Advance Write-Off Allowed as Business Loss When Linked to Commercial Purpose: ITAT Delhi

Unison Hotels Pvt. Ltd. Vs ACIT (ITAT Delhi)

In this appeal, the Tribunal examined whether advances written off by a hotel company were allowable as deductions, either as bad debts under section 36(1)(vii) or as business losses under sections 28 and 37(1) of the Income Tax Act. The assessee had written off three advances: ₹3.27 crore paid as security deposit for acquiring rights to renovate and operate a restaurant property, ₹1.50 crore advanced to an individual allegedly to secure fabric supply for hotel operations, and ₹11.06 lakh paid as earnest money deposit in a joint bid for natural gas supply.

On the ₹3.27 crore deposit, the Tribunal accepted that the amount was paid in the ordinary course of business to secure a 20-year right to renovate and operate a restaurant property connected with hotel operations. Due to a major fire at the hotel premises in 2008, the assessee could not fulfill the agreement terms, repeatedly sought refund, and eventually recovered only ₹72.50 lakh, writing off the balance. The Tribunal held that although the claim did not satisfy bad debt conditions under section 36, the unrecovered deposit constituted a business loss in the revenue field arising from commercial expediency and was allowable under sections 28 and 37(1). The disallowance was deleted.

On the ₹1.50 crore advance, the Tribunal upheld disallowance. The assessee argued that the advance, though interest-bearing, was given to secure timely supply of fabric for hotel use. However, the Tribunal found no evidence that fabric was ever supplied, noted that the advance was made personally to an individual rather than to a business entity, and observed that charging interest at 18–24% weakened the claim that it was a business advance. It held that the transaction was in the nature of a friendly loan, not an advance in the ordinary course of business, and therefore not deductible as business loss.

On the ₹11.06 lakh earnest money deposit, the Tribunal accepted that the assessee joined a bidding process to procure natural gas for hotel operations at a discounted price. When the bid failed and the deposit was forfeited, the assessee wrote it off. The Tribunal held that the payment was made wholly and exclusively for business purposes, supported by documentary evidence, and the forfeiture represented a revenue loss incidental to business. Accordingly, the addition was deleted.

As a result, the appeal was partly allowed, with relief granted for the security deposit and earnest money forfeiture, while the disallowance of the personal advance was sustained.

FULL TEXT OF THE ORDER OF ITAT DELHI

This appeal by the Assessee is against the order of National Faceless Appeal Centre (NFAC) [hereinafter referred to as the ‘Ld. CIT(A)] order dated 12.08.2024 arising out of the assessment order dated 23.12.2016 passed under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the ‘the Act’) passed by the Additional Commissioner of Income -tax, Range-27, New Delhi, (hereinafter referred to as the ‘AO’) pertaining to Assessment Year (AY) 2013-14.

2. Brief facts of the case: The assessee company E-filed its return of income declaring total income of Rs. 7,21,35,196/- for the Assessment Year 2014-15 on 29.11.2014. The case was selected for limited scrutiny in CASS. Accordingly, statutory notice u/s 143(2) of the I.T. Act, 1961, was issued on 01.09.2015 and served upon the assessee company. Questionnaire dated 30.08.2016 u/s 142(1) of the Income Tax Act, 1961 was sent to the assessee company calling for details, submissions and explanations as mentioned in them. The AO further noted that after the approval of PCIT-9, the case was taken up for complete scrutiny which was duly informed to the assessee during the course of the discussion. In response to the notices issued, Sh. Rajesh Rustagi and Ms. Shivangi Gupta, CA/Authorized Representative appeared on behalf of the assessee company, attended assessment proceedings from time to time and filed submissions and necessary details as requisitioned and discussed the case.

2.1 Disallowance on advances written off: The AO on perusal of Note 27 ‘Operating and general expenses” noted that the assessee had debited an amount of Rs. 4,90,65,185/- as advance written off in the P&L A/c. Vide order sheet entry dated 16.12.2016, the assessee was asked by the AO to justify the claim of advances written off along with the details. Vide reply dated 20.12.2016, the assessee submitted as under:-

“The advances written off during the year consist of ICD extended as well as the transaction advance given to parties which inspite of best efforts basis could not be recovered and final. The management of the company took the decision to write off those inter corporate deposit/transaction advance which became bad by providing the same into P&L A/c.

Further, the ICD of Rs. 1.50 crore extended to O.P. Parasrampuria owner of Parasrampuria synthetic which is currently a debt written nonperforming assets with Bank/FI’s on 1996 and the mutual discussion was carrying on even for providing the agricultural land in remote village in setting of the ICD. But the same has also not materialized.

The amount of Rs. 11.06 lacs was given in the joint bidding with Sankalp Oil & Natural Resources to Ministry of Petroleum and Natural Gas. The bidding was not gone in our favour the aforesaid amount was forfeited by Ministry of Petroleum and Natural Gas in terms of the bidding Terms & Conditions.

In addition to the above, the amount of Rs. 3.27 crore given to Gomti Food Spices Pvt. Ltd. for some land transaction for joint development and the same development could not be proceed with due to legal bottle neck in the land and title itself. Though the company would able to recover this part of advance extended in 2007. Keeping in view of the above as already narrated, the management has decided to write off the aforesaid amount.”

2.2 Thereafter, the AO noted that the submissions of the assessee was required to be seen in the light of Sections 36(1)(vii) and 36 (2)(i) of the Act which for the purpose of convenience was reproduced by the AO hereunder:

“36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28-

(vii) subject to the provisions of sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year:

Provided that in the case of an assessee to which clause (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause.

