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Income Tax Appellate Tribunal, MUMBAI BENCH “G”, MUMBAI
Before: SHRI M. BALAGANESH & SHRI KULDIP SINGH
O R D E R Per: M. Balaganesh(AM): This appeal has been filed by the assessee against the order of the Principal Commissioner of Income-tax (Central), Mumbai-2 (hereafter PCIT) passed under section 263 of the I.T. Act, 1961 dated 19/01/2021 for the assessment year 2016- 17.
2 ITA 312/Mum/2021
Grounds 1, 2 & 6 raised by the assessee were stated to be not pressed by the Ld.AR at the time of hearing and necessary endorsement was made by him in our file. Accordingly, grounds 1, 2 & 6 raised by the assessee are hereby dismissed, as not pressed.
The surviving grounds remain to be addressed is with regard to allowability of claim of advances written off on merits.
We have heard the rival submissions and perused the materials available on record. The return of income for the assessment year 2016-17 was filed by the assessee on 30/11/2016 declaring loss of Rs.85,70,15,438/-. The assessment under section 143(3) of the Act was completed on 29/12/2018 determining the total loss at Rs.85,67,45,962/- after making disallowance under section 40(a)(ia) of the Act to the tune of Rs.2,69,476/-. In the said return, the assessee claimed deduction towards bad debts amounting to Rs.18,84,79,611/-. The Ld.PCIT invoked his revisionary jurisdiction under section 263 of the Act by treating the order of the Ld.Assessing Officer as erroneous inasmuch as it is prejudicial to the interest of the Revenue on the ground that the Ld.Assessing Officer had not conducted any enquiry with regard to claim of bad debts made by the assessee. Accordingly, the Ld.PCIT set aside the order passed by the Ld.Assessing Officer with the direction to enquire the said issue afresh.
3 ITA 312/Mum/2021
Before us, he assessee is not challenging the validity of revisionary jurisdiction of Ld.PCIT under section 263 of the Act. Instead, the assessee is challenging the allowability of the claim of bad debts, on merits. Accordingly, we are inclined to discuss the eligibility of the assessee to claim deduction of bad debts, on merits.
We find that assessee had made total provision for doubtful advances commencing from assessment year 2009-10 to assessment year 2015-16 to the tune of Rs.15,64,28,164/-. In the year in which such provision was made, the assessee had duly disallowed the same in the return of income. On this fact, there is absolutely no dispute. During the year under consideration, i.e. A.Y. 2016-17, the assessee had claimed total trade receivables and advances written off in the sum of Rs.18,84,79,611/- as deduction. This sum was claimed in the following manner:-
1) Utilisation of provision for doubtful advances - Rs.15,64,28,164/- From A.Ys 2009-10 to 2015-16 2) Debit to P&L Account during A.Y. 2016-17 - Rs. 3,20,51,447/-
Total Trade Receivables under Advances - Rs.18,84,79,611/- Accordingly, the assessee, in the balance-sheet as on 31/03/2016 relevant to assessment year 2016-17 had written off a sum of Rs.9,59,04,877/- from trade receivables and a sum of Rs.6,05,23,287/- from loans and advances. The total of these two sums works out to Rs.15,64,28,164/- being the provision made in 4 ITA 312/Mum/2021 earlier years and duly disallowed in the returns of the respective years and since a sum of Rs.15,64,28,164/- was written off and claimed as deduction by the assessee by utilizing the provision made in earlier years (which is purely a balance-sheet item), only a sum of Rs.3,20,51,447/- was reflected in the P&L Account of the assessee. These facts are very very clear from Schedule 14, Schedule 15 and Schedule 23 of the audited financial statements of the assessee for the year ended 31/03/2016.
Now, let us examine the allowability of write off of loans and advances to the tune of Rs.6,05,23,287/-. We find that the assessee had given advances during the course of its business to the following entities:-
Name Address PAN Amount (Rs.) Kingfisher Airlines C12, DDA AAACD5301J 6,11,88,807 Commercial Complex, IIT Gate, New Delhi MDLR Airlines MDLR House, AAECN5231C 36,85,310 S.C.O 2, 3, 4 – Sector15, Old Judicial Complex, Gurgaon -122 001 Paramount Sardar Patel Road, AACCP9164H 30,45,392 Airlines Little Mount, Guindy, Chennai- 400 032 Blue Ocean Cruises Ground Floor, Old AAECB3637K 20,00,000 Kamani Chambers R. Kamani Marg Ballard Estate,
5 ITA 312/Mum/2021
Mumbai Kafila Tours & 10185-C, Arya AAACD3853F 6,03,779 Travels Samaj Road, Karol Bagh, New Delhi The assessee submitted that their primary business activity comprises of on-line booking of domestic and international air tickets and holiday packages. It was explained that when a customer books an air ticket for travelling on a particular airline, the portal of the assessee communicates with the online portal of the particular airline. As per the prevailing business practices in the airline industry, the low cost carriers request the online ticket booking entities and the travel portals such as assessee to make an advance deposit to them which will be adjusted towards issue of air tickets by the airlines over a period of time. In case of full services carriers, a bank guarantee would be required to be given by the travel portals. In this background, we find that assessee had made deposits with Kingfisher Airlines, MDLR Airlines and Paramount Airlines. The Ld.AR submitted that these three Airlines had declared bankruptcy and could not repay the unutilized deposits lying with them either by way of payment or by way of issue of airline tickets. Hence, the deposits made by the assessee with those Airlines became irrecoverable which was sought to be written off by the assessee during the year and deduction claimed accordingly.
