KHYATI REALTORS P.LD, MUMBAI V. ACIT 6(2), MUMBAI

ITA 129/MUM/2014

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 3706 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 1 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-03-2016
• Appeal Filed By: Assessee
• Bench Allotted: A
• Next Hearing Date: 08-06-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 06-01-2014
• Court: TRIBUNAL
• Department Lawyers: K V NARSIMHACHARYA
• Keywords: Capital asset; Business income; Business expenditure; Bad and doubtful debts; Revenue expenditure; Capital expenditure
• Section: 37(1); 131; 37; 28

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A , BENCH MUMBAI BEFORE SHRI R.C.SHARMA, AM & SHRI PAWAN SINGH , JM ./ ITA NO. 129 / MUM/20 1 4 ( / ASSESSMENT YEAR : 200 9 - 10 ) M/S KYATI REA LTORS PVT. LTD., 301/68, MANEK BHUVAN, 1 ST HINDU COLONY, DADAR (EAST), MUMBAI - 400014 VS. ACIT - 6(2), MUMBAI - 20 ./ ./ PAN/GIR NO. : A A CCK 4422 B ( / APPELLANT ) .. ( / RESPONDENT ) /ASSESSEE BY : SHRI VIJAY MEHTA /REVENUE BY : SHRI K. V .NARSIMHACHARYA / DATE OF HEARING : 21 / 1 2 /2015 / DATE OF PRONOUNCEMENT 04/03/2016 / O R D E R PER R.C.SHARMA (A.M) : TH IS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF CIT(A) - MUMBAI, DATED 1 - 11 - 2013 , FOR THE ASSESSMENT YEAR 200 9 - 10 , IN THE MATTER OF ORDER PASSED U /S.143(3) OF THE I.T.ACT, WHEREIN FOLLOWING GROUNDS HAVE BEEN TAKEN BY THE ASSESSEE : - BEING AGGRIEVED BY THE ORDER OF THE LEA RNED COMMISSIONER OF INCOME TAX (APPEALS) - 12, MUMBAI, THIS APPEAL PETITION IS SUBMITTED ON THE FOLLOWING GROUNDS: 1) DISALLOWANCE OF BAD DEBTS OF RS 10 CRORES A. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT (A) ERRED IN CONFIR MING DISALLOWANCE OF BAD DEBTS OF RS.10 CRORES BY HOLDING THAT THE APPELLANT IS NOT ENGAGED IN MONEY LENDING BUSINESS AND THEREFORE, NOT ENTITLED TO CLAIM LOSS ON ACCOUNT OF IRRECOVERABLE LOAN/ ADVANCE. DISALLOWANCE BEING BAD IN LAW, NEEDS TO BE DELETED. B. WITHOUT PREJUDICE TO THE ABOVE, ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT (A) ERRED IN NOT ALLOWING THE CLAIM OF BAD ITA NO. 129/14 2 DEBTS BEING IN THE NATURE OF IRRECOVERABLE ADVANCE AS BUSINESS LOSS UNDER SECTION 37(1) OF THE ACT. 2) D ISALLOWANCE OF INTEREST UNDER SECTION 36(1)(III) OF RS 6,53,567 ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT (A) ERRED IN CONFIRMING DISALLOWANCE OF INTEREST UNDER SECTION 36(1)(III) OF THE ACT WITHOUT CONSIDERING THE FACT THAT THE APPELLANT HAD SUFFICIENT INTEREST - FREE FUNDS TO FINANCE INTEREST - FREE ADVANCES. THE DISALLOWANCE BEING BAD IN LAW, NEEDS TO BE DELETED. 2 . RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PERUSED. FACTS IN BRIEF ARE THAT HE ASSESSEE IS ENGAGED IN THE BU SINESS OF DEVELOPMENT OF REAL ESTATE, TRADING IN TDR AND FINANCE. THE NOTICE U/S.143(2) OF THE ACT WAS ISSUED ON 18 - 8 - 2010 AND VARIOUS DETAILS WERE CALLED FOR BY THE AO BY ISSUING NOTICES U/S.142(1) OF THE ACT. THE ASSESSEE FILED VARIOUS DETAILS IN RESPONS E THERETO. THE ASSESS MENT WAS COMPLETED BY THE AO BY PASSING ASSESSMENT ORDER U/S. 143 (3) OF THE ACT ON 30.12.2011 AND DETERMINING THE TOTAL INCOME OF THE