M/S. LUCKY EXPORTS,NEW DELHI vs. DCIT, NEW DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH : D : NEW DELHI

BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA No.771/Del/2014 Assessment Year: 2008-09 Lucky Exports, Vs DCIT, UG-28, Som Dutt Chambers-II, Circle-24(1), 9, Bhikaji Cama Place, New Delhi. New Delhi. PAN: AAAFL1147P (Appellant) (Respondent) Assessee by : Shri Naveen N.D. Gupta, CA Revenue by : Shri Saras Kumar, Sr. DR Date of Hearing : 20.08.2020 Date of Pronouncement : 28.09.2020 ORDER PER R.K. PANDA, AM: This appeal filed by the assessee is directed against the order dated 21.11.2013 of the CIT(A)-28, New Delhi relating to assessment year 2008-09.

ITA No.771/Del/2014 the assessee has claimed a sum of Rs.1,61,35,879/- under the head ‘write off/bad debt.’ He, therefore, asked the assessee to explain and justify the advances /bad debt written off in respect of 22 parties. He asked the assessee to file partywise explanation and justification of bad debt/advances written off and to produce the copy of account and names of such parties for the last three years. He also asked the assessee to file: (a) copy of bank statement when payment of advances written off were made; (b) Complete name, address, PAN and contact details of the parties including current address, if any; and (c) Copy of correspondence made in connection with recovery of loan/advances written off.

ITA No.771/Del/2014 j. Shri Satya Karan Punia Rs.25,03,750 k. Shri. Bharat Bhushan Rs.8,43,750 1. M/s Elite Manufacturing Pvt. Ltd Rs.1,59,000 m. M/s Unique Associates Rs.2,50,000 n. M/s Shivam International Rs.24,82,000 o. M/s Shivalik Builders Rs.14,75,992 p. M/s Shivalik Promoters Builders Pvt Ltd Rs.7,00,000 q. M/s Golf Management Groups Rs.80,000 ---------------------- Total Rs.1,45,21,079

ITA No.771/Del/2014 c. Shri. Rajeev Chopra Rs.4,12,786 d. M/s Ankita Imports & Exports Rs.10,00,000 e. Mr. Surjeet Singh Rs.3,20,000 f. Mr. Deepak Bharadwaj Rs.14,75,992 g. Mr. S.SJain Rs.2,50,000 h. Mr. Mayank Jian Rs.2,50,000 i. M/s Choudhary Consultants Rs.5,00,000 j. Shri Satya Karan Punia Rs.25,03,750 k. Shri. Bharat Bhushan Rs.8,43,750 1. M/s Elite Manufacturing Pvt. Ltd Rs.1,59,000 m. M/s Unique Associates Rs.2,50,000 n. M/s Shivam International Rs.24,82,000 o. M/s Shivalik Builders Rs.14,75,992 p. M/s Shivalik Promoters Builders Pvt Ltd Rs.7,00,000 q. M/s Golf Management Groups Rs.80,000 Rs.1,45,21,079 3. That the Ld CIT(A) is not justified in confirming the disallowance made by Ld AO in respect of amount written off of Rs.1,45,21,079/- and not allowing the same as business expenditure U/s 37(1) of the Income Tax Act’1961 being trade advance by stating that “As the expenses do not relate to the year in question they cannot be allowed U/s 37” which is based on surmises and conjectures, contrary to facts borne on record and provisions of law, as such the disallowances so made needs to be deleted. 4. That appellant craves right to amend, add, delete or withdraw any of the ground of appeal either before or at the time of hearing of this appeal.”

