CASE ANALYSIS: PR. COMMISSIONER OF INCOME TAX 6 v. KHYATI REALTORS PVT. LTD. [2022] 141 taxmann.com 461 (SC).
CASE DETAILS
Case name: Pr. Commissioner of Income Tax 6 v. Khyati Realtors Pvt. Ltd[1]. The appellant is Pr. CIT, the respondent is Khyati Realtors PVT. Ltd. The case is in SC by the appeal filed by revenue on the Bombay High Court judgement that affirmed the ITAT (Income Tax appellate tribunal) order. Furthermore, this is S.L.P and the judgement is given by “Justice Uday Umesh Lalit, Justice S. Ravindra Bhat, Justice Sudhanshu Dhulia” on 25th August, 2022.
FACTS IN BRIEF
The Khyati Realtors PVT. Ltd. is assessee here and they carry a business related with real estate, finance and TDR. For the AY 2009-10, the notice was sent to assessee u/s 143(2)[2] and 142(1)[3] of the IT Act, for various details. The assessment was completed by AO u/s 143(3)[4] of the IT Act by finding out the total income of the assessee as INR 87,880[5].
Furthermore, the assessee contended that in 2007 the amount of INR 10 Crore was transferred to M/s C. Bhansali Developers PVT. Ltd. for acquisition of some commercial property but there was no development in the project hence assessee sought back the amount from the builder. The assessee contended to the AO in a letter “The present case fully falls within the provisions of sec. 36(2)[6] hence the write off of advances for bad debt is allowable u/s. 36(1)(vii)[7].”
The AO disallowed the sum of INR 10 crore to be claimed as bad debt. The assessee became aggrieved party and moved to CIT and contended the content of letter[8], CIT confirmed the disallowance to the write off the bad debts. The assessee moved to ITAT and the plea was allowed thereby. Now the revenue (CIT) moved to Bombay High court u/s 260A of the IT Act[9]. The Bombay HC declined the plea of revenue and said that there is no question of law in the decision of the tribunal. The appellant thereafter moved to SC.
ISSUES UNDER CONSIDERATION
There were some questions of law which was framed by the court in this case:
- Whether the amount of INR 10 crore to be considered as a bad debt or not u/s 36(1)(vii) of the IT Act[10]?
- If the amount is considered to be bad debt, then it writes off to the bad debt is allowed to claim the deduction or not u/s 36(2)[11] of the IT Act?
JUDGEMENT
The Ratio decidendi / Reasoning of the court elucidates the following principles[12]:
i) The irrecoverable portion of a bad debt must be officially written off in the assessee’s accounts for the PY.
ii) The write-off of a bad debt cannot encompass any provision for bad and doubtful debts established in the assessee’s accounts.
iii) Deductions are permissible only if the debt or its portion has been factored into the assessee’s income computation for the relevant PY or an earlier preceding year.
iv) The burden rests on the assessee to demonstrate to the AO that the case satisfies the prerequisites outlined in Section 36(1)(vii) and Section 36(2) of the Act.
In the present case, the records indicate a lack of evidence supporting the claim that the advance provided to M/s C. Bhansali was part of the ordinary business course. The assessee fails to establish the advance as a loan, providing no clarity on its duration, terms, conditions, or interest arrangements, fails to demonstrate interest payment. Moreover, there is no indication that the statutory requirement for officially writing off the bad debt in the PY accounts has been fulfilled. Lastly, the contention that the amount was intended for acquiring immovable property positions it as a capital expenditure, disallowing its treatment as a business expenditure[13].
In the case of A.V. Thomas and Co. Ltd. v. Commissioner of Income Tax[14], the court clarified that under section 10(2)(xi)[15], the consideration of a bad or doubtful debt hinges on its initial classification as a trade-related debt. The court affirmed that disallowing the amount for bad and doubtful debt doesn’t negate a deduction claim if the expenditure was exclusively for business purposes. The court assessed whether the expense was incurred for business or fell into the capital domain, finding that, in this case, the expenditure satisfied both criteria – it was business-related and did not constitute a capital outlay.[16]
HELD: The court held that the allowance of the assessee’s INR 10 crore deduction for a bad and doubtful debt is deemed impermissible.[17] Referring to para 23, the court said that “In view of the foregoing discussion, the Revenue’s appeal has to succeed. The impugned judgment of the High Court and the order of ITAT are hereby set aside. The appeal is allowed, in the above terms, without order on costs.”[18]
ANALYSIS OF THE JUDGEMENT
The concept of write off to the bad debt was discussed in this judgement. Section 36(1)(vii)[19] of the act covers the bad debts, in order to claim the deduction under this section some condition must be fulfilled as[20]:
- There must be a debt.
