2013 (5) TMI 283 - HC - Income Tax

Advance rent written off as not recoverable - ITAT deleted the addition - Held that - It is not disputed that the assessee had paid a sum as advance which was to be adjusted against lease rents. The assessee had been carrying on business even prior to the lease agreement with respect to which advance had been made & had come to a conclusion that chances of recovery, of the amounts claimed from the lessors, in the near future were remote and had therefore written off the amount as irrecoverable in the previous year relevant to the assessment year 2004-2005. For an assessee to claim deduction in relation to the bad debts it is now no longer necessary for the assessee to establish that the debt had become irrecoverable and it is sufficient if the assessee forms such an opinion and writes off the debt as irrecoverable in its accounts. as decided in T.R.F Ltd. (2010 (2) TMI 211 - SUPREME COURT ) - In favour of assessee.

Summary

Issues:
1. Disallowance of entire amount written off by the assessee as irrecoverable.
2. Treatment of advance rent and capital expenditure by the Assessing Officer and CIT (Appeals).
3. Appeal by the revenue challenging the decision of the CIT (Appeals).
4. Tribunal's decision on the treatment of advance rent and capital expenditure.
5. Interpretation of the law regarding bad debts and deduction under the Income Tax Act.

Analysis:
The case involved an appeal by the revenue challenging the order of the Income Tax Appellate Tribunal regarding the disallowance of an amount written off by the assessee as irrecoverable. The controversy centered around an advance rent of Rs 33,47,489/- paid by the assessee and written off due to the property being demolished by the Delhi Development Authority. The Assessing Officer disallowed the entire amount as capital expenditure, leading to an addition to the assessee's income. The CIT (Appeals) made a distinction between the amount spent on property development and the advance rent. The CIT (Appeals) upheld the disallowance of the capital expenditure but allowed relief for a portion of the advance rent, considering the pending civil suit for recovery. The Tribunal upheld the decision on capital expenditure but granted relief on the advance rent, citing the Supreme Court's ruling on bad debts.

The Tribunal, following the T.R.F Ltd. case, held that the pendency of a civil suit does not bar writing off a debt if recovery chances are remote. The Tribunal disagreed with the CIT (Appeals) on the permissibility of writing off advance rent due to the ongoing suit. The High Court found no fault in the Tribunal's decision, emphasizing that the assessee had the right to write off the debt based on its opinion of recovery chances. Citing the T.R.F Ltd. case, the High Court clarified that it is sufficient for an assessee to form an opinion and write off a debt as irrecoverable to claim a deduction for bad debts. Consequently, the High Court dismissed the appeal, stating that it did not raise any substantial question of law for consideration.

Overall, the judgment focused on the treatment of advance rent and capital expenditure, highlighting the importance of forming an opinion on debt recovery for claiming deductions under the Income Tax Act. The decision reaffirmed the assessee's right to write off debts based on their assessment of recovery probabilities, as established by relevant legal precedents.