Pr. Commissioner of Income Tax 6 v. Khyati Realtors Pvt. Ltd.
S. RAVINDRA BHAT, J.
1. Special leave granted. With consent of the counsels for the
parties, the appeal was heard finally. The Revenue has appealed a decision
of the Bombay High Court1 which affirmed an order2 of the Income Tax
Appellate Tribunal (hereinafter, “ITAT”) which had upheld a claim by
the respondent (hereinafter, “assessee”) for writing off ` 10 crores as a
bad debt.
2. The assessee carries on real estate development busi ness,
trading in transferable development rights (TDR) and finance. In respect
of its return for the assessment year 2009-2010, the Assessment Officer
(hereinafter, “AO”) issued a notice under Section 143(2) of the Income
Tax Act 1961 (hereinafter “Act” or “IT Act”) on 18.08.2010, and also
1 In ITA No. 291 of 2017, decided on 30.04.2019.
2 In ITA No.129/Mum/2014, decided on 04.03.2016.
PR. COMMISSIONER OF INCOME TAX 6 v. KHYATI
REALTORS PVT. LTD.
under Section 142(1) of the Act, calling for various details. The assessee
filed its response thereto. The scrutiny assessment was co mpleted by
the AO under Section 143(3) on 30.12.2011, determining the total income
of the assessee at ` 87,880/-. The assessee contended that an amount
of ` 10 crores was deposited with one M/s C. Bhansali Developers Pvt.
Ltd. towards acquisition of commercial premises two years prior to the
assessment year in question (i.e., in 2007). It was contended that the
project did not appear to make any progress, and consequently, the
assessee sought return of the amounts from the builder. However, t he
latter did not respond. As a result, the assessee’s Board of Directors
resolved to write off the amount as a bad debt in 2009. It was als o
contended that the amount could also be construed as a loan, since the
assessee had ‘financing’ as one of its objects. In a letter dated 26.12.2011
to the AO, the assessee inter alia contended as follows:
“We submit that as per provisions of Section 36(2), in res pect
of monies advanced in the ordinary course of busine ss, the
same allowable as bad debts even if the amount has not been
taken into account in computing the total income. This is well
accepted position in respect of write off of advances giv en in
the lending business. The present case fully falls within the
provisions of sec. 36(2) hence the write off of adv ances is
allowable u/s. 36(1)(vii).”
3. The AO disallowed the sum of ` 10 crores claimed as a bad
debt in determining its income under “Profits and Gains of Business or
Profession”. Aggrieved, the assessee appealed. Before the appellate
Commissioner (hereinafter, “CIT (A)”) the assessee r eiterated the
contents of a letter dated 05.12.2011 written to the AO as follows:
“As part of our regular business activity, the company in order
to purchase certain commercial premises had made reservation
by way of bookings in the upcoming project at Old Mu mbai
Pune Highway, Khapoli, which was to be developed by M/s
C. Bhansali Developers Pvt Ltd. In order to confirm the
reservation/booking of said commercial premises, bu ilder
insisted for advance of Rs 10 crores. Accordingly, the company
had advanced Rs 10 crores on 06.03.2007 towards reserving/
booking of the commercial premises in the said project ... Since
the said advance was for purchase of commercial pro perty,
there was no question of charging interest thereon...However,
43
further development about the said project of the buil der is
that the builder after taking advances from us did not proceed
in this matter and possibly siphoned the money for other
purposes. On coming to know about their non-proceedi ng in
the development of the said project, we had a numbe r of
meetings with the directors of M/s C. Bhansali Deve lopers
Pvt Ltd. They did not listen to our request for retur ning the
money…”
4. The CIT(A) confirmed the disallowance on account of bad
debts and interest. A further appeal was preferred to the ITAT, which
allowed the assessee’s plea. The Revenue sought an ap peal to the
Bombay High Court under Section 260A of the IT Act. The Bombay
High Court ruled that no question of law requiring a decision arose in the
appeal and consequently declined to entertain the Revenue’s plea.
