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TMI Blog2018 (1) TMI 1239X X X X Extracts X X X X X X X X Extracts X X X X ..... as submitted that assessee has made the investment in order to get the benefit of procuring the fly Ash at a concessional rate - Held that:- When the Bench asked to substantiate the submission, ld. AR brought on record the various purchase statements, which are part of record. In order to verify the claim of the assessee and for proper justice, we are inclined to refer this matter back to file of AO with limited purpose to verify the submission of the assessee, whether assessee has procured the fly ash on concession, which supports the investment decision. In case, it is found that assessee has purchased the fly ash at concessional rate ( less by ₹ 40/- per tonne) then the AO may allow the claim of the assessee, otherwise, addition may be sustained. Therefore, ground raised by revenue is allowed for statistical purposes. - ITA No. 1048/Hyd/2013 And ITA No. 1058/Hyd/2013 - - - Dated:- 25-1-2018 - SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER For The Assessee : Sri M.V. Anilkumar For The Revenue : Smt. N. Swapna ORDER PER S. RIFAUR RAHMAN, AM: These are cross appeals filed by the assessee and revenue directe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowed ₹ 2,26,16,000 and ₹ 1,64,00,000/-, being amounts written off, incurred in the course of business and exclusively for the purpose of business in the year they have become not fruitful. 2. Your Appellant submits the CIT(A) erred in law and facts of the case in disallowing the amount of ₹ 2,26,16,000/- being the amount paid as advance to Mahindra Industrial Park Ltd for purchase of land to set up a textile unit, which was not viable and fruitful, as capital expenditure. 3. Your Appellant submits the CIT(A) erred in law and facts of the case in disallowing the amount of ₹ 1,64,00,000/- being the amount paid as advance to Laxmi Machinery Works for purchase of machinery to set up a textile unit, which was not viable and fruitful, as capital expenditure. 4. Your appellant submits that the advance was paid in the course of business and for the purpose of business and has been forfeited was allowable as business expenses under section 37(1) of the Income Tax Act, 1961. 9. During the course of assessment proceedings, the AO noticed that an amount of ₹ 4,49,45,842/- debited to P L account towards provision/write off of advances unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture in question can be regarded as trading loss of the assessee for allowance u/s. 37(1) of the I.T. Act. Therefore, the assessee's claim of expenditure towards write off of advances of ₹ 2,26,16,000/- and the claim of forfeiture of security deposit of ₹ 1,64,00,000/-, were not allowable expenditure under the provisions of sec.37(1) of the Income Tax Act, 1961 and the same were considered for disallowance and addition to the total income. 9.3 Alternatively, the AO observed that the claim of the assessee cannot also be allowed under the provisions of sec.36(1)(vii) as a bad debt written off as irrevocable in the accounts of the assessee in the previous year as the conditions stipulated therein for write off as bad debt are - a) The debt should be incidental to the business. b) It should have been taken into account in computing the income of the assessee or it should represent money lent in the ordinary course of business or money lending business. c) It should be written off in the books of account. d) The business in respect of which the debt is incurred should be continued during the previous year. 9.4 AO observed that in the assessee's case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has entered into an agreement of lease with M/s Mahindra Industrial Park Ltd., Chennai for acquiring 7 acres of land at 562 on lease for 99 years for a consideration of ₹ 224 lakhs and due to non-performance of conditions stipulated in the agreement by the assessee, the lessor has confiscated the advance. Similarly, assessee paid a security advance to purchase textile machinery for expansion of textile business to M/s Laxmi Machine Works of ₹ 164 lakhs. Due to sluggish market condition, it had to drop the expansion plan and accordingly the security deposits were forfeited. Ld. CIT(A) has treated the above losses as the capital in nature and sustained the disallowance made by AO. Ld. DR also supported the views of the tax authorities and relied on following case law and we have analysed each case as below: 1. Hasimara Industries Ltd. (supra): in this case, assessee has diversified its activity into cotton business. In this process, it had deposited ₹ 20 lakhs to secure licence in pursuant to a leave and licence agreement. After expiry of scheduled period, the licensor company went into liquidation. The assessee could not recover the deposit and it was written o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le to the facts of the case on hand. 6. Kanoria Chemicals (supra): In this case, the letter of intent was obtained to start a new project, which was abandoned. The case in hand is not about new project but expansion. Hence, not applicable. 7. Swadeshi Cotton Mills Co. Ltd., (supra): In this case, assessee entered into two contracts with two other parties for purchase of textile machinery in order to expand its factory, subsequently, having regard to altered circumstances, decided to cancel both contract. The cancellation of these contracts, assessee has to incur cost. These costs were claimed as revenue expenditure. It was held, the payment made to avoid a larger capital expenditure that would not have served the interest of the company. Such payment made is clearly in the nature of a capital expenditure and not an expenditure incurred wholly or exclusively for the purpose of the business. 14.1 The last case is on the subject of expansion. The Hon ble Supreme Court has disallowed the claim of the assessee but we noticed in the subsequent decision in the case of Sasson J. David Co. P. Ltd., 118 ITR 261, the Hon ble Supreme Court expressed their opinion and discussed the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the purpose of the business is allowable. Therefore, in our view, there is clear possibility that in the case of expansion, the expenditure is for the purpose of business only. 14.2 Coming to the issue in hand, the assessee made the advance for purchase of machinery and lease advance, which became irrecoverable. These payments were made for expansion of textile business. In our considered view, any investment/advance paid for procuring fixed assets or leasehold rights, it becomes an asset only after such assets are installed or for that matter accepted or used for the business. Till then, it remains as business contracts, which comes within the business operation, it does not matter, whether it is for capital or revenue, it is for the purpose of business only. Therefore, it falls within the ambit of section 37. As discussed in the case of Sasson J. David Co. case (supra) that as long as it is expended wholly and exclusively for the purpose of business, and not necessarily for the business, it falls within the ambit of section 37 of the Act. Therefore, the advance paid for the purpose of expansion, will fall within the ambit of section 37 of the Act. With regard to the argume ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eft to APGENCO for allowing supply of fly ash to these companies as consideration. The AR submitted that the appellant had made an investment of ₹ 61.44 lakhs during the period starting from 2006 to 2008 of which it had claimed ₹ 59.25 lakhs being the pro rata benefit utilized during the year by way of supply of fly ash by APGENCO at concessional rate. The AR submitted that as this claim was in the nature of amount spent to gain benefit of concessional supply of raw material, it was an expenditure incurred for the purpose of and during the course of business of the company and allowable as a revenue expenditure / loss u/s. 37 of the Income tax Act. 18. The CIT(A) referring to the agreement dated 06/03/2006 entered by the assessee along with three other parties with APGENCO, observed that the terms of the agreement make it clear that the investment made in the upgradation of the plant was to be recovered by the assessee through supply of flyash, a raw material for its own business. Further, he observed that the investment being a quid pro quo for the supply of raw material, therefore, has to be held to be an expenditure on revenue account. He, therefore, deleted the d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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