KHYATI REALTORS P.LD,MUMBAI vs. ACIT 6(2), MUMBAI

O R D E R PER R.C.SHARMA (A.M): This is an appeal filed by the assessee against the order of CIT(A)- Mumbai, dated 1-11-2013, for the assessment year 2009-10, in the matter of order passed u/s.143(3) of the I.T.Act, wherein following grounds have been taken by the assessee :- Being aggrieved by the order of the learned Commissioner of Income Tax (Appeals)-12, Mumbai, this appeal petition is submitted on the following grounds: 1) Disallowance of bad debts of Rs 10 crores a. On the facts and circumstances of the case and in law, the learned CIT (A) erred in confirming disallowance of bad debts of Rs.10 crores by holding that the Appellant is not engaged in money lending business and therefore, not entitled to claim loss on account of irrecoverable loan/ advance. Disallowance being bad in law, needs to be deleted. b. Without prejudice to the above, on the facts and circumstances of the case and in law, the learned CIT (A) erred in not allowing the claim of bad 2 debts being in the nature of irrecoverable advance as business loss under section 37(1) of the Act. 2) Disallowance of interest under section 36(1)(iii) of Rs 6,53,567 On the facts and circumstances of the case and in law, the learned CIT (A) erred in confirming disallowance of interest under section 36(1)(iii) of the Act without considering the fact that the Appellant had sufficient interest-free funds to finance interest-free advances. The disallowance being bad in law, needs to be deleted.”

4. We have considered rival contentions, carefully gone through the orders of authorities below and also deliberated on the judicial pronouncements referred by lower authorities in their respective orders. From the record we found that AO has dealt with the issue of bad debts in para 6 of his assessment order, wherein the AO has rejected explanation of the assessee that it was 3 ITA No.129/14 falling within the provisions of Section 36(2) as the advance was made during the course of business and, hence, write off of advance was allowable u/s.36(1)(vii) of the Act. Before the CIT(A) the assessee vide letter dated 5-12- 2011 had submitted as under :-

As part of our regular business activity, the company in order to purchase certain commercial premises had made reservation by way of bookings in the upcoming project at Old Mumbai Pune Highway, Khapoli, which was to be developed by M/s C. Bhansali Developers Pvt Ltd. In order to confirm the reservation I booking of said commercial premises, builder insisted for advance of Rs 10 crores. Accordingly, the company had advanced Rs 10 crores on 06.03.2007 towards reserving! booking of the commercial premises in the said project ... Since the said advance was for purchase of commercial property, there was no question of charging interest thereon ... However, further development about the said project of the builder is that the builder after taking advances from us did not proceed in this matter and possibly siphoned the money for other purposes. On coming to know about their non-proceeding in the development of the said project, we had a number of meetings with the directors of M/s C. Bhansali Developers Pvt Ltd. They did not listen to our request for returning the money. .. In these circumstances and after discussing amongst other directors of our company, a conscious decision was taken to write off this amount as bad debt. Accordingly, a resolution was passed in the Board meeting on 28th March 2009 and the said amount has been written off as 'bad debt.

Further, the assessee furnished following justification for claiming the principal amount as bad debts vide letter dated 26/12/2011: . "We submit that as per provisions of Section 36(2), in respect of monies advanced in the ordinary course of business, the same allowab./e as bad debts even if the amount has not been taken into account in computing the total income. This is well accepted position in respect of write off of advances given in the lending business. The present case fully falls within the provisions of sec. 36(2) hence the write off of advances is allowable u/s. 36(1 )(vii). " However, the learned AO did not accept the above submission made by the assessee and held that the same was never an income of the assessee Therefore Rs.10 crores was considered as capital loss of the assessee.