5. The Revenue contended that Section 36(1)(vii) of the Act gives
benefit to the assessee to claim a deduction on any bad debt or part
thereof, which is written off as irrecoverable in the accounts of the
assessee for the previous year. This benefit is subject to S ection 36(2)
of the Act. It is obligatory upon the assessee to prove to the AO that the
case satisfies the ingredients of both Section 36(1)(vii) and Section 36(2)
of the Act. It was urged that the ITAT and the High Court er red in
accepting the assessee’s contentions, which were not supported by any
material or document. It was submitted that the assessee ’s claim of
giving ` 10 crores to M/s C. Bhansali Developers Pvt. Ltd. for the
alleged project was not substantiated by any material. Additionally, the
assessee had also pleaded that the amount was given as a ‘loa n’ to the
developer, which was a different plea altogether. This plea was bereft
of any material as to the terms of the loan, or the conditions of repayment,
including interest. It was submitted that by virtue of Section 36(2) of the
Act, the AO has to be satisfied that the action of writing off is on sound
and reasonable basis, and not a device. Reliance was placed on Catholic
Syrian Bank Ltd. v. Commissioner of Income Tax, Thrissur 3 to urge
that the assessee is obligated to prove to the AO that the claim satisfies
the ingredients of both Section 36(1)(vii) on the one hand and Section
36(2) of the Act as well.
6. The Revenue further argued that the assessee’s submissi on
that the amount could alternatively be deducted as an e xpenditure
3 (2012) 3 SCC 784.
PR. COMMISSIONER OF INCOME TAX 6 v. KHYATI
REALTORS PVT. LTD. [S. RAVINDRA BHAT, J.]
exclusively laid out for commercial purposes under Section 37 of the
Act was belated, and raised for the first time only after the order of the
CIT(A).
7. Ms. Kavita Jha, learned counsel for the assessee urg ed this
court not to interfere with the findings of the ITAT and the High Court.
She highlighted that the following facts and circumstances were not in
dispute:
i) The assessee was engaged in the business of real estat e
and financing.
ii) The objects clause of the Memorandum of Association of
the assessee company reflected the business of contractors,
erectors, constructors of buildings, etc., as well as receiving
or lending money as its objects.
iii) ` 10 crores was advanced on 06.03.2007 to M/s C. Bhansali
Developers Pvt. Ltd. to acquire certain commercial premises
and for reservation by way of bookings in their upcoming
project on the Old Mumbai-Pune Highway in Khopoli.
iv) The said ` 10 crores was written off during assessment
year 2009-10.
v) The ` 10 crores advanced to M/s C. Bhansali on 06.03.2007
was in the ordinary course of its business.
8. It was contended that since the builder/borrower defaulted in
repaying the amount, the respondent assessee decided to write of f the
same as a bad debt under Section 36(1)(vii) read with Section 36(2) of
the Act. It was contended that after the amendment of Section 36 of the
Act in 1989, there was virtually no scope for the AO to scrut inize in
detail a decision to write off the debt. Counsel relied on the decision of
this court in T.R.F. Limited v. Commissioner of Income Tax, Ranchi 4.
9. Ms. Jha further contended that there was nothing in the Act
which barred an assessee from claiming the benefit of Section 37 of the
Act in a case where the expenditure was laid out or incurred exclusively
for business or commercial purposes, where it might not be successful
to establish its claim for deduction under any other head.
4 (2010) 13 SCC 532.
45
10. The learned counsel also relied on the judgment of this court
in Commissioner of Income Tax v. Mysore Sugar Co. Ltd. 5 As well as
other judgments of High Courts, such as Mohan Meakin Ltd. v.
Commissioner of Income Tax 6; Harshad J. Choksi v. Commissioner
of Income Tax 7 and IBM World Trade Corporation v. Commissioner
of Income Tax8 to buttress her submissions.
