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 that it had advanced to the landowner. The assessing authority negated the claim, being of the view that the claim did not satisfy the conditions under Section 36(2) of the Act. The appellant had 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 the business but concluded that as the expenditure had been incurred in financial year 1999-00, the claim could not be entertained in AY 2008-09. An appeal was filed before the Commissioner of Income-Tax (Appeals) (CIT(A)) relying upon the judgment of the Supreme Court in TRF Industries v Commissioner of Income Tax. The appellant did not pursue the alternate claim in first appeal. The CIT(A) allowed the appeal on the ground that a bad debt does not require to be proved to be irrecoverable, and it would suffice if it were written off. The Revenue instituted a second appeal before the Income Tax Appellate Tribunal (ITAT) contending that the condition under Section 36(2) had not been complied with. The Tribunal accepted the case of the Revenue and allowed the appeal on 23.09.2013. The present appeal was filed against that order and was admitted on 06.08.2014 on the question of law: 'Whether in the facts and circumstances of the case, the advances given in the course of construction business, which become irrecoverable and written off in the books of account, is allowable as business loss?' The High Court noted that while passing the order on admission, the Court had categorically noted that in light of the decisions in Commissioner of Income Tax v Inden Bislers and Badridas Daga v Commissioner of Income Tax, there is no avenue for the assessee to pursue the claim of bad debt under Section 36(1)(vii). The Court held that the only question of law that may arise is whether the claim is allowable as business loss under Section 37(1). The Court allowed the appeal, holding that the advances given in the course of construction business which become irrecoverable and written off are allowable as business loss under Section 37(1) of the Act.
Headnote
A) Income Tax - Bad Debt - Section 36(1)(vii) and Section 36(2) - Write-off of Bad Debt - The assessee claimed write-off of an advance of Rs.50 lakhs under Section 36(1)(vii) as bad debt. The assessing authority negated the claim as the conditions under Section 36(2) were not satisfied, as the debt was not taken into account in computing income in any previous year. The CIT(A) allowed the claim relying on TRF Industries, but the Tribunal reversed. The High Court held that the claim under Section 36(1)(vii) cannot succeed as the debt was not taken into account in computing income, but the alternate claim under Section 37(1) for business loss is allowable. (Paras 1-6) B) Income Tax - Business Loss - Section 37(1) - Allowability of Advances Written Off - The assessee, a builder, advanced Rs.50 lakhs to landowners under a joint venture agreement. The advance became irrecoverable and was written off in AY 2008-09. The assessing authority accepted that the loss was incidental to business but rejected the claim as the expenditure was incurred in 1999-00. The High Court held that the loss is allowable as business loss under Section 37(1) in the year of write-off, as the loss crystallized only when the advance became irrecoverable and was written off. The Court relied on the principle that business loss is allowable in the year it is ascertained and written off. (Paras 7-10) C) Income Tax - Alternate Claim - Section 37(1) - Consideration of Alternate Claim - The assessee had raised an alternate claim before the assessing authority that the expenditure was allowable as business expenditure under Section 37(1). The assessing authority did not consider it on merits. The CIT(A) allowed the claim under Section 36(1)(vii) and did not consider the alternate claim. The Tribunal also did not consider the alternate claim. The High Court held that the alternate claim under Section 37(1) is maintainable and should be considered, as the facts support the allowability of the loss as business loss. (Paras 3-4, 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, when the claim under Section 36(1)(vii) fails due to non-compliance with Section 36(2).
Final Decision
Appeal allowed. The advances given in the course of construction business which become irrecoverable and written off in the books of account are allowable as business loss under Section 37(1) of the Income Tax Act, 1961.
Law Points
- Bad debt write-off under Section 36(1)(vii) requires compliance with Section 36(2)
- Advances given in course of business becoming irrecoverable and written off are allowable as business loss under Section 37(1)
- Business loss can be claimed in the year of write-off even if expenditure was incurred in earlier year
- Alternate claim under Section 37(1) can be considered even if not raised before lower authorities
