Irrecoverable Advances given for Purchase of Land for Real Estate Development Business allowable either as Trading Loss or Business Expenditure: ITAT [Read Order]

The Bangalore bench of the Income Tax Appellate Tribunal (ITAT) has held that the advances given for purchase of land in the normal course of business of carrying on real estate development, if not recoverable could be allowed as either trading loss under section 28 of the Income Tax Act, 1961 or as expenditure under section 37 of the Act.

The assessee, Canara Housing Development Company engaged in the business of real estate development. The A.O. noticed that the assessee has written off Rs.9,81,13,042/- asbad debts.According to the assessee, the amount so written off represents ‘property advances’ made to various parties during the normal course of business, which became irrecoverable.

However, the Assessing Officer disallowed the claim by observing that the assessee has not entered into any MOU/Agreement with the parties to whom advances have been paid and in the absence of the same, the assessee could not establish beyond doubt that the advances made are indeed land advances and not any other payment.

The Tribunal bench comprising Shri B. R. Baskaran, Accountant Member and Smt. Beena Pillai, Judicial Member observed that the advances given for purchase of land in the normal course of business of carrying on real estate development, if not recoverable could be allowed as either trading loss u/s 28 of the Act or as expenditure u/s 37 of the Act.

Remitting the matter back to the file of the AO, the Tribunal concluded that “In fact, the AO has accepted the loss to the extent of Rs.1.94 crores specifically observing that these kinds of payments/write off are incidental to the business, meaning thereby, the AO has actually applied the provisions of sec.28/37 of the Act. Before us, the Ld. A.R. has furnished a written submission explaining the reasons, which compelled the assessee to write off these amounts. We noticed that the Ld CIT(A) has proceeded to examine the claim as bad debts u/s 36(1)(vii) of the Act and the AO has disallowed the claim only for the reason that the amount written off are larger advances. In our view, the criteria applied by the AO for allowing the claim to the extent of Rs.1.94 crores should be applied to other advances also.”

Shri Ramakrishnan appeared for the assessee.

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