ASSESSEE AT RS. 87,880/ - . THE ASSESSING OFFICER MADE FOLLOWING DISALLOWANCES WHILE DETERMINING INCOME OF THE ASSESSEE UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION' AGAINST WHICH ASSESSEE IS IN APPEAL BEFORE US. A . DISALLOWANCE OF INTEREST U/S. 36(L)(III) : RS. 6,53,567/ - B . DISALLOWANCE OF BAD DEBTS : RS. 10,00,00,000/ - 3. AGAINST TH E ABOVE ADDITIONS, ASSESSEE FILED APPEAL BEFORE THE CIT(A) . DURING THE APPELLATE PROCEEDINGS, ELABORATE WRITTEN SUBMISSIONS WERE FILED. HOWEVER, THE CIT(A) CONFIRMED THE DISALLOWANCE ON ACCOUNT OF BAD DEBT S AND INTEREST. AGAINST THE ABOVE ORDER OF CIT(A) A SSESSEE IS IN FURTHER APPEAL BEFORE US. 4. WE HAVE CONSIDERED RIVAL CONTENTIONS, CAREFULLY GONE THROUGH THE ORDERS OF AUTHORITIES BELOW AND ALSO DELIBERATED ON THE JUDICIAL PRONOUNCEMENTS REFERRED BY LOWER AUTHORITIES IN THEIR RESPECTIVE ORDERS . FROM THE R ECORD WE FOUND THAT AO HAS DEALT WITH THE ISSUE OF BAD DEBTS IN PARA 6 OF HIS ASSESSMENT ORDER, WHEREIN THE AO HAS REJECTED EXPLANATION OF THE ASSESSEE THAT IT WAS ITA NO. 129/14 3 FALLING WITHIN THE PROVISIONS OF SECTION 36( 2 ) AS THE ADVANCE WAS MADE DURING THE COURSE OF BUSINESS AND, HENCE, WRITE OFF OF ADVANCE WAS ALLOWABLE U/S.36(1)(VII) OF THE ACT. BEFORE THE CIT(A) THE ASSESSEE VIDE LETTER DATED 5 - 12 - 2011 HAD SUBMITTED AS UNDER : - 'AS PART OF OUR REGULAR BUSINESS ACTIVITY, THE COMPANY IN ORDER TO PURCHASE CERTAIN COM MERCIAL PREMISES HAD MADE RESERVATION BY WAY OF BOOKINGS IN THE UPCOMING PROJECT AT OLD MUMBAI PUNE HIGHWAY, KHAPOLI, WHICH WAS TO BE DEVELOPED BY M/S C. BHANSALI DEVELOPERS PVT LTD. IN ORDER TO CONFIRM THE RESERVATION I BOOKING OF SAID COMMERCIAL PREMISES , BUILDER INSISTED FOR ADVANCE OF RS 10 CRORES. ACCORDINGLY, THE COMPANY HAD ADVANCED RS 1 0 CRORES ON 06.03.2007 TOWARDS RESERVING! BOOKING OF THE COMMERCIAL PREMISES IN THE SAID PROJECT ... SINCE THE SAID ADVANCE WAS FOR PURCHASE OF COMMERCIAL PROPERTY, T HERE WAS NO QUESTION OF CHARGING INTEREST THEREON ... HOWEVER, FURTHER DEVELOPMENT ABOUT THE SAID PROJECT OF THE BUILDER IS THAT THE BUILDER AFTER TAKING ADVANCES FROM US DID NOT PROCEED IN THIS MATTER AND POSSIBLY SIPHONED THE MONEY FOR OTHER PURPOSES. ON COMING TO KNOW ABOUT THEIR NON - PROCEEDING IN THE DEVELOPMENT OF THE SAID PROJECT, WE HAD A NUMBER OF MEETINGS WITH THE DIRECTORS OF M/S C. BHANSALI DEVELOPERS PVT LTD. THEY DID NOT LISTEN TO OUR REQUEST FOR RETURNING THE MONEY. .. IN THESE CIRCUMSTANC ES AND AFTER DISCUSSING AMONGST OTHER DIRECTORS OF OUR COMPANY, A CONSCIOUS DECISION WAS TAKEN TO WRITE OFF THIS AMOUNT AS BAD DEBT. ACCORDINGLY, A RESOLUTION WAS PASSED IN THE BOARD MEETING ON 28TH MARCH 2009 AND THE SAID AMOUNT HAS BEEN WRITTEN OFF AS 'B AD DEBT. ' FURTHER, THE ASSESSEE FURNISHED FOLLOWING JUSTIFICATION FOR CLAIMING THE PRINCIPAL AMOUNT AS BAD DEBTS VIDE LETTER DATED 26/12/2011: . 