ITA No.771/Del/2014

M/S LUCKY EXPORTS INC. A.Y 2008-09 DETAILS OF ADVANCES WRITTEN OFF AS TRADE ADVANCE Note (1) : Page 37 & 48 (CIT(A) Order) CIT(A) disallowed treating claim as Bad Debts of Trading Debt ; whereas Assessee has claimed Trading Loss allowable U/s 28(1)/37(1). S.No Name of Amount of F. Y Particulars of Basis of Basis of Arguments the Party Advance in in Advance & Disallow- Confirmation Rs.) Whi- Write off ance by by CIT(A) ch AO Given 1 Mahima 97-98, Assessee was Genuine- Based on AO 1. Arm's Length Party. Trading & 15,66,848 98-99 exporting ness of 2. Payment by Account Payee Investment toothpaste & Transacti- Cheque. Limited purchasing on and 3. Assessment U/s 143(3) Party & toothpaste from Nature of Transaction found genuine. Mahima. In Advance 4. Balance consistently appearing Export Contracts Not Clear in Audited Balance Sheet as time is the Advances. essence of 5. Balance found genuine as supplies as if Advances by Assessing Officer supply is not consistently U/s 143(3). received in time 6. Copy of Purchase bills along danger of with Export Invoices with Bill of cancellation of LC Lading & Custom Exchange. or loss of export 7. No evidence that amount paid order. by Cheque received back as in Subsequently, no cash. further export 8. Assessee claimed write off as order & Mahima Trading Loss U/s 28(1)/37(1) & failed to refund CIT(A) disallowed claim U/s balance 36(1)(vii) as Bad Debts (Page 37 outstanding. CIT(A) Order). 2 Deepak 1993- Advance given for Genuinen Appellant not 1. Arm's Length Party. Bharadwaj 10,00,000 94 procurement of ess of able to prove 2. Payment by Account Payee Export Supplies. Transactio that it is debt Cheque. In Export n and and trade 3. Assessment U/s 143(3) Party & Contracts time is Nature of debt. Transaction found genuine. the essence of Advance 4. Balance consistently appearing supplies as if Not Clear in Audited Balance Sheet as supply is not Advances. received in time 5. Balance found genuine as danger of Advances by Assessing Officer cancellation of LC consistently U/s 143(3). or loss of export 6. No evidence that amount paid order. But no by Cheque received back as in supply received cash. and party not 7. Assessee claimed write off as refunded the Trading Loss U/s 28(1)/37(1) & advance CIT(A) disallowed claim U/s 36(1)(vii) as Bad Debts (Page 37 CIT(A) Order).

ITA No.771/Del/2014

3 Unique 2001- Advance for Business Since 1. Arm's Length Party. Associates 2,50,000 02 Providing Nexus of payment 2. Payment by Account Payee Services to payment towards Cheque. Arrange Duty not consultancy 3. Assessment U/s 143(3) Party & Drawback & proved. charges, thus Transaction found genuine. DEPB License as it ws not a 4. Balance consistently appearing per Agreement. trade debt. in Audited Balance Sheet as Advances. 5. Balance found genuine as Advances by Assessing Officer consistently U/s 143(3). 6. Copy of Agreement with service provider (Clause 4, Page 128 provides for advance). 7. No evidence that amount paid by Cheque received back as in cash. 8. Assessee claimed write off as Trading Loss U/s 28(1)/37(1) & CIT(A) disallowed claim U/s 36(1)(vii) as Bad Debts (Page 37 CIT(A) Order). 4 Adani 1998- Advance given for Genuine- Based on AO 1. Arm's Length Party. Exports 2,50,961 99, procurement of ness of 2. Payment by Account Payee Limited 2002- Export Supplies Transacti- Cheque. 03 of Rice. In Export on and 3. Assessment U/s 143(3) Party & Contracts time is Efforts to Transaction found genuine. the essence of recover 4. Balance consistently appearing supplies as if the in Audited Balance Sheet as supply is not amount Advances. received in time, not 5. Balance found genuine as danger of proved. Advances by Assessing Officer cancellation of LC consistently U/s 143(3). or loss of export 6. Copy of Purchase bills along order. But no with Export Invoices with Bill of supply received Lading & Custom Exchange. and party not 7. No evidence that amount paid refunded the by Cheque received back as in advance cash. 8. Assessee claimed write off as Trading Loss U/s 28(1)/37(1) & CIT(A) disallowed claim U/s 36(1)(vii) as Bad Debts (Page 37 CIT(A) Order). 5 S.S jain 1993- Advance given for Genuine- Appellant not 1. Arm's Length Party. (Krishna 2,50,000 94 procurement of ness of able to prove 2. Payment by Account Payee Finance Export Supplies. Parties, that it is debt Cheque. Co.) In Export Transacti- and trade 3. Assessment U/s 143(3) Party & Contracts time is on and debt. Transaction found genuine. the essence of Payments 4. Balance consistently appearing supplies as if not in Audited Balance Sheet as supply is not proved. Advances. received in time 5. Balance found genuine as danger of Advances by Assessing Officer cancellation of LC consistently U/s 143(3). or loss of export 6. No evidence that amount paid order. But no by Cheque received back as in supply received cash. and party not 7. Assessee claimed write off as refunded the Trading Loss U/s 28(1)/37(1) & advance CIT(A) disallowed claim U/s 36(1)(vii) as Bad Debts (Page 37 CIT(A) Order).

