Advance given for purchase of land in course of Real Estate business if not recovered is allowed as Expense: ITAT

The Income Tax Appellate Tribunal (The “ITAT”) in the matter of Canara Housing Development Company said that advances that are given for the purchase of land in the normal course of business of carrying on real estate development, if not recoverable could be allowed as either trading loss under section 28 of the Act or as expenditure under section 37 of the Act.

The facts relating to the issue are stated in brief. The assessee is engaged in the business of real estate development. The A.O. noticed that the assessee has written off Rs.9,81,13,042/- as bad debts. The assessee submitted that the amount so written off represents ‘property advances’ made to various parties during the normal course of business, which became irrecoverable. The A.O. noticed that the assessee has not entered into any MOU/Agreement with the parties to whom advances have been paid. In the absence of the same, the A.O. held that the assessee could not establish beyond doubt that the advances made are indeed land advances and not any other payment. Accordingly, the AO took the view that the claim of write-off of large advances exceeding Rs.50.00 lakhs should be disallowed.

ITAT Order:

8. We heard the rival contentions and perused the record. We notice that the A.O. has disallowed part of claim of the assessee only for the reason that the quantum of advance given is on higher side, while the A.O. has himself allowed the claim in respect of smaller advances observing that they are incidental in the business of real estate development. From the assessment order, we notice that the A.O. has fixed a limit of Rs.50 lakhs for this purpose and accordingly, disallowed advances exceeding Rs.50 lakhs. Admittedly, that cannot be a criterion for making disallowance of the claim made by the assessee. Further the AO has allowed claim in respect of a party, but disallowed similar claim made in respect of very same person only for the reason that the said advance is on higher side. This stand of the AO is also not acceptable.

9. We notice that the Ld. CIT(A) has expressed the view that the assessee has not proved before the A.O. that the attempts made by it for recovery of the amount has failed and further the debtors were not financially sound to repay the debt. We notice that the assessee has canvassed its claim as bad debts u/s 36(1)(vii) of the Act and hence it has placed its reliance on the decision rendered by Hon’ble Supreme Court in the case of TRF Limited (supra). The Ld CIT(A) also appears to have proceeded on that line only by observing that writing off of bad debt is not an empty formality and assessee cannot convert any live amount to bad debt only on the basis of technical rule of write off.

10. However, in our view, the advances given for purchase of land in the normal course of business of carrying on real estate development, if not recoverable could be allowed as either trading loss u/s 28 of the Act or as expenditure u/s 37 of the Act. In fact, the AO has accepted the loss to the extent of Rs.1.94 crores specifically observing that these kinds of payments/write off are incidental to the business, meaning thereby, the AO has actually applied the provisions of sec.28/37 of the Act. Before us, the Ld. A.R. has furnished a written submission explaining the reasons, which compelled the assessee to write off these amounts. We noticed that the Ld CIT(A) has proceeded to examine the claim as bad debts u/s 36(1)(vii) of the Act and the AO has disallowed the claim only for the reason that the amount written off are larger advances. In our view, the criteria applied by the AO for allowing the claim to the extent of Rs.1.94 crores should be applied to other advances also.

11. In view of the foregoing discussions, we are of the view that the claim of the assessee is required to be examined either u/s 28 or u/s 37 of the Act. Accordingly, we are of the view that this issue requires fresh examination at the end of the A.O. Accordingly, we set aside the order passed by the Ld. CIT(A) on this issue and restore the same to the file of the A.O. with the direction to examine the claim of the assessee u/s 28 / 37 of the Act. The assessee should be given adequate opportunity of being heard.

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