2012 (6) TMI 710 - AT - Income Tax

Non-recovery of the advance made for the development of the product - bad debts or capital loss - assessee engaged in the business of software verification validation and testing for various software developers - Held that - CIT(A) has taken into consideration the terms and conditions of the agreement to ascertain the nature of amount forwarded by the assessee to M/s.SATPL and has rightly held that amount was paid by the assessee for furthering its business interest and not for the purpose of investment. Therefore amount advanced which was subsequently not recovered is a business loss and thus allowable as revenue expenditure - Decided in favor of assessee.

Summary

Issues:
- Disallowance of bad debts written off by the assessee
- Nature of the amount advanced by the assessee to another company

Analysis:
1. Disallowance of Bad Debts:
- The assessee, a software company, filed its income return for the assessment year 2005-06, declaring income as &8377;1,14,517.
- During assessment, disallowances were made by the Assessing Officer, including &8377;15.00 lakhs for bad debts written off.
- The CIT(A) allowed the appeal of the assessee against the assessment order.
- The revenue appealed to the Tribunal, arguing that the CIT(A) erred in deleting the disallowance of &8377;15 lakhs as bad debts.
- The revenue contended that the amount invested by the assessee in a joint venture should be treated as capital loss, not bad debts.
- The assessee argued that the amount advanced was not capital investment but for enhancing business opportunities.
- After considering submissions, the Tribunal found that the amount advanced was for business purposes, not capital investment, and upheld the CIT(A)'s decision.

2. Nature of Amount Advanced:
- The revenue argued that the amount advanced was for investment, citing terms like 'development' and 'investment' used by the assessee.
- The CIT(A) analyzed the agreement between the parties and concluded that the amount was paid to further the assessee's business interests, not as an investment.
- The CIT(A) held that the amount of &8377;15 lakhs advanced by the assessee, not recovered later, constituted a business loss and was allowable as revenue expenditure.
- The Tribunal found no merit in the revenue's appeal, dismissing it and upholding the CIT(A)'s decision.
- The Tribunal emphasized that the judgements cited by the revenue were not applicable to the present case, as the money was not advanced for acquiring a capital asset but for project development.

3. Conclusion:
- The Tribunal, after thorough analysis, upheld the CIT(A)'s order, stating that the amount advanced by the assessee was for business purposes and not capital investment.
- The Tribunal found no reason to interfere with the CIT(A)'s decision, dismissing the revenue's appeal.
- The Tribunal emphasized the importance of analyzing the nature of transactions based on agreements and business context to determine the treatment of amounts advanced or written off.