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Facts
The assessee company advanced Rs. 20 lakhs for the purchase of land for factory expansion, but the deal fell through. The seller did not return the advance, and the assessee wrote it off as a bad debt/business loss. The Assessing Officer disallowed this claim, treating it as a capital loss. The assessee also claimed prior period expenses for insurance and services, which were disallowed by the AO.
Held
The Tribunal held that the advance written off was a business loss and not a capital loss, as it was incurred for business expediency and not for acquiring a capital asset. The prior period expenses were also allowed as they crystallized during the relevant year and were revenue in nature, with no prejudice to the revenue.
Key Issues
1. Whether the write-off of advance paid for land acquisition is a business loss or a capital loss. 2. Whether prior period expenses crystallizing in the current year are allowable as a deduction.
Sections Cited
143(3), 37(1), 28, 36(2), 37
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “D” BENCH MUMBAI
Before: SHRI AMIT SHUKLA & SHRI GIRISH AGRAWAL
O R D E R
PER GIRISH AGRAWAL, ACCOUNTANT MEMBER:
This appeal filed by assessee is against the order of Ld. CIT(A), Agra, vide order no. ITBA/APL/S/250/2024-25/1071727730(1), dated 31.12.2024 passed against the assessment order by Assistant Commissioner of Income Tax, Circle 15(2)(2), Mumbai, u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”), dated 24.12.2019 for Assessment Year 2017-18.
Mahakoshal Refractories Pvt. Ltd. AY 2017-18 2. Grounds taken by the assessee are reproduced as under: “1. Bad Debts-The learned Commissioner of Income Tax erred in law & facts in relating disallowance of Rs. 20,00,000/- paid to Raja Jagwani for purchase land. 2. Prior period expenses- The learned Commissioner of Income Tax erred in law & facts in not allowing prior period expenses of Rs. 562639.”
Brief fact of the case are that assessee is a private limited company, manufacturing refractories. It filed the return of income on 16.10.2017 reporting an income of Rs 7,95,04,900/- The return was selected for scrutiny and order u/s 143(3) was passed on 24.12.2019 assessing total income of Rs. 8,69,91.330/-. Ld. CIT(A) confirmed the additions so made, while dismissing the appeal. Assessee is in appeal on the two issues amongst others and for the relief granted by ld. CIT(A), Revenue is not in appeal for the same.
We first take up ground no.1 in respect of addition of Rs.20 lakhs which were claimed as bad debts under the head ‘other administrative expenses’ in its profit and loss account. In this respect, assessee brought out the facts on record by submitting that it is running a factory at village Gudri Tahsil-Boharibandh, District-Katni (MP). The factory required further land for expansion purposes and therefore assessee entered in to an agreement with one Shri Raja Jagwani for purchase of a piece of land (khasra no. 95) which was contiguous to the factory land (khasra no. 96 and 97) and therefore, of much value to the assessee. An advance payment of Rs 20 lakhs was made to Shri Raja Jagwani for purchase of the said land on 29.12.2014. However, the deal never went through due to family problems at the end of land owner. Shri Jagwani did not return the advance payment citing financial difficulties and requested the assessee to forego the advance payment. Assessee being immediate Mahakoshal Refractories Pvt. Ltd. AY 2017-18 neighbour, thought it prudent to write off the amount instead of litigating over the matter. Assessee, therefore wrote off the amount in the books of account and claimed it as bad debt/business loss under section 37(1) of the Act. Ld. ACIT, however, disallowed the claim holding that it was not a debtor- creditor relationship pertaining to business and the advance was clearly for acquisition of a capital asset Assessee, however argued vehemently that the above bad debt should be allowed as it relates to its business loss and is a business loss suffered by it.
