The Ahmedabad Bench of Income Tax Appellate Tribunal ( ITAT ) ruled that business losses, including irrecoverable amounts from regular business transactions such as bad debts, advances, and deposits, are allowable under Section 28 of the Income Tax Act,1961.
Ambalal Sarabhai Enterprises Ltd.,appellant-assessee,was involved in manufacturing drugs and pharmaceuticals. It also offered marketing and consultancy services in areas like fine chemicals, industrial glass containers, packing materials, and electronic instruments. The company had 15 divisions, including service units that supported other units within the corporation.
The assessee claimed a business loss of Rs. 58.35 lakh, including Rs. 21,09,182 for bad debts from sales and Rs. 37,26,818 for written-off advances and deposits. The Assessing Officer(AO) disallowed the entire claim, stating the write-offs could not be allowed under Sections 36(1)(vii) or 37 and that no evidence supported the alternate claim under Section 28 of the Act.
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The Commissioner of Income Tax(Appeals)[CIT(A)] allowed Rs. 21,09,182 as bad debt but upheld the disallowance of Rs. 37,26,818. The CIT(A) also noted the lack of evidence for the alternative claim under Section 28 of the Act.
The assessee’s counsel explained that the written-off debit balances were from regular business transactions, including sales and advances. The counsel argued that the CIT(A) ignored the evidence and rejected the alternate claim without allowing more time for additional proof. The transactions and amounts were explained with a paper book.
The counsel also referred to previous explanations given to the AO and CIT(A) and supported the claim with cases like Jackie Shroff Vs. ACIT, Angel Commodities Broking [P.] Ltd. Vs. DCIT, and Harshad J. Choksi Vs. CIT.
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The two member bench comprising Suchitra Kamble(Judicial Member) and Makarand V.Mahadeokar(Accountant Member) considered the arguments and evidence provided by both sides. It confirmed that losses from regular business transactions, including irrecoverable amounts, are allowed as business losses under Section 28. The assessee showed that the Rs. 37,26,818 written off was related to deposits, advances, and other business transactions.
The tribunal found the CIT(A)’s claim that the assessee did not provide enough evidence was incorrect, as the details and reasons for irrecoverability were clearly provided. It also noted that the AO and CIT(A) did not ask for more evidence.
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Based on previous cases, the tribunal allowed the Rs. 21,09,182 from sales and the Rs. 37,26,818 from deposits and advances as business losses under Section 28 of the act. It directed the AO to approve the full claim of Rs. 58.35 lakh as a business loss.
In short,the appeal filed by the assessee was allowed.
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