'WE SUBMIT THAT AS PER PROVISIONS OF SECTION 36(2), IN RESPECT OF MONIES ADVANCED IN THE ORDINARY COURSE O F BUSINESS, THE SAME ALLOWAB./E AS BAD DEBTS EVEN IF THE AMOUNT HAS NOT BEEN TAKEN INTO ACCOUNT IN COMPUTING THE TOTAL INCOME. THIS IS WELL ACCEPTED POSITION IN RESPECT OF WRITE OFF OF ADVANCES GIVEN IN THE LENDING BUSINESS. THE PRESENT CASE FULLY FALLS WI THIN THE PROVISIONS OF SEC. 36(2) HENCE THE WRITE OFF OF ADVANCES IS ALLOWABLE U/S. 36(1 )(VII). ' HOWEVER, THE LEARNED AO DID NOT ACCEPT THE ABOVE SUBMISSION MADE BY THE ASSESSEE AND HELD THAT THE SAME WAS NEVER AN INCOME OF THE ASSESSEE THEREFORE RS.10 CRORES WAS CONSIDERED AS CAPITAL LOSS OF THE ASSESSEE. 5. THE FOLLOWING FACTS ARE NOT IN DISPUTE: - ITA NO. 129/14 4 I) THE ASSESSEE IS ENGAGED IN THE BUSINESS OF REAL ESTATE AND FINANCING. II)THE OBJECTS CLAUSE OF THE MEMORANDUM OF ASSOCIATION OF THE APPELLANT COMPANY REFLECTS THE BUSINESS OF CONTRACTORS, ERECTORS, CONSTRUCTORS OF BUILDINGS, ETC AS WELL AS RECEIVING OR LENDING MONEY AS ITS OBJECTS (COPY OF EXTRACT OF MEMORANDUM OF ASSOCIATION IS ENCLOSED). III) AMOUNT OF RS. 1 0 , 00 , 00 , 000/ - WAS ADVANCED ON 6 - 3 - 2007 TO M/ S C. BHANSALI DEVELOPERS PVT LTD IN ORDER TO PURCHASE CERTAIN COMMERCIAL PREMISES AND FOR RESERVATION BY WAY OF BOOKINGS IN THEIR UPCOMING PROJECT AT OLD MUMBAI PUNE HIGHWAY, KHAPOLI, IV) RS. 10,00,00,000/ - IS WRITTEN OFF DURING A.Y. 2009 - 10 2.8. A CCORDINGLY, SEVERAL ADVANCES ARE MADE BY THE APPELLANT IN THE ORDINARY COURSE OF BUSINESS. AD VANCE OF RS 10 CRORES MADE TO M/ S C. BHANSALI ON 6.3.2007 WAS ALSO IN THE ORDINARY COURSE OF ITS BUSINESS AS ELABORATED IN THE PARAGRAPHS ABOVE. 2.9. SINCE THE P ARTY DEFAULTED IN REPAYING THE AMOUNT OF ADVANCE, THE APPELLANT DECIDED TO WRITE - OFF THE SAME AS BAD DEBTS UNDER SECTION 36(1 )(VII) READ WITH SECTION 36(2)(I). 2.10. THE RELEVANT EXTRACT OF SECTION 36(2) OF THE ACT IS REPRODUCED BELOW: ' IN MAKING ANY DEDUCTION FOR A BAD DEBT OR PART THEREOF, THE FOLLOWING PROVISIONS SHALL APPLY - (I) NO SUCH DEDUCTION SHALL BE ALLOWED UNLESS SUCH DEBT OR PART THEREOF HAS BEEN TAKEN INTO ACCOUNT IN COMPUTING THE INCOME OF THE ASSESSEE OF THE PREVIOUS YEAR IN WHICH THE AMOUNT OF SUCH DEBT OR PART THEREOF IS WRITTEN OFF OR OF AN EARLIER PREVIOUS YEAR, OR REPRESENTS MONEY LENT IN THE ORDINARY COURSE OF THE BUSINESS OF BANKING OR MONEY - LENDING WHICH IS CARRIED ON BY THE ASSESSEE. ' 2.11. SINCE THE APPELLANT IS SQUARELY C OVERED UNDER THE STATUTORY PROVISION, THE ADVANCES WRITTEN OFF IN THE ORDINARY COURSE OF BUSINESS SHOULD BE ALLOWED AS A DEDUCTION UNDER SECTION 36(1 )(VII) READ WITH SECTION 36(2) OF THE ACT. 2.12. FURTHER, WE WISH TO INFORM YOUR HONOUR THAT IT IS WELL SETTLED THAT MONEY LENT IN THE COURSE OF MONEY LENDING BUSINESS IS INCIDENTAL TO THE BUSINESS OF THE ASSESSEE AND THEREFORE, SUCH DEBT ON BECOMING BAD IS ALLOWABLE AS A DEDUCTION. ACCORDING TO SECTION 36(2)(I), RESTRICTION FOR ACCOUNTING OF DEBT AS INCOME IN THE EARLIER YEAR IS NOT APPLICABLE WHERE SUCH DEBT REPRESENTS LOAN IN THE ITA NO. 129/14 5 ORDINARY COURSE OF BUSINESS OF BANKING OR MONEY - LENDING WHICH IS CARRIED ON BY THE ASSESSEE. 2.13. IN THIS CONNECTION, WE PLACE RELIANCE ON THE FOLLOWING JUDICIAL PRECEDENTS: CIT V PANDIT LAKSHMI KANT JHA [1972] 84 ITR 481 (SC) CIT V POTENTIAL MANAGEMENT SERVICES LTD (2009) 29 (I) ITCL 110 (CAL - HC) DCIT V SREI INTERNATIONAL FINANCE LTD. [2006]10 SOT 722 (DELHI) AJAR ENTRADE (P.) LTD.V ACIT [2005]2 SOT 511 (AHD.) MATRIX LOG ISTICS (P.) LTD. V CIT [2010]122 ITD 228 (AHD.) POYSHA OXYGEN (P.) LTD. V ACIT [2008]19 SOT 711 (DELHI)(TM) SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA V ADDNL CIT [2009] 32 SOT 536 (MUM.) A GIST OF THE AFORESAID RULINGS IS ENCLOSED IN ANNEXURE 1. 