ITA No.771/Del/2014

6 Mayank 1993- Advance given for Genuine- Appellant not 1. Arm's Length Party. Jain 2,50,000 94 procurement of ness of able to prove 2. Payment by Account Payee (Krishna Export Supplies. Parties, that it is debt Cheque. Finance In Export Transacti- and trade 3. Assessment U/s 143(3) Party & Co.) Contracts time is on and debt. Transaction found genuine. the essence of Payments 4. Balance consistently appearing supplies as if not in Audited Balance Sheet as supply is not proved. Advances. received in time 5. Balance found genuine as danger of Advances by Assessing Officer cancellation of LC consistently U/s 143(3). or loss of export 6. No evidence that amount paid order. But no by Cheque received back as in supply received cash. and party not 7. Assessee claimed write off as refunded the Trading Loss U/s 28(1)/37(1) & advance CIT(A) disallowed claim U/s 36(1)(vii) as Bad Debts (Page 37 CIT(A) Order). 7 Satya 2001- Advance given for No Appellant not 1. Arm's Length Party. Karam 25,03,750 02 procurement of document- able to prove 2. Payment by Account Payee Punia Export Supplies tary that it is debt Cheque. of Medicine. In evidence and trade 3. Assessment U/s 143(3) Party & Export Contracts for debt. Transaction found genuine. time is the Idenitity 4. Balance consistently appearing essence of & in Audited Balance Sheet as supplies as if Business Advances. supply is not relation. 5. Balance found genuine as received in time, Advances by Assessing Officer danger of consistently U/s 143(3). cancellation of LC 6. No evidence that amount paid or loss of export by Cheque received back as in order. But no cash. supply received 7. Assessee claimed write off as and party not Trading Loss U/s 28(1)/37(1) & refunded the CIT(A) disallowed claim U/s advance 36(1)(vii) as Bad Debts (Page 37 CIT(A) Order). 8 Ankita 1992- Advance given for Genuine- Appellant not 1. Arm's Length Party. Imports & 10,00,000 93 procurement of ness of able to prove 2. Payment by Account Payee Exports Export Supplies. Parties, that it is debt Cheque. In Export Transacti- and trade 3. Assessment U/s 143(3) Party & Contracts time is on and debt. Transaction found genuine. the essence of Payments 4. Balance consistently appearing supplies as if not in Audited Balance Sheet as supply is not proved. Advances. received in time 5. Balance found genuine as danger of Advances by Assessing Officer cancellation of LC consistently U/s 143(3). or loss of export 6. No evidence that amount paid order. But no by Cheque received back as in supply received cash. and party not 7. Assessee claimed write off as refunded the Trading Loss U/s 28(1)/37(1) & advance. CIT(A) disallowed claim U/s 36(1)(vii) as Bad Debts (Page 37 CIT(A) Order).

ITA No.771/Del/2014

9 Bharat 2004- Advance given for Address Appellant not 1. Arm's Length Party. Bhushan 8,43,780 05, procurement of Proof and able to prove 2. Payment by Account Payee 2006- Export Order for Business that it is debt Cheque. 07 Medicine to nexus of and trade 3. Assessment U/s 143(3) Party & Russia . In Export payment debt. Transaction found genuine. Contracts time is not 4. Balance consistently appearing the essence of proved. in Audited Balance Sheet as supplies as if Advances. supply is not 5. Balance found genuine as received in time Advances by Assessing Officer danger of consistently U/s 143(3). cancellation of LC 6. Copy of Agreement with or loss of export service provider. order. But no 7. No evidence that amount paid supply received by Cheque received back as in and party not cash. refunded the 8. Page 18, Para 3.8 of AO advance. Order , Assessee could not furnish address whereas Page 3 Para 2 vide reply dated 03.12.2010 Assessee provided address of Bharat Bhushan. 10 Ranjeev 2003- Advance for Expendit- Based on AO 1. Arm's Length Party. Chopra 4,12,786 04, Working Jointly ure being 2. Payment by Account Payee 2004- for Shipping Capital in Cheque. 05 Business at Iraq. Nature 3. Assessment U/s 143(3) Party & cannot be Transaction found genuine. written off 4. Balance consistently appearing as in Audited Balance Sheet as Revenue Advances. Expendi- 5. Balance found genuine as ture Advances by Assessing Officer consistently U/s 143(3). 6. Copy of Agreement with service provider. 7. No evidence that amount paid by Cheque received back as in cash. 8. No benefit of enduring nature resulted to assessee. 9. Loss was incidental to business of assessee. 11 Choudhary 1999- Advance for Business Since 1. Arm's Length Party. Consultan-ts 5,00,000 00 Providing Nexus of payment 2. Payment by Account Payee Services to payment towards Cheque. Arrange Duty not consultancy 3. Assessment U/s 143(3) Party & Drawback & proved. charges, thus Transaction found genuine. DEPB License as it was not a 4. Balance consistently appearing per Agreement. trade debt. in Audited Balance Sheet as Advances. 5. Balance found genuine as Advances by Assessing Officer consistently U/s 143(3). 6. Copy of Agreement with service provider. 7. No evidence that amount paid by Cheque received back as in cash. 8. Assessee claimed write off as Trading Loss U/s 28(1)/37(1) & CIT(A) disallowed claim U/s 36(1)(vii) as Bad Debts (Page 37 CIT(A) Order).

