The Bangalore bench of the Income Tax Appellate Tribunal (ITAT) has directed the income tax department to reconsider the claim of non-recoverable advances to employees and vendors as business loss under section 37(1) r.w.s. 28 of the Income Tax Act, 1961.
The assessee, Xchanging Solutions Limited, had given advances to the employees against their salary for meeting expenses on food and travel while working on clients deliverables / projects. Further, some advances were also given to various vendors / service providers for carrying out various services in connection with the operations of the assessee. Certain advances could not be recovered from the employees who had left the services of the assesseeand also from the vendors due to various reasons. The advances which could not be recovered has been written of to the profit and loss account of the assessee for the relevant assessment year and claimed as allowable expenses / business loss in terms of section 37(1) r.w.s. 28 of the Income Tax Act, 1961. The said claim was rejected by the Assessing Officer by holding that as per the provisions of section 36 of the I.T.Act, bad debts can be allowed only if it is trade receivables, which has been already offered to income in the previous year and the same has not been received subsequently.It was further held by the A.O. that the advances paid and written of as bad debt will not fall under the provisions of the Income-tax Act as lending or advancing amount is not the business of the assessee.
While disposing the second appeal filed by the assessee-Company, Judicial Member Mr. George George K and Accountant Member B R Bhaskaran held thatthe claim made by the assessee is not towards bad debt u/s 36(1)(vii) of the I.T.Act, but under the provisions of section 28 of the I.TAct as business or trade loss.
“Giving advance to the employees as well as vendors were essential and wholly and exclusively linked to the business of the assessee. The loss if any is an incidental business loss. In this context, we rely on the judgment of the Hon’ble Delhi High Court in the case of Triveni Engineering & Industries Limited (ITA No.56 of 2009). Further, the advances given tothe vendors, which is non-recoverable, is also allowable as business loss. This proposition has also been upheld by the Hon’ble Apex Court in the case of Mysore Sugar Co. Ltd. (1962) 46 ITR 649. Since the A.O. has not examined the claim of deduction u/s 37(1) r.w.s. 28 of the I.T.Act, we deem it appropriate to restore the issue to the files of the A.O. for de novo consideration. The assessee is directed to furnish necessary evidences before the A.O. The A.O. is directed to dispose of the matter expeditiously after affording a reasonable opportunity of hearing to the assessee,” the bench said.
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