Analysis and Conclusions
11. Section 36 of the Act occurs under the heading ‘other
deductions’, and its relevant extract, for the purpose of this ca se, is as
follows:
“36. (1) The deductions provided for in the following clauses
shall be allowed in respect of the matters dealt with therein,
in computing the income referred to in section 28—
***
(vii) subject to the provisions of sub-section (2), the amount
of any bad debt or part thereof which is written of f as
irrecoverable in the accounts of the assessee for the previo us
year:
Provided that in the case of an assessee to which clause (vii a)
applies, the amount of the deduction relating to any such debt
or part thereof shall be limited to the amount by which su ch
debt or part thereof exceeds the credit balance in the provis ion
for bad and doubtful debts account made under that clause:
Provided further that where the amount of such debt or part
thereof has been taken into account in computing the income
of the assessee of the previous year in which the a mount of
such debt or part thereof becomes irrecoverable or of an
earlier previous year on the basis of income computation and
disclosure standards notified under sub-section (2) of Section
145 without recording the same in the accounts, the n, such
debt or part thereof shall be allowed in the previous year i n
which such debt or part thereof becomes irrecoverable and it
5 1963 (2) SCR 976.
6 2012 (348) ITR 109 (Del).
7 349 ITR 250 (Bom).
8 1990 (186) ITR 412 (Bom).
PR. COMMISSIONER OF INCOME TAX 6 v. KHYATI
REALTORS PVT. LTD. [S. RAVINDRA BHAT, J.]
shall be deemed that such debt or part thereof has been written
off as irrecoverable in the accounts for the purposes o f this
clause.
Explanation 1.—For the purposes of this clause, any bad debt
or part thereof written off as irrecoverable in the acc ounts of
the assessee shall not include any provision for ba d and
doubtful debts made in the accounts of the assessee.
Explanation 2.—For the removal of doubts, it is her eby
clarified that for the purposes of the proviso to clause (v ii) of
this sub-section and clause (v) of sub-section (2), the acc ount
referred to therein shall be only one account in re spect of
provision for bad and doubtful debts under clause (viia) and
such account shall relate to all types of advances, in cluding
advances made by rural branches;….
***
(2) In making any deduction for a bad debt or part t hereof,
the following provisions shall apply—
(i) no such deduction shall be allowed unless such debt or
part thereof has been taken into account in computi ng the
income of the assessee of the previous year in whic h the
amount of such debt or part thereof is written off or of an
earlier previous year, or represents money lent in the o rdinary
course of the business of banking or money-lending which is
carried on by the assessee;
(ii) if the amount ultimately recovered on any such debt or
part of debt is less than the difference between th e debt or
part and the amount so deducted, the deficiency sha ll be
deductible in the previous year in which the ultimate recove ry
is made;
(iii) any such debt or part of debt may be deducted if i t has
already been written off as irrecoverable in the account s of
an earlier previous year (being a previous year rel evant to
the assessment year commencing on the 1st day of April, 1988 ,
or any earlier assessment year), but the Assessing Officer
had not allowed it to be deducted on the ground that it had
not been established to have become a bad debt in that year;
47
(iv) where any such debt or part of debt is written off as
irrecoverable in the accounts of the previous year ( being a
previous year relevant to the assessment year comme ncing
on the 1st day of April, 1988, or any earlier assessment year)
and the Assessing Officer is satisfied that such debt or part
became a bad debt in any earlier previous year not f alling
beyond a period of four previous years immediately precedin g
the previous year in which such debt or part is writ ten off,
the provisions of sub-section (6) of Section 155 shall apply;
(v) where such debt or part of debt relates to advances made
by an assessee to which clause (viia) of sub-sectio n (1)
applies, no such deduction shall be allowed unless the assessee
has debited the amount of such debt or part of debt in that
previous year to the provision for bad and doubtful debts
account made under that clause.”
