2020 (12) TMI 231 - HC - Income Tax

Deduction u/s 36 or 37 - provisions for claims and compensation - Security deposits given under development agreement - assessee is under obligation to construct a pent house but due to non-approval of the permission from local authorities, the assessee could not construct the pent house but the landlord did not return the deposit as the assessee failed to satisfy the terms of the agreement - Revenue as well as the Tribunal disallowing the same as provisions for claims and compensation on the ground that it was not written off in the Books of Accounts of the Assessee - HELD THAT - Claim of creation of provision for such expenditure, which is not yet incurred and is only intended to be written off as compensation paid to the land owner for the admitted failure of the Assessee to complete the contract in the manner as agreed between the parties, does not entitle the Assessee to claim the same either as Bad Debts under Section 36(1)(vii) of the Act or as Business Expenditure under Section 37 Either the Assessee admits this liability and pays the said amount to the land owner or the advance given thereafter is written off in its Book of Accounts to conclusively express its intention not to claim anything back from the land owner only could have been a reasonable conclusion of such expenditure being claimed as Compensation or a Business Expenditure under Section 37 of the Act. It is not a question of such advance turning to be a bad debt but the more relevant provision applicable to such facts would be Section 37 of the Act. A developer of a building could claim it as an expenditure in the year in which such expenditure is actually incurred or the advance is written off and its right to claim the refund of such security is completely waived off. Nothing of this sort has happened in the present case and merely by making a book entry for creating a provision for future expenditure or compensation, the Assessee cannot be permitted to claim deduction under Section 36 or 37 of the Act. The provision as such, cannot be allowed as Business Expenditure in the hands of the Assessee.The appeal filed by the Assessee is liable to be dismissed.

Summary

Issues:
1. Whether the bad debt was written off as required by law under Section 36 of the Act?
2. Whether the amount was allowable as business loss under Section 28 or Section 37 of the Act?

Analysis:
1. The appeal involved issues arising from a common order by the Income Tax Appellate Tribunal for the Assessment Years 2006-07 and 2007-08. The questions raised by the Assessee pertained to the treatment of a security deposit of ?30 lakhs made to a landlord for property development. The Tribunal found that the amount was retained in the balance sheet under "provisions for claims and compensation" and had not been written off. Referring to the Supreme Court judgment in M/s. T.R.F. Ltd., the Tribunal held that for a bad debt deduction, it is sufficient for the debt to be written off in the accounts, which was not done in this case. The Assessee argued that the provision made in the books should allow for a deduction, but the Revenue contended that showing the amount as receivable contradicted the claim for deduction.

2. The Assessee relied on the Supreme Court decision to support the deduction claim, emphasizing that the provision made should suffice for the deduction under Section 36(1)(vii) of the Act. However, the Revenue argued that merely creating a provision without actual write-off or payment did not entitle the Assessee to claim the amount as an expenditure. The Court noted that the Assessee's accounting treatment, showing the amount as receivable, did not support the claim for deduction. The Court emphasized that the Assessee must either pay the amount or write it off to claim it as compensation or business expenditure, which was not done in this case.

3. The Court concluded that the provision for future expenditure or compensation, without actual payment or write-off, could not be claimed as a deduction under Section 36 or 37 of the Act. The judgment cited by the Assessee was deemed inapplicable to the present case. The Court dismissed the Assessee's appeal, stating that the provision could not be allowed as Business Expenditure. The questions raised were answered against the Assessee and in favor of the Revenue, with no costs awarded.