2.1 4. IT IS ALSO A SETTLED POSITION THAT A WRITE OFF OF A TRADE DEBT IN THE BOOKS OF ACCOUNTS IS SUFFICIENT TO CLAIM THE BAD DEBTS UNDER THE ACT. A COPY OF THE LEDGER OF THE PARTY HIGHLIGHTING THE WRITE - OFF IS ENCLOSED HEREWITH FOR YOUR PERUSAL. 2.15, BASED ON THE ABOVE, THE DISALLOWANCE OF THE CLAIM OF BAD DEBTS IN RESPECT OF ADVANCES TO M/S C.BHANSALI IS BAD IN LAW AND THEREFORE. THE APPELLANT REQUEST YOUR HONOUR TO DELETE THE SAME. (B) WITHOUT PREJUDICE TO THE ABOVE AND WITHOUT ADMITTING, ON THE FACTS A ND CIRCUMSTANCES OF THE CASE AND IN LAW, AFORESAID AMOUNT OF RS.10 CRORE SHOULD BE ALLOWED AS BUSINESS LOSS TO THE APPELLANT. 2.16. THE APPELLANT SUBMITS THAT WITHOUT PREJUDICE TO THE ABOVE, THE LOSS ON ACCOUNT OF NON RECOVERABILITY OF THE ADVANCES MADE IN THE ORDINARY COURSE OF BUSINESS SHOULD BE ALLOWED UNDER SECTION 28 / 37 OF THE ACT. 2.17. THE APPELLANT SUBMITS THAT THE ADVANCES WERE LAID DOWN WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND THEREFORE, IF THE WRITE - OFF OF SUCH ADVANCES IS NOT ALLOWABLE UNDER SECTION 36(2), THE SAME SHOULD BE ALLOWED UNDER SECTION 37. 2.18. IN THIS REGARD, THE APPELLANT RELIES ON THE FOLLOWING JUDICIAL PRECEDENTS: A. I.B.M. WORLD TRADE CORPORATION V CIT (1990) 1861TR 412 (BOM) AMOUNTS ADVANCED BY THE ASSE SSE E FOR THE PURPOSE OF ACQUIRING THE FACTORY ON LEASE - AMOUNT IS ADVANCED FOR THE PURPOSE OF THE ASSESSEE'S BUSINESS- WHEN SUCH ADVANCES WERE LOST, THE LOSS WOULD BE A BUSINESS LOSS AND NOT A CAPITAL LOSS - MERE FACT THAT ITA NO. 129/14 6 FACTORY WOULD BE READY IN A YEAR OR SO WOULD NOT MAKE ANY DIFFERENCE - LOSS WAS THEREFORE ALLOWABLE AS A BUSINESS LOSS. B. CHENAB FOREST CO. V CIT [1974] 96 ITR 568 (J. & K.) ASSESSEE, A FOREST LESSEE ADVANCED MONEY TO SUB - CONTRACTORS APPOINTED TO EXPLOIT FOREST - ADVANCES WERE ADJUSTED AG AINST ULTIMATE PAYMENT DUE TO THEM - DUE TO NON - EXTENSION OF LEASE IN FAVOUR OF ASSESSEE SOME OF ADVANCES COULD NOT BE RECOVERED FROM SUCH CONTRACTORS WHICH WERE ORIGINALLY CLAIMED AS BAD DEBTS BUT WAS REJECTED AS NOT FULFILLING CONDITION UNDER SECTION 36( 2) - ASSESSEE THEN CLAIMED THAT AMOUNT IN QUESTION SHOULD BE ALLOWED AS BUSINESS EXPENDITURE UNDER SECTION 37(1) - WHETHER IN VIEW OF FACT THAT NATURE OF BUSINESS AND SYSTEM OF WORKING OF ASSESSEE BEING SUCH THAT IT WAS NECESSARY TO MAKE ADVANCES TO CARRY ON BUSINESS, IT COULD BE CONCLUDED THAT ADVANCES WERE PAID IN ORDINARY COURSE OF BUSINESS AND THEREFORE, ASSESSEE WAS ENTITLED TO DEDUCTION UNDER SECTION 37( 1) - HELD, YES C. CIT V PURE BEVERAGES LTD. [1994] 209 ITR 131 (GUJ.) SECTION 37(1) OF THE INC OME - TAX ACT,1961 - BUSINESS EXPENDITURE - ALLOWABILITY OF - ASSESSMENT YEAR 1975 - 76 - ASSESSEE - COMPANY, A DEALER IN SOFT DRINKS, MADE ARRANGEMENT WITH A BANK TO MAKE ADVANCES TO ITS DEALERS FOR PURCHASE OF ELECTRONIC COOLERS WHICH WERE NECESSARY FOR CHILLI NG