ITA No.771/Del/2014

12 Surjeet 1992- Advance given for Genuinen Genuineness 1. Arm's Length Party. Singh 3,20,000 93 procurement of ess of of Transaction 2. Payment by Account Payee Export Supplies. Transactio and Nature of Cheque. In Export n and Advance Not 3. Assessment U/s 143(3) Party & Contracts time is Nature of Proved and Transaction found genuine. the essence of Advance cannot be 4. Balance consistently appearing supplies as if Not Clear allowed as in Audited Balance Sheet as supply is not Bad Debt. Advances. received in time 5. Balance found genuine as danger of Advances by Assessing Officer cancellation of LC consistently U/s 143(3). or loss of export 6. No evidence that amount paid order. But no by Cheque received back as in supply received cash. and party not 7. Assessee claimed write off as refunded the Trading Loss U/s 28(1)/37(1) & advance CIT(A) disallowed claim U/s 36(1)(vii) as Bad Debts (Page 37 CIT(A) Order. 13 Shivam 2000- Advance given for Genuinen Genuineness 1. Arm's Length Party. Internatio- 24,82,000 01 Procurement of ess of of Transaction 2. Payment by Account Payee nal Medical Transactio and Nature of Cheque. Equipments for n and Advance Not 3. Assessment U/s 143(3) Party & Exports. In Export Nature of Proved and Transaction found genuine. Contracts time is Advance appellant not 4. Balance consistently appearing the essence of Not Clear able to prove in Audited Balance Sheet as supplies as if as Debt & Advances. supply is not Trade Debt. 5. Balance found genuine as received in time Advances by Assessing Officer danger of consistently U/s 143(3). cancellation of LC 6. No evidence that amount paid or loss of export by Cheque received back as in order. But no cash. supply received 7. Assessee claimed write off as and party not Trading Loss U/s 28(1)/37(1) & refunded the CIT(A) disallowed claim U/s advance. 36(1)(vii) as Bad Debts (Page 37 CIT(A) Order). 14 Shivalik 1995- Advance for Expendi- Expense in 1. Arm's Length Party. Builders 14,75,992 96, Construction of ture being not trading 2. Payment by Account Payee 96-97, Guest House for Capital in liability as Cheque. 97-98, Stay of Foreign Nature such expense 3. Assessment U/s 143(3) Party & 98-99, Buyers on Land cannot be is capital in Transaction found genuine. 99-00 not owned by firm written off nature. 4. Balance consistently appearing but by the as in Audited Balance Sheet as partners Revenue Advances. Expendi- 5. Balance found genuine as ture. Advances by Assessing Officer consistently U/s 143(3). 6. Copy of Invoices. 7. No evidence that amount paid by Cheque received back as in cash. 8. Assessee claimed write off as Trading Loss U/s 28(1)/37(1) & CIT(A) disallowed claim U/s 36(1)(vii) as Bad Debts (Page 37 CIT(A) Order). 9. No benefit of enduring nature resulted to assessee. 10. Loss was incidental to business of assessee.

