ZENRIBA ESTATES & INVESTMENTS P. LTD,MUMBAI vs. DCIT 7(3), MUMBAI

आदेश / O R D E R

Per Sandeep Gosain, Judicial Member:

Zenriba Estates & Investments Pvt. Ltd. 1) The Commissioner of Income Tax (Appeals)-13 ('the CIT(A)") has erredin law and on facts by dismissing the appeal of the appellant and confirming the assessment order passed u/sJ43(3) of the Act dated 5Th December, 2012 by the Dy. Commissioner of Income Tax 7(3) Mumbai as regards disallowance of bad debts of Rs.86,54,888/- 2) The CIT(A) has erred in law and on facts b holding that theappellant's claim of deduction of Rs.86,54,888/- is neither allowable as bad debts u/s.36(1)(vii) nor allowable as business loss u/s,28 of the Act. 3) The CIT(A) failed to appreciate the fact that the appellant is in thebusiness of dealing in plots of land and that the appellant had paid advance for purchase of plot of land in the ordinary course of business to Orkay Industries Limited which went into liquidation and as such the amount paid to the said company became bad and hence allowable as deduction as bad debt. 4) Without prejudice to what is stated hereinabove the CIT(A) failed toappreciate that in any event the appellant company is an investment company and hence the said amount of advance should be allowed by way of deduction as had debt. 5) Without prejudice to what is stated hereinabove assuming withoutadmitting that the said transaction does not partake the character oftrade receivables, Zenriba Estates & Investments Pvt. Ltd. even then the appellant is entitled to deduction ofthe said amount u/s.37 of the Act as the appellant has lost money in the ordinary course of business. The aforesaid grounds of appeal are without prejudice to one another. Your Appellant craves leave to add / alter / amend any one or more of the aforesaid grounds and / or to make new submissions at the hearing of the appeal as well as to submit fresh documents and information that may be required at the time of hearing of the appeal.

2. As per the facts of the present case, the assessee is engaged in the business of dealing in properties. During the year, the assessee claimed deduction of bad debts written off of Rs.86,54,888/-. This money was advanced to M/s. Orkay industries Ltd being principal amount of Rs82,25,000/- and the interest thereon at Rs.4,29,888/-. The assessee explained to the AO that the company had advanced the money to M/s. Orkay Industries Ltd in the year 1995-96 as advanced for purchase of land. M/s. Orkay Industries Ltd had gone into liquidation and the amount was not recoverable from that company. Therefore, the amount of Rs.86,54,888/ - was written off and exigible for deduction as bad debts as per provisions of I.T. Act. The AO was Zenriba Estates & Investments Pvt. Ltd. not satisfied with the assessee’s submissions. The AO held that as per provisions of Sec.36(1)(vii) r.w sec.36(2), the deduction of bad debts is allowable when the said bad debts were included in the income of the year under consideration or in the income of any earlier year. In the instant case, bad debts were not included in assessee’s income of any year, therefore, the claim of bad debts u/s.36(1)(vii) was not found allowable to the assessee company. The AO further held that the nature of transactions was advances given to M/s. Orkay Industries Ltd which could not partake the character of trade receivable which is eligible for deduction as bad debts. The AO also held that the deduction of Rs 86 54,888/-was also not allowable to the assessee as business loss u/s.28(i) or any other provisions of the Act. The business loss could be allowed if it was incurred on revenue item. As per the facts of the case, the appellant had given advances for purchase of land to M/s. Orkay Industries Ltd which was written off and claimed as business loss. It is true that the appellant deals in Real Estate Business activity, however, the assessee had not advanced any evidence to the fact that it had advanced the money for the purpose of trading assets. The AO further held that if the Zenriba Estates & Investments Pvt. Ltd. advances were given for some property, then as to why interest had been charged by the appellant. Therefore, it was held that such written off advances could not be allowed to the appellant even as business loss. Resultantly, the AO disallowed the deduction of Rs.86,54,888/- as bad debts written off/business loss.

3. Aggrieved by the order of AO, assessee preferred appeal before Ld. CIT(A) and Ld. CIT(A) after considering the case of both the parties dismissed the appeal of the assessee. Now before us, the assessee has preferred the appeal.

Ground No. 1 to 5. 4. Since all the grounds raised by the assessee are inter connected and inter related and relates to challenging the action of Ld. CIT(A) in confirming the disallowance of bad debts of Rs. 86,54,888/-, therefore we thought it fit to dispose of the same by this common order.

