2022 (8) TMI 1141 - SC - Income Tax

Deduction of bad and doubtful debt u/s 36(1)(vii) or u/s 37 - Advance against the purchase of property - It was contended that the project did not appear to make any progress, and consequently, the assessee sought return of the amounts from the builder. However, the latter did not respond. As a result, the assessee s Board of Directors resolved to write off the amount as a bad debt - HELD THAT - As noted by the CIT(A), there was no material to substantiate this submission, in respect of payment of the amount, the time by which the constructed unit was to be given to it, the area agreed to be purchased, etc. Equally, in support of its other argument that the amount was given as a loan, the assessee nowhere established the duration of the advance, the terms and conditions applicable to it, interest payable, etc. The assessee conceded that it had received interest income for the relevant assessment year. However, it could not establish that any interest was paid (or shown to be payable in its accounts) for the sum of ₹ 10 crores. Furthermore, there is nothing on record to suggest that the requirement of the law that the bad debt was written-off as irrecoverable in the assessee s accounts for the previous year had been satisfied. Another reason why the amount could not have been written-off, is that the assessee s claim was that it was given to M/s Bhansali Developers Pvt. Ltd. for acquiring immovable property it therefore, was in the nature of a capital expenditure. It could not have been treated as a business expenditure. In view of the above discussion, it is held that the assessee s claim for deduction as a bad and doubtful debt could not have been allowed. The findings of the ITAT and the High Court, to the contrary, are therefore, insubstantial and have to be set aside. Admissibility of an expenditure as a deduction, which does not fall within the provisions of Sections 28 to 43, and is not capital in nature, but is laid out or spent exclusively for the purpose of business, under Section 37 - This court was satisfied that the disallowance of the amount, on account of bad and doubtful debt, did not preclude a claim for deduction, on the ground that the expenditure was exclusively laid out for the purpose of business. The court applied the test of whether the expense was incurred for business, or whether it fell into the capital stream. In the facts of the case, the tests were satisfied the expenditure was for the purpose of business, and did not fall in the capital stream. This court is of the opinion that as a proposition of law, that enunciation is unexceptional, since the heads of expenditure that can be claimed as deduction are not exhaustive which is the precise reason for the existence of Section 37. Therefore, in a given case, if the expenditure relates to business, and the claim for its treatment under other provisions are unsuccessful, application of Section 37 is per se not excluded. This court is of the opinion however, that in the facts of this case, the judgment in Southern Technologies 2010 (1) TMI 5 - SUPREME COURT on this issue (where the claim of bad and doubtful debt was disallowed) is appropriate, and applicable. Thus the Revenue s appeal has to succeed. The impugned judgment of the High Court and the order of ITAT are hereby set aside.

Summary

Issues Involved:
1. Deductibility of Rs. 10 crores as a bad debt under Section 36(1)(vii) read with Section 36(2) of the Income Tax Act, 1961.
2. Alternative claim for deduction of Rs. 10 crores as an expenditure under Section 37 of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

Issue 1: Deductibility of Rs. 10 Crores as a Bad Debt
The assessee, engaged in real estate development, trading in transferable development rights (TDR), and finance, claimed a deduction of Rs. 10 crores as a bad debt. This amount was advanced to M/s C. Bhansali Developers Pvt. Ltd. for acquiring commercial premises, which was later written off due to non-progress of the project. The AO disallowed the claim, which was upheld by the CIT(A) but reversed by the ITAT and the Bombay High Court.

The Revenue argued that the assessee failed to substantiate the claim with material evidence and did not satisfy the conditions under Section 36(1)(vii) and Section 36(2). The assessee contended that the amount was advanced in the ordinary course of business, and after the amendment of Section 36 in 1989, it was sufficient to write off the debt without further scrutiny by the AO, relying on T.R.F. Limited v. Commissioner of Income Tax.

The Supreme Court observed that for a debt to be deductible as bad, it must be written off as irrecoverable in the accounts of the assessee for the previous year and must not include any provision for bad and doubtful debts. The assessee failed to prove that the Rs. 10 crores were advanced in the ordinary course of business or as a loan with specific terms. Furthermore, the amount was for acquiring immovable property, making it a capital expenditure, not a business expenditure. The court held that the assessee's claim did not meet the conditions of Section 36(1)(vii) and Section 36(2), and thus, the deduction could not be allowed.

Issue 2: Alternative Claim for Deduction under Section 37
The assessee alternatively claimed that the Rs. 10 crores could be deducted as an expenditure under Section 37, which allows deductions for expenses laid out exclusively for business purposes. The Revenue argued that this claim was raised belatedly and was not substantiated.

The Supreme Court noted that Section 37 applies to expenditures not covered under Sections 30 to 36 and not being capital or personal expenses. The court referred to The Commissioner of Income Tax v. The Mysore Sugar Co., Ltd., which allowed a similar deduction under the old Income Tax Act. However, the court emphasized that if an item is excluded by an explanation under Section 36, it cannot be claimed under Section 37.

In the present case, the court found that the expenditure was in the nature of capital expenditure for acquiring immovable property and not laid out for business purposes. Therefore, the claim under Section 37 was also not permissible.

Conclusion:
The Supreme Court set aside the judgments of the ITAT and the Bombay High Court, ruling that the assessee's claim for deduction of Rs. 10 crores as a bad debt or as an expenditure under Section 37 could not be allowed. The appeal by the Revenue was allowed without any order on costs.