2019 (11) TMI 1178 - AT - Income Tax

Bad Debts written off disallowed - HELD THAT - AR has stated at the Bar that at no point of time the assessee was engaged in industrial activity or the objects of the assessee were amended to include carrying on of industrial activity as its business. Hence, there is no question of purchasing land to set up any industrial activity. We find merit in the contentions of the assessee. The inevitable conclusion that can be drawn from examining the documents on record and facts of the case is that the industrial plot was held by the assessee as stock in trade. Since, the assessee failed to recover the advance paid which was forfeited by the Vendor of the plot in line with the terms and conditions of agreement dated 07-12-2005, the assessee had no other option but to write off the same. As per terms and conditions of the agreement of sale, the assessee had paid ₹ 10 lakhs at the time of execution of agreement, whereas, the assessee has written off ₹ 25 lakhs. The authorities below have not examined the amount which the assessee has paid as advance for the purchase of industrial plot. Therefore, we deem it appropriate to restore this issue back to the file of Assessing Officer for limited purpose to verify the amount paid by the assessee as advance for purchase of industrial plot. In principle, we are of the view that advance paid by the assessee towards purchase of plot had become irrecoverable and hence, the claim of assessee deserves to be allowed.

Summary

Issues Involved:
1. Disallowance of Bad Debts written off - ?25,00,000/-
2. Addition on account of undisclosed income from sale of shares under the head ‘Income from other sources’ - ?65,51,352/-

Issue-wise Analysis:

1. Disallowance of Bad Debts written off - ?25,00,000/-:

The assessee is a company engaged in the business of trading and development of land. The Assessing Officer disallowed the bad debts written off amounting to ?25,00,000/-. The CIT(A) upheld this disallowance. The assessee contested this decision, arguing that the amount was an advance paid for the purchase of industrial land, which was forfeited due to non-payment of the remaining consideration. The assessee claimed the advance as a bad debt under Section 36(1)(vii) of the Income-tax Act, 1961.

The assessee entered into an agreement with M/s. Parasrampuria Industries Limited for purchasing an industrial plot for ?1,17,60,000/-. The assessee paid ?10,00,000/- initially and an additional ?15,00,000/- later but failed to pay the remaining amount by the stipulated date, leading to forfeiture of the advance. The assessee argued that the land was intended for trading purposes and was shown as “Current Assets” in the Balance Sheet, not as investments or fixed assets. The assessee’s Memorandum of Association did not permit industrial or manufacturing activities, supporting the claim that the land was for trading purposes.

The Tribunal found merit in the assessee's contentions, noting that the industrial plot was held as stock-in-trade. However, the Tribunal observed that the exact amount paid as advance (?25,00,000/-) needed verification. The issue was restored to the Assessing Officer for verifying the advance amount, allowing the assessee's claim in principle.

2. Addition on account of undisclosed income from sale of shares under the head ‘Income from other sources’ - ?65,51,352/-:

The Assessing Officer added ?65,51,352/- as undisclosed income from the sale of shares under the head ‘Income from other sources’. The CIT(A) held that this income should be assessed under ‘Income from business’ instead of ‘Income from other sources’. The Revenue appealed against this reclassification.

The Tribunal noted that the tax effect involved in the appeal was less than the monetary limit prescribed by the CBDT Circular No. 17/2019, which enhanced the limit for filing appeals by the Department to ?50 lakhs. Consequently, the Tribunal dismissed the Revenue's appeal on account of low tax effect without delving into the merits of the case. The Tribunal clarified that the Revenue could approach for restoration of the appeal if it fell under the exceptions prescribed in the CBDT Circular.

Conclusion:

The Revenue’s appeal was dismissed due to low tax effect as per the CBDT Circular. The assessee’s Cross Objection regarding the disallowance of bad debts was allowed for statistical purposes, with the issue remanded to the Assessing Officer for verification of the advance amount paid. The Tribunal treated the Cross Objection as an independent appeal and adjudicated it on merits, supporting the assessee’s claim that the advance was for trading purposes and not a capital expenditure.