2022 (4) TMI 1308 - AT - Income Tax

Allowability of claim of advances written off - only grievance of the revenue is that assessee had not offered any income in terms of section 36(2) of the Act in earlier years and hence, the said claim when written off, is not allowed as deduction under section 36(1)(vii) - HELD THAT - Once a trade advance was given in the normal course of business of the assessee and that the said trade advance becomes irrecoverable and consequently, when the same was written off by the assessee as irrecoverable, the same would only be a business loss for the assessee allowable as deduction under section 28 of the Act and provisions of section 36(2) r.w.s. 36(1)(vii) would not come into operation. Hence, we direct the Assessing Officer to grant deduction on account of trade advances written off. Accordingly, the ground raised by the assessee in this regard are allowed.

Summary

Issues:
Allowability of claim of advances written off on merits.

Analysis:
The appeal was filed against the order of the Principal Commissioner of Income-tax under section 263 of the I.T. Act for the assessment year 2016-17. The Ld.PCIT set aside the order of the Ld.Assessing Officer due to lack of inquiry regarding the claim of bad debts made by the assessee. The surviving issue was the allowability of the claim of advances written off. The assessee did not challenge the revisionary jurisdiction of Ld.PCIT but contested the allowability of bad debts claim. The assessee had made provisions for doubtful advances in previous years and claimed deduction for bad debts in the assessment year 2016-17.

The assessee had written off trade receivables and advances totaling &8377; 18,84,79,611/- in the balance-sheet for the assessment year 2016-17. The advances made to various entities were explained, and it was highlighted that they became irrecoverable due to bankruptcy or operational issues. The Tribunal found that these advances were made in the normal course of business and were irrecoverable, thus qualifying as trading losses under section 28 of the Act. The Tribunal directed the Assessing Officer to grant deduction for the written-off amounts.

Regarding the specific amounts claimed for trade receivables and advances written off, the Tribunal noted that relief had already been granted for trade receivables. The remaining amount for trade advances written off was also considered as a business loss and allowed as a deduction under section 28 of the Act. The Tribunal directed the Assessing Officer to grant deduction for this amount as well. Consequently, the appeal of the assessee was partly allowed.

In conclusion, the Tribunal upheld the allowability of the claim of advances written off by the assessee as trading losses under section 28 of the Act. The Tribunal directed the Assessing Officer to grant deductions for the written-off amounts, both for trade receivables and trade advances, thereby partly allowing the appeal of the assessee.