ITA No.771/Del/2014

15 Golf 1997- Advance for Expendi- Expense in 1. Arm's Length Party. Managemen 80,000 98 Construction of ture being not trading 2. Payment by Account Payee t Group Guest House for Capital in liability as Cheque. Stay of Foreign Nature such expense 3. Assessment U/s 143(3) Party & Buyers on Land cannot be is capital in Transaction found genuine. not owned by firm written off nature. 4. Balance consistently appearing but by the as in Audited Balance Sheet as partners Revenue Advances. Expendi- 5. Balance found genuine as ture. Advances by Assessing Officer consistently U/s 143(3). 6. No evidence that amount paid by Cheque received back as in cash. 7. Assessee claimed write off as Trading Loss U/s 28(1)/37(1) & CIT(A) disallowed claim U/s 36(1)(vii) as Bad Debts (Page 37 CIT(A) Order). 8. No benefit of enduring nature resulted to assessee. 9. Loss was incidental to business of assessee. 16 Shivalik 1999- Advance for Expendi- Expense in 1. Arm's Length Party. Promoters 7,00,000 00 Construction of ture being not trading 2. Payment by Account Payee & Builders Guest House for Capital in liability as Cheque. Pvt Ltd Stay of Foreign Nature such expense 3. Assessment U/s 143(3) Party & Buyers on Land cannot be is capital in Transaction found genuine. not owned by firm written off nature. 4. Balance consistently appearing but by the as in Audited Balance Sheet as partners Revenue Advances. Expendi- 5. Balance found genuine as ture. Advances by Assessing Officer consistently U/s 143(3). 143(3). 6. Copy of Invoices. 7. No evidence that amount paid by Cheque received back as in cash. 8. Assessee claimed write off as Trading Loss U/s 28(1)/37(1) & CIT(A) disallowed claim U/s 36(1)(vii) as Bad Debts (Page 37 CIT(A) Order). 9. No benefit of enduring nature resulted to assessee. 10. Loss was incidental to business of assessee. 17 Elite 2002- Advance given for Genuine- Appellant not 1. Arm's Length Party. Manufactu- 1,69,000 03, procurement of ness of able to prove 2. Payment by Account Payee ring (P) Ltd 2003- Export Supplies. Transacti- that it is debt Cheque. 04 In Export on and and trade 3. Assessment U/s 143(3) Party & Contracts time is Nature of debt. Transaction found genuine. the essence of Advance 4. Balance consistently appearing supplies as if Not Clear in Audited Balance Sheet as supply is not Advances. received in time 5. Balance found genuine as danger of Advances by Assessing Officer cancellation of LC consistently U/s 143(3). or loss of export 6. No evidence that amount paid order. But no by Cheque received back as in supply received cash. and party not 7. Assessee claimed write off as refunded the Trading Loss U/s 28(1)/37(1) & advance CIT(A) disallowed claim U/s 36(1)(vii) as Bad Debts (Page 37 CIT(A) Order). GRAND TOTAL 140,55,117 10

ITA No.771/Del/2014 7. He submitted that all those advances were shown in the balance sheet of the assessee company in the past years and the assessments have been completed u/s 143(3). The AO, after verification of the books of account has accepted such advances. Therefore, when these advances were written off during the impugned assessment year by passing a resolution by the partners, copy of which is placed at page 101 and 102 of the paper book, the AO should not have been disallowed the same and the ld.CIT(A) should not have confirmed the action of the AO.

7.1. Referring to the order of the AO as well as the ld.CIT(A), the ld. Counsel submitted that both the lower authorities have disallowed the claim of the assessee on the ground that the same was claimed as bad debt whereas the claim of the assessee was always of write off of a trade loss u/s 28(1)/37(1). Referring to the decision of the Hon’ble Supreme Court in the case of Radhasoami Satsang, 193 ITR 321 (SC), he submitted that the Hon’ble Supreme Court in the said decision has held that where a fundamental aspect permeating through the different assessment years has been found as a fact, one way or the other and the parties have allowed that position to be sustained by not challenging the order, it would not at all be appropriate to allow the position to be changed in a subsequent year.

ITA No.771/Del/2014 He submitted that the AO rejected the claim of the assessee on the ground that the genuineness of the transaction and nature of advances is not clear. However, the AO never bothered to go through the past assessment records of the assessee wherein those advances were continuously shown in the audited balance sheet which were filed along with the return of income and were accepted by the AO in the assessment framed u/s 143(3) for most of the years. Therefore, under these circumstances, the lower authorities are not justified in disallowing the claim of trading loss u/s 28(1)/37 of the IT Act. On account of non-availability of details.

9.1 Referring to the decision of the Hon’ble Delhi High Court in the case of EKL Appliances Ltd. (2012) 20 taxmann.com 509, he submitted that the Hon’ble Delhi High Court has upheld the decision of the Tribunal and dismissed the appeal filed by the Revenue where the Tribunal has upheld the order of the CIT(A) in allowing the claim of business loss. In that case, the assessee had made an entry of Rs.66,86,974/- in its books of account towards doubtful debts/advances. The AO held that the claim of the assessee could not be allowed as no details regarding these

ITA No.771/Del/2014 expenses had been filed, i.e., whether these were actually trade debts incurred in the course of business and what steps were taken to recover the amount and why these had been written off. He accordingly added the amount of Rs.66,86,974/-. The CIT(A), on the basis of the remand report and on the basis of the fact stated by the assessee that they had given advances of Rs.66,68,000/- to ‘D’ for supply of packaging material and there were other small amounts/petty balances payable by other third parties deleted the addition of Rs.66,68,000/-. On appeal by the Revenue, the Tribunal dismissed the appeal. On further appeal by the Revenue, the Hon’ble High Court dismissed the appeal filed by the Revenue holding that the claim of the assessee was to be allowed u/s 37(1) r.w. section 28(1) instead of section 36(1)(vii). 9.2 Referring to the decision of the Hon’ble Delhi High Court in the case of Mohan Meakin Ltd. (2011) 11 taxmann.com 141, he submitted that the Hon’ble High Court in the said decision has held that non-recovery of trade advances amounted to business loss and were to be allowed as deduction u/s 28(1) and 37(1).