SOFT DRINKS - ASSESSEE REIMBURSED TO BANK LOSSES ON ACCOUNT OF NON - RECOVERY OF AMOUNTS FROM DEALERS - WHETHER LIABILITY TO BANK WAS INCURRED IN COURSE OF CARRYING ON ASSESSEE'S BUSINESS AND WAS IN NATURE OF ALLOWABLE REVENUE EXPENDITURE - HELD, YES D. CIT V S.A.S. RAMASWAMY CHETTIAR [1946] 141TR 236 (MAD.) SECTION 37(1) OF THE INCOME - TAX ACT, 1961 [CORRESPONDING TO SECTION 10(2)(XII) (NOW SECTION 10(2)(XV OF THE INDIAN INCOME - TAX ACT, 1922] - BUSINESS EXPENDITURE - ALLOWABILITY OF - ASSESSMENT YEAR 19 40 - 41 - ASSESSEE, A NATTIUKOTTAI CHETTIAR ENGAGED IN MONEY - LENDING BUSINESS, SOUGHT TO DEDUCT UNDER SECTION 10(2)(XII) OF 1922 ACT CERTAIN SUM OF LOAN FOR WHICH HE GUARANTEE AND WHICH HE HAD TO MAKE GOOD ON BORROWERS FAILURE TO REPAY HAD GIVEN - IT WAS CO MMON PRACTICE AMONG NATTUKOTTAI CHETTIARS TO BORROW FROM BANKS FOR PURPOSE OF LENDING OUT SUMS SO OBTAINED AT HIGHER RATES OF INTEREST AND TO STAND SURETY FOR ONE ANOTHER IN THESE BORROWINGS - WHETHER BY REASON OF AFORESAID PRACTICE, SUM PAID BY ASSESSEE SHOULD BE REGARDED AS LOSS INCURRED BY ASSESSEE IN CARRYING ON HIS MONEY - LENDING BUSINESS AND, THEREFORE, HE WAS ENTITLED TO DEDUCTION UNDER SECTION 10(2)(XII) OF 1922 ACT - HELD, YES 2.19. BASED ON THE ABOVE, THE APPELLANT REQUESTS YOUR HONOUR TO ALLOW THIS GROUND OF APPEAL AND DELETE THE DISALLOW ANCE OF WRITE - OFF OF ADVANCES. ITA NO. 129/14 7 5 . BY THE IMPUGNED ORDER, THE CIT(A) CONFIRMED THE DISALLOWANCE AFTER DEALING WITH THE ISSUE AT PARA 3.3 AT PAGE S 6 TO 13 OF HIS ORDER. IT WAS ALSO ARGUED BEFORE THE CIT(A) THAT ALTERNATE PLEA OF THE ASSESSEE IS THAT DEDUCTION SHOULD BE ALLOWED U/S.37 OF THE ACT, IF THE WRITE OFF OF ADVANCE IS NOT FALLING UNDER SECTION 36( 2 ) OF THE ACT. T HE CIT(A) DECLINED ASSESSEES CLAIM U/S.36(2) ON THE PLEA THAT ASSESSEE WAS NOT HAVING MONEY L ENDING LICENCE NOR IT HAS NBFC LICENSE, THEREFORE, ASSESSEE WAS COVERED BY EXPLANATION TO SECTION 37(1) OF THE ACT. THE CIT(A) ALSO DECLINED CLAIM OF ASSESSEE U/S.37 ON THE PLEA THAT ASSESSEES CLAIM OF BAD DEBTS WAS FALLING UNDER SECTION 30 TO 36 OF THE A CT. 6 . WE HAD GONE THROUGH THE ORDERS OF AUTHORITIES BELOW AND DULY CONSIDERED THE SUBMISSIONS MADE BEFORE THE LOWER AUTHORITIES. WE HAD VERIFIED THE OBJECT CLAUSE OF THE MEMORANDUM OF ASSOCIATION OF THE ASSESSEE COMPANY WHICH CLEARLY REFLECTED BUSINESS O F REAL ESTATE AS WELL AS RECEIVING OR LENDING OF MONEY AS ITS OBJECTS. DURING THE YEAR UNDER CONSIDERATION ALSO ON THE MONEY SO LENT THE ASSESSEE HAS EARNED INTEREST INCOME OF RS.24.62 CRORES. THIS INTEREST INCOME WAS ALSO TREATED BY AO AS BUSINESS INCOME AND NOT AS INCOME FROM OTHER SOURCES. THIS INTEREST INCOME WAS EARNED ON THE AMOUNT ADVANCED BY THE ASSESSEE DURING THE YEAR AS PER ITS OBJECT CLAUSE , HOWEVER, ON THE ADVANCE OF RS.10 CRORE THE ASSESSEE HAD NOT CHARGED ANY INTEREST, THEREFORE, CIT(A) WA S CORRECT IN DECLINING ASSESSEES CLAIM U/S.36(1)(VII) R.W.S36(2) OF THE ACT. 7 . IT IS A MATTER OF RECORD THAT ASSESSEE WAS ENGAGED IN THE BUSINESS OF REAL ESTATE DEVELOPMENT AND TRADING OF TDR AND FINANCE SERVICES. IN THE COURSE OF ITS BUSINESS OF REAL E STATE DEVELOPMENT, THE ASSESSEE HAD GIVEN