Ceramin India Private Limited Vs DCIT (ITAT Hyderabad)
ITAT Hyderabad held that if the assessee is not entitled to claim the loss of investment as bad debts, the same cannot be claimed as business loss as per his sweet will.
Facts-
The assessee is a company engaged in the business of trading in minerals & processing related to ceramics. It filed its return of income declaring total income at Rs.1,44,86,260 under normal provisions and book profit of Rs.1,42,80,309/- under the provisions of section 115JB of the Income Tax Act, 1961.
The AO observed from the profit and loss account that the assessee company had claimed an expenditure of Rs. 36,46,500/- towards ‘bad debts written off’ under the head ‘other expenses’.
The AO noted that out of the three advances, the advance given to Mr. Prbir Ghosh is a capital advance and the remaining two advances pertain to trade advances/material advances. Since the expenditure claimed with respect to bad debts written-off were not offered as income in the previous years, the Assessing Officer asked the assessee to show cause as to why the same should not be disallowed.
AO observing that the capital loss is not an allowable deduction against the business income, AO disallowed bad written off of Rs. 29,30,000/- and added to the total income.
CIT(A) not only he sustained the addition made by the AO of Rs.29,30,000/- but also directed the AO to verify the receipt of Rs.55 lakhs in the hands of the assessee company awarded by the Arbitrator Court and bring the same to tax.
Being aggrieved, the present appeal is filed by the assessee.
Conclusion-
In our opinion, when the assessee is not entitled to claim the same as bad debt, the assessee cannot claim the same as business loss as per his sweet will. The law is well settled on this aspect and business loss, if any, can be claimed by the assessee in the year of incurring of the expenditure and not as per his sweet will. In this view of the matter, the order of the CIT(A) sustaining the addition of Rs.29,30,000/- is upheld and the grounds raised by the assessee on this issue are dismissed.
FULL TEXT OF THE ORDER OF ITAT HYDERABAD
This appeal filed by the assessee is directed against the order dated 16.07.2018 of Learned Commissioner of Income Tax (Appeals)-1, Hyderabad relating to AY 2015-16.
2. Facts of the case, in brief, are that the assessee is a company engaged in the business of trading in minerals & processing related to ceramics. It filed its return of income on 28.11.2015 declaring total income at Rs.1,44,86,260 under normal provisions and book profit of Rs.1,42,80,309/- under the provisions of section 115JB. The case was selected for scrutiny under CASS and statutory notices u/s. 143(2) & 142(1) were issued and served on the assessee to which the AR of the assessee appeared before the AO from time to time and filed the requisite details.
3. The AO observed from the profit and loss account that the assessee company had claimed an expenditure of Rs. 36,46,500/-towards ‘bad debts written off’ under the head ‘other expenses’. From the ledger extracts and supporting documents of bad debts written off submitted by the assessee, the AO noted that the assessee had given advances to the following three parties:
i. Mr. Prabir Ghosh-Rs.84,30,000/- out of which Rs.29,30,000/-was written off
ii. M/s.Neo Mining & Minerals Pvt.Ltd. Rs.3,00,000/- out of which Rs.3,00,000/- was written off and
iii. M/s. Uni Sai Minerals-Rs.4,16,000/- out of which Rs.4,16,000/- was written off.
The AO noted that out of the three advances, the advance given to Mr. Prbir Ghosh is a capital advance and the remaining two advances pertain to trade advances/material advances. Since the expenditure claimed with respect to bad debts written-off were not offered as income in the previous years, the Assessing Officer asked the assessee to show cause as to why the same should not be disallowed.
3.1 In response, the assessee submitted that the bad debts written off of Rs.36,46,500/- are allowable as they pertain to business activity and in support of its contention, the assessee relied on the following case laws:-
* CIT vs. Mysore Sugar Co. Ltd.(1962) 46 ITR 649(SC)
* Chenab Forest Co vs. CIT(1974) 96 ITR 568(J&K)
* Binani Cement vs. CIT(2015) 60 Taxman.com 384(Calcutta)
4. However, the AO was not satisfied with the arguments advanced by the assessee. He referred to the provisions of section 36(2) and noted that any debt written off to be eligible for deduction should have been part of total income of the year under consideration or of an earlier previous year. However, the assessee does not fulfil the criteria. He noted that out of three advances written off, two debts written off, i.e. M/s. Neo Mining & Minerals Pvt.Ltd & M/s.Uni Sai Minerals relate to advances for purchase of raw materials, i.e. trade advances. However, the bad debt written off in the name of Mr. Prabir Ghosh of Rs.29,30,000/- was not allowable as the advance given is for transfer of lease of china clay mines situated at Jankarpalli village, Rengali Sub-division, Sambalpur District, Orissa with an area of 100 acres, which is capital in nature. Since the capital loss is not an allowable deduction against the business income, the Assessing Officer disallowed bad written off of Rs.29,30,000/- and added to the total income.
5. Before the ld.CIT(A), the assessee made elaborate arguments. It was submitted that the assessee company had written off bad debts amounting to Rs.36, 46, 500/- in the statement of profit & loss under the head “Other Expenses”. The aforesaid amount represented advances given to suppliers which were considered as irrecoverable during the year and hence, written off as bad debts in the books of accounts of the assessee. This bad debts written off was claimed as an allowable expense u/s.36(1 )(vii) of the Act while filing return of Income for the concerned year. It was submitted that out of the aforesaid advances of Rs.36,46,500/- an amount of Rs,29,30,000/- was pertaining to advances given to Mr. Prabir Ghosh to lease a china clay situated at village Jankarpalli in Sambalpur district, Orissa in the year 2006, An agreement was executed between the assessee and the lessor and advance of Rs.84,30,000/- was paid as consideration in different instalment to the lessor.it was submitted that the assessee was entitled to extract clay from mine from the date advance was paid to the lessor, Due to certain unavoidable circumstances, the lease of the china clay mine was subsequently cancelled and the assessee did not receive any rights in china clay mine as envisaged in the Agreement. Since advances were paid to the lessor and the assessee did not have any lease rights on the mine, the assessee filed an Arbitration petition against the lessor under the Arbitration and Conciliation Act. 1996. The Arbitrator awarded a compensation of Rs,55,00,000/- in favour of the assessee. The above compensation was awarded to the assessee after considering deduction towards the cost of China clay extracted and cost of use of plant machinery of the lessor by the assessee at the clay mine amounting to Rs.29,30,000/-. Considering the fact that the above difference between the advances given to Mr. Prabhir Ghosh and the award granted by the Arbitrator represents the cost of materials extracted by the assessee and such materials do not accrue any enduring benefit to the Appellant, the same was charged to the Profit and loss account for the concerned year. It was submitted that in anticipation of getting the china clay mine as per the agreement with Mr. Prabir Ghosh, no cost of purchases were booked by the assessee in its books of accounts. It was argued that when sales were made relating to manufactured goods out of such raw materials, the same had formed part of income of the Appellant. Accordingly, it cannot be said that the assessee has not offered the corresponding income to tax. It was submitted that as per the award of the arbitrator, the aforesaid amount of Rs.29,30,000/-was adjusted for the following reasons:
