Advance given for purchase and subsequently written off in Profit and Loss account as bad debts allowed as business expenditure u/s 37(1)
In a recent judgment, ITAT Chandigarh allowed deduction under section 37(1) as business expenditure towards advance written off as irrecoverable bad debts, following the Supreme Court decision that once an amount is written off as irrecoverable, no further proof or documentation is required to substantiate the claim.
ABCAUS Case Law Citation:
4543 (2025) (05) abcaus.in ITAT
In the instant case, the assessee had challenged the order passed by the CIT(A) in confirming the disallowance of deduction of bad debts written off being in the nature of irrecoverable advance as business loss u/s 37(1) read with section 28 of the Income Tax Act, 1961 (the Act).
The assessee was engaged in the real estate business. It filed its return of income for relevant Assessment Year declaring a loss. The case was selected under CASS, and notices under Sections 143(2) and 142(1) of the Act were duly issued.
During the assessment proceedings, it was noticed that the assessee had claimed a deduction as bad debts written off, relating to an advance given for the proposed purchase of land.
The assessee submitted that the advance, made through banking channels in the preceding previous year, remained unrecovered due to the non-materialization of the transaction amid a recession in the real estate sector. The assessee, therefore, wrote off the amount as irrecoverable and claimed it as a deduction under Section 36(1)(vii) or alternatively as a business loss under Section 37(1) read with Section 28 of the Act. It was stated that the advance was a business transaction and referenced various judicial precedents and CBDT Circular No. 12/2016 in support of its claim.
The AO, after considering the submissions, disallowed the claim on different grounds. Firstly, the AO observed that the debt in question had never been taken into account in computing the income of any previous year, thereby violating the condition laid down in Section 36(2)(i). Secondly, the assessee failed to furnish essential details such as the PAN, address, and a formal agreement with the party, raising doubts about the genuineness of the transaction. It was also pointed out that no TDS was deducted on the advance payment.
Further, the AO held that since the amount was shown as “Loans and Advances” in the balance sheet and the assessee was not engaged in money lending business, the amount was in the nature of capital expenditure and hence not allowable under Section 37(1).
The AO distinguished the judicial precedents cited by the assessee as factually different and emphasized that mere assertions without corroborative evidence could not establish the genuineness of the business loss.
Additionally, the AO held that as the expenditure did not pertain to the relevant assessment year but to an earlier period, it failed to satisfy the condition that expenditure must be incurred during the relevant year for a claim under Section 37(1).
Concluding that neither Section 36(1)(vii) nor Section 37(1) supported the assessee’s claim, the AO made the impugned addition to the returned income and initiated penalty proceedings under Section 271(1)(c) for furnishing inaccurate particulars of income.
Against the order of the Ld. AO the assessee went in appeal before the CIT(A) who sustained the order passed by the AO.
Before the Tribunal, the assessee submitted that it was engaged in the real estate business, had advanced the amount in question to one party for the purchase of land as part of its regular business operations. The transaction did not materialize, and despite repeated efforts, the amount remained unrecovered. Consequently, the appellant prudently wrote off the amount as a business loss in the relevant Assessment Year.
It was submitted that the loss is allowable either as a business loss under section 28 or as a business expenditure under section 37(1) of the Income Tax Act. Several Judicial precedents, were relied upon by the assessee in support that advances made in the course of business, if irrecoverable, are allowable as business losses.
It was further submitted that the absence of a formal agreement or PAN does not negate the business purpose, especially in the real estate industry where advances are often made based on mutual understanding, as recognized by the Hon’ble Supreme Court clarifying that once an amount is written off, it must be allowed without requiring proof of irrecoverability. The advance was a business transaction duly recorded in the books and not a capital investment.
The Tribunal observed that the AO had initially disallowed the deduction, citing the absence of a formal agreement, PAN details, and Tax Deducted at Source (TDS) records. However, the advance was a genuine business expense, properly recorded in the accounts, and it was not considered a capital expense.
The Tribunal further noted that the said amount had continuously being shown in the balance sheet of the assessee as loan / advances and the Revenue had never questioned its correctness. Rather, it had been taken on record year after year without being questioned. The AO raised this issue only when this amount was written off by the assessee as non recoverable.
The Tribunal further observed that as pointed out by the assessee, the Hon’ble Supreme Court set a clear precedent that once an amount is written off as irrecoverable, no further proof or documentation is required to substantiate the claim. This principle was applied in a case where the assessee had already written off the amount as irrecoverable.
In view of the above, the Tribunal opined that the order passed by the CIT(A) on this issue cannot be sustained. As a result, the Tribunal allowed the assessee’s claim for a deduction of bad debts and the addition made by the AO is deleted.
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