(2) In making any deduction for a bad debt or part thereof, the following provisions shall apply-

(i) no such deduction shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year, or represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee;”

2.3 The AO further noted that the plain reading of S.36 and settled law on the subject shows that the pre-requisites for claim of bad debt are as follows:

“1. It must be a debt.

2. Such debt must be revenue in nature as held in 77 ITR 751(SC) and 321 ITR 43 (Bom).

3. Such debt must be incidental to the business or profession of the assessee.

4. Such debt must have been taken into account in computing the income of the assessee in the earlier years.”

2.4 The AO further noted that during the year the assessee company was running a 5- star hotel by the name of ‘The Grand’ and it was not in the business of lending business. Further, taking note of the reply of the assessee, the AO noted that these were inter-corporate deposits (ICDs) or advances given for acquisition of capital assets. The AO further noted that it was not the case of assessee that he had shown any business income in any of the earlier years from these ICDs. Accordingly, the AO held that, therefore, as per Sec 36(1) (vii) the claim of Rs. 4,90,65,185/- as advances written off in the P&L A/c was not allowable and accordingly, added to the total income of the assessee.

3. Aggrieved with the said order, the assessee filed an appeal before the Ld. CIT(A).

4. The Ld. CIT(A) dismissed the appeal of the assessee in respect of the above disallowances/ addition.

5. Aggrieved with the said order, the assessee is in appeal before us on the following grounds of appeal:

“1. That the issuance of Notices u/s 143(2) for AY. 2014-15 on 01-09-22015, 09-09­2015 and 01-08-2016 by the Circle 27(1) Delhi of the Act was without jurisdiction as the assessment u/s 143(3) for AY. 2013-14 was completed by the DCIT Circle 27(2) Delhi on 29/03/2016 and in absence of transfer of jurisdiction of the assessee from the DCIT/ACIT Circle 27 (2) Delhi to Circle 27(1) Delhi, entire proceedings are bad in law and deserves to be quashed.

2. That the impugned assessment order dt. 23/12/2016 is bad in law because assumption of jurisdiction by the JCIT/Addl. CIT Range 27 Delhi is without any jurisdiction transfer order from the competent authority transferring the same from the DCIT/ACIT Circle 27(1) Delhi to the JCIT/Addl. CIT Range 27 Delhi.

3. That the impugned assessment order is bad in law as the case was selected for limited scrutiny in CASS but, the case was converted for complete scrutiny by the JCIT/Addl. CIT Range 27 Delhi without approval granted by the competent authority, i.e. PCIT-9 Delhi, and in any case, without informing the assessee.

4. That the addition/disallowance of Rs. 4,88,62,860, being the amount of advances written off, ignoring that the said amounts were given in the normal course of business and non-recovery of the same is a trading loss allowable to the assessee and also ignoring the submissions and evidences placed on record, is illegal and unjustified. Thus, the addition so made should be deleted.

5. That the addition/disallowance of Rs. 3,27,56,000. being the amount of advance written off, by treating such advance as capital expenditure and also ignoring the submissions and evidences placed on record by assessee, ignoring the fact that the amount was given by assessee, engaged in the business of running a hotel, to M/s Gomiti Food and Spices Pvt. Ltd. for taking on rent a property for the purpose of running a restaurant, is advance given wholly and exclusively for the purpose of hotel business carried on by the assessee, and therefore, non-recovery of the same is a trading loss allowable to the assessee. Thus, the addition so made is illegal and unjustified and should be deleted.

6. That the addition/disallowance of Rs. 1,50,00,000 being the amount of interest bearing advance written off whose interest was duly offered to tax in ITR, by treating such advance as not incidental to the business carried on by the assessee and also ignoring the submissions and evidences placed on record by assessee, ignoring the fact that the amount was given by assessee, engaged in the business of running a hotel, to Mr. O.P. Parasrampuria for securing timely delivery of fabric for various uses in its hotel business, is advance given wholly and exclusively for the purpose of hotel business carried on by the assessee, and therefore, non-recovery of the same is a trading loss allowable to the assessee. Thus, the addition so made is illegal and unjustified and should be deleted.

7. That the addition/disallowance of Rs. 11,06,860, being the amount of advance written off, by treating such advance as not incidental to the business carried on by the assessee and also ignoring the submissions and evidences placed on record by assessee, ignoring the fact that the amount was given by assessee, engaged in the business of running a hotel, to M/s Sankalp Oil and Natural Resources Pvt. Ltd. for joint participation on consortium basis for bidding in a tender for ensuring supply of gas required by the assessee for its hotel business at a discounted price, is advance given wholly and exclusively for the purpose of hotel business carried on by the assessee, and therefore, non-recovery of the same is a trading loss allowable to the assessee. Thus, the addition so made is illegal and unjustified and should be deleted.

8. The appellant craves leave to amend, delete or add any grounds of appeal before or during the course of hearing of the appeal.”

5.1 At the outset, the Ld. AR submitted that the assessee would argue the grounds on merits and will not pursue the legal grounds. Hence, ground no. 1 to 3 are dismissed as not pressed. Ground no. 4 of the appeal is general in nature and does not require any separate adjudication. The issues and the specific grounds of appeal in this case are discussed disallowance wise.

6. Write off advance of Rs. 3,27,56,000/- to M/s Gomti Foods & Spices (P) Ltd.

6.1 The relevant extract of the order of the Ld. CIT(A) confirming the disallowance of Rs. 3,27,56,000/- is reproduced as under:

“The appellant has given varying explanation regarding the advance given. As explained before the AO, the amount of Rs. 3.27 crore given to Gomti Foods & Spices Pvt. Ltd. Spices Pvt. Ltd. was for some land transaction for joint development and the same development could not be proceed with due to legal bottle neck in the land and title itself. In such instance, the expenditure was capital in nature and therefore, beyond the scope of allowance u/s. 37 of the I. T. Act because it would have led to development of a capital asset which would have given long term & enduring benefit to the appellant.

