2022 (10) TMI 480 - AT - Income Tax

Bad debts claimed u/s 36(2)(i) - Assessee debited Amount written off paid against advance of land - HELD THAT - The assessee is a real estate developer. The amount was invested for stock in trade related to his business. The loss was incurred for non utilization of the property and the payment would not be realized in this expectation. The assessee took the amounts in the profit and loss account as loss. In the observation of the CIT(A), the expenditure is taken as a business income and treated the loss as a bad and doubtful debts u/s 36(2). There is change of nature of investment was done by the Revenue authorities which is not accepted in the law. There is no question about the genuinity of the transaction of the assessee. As per accounting policy and general business practice any nature of loss is booked in books of accounts under specific head. But in IT Return the area of declaration is specific which was compelled the assessee to mention the business loss in bad doubtful coloumn. But the nature of loss cannot be changed which is supported by basic evidence, books of accounts. The catena of judgments which are mentioned above are in favour of the assessee. It is clear that this particular loss is a business loss and assessee is allowable to claim the loss in profit and loss account. Accordingly, the addition amount is to be deleted.- Decided in favour of assessee.

Issues Involved:
1. Confirmation of addition of Rs. 1,10,00,000/- on account of bad debts claimed under section 36(2)(i) of the Income Tax Act.
2. Determination of whether the amount written off qualifies as a business loss or a bad debt.

Issue-wise Detailed Analysis:

1. Confirmation of Addition of Rs. 1,10,00,000/- on Account of Bad Debts Claimed Under Section 36(2)(i) of the Income Tax Act:

The primary issue in this appeal is whether the addition of Rs. 1,10,00,000/- claimed by the assessee as bad debts under section 36(2)(i) of the Income Tax Act was justified. The assessee, a company engaged in real estate development, had entered into an agreement to purchase land and paid Rs. 1,10,00,000/- as advance. However, the land was under litigation, and the case was eventually decided against the seller by the Punjab & Haryana High Court and later by the Supreme Court. Consequently, the assessee wrote off the amount as a loss in the Assessment Year 2014-15.

The Revenue authorities treated this amount as a bad debt under section 36(2)(i) and disallowed the claim, arguing that the amount did not pass through the profit and loss account. The CIT(A) upheld this view, stating that the amount did not qualify as a bad debt under section 36(2)(i) because it was not routed through the profit and loss account and was not related to revenue generation.

2. Determination of Whether the Amount Written Off Qualifies as a Business Loss or a Bad Debt:

The assessee contended that the amount was not claimed as a bad debt but as a business loss. The assessee argued that the investment in land was a business expenditure, and the loss incurred due to the non-utilization of the property should be treated as a business loss. The assessee provided evidence, including the audit report and financial statements, to support this claim.

The assessee's counsel relied on several judicial precedents, including the ITAT Kolkata Bench's decision in IMC Ltd vs DCIT and the Supreme Court's decision in CIT v. Mysore Sugar Co. Ltd., to argue that the loss should be considered a business loss and not a bad debt. The counsel emphasized that the amount was advanced for business purposes and not as a capital expenditure.

The Revenue authorities, on the other hand, argued that the nomenclature of the loss as a bad debt in the return of income indicated that it should be treated under section 36(2). They contended that the amount did not qualify as a bad debt because it was not related to revenue generation and was not routed through the profit and loss account.

Judgment:

The Tribunal observed that the assessee is a real estate developer and the amount was invested for stock in trade related to its business. The loss was incurred due to the non-utilization of the property, and the payment could not be realized. The Tribunal noted that the Revenue authorities had changed the nature of the investment from a business loss to a bad debt, which was not acceptable under the law.

The Tribunal concluded that the loss incurred by the assessee was a business loss and not a bad debt. The Tribunal emphasized that the nature of the loss could not be changed based on the declaration in the return of income, especially when the loss was supported by basic evidence and books of accounts. The Tribunal relied on various judicial precedents to support its conclusion.

Final Decision:

The Tribunal allowed the appeal of the assessee and directed the deletion of the addition of Rs. 1,10,00,000/-. The Tribunal held that the loss was a business loss and the assessee was entitled to claim the loss in the profit and loss account.

Order Pronouncement:

The order was pronounced in the open court on 11.08.2022. The appeal of the assessee in ITA No. 192/Asr/2018 was allowed.

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