ROOP KISHORE MADAN,NEW DELHI vs. ACIT CIRCLE-16, NEW DELHI

During the Assessment year 2010-11 this business was closed. As this amount could not be recovered nor goods were arranged, the amount was therefore written off.

The Assessing Officer vide its order dated 28.03.2013, made the addition of Rs.24,60,310/- in respect of this Trade Advance Written off in the Proprietorship concern M/s Rhea Distribution Co. under the head Trade Advances- Irrecoverable Written Off and Claimed as Expenses in the profit & loss Account. The assessee preferred an appeal against the said order and ld. CIT(A) confirmed the addition.

Aggrieved, the assessee filed appeal before the Tribunal.

We have gone through the record.

We find that the ld. CIT(A) has affirmed the action of the Assessing Officer invoking the provisions of Section 36(2) of the Income Tax Act, 1961.

The facts of the matter is that the assessee has claimed expenses of Rs. 24,60,310/- under the head “Trade Advance - Irrecoverable/written off” in its profit and loss account as the assessee was unable to recover the amount of advance. Trade Advance was given to the M/s MSPV Trading Pty. Ltd. in the Financial Year 2005-06 for arranging and identifying the manufacturers in Australia who could supply cigarettes to the assessee. The company didn’t supply any goods and neither returned the money back. Out of the Total Advance of Aus. $76,500, the assessee could recover only Aus. $ 10,000. The amount was shown by the appellant in the Financial Statement as Sundry Debtors/ Trade Advance in the Financial Year 2006- 07, 2007-08 & 2008-09 and so was assessed by the AO in the block assessment of the said years. The business of sale of Cigarettes was not going on well & so the assessee closed the business of cigarettes in Financial Year 2009-10. The balance amount of Aus $ 66,500 amounting to INR Rs. 24,60,310/- as per financial statements could not be recovered. The copy of the

Thus, the facts of the case are clear and apparent from the record.

The Assessing Officer has relied on section 36(2) of the Income Tax Act and asked the assessee to explain whether these receipts were routed through the Profit & Loss A/c within the meaning of Section 36(2) of the I. T. Act. Therefore in absence of proper details and explanation Rs.24,60,310/- is disallowed & added to the Income of the assessee. The Assessing Officer made the addition on the basis of Section 36(2) of IT Act, however the “Advances Written Off’ is allowable u/s 37 of the Income Tax Act 1961 as there is a direct nexus between the amount of advance given and business of the

The impugned business advances, which were given to the company M/s MSPV Trading Pty Ltd., partake the character of advances for acquiring trading goods which were likely to be sold in the normal course of business of the assessee firm. The funds for acquiring trading goods in the form of advances to the relevant parties were given on the basis of negotiation and confirmations.

The question before us was whether the said amount which was given up represented a loss of capital or was revenue expenditure. In the background of these facts, we have examined the judicial precedents on this issue.

In the case of CIT vs. Mysore Sugar Co. Ltd., (1962) 46 ITR 649 (SC), the assessee was a manufacturer of sugar and used to advance seedlings, fertilizers and money to sugarcane growers under an agreement by which the growers agreed to sell the next crop of the sugarcane grown by them exclusively to the assessee at current market rates and to have the advances adjusted towards the price of the sugarcane to be delivered to the company. In the year under consideration owing to drought, the sugarcane growers could not grow sugarcane and the advances remained unrecovered. A Government Committee recommended that the assessee should ex gratia forego some of its dues. The assessee, accordingly, waived its rights in respect of Rs. 2,87,422/- and claimed the said amount as a deduction under section 10(2)(xi) and 10(2)(xv) of the Indian I. T. Act 1922. The question was

In Chenab Forest Co. vs. CIT (1974) 96 ITR 568 (J&K) a forest contractor advanced money to sub-contractor for cutting and moving the trees. But the forest contract was not renewed. Accordingly, portion of the advances became irrecoverable. It was clear that to carry on the business, it was essential that advances should be made. Without these advances, the forest lessee might not be able to carry on the business. The advances during the ordinary course of business would have been adjusted and recouped if the lease were renewed. Since there was no renewal, the non- recoverability was a result of the circumstances. Therefore, it was that the assessee was entitled to deduction of irrecoverable advances under section 37.

In T. J. Lalvani vs. CIT, (1970) 781 ITR 176 (Bom.), it was held that the financing by the assessee of another person's business and of all its import of goods on his license was an activity of the assessee in the course of his business and the loss arising on the loan, therefore, was a loss, which had occurred in connection with the business of the assessee and was incidental to it and was, therefore, claimable by the assessee as a trading loss.

In CIT vs. Globe Theaters Ltd. (1950) 8 ITR 403 (Cal.), the assessee who was an exhibitor of cinema films, advance money to a company for constructing a cinema house. The said

In case of CIT vs. Anjani Kumar Co. Ltd., (2003) 259 ITR 114 (Raj.), the Assessing Officer noticed that a sum of Rs.52,489/- was written off on account of advance made to the agriculturist for purchase of agricultural land. The intention of the assessee, of course, was to acquire the land to set up a boiler factory, but ultimately that did not materialize. The agriculturist refused to refund the amount. The assessee filed a civil a suit in the court, where the assessee lost its claim. Then the assessee had written off that amount in the books of account and claimed deduction on the incurred amount as revenue loss. The Assessing Officer rejected his claim. According to the Assessing Officer when the amount was advanced for acquiring the capital asset, the written off amount could not be allowed as deduction in the income of the assessee. The High Court held that, in the instant case, the new project had never matured. The expenditure incurred by the assessee had, therefore, to be written off. The efforts to make a new project by the same management in relation to the same business would certainly come within the test of identity laid down by the Supreme Court and since no benefit of enduring

In the case of Deputy Commissioner of Income Tax, Circle 2(1), Vijaywada vs. Friends Shoe Company [2016] 74 taxmann.com 100 (Vishakhapatnam -Trib.) held that where assessee in normal course of business, gave advance to suppliers for purchase of raw materials, in view of fact that suppliers neither supplied raw material nor returned money, amount paid to them was to be allowed as bad debt. Similarly, in the case of Asstt. Commissioner of Income Tax Vs. Appollo Tyres Ltd. [2013] 33 Taxmann.com 575 (Cochin-Trib.) held that Business advances given for acquisition of revenue items is allowable to be written off under section 37.

In Ramchandar Shivnarayan Vs. CIT (1978) 111 ITR 263, the Hon’ble Supreme Court summed up the principles in the following words:

Hence, keeping in view the peculiar facts and circumstances of the case, since the amount given is in the course of business, the same may be allowed to be written off u/s 37 of the Income Tax Act, 1961.