Secondly, even if the argument of the appellant is accepted that the advance was given for the renovation and re-development of the property of Gomti Foods & Spices Pvt. Ltd. for the purpose of a fine dining restaurant on a long term lease of 20 years, on revenue sharing basis is considered, it would still fall within the ambit of capital expenditure as this would have led to long term rights for use of the property with enduring benefits.

M/s. Gomti Foods & Spices Pvt. Ltd. had granted the appellant exclusive rights to renovate and re-develop the property for use as a fine dining restaurant and Gomti Foods & Spices Pvt. Ltd. and had agreed to transfer rights to use of property to appellant for 20 years in exchange of 4 crores as refundable deposit and a monthly rental of 1% of the monthly gross sales from the restaurant.

Further, considering the facts of the case and the evidences on record, along with the judgment of the Supreme Court in the above mentioned case law as discussed above, Assam Bengal Cement Co. Ltd. vs. Commissioner of Income Tax, West Bengal, (1955) 27 ITR 34 (SC), Pingle Industries Ltd. vs. Commissioner of Income Tax, (1960) 40 ITR 67 (SC), Commissioner of Income Tax, U.P. Vs Maheshwari Devi Jute Mills Ltd., (1965) 57 ITR 36 (SC). R.B. Seth Moolchand Suganchand vs. Commissioner of Income Tax, Delhi, (1973) 3 SCC 257, CIT, Bombay vs. Jalan Trading Co., (1985) 4 SCC 59, Aditya Minerals Pvt. Ltd. vs. Commissioner of Income Tax, (1999) 239 ITR 817, it is held that the advance given by the appellant to M/s. Gomti Foods & Spices Pvt. Ltd. was in the nature of capital expenditure and therefore, cannot be allowed as revenue expenditure under provision of section 37 of the I. T. Act.

In view of the same, the AO was justified in making the addition.

Therefore, this ground of appeal taken by the appellant is dismissed.”

6.2 In this regard, the specific ground being ground no. 5 of the appeal is reproduced as under:

“5. That the addition/disallowance of Rs. 3,27,56,000. being the amount of advance written off, by treating such advance as capital expenditure and also ignoring the submissions and evidences placed on record by assessee, ignoring the fact that the amount was given by assessee, engaged in the business of running a hotel, to M/s Gomiti Food and Spices Pvt. Ltd. for taking on rent a property for the purpose of running a restaurant, is advance given wholly and exclusively for the purpose of hotel business carried on by the assessee, and therefore, non-recovery of the same is a trading loss allowable to the assessee. Thus, the addition so made is illegal and unjustified and should be deleted.”

6.3 At the time of hearing, the Ld. AR submitted as under:

“Re: Gomti Foods

– The assessee has entered into an agreement dated 15.11.2007 between Gomti Foods & Spices (P.) Ltd. on 15.11.2007. [Refer: P.B. Page 34-38]

– The broad contours of the said agreement are as follows:

i. Gomti foods was to grant the assessee exclusive rights to renovate and use 2200 sq. ft. property for 20 years as a restaurant, after receiving Rs. 4 crore refundable deposit and 1% monthly gross sales as rent.

ii. Deposit refundable post-term; rent starts after 1-year development completion. No partnership or agency created; governed by Indian law with written amendments only.

iii. The assessee was to pay Rs. 4,00,00,000 as refundable security deposit for 20-year right to renovate and use the 2200 sq. ft. property at 4 Regal Building, Parliament Street, New Delhi, as a restaurant;

iv. The development was to be completed by the assessee within a period of 1 year from the date of signing of this agreement and will be put to use as a restaurant by 31/ 12/ 2008.In case the assessee would be unable to complete the same and put to use as stipulated within 1 the period of 1 year’, the agreement was to be considered as dismissed and Gomti foods had the power to forfeit the deposit of Rs. 4,00,00,000.

– Subsequently, the major fire, which broke out in the basement kitchen of the Grand hotel on 26.01.2008, which quickly spread to other floors, which required 40 fire tenders and three hours to control it. [Refer: Media Report published in Times of India P.B. Page 43-45 & Fire Report in Delhi Fire Services, Govt. of NCT, Delhi @ Page 46]

– Thus, the assessee was unable to fulfil the conditions stipulated in the aforesaid agreement. In these circumstances, the assessee repeatedly requested Gomti foods for refund of the deposit of Rs.4,00,00,000/-.

– The following table demonstrates the number of communications with Gomti foods:

S.No.	Letter Dated	Reference (Pg.)
1.	05.05.2008	@ P.B. Page 48
2.	10.10.2008	@ P.B. Page 49
3.	20.10.2008	@ P.B. Page 50
4.	30.04.2009	@ P.B. Page 51
5.	30.05.2009	@ P.B. Page 52
6.	17.05.2011	@ P.B. Page 54
7.	12.09.2011	@ P.B. Page 55

– On 30.04.2011 & 31.05.2013, Gomti Foods decided to refund Rs. 72.50 lakhs on humanitarian grounds and refused to pay the balance of Rs. 3.27 crores. [Refer: P.B. Page 53 & 56]

– Thereafter, realizing the bleak chances of recovery, the management vide resolution dated 24.03.2014 decided to write off the balance of Rs. 3.27 crores in the books of account. [Refer: P.B. Page 57]

– At the outset, it is submitted that the case of the assessee is squarely covered by the decision of the coordinate bench of this Hon’ble Tribunal in the case of Outworks Solutions Pvt. Ltd. vs JCIT: ITA No. 4234/Del/2015 (Delhi – Trib.), wherein in the similar circumstances, the Hon’ble Bench has deleted the addition made by the AO. [Refer: Para 7-9].

