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Issues involved: The principal issue in this case concerns the validity of the assessee's claim for loss sustained on the write off of non-recoverable advances made for the purchase of machinery and due to non-acceptance of delivered machinery for its business.
Details of the judgment: 1. The Appellate Tribunal ITAT Mumbai heard an appeal by the Assessee against the Order by the Commissioner of Income Tax (Appeals) partly allowing the assessee's appeal contesting its assessment u/s.143(3) of the Income Tax Act, 1961 for the assessment year 2006-07. 2. The assessee, a company engaged in various businesses, claimed losses on non-recoverable advances made for machinery purchase and non-accepted machinery delivery. The outstanding advances were forfeited by the supplier, and the machinery delivery was not accepted, leading to the write-off of these amounts as irrecoverable losses. 3. The parties presented their cases, with the assessee claiming the losses as bad debts u/s. 36(1)(vii) or as business losses. The Revenue argued that the losses were capital in nature and not deductible in computing business income. 4. The Tribunal found it difficult to accept the losses as not on capital account, emphasizing that the losses were incurred due to the assessee rescinding relevant contracts for capital assets. The Tribunal referenced various case laws to support its decision that the losses were capital in nature and not deductible as business losses. 5. Even if considered as business losses, the Tribunal noted that the year of allowability needed to be determined, as losses u/s.28 could only be allowed in the year they were sustained. The Tribunal highlighted specific events and notices related to the losses occurring in earlier years, indicating that the losses could not be said to have arisen in the relevant year. 6. The Tribunal analyzed decisions relied upon by the assessee, distinguishing them based on the nature of advances and losses incurred. It concluded that the losses claimed by the assessee were capital in nature and not deductible as business losses, except for a separate amount related to prepaid expenses, which was held as deductible as a business loss. 7. The Tribunal partly allowed the assessee's appeal for statistical purposes, directing further verification by the Assessing Officer regarding the nature and timing of the deductible business loss related to prepaid expenses. Conclusion: The Tribunal upheld that the losses claimed by the assessee were capital in nature and not deductible as business losses, except for a specific amount related to prepaid expenses, which was deemed deductible as a business loss.
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