Claim of Bad debts cannot be denied on grounds of higher amount: ITAT set aside order of AO

The issue in this appeal of the assessee is regard to the disallowance of bad debts amounting to Rs.7,86,78,212/-.

In this matter, the assessee is engaged in the business of real estate development and had written off Rs.9,81,13,042/- as bad debts on account of ‘property advances’ made to various parties during the normal course of business, which became irrecoverable. The Assessing Officer disallowed advances aggregating to Rs.7,86,78,212/- and allowed a sum of Rs.1,94,34,380/-, as it represented smaller advances of less than Rs.50.00 lakhs on the reasoning that these kind of write off is incidental to the business.

Aggrieved by the order of AO, assessee filed appeal before CIT(A) who confirmed the disallowance made by the AO.

Aggrieved by the above order, assessee peeferred appeal before the tribunal.

The assessee submitted that he had given advances for purchase of land un normal course of business and had written of these advances when it came to the conclusion that they are not recoverable. Further, assessee submitted that the AO had allowed the claim to the extent of Rs.1.94 crores and disallowed the balance amount of Rs.7.87 crores only for the reason that they are larger amounts. Accordingly he contended that the quantum of write off of the advance should not be a criteria for disallowing the claim.

ITAT was of the view that 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. Accordingly, the claim of the assessee is required to be examined either u/s 28 or u/s 37 of the Act and the issue requires fresh examination at the end of the AO.

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