We find that assessee had made an advance to M/s Blue Ocean Cruises to enable it to sell cruise tickets on its online portal. However, the said cruise did not operate as per the scheduled departures which resulted in dispute arising with them and subsequently, the said company had stopped operating cruises. Hence, the deposit lying with them became irrecoverable and accordingly
6 ITA 312/Mum/2021 assessee sought to write off the same and claimed deduction in the return. Similarly, the assessee had made advances to M/s Kafila Tours & Travels with respect to booking for a charter flight. This booking was cancelled and the deposit was forfeited by them. Accordingly, this deposit became irrecoverable and accordingly assessee chose to write off the same treating it as irrecoverable and claimed deduction in the return.
From the above it could be seen that all the aforesaid advances / deposits were made by the assessee company in the normal and regular course of its business and for the purpose of its business. So they fall clearly within the ambit of trade advances and trade deposits. It is not in dispute that the concerned recipients of the advances / deposits had not repaid the money to the assessee or adjusted the deposits lying with them by way of supply of air tickets or providing cruise tickets or running the chartered flight, as the case may be. Hence, it is clearly established that the deposits and advances lying with the above parties became irrecoverable in the hands of the assessee. Once a trade deposit / trade advance made by the assessee during the course of business which became irrecoverable at a subsequent point of time, the write off of such irrecoverable deposits / advances would squarely be a trading loss for the assessee which would be allowable as deduction under section 28 of the Act. In fact, from the perusal of the balance-sheet of the assessee we find that assessee had not written off in the year in which those advances have been made. It had initially treated the same as doubtful advances and made provision for such doubtful advances in the books by debiting to P&L Account and the said provision was duly disallowed by it in the return of income filed for the respective assessment years,
7 ITA 312/Mum/2021 i.e. A.Y. 2009-10 to 2015-16. Later, on coming to know of the fact that the deposits became clearly irrecoverable despite several efforts taken by the assessee, it chose to write off the same and claimed deduction accordingly. There is no dispute that the advances / deposits had indeed become irrecoverable; that those deposits / advances were made during the regular course of business of the assessee and hence, the write off of those deposits would clear fall within the ambit of a trading loss allowable under section 28 of the Act. Either way, this issue is no longer res integra in view of the decision of the Hon’ble jurisdictional High Court in the case of Harshad J Choksi vs CIT reported in 349 ITR 250 (Bom). We find that the Ld.PCIT had observed that the assessee had not offered any income in respect of these advances in earlier years in terms of section 36(2) of the Act and hence, the claim of bad debts allowable under section 36(1)(vii) of the Act. We find that the Ld.PCIT has proceeded on an assumption that these are trade debts. Factually, these are trade advances / trade deposits made during the course of business of the assessee. Hence, primarily the provisions of section 36(2) r.w.s. 36(1)(vii) of the Act would not come into operation at all. The advances and trade deposits made by the assessee in the regular course of business, which later became irrecoverable eventually leading to write off of the same would only be a regular business loss allowable to the assessee. We direct the ld. Assessing Officer to grant deduction for an amount of Rs.6,05,23,287/-.
As stated earlier, a sum of Rs.15,64,28,164/- included in the total sum of Rs.18,84,79,611/- was claimed as deduction during the year on account of trade receivables and advances written off. This sum of Rs.15,64,28,164/- as stated (supra) had not been claimed as deduction by debiting to P&L Account during the 8 ITA 312/Mum/2021 year. Instead, it was claimed as deduction by adjusting the provision made in earlier years (which is purely a balance-sheet item). It is not in dispute that in the years in which such provisions were made, the assessee had voluntarily disallowed the same in the return of income. Hence, the remaining sum of Rs.3,20,51,447/- (Rs.18,84,79,611/- (-) Rs.15,64,28,164/-) alone was debited to P&L Account for the year under consideration on account of trade receivables and advances written off and claimed deduction accordingly. This sum of Rs.3,20,51,447/- is also included in Rs.18,84,79,611/-. The break up of Rs.3,20,51,447/- is as under:-
(a) Trade receivables written off - Rs.2,48,71,992/- (b) Trade advances written off - Rs. 71,79,456/-
Total - Rs.3,20,51,447/- During the course of hearing, the Ld.AR before us, clearly stated that the Ld.AO in the giving effect proceedings had indeed granted relief to the assessee in respect of trade receivables written off in the sum of Rs.2,48,71,992/-. Hence, he argued that what survives is in respect of trade advances written off of Rs.71,79,456/-. It is not in dispute that this sum of Rs. 71,79,456/- also represents advances made by the assessee during the regular course of business of the assessee and for the purpose of the business. The only grievance of the revenue is that assessee had not offered any income in terms of section 36(2) of the Act in earlier years and hence, the said claim when written off, is not allowed as deduction under section 36(1)(vii) of the Act. We have already detailed hereinabove that once a trade advance was given in the normal course of business of the assessee and that the