2016 (4) TMI 476 - AT - Income Tax

Disallowance in respect of loss on advances written off - Held that - There can be hardly any dispute about the legal positions in view of hon ble apex court decision in TRF Ltd. vs. CIT 2010 (2) TMI 211 - SUPREME COURT that after amendment in section 31(vii) of the Act post facto 01-04-1998 that it is not necessary for an assessee to establish the debts to have actually become bad. We find that the assessee has filed all necessary details even before the CIT(A) qua the bad debts in question. There is no evidence much less cogent one with both the lower authorities specifically rebutting assessee s contentions to have paid the impugned advances in course of its business of civil construction as made to the three parties given above. A shed in Minda (Huf) Limited. 2006 (3) TMI 213 - ITAT DELHI-A when advances given in the course of business become irrecoverable and an assessee write off the same as irrecoverable thereby claiming a deduction, the same amounts to trading loss as allowable u/s. 37 of the Act. The Revenue is unable to either point out any distinction on facts or law thereto. We accept assessee s arguments against the impugned disallowance and hold that its claim of bad debts in question of ₹ 20, 40,451/- is allowable as loss u/s. 28/37 of the Act. - Decided in favour of assessee Disallowance of land development expenses - Held that - As during the course of hearing that neither the Revenue has been able to support the impugned disallowance @ 20% hereinabove after pointing out specific material rebutting contents of the relevant evidence on record nor the assessee leads us to any cogent evidence for having incurred whole of the expenditure for developing its akota land stated hereinabove. We observe in these facts that both the parties have failed to discharge their respective onuses in support of and against the land development claim. We feel appropriate in the larger interest of justice in these facts and circumstances that a lump sum disallowance of ₹ 2,50,000/- instead of ₹ 24,95,422/- in question would be just and proper - Decided partly in favour of assessee

Summary

Issues Involved:
1. Disallowance of bad debts written off.
2. Disallowance of land development expenses.

Issue-wise Detailed Analysis:

1. Disallowance of Bad Debts Written Off:
The assessee contested the disallowance of Rs. 20,40,451/- as bad debts written off, comprising advances to three entities: M/s. Moogambiga Supplies, RRRDA, and Molin Mission Church. The Assessing Officer (AO) disallowed the claim on the grounds that the assessee failed to substantiate the claim under Section 36(1)(vii) read with sub-section 2 of the Income Tax Act, 1961, and relied on the jurisdictional High Court decision in Dhall Enterprises & Engineers India Pvt. Ltd., which stated that mere debiting of the amount is insufficient without actual write-off.

The CIT(A) upheld the AO's findings, emphasizing that the advances were earnest money deposits and not revenue-related, thus ineligible for bad debt deduction under Section 36(1)(vii). The CIT(A) also noted that since the appellant had claimed the deduction under Section 36(1)(vii), it could not be entertained under Sections 28/37 as per the Madras High Court ruling in 296 ITR 514 (Mad.). Furthermore, the CIT(A) stated that even if treated as a loss, it would be a capital loss, not a revenue loss.

Upon appeal, it was noted that the Supreme Court decision in TRF Ltd. vs. CIT 323 ITR 397 clarified that post-01-04-1998, it is not necessary to establish that debts have actually become bad. The Tribunal found that the assessee had provided all necessary details and there was no evidence from the lower authorities rebutting the assessee's contentions. The Tribunal also referenced a co-ordinate bench decision in Minda HUF Ltd vs. JCIT, which allowed similar claims as trading loss under Section 37. Consequently, the Tribunal allowed the assessee's claim of bad debts of Rs. 20,40,451/- as a loss under Sections 28/37.

2. Disallowance of Land Development Expenses:
The assessee challenged the disallowance of Rs. 24,95,442/- related to land development expenses. The AO disallowed Rs. 17,23,034/- as prior period expenses and 20% of the remaining expenses (Rs. 7,72,388/-) for being incurred towards non-business purposes. The CIT(A) upheld the disallowance, stating that the expenses related to prior years and were not substantiated with proper vouchers or explanations.

The Tribunal reviewed the case and found that the assessee had carried forward the expenses as fixed assets and had not claimed them in previous years. The Tribunal noted that the AO had not questioned these expenses in earlier assessments. However, the Tribunal observed that both parties failed to provide sufficient evidence to substantiate their claims fully. In the interest of justice, the Tribunal deemed a lump sum disallowance of Rs. 2,50,000/- instead of the full disallowance of Rs. 24,95,422/- to be appropriate, thus granting partial relief to the assessee.

Conclusion:
The appeal was partly allowed. The Tribunal accepted the assessee's claim for bad debts written off under Sections 28/37, amounting to Rs. 20,40,451/-. For the land development expenses, the Tribunal reduced the disallowance to a lump sum of Rs. 2,50,000/-, providing partial relief. The order was pronounced in the open court on 11-03-2016.