Income Tax Appellate Tribunal Kolkata has held that a trade advance written off if not allowable in terms of section 36(1)(vii) read with section 36(2) is allowable as deduction as a regular trading loss u/s 28 of the Income Tax Act, 1961

Case Details:
ITA No. 1185/Kol/2012 A.Y. 2008-09
Income Tax Officer (Appellant) vs M/s. Shree Gouri Shankar Jute Mills Ltd (Respondent)
Date of Order: 08-10-2015

Brief Facts of the Case:
The assessee was engaged in the business of manufacture of Jute and in the course of its business had paid advance for purchase of jute to Shri R. K. Jalan (supplier)  in the early 1990s amounting to Rs. 70,02,013/-. The said supplier did not supply the Jute to the assessee and the same was converted into loan transaction by the assessee commencing from Asst Year 1991-92 onwards and interest was charged thereon. The assessee had duly offered the interest income derived thereon from Asst Years 1991-92 to 1997-98 amounting to Rs. 66,46,543/- in total under the head “income from business” and the same was accepted by the revenue in section 143(3) proceedings. During the period from Asst Years 1991-92 to 1995-96, the assessee was also in receipt of certain principal dues from the supplier to the extent of Rs. 23,00,000/- and the balance of advance receivable from supplier was Rs. 47,02,013/- from Asst Year 1995-96 onwards. The assessee stopped charging interest on the aforesaid advance from Asst Year 1998-99 onwards as it found that the recovery of principal amount of advance itself is doubtful of recovery.

On the death of the supplier, the assessee during AY 2008-09 wrote off the entire trade advance of Rs. 1,13,48,556/- represented by principal portion thereon amounting to Rs. 47,02,013 and interest receivable thereon amounting to Rs. 66,46,543/-. Miscellaneous expenses written off account was debited by crediting the supplier account and deduction was claimed accordingly in the return of income as bad debts.

However, Assessing Officer disallowed the same on the ground that the provisions of section 36(2) were not satisfied by the assessee and moreover, it is not an allowable expenditure under section 37 of the Act since giving such advance was not the business of the assessee. AO also recorded that the interest income on such advance in the earlier assessment years were not offered as business income by the assessee.

Excerpts from the ITAT Order:
Even otherwise, we find that since the trade advance was made during the course of its business by the assessee, any loss on account of recoverability would automatically fall under the category of trade debt and hence is allowable as business loss. Reliance in this regard is placed on the decision of the Hon’ble Supreme Court in the case of CIT vs Mysore Sugar Co. Ltd reported in (1962) 46 ITR 649 (SC) . The facts before the Hon’ble Apex Court and decision rendered thereon is given below:-

Facts: “The assessee was a sugar company. The assessee purchased sugarcane from the sugarcane growers and crushed them in its factory to prepare sugar. As a part of its business operations. It entered into agreements with the sugarcane growers, and advanced them sugarcane seedlings, fertilizers and also cash. The sugarcane growers entered into a written agreement by which they agreed to sell sugarcane exclusively to the assessee at current market rates and to have the advances adjusted towards the price of sugarcane, agreeing to pay interest in the meantime. For this purpose, an account of each sugarcane growers was opened by the assessee-company. A crop of sugarcane took about 18 months to mature, and these agreements took place at the harvest season each year, in preparation for the next crop.

In the year 1948-49, due to drought, the assessee company could not work its sugar mills and the sugarcane growers could not grow or deliver the sugarcane. The advances made in 1948-49 thus remained unrecovered, because they could only be recovered by the supply of sugarcane to the assessee-company. The Mysore Government realising the hardship appointed a Committee to investigate the matter and to make a report and recommendations. The Committee recommended that the assessee-company should ex gratia forgo some of its dues, and in the year of account ending 30-6-1952, the company waived its rights in respect of Rs.2,87,422. The company claimed this as a deduction under section 10(2)(xv) of 1922 Act. The ITO declined to make the deduction, because, in his opinion, this was neither a trade debt nor even a bad debt but an exgratia payment almost like a gift. An appeal to the AAC also failed. The Appellate Tribunal upheld the disallowance. On reference the High Court held that the expenditure was not in the nature of a capital expenditure, and was deductible as a revenue expenditure.

