sub-contractors appointed to exploit forest - Advances were adjusted against ultimate payment due to them Due to non-extension of lease in favour of assessee some of advances could not be recovered from such contractors which were originally claimed as bad debts but was rejected as not fulfilling condition under section 36(2) Assessee then claimed that amount in question should be allowed as business expenditure under section 37(1) - Whether in view of fact that nature of business and system of working of assessee being such that it was necessary to make advances to carry on business, it could be concluded that advances were paid in ordinary course of business and therefore, assessee was entitled to deduction under section 37( 1) - Held, yes c. CIT v Pure Beverages Ltd. [1994] 209 ITR 131 (GUJ.) Section 37(1) of the Income-tax Act,1961 - Business expenditure - Allowability of - Assessment year 1975-76 - Assessee-company, a dealer in soft drinks, made arrangement with a bank to make advances to its dealers for purchase of electronic coole ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... money as its objects. During the year under consideration also on the money so lent the assessee has earned interest income of ₹ 24.62 crores. This interest income was also treated by AO as business income and not as income from other sources. This interest income was earned on the amount advanced by the assessee during the year as per its object clause, however, on the advance of ₹ 10 crore the assessee had not charged any interest, therefore, CIT(A) was correct in declining assessee s claim u/s.36(1)(vii) r.w.s36(2) of the Act. 7. It is a matter of record that assessee was engaged in the business of real estate development and trading of TDR and finance services. In the course of its business of real estate development, the assessee had given advance to M/s C. Bhansali Developers Pvt. Ltd. on 6-3-2007 for purchasing certain commercial premises had made reservation by way of booking in the upcoming project at Old Mumbai Pune Highway, Khapoli. Thus, money was advanced in the course of its business of real estate development, loss of such money on account of non-recoverability of advance made in the course of business is required to be allowed u/s.28/37 of the I.T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting the income chargeable under the head Profits and gains of business or profession . Applying the provisions of Section 37(1) to the facts of the instant case, we found that the amount so advanced was not in the nature of capital expenditure or personal expenses of the assessee, but was in the nature of advance given for reserving/booking of the commercial premises in the ordinary course of assessee s business of real estate development and which could not be recovered therefore, there is no reason to decline assessee s claim as business loss u/s.37(1) r.w.s.28 of the I.T.Act. Accordingly, we direct the AO to allow the advance of ₹ 10 crore which could not be recovered u/s.28 r.w.s.37(1) of the I.T.Act, 1961. 9. We also found that due to persistent efforts the assessee has been able to recover part of the advance and such recovered amount has also been offered to tax in A.Y.2012-2013. The assessee having offered to tax the amount recovered as income in subsequent year, the disallowance made in the year under consideration would result in subjecting the assessee to tax twice. Accordingly, we do not find any justification for decline of assessee s claim of busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) that since no interest income was received by assessee it cannot be said to be loan given in the normal course of business for earning interest income, therefore, the same cannot be allowed u/s.36(1)(vii) r.w.s.36(2) of the I.T.Act. In view of the above discussion, we direct the AO to allow assesee s claim u/s.26/37(1) of I.T.Act. 12. With regard to disallowance of ₹ 653,536/- u/s.36(1)(iii), we found that the AO has disallowed the amount on the plea that assessee has diverted its interest bearing funds for non-business purpose. The contention of the assessee before the lower authorities was that advances were given by the assessee as a builder and developer for the purchase of the property, in case the deal does not materialize the assessee either gets interest or compensation based on the terms and conditions agreed with the respective parties. Such advances cannot be treated as for non-business purpose. It was also contention before the lower authorities that advances were made through reserves and surplus of the company, therefore, no disallowance should be made in view of the decision of Hon ble jurisdictional High Court in the case of Reliance Utilities Powe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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