2019 (1) TMI 400 - AT - Income Tax

Tribunal allows write-off of advances as business loss

The Tribunal allowed the appeal of the assessee, directing the Assessing Officer to allow the claim of write-off of advances as business loss. The ... Advances written off - assessee claimed that the advanced in the course to build his carrier and there is a business exigency in advancing moneys to his wife - deduction u/s. 37(1) or u/s. 28 of the Act as business loss - submission of the assessee that till date the moneys advanced to M/s. Quest Films and also to Mrs. Ayesha Shroff could not be recovered and there is no possibility of recovery in near future - Held that:- We hold that the Ld.CIT(A) having held that the amount advanced by the assessee are business advances is wrong in holding that the said advances cannot be held as deduction as the assessee had written off advances suomoto. We are in agreement with the CIT(A) that the advances written off by the assessee are business advances and there is no challenge by the Revenue to this finding. Once the advances are held to be business advances they are allowable as deduction either u/s. 37(1) or u/s. 28 of the Act as business loss. Deduction cannot be denied on the ground that the assessee had suomoto written off the advances. Thus we reverse the finding of the Ld.CIT(A) to that extent and direct the Assessing Officer to allow the claim of write off of advances by the assessee as business loss u/s. 28 of the Act. - Decided in favour of assessee. Issues Involved:1. Taxation of advances received by the assessee as income.2. Addition sustained in respect of the advances written off by the assessee.Issue-wise Detailed Analysis:1. Taxation of Advances Received by the Assessee as Income:The first ground in the appeal was against the action of the Assessing Officer (AO) in bringing to tax the advances received by the assessee as income, as opposed to the income shown by the assessee based on the completion and release of movies. The Tribunal noted that this issue had been decided against the assessee for the Assessment Year (AY) 2006-07. Respectfully following the previous order, the Tribunal sustained the action of the AO and the appellate authority, rejecting the grounds raised by the assessee on this issue.2. Addition Sustained in Respect of the Advances Written Off by the Assessee:Facts:The assessee, an individual, filed a return of income declaring a loss, which was treated as invalid due to late filing. The assessment was reopened, and the AO noticed that the assessee had written off bad advances amounting to Rs. 11,34,59,979/-. The assessee contended that these advances were business-related, given to M/s. Quest Films and Mrs. Ayesha Shroff (the assessee's wife) for the production of films. The AO rejected the claim, holding that the advances were personal in nature and lacked business nexus, thus not allowable as deductions.Appeal:On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] held that the loans given by the assessee were business advances. However, the CIT(A) sustained the disallowance on the grounds that the mere suomoto write-off of the advances could not be allowed as a deduction.Tribunal's Findings:The Tribunal examined the submissions, agreements, and previous case laws cited by the assessee, including decisions from the Hon'ble Bombay High Court and the Hon'ble Supreme Court. The Tribunal found that the advances were made for commercial reasons, to promote the assessee's career and to avoid potential criminal proceedings against his wife, thus constituting business advances.Legal Precedents:- CIT v. K.M. Mody: The Bombay High Court held that personal relationships cannot be the sole factor in determining whether loans are personal or business-related if advanced in the normal course of business.- Patnaik & Co. Ltd. v. CIT: The Supreme Court held that investments made for commercial expediency and resulting in revenue loss must be regarded as business losses.- S.A. Builders Ltd. v. CIT: The Supreme Court emphasized that commercial expediency includes expenditures incurred for the purpose of business, even if not legally obligated.Conclusion:The Tribunal concluded that the advances were business-related and allowable as business losses under Section 28 of the Income Tax Act. The Tribunal reversed the CIT(A)'s finding that the suomoto write-off was not allowable, directing the AO to allow the claim of write-off of advances as business loss.Result:The appeal of the assessee was allowed, and the order was pronounced in the open court on 31st December 2018.