Summary
A real-estate and finance company paid Rs. 10 crore in 2007 to a builder to book commercial premises. When the project stalled, it wrote the sum off as a bad debt in assessment year 2009-10, alternatively calling it a loan or a Section 37 business expense. The Assessing Officer and CIT(A) disallowed the deduction, but the ITAT allowed it and the High Court found no question of law. The Supreme Court allowed the Revenue's appeal. A Section 36(1)(vii) deduction requires an actual write-off in the accounts and compliance with Section 36(2): the debt must have entered income or be money lent in banking or money-lending business. The assessee proved neither, and an advance to buy property is a capital outlay, not a debt. Section 37 may sometimes apply after a failed Section 36 claim, but not here.
Issues
- Whether an advance paid to a builder to book commercial premises, later written off, was deductible as a bad debt under Section 36(1)(vii) read with Section 36(2) of the Income Tax Act, 1961
- Whether the amount was alternatively deductible as business expenditure under Section 37
Provisions considered
- Section 36(1)(vii) and 36(2), Income Tax Act, 1961No actual write-off was shown, the sum never entered income and it was not money lent in a banking or money-lending business. The deduction was therefore disallowed. (¶¶ 13, 17, 18, 19)
- Section 37(1), Income Tax Act, 1961Section 37 is not barred merely because a Section 36 claim fails. It could not help here because the advance for acquiring immovable property was capital in nature. (¶¶ 21, 22, 23)
Held
- For a deduction under Section 36(1)(vii), the debt must actually be written off as irrecoverable in the accounts for the previous year, and a provision for bad and doubtful debts does not count. Under Section 36(2), the debt must have been taken into account in computing income, or represent money lent in the ordinary course of banking or money-lending business. The assessee must prove both before the Assessing Officer. (¶¶ 13, 14, 16, 17)
- The assessee produced no material on the booking terms, the area or the delivery date, nor on any loan terms or interest. Nothing showed a write-off in its accounts for the previous year, or that the advance was made in the ordinary course of business. (¶ 18)
- An advance to purchase immovable property is capital in nature. Following A.V. Thomas, a sum handed over to buy something and not returned is not a 'debt' that would have swelled profits, so the bad debt claim fails. (¶¶ 18, 19)
- Section 37 can apply to business expenditure not covered by Sections 30 to 36 even after a claim under another head fails, as in Mysore Sugar. On these facts, applying Southern Technologies, it could not support the deduction. (¶¶ 20, 21, 22, 23)
Result
Revenue's appeal allowed; the orders of the High Court and the ITAT allowing the Rs. 10 crore bad-debt deduction were set aside; no order as to costs.