– To the similar effect are the following decisions:

• • • • DCIT vs. Ebony Retail Holdings Pvt. Ltd.: ITA No. 2825/Del/2014 (Delhi – Trib.) [Refer Para 4.5]
      • ACIT vs M/s Benetton India Pvt. Ltd: ITA No. 1091/Del/2018(Delhi – Trib.) [Para 7­12]
      • CIT vs. Pricol Ltd.: [2021] 130 com 459 (Madras) [Para 4-7]
      • DCIT vs V.K. Construction Works (P.) Ltd.: [1996] 56 ITD 399 (CHD.) [Para 5-10]
      • Thackers H.P. & Co. vs CIT: 134 ITR 21 (MP)

In view of the above, it is respectfully submitted that the write off of security deposit is

allowed as deduction under section 37(1) of the Act, and the same needs to be deleted.”

6.4 The Sr. DR supported the orders of the authorities below.

6.5 We have heard both the parties and perused the material available on record. During the year, the assessee was engaged in the business of running a 5-star Hotel in the name and style ‘The Grand, New Delhi at Vasant Kunj’. As part of its hotel business, the assessee paid a deposit of Rs. 4.00 crores for 20-year right to renovate and use the 2200 sq. ft. property at 4 Regal Building, Parliament Street, New Delhi, as a restaurant to M/s Gomti Foods Spices Ltd. vide an agreement dated 15.11.2007 (placed at page no. 34-38 of the paper book). In this regard, the assessee submits that however, due to a massive fire at its premises i.e. at Grand Hotel in the year 2008, the assessee was unable to fulfil the conditions stipulated in the said agreement with M/s Gomti Food Spices Ltd. and repeatedly requested M/s Gomti Food Spices Ltd for the refund of Rs. 4 crores. In this regard, the assessee has submitted necessary documents in its support placed at page no. 48-55 of the paper book to show that the assessee made all efforts to get the securities deposits refunded but was able to receive a refund of Rs. 72.50 lakhs. Further, it is submitted that realizing the bleak chances of recovery, the management vide resolution dated 24.04.2014 decided to write of the balance of Rs. 3.27 crores in its books of accounts. On similar facts, the Co­ordinate Bench of the Tribunal, in the case of DCIT vs. Ebony Retail Holding Pvt. Ltd. (supra) allowed a similar claim of the assessee. The relevant extract of the said order is reproduced as under:

“7. Before us, the ld. AR vehemently stated that the said amount was given as security deposit towards rented premises. It is the say of the ld. AR that since the premises was destroyed in fire and the assessee had to vacate the said premises, he requested the landlord for refund of the security deposit. The request was declined and, therefore, the assessee was left with no choice but to write off the said security deposit and the same should be allowed as legitimate business expenditure u/s 37/28 of the Act.

8. Per contra, the Ld. DR supported the findings of the AO.

9. We have given careful consideration to the orders of the authorities below. No doubt, the assessee claimed write off as bed debt but it is equally true that the assessee did explain the sequence of events which prompted it for the said write off. There is no denying that the assessee does not fulfil the conditions mandated in section 36(2) r.w.s 36(1)(vii) of the Act. It is equally true that the loss of security deposit is business loss in the revenue field because the said security deposit was given in the ordinary course of business of the assessee and since the assessee had to shift the business premises on the wake of the fire, the write off became imminent because the landlord declined to refund the security deposit. In our considered opinion, the write off has to be considered in the light of provisions of section 28 r.w..s 37 of the Act. We, accordingly, set aside the findings of the CIT(A) and direct the AO to delete the disallowance of Rs. 8,31,852/-“

(emphasis supplied by us)

6.6 As noted above, the advance of Rs. 4.00 crores made by the assessee to M/s Gomti Foods Spices Ltd. was given in the ordinary cause of business and the assessee could not execute the terms of the agreement due to the massive fire. The advance even though not satisfying the condition of section 36(2) r.w.s. 36(1)(vii) of the Act but the same has to be considered in the light of provisions of section 28 r.w..s 37 of the Act and it is considered as a business loss. Accordingly, we set aside the findings of the CIT(A) and direct the AO to delete the disallowance of Rs. 3,27,56,000/-. Ground no. 5 of the appeal is allowed.

7. Issue of advance written off Rs. 1,50,00,000/- to Mr. O.P. Parasrampuria.

7.1 The relevant extract of the order dismissing the appeal of the assessee is reproduced as under:

The appellant during the course of the assessment proceedings had made the submissions in this regard as following:

“Further, the ICD of Rs. 1.50 crore extended to O.P. Parasrampuria owner of Parasrampuria synthetic which is currently a debt written nonperforming assets with Bank/Fl’s on 1996 and the mutual discussion was carrying on even for providing the agricultural land in remote village in setting of the ICD. But the same has also not materialized.”

The Assessing Officer in the assessment order has stated that the appellant was in business of running a five star hotel and not in the money lending business. Therefore, the same has been disallowed by the AO.

