Shri Allu Arvind Babu v. The Assistant Commissioner Of Income Taxnon Corporate Circle-20(1)Chennai

IN THE HIGH COURT OF JUDICATURE AT MADRAS RESERVED ON: 24.11.2020DELIVERED ON: 04.12.2020 Shri Allu Arvind Babu..Appellant Vs. The Assistant Commissioner of Income TaxNon Corporate Circle-20(1)Chennai..Respondent Tax Case Appeal filed under Section 260A of the Income TaxAct, 1961 against the order of the Income Tax Appellate Tribunal'C' Bench, Chennai dated 15.07.2016 passed in ITANo.1253/Mds/2015 for the Assessment Year 2006-07 against theorder dated 20/03/2015 and made in IT(A) No.48/11-12 on the fileof the Commissioner of Income Tax(Appeals)-14, Chennai 34 andagainsttheorderdated23/12/2011andmadeinPANo.GIR.No.ADAPA950713 on the file of the Income Tax Officer,Media Ward I, Chennai 34.For Appellant : Mr.R.Vijayaraghavan For Subbaraya Iyer PadmanabhanFor Respondent : Mr.M.Swaminathan Sr. Standing Counsel Assisted by Ms.V.Pushpa Jr. Standing Counsel The present appeal, though arises out of a common orderpassed against the appellant by the Income Tax AppellateTribunal, "C" Bench, dated 15.07.2016, for the Assessment Years2006-07 and 2007-08, the issues involved in both the appeals areentirely different and therefore, both the writ appeals arebeing disposed of by separate orders. https://hcservices.ecourts.gov.in/hcservices/ 2. The substantial questions of law arising in the presentappeal filed by the Assessee, as framed by the Assessee, are asunder: (i)Whether, on the facts and in thecircumstances of the case, the Tribunal was rightin law in holding that the bad debt was notwritten off as required by law as per theprovisions of Section 36 of the Act, though thewrite off of the debt is made from the accountsof the debtors, and the amount of loans andadvances at the year end in the balance sheet isshown as net of the provisions for impugned debt? (ii) Whether, on the facts and in thecircumstances of the case, the Tribunal was rightin law in not considering the alternate claimthat the amount was allowable as business lossunder Section 28 or under Section 37 of the Act,as the debt has occurred during the course ofbusiness and was exclusively incurred for thepurpose of business and incidental to thebusiness and was not capital in nature? 3. By consent of both sides, the matter was heard finally atthis stage and is being disposed of. 4. The relevant finding of the Tribunal with regard to thequestions raised in the present appeal filed by the Assessee arequoted below: "7. The facts of the issue are that theassessee is the proprietor of Nest Foundationswhich is engaged in development of properties.The assessee has entered into a developmentagreement with Mr.C.Sriramulu, landlord todevelop a building at Erramanjali, Hyderabad videdevelopment agreement dated 02.11.1998. As perthe terms of agreement, the assessee had paid asum of Rs.30,00,000 towards security deposit,which shall be refunded by the landlord onsatisfaction of the terms of the contract. As perterms of the contract, the assessee is underobligation to construct a pent house but due tonon-approval of the permission from localauthorities, the assessee could not construct thepent house. Hence, it is claimed that thelandlord did not return the deposit as the assessee failed to satisfy the terms of theagreement. Relevant portiions of the agreementare as follows: "10. The second party has paid anamount of Rs.30,00,000/- (Rupees Thirtylakhs only) by way of cheques as securitydeposit interest free for due performance ofthe contract which the first party shallreturn without interest after completion ofthe first party's share of the total builtup area including the penthouse as per thespecifications and acceptance thereof by thesecond party and in the case the penthouseis not constructed for want of permissionthe settlement is made as per conditionmentioned in clause 7." assessee failed to satisfy the terms of theagreement. Relevant portiions of the agreementare as follows: "10. The second party has paid anamount of Rs.30,00,000/- (Rupees Thirtylakhs only) by way of cheques as securitydeposit interest free for due performance ofthe contract which the first party shallreturn without interest after completion ofthe first party's share of the total builtup area including the penthouse as per thespecifications and acceptance thereof