ADVANCE TO M/S C. BHANSALI DEVELOPERS PVT. LTD. ON 6 - 3 - 2007 FOR PURCHASING CERTAIN COMMERCIAL PREMISES HAD MADE RESERVATION BY WAY OF BOOKING IN THE UPCOMING PROJECT AT OLD MUMBAI PUNE HIGHWAY, KHAPOLI. THUS, MONE Y WAS ADVANCED IN THE COURSE ITA NO. 129/14 8 OF ITS BUSINESS OF REAL ESTATE DEVELOPMENT, LOSS OF SUCH MONEY ON ACCOUNT OF NON - RECOVERABILITY OF ADVANCE MADE IN THE COURSE OF BUSINESS IS REQUIRED TO BE ALLOWED U/S.28/37 OF THE I.T.ACT AS BUSINESS LOSS. THE FACT THAT ADVANC E WAS MADE IN THE ORDINARY COURSE OF BUSINESS WAS NOT DENIED BY THE AO. IT IS ALSO A MATTER OF RECORD THAT THE ADVANCE SO GIVEN COULD NOT BE RECOVERED, UNDER THESE CIRCUMSTANCES THE ASSESSEE HAS WRITTEN OFF THE AMOUNT IN ITS BOOKS OF ACCOUNT. SUCH AMOUNT I S REQUIRED TO BE ALLOWED AS BUSINESS LOSS U/S.28/37 OF THE I.T.ACT. THE CASE LAWS CITED BEFORE THE CIT(A) FULLY SUPPORT THE CONCLUSION THAT MONEY GIVEN IN ORDINARY COURSE OF BUSINESS FOR THE PURPOSE OF BUSINESS IF REMAINS NON - RECOVERABLE, THE SAME IS TO BE ALLOWED AS BUSINESS LOSS U/S.28/37 OF THE I.T.ACT. 8 . WE FOUND FORCE IN THE ALTERNATE PLEA OF THE ASSESSEE THAT ADVANCE GIVEN TO M/S C.BHANSALI DEVELOPERS PVT. LTD. IN ORDER TO PURCHASE CERTAIN COMMERCIAL PREMISES AND FOR RESERVATION BY WAY OF BOOKING IN THEIR UPCOMING PROJECT AT OLD MUMBAI PUNE HIGHWAY, KHAPOLI WAS IN THE ORDINARY COURSE OF BUSINESS OF ASSESSEE AS DEVELOPER. SINCE THE AMOUNT COULD NOT BE RECOVERED EVEN AFTER MUCH PERSUASION THE ASSESS E E COMPANY PASSED A RESOLUTION IN ITS BOARD MEETING HEL D ON 28 - 3 - 2009, AND THE SAID AMOUNT HAS BEEN WRITTEN OFF AS BAD DEBTS. THE MONEY GIVEN IN THE ORDINARY COURSE OF BUSINESS AS ADVANCE IF COULD NOT BE RECOVERED IS ALLOWABLE U/S.28/37 OF THE I.T.ACT. THE CLAIM OF THE ASSESSEE HAS TO BE SEEN FROM THE ANGLE O F THE PROVISIONS OF SECTION 37(1) OF THE ACT, WHEREIN IT IS PROVIDED THAT ALL EXPENDITURE RELATING TO CARRYING ON OF THE BUSINESS IS TO BE ALLOWED AS DEDUCTION WHILE COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD PROFIT FROM BUSINESS OR PROFESSION, WHERE T HE EXPENDITURE IS NOT IN THE NATURE DESCRIBED IN SECTIONS 30 TO 36 OF THE ACT AND NOT BEING IN THE NATURE OF CAPITAL OR PERSONAL EXPENDITURE. IT IS NOT IN DISPUTE THAT THE EXPENDITURE CLAIMED BY THE ASSESSEE IS NOT COVERED BY ANY OF THE PROVISIONS OF ITA NO. 129/14 9 SECT IONS 30 TO 36 OF THE ACT AND BEING NOT A CAPITAL OR PERSONAL EXPENDITURE , AND HAVING BEEN INCURRED FOR THE PURPOSE OF CARRYING ON OF THE BUSINESS, IS ELIGIBLE FOR DEDUCTION UNDER SECTION 37(1) OF THE ACT. THE PROVISIONS OF SECTION 37 READS AS UNDER : - 37. (1) ANY EXPENDITURE (NOT BEING EXPENDITURE OF THE NATURE DESCRIBED IN SECTIONS 30 TO 36 [***] AND NOT BEING IN THE NATURE OF CAPITAL EXPENDITURE OR PERSONAL EXPENSES OF THE ASSESSEE), LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS 3 OR PROF ESSION SHALL BE ALLOWED IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION . APPLYING THE PROVISIONS OF SECTION 37(1) TO THE FACTS OF THE INSTANT CASE, WE FOUND THAT THE AMOUNT SO ADVANCED WAS NOT IN THE NATURE OF CAPITAL EXPENDITURE OR PERSONAL EXPENSES OF THE ASSESSEE, BUT WAS IN THE NATURE OF ADVANCE GIVEN FOR RESERVING/BOOKING OF THE COMMERCIAL PREMISES IN THE ORDINARY COURSE OF ASSESSEES BUSINESS OF REAL ESTATE DEVELOPMENT AND WHICH COULD NOT BE RECOVERED THEREFORE, THERE IS NO REASON TO DECLINE ASSESSEES CLAIM AS BUSINESS LOSS U/S.37(1) R.W.S.28 OF THE I.T.ACT. ACCORDINGLY, WE DIRECT THE AO TO ALLOW THE ADVANCE OF RS.10 CRORE WHICH COULD NOT BE RECOVERED U/S.28 R.W.S.37(1) OF THE I.T.ACT, 1961. 