ITA No.771/Del/2014

10.1 Relying on various other decisions, the ld. Counsel submitted that when certain advances become irrecoverable and the assessee writes of the same, the claim of the assessee as business loss has been allowed. For the above proposition, he relied on the decision of the Mumbai Bench of the Tribunal in Jackie Shroff (2019) 101 taxmann.com 455, the decision of the Ahmedabad Bench of the Tribunal in the case of Kalpataru Power Transmission Ltd. (2017) 82 taxmann.com 340, the decision of the Rajkot Bench of the Tribunal in the case of Hiravati Marine Products (P) Ltd. (2019) 104 taxmann.com 271 the decision of the Hon’ble Supreme Court in the case of Dr. T.A. Qureshi, vide Civil Appeal No.5635 of 2006, order dated 06.12.2006 and various other decisions.

10.2 The ld. Counsel for the assessee, relying on the following decisions submitted that when advances given for acquisition of capital asset were written off, the same were allowed as business loss. For the above proposition, he relied on the decision of the Hon’ble Rajasthan High Court in the case of Anjani Kumar Co. Ltd. (2003) 259 ITR 114, the decision of the Delhi Bench of the Tribunal in the case of Swastik Pipes Ltd. (2018) 66 ITR (T) 1 and various other decisions. He accordingly submitted that the claim of the assessee towards business loss on account of advances written during the year has to be allowed as business loss and the order of the CIT(A) be set aside.

ITA No.771/Del/2014 should not be allowed as bad debt since the assessee did not fulfill the conditions laid down in the provisions of section 36(1)(vii). Further, he has also held that since the expenses do not relate to the year in question, these cannot be allowed u/s 37 of the IT Act. He accordingly submitted that the order of the CIT(A) being in accordance with the law, should be upheld and the grounds raised by the assessee should be dismissed.

ITA No.771/Del/2014 felt that those advances were not recoverable, the assessee passed a resolution for writing off of those advances and, therefore, the same should be allowed as business loss. It is also his submission that the lower authorities have basically disallowed the claim of the assessee treating the same as bad debt written off whereas the claim of the assessee before the AO as well as the CIT(A) was always of writing off of the same as business loss u/s 28/37(1).

ITA No.771/Del/2014 same as bad debt written off. So far as the allegation of the AO that the genuineness of the transaction and nature of advances are not clear is concerned, we find from the various pages of the paper book that such balances were consistently appearing in the audited balance sheet as ‘advances’ and such balances were found genuine as advances by the AO consistently in the orders passed u/s 143(3) of the Act. Further, the assessee, during the course of original assessment proceedings in those years had filed the relevant details which were accepted after due verification and no adverse view has been taken. We find, the Hon’ble Delhi High Court in the case of ACIT vs. Jay Engineering Works Ltd. (supra) has held that income-tax authorities could rely on the report of the auditors if detailed information of the claims were not available. Since, in the instant case, the assessments in the past were completed u/s 143(3) and such advances were being shown in the balance sheet, therefore, the AO should not have doubted the genuineness of the advances which were given in the past and consistently appearing in the audited balance sheets.

ITA No.771/Del/2014 16. We find, the Hon’ble Delhi High Court in the case of CIT vs. New Delhi Hospitals Ltd., vide ITA 1258/2010, has allowed the claim of bad debt of Rs.44,28,000/- as business loss which was held by the AO as capital loss. We find, the following substantial question of law was admitted before the Hon’ble High Court:- "Whether in the facts and circumstances of the present case, the ITAT is justified to hold the assessee's claim of deduction as bad debt of Rs.44,28,000/- being allowable as business loss instead of holding by Assessing Officer as capital loss?"