The appellant during the appellate proceedings has made submissions which have been discussed in Para C above. The relevant extract of the submission is reproduced as below:

O.P. Parasrampuria

1. Insofar as advance of Rs. 1.50 Crore written off during the year under consideration and claimed as deduction is concerned, briefly, relevant facts are that the assessee had given interest bearing loan of Rs. 2.70 Crore to Mr. O.P. Parasrampuria, Chairman of Parasrampuria Group in FY. 1995-96, carrying interest ranging from 18-24% in 3 tranches of Rs. 1 Crore on 15/11/1995, Rs. 1 Crore on 04/01/1996 and Rs. 70 Lakh on 31/01/1996, out of which Mr. O.P Parasrampuria returned Rs. 1.20 Crore in FY. 1996-97, resulting into balance advance of Rs. 1.50 Crore given by the assessee to Mr. Parasrampuria as on 31/03/1997. The assessee credited the interest received from Mr. O.P Parasrampuria to P&L A/c and thereby offered such business income to tax. As proof, assessee submitted evidences to the AO explained in detail hereinafter

1. The objective of the assessee behind giving loan and advance to Mr. O.P Parasrampuria was not to earn interest, but to secure timely delivery of fabric from Parasrampuria Group, textile mill owner, for various uses in its hotel business like curtain, bed sheet, linen, etc. Mr. O.P. Parasrampuria had assured the assessee to supply required fabric to assessee not only on priority basis but also at a discounted price as compared to its prevailing market selling price on the date of delivery of fabric. Hence, the loan and advance given by the assessee to Parasrampuria Group was wholly and exclusively for the purpose of business carried on by the assessee.

2. Subsequently, the Parasrampuria Group came into financial distress and insolvency proceedings were initiated against the Parasrampuria Group. Consequentially, Mr. O.P. Parasrampuria did not pay the balance amount of Rs. 1.50 Crore. The company consequently followed up with Parasrampuria Group for seeking refund of aforesaid amount of Rs. 1.50 Crore but of no avail. Mr. O.P. Parasrampuria kept on assuring the assessee about returning the loan amount, but never repaid. Eventually, keeping in view the severely distressed financial position of Mr. O.P. Parasrampuria and its Group companies and the pending litigation and ongoing insolvency proceedings against them, the management of the assessee-company decided to write off the loan in FY. 2013-14 by passing a board resolution.”

The appellant has stated that the advance of Rs. 1.50 crores written off, were interest bearing loan of Rs. 2.70 crores given to Mr. O.P. Parasrampuria, Chairman of Parasrampuria Group in F.Y. 1995-96 at interest rates bearing of 18 to 24%. The appellant has submitted that the objective was not to earn interest but to ensure the timely delivering of fabrics from the Parasrampuria Group which is in textiles business. The appellant has also contended that it was also to ensure a delivery of fabrics on priority basis and on discounted price.

The submission furnished by the appellant does not appear to be justified. a) The advance has not been made to the Parasrampuria Group but to its Chairman O.P. Parasrampuria. Such advance of interest bearing loan that too at exorbitant interest rates of 18 to 24% appear to be clearly in a personal capacity. The loans were neither incidental to the business of the appellant nor related to its principal business activity

The appellant is not in the money lending business but in the hotel industry. If it was to be a business transaction, the advance so made, should have been provided to the company of the Parasrampuria Group, if it was for the purpose of providing fabrics for five star hotels as has been claimed by the appellant.

b. Secondly, it is not the case of the appellant that from the year F.Y. 1995-96, to the F.Y. 2013-14, in which the advance was written off, the Parasrampuria Group companies had provided any fabric to the appellant on priority basis or on discounted prices. In fact, there is no evidence submitted that any delivery of fabric had been made by the Parasrampuria Group companies, for allegedly which these advances had been given. The very fact that Shri O.P. Parasrampuria had returned some loans, debunks the explanation of the appellant because had the transaction been genuine, fabric would have been supplied, not loans returned.

c. From the facts and evidences on record, it is seen that the advances which have been written off, were not in the nature of expenses incidental to the business of the appellant and hence were not allowable as per the provisions of section 37 of the I. T. Act. Giving of loans on interest was not the principal business of the appellant, nor was it incidental to its business activities and therefore, the Assessing Officer had rightly disallowed the same.

Reliance in this regard is also placed on the following judgments of the High Court:

Ashok Leyland Ltd. v. ACIT (2022) 288 Taxman 514 /(2023) 455 ITR 526 (Mad.) (HC)

In this case, the Assessee has advanced certain amount on interest. After some years the loan was written off as irrecoverable amount and claimed as business loss. The Assessing Officer disallowed claim on ground that money lending and banking were not principal activities and that advances were transactions on capital account and, therefore, loss suffered by assessee was capital loss which was neither admissible under section 36(1)(iii) nor under section 37(1) of the Act.-Commissioner (Appeals) confirmed order of Assessing Officer on premise that putting surplus money as inter corporate deposit for earning of interest could not be said to be incidental to business or during ordinary course of business. Tribunal held that loss incurred by assessee in respect of loan advanced was in nature of capital loss and was not allowable under section 28(1) of the Act. (AY. 2000-01).

Salem Mangnesite (P.) Ltd. v. Commissioner of Income-tax-III”, Bombay [2009] 180 Taxman 545 (Bombay), High Court

In this case, the assessee-company, which was solely in business of mining, had lent certain amount to its wholly owned subsidiary company for construction of a jetty. Subsequently, the subsidiary company suffered loss and was not in a position to repay said loan. Therefore, assessee accepted a small amount in full and final settlement of said loan and wrote off remaining amount. It claimed deduction of amount written off on ground that it was loss incidental to its business. The Hon’ble High Court while adjudicating “Whether when loan granted to subsidiary company did not spring directly from business of assessee-company and was not incidental to it, amount written off by assessee could be allowed as a deduction under section 28.” Held that the same was not incidental and could not be allowed as a deduction.

In view of the above discussion, facts of the case and following the decision of the High Court as discussed above, it is held that the advance of Rs. 1.5 crores written off during the year is not an allowable deduction and therefore, the AO was justified in making the addition on this account. Hence the ground of appeal of the appellant in this regard is dismissed.”