by thesecond party and in the case the penthouseis not constructed for want of permissionthe settlement is made as per conditionmentioned in clause 7." "7. The second party has also agreed toconstruct a penthouse exclusively for thefirst party admeasuring 1250 sq.ft. out ofwhich 1000 sq.ft. at its own cost and forthe balance 250 sq.ft. the cost ofconstruction will be borne by the first andsecond party equally. The construction ofthe penthouse by the second party shall bemade by taking necessary permission forconstruction from MCH or any other concernedauthority. In the event of permission forconstruction of the penthouse from MCH orany other concerned authorities could not beobtained, the second party shall compensatethe first with equivalent area by allottingthe same at first instance out of the totalconstructed area arid the balance shall beshared equally by both the parties." The Assessing Officer did not allow the claim ofthe assessee on the ground that it is a"provision" and the amount is still retained inthe balance sheet of the assessee. Aggrieved bythe order of ld. Assessing Officer, the assesseecarried the appeal before the Ld. CIT(A). 8. On appeal, the Ld. CIT(A) observedthat the balance sheet of M/s. Nest Foundationthat is the proprietorship concern of theassessee clearly reflects Rs.30 Lakhs asprovision for claims and compensation. The P&LA/c for the accounting year ending 31st March2006, shows the same amount under the head "provisions for claims and compensation". furtherCIT(A) observed that the said amount is aprovision for compensation. This cannot betreated as bad debt written off, as it is stillappearing in the balance sheet. This is alsocannot be treated as a trading loss. This amountwas deposited as security deposit. Therefore, itis capital in nature. Thus CIT(A) observed thatthe said amount cannot be held as an expenditureand confirmed the order of AO. 9. We have heard both the parties and perusedthe material on record. The amount of Rs.30 lakhswas still appearing in the balance sheet ofassessee under the head "provisions for claimsand compensation" and it was not written off inthe books of accounts of assessee. Being so, itcannot be treated as bad debt in the assessmentyear under consideration. Accordingly, placingreliance on the judgment of Supreme Court in thecase of M/s. T.R.F. Ltd., reported in [2010] 323ITR 397 (SC) wherein held that:- "After the amendment of section 36(1)(vii)of the Income Tax Act, 1961, with effectfrom April 1, 1989, in order to obtain adeduction in relation to bad debts, it isnot necessary for the assessee to establishthat the debt, in fact, has becomeirrecoverable: it is enough if the bad debtis written off as irrecoverable in theaccounts of the assessee." Accordingly, this ground is dismissed." "After the amendment of section 36(1)(vii)of the Income Tax Act, 1961, with effectfrom April 1, 1989, in order to obtain adeduction in relation to bad debts, it isnot necessary for the assessee to establishthat the debt, in fact, has becomeirrecoverable: it is enough if the bad debtis written off as irrecoverable in theaccounts of the assessee." Accordingly, this ground is dismissed." 5. The learned counsel for the Assessee, Mr.Vijayaraghavan,submitted that since the Security Deposit or advance of Rs.30.00Lakhs given by the Assessee/the developer, to the land ownerMr.C.Sriramulu, in the present Assessment Year 2006-07, theAssessee made a provision for this expenditure of Rs.30.00 Lakhsin its Books of Accounts and therefore, the same could beallowed as an expenditure or deduction in the Assessment Year2006-07. Even though the advance given to the land ownerMr.C.Sriramulu was shown as receivable in the Balance Sheet forthe previous year ending on 31.03.2006 relevant for theAssessment Year 2006-07, the Revenue as well as the Tribunalwere not justified in disallowing the same as "provisions forclaims and compensation" on the ground that it was not writtenoff in the Books of Accounts of the Assessee. 6. The learned counsel for the Assessee re-iterated hissubmissions, placing reliance on the decision of the SupremeCourt in the case of M/s. T.R.F. Ltd. reported in [(2010) 323ITR 397 (SC)], quoted in paragraph 9 of its order by theTribunal itself, that to claim a deduction in relation to baddebts under Section 36(1)(vii) of the Act it was not for theAssessee to establish that the debt in fact had becomeirrecoverable and deduction should have been allowed in thehands of the Assessee, since a provision was made with regard tothe said compensation of Rs.30.00 Lakhs. 