2012 (12) TMI 633 - AT - Income Tax

Tribunal upholds trade advance write-off as legitimate business loss under Tax Act

The Assistant Commissioner of Income Tax, Company Circle, III(3), Chennai Versus M/s. Yubo Investment Co. Pvt. Ltd.

The Assistant Commissioner of Income Tax, Company Circle, III(3), Chennai Versus M/s. Yubo Investment Co. Pvt. Ltd. - TMI Issues Involved:1. Deletion of disallowance of trade advance written off.Detailed Analysis:1. Deletion of Disallowance of Trade Advance Written Off:- Facts of the Case: The assessee, a company engaged in property development, filed its return of income for the assessment year 2005-06. The Assessing Officer added Rs. 54,90,185/- to the total income, representing trade advances written off, on the grounds that no steps were taken to recover the money and the advance was not previously considered as income by the assessee.- Commissioner of Income Tax (Appeals) Decision: The Commissioner of Income Tax (Appeals) deleted the addition, holding that the write-off is allowable as a business loss under section 28(1) as it is a genuine business loss. The Commissioner referenced various decisions of the Hon'ble Supreme Court and High Courts, emphasizing that the profit to be assessed must be real profits, computed after deducting losses and expenditures incurred for business purposes unless expressly disallowed by the Act. The Commissioner cited the Supreme Court's ruling in CIT v. Wood Ward Governors India Pvt. Ltd., which held that 'expenditure' under section 37 may cover an amount that is a loss, even if it has not gone out from the assessee's pocket. The Commissioner also referenced the Supreme Court's decision in TRF Ltd., which stated that a debt need not be proved irrecoverable if it is written off.- Revenue's Appeal: The Revenue argued that the assessee did not take steps to recover the advance and did not offer the amount as income in earlier years, thus it should not be allowed as a deduction under section 36 as bad debts. The Revenue supported the Assessing Officer's disallowance.- Assessee's Argument: The assessee contended that the advance was given for a construction project that failed due to various problems. Despite efforts to recover the advance, the company to which the advance was given vanished, and its directors were untraceable. The assessee argued that legal steps for recovery were futile and that the advance written off should be allowed as a business loss under section 28 read with section 37. The assessee cited decisions in Mohan Meakin Ltd. vs. CIT and DCIT vs. Shri T. Pithambar to support their claim.- Tribunal's Findings: The Tribunal noted that there was no dispute regarding the advance given in the course of business and its write-off in the books of account. The Tribunal held that the write-off could not be disallowed merely because legal steps for recovery were not initiated. The assessee was not claiming the write-off as a bad debt, thus the condition of offering the advance as income in earlier years did not apply. The Tribunal referenced the Mumbai Bench's decision in DCIT vs. Shri T. Pitamber, which held that a business loss is deductible if it is directly related to business operations and is written off in the books of account.- Supporting Case Law: The Tribunal cited several cases, including:- Mohan Meakin Ltd. vs. CIT: The Delhi High Court held that advances written off due to non-recovery and the demise of the debtor's proprietor were allowable as business losses.- CIT v. WoodWard Governor India P. Ltd.: The Supreme Court held that 'any expenditure' under section 37 includes losses not necessarily involving an outflow of cash.- A.W. Figgis & Co. Ltd. v/s CIT: The Calcutta High Court held that filing a civil suit is not necessary for claiming a business loss if it would only add to financial expenditure without recovery.- Conclusion: The Tribunal upheld the Commissioner of Income Tax (Appeals)'s order, allowing the advance written off as a business loss under section 28 of the Act and dismissed the Revenue's appeal.