Tribunal directs deletion of bad debt addition, allows deduction for business activities and partially disallows land leveling expenses

The Tribunal partially allowed the appeal, directing the AO to delete the bad debt addition of Rs. 11.5 crores as the assessee was found to be engaged in business activities and entitled to the deduction. Regarding the disallowance of land leveling expenses of Rs. 33,42,400, the Tribunal partially allowed the claim, disallowing expenses for prior periods and post-property transfer. The decision was issued on 12/02/2020 in Ahmedabad.

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Issues Involved:
1. Disallowance of bad debt of Rs. 11.5 crores.
2. Disallowance of land leveling expenses of Rs. 33,42,400.

Issue-wise Detailed Analysis:

1. Disallowance of Bad Debt of Rs. 11.5 Crores:
The first issue raised by the assessee pertains to the disallowance of a bad debt claim amounting to Rs. 11.5 crores. The assessee, engaged in construction and real estate development, sold a project to Shakun Corporation Pvt. Ltd. (SCPL) for Rs. 14 crores but only received Rs. 2.5 crores. The remaining amount was claimed as a bad debt due to SCPL's insolvency.

The Assessing Officer (AO) disallowed the bad debt claim, citing that:
- The assessee did not file an FIR against SCPL.
- The project was mortgaged and transferred to Shree Hari Enterprise through auction.
- Shree Hari Enterprise, in a statement, acknowledged an understanding to pay the remaining amount to the assessee.

The AO argued that the assessee did not take concrete steps to cancel the sale contract and could legally recover the amount from Shree Hari Enterprise as per the Debt Recovery Tribunal's order.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, stating that the assessee was not engaged in real estate business, as evidenced by the absence of business income and stock in trade in previous and subsequent years. The CIT(A) asserted that the property was shown as an investment, not as stock in trade.

Upon appeal, the Tribunal analyzed whether the assessee was carrying on business activities and whether the bad debt claim was justified. The Tribunal found several infirmities in the CIT(A)'s findings:
- The Revenue accepted the sale as a business transaction.
- The CIT(A) did not reclassify the transaction under the appropriate income head.
- The AO did not dispute the business activity.
- The assessee had an approved construction plan and a business brochure.
- The transaction with SCPL was genuine and at arm's length.
- The assessee recovered part of the bad debt in subsequent years and offered it to tax.

The Tribunal concluded that the assessee was indeed carrying on business activities and was entitled to the bad debt deduction once it was written off in the books, as per the Supreme Court's decision in T.R.F. Ltd. vs. CIT. The Tribunal directed the AO to delete the addition, allowing the assessee's ground of appeal.

2. Disallowance of Land Leveling Expenses of Rs. 33,42,400:
The second issue involved the disallowance of land leveling expenses claimed by the assessee. The AO disallowed the expenses due to a lack of documentary evidence. The CIT(A) confirmed the disallowance, noting the absence of bills, contractor identity, and mode of payment, and observed that the expenses were claimed after the property transfer.

The Tribunal reviewed the case and found that the assessee provided bills for the expenses, but the authorities did not verify their genuineness through statutory powers. The Tribunal noted that the inspector's report, which stated no brick kiln was found, lacked corroborative evidence.

The Tribunal partially allowed the assessee's claim, disallowing:
- Rs. 9,14,600 for prior period expenses, as similar expenses were already claimed in the previous year.
- Rs. 15,69,400 for expenses incurred after the property transfer, as there was no justification for incurring these expenses post-transfer.

The Tribunal directed the AO to allow the remaining expenses, thus partly allowing the assessee's ground of appeal.

Conclusion:
The appeal was partly allowed, with the Tribunal directing the AO to delete the bad debt addition and partially allowing the land leveling expense claim. The order was pronounced on 12/02/2020 at Ahmedabad.

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