Before us, ld. Counsel for the assessee asserted that it is business loss and had to be allowed as a deduction. The loss was incidental to the business and certainly not a capital loss. The payment made as advance was wholly and exclusively for the purpose of business which resulted into a loss scenario and therefore claimed as a deduction. According to him, the admitted fact is that advance was paid for acquiring the land to set up a factory but when the said land could not be acquired, no capital asset came into existence. Corollary to this is that if an asset is acquired and results into benefits of enduring nature then, offcourse the assessee cannot get the deduction for an amount of acquisition as revenue expenditure. However, in the present case, assessee could not acquire land for the stated reasons and therefore the amount which became irrecoverable, paid as advance, is a business loss which ought to be allowed.
4.1. Ld. Counsel referred to the principle laid down by Hon'ble Supreme Court in the case of PCIT vs. Khyati Realtors Pvt. Ltd. [2022] 141 taxmann.com 461 (SC) wherein it addressed the question as to “for what the money was laid out is to be considered”. If it was for acquiring an asset of enduring nature then, it is a loss of capital Mahakoshal Refractories Pvt. Ltd. AY 2017-18 nature but if it is an outgoing in the doing of a business then, it is a revenue loss. The observations of the Hon'ble Court are extracted below: "To find out whether an expenditure is on the capital account or on revenue, one must consider the expenditure in relation to business. Since all payments reduce capital in the ultimate analysis, one is apt to consider a loss as amounting to a loss of capital. But this is not true of all losses. Because losses in the running of the business cannot be said to be of capital. The questions to consider in this connection are: for that was the money laid out was that to acquire an asset of enduring nature or was it an outgoing in the doing of the business? If money be lost in the first circumstances it is loss of capital but if lost in the second circumstances it is revenue loss. In the first it bears the character of investment but in the second, to use a commonly understood phrase, it bears the character of current expenses".
4.2. On the strength of above, it was submitted that assessee acquired the land not for investment purposes but to run the factory in more productive way. Since assessee could not acquire the said land, it suffered the loss on account of not being able to carry out the expansion of the factory. The amount which was advanced for acquiring the land was for the purpose of business expediency and expanding the business. Thus, it is ought to be treated as a revenue loss, suffered in the course of business of the assessee.
We note that the factual position of assessee making an advance payment for acquiring the land adjacent to its existing factory premises for the purpose of expansion has not been controverted by the authorities below nor by the ld. Sr. DR by bringing any cogent material on record. The sum of Rs.20 lakhs expended by the assessee with a view to gain direct and immediate benefit to its business on the grounds of commercial expediency, is expended wholly and exclusively for the purpose of its business. The said amount became irrecoverable and thus, the loss incurred by the assessee is for business expediency, directly relatable to its business. In our view, even if deduction of advance written off by the assessee during the year is not allowable as Mahakoshal Refractories Pvt. Ltd. AY 2017-18 a bad debt, same would not jeopardise claim of assessee for deduction of it as a business loss. Assessee has evidently demonstrated the money advanced by it was in the nature of business expediency and is an allowable deduction u/s.37(1), if not under this section, then as business loss u/s.28(1). We agree to the claim of the assessee and accordingly delete the disallowance made by the ld. Assessing Officer. It is not a case where the payment made by the assessee is held to be a sham, bogus or accommodation entry. This being a genuine transaction undertaken in the ordinary course of business, is allowable as claimed by the assessee.
Our view is fortified by the decision of Hon'ble Jurisdiction High Court of Bombay in the case of Mahindra and Mahindra Ltd. vs. CIT(A) [2023] 151 taxmann.com 332 (Bom). In this decision, the substantial question of law which came up before the Hon'ble Court has a direct bearing on the issue in hand addressed by us in the present appeal. The relevant substantial question framed by the Hon'ble Court is reproduced below” “Whether on the facts and in the circumstances of the case as well as in law the Tribunal was right in not allowing expenses of Rs. 42.89 lakhs incurred by the appellant company for MMC and not allowing deduction of write off of Rs. 622,01 lakhs (not Rs. 578.09 lakhs as originally put) u/s. 28 of the Act being the amount lent to MMC including interest due thereon and advances for purchase of machineries given in the course of business dealings with MMC?”
6.1. Fact in brief in relation to the above substantial question of law is that assessee claimed deduction of Rs.622.01 lakhs in computing the taxable income. This amount was considered not recoverable by the assessee and was written off while computing income under the head “profits and gains of business or profession”. Hon'ble Court examined whether the expenditure incurred or the deduction claimed arose in carrying on business of assessee or incidental to it. Hon'ble Court noted the fact that commercial expediency required assessee to Mahakoshal Refractories Pvt. Ltd. AY 2017-18 incur expenditure or give advances or give ICDs cannot be dismissed lightly. According to the Hon'ble Court, list of allowances enumerated in section 30 to 37 are not exhaustive. According to it, an item of loss or expenditure incidental to business may be deducted in computing profits and gains even if it does not fall within any of these sections, for the tax is on profits and gains computed on ordinary commercial principles. In order to arrive at profits and gains, account must necessarily be taken of all losses incurred by the assessee. It was thus, held that business losses, though they fall outside the purview of sections 30 to 37 are allowable on ordinary commercial principles of computing principles. Hon'ble Court also held that whether to treat the debt as bad debt or as business loss / deduction u/s. 28 is a commercial or business decision of the assessee based on relevant material in possession of the assessee. According to the Hon'ble Court, once assessee records the amount as business loss/deduction in its book of account that would prima facie establish that it was not recoverable loss, unless ld. Assessing Officer has good reasons to hold otherwise. This burden would be on the ld. Assessing Officer to make out cogent reasons which according to the Hon'ble Court was not so in the case under consideration. It was thus, noted that there is no dispute that amount spent /recoverable from group company MMC and thus quite obvious that the amount in question was incurred by assessee for business expediency.
6.2. While arriving at these findings, support was drawn from the decision in the case of Harshad J. Choksi vs. CIT [2012] 25 taxmann.com 567 (Bom) which dealt with this issue in paragraph 9 to 12 that any loss which occurs in carrying on the business and is related to the business operation is entitled to be deducted to arrive at “9. Our opinion is sought on the issue, whether if an amount is held to be not deductible as a bad debt, in view of non compliance of the condition precedent as provided under section 36(2) of the Act, could the same be considered as a allowable business loss. The Tribunal in its order dated 19-12-1994 has not considered the issue, whether or not a loss claimed by the assessee is allowable as a business loss on the basis of the evidence produced by the assessee. The Tribunal proceeded on a premise that once a claim is made for deduction as bad debts, then the deduction can be granted only if the provision of section 36 of the Act are satisfied and it is not open to an assessee to claim a deduction in the alternative under any other provision of the Act. In view of the above, we are not making any observation with regard to whether the claim of the assessee on merits is allowable as a business loss. We are only examining the issue posed for us viz. that when the claim made for bad debts is not satisfied, could it be considered as a allowable business loss.
10. Section 28 of the Act imposes a charge on the profits or gains of business or profession. The expression "Profits and gains of business or profession" is to be understood in its ordinary commercial meaning and the same does not mean total receipts. What has to brought to tax is the net amount earned by carrying on a profession or a business which necessarily requires deducting expenses and losses incurred in carrying on business or profession. The Supreme Court in the matter of Badridas Daga v. Commissioner of Income Tax, reported in 34 ITR page 10, has held that in assessing the amount of profits and gains liable to tax, one must necessarily have regard to the accepted commercial practice that deduction of such expenses and losses is to be allowed, if it arises in carrying on business and is incidental to it.
On the basis of the aforesaid decisions, it can be concluded that even if the deduction is not allowable as bad debts, the Tribunal ought to have considered the assessee's claim for deduction as business loss. This is particularly so as there is no bar in claiming a loss as a business loss, if the same is incidental to carrying on of a business. The fact that condition of bad debts were not satisfied by the assessee would not prevent him from claiming deduction as a business loss incurred in the course of carrying on business as share broker.