(emphasis supplied by us)

7.2 In this regard, the specific ground being ground no. 6 of this appeal is reproduced as under:

“ That the addition/disallowance of Rs. 1,50,00,000, being the amount of interest bearing advance written off whose interest was duly offered to tax in ITR, by treating such advance as not incidental to the business carried on by the assessee and also ignoring the submissions and evidences placed on record by assessee, ignoring the fact that the amount was given by assessee, engaged in the business of running a hotel, to Mr. O.P. Parasrampuria for securing timely delivery of fabric for various uses in its hotel business, is advance given wholly and exclusively for the purpose of hotel business carried on by the assessee, and therefore, non-recovery of the same is a trading loss allowable to the assessee. Thus, the addition so made is illegal and unjustified and should be deleted.

7.3 At the time of hearing, the Ld. Sr. AR submitted as under:

“ Re: O.P. Parasrampuria

The assessee has granted various advances to one O.P. Parasrampuria in year 1995-to 2000. [Refer: P.B. Page 58 & 81] with an underlying objective of procuring fabric such as curtains and bed sheets for use hotel business.

However, despite various communications demonstrated as follows, the assessee was not able to neither procure any material and nor was able to recover any sums advanced:

S.No.	Letter Dated	Reference (Pg.)
1.	02.04.2001	@ P.B. Page 71
2.	05.04.2002	@ P.B. Page 72
3.	15.09.2003	@ P.B. Page 73
4.	02.01.2004	@ P.B. Page 74
5.	02.01.2004	@ P.B. Page 75
6.	18.03.2006	@ P.B. Page 76
7.	18.03.2008	@ P.B. Page 77
8.	21.04.2008	@ P.B. Page 78
9.	25.12.2009	@ P.B. Page 79
10.	13.04.2013	@ P.B. Page 80

Thereafter, realizing the bleak chances of recovery, the management vide resolution dated 24.03.2014 decided to write off the balance of Rs. 1.50 crores in the books of account. [Refer: P.B. Page 81].

It is a settled law that nomenclature of the transaction is not relevant and the intention of the parties must be understood from the language they have used, considered in the light of the surrounding circumstances and object of the contract (which can be oral). [Refer: M/S T.T. Ltd. v. Industrial Finance Corporation 2000 VII AD (Delhi) 146 (Delhi High Court), Bank of India v. K. Mohan Das, (2009) 5 SCC 313, Delhi Development Authority v. Joint Action Committee and Bharat Sanchar Nigam Ltd. v. Bpl Mobile Cellular Ltd. 2008 (8) SCALE 106, Godhra Electricity Co. Ltd. v. The State Of Gujarat 1975 AIR 32; M/S Uttam Singh Duggal v. Hindustan Steel Ltd. AIR 1982 MP 206. (MP HC)].

In that view the matter, it is submitted that although it appears that the assessee had initially given loan, however, as submitted supra, the underlying objective for advancing money was for procuring fabric such as curtains and bed sheets for use hotel business.

Further, it is also well settled, write off of advances given in the course of business for procuring material is a revenue loss, allowable under section 37(1) of the Act.

Reliance, in this regard, is placed on the following decisions:

• • Roop Kishore Madan vs. ACIT [2024] 162 com 473 (Delhi – Trib.) [Para 11-23]
  • DCIT vs. Friends Shoe Company: 74 com 100 (Visakhapatnam – Trib.) [Para 9-11]
  • CIT vs. Appollo Tyres Ltd. [2013] 33 com 575 (Cochin – Trib.) [Para 20­24]
  • Mahakoshal Refractories (P.) Ltd. vs. ITO: 175 com 673 (Mumbai – Trib.) [Para 4-7]

In view of the above, it is respectfully submitted that the write off of advance is allowed 1as deduction under section 37(1) of the Act, and the same needs to be deleted.”

7.4 The Sr. DR supported the orders of the authorities below.

7.5 We have heard both the parties and perused the material available on record.

We agree with the findings of the AO, that the assessee was not in the money lending business. This advance of Rs. 1.5 crores paid to Shri O.P. Parasrampuria claimed to have been given by the assessee for the purposes of regular procurement of fabric of any Parasrampuria group companies is not supported by any evidence. In fact, the assessee has not been able to controvert the findings of the Ld. CIT(A) that if it was to be a business transaction, the advance so made, should have been provided to the company of the Parasrampuria Group, if it was for the purpose of providing fabrics for 5 star hotels as has been claimed by the assessee. Further, the observation of the Ld. CIT(A) that such advance of interest bearing loan that too at exorbitant interest rates of 18 to 24% appear to be clearly in a personal capacity and the fact that Shri O.P. Parasrampuria had returned some loans, debunks the explanation of the assessee because had the transaction been genuine, fabric would have been supplied, not loans returned has also not been controverted by the assessee by any explanation. In this regard, the case laws relied upon the assessee are distinguishable on facts. Therefore, in the given facts of the case, it is held that the advance of Rs. 1.5 crore was not in the nature of ordinary course of business and it is in a nature of a friendly loan and the same cannot be allowed as a business expense claimed by the assessee. Accordingly, we uphold the order of the Ld. CIT(A). Ground no. 6 of the appeal is dismissed

8. Write off of advance of Rs. 11,06,860/- to M/s Sankalp Oil & Natural Resources Pvt. Ltd.

8.1 The relevant finding of the Ld. CIT(A) in dismissing advance of Rs. 11,06,860/- to M/s Sankalp Oil & Natural Resources Pvt. Ltd. written off, the appeal is reproduced as under:

“D.3 Sankalp Oil & Natural Resources Private Limited

i) The appellant had submitted in the assessment order that the amount of Rs. 11.06 lakhs was given in the joint biding with Sankalp Oil & Natural Resources to Ministry of Petroleum and Natural Gas. The biding was not gone in our favour the aforesaid amount was forfeited by Ministry of Petroleum and Natural Gas not terms of the biding Terms & Conditions.