Section 37 reads as follows:
“37. (1) Any expenditure (not being expenditure of the nature
described in sections 30 to 36 and not being in the nature of
capital expenditure or personal expenses of the ass essee),
laid out or expended wholly and exclusively for the purposes
of the business or profession shall be allowed in co mputing
the income chargeable under the head “Profits and gain s of
business or profession”.
Explanation 1.—For the removal of doubts, it is her eby
declared that any expenditure incurred by an assess ee for
any purpose which is an offence or which is prohibi ted by
law shall not be deemed to have been incurred for the purpos e
of business or profession and no deduction or allowance shall
be made in respect of such expenditure.”
12. The income of every assessee has to be assessed accordi ng
to the statutory framework laid out Chapter IV, Part D of the Act. That
chapter deals with heads of income. Section 28 of the Act deals with the
chargeability of income to tax under the head ‘Profits and Gains of
Business or Profession’. The other deductions that an assess ee can
claim are elaborated under Section 36 of the Act, which opens with the
phrase “the deductions provided for in the following clauses s hall
be allowed in respect of the matters dealt with therein, in computing
PR. COMMISSIONER OF INCOME TAX 6 v. KHYATI
REALTORS PVT. LTD. [S. RAVINDRA BHAT, J.]
the income referred to in Section 28”. For the purposes of computing
income chargeable to tax, therefore, besides specific deductions, ‘other
deductions’ enumerated in different clauses of Section 36 can be allowed
by the AO. Each of the deductions must relate to the business carried
out by the assessee. If the assessee carries on a business and writes off
a debt relating to the business as irrecoverable, it would without doubt
be entitled to a corresponding deduction under clause (vii) of sub-section
(1) of Section 36 subject to the fulfilment of the conditions set forth in
sub-section (2) of Section 36 of the IT Act.
13. Before the amendment in 1989, the law was that even in
cases where the assessee had made only a provision in its accounts for
bad debts and interest thereon, without the amount actually being debited
from the assessee’s Profit and Loss account, the assessee coul d still
claim deduction under Section 36(1)(vii) of the Act. With effect from 1
April 1989, with the insertion of the new Explanation under Sec tion
36(1)(vii), any bad debt written-off as irrecoverable in t he account of
the assessee would not include any ‘provision’ for bad and doubtful debt
made in the accounts of the assessee. In other words, before thi s date,
even a provision could be treated as a write off. However, a fter this
date, the Explanation to Section 36(1)(vii) brought about a change. As a
result, a mere provision for bad debt per se was not entitled to deduction
under Section 36(1)(vii). This position in law was recognized by this
court in Southern Technologies Ltd. v. Joint Commissioner of Income
Tax, Coimbatore 9:
“25. [B]y insertion (w.e.f. 1.4.1989) of a new Explanation in
Section 36(1)(vii), it has been clarified that any bad debt
written off as irrecoverable in the account of the assessee
will not include any provision for bad and doubtful debt made
in the accounts of the assessee. The said amendment indicates
that before 1.4.1989, even a provision could be treate d as a
write off. However, after 1.4.1989, a distinct dich otomy is
brought in by way of the said Explanation to Sectio n
36(1)(vii). Consequently, after 1.4.1989, a mere provision for
bad debt would not be entitled to deduction under S ection
36(1)(vii). To understand the above dichotomy, one must
understand “how to write off”. If an assessee debits an amount
of doubtful debt to the P&L Account and credits the asset
9 (2010) 2 SCR 380.
49
account like sundry debtor’s Account, it would const itute a
write off of an actual debt. However, if an assesse e debits
“provision for doubtful debt” to the P&L Account and makes
a corresponding credit to the “current liabilities and
provisions” on the Liabilities side of the balance she et, then
it would constitute a provision for doubtful debt. In the latt er
case, assessee would not be entitled to deduction a fter
1.4.1989.
