Case Note & Summary
The appellant, M/s. Deccan Estates, a builder, entered into a joint venture agreement on 10.12.1995 with landowners for development of a property named 'Deccan Enclave'. In the financial year relevant to assessment year (AY) 2008-09, the appellant claimed a write-off under Section 36(1)(vii) of the Income Tax Act, 1961, of an amount of Rs.50 lakhs advanced to the landowner. The assessing authority negated the claim on the ground that it did not satisfy the conditions under Section 36(2) of the Act, as the debt had not been taken into account in computing income in any previous year. The assessee also put forth an alternate claim that the expenditure was allowable as business expenditure under Section 37(1). The assessing authority accepted that the loss was incidental to business but held that since the expenditure was incurred in financial year 1999-00, it could not be claimed in AY 2008-09. On appeal, the Commissioner of Income Tax (Appeals) allowed the claim as a bad debt, relying on the Supreme Court judgment in TRF Industries v CIT, holding that a bad debt need not be proved irrecoverable if written off. The Revenue appealed to the Income Tax Appellate Tribunal (ITAT), which allowed the Revenue's appeal on 23.09.2013, holding that the condition under Section 36(2) was not satisfied. The assessee filed the present appeal under Section 260A of the Act, which was admitted on 06.08.2014 on the question of law whether advances given in the course of construction business, which become irrecoverable and written off, are allowable as business loss. The High Court noted that at the time of admission, it was observed that in light of decisions in CIT v Inden Bislers and Badridas Daga v CIT, there was no avenue for the assessee to pursue the claim of bad debt under Section 36(1)(vii), but the only question of law that may arise was whether the loss could be allowed as business loss under Section 37(1). The court held that the loss was incidental to the assessee's business and that the alternate claim under Section 37(1) was permissible even if not raised before the CIT(A), as the facts were already on record. The court set aside the Tribunal's order and allowed the appeal, directing the assessing authority to allow the claim as business loss under Section 37(1).
Headnote
A) Income Tax - Bad Debt vs Business Loss - Section 36(1)(vii) and Section 37(1) of Income Tax Act, 1961 - The assessee claimed write-off of advance as bad debt under Section 36(1)(vii) but did not satisfy condition under Section 36(2) that debt was taken into account in computing income. The assessing authority and Tribunal rejected the claim. However, the High Court held that the loss was incidental to business and allowable as business expenditure under Section 37(1), as the alternate claim was permissible even if not raised earlier, relying on precedents. (Paras 1-10) B) Income Tax - Alternate Claim - Section 37(1) of Income Tax Act, 1961 - The court allowed the assessee to pursue the alternate claim of business loss under Section 37(1) even though it was not pressed before the CIT(A), as the facts were already on record and the assessing authority had accepted that the loss was incidental to business. The court set aside the Tribunal's order and allowed the appeal. (Paras 8-10)
Issue of Consideration
Whether advances given in the course of construction business, which become irrecoverable and written off in the books of account, is allowable as business loss under Section 37(1) of the Income Tax Act, 1961, even if not claimed as bad debt under Section 36(1)(vii)?
Final Decision
Appeal allowed. The order of the Income Tax Appellate Tribunal dated 23.09.2013 is set aside. The assessing authority is directed to allow the claim of the assessee as business loss under Section 37(1) of the Income Tax Act, 1961.
Law Points
- Bad debt under Section 36(1)(vii) requires debt to be taken into account in computing income
- business loss under Section 37(1) is allowable if incidental to business
- alternate claim can be considered even if not raised before lower authorities
- write-off in books is sufficient for business loss deduction.