However, during the appellate stage, the appellant has given a different explanation. It has submitted that

1. After weighing pros and cons in the form of incurring of cost by way of forfeiture of Earnest Money Deposit of Rs. 10 Lakh plus interest thereon in the event of non-award of tender to the assessee and the gain in the form of receipt of gas for hotel business at discounted price, leading to huge profit to the assessee viz-a-viz likely loss of Rs. 10 Lakh (2 FDRs of Rs. 5 lakh each) plus interest thereon till the date of award, the assessee decided to agree with the proposal submitted by M/s Sankalp Oil and Natural Resources Pvt. Ltd. Resultantly, assessee submitted 2 FDRs of Rs. 10 Lakh to the Ministry of Petroleum and Natural Gas for its participation in the bidding. Unfortunately, the tender was not awarded to the assessee and M/s Sankalp Oil and Natural Resources Pvt. Ltd. Consequentially, the Ministry of Petroleum and Natural Gas did not refund the FDR. It resulted into loss to the assessee of Rs. 10 Lakh plus interest thereon of Rs. 1,06,860/- which had accrued till the date of forfeiture of FDR by the Ministry of Petroleum and Natural Gas and had been recorded as income by the assessee by way of interest on FDR till that date. Hence, assessee wrote off the amount of Rs. 11,06,860/- in the year under consideration under authorization of board resolution dt. 24/03/2014 passed by the Board of Directors.

ii) It is clear from the facts of the case that the amount of Rs. 11.06 lakhs was given to the Ministry of Petroleum and Natural Gas in a joint bid with Sankalp Oil & Natural Gas.

The appellant is in the hotel business and not in the business related to petroleum and natural gas. Therefore, any expenditure made in this regard cannot be considered to be incidental to the business of the appellant.

Reliance in this regard is placed on the following judgments of the High Court which have already been discussed in the prior Paras:

Ashok Leyland Ltd. v. ACIT (2022) 288 Taxman 514 /(2023) 455 ITR 526 (Mad.)(HC)

Salem Mangnesite (P.) Ltd. v. Commissioner of Income-tax-III, Bombay [2009] 180 Taxman 545 (Bombay), High Court

Further, reliance is also placed on the judgment of Pragati Construction Co. v. Dy. Commissioner of Income-tax [2011] 11 taxmann.com 203 (Delhi High Court)

In this case, the assessee was carrying on business of construction, purchase and sale of flats. It’s sister concern, PCL made a bid in an auction held by DDA, for purchasing a plot to construct a multi-storey building. On date of auction assessee issued a cheque for sum of Rs. 44.50 lakhs to PCL ostensibly to purchase purposed multi-storey building. PCL was declared as successful bidder and deposited earnest money to DDA. PCL admittedly did not pay monies beyond what it had paid as earnest money and instead got involved with auctioning authority on issue of flaws in control drawings. Despite dispute obtaining between PCL and DDA with regard to control drawings, assessee entered into an agreement with PCL for booking space with above auctioned plot. However, earnest money paid by PLC was forfeited and suit against DDA was yet pending.

Factor of forfeiture of above earnest money was informed to assessee and PCL showed its inability refund of advance given by assessee. Assessee after making certain adjustments, reduced sum of amount due to PCL and claimed that amount as deduction under section 37(1).

The Hon’ble High Court while adjudicating on the issue as to “Whether aforesaid facts showed that amount in issue was not expended by assessee to purchase commercial space in proposed building and purpose of payment was subsequently morphed to suit situation and, therefore, condition required to be fulfilled to sustain a deduction under section 37 that expenses should be incurred for purpose or should be incidental to business of assessee was not fulfilled in instant case.” Held, yes –

Thus, the Hon’ble High Court held the answer to be in the affirmative.

Further, since when money was paid to PCL auction had not been held, assessee, who was in business of sale and purchase of flats, could not have incurred said expense for its own business as there was no commercial space acquired by PCL which it could sell to assessee – Held, yes Whether, therefore, Tribunal had rightly disallowed loss claimed by assessee as trading loss – Held, yes

iii) From the facts and evidences on record, it is seen that the amount of Rs. 11.06 lakhs which has been written off, was not in the nature of expenses incidental to the business of the appellant and hence is not allowable as per the provisions of section 37 of the I. T. Act. The petroleum and natural gas business is not a principal business of the appellant, who is in the hotel business. Thus, when the amount of Rs. 11.06 lakhs was forfeited by the Ministry of petroleum and natural gas, it could not have been said to be an expenditure incidental to the business of the appellant.

Therefore, the Assessing Officer had rightly disallowed the same.

In view of the above discussion, facts of the case and following the decision of the High Court as discussed above, it is held that the amount of Rs. 11.06 lakhs written off during the year is not an allowable deduction and hence the ground of appeal of the appellant in this regard is dismissed.”

8.2 In this regard, the specific ground being ground no. 7 of the appeal is reproduced as under:

“7. That the addition/disallowance of Rs. 11,06,860, being the amount of advance written off, by treating such advance as not incidental to the business carried on by the assessee and also ignoring the submissions and evidences placed on record by assessee, ignoring the fact that the amount was given by assessee, engaged in the business of running a hotel, to M/s Sankalp Oil and Natural Resources Pvt. Ltd. for joint participation on consortium basis for bidding in a tender for ensuring supply of gas required by the assessee for its hotel business at a discounted price, is advance given wholly and exclusively for the purpose of hotel business carried on by the assessee, and therefore, non-recovery of the same is a trading loss allowable to the assessee. Thus, the addition so made is illegal and unjustified and should be deleted.”

