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2021 (5) TMI 677 - AT - Income TaxBusiness loss u/s 28/37(1) - write off/bad debt - advances /bad debt written off in respect of 22 parties - As assessee could not give justification for the write off and that the genuineness of the transaction and nature of advance is not clear, the AO disallowed an amount - HELD THAT - We find in the case of Kalpataru Power Transmission Ltd.. 2016 (8) TMI 209 - ITAT AHMEDABAD has held that irrecoverable advances given to job work contractors for supply of material and labour in regular course of business would be a business loss and, therefore, amount written off would be allowable as business expenditure. Rajkot Bench of the Tribunal in the case of Hiravati Marine Products (P) Ltd. 2019 (5) TMI 10 - ITAT RAJKOT while deciding an identical issue noted that the assessee company was engaged in the business of processing and exports of marine products, claimed deduction of certain amount which represented advances written off. In view of fact that advances given by assessee were duly disclosed in financial statements and, moreover, it was also undisputed that there was downfall in business of fishermen to whom advances were made due to cyclone and earthquake, assessee's claim for deduction was held to be allowed. In the case of Dr. T.A. Qureshi, 2006 (12) TMI 91 - SUPREME COURT held that the Explanation to section 37 has really nothing to do with the instant case as it was not a case of a business expenditure, but of business loss. Business losses are allowable on ordinary commercial principles in computing profits. Once it was found that the heroin seized formed part of the stock-in-trade of the assessee, it followed that the seizure and confiscation of such stock-in-trade had to be allowed as a business loss. Loss of stock-in-trade has to be considered as a trading loss. The Delhi Bench of the Tribunal in the case of Swastik Pipes Ltd. 2018 (4) TMI 985 - ITAT DELHI while deciding the identical issue had noted that the assessee paid advance to one, SG for acquisition of a capital asset. SG did not carry out his obligation. Thus, assessee written off amount paid to SG as bad debt. Assessing Officer disallowed same. Commissioner (Appeals) noted that amount did not qualify as bad debt because it was an advance paid for acquisition of capital asset. Amount was a loss to assessee and would be an allowable expenditure under section 37(1). The Tribunal held that since it was clear that loss was incidental to business of assessee which were written off in books of account as irrecoverable, it was correctly allowed as business loss by Commissioner (Appeals). We are of the considered opinion that the claim of the assessee has to be allowed as business loss u/s 28/37(1) of the IT Act. We, therefore, set aside the order of the CIT(A) and the grounds raised by the assessee are allowed.
Issues Involved:
1. Disallowance of bad debt/trade advance write-offs. 2. Classification of the write-off as business loss under Section 28/37(1) versus bad debt under Section 36(1)(vii). Detailed Analysis: 1. Disallowance of Bad Debt/Trade Advance Write-offs: The assessee, a partnership firm engaged in merchant exporting, filed its return of income declaring a total income of ?2,96,21,168/-. During the assessment, the AO observed a claim of ?1,61,35,879/- under 'write off/bad debt' and requested detailed explanations for the advances/bad debts written off for 22 parties. The AO disallowed ?1,45,21,079/- due to lack of justification and unclear nature of the advances. The CIT(A) sustained the addition but corrected a computational error, reducing the disallowed amount by ?4,65,962/-. 2. Classification of the Write-off as Business Loss under Section 28/37(1) versus Bad Debt under Section 36(1)(vii): The assessee contended that the write-offs should be considered as business loss under Section 28/37(1) rather than bad debt under Section 36(1)(vii). The assessee argued that the advances were consistently shown in past balance sheets and accepted in assessments under Section 143(3). The AO and CIT(A) disallowed the claim, treating it as bad debt, while the assessee maintained it was a business loss. Tribunal's Observations and Decision: - The Tribunal noted that the advances were consistently shown in audited balance sheets and accepted in past assessments under Section 143(3). The AO should not have doubted the genuineness of the advances. - The Tribunal found that the lower authorities had disallowed the claim treating it as bad debt, while the assessee's claim was for business loss under Section 28/37(1). - The Tribunal referred to several judicial precedents supporting the allowance of business loss for irrecoverable advances, including decisions from the Hon'ble Supreme Court, Delhi High Court, and various Tribunal benches. - The Tribunal emphasized that the amounts paid through banking channels had not returned to the assessee, and the write-off was a conscious decision supported by a resolution passed by the partners. Key Judicial Precedents Cited: 1. Radhasoami Satsang, 193 ITR 321 (SC): Established that a consistent position in different assessment years should not be changed unless there is a material change in facts. 2. ACIT vs. Jay Engineering Works Ltd., 113 ITR 389 (Delhi HC): Held that income-tax authorities could rely on auditor reports if detailed information was unavailable. 3. Neo Poly Pack (P) Ltd., 112 taxman 363 (Delhi HC): Emphasized consistency in decisions across assessment years unless facts change. 4. EKL Appliances Ltd. (2012) 20 taxmann.com 509 (Delhi HC): Allowed business loss claim under Section 37(1) instead of Section 36(1)(vii). 5. Mohan Meakin Ltd. (2011) 11 taxmann.com 141 (Delhi HC): Allowed non-recovery of trade advances as business loss under Section 28(1) and 37(1). 6. Minda (HUF) Ltd. (2006) 101 ITD 191 (ITAT): Allowed deduction for irrecoverable advances as trading loss under Section 37(1). 7. Jackie Shroff (2019) 101 taxmann.com 455 (Mumbai ITAT): Allowed deduction for advances given for commercial expediency as business loss. 8. Kalpataru Power Transmission Ltd. (2017) 82 taxmann.com 340 (Ahmedabad ITAT): Allowed irrecoverable advances as business expenditure. 9. Hiravati Marine Products (P) Ltd. (2019) 104 taxmann.com 271 (Rajkot ITAT): Allowed deduction for advances written off due to business downturn. 10. Dr. T.A. Qureshi, Civil Appeal No.5635 of 2006 (SC): Allowed loss of stock-in-trade as trading loss. 11. Swastik Pipes Ltd. (2018) 66 ITR (T) 1 (Delhi ITAT): Allowed business loss for advances written off for acquisition of a capital asset. 12. Harshad J. Choksi vs CIT (2012) 25 taxmann.com 567 (Bom HC): Allowed business loss even if not deductible as bad debt under Section 36(2). Conclusion: The Tribunal concluded that the assessee's claim for business loss under Section 28/37(1) was justified. The disallowance by the AO and CIT(A) was set aside, and the grounds raised by the assessee were allowed. The decision was pronounced in the open court on 28.09.2020.
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