2006 (3) TMI 213 - AT - Income Tax

Deduction u/s 37 - written of doubtful debts - trading loss incurred in carrying out the business and being incidental to the operations of the business is allowable u/s 37? - HELD THAT - From the details furnished by the assessee in the paper book it is found that the assessee had given full details of each item. The amounts represented advances given to the parties. The advances were given during the course of business for supply of raw-material etc. Either the material was not supplied or defective material was supplied. The amount became irrecoverable from the parties to whom the advances were made. Thus, the advances were totally connected with the business activities of the assessee. The learned CIT (Appeals) was not justified in observing that the amount of advance was not a trading loss. After seeing the details of amounts, it is observed that the assessee was not required to take a lengthy litigation for recovering the small amounts. In our opinion, therefore, the approach of the learned CIT (Appeals) is not justified. Hon'ble Gujarat High Court also considered the issue relating to business loss in the case of Dinesh Mills Ltd. v. CIT 2001 (12) TMI 65 - GUJARAT HIGH COURT . In that case, the assessee incurred a loss on account of embezzlement of its employee between 29-1-1974 and 26-4-1976. The loss was discovered in 1977-78. The Assessing Officer disallowed the claim on the ground that the loss remained indeterminate during the assessment year in question and it could be ascertained only in subsequent years. The ld. CIT(A) allowed part of the loss which approach was also maintained by the Tribunal. The Hon'ble Gujarat High Court, after reversing the view of the Tribunal, held that in view of the statement made on behalf of the assessee to the effect that no deduction had been allowed in any subsequent year, the assessee would be entitled to deduction of loss during the assessment year in question as this was the year in which loss on account of embezzlement was in fact discovered. On the basis of this authority, the submission of the ld. counsel that in the case of the assessee also, nothing has been recovered till now and, therefore, the claim of the assessee should be allowed, carries much force. Thus, we are unable to sustain the approach of the learned CIT (Appeals) and set aside his findings. In our considered opinion, the claim of deduction is allowable as trading loss u/s 37. Grounds taken by the assessee are, therefore, allowed. In the result, assessee's appeal is allowed.

Summary

Issues Involved:

1. Sustenance of disallowance of Rs. 6,07,045 made by the Assessing Officer on account of doubtful debts/advances written off.

Detailed Analysis:

Issue 1: Sustenance of disallowance of Rs. 6,07,045 made by the Assessing Officer on account of doubtful debts/advances written off.

The assessee-company, engaged in manufacturing automobile locks and lock switches, had debited Rs. 16,25,176 under "Provision for doubtful debts/advances" in the P&L Account for the assessment year 1997-98. Out of this, Rs. 10,18,131 was written off as irrecoverable debts from sales of finished goods, which the Assessing Officer accepted. However, Rs. 6,07,045, written off as advances irrecoverable from vendors, was disallowed by the Assessing Officer under section 36(1)(vii) because it was not considered income in any assessment year, thus not satisfying section 36(2)(i).

The Assessing Officer also rejected the claim under section 37, stating the assessee failed to substantiate that these amounts were not capital or personal expenditure and were laid out wholly and exclusively for business purposes. The assessee could not provide evidence that the amounts became unrealizable during the period, leading to the disallowance of Rs. 6,07,045.

On appeal, the assessee argued that while the amount might not be deductible under section 36(1)(vii), it should be allowed as a trading loss under section 37, citing decisions in Calcutta Co. Ltd. v. CIT and CIT v. K.T.M.S. Mahmood. However, the CIT (Appeals) rejected this plea, noting the assessee's changed stance and distinguishing the cited cases. The CIT (Appeals) referred to Sarangpur Cotton Manufacturing Co. Ltd. v. CIT and G.P. Singh v. CIT to uphold the disallowance.

Before the Tribunal, the assessee's counsel presented detailed year-wise information, party names, and reasons for writing off the amounts, emphasizing that the advances were business-related and not recoverable. The counsel argued that the advances were made during business operations and were not recoverable, thus should be considered a trading loss.

The Tribunal examined the details and found the advances were business-related, given for raw material supply, and either the material was not supplied or was defective. The Tribunal noted that pursuing lengthy litigation for small amounts was not justified and considered the advances as trading loss. The Tribunal referred to several cases, including Crescent Films (P.) Ltd. v. CIT, Jhalani & Co., Ramchandar Shivanarayan v. CIT, and Commonwealth Trust (India) Ltd. v. CIT, which supported the claim of such losses being deductible as trading losses under section 37.

The Tribunal concluded that the assessee's claim was allowable as trading loss under section 37, setting aside the CIT (Appeals)'s findings and allowing the assessee's appeal.

Conclusion:

The Tribunal allowed the assessee's appeal, recognizing the Rs. 6,07,045 as a trading loss deductible under section 37, thereby overturning the CIT (Appeals)'s decision.