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Facts
The assessee made substantial advance payments for material supply which became irrecoverable, leading to a claim for trading loss. The Assessing Officer (AO) disallowed the bad debt written off from one party, stating Section 36 was not applicable, while allowing another similar write-off. The CIT(A) allowed the assessee's alternate claim, treating the irrecoverable advances as business expenditure under Section 28, prompting the Revenue to file an appeal.
Held
The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision. It ruled that the irrecoverable advance payments, made in the normal course of business, constituted a trade loss allowable as business expenditure under Section 28, citing various judicial precedents including the Supreme Court. The Tribunal also rejected the Revenue's contention that the loss had not crystallized in the relevant assessment year.
Key Issues
1. Whether irrecoverable trade advances made in the course of business constitute a business loss deductible under Section 28 of the Income Tax Act. 2. Whether such a loss had crystallized during the relevant assessment year for deduction.
Sections Cited
139(1), 143(2), 36, 44AB, 36(1)(vii), 36(2), 28, 37(1)
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Income Tax Appellate Tribunal, ‘B’ BENCH : BANGALORE
Before: SHRI PRASHANT MAHARISHI, VICE – & SHRI SOUNDARARAJAN K.
ORDER PER SOUNDARARAJAN K., JUDICIAL MEMBER
This is an appeal filed by the revenue challenging the order of Ld.CIT(A)-11, Bengaluru dated 21/08/2024 in respect of the A.Y. 2012-13 and raised the following grounds . “(i) Whether the Id. CIT(A) was correct on law and facts in allowing the alternate claims of trading loss incurred by the assessee, in absence of any documentary evidence produced by the assessee. (ii) Whether the Id. CIT(A) was correct on law and facts in not considering the fact that the claims of trading loss raised by the assessee has not crystallised during the relevant assessment year.”
2. This appeal was filed by the revenue with a delay of 5 days and in support of the said delay, the revenue had filed an application to condone the said delay.
We have considered the said application and also the fact that the delay is only 5 days we condone the said delay and proceeded to decide the appeal on merits.
The brief facts of the case are that the assessee filed her return of income on 30/09/2012 u/s. 139(1) of the Act. Subsequently, she filed her revised return on 19/02/2013. The AO found that the assessee had claimed deduction under Chapter VIA and has also reported a higher business loss in the revised return. Therefore the case was selected for scrutiny and notice u/s. 143(2) was issued on 23/09/2013. At the time of the assessment proceedings, the AO had not accepted bad debts written off from Mr. Prasanna V. Ghotge whereas allowed the said written off from M/s. BST HK Ltd. The assessee submitted that the said written off done by the assessee are the trade advances for the supply of materials during the course of the business which could not be recovered from the said Mr. Prasanna V. Ghotge and therefore the said bad debt is eligible for deduction u/s. 36 of the Act. The AO also observed that the assessee had not got audited his books of accounts u/s. 44AB of the Act even though the turnover exceeds the limits.
As against the said order, the assessee filed an appeal before the Ld.CIT(A)-11, Bengaluru. The Ld.CIT(A) also sought for a remand report from the AO and obtained rejoinder from the assessee to the said remand report. The Ld.CIT(A) after considering the submissions made by the assessee as well as the remand report and the rejoinder had discussed the issue in detail and arrived a conclusion that the claim of deduction u/s. 36(1)(vii) could not be granted since the requirement mentioned in 36(2) was not met out by the assessee. However, the Ld.CIT(A) had considered the alternate prayer made by the assessee that the bad debts written off by the assessee was in the course of its business and therefore the same is a business expenditure eligible for deduction u/s. 28 of the Act. The Ld.CIT(A) considered the alternate plea made by the assessee and based on the judgements of the Hon’ble Supreme Court as well as the others judgements of the Hon’ble High Courts, had allowed the appeal of the assessee.
As against the said order, the revenue is in appeal before this Tribunal.
