2012 (3) TMI 325 - HC - Income Tax

Claim of bad debt - Business or Capital loss - In the assessment order dated 29th August, 2006, the Assessing Officer disallowed bad debt of Rs.44,28,000/- on the ground that provisions of Section 36(1)(vii) read with Section 36(2) of the Act were not satisfied as the amount had not been taken into account in computing income of the earlier years - It is not in dispute that the assessee is also in the business of constructing and developing buildings - The amount of Rs.44,28,000/- receivable from M/s. Gulmohar Estate Ltd. paid towards purchase of flats were shown under the head loans and advances in the balance sheet as on 31.03.1991 - It is also an admitted position that the possession of the fats agreed to be purchased by the assessee was not given to the assessee and, thus, the transfer of flats within the meaning of Income Tax Act was not completed - the transaction to purchase property from M/s. Gulmohar Estate Ltd. was related or incidental to the assessee s business. After taking into account the intention of the assessee, it is well settled that it is the intention of the assessee which would matter in deciding as to whether the property purchased were intended for carrying on business or to hold it as an investment coupled with the line of the business carried on by the assessee - Decided in favor of the assessee

Issues Involved:
1. Whether the ITAT is justified in allowing the assessee's claim of deduction as a business loss instead of a capital loss.

Issue-wise Detailed Analysis:

1. Justification of ITAT's Decision to Allow Deduction as Business Loss:

The primary issue revolves around the ITAT's decision to allow the assessee's claim of deduction as a business loss instead of a capital loss. The respondent-assessee, a company involved in real estate, declared an income of Rs.2,62,34,270/- for the assessment year 2004-05. The Assessing Officer (AO) disallowed a bad debt claim of Rs.44,28,000/- on the grounds that the provisions of Section 36(1)(vii) read with Section 36(2) of the Income Tax Act, 1961, were not satisfied. The AO noted that the amount was paid to M/s Gulmohar Estate Limited for property purchase, but the property was neither refunded nor sold, thus treating it as a capital loss.

The CIT(Appeals) confirmed the AO's addition, noting that the assessee failed to provide evidence that the amount was advanced for the purchase of stock-in-trade or in the ordinary course of business. The CIT(A) observed that the assessee had investments in properties, evident from its balance sheet, and had shown Long Term Capital Gain on the sale of a flat at HUDA.

The tribunal, however, allowed the loss under Section 37 of the Act, after examining the nature of the assessee's business activities, which included constructing and developing buildings, and treating immovable properties as stock-in-trade. The tribunal noted that the assessee had entered into agreements with M/s Gulmohar Estate Ltd. for purchasing properties as part of its business activities. The tribunal found that the amount of Rs.44,28,000/- was shown under "loans and advances" in the balance sheet and was written off as a business loss when the vendor absconded.

The tribunal's decision was based on the assessee's business nature, which involved real estate and construction, and the intention behind the property transactions. The tribunal observed that the properties were intended for business purposes, either as stock-in-trade or for the use of employees, making the loss incidental to the business.

2. Factual Findings and Reasoning by the Tribunal:

The tribunal's findings were based on the factual nature of the assessee's business and the intention behind the transactions. The tribunal referred to the memorandum of association and other business transactions of the assessee, which involved treating properties as stock-in-trade. The tribunal rejected the CIT(A)'s view that the assessee failed to produce evidence of the advance being made for stock-in-trade or in the ordinary course of business. The tribunal highlighted that the assessee was a promoter and developer of several properties and had shown advances from flat owners under "current liabilities and provisions."

The tribunal emphasized that the intention of the assessee is crucial in determining whether the property was held as an investment or for business purposes. The tribunal concluded that the transaction to purchase properties from M/s Gulmohar Estate Ltd. was related to the assessee's business and the loss incurred was a business loss.

Conclusion:

The High Court upheld the tribunal's decision, stating that the tribunal's reasoning was factual and not unreasonable or perverse. The court answered the substantial question of law in the affirmative, in favor of the assessee and against the Revenue, and dismissed the appeal with no order as to costs.

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