- Debt must be directly to the business or profession of the assessee.
- Debt must be had been taken into account in computing assessable income.
- Debt must have been written off in the books of account of the assessee.
- Bad debt of a discontinued business is not admissible and etc.
In the case, CIT v. Dhanalakshmi Corpn.[21] it was held that the question of admissibility of the bad debts is to be decided on the facts and circumstances of each case. In the case, Catholic Syrian Bank Ltd. v. CIT, Thrissur[22], the court urges to the assessee to prove all the ingredients under section 36(1)(vii) and 36(2) of the Act to the AO in order to write off the bad debt as deduction. In the case of the commissioner of income Tax v. The Mysore Sugar Co. Ltd[23], the court held that the expenditure should be claimed only for the purpose of the business. In the case, M/S. Southern Technologies Ltd. v. Joint commnr of Income Tax[24], provides the concept of real income theory and also the grounds on which the doubtful and bad debt should be disallowed.
From the all precedents and the provision of the act analysed in this part and jointing the dots from the judgement of this case provided, I agree with the decisions given by the apex court on the grounds that the debt negate to fulfil the criterion which is mentioned u/s 36(1)(vii) of the act as well as provided in the various precedents like the assessee was unable to prove the advance as loan, no clarity was given on the conditions, durations or interest arrangement and nowhere it was mentioned that there was any official written where the write off to the bad debt in PY was shown[25].
STATUS OF THE JUDGEMENT IN TODAY’S SCENARIO: The judgement given in this case is binding to all the HC and tribunals. Furthermore, this judgement is valid today and it is followed by all the tribunals and the HC as under article 141 of the Indian Constitution[26].
CONCLUSION
The apex court held that the benefit given under section 36(1)(vii) of the IT Act to the assessee for claiming the deduction on the bad debts which must be written off in the previous year account of the assessee and it is subject to the section 36(2) of the Act. The court said that the assessee has an obligation to satisfy the AO by fulfilling all the ingredients of s.36(1)(vii) as well as s.36(2) of the IT Act. The court also held that it is not allowed that on the basis of the facts of the case any advance written off is given on the business expenditure u/s 37(1) of the Act[27].
The current status of this judgement is that- It is nowhere overruled yet and followed by all the HC as well as the tribunals/forums of the country. This judgment has been cited in numbers of cases[28].
Notes:-
[1]. [2022] 141 taxmann.com 461 (SC).
[2]. The Income Tax Act, 1961 (Act no.43 of 1961), s.143(2).
[3]. The Income Tax Act, 1961 (Act no.43 of 1961), s.143(1).
[4]. The Income Tax Act, 1961 (Act no.43 of 1961), s.143(3).
[5]. Refer to para 2.
[6]. The Income Tax Act, 1961 (Act no.43 of 1961), s.36(2).
[7]. The Income Tax Act, 1961 (Act no.43 of 1961), s.36(1)(vii).
[8]. Refer to para 3.
[9]. The Income Tax Act, 1961 (Act no.43 of 1961), s.260A.
[10]. The Income Tax Act, 1961 (Act no.43 of 1961), s.36(1)(vii).
[11]. The Income Tax Act, 1961 (Act no.43 of 1961), s.36(2).
[12]. Refer to para 17.
[13]. Refer to para 18.
[14]. [1963] Supp (1) SCR 776.
[15]. The Income Tax Act, 1961 (Act no.43 of 1961), s.10(2)(xi).
[16]. Refer to para 21.
[17]. Refer to para 19.
[18]. Refer to para 24.
[19]. The Income Tax Act, 1961 (Act no.43 of 1961), s.36(1)(vii).
[20]. DR. K. SINGHANIA, DIRECT TAXES LAW & PRACTICE 379-381 (Taxmann, 66th ed. 2022).
[21]. [1962] 46 ITR 1031 (Mad.).
[22]. (2012) 343 ITR 270.
[23]. 1963 (2) SCR 976
[24]. (2010) 2 SCR 380.
[25]. Refer to para 18.
[26]. The Constitution of India. 141, 1950.
[27]. The Income Tax Act, 1961 (Act no.43 of 1961), s.37(1).
[28]. Cited in The Indian Steel & Wire Products Ltd. v. ITO (on 21 April 2023), B.L.Kashyap & Sons Ltd, New Delhi v. DCIT (on 18th July 2023).
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