PCIT v. Khyati Realtors Private Limited

Case snapshot

Sections / provisions: 36(1)(vii)

Questions before the Court / Tribunal

• S. 36(1)(vii) : Bad Debts-Business loss-Amount paid to builder towards acquisition of commercial premises-Write off of the amount as irrecoverable neither allowable as bad debt nor as business loss-Assessee to prove both conditions of section 36(1)(vii) and 36(2) of the Act are satisfied. [S. 28(i), 36(2), 37(1)] The assessee is in the business of real estate development . The assessee advanced Rs 10 crore to C. Bhasali Developers Pvt Ltd for acquisition of commercial premises. The assessee contended that an amount was deposited with one developer towards acquisition of commercial premises two years prior to the…
• What factual, statutory and procedural conditions control the relief?
• How does the operative order apply to the parties and the challenged proceeding?

Material facts and procedural background

PR. COMMISSIONER OF INCOME TAX 6 ...APPELLANT(S)

1. Special leave granted. With consent of the counsels for the parties, the appeal was heard finally. The Revenue has appealed a decision of the Bombay High Court1 which affirmed an order2 of the Income Tax Appellate Tribunal (hereinafter, “ITAT”) which had upheld a claim by the respondent (hereinafter, “assessee”) for writing off ₹ 10 crores as a bad debt.

2. The assessee carries on real estate development business, trading in transferable development rights (TDR) and finance. In respect of its return for the assessment year 2009-2010, the Assessment Officer (hereinafter, “AO”) issued a

notice under Section 143(2) of the Income Tax Act 1961 (hereinafter “Act” or “IT Act”) on 18.08.2010, and also under Section 142(1) of the Act, calling for various details. The assessee filed its response thereto. The scrutiny assessment was completed by the AO under Section 143(3) on 30.12.2011, determining the total income of the assessee at ₹ 87,880/-. The assessee contended that an amount of ₹ 10 crores was deposited with one M/s C. Bhansali Developers Pvt. Ltd. towards acquisition of commercial premises two years prior to the assessment year in question (i.e., in 2007). It was contended that the project did not appear to make any progress, and consequently, the assessee sought return of the amounts from the builder. However, the latter did not respond. As a result, the assessee’s Board of Directors resolved to write off the amount as a bad debt in 2009. It was also contended that the amount could also be construed as a loan, since the assessee had ‘financing’ as one of its objects. In a letter dated 26.12.2011 to the AO, the assessee inter alia contended as follows:

3. The AO disallowed the sum of ₹ 10 crores claimed as a bad debt in determining its income under “Profits and Gains of Business or Profession”. Aggrieved, the assessee appealed. Before the appellate Commissioner (hereinafter, “CIT (A)”) the assessee reiterated the contents of a letter dated 05.12.2011 written to the AO as follows:

Appellant / assessee submissions

notice under Section 143(2) of the Income Tax Act 1961 (hereinafter “Act” or “IT Act”) on 18.08.2010, and also under Section 142(1) of the Act, calling for various details. The assessee filed its response thereto. The scrutiny assessment was completed by the AO under Section 143(3) on 30.12.2011, determining the total income of the assessee at ₹ 87,880/-. The assessee contended that an amount of ₹ 10 crores was deposited with one M/s C. Bhansali Developers Pvt. Ltd. towards acquisition of commercial premises two years prior to the assessment year in question (i.e., in 2007). It was contended that the project did not appear to make any progress, and consequently, the assessee sought return of the amounts from the builder. However, the latter did not respond. As a result, the assessee’s Board of Directors resolved to write off the amount as a bad debt in 2009. It was also contended that the amount could also be construed as a loan, since the assessee had ‘financing’ as one of its objects. In a letter dated 26.12.2011 to the AO, the assessee inter alia contended as follows:

5. The Revenue contended that Section 36(1)(vii) of the Act gives benefit to the assessee to claim a deduction on any bad debt or part thereof, which is written off as irrecoverable in the accounts of the assessee for the previous year. This benefit is subject to Section 36(2) of the Act. It is obligatory upon the assessee to prove to the AO that the case satisfies the ingredients of both Section 36(1)(vii) and Section 36(2) of the Act. It was urged that the ITAT and the High Court erred in accepting the assessee’s contentions, which were not supported by any material or document. It was submitted that the assessee’s claim of giving ₹ 10 crores to M/s C. Bhansali Developers Pvt. Ltd. for the alleged project was not substantiated by any material. Additionally, the assessee had also pleaded that the amount was given as a ‘loan’ to the developer, which was a different plea altogether. This plea was bereft of any material as to the terms of the loan, or the conditions of repayment, including interest. It was submitted that by virtue of Section 36(2) of the Act, the AO has to be satisfied that the action of writing off is on sound and reasonable basis, and not a device. Reliance was…

6. The Revenue further argued that the assessee’s submission that the amount could alternatively be deducted as an expenditure exclusively laid out for commercial purposes under Section 37 of the Act was belated, and raised for the first time only after the order of the CIT(A).

7. Ms. Kavita Jha, learned counsel for the assessee urged this court not to interfere with the findings of the ITAT and the High Court. She highlighted that the following facts and circumstances were not in dispute:

Revenue / respondent submissions

The packaged judgment does not separately label the respondent's submissions in an independently extractable passage. No contention is inferred; read the full order.

