2016 (2) TMI 876 - AT - Income Tax

Claim of deduction written off on account of unrecoverable advance made for purchase of machinery - Held that - As second installment of the claim made on account of unrecoverable advance to the extent of 30% of the total amount. The facts and issues arising in the present captioned assessment year are identical to the facts and issues in assessment year 2009-10 and following the same parity of reasoning, we hold that the assessee is entitled to the claim of deduction of ₹ 43,34,640/-, written off on account of unrecoverable advance made for purchase of machinery. - Decided in favour of assessee

Summary

Issues Involved:
1. Disallowance of loss on account of unrecoverable advance given in the course of business under sections 28, 29, and 37 of the Income-tax Act, 1961.
2. Application of provisions of section 36 when the deduction was not claimed under section 36.
3. Acceptance of income as per the revised return of income by the assessee.

Detailed Analysis:

1. Disallowance of Loss on Account of Unrecoverable Advance:
The primary issue was whether the loss on account of an unrecoverable advance for the purchase of machinery could be allowed as a deduction under sections 28, 29, and 37 of the Income-tax Act, 1961. The assessee had claimed a deduction for unrecoverable advances made to an Italian company, M/s. Galileo Vacuum Systems, for machinery that was not delivered. The assessee had booked the loss in stages: 30% in assessment year 2009-10, 30% in 2010-11, and 40% in 2011-12. The Tribunal found that the loss was incurred in the course of carrying on the business and was thus eligible for deduction under sections 28, 29, and/or 37 of the Act. The Tribunal referenced the decision in CIT Vs. Anjani Kumar Co. Ltd., which held that when no capital asset comes into existence, the payment should be allowed as a business loss.

2. Application of Provisions of Section 36:
The assessee argued that the deduction was not claimed under section 36, which pertains to bad debts, but under sections 28, 29, and 37. The Tribunal agreed with the assessee, stating that the provisions of section 36(1)(vii) were not applicable as the claim was not for bad debts but for a business loss. The Tribunal cited several cases, including Pik Pen Private Limited Vs. ITO and DCIT Vs. Edelweiss Capital Ltd., supporting the view that advances for capital assets that never materialized could be written off as business losses.

3. Acceptance of Income as per Revised Return:
The Tribunal addressed the issue of whether the revised return of income, which included the deduction for the unrecoverable advance, should be accepted. The Tribunal found merit in the assessee's claim and directed the Assessing Officer to allow the deduction. The Tribunal noted that the assessee had recognized the expenditure in the year under consideration and that the claim was not premature or unascertained, referencing the decision in CIT Gwalior Rayong Silk Mfg. (WVG) Co. Ltd. regarding the year of write-off.

Conclusion:
The Tribunal concluded that the assessee was entitled to the deduction for the unrecoverable advance made for the purchase of machinery, which was never delivered. The Tribunal directed the Assessing Officer to allow the claim of Rs. 43,34,640/- written off as a business loss. The appeal of the assessee was allowed, and the grounds of appeal were resolved in favor of the assessee.