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| DATE: | May 13, 2011 (Date of publication) |
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| Click here to download the judgement (mohan_meakin_bad_debt_business_expenditure.pdf) |
If “bad debt” not allowable u/s 36(1)(vii), claim for deduction u/s 37(1) can be raised for first time even before High Court
The assessee advanced sums to a supplier in order to obtain regular supplies. As the supplier failed to deliver the goods or to refund the advance, the assessee claimed the loss as a bad debt u/s 36(1)(vii). The AO rejected the claim though the CIT (A) allowed it. On appeal by the department, the Tribunal upheld the stand of the AO on the ground that the conditions of s. 36(2) were not satisfied. In the High Court, the assessee conceded that s. 36(1)(vii) was not applicable but pleaded for the first time that the loss should be allowed u/s 37(1) as a business loss. HELD upholding the claim:
(i) U/s 28 r.w.s. 29, computation of income has to be in accordance with the provisions contained in s. 30 to 43 which includes s. 37(1). If a loss of a debt does not come within s. 36(1)(vii), a claim can be made u/s 37(1). There is a clear distinction between a business expenditure and a business loss, the former is indicative of a volition but in loss it comes upon him so to speak as ab extra. Non-capital expenditure incurred for the purpose of business can be deducted u/s 37(1). The advances made by the assessee were not capital in nature and were of a type which would be within the contemplation of the words “laid out or expended wholly and exclusively for the purposes of the business”. S. 37 (1) is a residuary section extending the allowance to items of business expenditure and not of business losses which are deductible on the ordinary principles of commercial accounting (Chenab Forest Co 96 ITR 568 (J&K) & Mysore Sugar Co 46 ITR 649 (SC) followed);
(ii) Merely because the claim was made under one provision of the Act and not under another provision does not debar the assessee from claiming deduction u/s 37(1) even if it was not raised before the lower authorities.
The Orders of the ITAT and HCs referred above, as may be specially noted, bear out a clean but welcome departure from the rigid views invatirably used to be taken in the past. These are seen to have accorded due weight to the basic principles of commercial accounting.
The line of fresh thinking adopted / accepted in these cases, on issues such as, – deductibility of ‘infructuous capital expenditure’, ‘bad debt v loss incidental to business’ , one would urge, require to be kept in sharp focus. Further, by suitably but adequately covering such areas in the DTC Bill pending enactment, the tax adminitration could save itself, at least prospectively, from all such unproductive frivolous disputes and mindless litigation.
I respectfully disagree with the decision of the Hon’ble Delhi High Court on this issue. Section 37(1) is not meant to be an escape route to an assessee if it fails meet the conditions of Sec 36(1)(vii). The provisions of Sec 37(1) are not meant to be used as an alternate remedy. There is no overlapping of these two provisions. Hence on the facts of this case there does not appear to be a proper case in resorting to applying the provision of Sec.37(1)of the Act in giving relief to the assessee.