ITA No.771/Del/2014 and developer of Heritage City at Gurgaon, in respect of which the profit has been shown under the head "business or profession". During the year 1990-91, the asessee company entered into an agreement with M/s. Gulmohar Estate Ltd for the purchase of three properties at Garden Estate, Gurgaon for the total consideration of Rs.44,28,000/- as per the agreement dated 27.07.1990. The assessee made the total payment to M/s Gulmohar Estate Ltd. in the year 1990- 91. Inspite of making full payment, no physical possession was handed over by the purchaser to the assessee. Since no physical possession was received by the assessee, the property proposed to be purchased by the assessee were not shown as stock in trade in the books of assessee as per the normal accounting practice. The assessee had debited the amount of Rs.44,28,000/- in the books of accounts and shown under the head "loans and advances". Thereafter, in the year 2003-04, M/s. Gulmohar Estage Ltd. locked their offices and it was found that the property purchased by the assessee were fraudulently sold to some other people also. District town and Country Planner, Haryana gave a public notice canceling the licnece of Garden Estate of M/s. Gulmohar Estate Ltd. The assessee, therefore, taken a decision to write off the entire amount as business loss. It is also an admitted position that the possession of the fats agreed to be purchased by the assessee was not given to the assessee and, thus, the transfer of flats within the meaning of Income Tax Act was not completed. Therefore, it is a case where amount was paid in advance for purchase of property. The assessee is in the line of business or real estate as discussed above. It can, therefore, be reasonably be presumed or a reasonable inference can be drawn that the assessee intended to purchase the properly in the course of original business carried on by it or at best it can be said that the assessee purchased the property for residences of its employees including directors. Even if it is presumed that the assessee intended to purchase the three flats of use of its employees and directors, the amount so advanced to M/s. Gulmohar Estate Pvt. Ltd would be considered to be made as incidental to the business carried on by the assessee." 5. Learned counsel for the Revenue has submitted that in the end of paragraph 18 the tribunal has drawn an assumption without any basis that the intended purchase was in the course of business or at best the purchase was for a residence of its employees, including directors. We are not impressed by the aforesaid contention. The tribunal has referred to the nature of activities undertaken by the respondent-assessee,i.e., the assessee was a real estate company and was a contractor. The tribunal referred to the Memorandum of Association and mentioned other transactions of sale/purchase in which the assessee had treated immovable properties as stock in trade. The history for the business transactions undertaken by the assessee have been kept in mind. No doubt, the assessee also had rental income but this factum alone does not show and establish that the properties, which were being purchased from M/s Gulmohar Estate Limited, were to be treated as investment 19

ITA No.771/Del/2014 and not for the purpose of stock in trade. The tribunal thereafter in paragraphs 19 and 20 has observed as under:- "19. The Id. C1T(A) has rejected the assessee's claim of business loss merely by observing as under:- "6.3 It may also be mentioned here that the appellant has not claimed such written off as business loss either in the return of income filed or during the course of assessment proceedings or appellate proceedings before me that the advance was made for the purchase of stock in trade or the amount was advanced in the ordinary course of business. It is also observed from the Assessment Order that appellant has made investment in properties and has shown long term capital gain on sale of such property. In view of these facts, appellant's claim that he amount written off may be treated as business loss is also rejected." From the said observation of the ld.CIT(A), we find that the Id. CIT(A) was of the view the assessee failed to produce any evidence that the advance was made for the purpose of stock in trade or the amount was advanced in the ordinary course of business, which in our considered opinion, is not correct in the light of the submissions of the assessee made before the Id. CIT(A), which has been reproduced by the Id. CIT(A) in his order at para 5 of his order. In the aforesaid submission made before the Id. C1T(A), the assessee categorically stated that the assessee was a construction and real estate company promoted by Shri Ram Prasad Ji in 1968, and the assessee is promoter and developer of New Delhi House and Mercantile house at New Delhi and Heritage City at Gurgaon. The details about the agreement made during 1990-91 were also given to the Id. CIT(A). The Id. CIT(A) has not stated anything adverse to the assessee's contention to the fact that the assessee is promoter and developer of New Delhi House and Mercantile House of New Delhi and Heritage City at Gurgaon. The assessee also explained before the Id. CIT(A) that since the possession of the proposed property was not given to the assessee, the property could not be shown under the head "stock in trade" but the amount advanced had to be shown under the head "loans and advances". 20. One more reason given by the A.O. as well as by the Id. CIT(A) to reject the assessee's claim that from the assessment order, it was observed that the assessee made investment in property and has shown long term capital gain on such property. However, the answer to question whether any property purchased by the assesse, who is also in the business of construction and sale of flats/properties/housing complex, is on investment account or on 20