At the time of hearing, the Ld AR relied on the findings given by the Ld.CIT(A) and prayed to dismiss the appeal filed by the revenue. The Ld.AR further submitted that admittedly, the amount was given as advance for supplying the materials but unfortunately the supplier has not supplied the entire quantity of the material agreed and also not returned the balance amount which he received as an advance and therefore the said loss could be treated as a trade loss and eligible for deduction u/s. 28 of the Act. The Ld.AR also relied on the civil and criminal proceedings initiated by the assessee against the said Mr. Prasanna V. Ghotge for allowing the appeal filed by the assessee. The Ld.AR also filed a case law compilation in support of his case and prayed to dismiss the appeal.
The Ld DR relied on the findings of the AO and submitted that the Ld CIT is not correct in allowing the alternate prayer without any evidence. The Ld DR further submitted the claim of loss has not crystallised during the relevant assessment year and therefore the relief granted by the Ld CIT is not correct.
We have heard the arguments of both sides and perused the materials available on record.
10. In this case, the only dispute is with regard to the written off of the trade loss from Mr. Prasanna V. Ghotge to whom the assessee had made a advance payment of Rs. 13,50,00,000/-for supplying materials during the month of January,2011. The supplier partly fulfilled his obligation worth Rs 7,59,00,000 by June 2011. The assessee was able to get the partial refund of Rs 2,30,00,000 on 11/06/2011. The assessee was not able to recover the balance of Rs 3,61,00,000 and therefore initiated both civil and criminal proceedings but without any success. Therefore the assessee decided to write of the same during the F/Y 2011-12. Similar advance was also paid to M/S BST HK Ltd. Since the said amounts becomes irrecoverable the assessee decided to written off the amounts. The assessee not only written off the bad debt from the said Mr. Prasanna V. Ghotge but also written off the debt of M/s. BST HK Ltd. The AO accepted the said written off made by the assessee in respect of M/s. BST HK Ltd. whereas not accepted the written off in respect of the supplier Mr. Prasanna V. Ghotge. The assessee right from the beginning contended that she had made the trade advances to the supplier Mr. Prasanna V. Ghotge for the supply of materials as a part of business operation. Due to the reasons beyond the control of the assessee, the supplier had not fulfilled the obligation to supply the materials and in spite of the various steps taken by the assessee, they are not able to recover the amounts from the said supplier. Therefore the assessee had written off the said bad debts in their books which was denied by the AO on the ground that section 36 would not apply to the facts and circumstances of the case. In the same assessment order, the AO had accepted the another bad debt written off by the assessee in the case of M/s. BST HK Ltd. On appeal before the Ld.CIT(A), the assessee had filed a detailed grounds of appeal and also relied on the judgment of the Hon’ble Supreme Court reported in 46. ITR 649 in the case of CIT vs. Mysore Sugar Company Limited and the other orders of this Tribunal. The assessee also contended that the expenditure incurred is a revenue expenditure since the same has been incurred purely for the business operations and therefore entitled for deduction u/s. 28 of the Act. The said plea was made by way of an alternate argument before the Ld.CIT(A) and in support of the said argument, the assessee relied on the various orders of this Tribunal. After extracting the findings given by the Hon’ble High Court as well as the various Tribunals, the Ld.CIT(A) was inclined to accept the alternate plea raised by the assessee. Before doing so, the Ld.CIT(A) also sought for a remand report from the AO for which the assessee also filed their rejoinder. Finally the Ld.CIT(A) had given his findings in the following paragraphs: “6.2.1 One of the issues that requires consideration is the genuineness of the business transactions of the appellant with M/s. Prasanna.V. Ghotge. Perusal of the documents submitted by the appellant relating to the nature/ details of the transactions and the criminal proceedings initiated and also the findings of the AO is evident of the genuineness of the transactions. The fact that appellant entered into business transaction with M/s Prasanna. V Ghotge for supply of iron ore is not in question. Since the supplier had not