2022 (5) TMI 1332 - AT - Income Tax

Disallowance of write off of property advances - assessee submitted that the amount so written off represents property advances made to various parties during the normal course of business which became irrecoverable - A.O. noticed that the assessee has written off it as bad debts - AO has disallowed part of claim of the assessee only for the reason that the quantum of advance given is on higher side while the A.O. has himself allowed the claim in respect of smaller advances observing that they are incidental in the business of real estate development - HELD THAT - From the assessment order we notice that the A.O. has fixed a limit of Rs. 50 lakhs for this purpose and accordingly disallowed advances exceeding Rs. 50 lakhs. Admittedly that cannot be a criterion for making disallowance of the claim made by the assessee - AO has allowed claim in respect of a party but disallowed similar claim made in respect of very same person only for the reason that the said advance is on higher side. This stand of the AO is also not acceptable. CIT(A) has expressed the view that the assessee has not proved before the A.O. that the attempts made by it for recovery of the amount has failed and further the debtors were not financially sound to repay the debt. We notice that the assessee has canvassed its claim as bad debts u/s. 36(1)(vii) of the Act and hence it has placed its reliance on the decision rendered in the case of TRF Limited 2010 (2) TMI 211 - SUPREME COURT - CIT(A) also appears to have proceeded on that line only by observing that writing off of bad debt is not an empty formality and assessee cannot convert any live amount to bad debt only on the basis of technical rule of write off. In our view the advances given for purchase of land in the normal course of business of carrying on real estate development if not recoverable could be allowed as either trading loss u/s. 28 of the Act or as expenditure u/s. 37 of the Act. In fact the AO has accepted the loss to the extent of Rs. 1.94 crores specifically observing that these kinds of payments/write off are incidental to the business meaning thereby the AO has actually applied the provisions of Sec. 28/37 - Before us the Ld. A.R. has furnished a written submission explaining the reasons which compelled the assessee to write off these amounts. We noticed that the Ld. CIT(A) has proceeded to examine the claim as bad debts u/s. 36(1)(vii) of the Act and the AO has disallowed the claim only for the reason that the amount written off are larger advances. In our view the criteria applied by the AO for allowing the claim to the extent of Rs. 1.94 crores should be applied to other advances also. We are of the view that the claim of the assessee is required to be examined either u/s. 28 or u/s. 37 of the Act. Accordingly we are of the view that this issue requires fresh examination at the end of the A.O. Accordingly we set aside the order passed by the Ld. CIT(A) on this issue and restore the same to the file of the A.O. with the direction to examine the claim of the assessee u/s. 28/37 of the Act. The assessee should be given adequate opportunity of being heard.

Summary

Issues:
Disallowance of write off of property advances amounting to Rs. 7.86 crores as bad debts.

Analysis:
The issue in this case revolves around the disallowance of a write-off of property advances amounting to Rs. 7.86 crores by the Assessing Officer (AO). The assessee, engaged in real estate development, had claimed the write-off as bad debts. The AO disallowed the claim, stating that the assessee failed to establish that the advances made were indeed land advances and not any other payment, as there were no MOU/Agreement with the parties. The AO allowed a smaller sum of Rs. 1.94 crores, considering it incidental to the business. The Commissioner of Income Tax (Appeals) upheld the disallowance, emphasizing that writing off bad debt is not merely a technical rule but requires evidence of irrecoverability and financial unsoundness of debtors.

The appellant contended that the write-off was justified as the advances became irrecoverable in the course of real estate business activities. The AO's inconsistency in allowing smaller advances while disallowing larger ones was highlighted. The appellant argued that if a portion of the amount was accepted as irrecoverable, the entire sum should be treated similarly. The appellant also referred to a Supreme Court decision to support the deduction of bad debts. The appellant further argued that the reasoning applied by the AO to allow a portion of the claim should be applied uniformly to all advances.

Upon examination, the ITAT observed that the AO's disallowance based on the quantum of advances was arbitrary and inconsistent, especially when smaller advances were allowed. The ITAT noted that the appellant had claimed the write-off as bad debts under relevant sections of the Income Tax Act. The ITAT opined that the advances for land purchase, if unrecoverable, could be treated as trading loss or expenditure. The ITAT found merit in the appellant's argument that the criteria applied by the AO for allowing a portion of the claim should be uniformly applied to all advances. Consequently, the ITAT set aside the CIT(A)'s order and directed a fresh examination by the AO under relevant sections of the Act, providing the appellant with a fair hearing opportunity.

In conclusion, the ITAT allowed the appeal for statistical purposes, emphasizing the need for a thorough reevaluation of the claim under appropriate sections of the Income Tax Act.