2016 (4) TMI 564 - AT - Income Tax

Tribunal allows appeal, directs AO to allow Rs. 10 crore bad debt claim as business loss.

The Tribunal allowed the appeal, directing the AO to allow the bad debt claim of Rs. 10 crores as a business loss under Section 28/37 and delete the ... Allowability of bad debts - application of section 36(1)(vii) read with section 36(2) - allowability under section 37(1) as business loss - advances made in the ordinary course of business - deduction of interest under section 36(1)(iii) - presumption as to source of funds where own funds exceed advancesAllowability of bad debts - application of section 36(1)(vii) read with section 36(2) - allowability under section 37(1) as business loss - advances made in the ordinary course of business - Whether the advance of Rs. 10 crore written off by the assessee is allowable as a bad debt under section 36(1)(vii) read with section 36(2), or alternatively as a business loss under section 37(1)/head 'Profits and gains of business or profession'. - HELD THAT: - The Tribunal examined the objects clause of the assessee's memorandum and the factual matrix showing that the assessee carried on real estate development, trading in TDR and finance and had, in the year under consideration, received substantial interest income on amounts advanced in the course of business. The advance of Rs. 10 crore was made as reservation/booking money for commercial premises in the ordinary course of the assessee's real estate business and was written off after recovery attempts failed. The Tribunal agreed with the lower authorities that the advance did not attract section 36(1)(vii)/36(2) because no interest had been charged on that particular advance and it therefore could not be treated as a loan in the ordinary course of a money lending business for the purpose of section 36(2). However, applying section 37(1) read with the head ''Profits and gains of business or profession'' and relying on precedents where advances made in the ordinary course of business but rendered irrecoverable were held to be allowable as business loss, the Tribunal held that the payment was not capital or personal expenditure nor covered by sections 30 to 36 and was laid out wholly and exclusively for the purposes of the business. The Tribunal further noted that part recovery in a subsequent year had been offered to tax, and allowing the deduction in the year of write off avoids double taxation. Accordingly, the write off was held not allowable under section 36(1)(vii)/36(2) but allowable as a business loss under section 37(1)/section 28. [Paras 7, 8, 9, 10, 11]Advance of Rs. 10 crore is not allowable under section 36(1)(vii) read with section 36(2), but is allowable as a business loss under section 37(1) read with section 28; direction to allow the claim and grant relief.Deduction of interest under section 36(1)(iii) - presumption as to source of funds where own funds exceed advances - Whether disallowance of interest under section 36(1)(iii) on the ground that funds were diverted to non business purpose is justified. - HELD THAT: - The Tribunal considered the AO's finding that interest-bearing borrowed funds were partly used for non-business advances and therefore the interest was disallowable. The assessee showed that the advances were made in the ordinary course of its business as a developer and that the advances were financed from reserves and surplus. Applying the principle in the jurisdictional High Court decision relied upon by the assessee, where own funds exceed the advances a presumption may be drawn that own funds were applied to such advances (thereby sparing borrowed funds from being treated as diverted), the Tribunal found no justification for the disallowance. On the facts, the assessee's reserves and surplus exceeded the alleged advances and the advances were business related, so the interest disallowance under section 36(1)(iii) was deleted. [Paras 12, 13]Disallowance of interest under section 36(1)(iii) is deleted; interest deduction to be allowed.Final Conclusion: The assessee's appeal is allowed: the Rs. 10 crore write off is disallowed under section 36(1)(vii)/36(2) but allowed as a business loss under section 37(1)/section 28, and the disallowance of interest under section 36(1)(iii) is set aside. Issues Involved:1. Disallowance of bad debts of Rs. 10 crores.2. Disallowance of interest under section 36(1)(iii) of Rs. 6,53,567.Issue-Wise Detailed Analysis:1. Disallowance of Bad Debts of Rs. 10 Crores:The assessee, engaged in real estate development, trading in TDR, and finance, advanced Rs. 10 crores to M/s C. Bhansali Developers Pvt Ltd. for reserving commercial premises. The project did not materialize, and the amount was written off as bad debt. The Assessing Officer (AO) disallowed the claim under Section 36(1)(vii) read with Section 36(2) of the Income Tax Act, stating that the assessee was not engaged in money lending and the amount was not an income of the assessee.The CIT(A) upheld the AO's decision, noting that the assessee did not have a money lending license or NBFC license. The CIT(A) also rejected the alternative claim under Section 37, stating that the bad debt claim fell under sections 30 to 36 of the Act.Upon appeal, the Tribunal examined the Memorandum of Association, which included real estate and money lending as business activities. The Tribunal noted that the interest income from lending was treated as business income by the AO. The Tribunal found that the advance was made in the ordinary course of business and was irrecoverable, thus qualifying as a business loss under Section 28/37 of the Act. The Tribunal cited various judicial precedents supporting the claim that non-recoverable advances made in the ordinary course of business are allowable as business losses. The Tribunal directed the AO to allow the claim of Rs. 10 crores as a business loss under Section 28/37 of the Act.2. Disallowance of Interest under Section 36(1)(iii) of Rs. 6,53,567:The AO disallowed Rs. 6,53,567, claiming the assessee diverted interest-bearing funds for non-business purposes. The assessee contended that the advances were for purchasing property, a regular business activity, and were made from reserves and surplus, not borrowed funds. The Tribunal referred to the jurisdictional High Court's decision in Reliance Utilities & Power Ltd., which presumes that advances for non-business purposes are made from own funds if reserves exceed the advances.The Tribunal found that the advances were indeed related to the business and the reserves and surplus were higher than the advances. Therefore, the disallowance under Section 36(1)(iii) was not justified. The Tribunal directed the AO to delete the disallowance.Conclusion:The Tribunal allowed the appeal, directing the AO to:1. Allow the bad debt claim of Rs. 10 crores as a business loss under Section 28/37.2. Delete the disallowance of Rs. 6,53,567 under Section 36(1)(iii).Order Pronounced: The appeal of the assessee is allowed as per the order pronounced in the open court on 04/03/2016.