performed part of its commitments, the appellant was well within her commercial wisdom to write off the balance advance amounting to Rs. 3,61,00,000/- during the previous year 2011-12 relevant to A.Y 2012-13 and therefore the same is in the nature of business loss. 6.3 The records indicate that the appellant has produced the books of account and other details before the AO to establish that the transactions with Mr. Prasanna V. Ghotge were conducted in the normal course of business. The AO did not identify any defects or raise doubts regarding the genuineness of the transactions, as stated in paragraph 4 of the assessment order dated 28th March 2015, which is the subject of the current proceedings. The nature of the transaction between the appellant and M/s. Prasanna. V. Ghotgc was that of trade between the two parties and in respect of which, as brought out by the AO under para (4) of the impugned order. the appellant had made a total advance of Rs 13,50,00,000/- to M/s. Prasanna. V. Ghotge and in respect of which supply of goods to the extent of Rs. 9.89.00.000t- had been completed during the relevant previous year and the balance amount, in the business wisdom of the appellant was written off as irrecoverable, based on the law declared by the Hon'ble Supreme Court in the ease of M/s. Mysore Sugar Company Limited. 6.4 As regards the allowability of the same as a bad debt under section 36(1)(vii) as per the submission of the appellant, the stand taken in the assessment order appears to be incorrect application of law, since it fails to meet the requirements of section 36(2) of the Act.
6.5 As regards the view of the AO that the books of account have not been audited u/s 44AB of the Act, this would not dis-entitle the appellant from the eligible benefits as provided under law, so long as the appellant meets the requirements thereto. Further the AO has not denied the benefit of write off on account of the said lapse on the part of the appellant but on account of the non- compliance of section 36(2) Act. It is also to be noted that the AO, in the same proceedings has allowed the claim of bad debts in the case of M/s. BSTHK Limited and such claim was allowed despite the books of account not being audited u/s 44AB of the Act. 6.6 However, with regard to the alternate prayer of the appellant to allow the said amount as a business expenditure under section 28 of the Act is concerned. it is observed that the appellant has established that the write off is allowable u/s 28 of the Income Tax Act and such claim is duly supported by the judicial pronouncements rendered on the issue by the llon'ble Supreme Court in the cast of Mysore Sugar Company Limited Vs. CIT, Khyati Realtors Pvt Ltd and the principles of which have been followed in other decision cited by the appellant 6.7 On the issue of allowable business loss u/s 28, it is also pertinent to refer to the case of Today Homes & Infrastructure (P) Ltd Vs DC1T (2017) 88 taxmann.com 391 (ITAT Delhi) wherein a similar set of facts were involved. In this case the assessee had entered into an agreement regarding purchasing of land through ‘RK’ and as advance of Rs.31 lakhs was made by the assessee to him. On the basis of documents found during the course of search which were cash receipts issued by ‘RK’ against the said land dealing, the Assessing Officer has made this addition while rejecting the explanation of the assessee that the said advance was returned to the assessee since the dealing could not reach finality. 6.7.1 The Hon'ble Tribunal held that the authorities below had not disputed the fact that the amount of Rs 31 laths was advanced by the assessee to ‘RK’ towards the land dealing which ultimately did not materialize. The only dispute was regarding the refund of the said advance amount of Rs.31 lakhs by ‘RK’ to the assessee on the non - materialization of the dealing. Though the assessee could not establish that the said advance amount of Rs.31 lakhs was returned to the assessee nut the dealing in question was part of the business of the assessee and non - refund of the advance amount to the assessee was a business loss incidental to the business of the essence. The loss was thus an allowance deduction under section 28. 6.8 The case of the appellant is covered by the judicial decisions cited above and therefore the prayer of the appellant to treat the write off as business loss is allowable. 6.9 Considering the above facts of the case and the judicial pronouncements cited by the Appellant, issues raised under grounds 5,6,7 & 8 are allowed.”