4 i) The assessee is engaged in the business of real estate and financing. ii)The Objects Clause of the Memorandum of Association of the Appellant company reflects the business of contractors, erectors, constructors of buildings, etc as well as receiving or lending money as its objects (copy of extract of Memorandum of Association is enclosed). iii) Amount of Rs. 10,00,00,000/- was advanced on 6-3-2007 to M/s C. Bhansali Developers Pvt Ltd in order to purchase certain commercial premises and for reservation by way of bookings in their upcoming project at Old Mumbai Pune Highway, Khapoli, iv) Rs. 10,00,00,000/- is written off during A.Y. 2009-10 2.8. Accordingly, several advances are made by the Appellant in the ordinary course of business. Advance of Rs 10 crores made to M/s C. Bhansali on 6.3.2007 was also in the ordinary course of its business as elaborated in the paragraphs above. 2.9. Since the party defaulted in repaying the amount of advance, the Appellant decided to write-off the same as bad debts under section 36(1 )(vii) read with section 36(2)(i). 2.10. The relevant extract of section 36(2) of the Act is reproduced below: " In making any deduction for a bad debt or part thereof, the following provisions shall apply- (i) no such deduction 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 previous year, or represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee. " 2.11. Since the Appellant is squarely covered under the statutory provision, the advances written off in the ordinary course of business should be allowed as a deduction under section 36(1 )(vii) read with section 36(2) of the Act. 2.12. Further, we wish to inform your Honour that it is well settled that money lent in the course of money lending business is incidental to the business of the assessee and therefore, such debt on becoming bad is allowable as a deduction. According to section 36(2)(i), restriction for accounting of debt as income in the earlier year is not applicable where such debt represents loan in the 5 ordinary course of business of banking or money-lending which is carried on by the assessee. 2.13. In this connection, we place reliance on the following judicial precedents: CIT v Pandit Lakshmi Kant Jha [1972] 84 ITR 481 (SC) CIT v Potential Management Services Ltd (2009) 29 (I) ITCL 110 (Cal-HC) DCIT v SREI International Finance Ltd. [2006]10 SOT 722 (DELHI) Ajar Entrade (P.) Ltd.v ACIT [2005]2 SOT 511 (AHD.) Matrix Logistics (P.) Ltd. v CIT [2010]122 ITD 228 (AHD.) Poysha Oxygen (P.) Ltd. v ACIT [2008]19 SOT 711 (DELHI)(TM) Small Industries Development Bank of India v Addnl CIT [2009] 32 SOT 536 (MUM.) A gist of the aforesaid rulings is enclosed in Annexure 1. 2.14. It is also a settled position that a write off of a trade debt in the books of accounts is sufficient to claim the bad debts under the Act. A copy of the ledger of the party highlighting the write-off is enclosed herewith for your perusal. 2.15, Based on the above, the disallowance of the claim of bad debts in respect of advances to M/s c.Bhansali is bad in law and therefore. the Appellant request your Honour to delete the same. (b) Without prejudice to the above and without admitting, On the facts and circumstances of the case and in law, aforesaid amount of Rs.10 crore should be allowed as business loss to the appellant. 2.16. The Appellant submits that without prejudice to the above, the loss on account of non recoverability of the advances made in the ordinary course of business should be allowed under section 28 / 37 of the Act. 2.17. The Appellant submits that the advances were laid down wholly and exclusively for the purpose of business and therefore, if the write-off of such advances is not allowable under section 36(2), the same should be allowed under section 37. 2.18. In this regard, the Appellant relies on the following judicial precedents: a. I.B.M. WORLD TRADE CORPORATION v CIT (1990) 1861TR 412 (BOM) Amounts advanced by the assessee for the purpose of acquiring the factory on lease-Amount is advanced for the purpose of the assessee's business- When such advances were lost, the loss would be a business loss and not a capital loss-Mere fact that 6 factory would be ready in a year or so would not make any difference-Loss was therefore allowable as a business loss. b. Chenab Forest Co. V CIT [1974] 96 ITR 568 (J. & K.) Assessee, a forest lessee advanced money to sub-contractors appointed to exploit forest - Advances were adjusted against ultimate payment due to them - Due to non-extension of lease in favour of assessee some of advances could not be recovered from such contractors which were originally claimed as bad debts but was rejected as not fulfilling condition under section 36(2) - Assessee then claimed that amount in question should be allowed as business expenditure under section 37(1) - Whether in view of fact that nature of business and system of working of assessee being such that it was necessary to make advances to carry on business, it could be concluded that advances were paid in ordinary course of business and therefore, assessee was entitled to deduction under section 37( 1) - Held, yes c. CIT v Pure Beverages Ltd. [1994] 209 ITR 131 (GUJ.) Section 37(1) of the Income-tax Act,1961 - Business expenditure - Allowability of - Assessment year 1975-76 - Assessee-company, a dealer in soft drinks, made arrangement with a bank to make advances to its dealers for purchase of electronic coolers which were necessary for chilling soft drinks - Assessee reimbursed to bank losses on account of non-recovery of amounts from dealers - Whether liability to bank was incurred in course of carrying on assessee's business and was in nature of allowable revenue expenditure - Held, yes d. CIT v S.A.S. Ramaswamy Chettiar [1946] 141TR 236 (MAD.) Section 37(1) of the Income-tax Act, 1961 [Corresponding to section 10(2)(xii) (Now section 10(2)(xv» of the Indian Income-tax Act, 1922]- Business expenditure - Allowability of - Assessment year 1940-41 - Assessee, a Nattiukottai Chettiar engaged in money-lending business, sought to deduct under section 10(2)(xii) of 1922 Act certain sum of loan for which he guarantee and which he had to make good on borrowers failure to repay had given - It was common practice among Nattukottai Chettiars to borrow from banks for purpose of lending out sums so obtained at higher rates of interest and to stand surety for one another in these borrowings - Whether by reason of aforesaid practice, sum paid by assessee should be regarded as loss incurred by assessee in carrying on his money- lending business and, therefore, he Was entitled to deduction under section 10(2)(xii) of 1922 Act - Held, yes 2.19. Based on the above, the Appellant requests your Honour to allow this ground of appeal and delete the disallowance of write-off of advances.”

