2015 (6) TMI 1239 - AT - Income Tax

Addition towards trade advance written off - as per AO claim of the assessee cannot be treated as debt arose during the regular course of business and the same cannot be allowed for deduction under section 36(1)(vii) - Whether outstanding from Century Wood Limited is, whether the advance is capital loss or business loss? - HELD THAT - There is nothing on record that the assessee has received wood frame from Century Wood Limited. The assessee has also not explained the reasons for advancing various amounts in different dates when the assessee has not received any materials from Century Wood Limited. It is not the case of the assessee that the assessee is required the material. Therefore, from the business necessity or business requirement, the advances were made. If it is so and if it business requirement, the assessee ought to have been purchased the materials from some other company. The assessee has not able to prove that the advances made by the assessee are for the purpose of business. The assessee itself noted in the ledger account that the amount was receivable from Century Wood Limited and interests were charged as on 31.03.2001 and the entire amount receivable as on 31.03.2001 was a loan. Once the assessee itself treated it as loan, now it cannot be said that it is a trade advance. The assessee has not able to produce any material to show that it is a trade advance - we hold that the claim of the assessee cannot be allowed as trade advance and the same was rightly treated by the Assessing Officer as capital loss, which was confirmed by the ld. CIT(A). Alternative ground raised by the assessee that under section 37 of the Act it is a business loss - We find that the assessee is not in the business of money lending. The assessee also not able to explain as to why it has advanced various amounts in different dates and it has not able to correlate the amount given and the material i.e. wood frame the assessee wanted to purchase from Century Wood Limited. Under these circumstances of the case, we are of the opinion that it is not relating to the business of the assessee and it is only a capital loss. Accordingly, the alternative ground raised by the assessee is rejected.

Summary

Issues Involved:
1. Classification of the amount receivable as a trade advance or loan.
2. Eligibility for deduction under Section 36(1)(vii) of the Income Tax Act.
3. Treatment of the amount as capital loss or business loss.
4. Applicability of Section 37 of the Income Tax Act for business loss.
5. Relevance of cited case laws to the present case.

Issue-wise Detailed Analysis:

1. Classification of the Amount Receivable as a Trade Advance or Loan:
The assessee claimed an amount of Rs. 75,21,978/- as trade advance written off, which included Rs. 69,58,763/- receivable from Century Wood Limited. The Assessing Officer (AO) found that the amount receivable as on 01.04.2000 was Rs. 41,29,127/-, which the assessee treated as a loan by charging interest. Despite this, the assessee advanced further amounts without receiving any material from Century Wood Limited. The AO concluded that the amount was treated as a loan, not a trade advance, as the assessee charged interest and made no material transactions post-01.04.2000.

2. Eligibility for Deduction under Section 36(1)(vii) of the Income Tax Act:
The AO disallowed the claim under Section 36(1)(vii) as the amount was treated as a loan, not a trade debt. The CIT(A) upheld this view, noting that the assessee continued to treat the amount as a loan in its books, and no material was purchased after 01.04.2000. Since the assessee was not engaged in money lending, the provisions of Section 36(2)(i) were not satisfied.

3. Treatment of the Amount as Capital Loss or Business Loss:
The assessee argued that the amount should be treated as a business loss. However, both the AO and CIT(A) determined it was a capital loss, as the advances were not made for business purposes. The Tribunal agreed, noting that the assessee failed to demonstrate that the advances were for business needs or that materials were received from Century Wood Limited.

4. Applicability of Section 37 of the Income Tax Act for Business Loss:
The Tribunal rejected the alternative claim under Section 37, as the assessee was not in the business of money lending and could not correlate the advances to business transactions. The advances were thus deemed unrelated to the business, confirming the loss as capital in nature.

5. Relevance of Cited Case Laws to the Present Case:
The assessee cited several case laws to support its claim. However, the Tribunal found these inapplicable:
- CIT v. Integrated Finance Co. Ltd.: This case involved advances for machinery purchase, whereas the present case lacked evidence of trade advances.
- Southern Polymers (P.) Ltd.: The cited case involved a company engaged in money lending, unlike the assessee.

Conclusion:
The Tribunal dismissed the appeal, upholding the AO's and CIT(A)'s decisions. The amount receivable from Century Wood Limited was classified as a loan, not a trade advance, and thus did not qualify for deduction under Section 36(1)(vii) or as a business loss under Section 37. The loss was deemed capital in nature, and the cited case laws were found irrelevant to the facts of the case.