38. The point to be noted is that the IT Act is a tax on “re al
income”, i.e., the profits arrived at on commercial pri nciples
subject to the provisions of the IT Act. Therefore, if by
Explanation to Section 36(1)(vii) a provision for doubtful debt
is kept out of the ambit of the bad debt which is wr itten off
then, one has to take into account the said Explana tion in
computation of total income under the IT Act failing which
one cannot ascertain the real profits. This is where the conc ept
of “add back” comes in. In our view, a provision fo r NPA
debited to P&L Account under the 1998 Directions is only a
notional expense and, therefore, there would be add back to
that extent in the computation of total income unde r the IT
Act.
39. One of the contentions raised on behalf of NBFC before
us was that in this case there is no scope for “add back” of
the Provision against NPA to the taxable income of the
assessee. We find no merit in this contention. Unde r the IT
Act, the charge is on Profits and Gains, not on gross receip ts
(which, however, has Profits embedded in it). There fore,
subject to the requirements of the IT Act, profits to be a ssessed
under the IT Act have got to be Real Profits which have to be
computed on ordinary principles of commercial accoun ting.
In other words, profits have got to be computed after deduct ing
Losses/ Expenses incurred for business, even though such
losses/ expenses may not be admissible under Sections 30 to
43D of the IT Act, unless such Losses/ Expenses are exp ressly
or by necessary implication disallowed by the Act. Therefore,
even applying the theory of Real Income, a debit wh ich is
expressly disallowed by Explanation to Section 36(1) (vii), if
claimed, has got to be added back to the total income of the
PR. COMMISSIONER OF INCOME TAX 6 v. KHYATI
REALTORS PVT. LTD. [S. RAVINDRA BHAT, J.]
assessee because the said Act seeks to tax the “real income ”
which is income computed according to ordinary commercial
principles but subject to the provisions of the IT Act. Under
Section 36(1)(vii) read with the Explanation, a “write off” is
a condition for allowance.”
14. It is thus evident that merely stating a bad and doubtful debt
as an irrecoverable write off without the appropriate tre atment in the
accounts, as well as non-compliance with the conditions in Sec tion
36(1)(vii), 36(2), and Explanation to Section 36(1)(vii) would not entitle
the assessee to claim a deduction. This position was reiterated again in
Catholic Syrian Bank (supra):
“5. The language of Section 36(1)(vii) of the Act i s
unambiguous and does not admit of two interpretatio ns. It
applies to all banks, commercial or rural, schedule d or
unscheduled. It gives a benefit to the Assessee to claim a
deduction on any bad debt or part thereof, which is wri tten
off as irrecoverable in the accounts of the Assesse e for the
previous year. This benefit is subject only to Section 36(2) of
the Act. It is obligatory upon the Assessee to prov e to the
assessing officer that the case satisfies the ingre dients of
Section 36(1)(vii) on the one hand and that it sati sfies the
requirements stated in Section 36(2) of the Act on th e other.
The proviso to Section 36(1)(vii) does not, in absolute ter ms,
control the application of this provision as it com es into
operation only when the case of the Assessee is one which
falls squarely under Section 36(1)(viia) of the Act . We may
also notice that the explanation to Section 36(1)(v ii),
introduced by the Finance Act, 2001, has to be examined in
conjunction with the principal section. The explana tion
specifically excluded any provision for bad and doubtful debts
made in the account of the Assessee from the ambit and scope
of ‘any bad debt, or part thereof, written off as irrecove rable
in the accounts of the Assessee’. Thus, the concept of makin g
a provision for bad and doubtful debts will fall outs ide the
scope of Section 36(1)(vii) simplicitor. The proviso, as already
noticed, will have to be read with the provisions of S ection
36(1) (viia) of the Act.”
51
15. The assessee had relied on the ruling in T.R.F. Limited (supra).
In that judgment, this court had inter alia, observed that:
“4. This position in law is well-settled. After 1st April , 1989,
it is not necessary for the assessee to establish that the de bt,
in fact, has become irrecoverable. It is enough if the bad
debt is written off as irrecoverable in the account s of the
assessee. However, in the present case, the Assessing O fficer
has not examined whether the debt has, in fact, been writte n
off in accounts of the assessee. When bad debt occu rs, the
bad debt account is debited and the customer’s acco unt is
credited, thus, closing the account of the customer. In the case
of Companies, the provision is deducted from Sundry Debtors.
