advances written off

[praveenkumar makam]

advances written off is an eligible expenditure as per IT Act? if it is eligible under which section? and give me the relevant case laws

[CA Rachit Agarwal]

Please clarify the purpose for which the advances was given? There are different judgements dealing with various types of advances. 

Advance word is very broad in nature.

[praveenkumar makam]

dear agarwal sir,

advances given for purchase of cement which amounts to 89 lakhs, nown that company went to BIFR, so we want to write off such amount please refer regarding this and its case laws

 

[CA Rachit Agarwal]

If the advance for cement is in nature for the purchase of Factory Building or other fixed assets, then such advance would take the colors of Capital in nature and would not be allowed as deduction.

However if the cement purchase was for trading purpose or the cement to be used for the repair, then such advance would take the colors of revenue in nature and would be allowed as deductible expenditure.

Supreme Court in CIT v. Mysore Sugar Co. Ltd. [1962] 46 ITR 649 (SC)-

AI Summary

Capital vs revenue classification: deductibility of written-off advances depends on whether the advance funded trading consumption or capital acquisition. Tax deductibility of advances written off turns on their character: advances for materials consumed in trade or repairs are revenue in nature and deductible, whereas advances tied to acquisition or construction of fixed assets assume a capital character and are not deductible; the decisive test is the factual purpose and nexus of the advance to trading activity or capital formation.