8.3 At the time of hearing, the Ld. Sr. AR submitted as under:

“Re: Sankalp Oil

– The assessee has given Earnest Money Deposit in the form of Interest bearing Fixed Deposit of Rs. l0 Lakhs for a Joint Bidding with Sankalp Oil & Natural Resources Private Limited to participate in the bidding process for Natural Gas The EMD has been deposited with Directorate General of Hydrocarbon, MOPNG.[Refer: Letter dated 10.02.2011 for participation in award of tender for 2 FDR’s of 5 Lakh each & reply of assessee dated 01.03.2011 agreeing with the above offer @ P.B. Page 82 & 83].

– Sankalp Oil and Natural Resources Ltd. vide letter dated 30.05.2013 informed the assessee that they had not received any award from Directorate General of Hydrocarbon, MOPNG and as a result thereof the earnest money deposit of Rs.10 lakhs was forfeited. [Refer P.B. Page 84].

– Thereafter, realizing that the joint bidding did not materialized and the amount of FDR along with interest thereon totaling to Rs.11,06,860 could not have been recovered, the management vide resolution dated 24.03.2014 decided to write off the balance of Rs.11,06,860 in the books of account. [Refer: P.B. Page 85].

– It would be appreciated that the intention of the assessee while participating in the joint bidding process was to precure natural gas for running of the core hotel business of the assessee and loss / expenditure incurred on that count is an allowable deduction under section 37(1) of the Act as being incurred wholly and exclusively for the purpose of business.

– It has been consistently held by this Hon’ble Tribunal that write off of EMD/advances given to third party for obtaining tenders, subsequently written of in the course of business for procuring material is a revenue loss, allowable under section 37(1) of the Act.

– Reliance, in this regard, is placed on the decision of this Hon’ble Tribunal in the following cases:

• • • K. Elevators India (P.) Ltd. vs. DCIT: [2025] 172 taxmann.com 547 (Delhi – Trib.) [Refer Para 13]
    • Pyoginam vs Addl. CIT: 130 TTJ 7 (Delhi- Trib.) [Refer Para 4 to 7]

It is respectfully submitted that in the present case write off of EMD/advances was given to third party for obtaining natural gas, which for the reasons beyond the control of assessee were subsequently written of in the course of business and accordingly is a revenue loss, allowable under section 37(1) of the Act.”

8.4 The Sr. DR supported the orders of the authorities below.

8.5 We have heard both the parties and perused the material available on record.

It is submitted by the Ld. AR that the assessee had given Earnest Money Deposit in the form of interest-bearing Fixed Deposit of Rs. l0 Lakhs for a Joint Bidding with Sankalp Oil & Natural Resources Private Limited to participate in the bidding process for Natural Gas and the EMD was deposited with Directorate General of Hydrocarbon, MOPNG and placed letter dated 10.02.2011 for participation in award of tender for 2 FDRs of 5 Lakh each and the reply of assessee dated 01.03.2011 agreeing with the above offer at page no. 82 & 83 of the paper book. It is further submitted that the intention of the assessee while participating in the joint bidding process was to procure natural gas for running of the core hotel business of the assessee and loss / expenditure incurred and its forfeiture was an allowable deduction under section 37(1) of the Act as being incurred wholly and exclusively for the purpose of business. On similar facts the the Co-ordinate Bench of the Tribunal in the case of T.K. Elevators India (P.) Ltd. vs. DCIT (supra) had allowed such a forfeiture of earnest money paid to MTNL and BTPS. The relevant extract of the said order is reproduced as under:

“Ground No.4 regarding disallowance of Rs.4,82,597/- security deposit written off, debited under the accounting head advances written off. The advances given to MTNL and BTPS by ECE as security deposit for obtaining tenders. In para no.6.2(e), it is mentioned that the appellant as requested M/s. ECE to provide documents in relation to the same for getting the deposit back however, no documents could be traced by ECF and MTNL/BTPS and could not realized and advances were written off. The assesse failed to submit documents in support of non realization for claiming benefit of Section 37(1) of the Act. The appellant assesse had no means to recover and were written off under the head. However, in view smallness of the amount vis-a-vis income of Rs. 14,77,79,575/- of the assesse, the assesse claim for disallowance to be allowed as business loss as it pertains to revenue field on account of security deposit for participating in tenders.

8.6 In this case also the assessee submits the advance of Rs. 10 lakhs to M/s Sankalp Oil & Natural Resources Pvt. Ltd. were given as a business advance to run its business more smoothly. The assessee has submitted necessary evidences in this regard, which has not been controverted by the revenue. The case laws of the Hon’ble Delhi High Court in the case of M/s Pragati Construction Co. vs. DCIT (supra) relied upon by the Ld. CIT(A) has been carefully perused by us but found to be distinguishable on facts in as much, there the agreement was by M/s Pragati Construction Co. vs. DCIT (supra) to by buy commercial space from M/s PCL, when PCL had not acquired commercial space for which it was declared as a successful bidder as it did not pay the requisite money and went into a dispute with DDA, whereas in the present case it was a bid to get gas exploration right in ONGC to suit its business, which Sankalp Oil & Natural Resources Pvt. Ltd. failed to get it. Therefore, in the given fact of the case, the explanation of the assessee is found to be acceptable and we direct the AO to delete the addition of Rs. 11,06,860/-. Ground no. 7 of the appeal is allowed.

9. In the result, appeal of the assessee is partly allowed.

Order pronounced in the open court on 20^th April, 2026.