2023 (11) TMI 1100 - AT - Income Tax

Business losses from joint venture write-offs allowed as normal deductions under sections 28 and 37

ITAT Delhi allowed the appeal regarding write-off of loans and advances to joint venture company. The court held that business losses are allowable under ... Nature of loss - Loss arising on account of write off of part of loans and advances given by the appellant to the joint venture - allowable u/s 28(i) r.w. section 36(1)(vii) or 37(1) as a normal business loss - CIT(A) observing that the loss did not arise during the course of business of the assessee and that it did not occur during the year - As argued by assessee assessee company has never claimed the said expenditures u/s 36(2) rather the said expenditures are allowable as business loss under section 28 or 37 of the Act, as the same have been incurred during the normal carrying on of business - HELD THAT:- As observed that the assessee vide its letter filed before the Ld. AO had claimed that the chances of recovery of the impugned sum is nil and the same is allowable as an expense under section 37(1) - AO ignored the assessee’s claim in both the years. Before the Ld. CIT(A) the assessee submitted that it has written off in each of the two years being 20% of the total loan/advance given to JV Company in its audited financials. It was also asserted that nowhere the assessee has claimed the said amount as bad debt in the profit and loss account. Also the loss is allowable under section 28(i) r.w. section 36(1)(vii) or 37(1) as a normal business loss. Support was derived from the decision of Hon’ble Supreme Court in Madnani Development Corporation Pvt. Ltd. [1986 (7) TMI 2 - SUPREME COURT] wherein it is held that business losses are allowable on ordinary commercial principles of computing profits, provided they are of non-capital nature. Reliance was also placed on the decisions Mahendra N. Shah [2005 (10) TMI 37 - GUJARAT HIGH COURT], Turner Morrison & Co. Ltd. [2000 (3) TMI 34 - CALCUTTA HIGH COURT] Thus we are of the considered view that it would be appropriate and expedient as also in the interest of justice and fair play to set aside the order of the Ld. CIT(A) in both the AYs and restore the matter back to the file of the Ld. AO to decide the issue afresh. Disallowance being bad debt written off - said sum comprised of debit balances of suppliers written off and being loans to employees written off - AO made the disallowance for the reasons that conditions laid down under section 36(2) were not fulfilled - HELD THAT:- It is not in dispute that the loans/advances were given by the assessee in the course of carrying on of its business. These became irrecoverable due to which the assessee has written them off in its books of account. It is observed that neither the Ld. AO nor the Ld. CIT(A) had doubted the genuineness of the amounts written off. The assessee knows its interest best. If in the best judgment of the assessee, the amounts became irrecoverable and wrote them off in its books of account, it is an allowable deduction in computing the business income of the assessee. We, therefore, direct the Ld. AO to delete the impugned disallowances in both the AYs. Issues Involved:1. Disallowance of business loss claimed on account of advance written off to a joint venture company.2. Disallowance of loans to employees and debit balance of suppliers written off.Summary:Issue 1: Disallowance of Business Loss Claimed on Account of Advance Written Off to a Joint Venture CompanyThe assessee challenged the disallowance of Rs. 57,19,947/- claimed as business loss for AY 2014-15 and 2015-16, arguing that the advances written off were allowable as business losses under section 28 or 37 of the Income Tax Act, 1961, as they were incurred during the normal course of business. The CIT(A) sustained the disallowance, relying on a previous ITAT decision for AY 2012-13, which held that the loss did not arise during the course of business and was not allowable under section 36(2) of the Act. The Tribunal noted that the issue was subjudice before the Hon'ble Delhi High Court and remanded the matter back to the AO to reconsider the submissions and contentions of the assessee and to decide the issue afresh in accordance with law.Issue 2: Disallowance of Loans to Employees and Debit Balance of Suppliers Written OffFor AY 2014-15, the assessee contested the disallowance of Rs. 5,61,999/- on account of loans to employees and debit balance of suppliers written off. For AY 2015-16, the disallowance was Rs. 1,57,255/- for advances to suppliers written off. The AO disallowed these amounts on the grounds that the conditions under section 36(2) were not met, and the CIT(A) upheld the disallowances. The Tribunal observed that the loans/advances were given in the course of business and became irrecoverable, thus written off in the books of account. As the genuineness of the amounts written off was not doubted, the Tribunal directed the AO to delete the disallowances for both assessment years.Conclusion:The Tribunal allowed the appeals of the assessee for statistical purposes, directing the AO to reconsider the issue of business loss claimed on account of advance written off and to delete the disallowances of loans to employees and debit balance of suppliers written off, as per the directions provided.