As stated above, the Assessing Officer has not exam ined
whether, in fact, the bad debt or part thereof is written of f in
the accounts of the assessee. This exercise has not been
undertaken by the Assessing Officer. Hence, the mat ter is
remitted to the Assessing Officer for de novo consi deration
of the above-mentioned aspect only and that too only to the
extent of the write off.”
16. This court did not examine the impact of Section 36(2) and
the condition of write off, in the accounts of the assessee during the
previous year, in T.R.F Ltd. (supra).However, the judgments in Southern
Technologies (supra), and Catholic Syrian Bank (supra) spelt out the
conditions subject to which an assessee could write off a bad and doubtful
debt. Interestingly, Kapadia, C.J was a party to T.R.F and Catholic
Syrian Bank; he in fact authored the judgment in Southern
Technologies. Furthermore, Catholic Syrian Bank (supra) is by a bench
of three judges, whereas the other decisions are by benc hes of two
Judges. In the circumstances, this Court has to accord primacy to
Southern Technologies (supra).
17. It is evident from the above rulings of this court, that:
(i) The amount of any bad debt or part thereof has to be written-
off as irrecoverable in the accounts of the assessee for t he
previous year;
(ii) Such bad debt or part of it written-off as irrecoverable in the
accounts of the assessee cannot include any provision for
bad and doubtful debts made in the accounts of the assessee;
PR. COMMISSIONER OF INCOME TAX 6 v. KHYATI
REALTORS PVT. LTD. [S. RAVINDRA BHAT, J.]
(iii) No deduction is allowable unless the debt or part of it “has
been taken into account in computing the income of the
assessee of the previous year in which the amount of such
debt or part thereof is written off or of an earlier previou s
year”, or represents money lent in the ordinary course of the
business of banking or money-lending which is carried on by
the assessee;
(iv) The assessee is obliged to prove to the AO that t he case
satisfies the ingredients of Section 36(1)(vii) as well as Section
36(2) of the Act.
18. In the present case, the record shows that the accounts of the
assessee nowhere showed that the advance was made b y it to
M/s C. Bhansali Developers Pvt. Ltd. in the ordinary course of business.
Its primary argument was that the amount of ` 10 crores was given for
the purpose of purchasing constructed premises. However, the amount
was written-off on 28.03.2009. As noted by the CIT(A), there wa s no
material to substantiate this submission, in respect of payment of the
amount, the time by which the constructed unit was to be given to it, the
area agreed to be purchased, etc. Equally, in support of its other argument
that the amount was given as a loan, the assessee nowhere establi shed
the duration of the advance, the terms and conditions applicabl e to it,
interest payable, etc. The assessee conceded that it had received interest
income for the relevant assessment year. However, it could not establish
that any interest was paid (or shown to be payable in its accounts) for
the sum of ` 10 crores. Furthermore, there is nothing on record to suggest
that the requirement of the law that the bad debt was writt en-off as
irrecoverable in the assessee’s accounts for the previous year had been
satisfied. Another reason why the amount could not have been written-
off, is that the assessee’s claim was that it was giv en to M/s Bhansali
Developers Pvt. Ltd. for acquiring immovable property – i t therefore,
was in the nature of a capital expenditure. It could not have been treated
as a business expenditure. In A.V. Thomas and Co. Ltd., Alleppey v.
The Commissioner of Income Tax, (Bangalore) Kerala 10 this court
held as follows:
“16. Now, a question under s. 10(2)(xi) can only arise if there
is a bad or doubtful debt. Before a debt can become bad o r
doubtful it must first be a debt. What is meant by debt in this
10 [1963] Supp (1) SCR 776.
