The Chennai Bench of Income Tax Appellate Tribunal (ITAT) has allowed deduction in respect of written off irrevocable advances based on the inextricable link between advances to business and company.
During the course of assessment proceedings, the AO noticed that the assessee, V Krishnamurthy, had debited a sum under the head ‘investment written-off’ to its profit & loss account of Meena Enterprises, a proprietary concern. The assessee submitted that he has advanced a sum of Rs. 7.5 crores loan to Samjass IT Services India Ltd, to develop a software for his proprietary concern for an efficient management of its business.
The business of the company failed due to global set back and the assessee was forced to take over the fixed assets of the company. The outstanding amount was adjusted against assets and the balance amount has been treated as business loss.
According to the Assessing Officer, loss incurred by the assessee on account of write off of advances given to a company in which he was a director is capital loss and which could not be treated as revenue expenditure.
Sreenivasan, on behalf of the revenue submitted that Commissioner of Income Tax Appeal (CIT(A)) failed to appreciate the fact that the amount was shown in the books of accounts of the lender and borrower as unsecured loan only.
S. Sridhar,on behalf of the assessee submitted that the amount given by the assessee to the company had been treated as unsecured loans. Further, the assessee could not file necessary evidence to prove that said loan was given in the ordinary course of its business for development of software to be used in its proprietary concern.
The two-member Bench of V. Durga Rao (Judicial Member) and Manjunatha. G (Accountant Member) dismissed the appeal filed by the revenue observing that “Since, there was an inextricable link between advances given to the company and business of the assessee, and further, the assessee has derived business advantage by lending money to said company, in our considered view, written off of irrecoverable advances given to said company partakes the nature of business loss which can be allowed as deduction.”
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