Disallowance of Expenditure Written off deleted Without Examining Commercial Rationale and Nature of Loss: ITAT Remands Matter [Read Order]

The Bangalore Bench of the Income Tax Appellate Tribunal (ITAT) remanded the matter of a disallowed expenditure write off totaling ₹4,19,61,906 back to the Commissioner of Income Tax (Appeals) [CIT(A)] and ruled that the addition was deleted without sufficiently examining the commercial rationale and whether the loss was capital or revenue in nature.

Hubli Scan Centre Pvt. Ltd. (assessee), a provider of medical diagnostic services, filed a return for AY 2018-19 declaring a total loss of ₹2,65,89,808. The Assessing Officer (AO) observed that the company had debited ₹4,19,61,906 to its profit and loss account as "administrative expenses" representing deposits and loans written off.

The write off arose from a business arrangement with an associate concern, M/s Suchirayu Health Care Solutions Limited. The details of the arrangement included the original Agreement (July 2013). The assessee advanced ₹5 crores as a security deposit to the associate concern to purchase and install an MRI machine at the associate's hospital.

The associate concern was declared a Non-Performing Asset (NPA). Both parties agreed to a one-time settlement where the associate would pay only ₹80 lakhs, and the remaining balance was written off by the assessee as a business loss.

The AO disallowed the claim and argued that the assessee failed to prove the advancement was for business purposes or that any profit motive existed. The AO further noted that the assessee utilized interest-bearing loans to finance these interest-free advances to an associate that was already in financial distress.

Aggrieved by the AO’s order, the assessee filed an appeal before the CIT(A). The CIT(A) deleted the addition by relying on the settlement agreement and judicial precedents stating that the Tax Department cannot dictate how a businessman conducts his affairs. Aggrieved by the CIT(A)’s deletion, the Revenue challenged the CIT(A)'s order before the ITAT.

The two member bench comprising Prashant Maharishi (Vice President) and Keshav Dubey (Judicial Member) observed that the CIT(A) did not examine if the associate concern actually attempted to purchase the MRI machine or if the assessee ever received any shared revenue as intended.

The tribunal noted that the CIT(A) failed to determine if the loss was a revenue loss which was allowable under Section37(1) or Section 28 or a capital loss, which would not be deductible from business income.

The tribunal highlighted the short time lag between the revised agreement (2015) and the settlement (2017), therefore suggested the need to verify if the transaction was a "business rationale" or a "colorable device".

The tribunal set aside the CIT(A)'s order and restored the issue for fresh examination. The tribunal directed the CIT(A) to verify the complete chain of transactions and consider the Supreme Court's ruling in PCIT vs. Khyati Realtors Pvt. Ltd. regarding the deductibility of such advances. The appeal of the revenue was allowed for statistical purposes.

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