2016 (9) TMI 591 - AT - Income Tax

Claim of bad debts and advances written off - trading loss u/s 28 - Held that - It is not in dispute that the assessee had advanced the monies to them in the normal course of business and had offered interest income in the earlier years as income from business which has also been accepted as such by the ld AO in the assessment proceedings u/s 143(3) of the Act for the Asst Year 2001-02. We find that the assessee had preferred civil suits against these two parties which are pending in the courts. In case any amount that could be recovered out of the outcome of the civil suits, the same would get taxed as bad advances recovered as income in the year of receipt. We find that the assessee had discharged its onus from all aspects and hence the write off of these advances which were given in the normal course of business and accepted as such by the revenue is allowable as a trading loss u/s 28 of the Act. With regard to debts due from Ameri Gas Pvt Ltd, we find that the assessee had offered the sales in the year of supplies made to that party and had written off as irrecoverable in the year under appeal. The assessee had duly complied with the provisions of section 36(1)(vii) read with section 36(2) of the Act and accordingly we hold that the ld CITA had rightly deleted the disallowance made on that count. With regard to amounts due from Pennzol Investment & Trading Co Pvt ltd, we find that the trade advances against supplies given by the assessee to such party could not be recovered and remaining outstanding for quite a long period of time and hence the assessee decided to write off the same as irrecoverable. We find that the advance was given in the nature of trade and in the normal course of business of the assessee for supply of industrial gases and loss arising on account of irrecoverabilty of the same is a trading loss allowable u/s 28 of the Act. With regard to write off the earnest money deposits, the same was paid in the normal course of business and write off of the same is an allowable trading loss u/s 28 of the Act.

Summary

Issues:
Whether the claim of bad debts and advances written off by the appellant is justified.

Analysis:
The only issue in this appeal is whether the CIT(A) was correct in allowing the claim of bad debts and advances written off by the appellant. The appellant, an Indian Public Limited Company engaged in the manufacture and supply of Industrial Gases, made advance payments to certain suppliers/contractors. The amounts that could not be recovered were written off. The appellant provided detailed explanations for each write-off:
- Ameri Gas Private Ltd: The amount due from 1996 was not recoverable due to incomplete work and time-barring, leading to a write-off.
- Pennzol Investment & Trading Co Pvt Ltd: The unadjusted advance became bad after the company closed, necessitating a write-off.
- M/s. Deepak Jhunjhunwala & M/s. C.K.Tibrewala & Co: Efforts to recover the amounts were unsuccessful, leading to pending court cases and eventual write-offs.
- Earnest Money: The amount was written off as the tender was not finalized, leading to irrecoverability.

The appellant argued that the write-offs were justified as they were made after all efforts for recovery were exhausted. The appellant had taken legal actions and sold securities to recover the dues, but to no avail. The appellate tribunal found that the write-offs were allowable as trading losses under Section 28 of the Income Tax Act. The tribunal noted that the appellant had fulfilled the necessary conditions for claiming bad debts and advances written off. The tribunal upheld the CIT(A)'s decision to allow the claims and dismissed the revenue's appeal.

In conclusion, the tribunal found no infirmity in the CIT(A)'s order and dismissed the revenue's appeal, upholding the allowance of bad debts and advances written off by the appellant.