2016 (3) TMI 318 - AT - Income Tax

Addition made on account of bad debt - under section 36(2) section 36(1)(vii) SIC or as business loss under section 28 - Held that - if at all any loss incurred by the partner of the firm Mr. Khadeer Ahmed towards any transaction, then, he has to bear the loss and not by the assessee firm. General authorization given in the partnership deed to carry out any other activity is no longer res integra in the absence of specific authorization is required in acquisition of capital assset when lakhs of rupees involved. So much so, when lakhs of rupees of public are involved, it is the duty of the assessee to get legal entity before entering into any transaction for acquisition of any property. It is a layman statement that the assessee has committed a mistake, out of which, it has incurred the loss, which cannot be accepted in the present case. Since there is no iota of evidence that the assessee firm was involved in the above transaction having paid advance for the purpose of purchase of land, it cannot be said that any loss incurred in the course of business is a business loss or business expenditure. It is nothing but the assessee is trying to enjoy the benefit of section 36(1)(vii) of the Act through back door, which is not permissible under law. As per agreement for sale, it is only a money diversion from the accounts of MAX VALUE HOUSING to purchase the land by the individual Mr. M. Khadeer Ahmed and not for the assessee firm. Therefore, any loss incurred by the individual partner, he has to bear the same in view of the terms of partnership deed, so agreed upon by the partners of firm while executing the partnership deed. Thus, the claim has no locus standi, as stated to have been a business loss of the assessee firm. Under the above facts and circumstances, we reverse the order of the ld. CIT(A) and restore that of the Assessing Officer. - Decided in favour of revenue

Summary

Issues involved:
Deletion of addition made on account of bad debt under section 36(2) or as business loss under section 28 of the Income Tax Act, 1961.

Detailed Analysis:

1. Nature of Business and Claim of Bad Debt:
The appeal concerns the deletion of an addition made on account of bad debt or business loss for the assessment year 2008-09. The assessee, a partnership firm engaged in civil contracting, claimed an advance payment made for land purchase as bad debt. The Assessing Officer disallowed this claim, leading to an appeal. The Commissioner directed the allowance of the claim under section 36(2) or section 28 read with section 37 of the Act. The Revenue contested this, arguing that the land purchase was not on behalf of the firm, emphasizing the absence of the partner's capacity mention in the agreement. The Revenue further contended that capital asset expenditure cannot be a revenue loss and the advance payment was not offered as income in previous years. The Tribunal heard both sides and examined the records and submissions.

2. Disallowance and Business Nature Assessment:
The Assessing Officer disallowed the claim based on the firm's historical business as a civil contractor, not reflecting a shift to property development in the Form 3CD. The Tribunal noted discrepancies between the firm's claimed business purpose and the recorded nature of business. The agreement for land purchase indicated it was between individuals, not the firm, emphasizing the lack of legal capacity for the firm to transact directly. The partnership deed clarified that private debts are partners' responsibility, not the firm's, questioning the legitimacy of the claimed loss as a business expense. The Tribunal concluded that the claim was an attempt to benefit from section 36(1)(vii) improperly, reversing the Commissioner's order and upholding the Assessing Officer's decision.

3. Conclusion:
The Tribunal allowed the Revenue's appeal, highlighting the lack of evidence supporting the firm's involvement in the land purchase transaction and emphasizing the partners' individual liability for debts. The Tribunal's decision focused on the legal capacity of the firm, the nature of the claimed loss, and the absence of authorization for capital asset transactions. The judgment underscored the importance of proper documentation, legal entity capacity, and adherence to partnership agreements in determining allowable business losses or bad debts under the Income Tax Act, 1961.