53
connection was laid down by Rowlatt J., in Curtis v. J. & G.
Oldfield Ltd., (1925) 9 TC 319 as follows :-
“When the Rule speaks of a bad debt it means a debt which is
a debt that would have come into the balance sheet as a
trading debt in the trade that is in question and that it is bad.
It does not really mean any bad debt which, when it was a
good debt, would not have come in to swell the profits.”
17. A debt in such cases is an outstanding which if recovered
would have swelled the profits. It is not money handed over
to someone for purchasing a thing which that person has
failed to return even though no purchase was made. I n the
section a debt means something more than a mere advance. It
means something which is related to business or results from
it. To be claimable as a bad or doubtful debt it must first be
shown as a proper debt…”
19. In view of the above discussion, it is held that the assessee’s
claim for deduction of ` 10 crore as a bad and doubtful debt could not
have been allowed. The findings of the ITAT and the High Court, to the
contrary, are therefore, insubstantial and have to be set aside.
20. The second issue relates to the admissibility of an expenditure
as a deduction, which does not fall within the provisions of Sections 28
to 43, and is not capital in nature, but is laid out or spent exclusively for
the purpose of business, under Section 37 of the Act. A similar provision
existed under the old Income Tax Act, 1922 as in the case of provision
for bad debts, by Section 10(2) 11. This aspect was considered by this
11 Section 10(2): [S]uch profits or gains shall be computed after making the following
allowances, namely :-
***
(xi) When the assessee’s accounts in respect of any part of his business, profession or
vocation are not kept on the cash basis, such sum, in respect of bad and doubtful debts,
due to the assessee in respect of that part of his business, profession or vocation, and
in the case of an assessee carrying on a banking or money lending business such sum in
respect of loans made in the ordinary course of such business as the Income-tax Officer
may estimate to be irrecoverable but not exceeding the amount actually written off as
irrecoverable in the books of the assessee :
***
(xv) any expenditure (not being an allowance of the nature described in any of the
clauses (i) to (xiv) inclusive, and not being in th e nature of capital expenditure or
personal expenses) laid out or expended wholly and exclusively for the purpose of such
business, profession or vocations”.
PR. COMMISSIONER OF INCOME TAX 6 v. KHYATI
REALTORS PVT. LTD. [S. RAVINDRA BHAT, J.]
court in The Commissioner of Income Tax v. The Mysore Sugar Co.,
Ltd.12 The assessee there was engaged in production of sugar. It use d
to advance monies to cane growers in consideration of supply of
sugarcane. Due to drought, the cane growers could not repay a mounts
advanced. The assessee claimed the outstanding to be bad debts, and
sought to write them off. This was not allowed; the Income Tax Officer
held the expenditure to be capital in nature. The High Court ho wever,
set aside that determination. This court confirmed the view of the High
Court. However, the court also examined the argument whether in such
eventualities, the expenditure could be claimed to be exclusively laid out
for the purpose of business (under the provision corresponding to Section
37(1) of the Act). This court held as follows:
“7. The tax under the head “Business” is payable unde r s.
10 of the Income-tax Act. That section provides by sub-s. (1)
that the tax shall be payable by an assessee under the h ead
“profits and gains of business, etc.” in respect of the profits
or gains of any business, etc. carried on by him. Under su b-
s. (2), these profits or gains are computed after making c ertain
allowances. Clause (xi) allows deduction of bad and doubtful
business debts. It provides that when the assessee’s accou nts
in respect of any part of his business are not kept on the cash
basis, such sum, in respect of bad and doubtful debts, due to
the assessee in respect of that part of the his bus iness is
deductible but not exceeding the amount actually writt en off
as irrecoverable in the books of the assessee. Clau se (xv)
allows any expenditure not included in cls. (i) to (xiv), w hich
is not in the nature of capital expenditure or personal expen ses
of the assessee, to be deducted, if laid out or expanded w holly
and exclusively for the purpose of such business, e tc. The
clauses expressly provided what can be deducted; bu t the
general scheme of the section is that profits or gains mus t be
calculated after deducting outgoings reasonably attri butable
as business expenditure but so as not to deduct any p ortion
of an expenditure of a capital nature. If an expenditure comes
within any of the enumerated classes of allowances, the case
can be considered under the appropriate class; but there may
be an expenditure which, though not exactly covered by a ny
12 1963 (2) SCR 976
55
of the enumerated classes, may have to be considere d in
finding out the true assessable profits or gains. This wa s laid
down by the Privy Council in Commissioner of Income-tax v .