In fact this court in the matter of Commissioner of Income-tax v. R.B. Rungta & Co. (supra) upheld the finding of the Tribunal that the loss could be allowed on general principles governing computation of profits under section 10 of the Indian Income-tax Act, 1922 which is similar/identical to Section 28 of the Act. The revenue in that case urged that the assessee having claimed deduction as a bad debt the benefit of the general principle of law that all expenditure incurred in carrying on the business must be deducted to arrive at a profit cannot be extended. This submission was negatived by this court and it was held that even where the debt is not held to be allowable as bad debts yet the same would be allowable as a deduction as a revenue loss in computing profits of the business under section 10(1) of the Indian Income-tax Act, 1922,"
Mahakoshal Refractories Pvt. Ltd. AY 2017-18 6.3. Hon'ble Court also made a useful reference to the judgement of Hon'ble Supreme Court in Badridas Daga vs. CIT [1958] 34 ITR 10 (SC), wherein it was held that, for assessing the amount of profits and gains liable to tax, one must necessarily have regard to the accepted commercial practice that deduction of such expenses and losses is to be allowed if it arises in carrying on business and is incidental to it. There is no bar in claiming a loss, if the same is incidental to carrying on of a business. Hon'ble Court, thus concluded that expenditure/debts incurred for the purpose of business are directly relatable to the business of the assessee and thus eligible for deduction under business expenditure/loss in assessee’s return of business income and therefore would be deductible u/s.28 of the Act. Appeal was thus allowed in favour of the assessee.
In the present case before us, assessee has written off advance being not recoverable for which elaborate discussion has already been made and findings arrived at by us in above paragraphs. Our observations and findings on the same are fortified by the decision of Hon'ble Jurisdictional High Court of Bombay in the case of Mahindra and Mahindra Ltd. (supra). Accordingly, ground no.1 taken by the assessee in this respect is allowed.
In ground no.2, relating to disallowance of prior period expenses of Rs.4,62,639/- which includes ECGC expenses of Rs.4,91,140/- pertaining to insurance premium and Rs.71,499/- for TCS-ION services. The invoice in the first case is dated 29.03.2016 which was received by the assessee only on 06.04.2016. Accordingly, assessee made a corresponding accounting entry in the books of accounts for financial year 2016-17 relevant to Assessment Year 2017-18, since the said liability was not known earlier and arose in this year on account Mahakoshal Refractories Pvt. Ltd. AY 2017-18 of receipt of this invoice on 06.04.2016. In the second case, the bill was dated 31.03.2016 but was received on 21.05.2016. Ld. Assessing Officer held that since assessee follows mercantile system of accounting and the disclosures have been made of these expenses as per item 13(d) of Form 3CD, the same are not incurred during the year, not falling within the parameters of section 37(1). He thus, disallowed the same to make the addition.
8.1. Contention of the assessee is that these payments made by the assessee and accounted in its books of accounts for the relevant year are genuine payments, fact of which is not in dispute. It was also submitted that these expenses crystallised during the relevant year and are deductible u/s.37. Further, it was emphasised that treatment of the same is tax neutral as it ought to have been allowed in either of the years and there being no difference in the rate of tax, no prejudice is caused to the Revenue in respect of these expenses. The factum of these expense being revenue in nature is not in dispute. Also, nothing is brought on record to disprove the explanation of the assessee and to establish that deduction in respect to these expenses was allowed in the prior years.
In the given set of facts, we are in agreement with the submissions made by the assessee to allow the claim so made and delete the addition. For arriving at this finding, we find force from the decision of Hon'ble High Court of Calcutta in the case of PCIT vs. Balmer and Lawrie [2023] 149 taxmann.com 286 (Cal). In this judgement, similar disallowance was made wherein ld. Assessing Officer held that the assessee having not followed the mercantile system of accounting in respect of prior period expenses debited in the profit and loss account for the current year, the same is not allowable Mahakoshal Refractories Pvt. Ltd. AY 2017-18 expenditure. However, Hon'ble Court dismissed the claim of the Revenue by holding that where revenue was not able to place any material to disprove explanation furnished by the assessee before the authorities in support of this claim that liability to pay expenses charged under the head ‘prior period’ crystallised during the relevant year, entire expense has been rightly allowed. Accordingly, ground no.2 raised by the assessee is allowed.
In the result, appeal of the assessee is allowed.