ITA No.771/Del/2014 trading account is to determined in the light of the intention of the assessee to be decided upon on facts and surrounding circumstances relating to the given property in question No uniform or abstract test can be applied to all the transactions carried on by any assessee. It depends on facts and circumstances of any given transaction. We, therefore, have to decide the controversy in the light of the facts relating to the property in question and the intention of the assessee with regard to that property. In the light of the facts relating to the transaction in question, we have already observed above that the transaction to purchase property from M/s. Gulmohar Estate Ltd. was related or incidental to the assessee's business. After taking into account the intention of the assessee, it is well settled that it is the intention of the assessee which would matter in deciding as to whether the property purchased were intended for carrying on business or to hold it as an investment coupled with the line of the business carried on by the assessee. In the present case, after considering the totality of the facts and circumstances of the case, we find that the assessee's intention to purchase three flats in housing complex by making total payment in advance was to do business of real estate or otherwise transaction was undertaken for the purpose of business ordinarily carried on by the assessee." 6. The aforesaid reasoning given by the tribunal is factual in nature. It cannot be said that the findings recorded by the tribunal are unreasonable or perverse. 7. In view of the aforesaid factual findings recorded by the tribunal, the answer to the question has to be in affirmative, i.e. in favour of the assessee and against the Revenue.”

ITA No.771/Del/2014

ITA No.771/Del/2014 Assessing Officer held that claim of assessee could not be allowed as no details regarding these expenses had been filed, i.e., whether these were actually trade debts incurred in course of business, and what steps were taken to recover amount and why these had been written off - Hence amount of Rs. 66,86,974 was disallowed and added to income of assessee - On appeal, Commissioner (Appeals) had asked for a remand report in view of facts stated by assessee that they had given advance of Rs. 66,68,000 to ‘D’ for supply of packaging material and there were other small amounts/petty balances payable by other third parties Commissioner (Appeals) after examining facts and material brought on record deleted addition of Rs.66,68,000. He, however, confirmed balance addition of Rs. 18,974 for lack of evidence. Tribunal dismissed appeal of revenue against said deletion. It was held that looking to factual background of case though lower authorities rightly allowed claim of assessee but said claim was to be allowed under section 37(1) read with section 28(i) instead of section 36(l)(vii).

ITA No.771/Del/2014 quantity and value involved in transaction was substantial and to ensure regular supplies, assessee had to advance from time to time different amounts to boot house to enable them to keep their supplies in time - Since assessee could not realise Rs. 25.32 lakhs from said corporation, it had to suspend supplies to them and ultimately had to suspend order placed by them on boot house - In view of this development boot house showed its inability to refund advances and pleaded that they had in turn given substantial advances to workers engaged by them - In meantime, 'B' died and, therefore, assesses could not take any action against deceased 'B' or his legal heirs In view of fact that they would have made counter claims on account of firm orders placed having been cancelled - Assessee, therefore, wrote off advance given to boot house as bad debts having become irrecoverable -Assessing Officer, however, rejected assessee's claim - Whether, despite all efforts assessee was unable to recover debt it rightly wrote off same as bad debts and its decision not to take matter to court apprehending counter claim was well reasoned - Held, yes - Whether, therefore, assessee's claim of bad debt was to be allowed - Held, yes. Section 28(i) read with section 37(1) of the Income-tax Act, 1961 - Business loss/deduction - Allowable as - Assessment year 1986-87 - Whether in view of facts stated under heading 'Bad debts' non-recovery of trade advances amounted to business loss and were to be allowed as deduction under section 28(i) and section 37(1) - Held, yes

ITA No.771/Del/2014 material was not supplied or defective material was supplied. Assessee wrote off said amount as advance irrecoverable and claimed deduction thereof. It was held that assessee's claim of deduction was allowable as trading loss under section 37(1).

ITA No.771/Del/2014 deduction could not be denied merely because assessee had suo moto written off advances.

ITA No.771/Del/2014 seizure and confiscation of such stock-in-trade had to be allowed as a business loss. Loss of stock-in-trade has to be considered as a trading loss. [Para 17j

"Questions: • 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), could the same be considered as an allowable business loss? • Whether, therefore, the amount of Rs. 44.98 lakhs could be considered as an allowable business loss? Held: • Section 28 imposes a charge on the profits or gains of business or profession. The expression 'Profits and gains of business or profession' is to be 27

ITA No.771/Del/2014 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 case of Badridas Daga v. CIT [1958] 34 ITR 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. [Para 10] •On the basis of the aforesaid decision, 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. [Para 11] • In fact, the Bombay High Court in the case of CIT v. R.B. Rungta & Co. [1963] 50 ITR 233 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 1961 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 the 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. [Para 12] • Therefore, the amount of Rs. 44.98 lakhs, which was held to be not deductible as bad debts in view of the provisions of section 36(2), could be considered as an allowable business loss. [Para 13]

ITA No.771/Del/2014 29. In the result, the appeal filed by the assessee is allowed. The decision was pronounced in the open court on 28.09.2020. Sd/- Sd/- (KULDIP SINGH) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 28th September, 2020 dk Copy forwarded to 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asstt. Registrar, ITAT, New Delhi