2011 (2) TMI 284 - AT - Income Tax

Claim of bed debt - Amounts paid for development of websites is allowed as business loss If the websites had materialized, the expenditure could not have been viewed as capital expenditure because the website is put up for the purposes of day-to-day running of the business and even if one were to view that some enduring benefit is obtained by the assessee, the benefit cannot be said to accrue to the assessee in the capital field - A website is something where full information about the assessee s business is given and it helps the assessee s customers in dealing with it - A website constantly needs updating, otherwise it may become obsolete - It helps in the smooth and efficient running of the day-to-day business - The expenditure would have been allowable as revenue expenditure; as a corollary, when the website did not materialize, the amounts advanced to the companies who were engaged to develop the websites, when they became irrecoverable, can be written off and claimed as loss incidental to the business. The loss is thus allowable as business loss in terms of section 28 of the Act - The appeal of the department is dismissed.

Issues:
1. Whether the deletion of addition made on account of bad debts by the CIT(A) was justified.
2. Whether the advances made for website development can be considered as bad debts under section 36(1)(vii) of the Income Tax Act.
3. Whether the amount written off as bad debts can be allowed as business loss under section 28 of the Act.

Analysis:

Issue 1:
The first issue involves the deletion of the addition of bad debts by the CIT(A). The Assessing Officer disallowed the bad debts claimed by the assessee, stating that the debts were not established as irrecoverable. However, the CIT(A) allowed the bad debts based on the judgment of the Bombay High Court and held that certain debts should be allowed as a deduction. The appellate tribunal upheld the decision of the CIT(A) to allow the bad debts as a deduction, amounting to a total of &8377; 27,21,800, while confirming the disallowance of the remaining amount.

Issue 2:
The second issue revolves around whether advances made for website development can be considered as bad debts under section 36(1)(vii) of the Income Tax Act. The revenue contended that these advances were not bad debts but were meant for website development, and thus, could not be treated as bad debts under the Act. The tribunal agreed with the revenue's argument, stating that the advances were not considered in computing profits in previous years, and therefore, did not meet the conditions under section 36(2)(i).

Issue 3:
The final issue concerns whether the amount written off as bad debts can be allowed as business loss under section 28 of the Act. The tribunal analyzed the facts and contentions presented by both parties. The department argued that the expenditure for website development, if successful, would have been capital expenditure, not business loss. However, the tribunal upheld the assessee's alternative plea, citing relevant case law and judgments. The tribunal concluded that the amounts advanced for website development, which became irrecoverable, could be claimed as a loss incidental to the business under section 28 of the Act. Therefore, the tribunal upheld the CIT(A)'s decision on the grounds of business loss, dismissing the department's appeal.

In conclusion, the appellate tribunal upheld the CIT(A)'s decision to allow bad debts as a deduction while confirming the disallowance of the remaining amount. Additionally, the tribunal ruled in favor of the assessee, allowing the amount written off as bad debts to be claimed as business loss under section 28 of the Income Tax Act.

← Previous Next →