Zenriba Estates & Investments Pvt. Ltd. 5. We have heard both the counsels of the parties at length and we have also perused the material placed on record as well as the orders passed by revenue authorities. Before we decide the merits of the case, it is necessary to evaluate the orders passed by Ld. CIT(A). The Ld. CIT(A) has dealt with this ground in para no. 2.3 of its order. The operative portion of the order of Ld. CIT(A) is reproduced below:-

2.3 I have considered the facts of the case. 2.3(a) The appellant was in the business of dealing in properties. In the FY 95-96/96-97, the appellant advanced amount of Rs. 82,85,000/- to M/s. OrkayIndustries Ltd. The appellant had claimed deduction of Rs.82,25,000/- plus interest thereon 4,29,888/- thereon totaling to Rs.86,54,888/-as bad debts. As per provision of Sec,36( 1)(vii) r.ws. 36(2), the claim of bad debts is allowable only if the amount of bad debts had been included in the income of assesse of the year under consideration or of any earlier year. There was no dispute that the bad debt of Rs.86,54,888/- was not a trading receipt and was not included in the income of the present or any earlier assessment year. Therefore, the deduction of Rs.86,54,888/- was not allowable to the appellant u/s.36(1)(vii) of the Act.

Zenriba Estates & Investments Pvt. Ltd. 2.3(b) The next question for consideration is as to whether the deduction of Rs.86,54,888/- was allowable to the appellant as business loss. As explained above, the appellant was in the business of dealing in properties. The appellant has claimed that the money of Rs.82,25,000/- was advanced to M/s. Orkay Industries Ltd in the F.Y.95-96/96-97 for purchase of property. During assessment proceedings, as well as appellant proceedings, the appellant could not explain as to why the property could not be purchased from M/s. Orkay Industries Ltd for such long time i.e from F.Y.96-97 till A.Yunder consideration. The appellant has also failed to bring the evidence on record that M/sOrkay Industries Ltd was in the business of property dealing or M/s.Orkay Industries Ltd was in a position to sale any immovable property to the appellant. The appellant also failed to bring evidence on record that M/s OrkayIndustries Ltd was having any immovable property of its own which MsOrkay Industries Ltd could sell to the appellant. In the facts and circumstances, the appellant has failed to substantiate the claim that the amount of RsM25,OUO/-_ was _advanced to M/s. Orkay Industries Ltd for purchase of property. Secondly, the appellant has also failed o substantiate its claim that it had advanced the money to M/s. Orkay Industries Ltd in the ordinary Zenriba Estates & Investments Pvt. Ltd. course of business. The AO has correctly pointed out that if the amount was advance for purchase of property, why the appellant had charged interest thereon at Rs.4,29,888/-. In view of the above facts and discussion, it is held that the appellant’s claim of deduction of Rs. 86,54,888/- was neither allowable as bad debts u/s 36(1)(vii) nor allowable as business loss u/s 28 of the Act. This ground of appeal is therefore, dismissed.

After analyzing the aforementioned order passed by Ld. CIT(A) and after considering the judgments relied upon both the parties as well as hearing the counsels of the parties at length, we find that the AO disallowed the deduction of bad debts u/s 36(1)(vii) r.w.s. 36(2) on the ground that the said bad debts of Rs.86,54,888/- was not a trading receipt and was not included in the income of the present or any earlier assessment year. Therefore, the deduction of Rs.86,54,888/- was not allowable to the appellant u/s.36(1)(vii) of the Act. As per the disallowance u/s 28(i) is concerned, the said claim of the assessee was disallowed by the AO on the ground that the assessee has not advanced any evidence to the fact that it Zenriba Estates & Investments Pvt. Ltd. had advanced the money for the purpose of trading assets. It was further held by the AO that if the advance were made for same property then why interest has been charged by the assessee. Therefore on these basis, the AO reached to come to the conclusion that such written off advances could not be allowed to the assessee even as business loss. Before us, Ld. AR drawn our attention to the judgment passed by Co-ordinate bench of Hon’ble ITAT, Mumbai in ITA No. 7307/Mum/2007. The operative portion is reproduced below:- 7. We have heard the rival submissions and perused the relevant material record. There is no dispute on the fact that 'the assessee had taken godown on rent from the said Mr. Agrawal and a security deposit of Rs.5 lakhs was given. In the year the said amount has been written off as not recoverable. Obvious1ythc provisions of section 36(2) are not fulfilled, which is a pre- condition for claiming deduction uis,36(l)(0i). This sub-section (2) provides that no deduction for bad debt shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier Zenriba Estates & Investments Pvt. Ltd. previous represents money lent in the ordinary course of the business of banking or money lending which is carried on by the assessee. It is austere that the sum of Rs5 lakhs was given as security. This amount has not been taken into account in computing the income of the assessee of an earlier or current year. Resultantly there 4 is rii question of granting deduction u/s 36(1)(vii) on this amount.

