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 project named 'Deccan Enclave'. In the financial year relevant to assessment year 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, holding that the conditions under Section 36(2) were not satisfied. The appellant had also made 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 CIT(A) allowed the claim under Section 36(1)(vii) relying on the Supreme Court judgment in TRF Industries v CIT, holding that a bad debt need only be written off and need not be proved irrecoverable. The Revenue appealed to the ITAT, which allowed the appeal, holding that the condition under Section 36(2) that the debt must have been taken into account in computing income was not satisfied. The assessee then filed the present appeal under Section 260A. The High Court admitted the appeal on the question whether advances given in the course of construction business, which become irrecoverable and written off, are allowable as business loss. The 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 under Section 36(1)(vii), but the question of law was broad enough to cover the alternate claim under Section 37(1). The Court held that the loss was incidental to the assessee's business and had been written off in the books, and therefore, the alternate claim under Section 37(1) was allowable. The Court set aside the Tribunal's order and directed 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). The assessing authority rejected the claim as conditions under Section 36(2) were not satisfied. The CIT(A) allowed the claim. The Tribunal reversed, holding that the debt was not taken into account in computing income. The High Court held that the alternate claim under Section 37(1) for business loss is maintainable as the loss was incidental to business and written off. The Court allowed the appeal and directed the assessing authority to allow the claim as business loss. (Paras 1-10) B) Income Tax - Alternate Claim - Section 37(1) of Income Tax Act, 1961 - The assessee had made an alternate claim before the assessing authority that the expenditure was allowable as business expenditure. The assessing authority accepted that the loss was incidental to business but rejected it on timing. The CIT(A) did not consider the alternate claim. The High Court held that the question of law framed was broad enough to cover the alternate claim, and relying on precedents, allowed the claim as business loss. (Paras 7-10)
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 the claim under Section 36(1)(vii) for bad debt fails.
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 have been taken into account in computing income
- business loss under Section 37(1) does not require such condition
- advances given in course of business and written off are allowable as business loss
- alternate claim can be considered even if not raised before lower authorities if question of law is framed broadly.