Chitnavis I.L.R. (1932) IndAp 290 and has been accepted by
this Court. In other words, s. 10(2) does not deal exhaustively
with the deductions, which must be made to arrive at the true
profits and gains.
8. To find out whether an expenditure is on the capital ac count
or on revenue, one must consider the expenditure in relat ion
to the business. Since all payments reduce capital in the
ultimate analysis, one is apt to consider a loss as amounti ng
to a loss capital. But this is not true of all loss es, because
losses in the running of the business cannot be said to b e of
capital. The questions to consider in this connection are : for
that was the money laid out? Was it to acquire an asset of an
enduring nature for the benefit of the business, or w as it an
outgoing in the doing of the business? If money be lost in the
first circumstances, it is a loss of capital, but if lost in the
second circumstances, it is a revenue loss. In the first, i t bears
the character of an investment, but in the second, to use a
commonly understood phrase, it bears the character of current
expenses.
21. It is apparent that this court was satisfied that the disallowance
of the amount, on account of bad and doubtful debt, did not preclude a
claim for deduction, on the ground that the expenditure was exclusively
laid out for the purpose of business. The court applied the test of whether
the expense was incurred for business, or whether it fell into the capital
stream. In the facts of the case, the tests were satisfied – the expenditure
was for the purpose of business, and did not fall in the capital stream.
22. The assessee had relied on a few High Court judgments which
have ruled that even if a claim for deduction under Section 36(1) is not
allowed, the possibility of its exclusion under Section 37 cannot be ruled
out. This court is of the opinion that as a proposition of law, that enunciation
is unexceptional, since the heads of expenditure that can be claimed as
deduction are not exhaustive – which is the precise rea son for the
existence of Section 37. Therefore, in a given case, if the expenditure
relates to business, and the claim for its treatment under other provisions
are unsuccessful, application of Section 37 is per se not excluded.
PR. COMMISSIONER OF INCOME TAX 6 v. KHYATI
REALTORS PVT. LTD. [S. RAVINDRA BHAT, J.]
23. This court is of the opinion however, that in the facts of this
case, the judgment in Southern Technologies (supra) on this issue (where
the claim of bad and doubtful debt was disallowed) is appropriate, and
applicable. The relevant extract of the said judgment is as follows:
“44. As stated above, Section 36(1)(vii) after 1.4.1989 draws
a distinction between write off and provision for d oubtful
debt. The IT Act deals only with doubtful debt. It i s for the
assessee to establish that the provision is made as the l oan is
irrecoverable. However, in view of Explanation which keeps
such a provision outside the scope of “written off” bad debt ,
Section 37 cannot come in. If an item falls under S ections
30 to 36, but is excluded by an Explanation to Section 36 (1)
(vii) then Section 37 cannot come in. Section 37 applies only
to items which do not fall in Section 30 to 36. If a provisio n
for doubtful debt is expressly excluded from Sectio n 36 (1)
(vii) then such a provision cannot claim deduction under
Section 37 of the IT Act even on the basis of “real income
theory” as explained above.”
24. In view of the foregoing discussion, the Revenue’s appeal has
to succeed. The impugned judgment of the High Court and the order of
ITAT are hereby set aside. The appeal is allowed, in t he above terms,
without order on costs.
Devika Gujral Appeal allowed.
(Assisted by : Mahendra Yadav, LCRA)