2018 (9) TMI 622 - AT - Income Tax

Disallowing claim for deduction u/s 37(1)/28 of advances written off and investments written off - allowability of business loss - Held that - As relying on M/S. TAMILNADU MAGNESITE LTD. VERSUS THE ASSISTANT COMMISSIONER OF INCOME TAX 2018 (6) TMI 1236 - MADRAS HIGH COURT the aforesaid expenditure, being business loss for the assessee, was allowable to him once it was established that the project could not takeoff and the management considered it prudent to wrote-off the same in the books of accounts. The assessee has placed two identical Board Resolutions stated to be passed in two different Board Meetings i.e. 19/02/2007 & 02/07/2007 wherein the Board of Directors of the assessee company has decided to write-off the stated advances in the books of account. The dates of the two Board meetings fall in two different years and it becomes important to ascertain the true factual matrix since the claim of the assessee could be admissible only in the year in which the management finally took a decision to write-off the same in the books of accounts. As a logical consequence, it also become imperative to find out that the aforesaid claim has not been claimed /allowed to the assessee in any of the other years. Secondly, Ld. CIT(A) has noted that complete details of expenditure could not be filed by the assessee. Keeping in view the aforesaid factors, while agreeing with the claim of the assessee in principle, the matter stand remitted back to the file of Ld. AO for verification of aforesaid facts. - Decided in favour of assessee for statistical purposes.

Issues Involved:
1. Disallowance of claim for deduction under Section 37(1)/28 of the Income-Tax Act, 1961 for advances and investments written off.
2. Whether the advances written off can be considered as bad debts under Section 36(1)(vii) read with Section 36(2).
3. Whether the advances written off can be allowed as business expenditure under Section 28 or Section 37(1).

Detailed Analysis:

1. Disallowance of Claim for Deduction under Section 37(1)/28:
The assessee, engaged in project development activities, wrote off ?324.63 Lacs as advances and ?0.36 Lacs as investments in its Profit & Loss Account. The advances were related to a joint venture project with Tamil Nadu Industrial Development Corporation Ltd (TIDCO) for setting up an LNG power project, which was eventually abandoned. The Assessing Officer (AO) disallowed the claim, reasoning that the expenses were related to the joint venture and did not form part of the taxable income. The CIT(A) upheld this disallowance, stating that the write-off did not meet the conditions under Section 36(1)(vii) and Section 36(2) and could not be claimed under Section 37(1) due to specific prohibitions in the Act.

2. Advances Written Off as Bad Debts:
The CIT(A) found that the advances written off did not qualify as bad debts under Section 36(1)(vii) read with Section 36(2) because:
- The nature of the payment was capital expenditure.
- The conditions for bad debts were not fulfilled, including the requirement that the debt must have been taken into account in computing the income of the assessee.
The CIT(A) emphasized that the specific provisions of the Act must be satisfied for a claim to be allowed, and the advances written off did not meet these criteria.

3. Advances Written Off as Business Expenditure:
The assessee argued that the advances were given for business purposes and should be allowed as business expenditure under Section 28 or Section 37(1). The CIT(A) rejected this claim, stating that the assessee was attempting to claim the expenditure under general provisions after failing under specific ones. The CIT(A) noted that the joint venture project was not part of the assessee's regular business activities, and the expenses were not for the purpose of the assessee's business.

Tribunal's Findings:
The Tribunal noted that the assessee was engaged in project development activities and had written off the advances due to the abandonment of the project. The Tribunal agreed that the claim could not be allowed under Section 36(1)(vii) read with Section 36(2) as the amount was not in the nature of bad debts. However, the Tribunal found that the expenditure could be considered as a business loss under Section 37(1) read with Section 28(1) since the project was part of the assessee's business activities.

The Tribunal referenced several judicial pronouncements, including the Karnataka High Court's decision in Asia Power Projects Private Ltd. Vs DCIT and the Madras High Court's decision in Tamilnadu Magnesite Ltd. Vs. ACIT, which supported the view that expenses incurred for abandoned projects could be treated as revenue expenditure if they did not result in the creation of a new asset or enduring benefit.

Remand for Verification:
The Tribunal noted discrepancies in the dates of the Board Resolutions for writing off the advances and the lack of complete details of the expenditure. Therefore, the matter was remitted back to the AO for verification of the factual matrix and to ensure that the claim had not been allowed in any other year.

Conclusion:
The appeal was allowed for statistical purposes, with the matter remitted back to the AO for verification. The Tribunal agreed in principle that the expenditure could be considered as a business loss under Section 37(1) read with Section 28(1), provided the factual discrepancies were resolved and the conditions for the claim were met.

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