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2013 (10) TMI 1029 - HC - Income TaxWhether amount advanced to a contractor for execution of work for the purpose of business becomes irrecoverable, the same is not allowable as bad debt Held that - Assessee is an ice cream manufacturing concern. On February 3, 1996, the assessee concern placed an order with M/s. Alps Engineering Services Pvt. Ltd., for construction of a cold storage plant at its factory at Coimbatore and advanced a sum of Rs. 7,89,500. The said Alps Engineering Services Pvt. Ltd., did not commence the work due to their financial strain. A sum of Rs.2 lakhs was recovered from the advance already paid and the balance was claimed as deduction from the total income under the heading Business loss , as the amount was not recovered Reliance has been placed upon the judgment in the case of Hasimara Industries Ltd. v. CIT 1998 (5) TMI 7 - SUPREME Court , wherein it was held that if the assessee sustains business loss during the enlargement of the business, the same should be treated as capital investment Decided against the Assessee.
Issues:
1. Allowability of irrecoverable advance as bad debt. 2. Treatment of irrecoverable advance as business/trading loss. 3. Classification of advance as revenue loss or capital investment. Issue 1: Allowability of irrecoverable advance as bad debt The assessee challenged the order disallowing a sum of Rs. 5,89,500 as a bad debt. The advance was made to a contractor for constructing a cold storage plant, but the work was not commenced due to financial strain. The Assessing Officer disallowed the amount, considering it as a capital investment for acquiring assets. The Commissioner of Income-tax (Appeals) upheld this decision, stating that the advance was for securing an enduring benefit. The Income-tax Appellate Tribunal also dismissed the appeal, citing the judgment in Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC). The appellant argued that the unrecovered amount should be treated as a business loss, but the Revenue relied on Hasimara Industries Ltd. v. CIT [1998] 231 ITR 842 (SC), where business loss during business enlargement was considered as capital investment. Ultimately, the Tribunal held that the advance was not allowable as bad debt, following the Supreme Court's decision, and dismissed the appeal. Issue 2: Treatment of irrecoverable advance as business/trading loss The appellant contended that the unrecovered advance should be treated as a business loss. The argument was based on the inability to recover the amount due to the contractor's defunct status. However, the Revenue relied on the decision in Hasimara Industries Ltd. v. CIT [1998] 231 ITR 842 (SC), where business loss during business enlargement was categorized as capital investment. The Tribunal, in line with the Supreme Court's ruling, concluded that the advance could not be considered as a business/trading loss and upheld the disallowance of the amount. Issue 3: Classification of advance as revenue loss or capital investment The appellant sought to classify the unrecovered advance as a revenue loss, emphasizing the failure to recover the amount due to the contractor's insolvency. The Revenue, citing Hasimara Industries Ltd. v. CIT [1998] 231 ITR 842 (SC), argued that business loss during business expansion should be treated as capital investment. The Tribunal, guided by the Supreme Court's precedent, determined that the advance was not allowable as a revenue loss but should be considered as capital investment. Consequently, the Tribunal dismissed the appeal, aligning with the decision in Hasimara Industries Ltd. case and denying the appellant's claim for treating the unrecovered advance as a revenue loss.
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