9 . WE ALSO FOUND THAT DUE TO PERSISTENT EFFORTS THE ASSESSEE HAS BEEN ABLE TO RECOVER PART OF THE ADVANCE AND SUCH RECOVERED AMOUNT HAS ALSO BEEN OFFERED TO TAX IN A.Y.2012 - 2013. THE ASSESSEE HAVING OFFERED TO TAX THE AMOUNT RECOVERED AS INCOME IN SUBSEQUENT YEAR, THE DISALLOWANCE MADE IN THE YEAR UNDER CONSIDERATION WOULD RESULT IN SUBJECTING THE ASSESSEE TO TAX TWICE. ACCORDINGLY, WE DO NOT FIND ANY JUSTIFICATION FOR DECLINE OF ASSESSEES CLAIM OF BUSINES S LOSS U/S.28/37 OF THE I.T.ACT DURING THE YEAR UNDER CONSID ERATION. 1 0 . WHILE DECLINING ASSESSEES CLAIM U/S.37, THE RELIANCE PLACED BY CIT(A) ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF SOUTHERN TECHNOLOGIES ITA NO. 129/14 10 LTD., 320 ITR 577 IS COMPLETELY MISPLACED INSOFAR AS HONBLE SUPREME COURT HAS HELD THAT RBI DIRECTIVES REGARDING PROVISION OF NON - PERFORMING ASSETS DO NOT CONSTITUTE EXPENSES ON THE BASIS OF WHICH DEDUCTION COULD BE CLAIMED BY THE NBFC UNDER SECTION 36(1)(VII) OR SECTION 37(1) AND THE SAME IS TO BE ADDED BACK TO THE TOTAL INCOME EVEN BY APPLYING THE THEORY OF REAL INCOME. THE HONBLE SUPREME COURT FURTHER OBSERVED THAT SINCE A PROVISION FOR DOUBTFUL DEBT IS KEPT OUT OF THE AMBIT OF THE BAD DEBT BY EXPLANATION TO SECTION 36(1)(VII), THE SAID EXPLANATION HAS TO BE TAKEN INTO ACCOUNT IN THE COMPUTA TION OF TOTAL INCOME UNDER I.T.ACT AND THAT SECTION 37 APPLIES ONLY TO ITEMS WHICH DO NOT FALL UNDER SECTIONS 30 TO 36. HOWEVER, IN THE INSTANT CASE BEFORE US, IT IS NOT A CASE OF PROVISION OF ANY DOUBTFUL DEBTS NOR PROVISION OF NPA AS SUGGESTED BY HONBL E SUPREME COURT. IT IS A CASE OF IRRECOVERABLE ADVANCE GIVEN IN THE NORMAL COURSE OF ASSESSEES BUSINESS FOR PURCHASE OF CERTAIN COMMERCIAL PREMISES, RESERVATION BY WAY OF BOOKING IN THE UPCOMING PROJECT. THE AMOUNT SO PAID DOES NOT FALL UNDER ANY OF THE P ROVISIONS OF SECTION 30 TO 36 NOR IT IS IN THE NATURE OF CAPITAL EXPENDITURE, INSOFAR AS IT WAS NOT FOR ACQUIRING ANY CAPITAL ASSET BUT TO BUY/RESERVE PLACE IN THE UPCOMING PROJECT, WHICH IS STOCK - IN - TRADE IN ASSESSEES CASE DEALING IN REAL ESTATE. THE AD VANCE PAYMENT SO MADE WAS ALSO NOT IN THE NATURE OF PERSONAL EXPENDITURE, THEREFORE, SAME WAS ALLOWABLE AS BUSINESS LOSS U/S.28/37(1) OF THE ACT. 11. THE CIT(A) HAS ALSO PLACED RELIANCE ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF SUNDARAM FINA NCE LIMITED, 349 ITR 346. THE CIT(A)S RELIANCE IS FULLY MISPLACED INSOFAR AS THIS DECISION DEALS WITH TREATMENT OF CONTINGENT DEPOSIT RECEIVED BY THE ASSESSEE NBFC FROM ITS CUSTOMERS WHICH WAS HELD TO CONSTITUTE INCOME U/S.28 OF THE I.T.ACT. HOWEVER, HERE WE ARE CONCERNED WITH THE UNRECOVERABLE ADVANCE GIVEN IN THE NORMAL COURSE OF ITA NO. 129/14 11 BUSINESS, AND THE SAME IS ALLOWABLE AS