5. By the impugned order, the CIT(A) confirmed the disallowance after dealing with the issue at para 3.3 at pages 6 to 13 of his order. It was also argued before the CIT(A) that alternate plea of the assessee is that deduction should be allowed u/s.37 of the Act, if the write off of advance is not falling under Section 36(2) of the Act. The CIT(A) declined assessee’s claim u/s.36(2) on the plea that assessee was not having money lending licence nor it has NBFC license, therefore, assessee was covered by Explanation to Section 37(1) of the Act. The CIT(A) also declined claim of assessee u/s.37 on the plea that assessee’s claim of bad debts was falling under section 30 to 36 of the Act.

6. We had gone through the orders of authorities below and duly considered the submissions made before the lower authorities. We had verified the object clause of the memorandum of association of the assessee company which clearly reflected business of real estate as well as receiving or lending of money as its objects. During the year under consideration also on the money so lent the assessee has earned interest income of Rs.24.62 crores. This interest income was also treated by AO as “business income” and not as income from other sources. This interest income was earned on the amount advanced by the assessee during the year as per its object clause, however, on the advance of Rs.10 crore the assessee had not charged any interest, therefore, CIT(A) was correct in declining assessee’s claim u/s.36(1)(vii) r.w.s36(2) of the Act. 7. It is a matter of record that assessee was engaged in the business of real estate development and trading of TDR and finance services. In the course of its business of real estate development, the assessee had given advance to M/s C. Bhansali Developers Pvt. Ltd. on 6-3-2007 for purchasing certain commercial premises had made reservation by way of booking in the upcoming project at Old Mumbai Pune Highway, Khapoli. Thus, money was advanced in the course 8 of its business of real estate development, loss of such money on account of non-recoverability of advance made in the course of business is required to be allowed u/s.28/37 of the I.T.Act as business loss. The fact that advance was made in the ordinary course of business was not denied by the AO. It is also a matter of record that the advance so given could not be recovered, under these circumstances the assessee has written off the amount in its books of account. Such amount is required to be allowed as business loss u/s.28/37 of the I.T.Act. The case laws cited before the CIT(A) fully support the conclusion that money given in ordinary course of business for the purpose of business if remains non- recoverable, the same is to be allowed as business loss u/s.28/37 of the I.T.Act.