2006 (3) TMI 209 - AT - Income Tax

Summary

Issues:
1. Disallowance of provision for irrecoverable advances made in the ordinary course of business.
2. Allowability of deduction under section 36(1)(vii) or as business loss.
3. Treatment of advances as stock-in-trade.

Analysis:

Issue 1: Disallowance of provision for irrecoverable advances
The assessee, a non-banking financial company, claimed a deduction of Rs. 47,77,500 for provision of advances made in accordance with RBI guidelines. The Assessing Officer disallowed the deduction, citing it as a contingent liability. The CIT(A) upheld the disallowance due to the retrospective effect of an amendment to section 36(1)(vii), which excluded provision for bad and doubtful debts from deduction. The ITAT concurred, stating that the provision made by the assessee was not allowable under the amended section 36(1)(vii) despite being in accordance with RBI directions.

Issue 2: Allowability of deduction under section 36(1)(vii) or as business loss
The assessee argued that the provision should be allowed as a business loss or under section 36(1)(vii). The ITAT rejected this argument, noting that the Explanation to section 36(1)(vii) specifically disallowed deductions for provisions of bad and doubtful debts. The judgments cited by the assessee, including those related to the definition of 'provision' and business loss, were deemed inapplicable due to the retrospective effect of the amendment.

Issue 3: Treatment of advances as stock-in-trade
The assessee contended that the advances should be treated as stock-in-trade and valued at market value. However, the ITAT found this argument irrelevant to the case, as the dispute centered on the provision for bad and doubtful debts rather than the nature of the advances. The judgment cited by the assessee in this regard was deemed inapplicable to the present case.

In conclusion, the ITAT dismissed the appeal of the assessee, upholding the disallowance of the provision for irrecoverable advances and rejecting the alternative claims for deduction under section 36(1)(vii) or as business loss. The treatment of advances as stock-in-trade was also deemed irrelevant to the case.