Court / Tribunal analysis and reasoning

amount could not have been written-off, is that the assessee’s claim was that it was given to M/s Bhansali Developers Pvt. Ltd. for acquiring immovable property – it therefore, was in the nature of a capital expenditure. It could not have been treated as a business expenditure. In A.V. Thomas and Co. Ltd., Alleppey v. The Commissioner of Income Tax, (Bangalore) Kerala10 this court held as follows:

by this court in The Commissioner of Income Tax v. The Mysore Sugar Co., Ltd.12 The assessee there was engaged in production of sugar. It used to advance monies to cane growers in consideration of supply of sugarcane. Due to drought, the cane growers could not repay amounts advanced. The assessee claimed the outstanding to be bad debts, and sought to write them off. This was not allowed; the Income Tax Officer held the expenditure to be capital in nature. The High Court however, set aside that determination. This court confirmed the view of the High Court. However, the court also examined the argument whether in such eventualities, the expenditure could be claimed to be exclusively laid out for the purpose of business (under the provision corresponding to Section 37(1) of the Act). This court held as follows: “7. The tax under the head “Business” is payable under s. 10 of the Income-tax Act. That section provides by sub-s. (1) that the tax shall be payable by an assessee under the head “profits and gains of business, etc.” in respect of the profits or gains of any business, etc. carried on by him. Under sub-s. (2), these profits or gains are computed after making certain…

Operative decision and relief

4. The CIT(A) confirmed the disallowance on account of bad debts and interest. A further appeal was preferred to the ITAT, which allowed the assessee’s plea. The Revenue sought an appeal to the Bombay High Court under Section 260A of the IT Act. The Bombay High Court ruled that no question of law requiring a decision arose in the appeal and consequently declined to entertain the Revenue’s plea.

19. In view of the above discussion, it is held that the assessee’s claim for deduction of ₹ 10 crore as a bad and doubtful debt could not have been allowed. The findings of the ITAT and the High Court, to the contrary, are therefore, insubstantial and have to be set aside.

by this court in The Commissioner of Income Tax v. The Mysore Sugar Co., Ltd.12 The assessee there was engaged in production of sugar. It used to advance monies to cane growers in consideration of supply of sugarcane. Due to drought, the cane growers could not repay amounts advanced. The assessee claimed the outstanding to be bad debts, and sought to write them off. This was not allowed; the Income Tax Officer held the expenditure to be capital in nature. The High Court however, set aside that determination. This court confirmed the view of the High Court. However, the court also examined the argument whether in such eventualities, the expenditure could be claimed to be exclusively laid out for the purpose of business (under the provision corresponding to Section 37(1) of the Act). This court held as follows: “7. The tax under the head “Business” is payable under s. 10 of the Income-tax Act. That section provides by sub-s. (1) that the tax shall be payable by an assessee under the head “profits and gains of business, etc.” in respect of the profits or gains of any business, etc. carried on by him. Under sub-s. (2), these profits or gains are computed after making certain…

24. 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.

Ratio and legal principle

• The packaged judgment addresses S. 36(1)(vii) : Bad Debts-Business loss-Amount paid to builder towards acquisition of commercial premises-Write off of the amount as irrecoverable neither allowable as bad debt nor as business loss-Assessee to prove both conditions of section 36(1)(vii) and 36(2) of the Act are satisfied. [S. 28(i), 36(2), 37(1)] The assessee is in the business of real estate development . The assessee advanced Rs 10 crore to C. Bhasali Developers Pvt Ltd for acquisition of commercial premises. The assessee contended that an amount was deposited with one developer towards acquisition of commercial premises two years prior to the…. The precise proposition must be read with the Court/Tribunal's reasoning and operative directions.
• Reliance depends on matching the statutory version, jurisdiction, procedural stage and material evidence recorded in the judgment.

Why this judgment matters

This decision is relevant to practitioners and affected parties dealing with s. 36(1)(vii) : bad debts-business loss-amount paid to builder towards acquisition of commercial premises-write off of the amount as irrecoverable neither allowable as bad debt nor as business loss-assessee to prove both conditions of section 36(1)(vii) and 36(2) of the act are satisfied. [s. 28(i), 36(2), 37(1)] the assessee is in the business of real estate development . the assessee advanced rs 10 crore to c. bhasali developers pvt ltd for acquisition of commercial premises. the assessee contended that an amount was deposited with one developer towards acquisition of commercial premises two years prior to the… Its value lies in showing how the adjudicating forum connected the applicable rule to the proved facts and procedural posture.

Practitioner action points

• Match the statutory version, jurisdiction, procedural stage and decisive evidence before relying on the result.
• Verify current appellate, review and SLP history and any later amendment or controlling authority.
• Attach the complete judgment to the working paper or filing and cite the paragraph/page supporting the proposition.

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Section / provision impact

• 36(1)(vii) - apply the exact version considered in the judgment.

Case network

Similar issue / useful comparison

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Different outcome / possible distinction

• PCIT Chandigarh v. ABC Papers Limited - Dismissed
• Greatship (India) Ltd. v. ACIT (Bombay High Court) - Disposed

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