S. 36(1)(vii) : Bad Debts-Business loss-Amount paid to builder towards acquisition of commercial premises-Write off of the amount as irrecoverable neither allowable as bad debt nor as business loss-Assessee to prove both conditions of section 36(1)(vii) and 36(2) of the Act are satisfied. [S. 28(i), 36(2), 37(1)]
The assessee is in the business of real estate development . The assessee advanced Rs 10 crore to C. Bhasali Developers Pvt Ltd for acquisition of commercial premises. The assessee contended that an amount was deposited with one developer towards acquisition of commercial premises two years prior to the assessment year in question (i.e., in 2007) and the project did not appear to make any progress, and consequently, the assessee sought return of the amounts from the builder. However, the latter did not respond. As a result, the assessee’s Board of Directors resolved to write off the amount as a bad debt in 2009. The Assessing Officer disallowed the claim. On appeal before the CIT(A) the assessee contended that alternatively the claim may be allowed as business loss u/s 37(1) of the Act, however the CIT(A) affirmed the order of the Assessing Officer. On appeal referring the object clause of the assessee allowed the claim of the assessee as business loss. On appeal High Court affirmed the order of the Tribunal. On appeal by Revenue the allowing the appeal the Court held that Section 36(1)(vii) of the Act gives benefit to the assessee to claim a deduction on any bad debt or part thereof, which is written off as irrecoverable in the accounts of the assessee for the previous year. This benefit is subject to Section 36(2) of the Act. It is obligatory upon the assessee to prove to the AO that the case satisfies the ingredients of both Section 36(1)(vii) and Section 36(2) of the Act. Court also held that on the facts of the case the advance written off is not allowable as business expenditure u/s 37(1) of the Act. (SLP (C) No. 672 of 2020 dated August 25, 2022)
PCIT v. Khyati Realtors Private Limited (SC) www.itatonline.org

[Coram : Hon’ble Shri Justice UDAY UMESH LALIT, Hon’ble Shri Justice S. RAVINDRA BHAT AND Hon’ble Shri Justice SUDHANSHU DHULIA]