Ld. AR also drawn our attention to the judgment passed by Hon’ble Rajasthan High Court in the case of Commissioner of Income-tax Vrs. Anjani Kumar Co. Ltd. (2002) 124 TAXMAN 429 (Raj.) wherein it was held as under:- Section 37(1) of the Income-tax Act, 1961 - Business expenditure Allowability of - Assessment year 1979-80 - Though assessee-con1p2ny paid advance for acquiring agricultural land to set up a factory, it could not acquire land Further, on its failure to get a refund of said advance in spite of x civil suit, assessee wrote off that amount and claimed deduction as revenue loss - Whether since land was not acquired and no benefit of enduring nature resulted to assessee, expenditure in question could not be treated to be of capital nature and, therefore, assessee was entitled to deduction. The advance was paid for acquiring the agricultural land to set up a factory but when the agricultural land Zenriba Estates & Investments Pvt. Ltd. was not required. no capital asset came into existence therefore, there was no question of allowing depreciation on such assets. If any asset is acquired and if it is a benefit of enduring nature then the assessee cannot get the deduction of amount for cqu1cifthi of land as revenue expenditure. When land was not acquit-cd, no capital asset had been acquired, and therefore, the payment of advance was to be allowed as business loss Ld. AR also drawn our attention to the judgment passed by Hon’ble ITAT Delhi Bench in the case of Minda (HUF) Ltd. Vrs. Joint Commissioner of Income-tax (2006) 101 ITD 191 (Delhi) wherein it was held as under:- Section 37(1) of the Income-tax Act, 1961 - Business Expenditure - Allowability of - Assessment year 1997- 98 - During course of its business, assessee gave advances to vendors for supply of raw materials, etc - Said advances became ir-recoverable due to either material was not supplied or defective material was supplied - Assessee wrote off said amount as advance irrecoverable and claimed deduction thereof - Whether assessee's claim of deduction was allowable as trading loss tinder section 37(1).

Zenriba Estates & Investments Pvt. Ltd. From the details furnished by the assessee, it was found that the assessee had given full details of each item. The amounts represented advances given to the parties. The advances were given during the course of business for supply of raw material etc. Either the material was not supplied or defective material was supplied The amount became irrecoverable from the parties to whom the advances were made. Thus, the advances were totally connected with the business activities of the assessee The Commissioner (Appeals) was not justified in observing that the amount of advance was not a trading loss. The assessee was not required to take a lengthy litigation for recovering the small amounts. Therefore, the approach of the Commissioner (A) was not justified. The claim of deduction was allowable as trading loss under section 37. In the result. Assessee appeal was allowed.

Ld. AR also drawn our attention to the paper book and submitted that the advance given by the assessee to the company is neither in the nature of capital expenditure nor common expenditure of the assessee, nor any purpose which is an offence. The said advance is given in the ordinary course of business of the assessee for the purchase of property and hence the amount is Zenriba Estates & Investments Pvt. Ltd. written off in the books of the account of the assessee is allowable by way of deduction under the act. After having heard both the counsels at length, we find that in the present case, the assessee had paid advance for acquiring property during the course of business but since the property could not be finally acquired because of the reasons mentioned by the assessee in its reply. Therefore, no capital asset came into existence and no benefit of enduring nature resulted to the assessee. In such circumstances, the expenditure in question incurred for the purpose of acquiring property could not be treated to be of capital nature. Therefore, assessee is entitled to deduction. Since the assessee had made payment of Rs 82,25,000/- as advance to M/s Orkay Industries Ltd, therefore this payment is to be allowed as business loss. Considering the above facts and the nature of transaction, we are of the considered view that the said loss suffered by the assessee is a trading loss and thus is allowable, therefore these grounds of appeal raised by the assessee are partly allowed.

6. In the net result, the appeal filed by the assessee is partly allowed.