2016 (5) TMI 341 - AT - Income Tax

Disallowance of trading loss consisting of advance - Held that - As decided in CIT V Versus Abdul Razak And Co. 1981 (2) TMI 27 - GUJARAT High Court any debt which arose during the course of normal business activity and which becomes bad or irrecoverable, the same has to be allowed as trading loss under section 28(1). Considering the facts and circumstances of the case on hand, in our opinion, the Assessing Officer was not justified in making the disallowance of trading loss in respect of written off of trade advances made by the assessee to the parties namely Rayees Readymade And Denguz Apparels in the course of its business operation. Therefore, the Assessing Officer is directed to allow the aforesaid disallowance made by him. - Decided in favour of assessee

Summary

Issues:
Disallowance of trading loss for bad debts written off.

Analysis:
The appeal was against the Commissioner of Income Tax (Appeals)'s order upholding the disallowance of trading loss of ?27,55,547/- consisting of advances to two parties - Rayees Readymade and Dengus Apparels. The Assessing Officer disallowed the amount as there was no business connection of such waiver. The assessee claimed that the debts arose in the course of their business of dealing in Readymade Garments. The Authorized Representative argued that the debts were incurred during business operations and were directly incidental to the business activities. The Departmental Representative contended that the assessee failed to prove the debts had become bad and were not towards any sale transactions.

The main issue was the disallowance of the deduction claimed by the assessee for writing off certain trade debts. The assessee paid advances to the parties for the purchases of fabric and running their units for manufacturing readymade garments. Due to adverse market conditions, the business had to be discontinued, and recovery efforts failed, leading to the debts becoming irrecoverable. The assessee claimed the deduction under Section 37(1) or Section 28, not under Section 36(1)(vii) as assumed by the Assessing Officer. The Tribunal found a direct nexus between the written-off advances and the business activity, making the loss allowable under Section 37 of the Act. The conditions under Section 37(1) were met, and the loss was incurred wholly and exclusively for business purposes.

Additionally, the Tribunal cited precedents where bad debts arising from normal business activities were allowed as trading losses under Section 28(1). The High Courts held that debts incurred during the course of normal business activities and becoming bad or irrecoverable should be allowed as trading losses. Therefore, the Assessing Officer's disallowance of the trading loss for the written-off trade advances was deemed unjustified, and the appeal by the assessee was allowed.