Held: To find out whether an expenditure is on the capital account or on revenue, one must consider the expenditure in relation to the business. Since all payments reduce capital in the ultimate analysis, one is opt to consider a loss as amounting to a loss of business. But this is not true of all losses, because losses in the running of the business cannot be said to be of capital. The questions to consider in this connection are: for what purpose was the money laid out? Was it to acquire an asset of an enduring nature for the benefit of the business, or was it an outgoing in the doing of the business? If money be lost in the first circumstances, it is a loss of capital, but if lost in the second circumstance, it is a revenue loss. In the first, it bears the character of an investment, but in the second, to use a commonly understood phrase, it bears the character of current expenses.

In instant case the amount was an advance against price of one crop. The Oppigedars were to get the assistance not as an investment by the assessee-company in its agriculture, but only as an advance payment of price. The amount, so far as the assessee-company was concerned, represented the current expenditure towards the purchase of sugarcane, and it made no difference that the sugarcane thus purchased was grown by the Oppigedars with the seedlings, fertilizer and money taken on account from the assessee-company. In so far as the assessee-company was concerned, it was doing no more than making a forward arrangement for the next year’s crop and paying an amount in advance out of the price, so that the growing of the crop might not suffer due to want of funds in the hands of the growers. There was hardly any element of investment which contemplated more than payment of advance price. The resulting loss to the assessee-company was just as much a loss on the revenue side as would have been, if it had paid for the ready crop which was not delivered.

Hence, the decision of the High Court was right.

The appeal was dismissed”.

We find that the assessee had duly offered the interest income on advance receivable from Shri.R.K.Jalan as business income in the earlier years and the same has been accepted as such by the revenue.

It is not in dispute that the assessee had indeed written off the balance principal portion of Rs. 47,02,013/- and interest receivable portion of Rs. 66,46,543/- in its books by treating the same as irrecoverable and due to the death of the concerned party. It is also not in dispute that the corresponding credit is given to the concerned party account in the books of accounts. We are in agreement with the arguments of the Learned AR that even otherwise the entire write off if not allowable in terms of section 36(1)(vii) read with section 36(2) of the Act is allowable as deduction as a regular trading loss u/s 28 of the Act. Reliance in this regard is placed on the decision of Hon’ble Bombay High Court in the case of Harshad J. Choksi vs CIT reported in (2012) 25 taxmann.com 567 (Bom), wherein the question raised before the Hon’ble Bombay High Court and the decision rendered thereon is reproduced below:-

‘Questions:

Whether if an amount is held to be not deductible as a bad debt in view of non-compliance of the condition precedent as provided under section 36(2), could the same be considered as an allowable business loss?

Whether, therefore, the amount of Rs.44.98 lakhs could be considered as an allowable business loss?

Held:

Section 28 imposes a charge on the profits or gains of business or profession. The expression 'Profits and gains of business or profession' is to be understood in its ordinary commercial meaning and the same does not mean total receipts. What has to brought to tax is the net amount earned by carrying on a profession or a business which necessarily requires deducting expenses and losses incurred in carrying on business or profession. The Supreme Court in the case of Badridas Daga v. CIT [1958] 34 ITR 10 has held that in assessing the amount of profits and gains liable to tax, one must necessarily have regard to the accepted commercial practice that deduction of such expenses and losses is to be allowed, if it arises in carrying on business and is incidental to it. [Para 10]

On the basis of the aforesaid decision, it can be concluded that even if the deduction is not allowable as bad debts, the Tribunal ought to have considered the assessee's claim for deduction as business loss. This is particularly so, as there is no bar in claiming a loss as a business loss, if the same is incidental to carrying on of a business. The fact that condition of bad debts were not satisfied by the assessee would not prevent him from claiming deduction as a business loss incurred in the course of carrying on business as share broker. [Para 11]

In fact, the Bombay High Court in the case of CIT v. R.B. Rungta & Co. [1963] 50 ITR 233 upheld the finding of the Tribunal that the loss could be allowed on general principles governing computation of profits under section 10 of the Indian Income-tax Act, 1922, which is similar/identical to section 28 of the 1961 Act. The revenue in that case urged that the assessee having claimed deduction as a bad debt the benefit of the general principle of law that all expenditure incurred in carrying on the business must be deducted to arrive at a profit cannot be extended. This submission was negatived by the Court and it was held that even where the debt is not held to be allowable as bad debts yet the same would be allowable as a deduction as a revenue loss in computing profits of the business under section 10(1) of the Indian Income-tax Act, 1922. [Para 12]

Therefore, the amount of Rs. 44.98 lakhs, which was held to be not deductible as bad debts in view of the provisions of section 36(2), could be considered as an allowable business loss. [Para 13]

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