2017 (1) TMI 185 - AT - Income Tax

Tribunal allows bad debts claim but disallows interest & charges as revenue expenses

Manish Dharsibhai Parmar Versus ADDL. CIT., Range 2, Aurangabad

The Tribunal partly allowed the appeal. It considered the unrecovered amount of ? 2,93,611 as a business loss under Section 28, allowing the bad debts ... Disallowance of the bad debts claim - business loss admissibility - Held that:- In the present case, the amount ₹ 2,93,611/- paid by the assessee in excess of agreed consideration to discharge the liability of vendor of capital asset has not been received back by the assessee. Ostensibly, the said amount has become irrecoverable, therefore, the same is allowable as business loss under the provisions of section 28 of the Act. The amount paid by assessee to discharge the liability of vendor that has been adjusted against sale consideration partakes the character of capital expenditure. Thus in view of the facts we are of the considered opinion that although the amount of ₹ 2,93,611/- excess paid by the assessee cannot be allowed to write off as bad debt however, the said amount can be considered as business loss u/s 28 of the Act. - Decided partly in favour of assessee Disallowance of interest on loan and pre-payment charges - Held that:- A.R. could not place any other document to show that the building was complete in every respect and was ready to use during the period relevant to the assessment year under appeal. The only document i.e., building completion certificate on which the Ld. A.R. has placed heavy reliance could not support the case of assessee. The matter has travelled three stages. The assessee could not obtain the rectified or the correct building completion certificate either at the time of assessment or at the time of first appeal proceedings. Even during the second appeal stage, the assessee has filed the same document. There is no other document on record to substantiate the claim of assessee. Thus, we are of considered view that the building was not ready during the period under consideration. Under such circumstances, the interest paid and pre-payment charges paid by the assessee cannot be allowed as revenue expenditure. We do not find any infirmity in the order of ld. CIT(A) in rejecting the claim of the assessee and to treat the expenditure as revenue in nature - Decided against assessee Issues Involved:1. Disallowance of the bad debts claim Rs. 2,93,611/-.2. Disallowance of interest on loan Rs. 16,64,716 and pre-payment charges Rs. 3,12,107/-.Issue-wise Detailed Analysis:1. Disallowance of the Bad Debts Claim Rs. 2,93,611/-The assessee, engaged in the hotel business, purchased a hotel for Rs. 1.27 crores and paid an additional Rs. 5,91,611/- on behalf of the vendor to discharge liabilities like MIDC charges and property tax. The assessee adjusted Rs. 2,98,000/- from the balance consideration, leaving Rs. 2,93,611/- unrecovered, which was written off as bad debts.The Assessing Officer (AO) disallowed the bad debt claim, stating it did not meet the conditions under Section 36(2)(i) of the Income Tax Act, 1961. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this view, considering the expenditure as capital in nature.The Tribunal observed that the amount was paid to make the building encumbrance-free and was not recoverable, thus constituting a business loss. Citing the Rajasthan High Court's decision in CIT Vs. Anjani Kumar Company Ltd., which allowed irrecoverable advance payments for acquiring a capital asset as business loss, the Tribunal concluded that the Rs. 2,93,611/- could be considered as business loss under Section 28 of the Act. The Tribunal partly allowed the ground, accepting the alternative submission of treating the amount as a business loss.2. Disallowance of Interest on Loan Rs. 16,64,716 and Pre-payment Charges Rs. 3,12,107/-The assessee claimed interest on a loan taken for acquiring the hotel property and pre-payment charges as business expenditure under Section 37 of the Act. The AO disallowed the claim, stating the expenditure was for acquiring a capital asset and the hotel was not put to use as no income was shown from it.The Tribunal scrutinized the building completion certificate, which the assessee claimed was dated 25.07.2008. However, the certificate presented was dated 23.08.2003, raising doubts about its accuracy. The Tribunal noted that despite multiple stages of appeal, the assessee failed to provide a correct completion certificate or any other document proving the hotel was ready for use during the relevant period.Given the lack of evidence, the Tribunal upheld the CIT(A)'s decision, concluding the building was not ready during the assessment year. Consequently, the interest and pre-payment charges could not be allowed as revenue expenditure. The Tribunal dismissed this ground of appeal.Conclusion:The appeal was partly allowed. The Tribunal accepted the alternative submission for the bad debts claim, treating Rs. 2,93,611/- as business loss under Section 28. However, it upheld the disallowance of interest and pre-payment charges, affirming they were not revenue expenditures due to the lack of evidence showing the hotel was ready for use.