EXPENSES U/S.37(1) OR AS BUSINESS LOSS U/S.28 OF THE I.T.ACT. INSOFAR AS CIT(A)S CONCLUSION REGARDING DISALLOWANCE ON BAD DEBTS U/S.36(1) (VII), WE ARE IN AGREEMENT WITH THE CIT(A) THAT SINCE NO INTEREST INCOME WAS RECEIVED BY ASSESSEE IT CANNOT BE SAID TO BE LOAN GIVEN IN THE NORMAL COURSE OF BUSINESS FOR EARNING INTEREST INCOME, THEREFORE, THE SAME CANNOT BE ALLOWED U/S.36(1)(VII) R.W.S.36 (2) OF THE I.T.ACT. IN VIEW OF THE ABOVE DISCUSSION, WE DIRECT THE AO TO ALLOW ASSESEES CLAIM U/S.26/37(1) OF I.T.ACT. 1 2 . WITH REGARD TO DISALLOWANCE OF RS. 653,536/ - U/S.36(1)(III), WE FOUND THAT THE AO HAS DISALLOWED THE AMOUNT ON THE PLEA THAT ASSESSEE HAS DIVERTED ITS INTEREST BEARING FUNDS FOR NON - BUSINESS PURPOSE. THE CONTENTION OF THE ASSESSEE BEFORE THE LOWER AUTHORITIES WAS THAT ADVANCES WERE GIVEN BY THE ASSESSEE AS A BUILDER AND DEVELOPER FOR THE PURCHASE OF THE PROPERTY, IN CASE THE DEAL DOES NOT MATERIALIZE THE ASSESSEE EITHER GETS INTEREST OR COMPENSATION BASED ON THE TERMS AND CONDITIONS AGREED WITH THE RESPECTIVE PARTIES. SUCH ADVANCES CANNOT BE TREATED AS FOR NON - BUSINESS PURPOSE. IT WAS ALSO CONTENTION BEFORE THE LOWER AUTHORITIES THAT A DVANCES WERE MADE THROUGH RESERVES AND SURPLUS OF THE COMPANY, THEREFORE, NO DISALLOWANCE SHOULD BE MADE IN VIEW OF THE DECISION OF HON BLE JURISDICTIONAL HIGH COURT IN THE CASE OF RELIANCE UTILITIES & POWER LTD., 178 TAXMAN 135. 1 3 . WE HA VE CONSIDERED RIV AL CONTENTIONS, CAREFULLY GONE THROUGH THE ORDERS OF AUTHORITIES BELOW AND FOUND FROM THE RECORD THAT THE AMOUNT BORROWED FOR THE PURPOSE OF BUSINESS WAS PARTLY DISALLOWED BY THE AO ON THE PLEA THAT INTEREST CANNOT BE ALLOWED TO THE EXTENT OF INTEREST FREE ADVANCES/LOANS. AS PER THE DETAILS FURNISHED BEFORE THE LOWER AUTHORITIES, WE FOUND THAT ADVANCES WERE MADE IN THE REGULAR COURSE OF BUSINESS FOR PURCHASE OF PROPERTY, WHICH CANNOT BE TREATED AS NOT RELATED TO THE BUSINESS. FURTHER WE FOUND THAT THE RESE RVE AND ITA NO. 129/14 12 SURPLUS OF ASSESSEE COMPANY WAS MUCH MORE HIGHER THAN THE ALLEGED ADVANCES ON WHICH THE AO HAS DISALLOWED THE INTEREST. IN VIEW OF THE JURISDICTIONAL HIGH COURT DECISION IN THE CASE OF RELIANCE UTILITIES & POWER LTD. (SUPRA) , WHEREIN IT WAS HELD TH AT WHERE THE ASSESSEE HAS OWN AND BORROWED FUNDS, A PRESUMPTION CAN BE MADE THAT ADVANCES FOR NON - BUSINESS PURPOSES HAVE BEEN MADE OUT OF THE OWN FUNDS AND THAT THE BORROWED FUNDS HAVE NOT BEEN USED FOR THIS PURPOSE. APPLYING THE PROPOSITION OF LAW LAID DO WN BY THE JURISDICTIONAL HIGH COURT, WE DO NOT FIND ANY MERIT IN THE DISALLOWANCE SO MADE BY THE AO U/S. 36(1)(III) OF THE I.T.ACT, WHERE RESERVES AND SURPLUS OF ASSESSEE WAS MUCH MORE THAN THE ADVANCES. 1 4 . IN THE RESULT, APPEAL OF ASSESSEE IS ALLOWED. O RD ER PRONOUNCED IN THE OPEN COURT ON THIS 04/03/2016 SD/ - ( PAWAN SINGH ) SD/ - ( R.C.SHARMA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI ; DATED 04/03/2016 . . /PKM , . / PS / COPY OF THE ORDER FORWARDED TO : / BY ORDER, / ( ASSTT. REGISTRAR) , / ITAT, MU MBAI 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A), MUMBAI. 4. / CIT 5. , , / DR, ITAT, MUMBAI 6. / GUARD FILE. //TRUE COPY//