6. Per contra, Mr.M.Swaminathan, learned Senior StandingCounsel appearing for the Revenue, argued that mere creating ofa provision for the said advance of security deposit made by theAssessee in favour of the land owner will not entitle theAssessee to claim deduction, as the Assessee, by his ownconduct, has shown it as outstanding receivable in the BalanceSheet of the Assessee for the relevant previous year. The factthat the Assessee has not written off the said claim against theland owner and has not actually paid the said amount to the landowner during this year, mere creating of a provision for thesame does not entitle the Assessee to claim it as an expenditureand defer taxation to that extent. He also refuted thealternative claim of the Assessee under Section 37 of the Actas the expenditure incurred wholly and exclusively for thepurpose of business. 7. Having heard the learned counsel for the parties, we areof the clear opinion that there is no merit in the contentionraised by the learned counsel for the Assessee and the appealfiled by the Assessee deserves to be dismissed. 7. Having heard the learned counsel for the parties, we areof the clear opinion that there is no merit in the contentionraised by the learned counsel for the Assessee and the appealfiled by the Assessee deserves to be dismissed. 8. The claim of creation of provision for such expenditure,which is not yet incurred and is only intended to be written offas compensation paid to the land owner for the admitted failureof the Assessee to complete the contract in the manner as agreedbetween the parties, does not entitle the Assessee to claim thesame either as Bad Debts under Section 36(1)(vii) of the Act oras Business Expenditure under Section 37 of the Act. If merecreation of a provision for intended liability to be settled infuture, which claim is contradicted by the accounting treatmentgiven by the Assessee himself, namely by not reversing the entryof debit to the account of the land owner and continuing to showthe same as receivable in the Assets side of the Balance Sheetof the year in question, cannot entitle the Assessee to claimany such deduction. Either the Assessee admits this liabilityand pays the said amount to the land owner or the advance giventhereafter is written off in its Book of Accounts toconclusively express its intention not to claim anything backfrom the land owner only could have been a reasonable conclusionof such expenditure being claimed as Compensation or a BusinessExpenditure under Section 37 of the Act. 9. It is not a question of such advance turning to be a baddebt but the more relevant provision applicable to such factswould be Section 37 of the Act. A developer of a building couldclaim it as an expenditure in the year in which such expenditureis actually incurred or the advance is written off and its rightto claim the refund of such security is completely waived off.Nothing of this sort has happened in the present case and merelyby making a book entry for creating a provision for futureexpenditure or compensation, the Assessee cannot be permitted toclaim deduction under Section 36 or 37 of the Act. Therefore, inour considered opinion, the judgment relied upon by the learnedcounsel for the Assessee is of no application to the facts ofthe present case and the provision as such, cannot be allowed asBusiness Expenditure in the hands of the Assessee. 10. The appeal filed by the Assessee is liable to bedismissed and accordingly, it is dismissed and the questionsframed above are answered against the Assessee and in favour ofthe Revenue. No costs. Sd/- Assistant Registrar(CS VII) //True Copy// kplTo Sub Assistant Registrar 1.The Assistant Commissioner of Income TaxNon Corporate Circle-20(1)Chennai 2.The Commissioner of Income Tax(Appeals-14), Chennai 34. 3.The Income tax Officer, Media Ward I, Chennai 34. 4.Income Tax Appellate Tribunal, 'C' Bench, Chennai. +1cc to Mr.M.Swaminathan, Advocate, SR.No.39169 +1cc to M/s.Subbaraya Aiyar Padmanabhan, SR.No.39485 Judgment in TCA No.521 of 2017 VD(CO)KKV/22/12/2020 https://hcservices.ecourts.gov.in/hcservices/