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Facts
The assessee, engaged in the real estate business, claimed a deduction of Rs. 27,00,000/- for bad debts written off, relating to an advance given for land purchase. The transaction did not materialize, and the amount remained unrecovered.
Held
The Tribunal held that once an amount is written off as irrecoverable, no further proof is required to substantiate the claim, following the precedent set by the Supreme Court. The addition made by the AO was deleted.
Key Issues
Whether the write-off of an unrecovered advance for land purchase, in the absence of a formal agreement and PAN details, qualifies as a business loss deductible under the Income Tax Act.
Sections Cited
37(1), 28, 36(1)(vii), 36(2)(i), 271(1)(c)
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Income Tax Appellate Tribunal, CHANDIGARH BENCH “B”, CHANDIGARH
Before: SHRI. RAJPAL YADAV, VP & SHRI. KRINWANT SAHAY, AM
िनधा"रती की ओर से/Assessee by : Shri Ashwani Kumar, C.A and Ms. Muska Garg, C.A राज" की ओर से/ Revenue by : Shri Ved Parkash Kalia, Sr. DR सुनवाई की तारीख/Date of Hearing : 25/02/2025 उदघोषणा की तारीख/Date of Pronouncement : 01/05/2025 आदेश/Order
PER KRINWANT SAHAY, AM:
This is an appeal filed by the Assessee against the order of the Ld. CIT(A)-3, Gurgaon dt. 30/03/2018 pertaining to Assessment Year 2014-15.
In the present appeal Assessee has raised following grounds:
1. That the Ld. Commissioner of Income Tax (Appeals) has erred in law as well as facts in confirming the disallowance of deduction of bad debts written off being in the nature of irrecoverable advance as business loss u/s 37(1) read with section 28 of the Act. The addition made on this account amounting to Rs. 27,00,000/- may please be deleted.
2. That the Ld. Commissioner of Income Tax (Appeals) has erred in confirming the addition of Rs. 3,87,740/- on account of interest income whereas the assessee has taxed the same on receipt basis in the next assessment year. The addition made on this account amounting to Rs. 3,87,740/- may please be deleted.
3. Ground No. 2 was not pressed during the course of hearing, therefore appeal on this ground is dismissed as not pressed.
4. Now we shall deal ground no 1 of the appeal.
2 5. Briefly, the facts of the case are that the assessee, M/s Steel Strips Infrastructures Ltd., Chandigarh, engaged in the real estate business, filed its return of income for Assessment Year 2014-15 declaring a loss of Rs. 29,35,475/-. The case was selected under CASS, and notices under Sections 143(2) and 142(1) of the Income Tax Act, 1961 were duly issued. During the assessment proceedings, it was noticed that the assessee had claimed a deduction of Rs. 27,00,000/- as bad debts written off, relating to an advance given to one Ms. Joginder Paul Kaur for the proposed purchase of land. The assessee submitted that the advance, made through banking channels on 07.04.2012, remained unrecovered due to the non-materialization of the transaction amid a recession in the real estate sector. The assessee, therefore, wrote off the amount as irrecoverable and claimed it as a deduction under Section 36(1)(vii) or alternatively as a business loss under Section 37(1) read with Section 28 of the Act. It was stated that the advance was a business transaction and referenced various judicial precedents and CBDT Circular No. 12/2016 in support of its claim.
5.1 The AO, after considering the submissions, disallowed the claim of Rs. 27,00,000/- on different grounds. Firstly, the AO observed that the debt in question had never been taken into account in computing the income of any previous year, thereby violating the condition laid down in Section 36(2)(i). Secondly, the assessee failed to furnish essential details such as the PAN, address, and a formal agreement with Ms. Joginder Paul Kaur, raising doubts about the genuineness of the transaction. It was also pointed out that no TDS was deducted on the advance payment. Further, the AO held that since the amount was shown as "Loans and Advances" in the balance sheet and the assessee was not engaged in money lending business, the amount was in the nature of capital expenditure and hence not allowable under Section 37(1). The AO distinguished the judicial precedents cited by the assessee as factually different and emphasized that mere assertions without corroborative evidence could not establish the genuineness of the business loss. Additionally, as the expenditure did not pertain to the assessment year but to an earlier period, it failed to satisfy the condition that expenditure must 3 be incurred during the relevant year for a claim under Section 37(1). Concluding that neither Section 36(1)(vii) nor Section 37(1) supported the assessee’s claim, the AO made an addition of Rs. 27,00,000/- to the returned income and initiated penalty proceedings under Section 271(1)(c) for furnishing inaccurate particulars of income.
