2007 (10) TMI 284 - HC - Income Tax

Sum was advanced to purchase a capital asset for the assessee - non-return of the money so advanced - unless the advance made was in the course of trading or incidental to the business of the assessee, the bad debts arising therefrom could not be treated as a business loss - conclusion of Tribunal that the non-recovery of the said sum was a business loss is contrary to the assessee s letter, which makes the position explicit that it was advanced for the purchase of a capital asset - non-recovery by the assessee would, amount to a capital loss

Summary

Issues:
Interpretation of bad debt as a business loss or capital loss for tax deduction.

Analysis:
The appeal under section 260A of the Income-tax Act, 1961 challenged the judgment of the Income-tax Appellate Tribunal regarding the treatment of a sum of Rs. 9 lakhs as a bad debt. The assessee's explanation for writing off the amount was based on a failed transaction for the purchase of a premises at Okhla, New Delhi. The Assessing Officer initially rejected this explanation, citing a Supreme Court judgment on the treatment of bad debts. The Commissioner of Income-tax (Appeals) upheld this decision, categorizing the amount as a capital loss due to its intended use for a capital asset. However, the Tribunal viewed the non-recovery of the amount as a business loss since the asset was not acquired and the money was deemed irrecoverable.

The Revenue contended that the Tribunal's decision was flawed as it accepted a new argument from the assessee, contradicting their initial stance that the amount was advanced for a capital asset purchase. The Tribunal's failure to consider the assessee's letter to the Assessing Officer, explicitly stating the purpose of the advance, was highlighted. It was emphasized that the Tribunal's conclusion on the nature of the loss contradicted the facts presented in the letter, which clearly indicated the intention for a capital asset purchase. The absence of any earlier plea or evidence supporting the advanced rent theory further weakened the assessee's case.

Ultimately, the High Court set aside the Tribunal's order, ruling in favor of the Revenue. The court affirmed that the non-recovery of the sum of Rs. 9 lakhs should be treated as a capital loss rather than a business or revenue loss, aligning with the initial assessments of the Assessing Officer and the Commissioner of Income-tax (Appeals). The decision was based on the explicit purpose stated in the assessee's letter and the lack of evidence supporting an alternative interpretation. The judgment resolved the substantial question of law in the negative, concluding the appeal in favor of the Revenue.