We have also perused the orders of the Coordinate Bench of this Tribunal in the case of M/s. Foretell Business Solutions Pvt. Ltd. vs. ITO in dated 30/11/2021 wherein this Hon’ble Tribunal had allowed the claim of the assessee by giving the following finding: “6.4 In the present facts of the case, there is no dispute that the advances were given by the assessee in the normal course of its business and when a loss arises due to non-recovery of such advances and when the same is irrecoverable and written off as such, the same should be allowed as a business loss while computing the profit and gains of business. The Hon'ble Delhi High Court in the case of CIT v. Sumangal Overseas Limited [I.T.A. No. 174 of 2011(Del)] held as follws: “A trading loss has a wider connotation than a bad debt. A bad debt may also be a trading loss. But a trading loss need not necessarily be a bad debt. There. may be a bad debt which may not fall within the purview of section 36(1)(vii) of the Act, by may well be regarded as one eligible for deduction incurred in the course of carrying on business will come under that category and will naturally enter into computing the net total income as the real profit chargeable to tax cannot be arrived at without setting off legitimate trading loss.”
Respectfully following the same, we hold that the amount that could not be recovered is to be treated as trading loss.”
We have also perused another order of this Tribunal in the case of M/s. Xchanging Solutions Ltd. vs. DCIT in IT(TP)A No. 3358/Bang/2018 vide order dated 01/11/2021 wherein the similar issue was decided as follows: “8.4 We have heard rival submissions and perused the material on record. The claim made by the assessee is not towards bad debt u/s 36(1)(vii) of the I.T.Act, but under the provisions of section 28 of the I.T.Act as business or trade loss. Giving advance to the employees as well as vendors were essential and wholly and exclusively linked to the business of the assessee. The loss if any is an incidental business loss. In this context, we rely on the judgment of the Hon’ble Delhi High Court in the case of Triveni Engineering & Industries Limited (ITA No.56 of 2009). Further, the advances given to the vendors, which is non-recoverable, is also allowable as business loss. This proposition has also been upheld by the Hon’ble Apex Court in the case of Mysore Sugar Co. Ltd. (1962) 46 ITR 649. Since the A.O. has not examined the claim of deduction u/s 37(1) r.w.s. 28 of the I.T.Act, we deem it appropriate to restore the issue to the files of the A.O. for de novo consideration. The assessee is directed to furnish necessary evidences before the A.O. The A.O. is directed to dispose of the matter expeditiously after affording a reasonable opportunity of hearing to the assessee.”
Apart from the above said orders of this Tribunal, the Ld.CIT(A) also relied on the Hon’ble Supreme Court judgement in the case of CIT vs. Mysore Sugar Company Limited reported in 46 ITR 649 and the order of the Hon’ble Delhi Bench of this Tribunal in case of Today Homes & Infrastructure (P) Ltd. vs. DCIT reported in 88 taxmann.com 391.
On going through the finding given by the Ld.CIT(A) as well as the findings given by the Tribunal in the orders extracted above, we are of the view that the Ld.CIT(A) had applied his mind and granted relief in accordance with the principles laid down by the Hon’ble Supreme Court as well as other High Courts and Tribunals. The revenue’s main contention is that the trade loss raised by the assessee has not crystallised during the relevant Assessment Year and therefore the order of the Ld.CIT(A) is not correct. We have considered the said ground raised by the revenue and we are not accepting the said ground for the reason that the advance was paid during the A/Y 2011-12 and the bad debts were written off by the assessee as a trade loss during the A/Y 2012-13 and therefore the same is entitled for deduction u/s. 28 of the Act as held by the various Tribunals as well as the Hon’ble Supreme Court and Hon’ble High Court. In view of the above said discussions, we are of the view that the revenue had not made out a case for reversing the findings of the Ld.CIT(A). We, therefore dismiss the appeal filed by the revenue.
In the result, the appeal filed by the revenue is dismissed.
Order pronounced in the open court on 18th August, 2025.