Against the order of the Ld. AO the assessee went in appeal before the Ld CIT(A) who has since sustained the order passed by the AO on this issue by stating in impugned order as under:
Against the order of the Ld. AO, the assessee filed an appeal before the Ld. CIT(A), who has upheld the order passed by the AO on this issue, stating in the impugned order as under:
I have gone through the assessment order and submissions of the appellant and following observations are made: Ground No. 1 relates to addition of Rs. 27,00,000 made by the AO. The AO has disallowed the deduction claimed u/s 36(1) (hi) of the Act after considering the facts of the case, submissions of the appellant and the relevant provisions of Act applicable in the case in Para 3 of the Assessment Order. During the appellate proceedings also, the appellant has not been able to file copy of agreement for purchase of land entered into with Mrs. Joginder Pal Kaur from whom advance was shown to have been received, along with her PAN, address and TDS deducted on the said payment. Thus, the appellant has even failed to prove the genuineness of this advance, so as to even claim it as advance written off and also the basic conditions for allowing deduction under the Act. The AO has clearly distinguished the cases relied upon by the appellant on facts of the case. In view of the detailed reasoning given by the AO in the assessment order and discussion above, the addition made by the AO is confirmed.
During the course of hearing the Ld. AR submitted that the Assessee engaged in the real estate business, had advanced Rs. 27,00,000/- to Ms.
4 Joginder Paul Kaur for the purchase of land as part of its regular business operations. The transaction did not materialize, and despite repeated efforts, the amount remained unrecovered. Consequently, the appellant prudently wrote off the amount as a business loss in the assessment year 2014-15. It is submitted that the loss is allowable either as a business loss under section 28 or as a business expenditure under section 37(1) of the Income Tax Act. Judicial precedents, including CIT v. Mysore Sugar Co. Ltd., CIT v. Inden Biselers, and Khyati Realtors Pvt. Ltd. v. ACIT (ITAT Mumbai), support that advances made in the course of business, if irrecoverable, are allowable as business losses.
8.1 The absence of a formal agreement or PAN does not negate the business purpose, especially in the real estate industry where advances are often made based on mutual understanding, as recognized by the Hon’ble Supreme Court in S.A. Builders Ltd. v. CIT. Further, CBDT Circular No. 12/2016 and the judgment in TRF Ltd. v. CIT clarify that once an amount is written off, it must be allowed without requiring proof of irrecoverability. The advance was a business transaction duly recorded in the books and not a capital investment.
8.2 Accordingly, it is respectfully prayed that the disallowance of Rs. 27,00,000/- be deleted and the appellant’s claim for deduction be allowed.
Per contra, the Ld. DR relied on the order of the lower authorities.
We have heard the rival contention and perused the material available on the record. In the present ground of the appeal we find that the Ld. AO had initially disallowed the deduction, citing the absence of a formal agreement, PAN details, and Tax Deducted at Source (TDS) records. However, we find that the advance is a genuine business expense, properly recorded in the accounts, and it is not considered a capital expense. Here it is important to note that this amount of Rs. 27,00,000/- has continuously being shown in the balance sheet of the assessee as loan / advances and the Revenue has never questioned its correctness. Rather, it has been taken on 5 record year after year without being questioned. The AO has raised this issue only when this amount was written off by the assessee as non recoverable. During the course of hearing the Ld. Counsel of the Assessee drew our attention to the finding of the Hon’ble Supreme Court in the case of TRF Ltd. v. CIT (supra), wherein the Hon’ble Supreme Court set a clear precedent that once an amount is written off as irrecoverable, no further proof or documentation is required to substantiate the claim. This principle was applied in this case, where the assessee had already written off the amount as irrecoverable. After considering the facts and legal principles, we are of the opinion that the order passed by the Ld. CIT(A) on this issue cannot be sustained. As a result, we allow the assessee's claim for a deduction of Rs. 27,00,000/-, and the addition made by the AO is deleted.
In the result, appeal of the Assessee is partly allowed.