The Tax Publishers2020 TaxPub(DT) 5323 (Mad-HC) : (2021) 430 ITR 0183

INCOME TAX ACT, 1961

Section 37 Section 36(1)(vii)

Where assessee was engaged in developing of properties and claimed 'provisions for claims and compensation', as the claim of creation of provision for such expenditure, which was not incurred and was only intended to be written off as compensation paid to the land owner for the admitted failure of the assessee to complete the contract in the manner as agreed between the parties, did not entitle the assessee to claim the same either as bad debts under section 36(1)(vii) or as business expenditure under section 37.

Business expenditure - Allowability - Assessee engaged in developing of properties and claimed 'provisions for claims and compensation' -

Assessee was engaged in developing of properties. Assessee was under obligation to construct a pent house but due to non-approval of the permission from local authorities, assessee could not construct the pent house but the landlord did not return the deposit as the assessee failed to satisfy the terms of the agreement. Assessee challenged the order of Tribunal holding that the bad debt was not written off as required by law as per the provisions of section 36, even though the write off of the debt was made from the accounts of the debtors, and the amount of loans and advances at the year end in the balance sheet was shown as net of the provisions for relevant debt. Further, assessee contended that Tribunal was not right in law in not considering the alternate claim that the amount was allowable as business loss under section 28 or under section 37, as debt occurred during the course of business. Held: Claim of creation of provision for such expenditure, which was not incurred and was only intended to be written off as compensation paid to the land owner for the admitted failure of the assessee to complete the contract in the manner as agreed between the parties, did not entitle the assessee to claim the same either as bad debts under section 36(1)(vii) or as business expenditure under section 37. Either the assessee admits this liability and pays the said amount to the land owner or the advance given thereafter is written off in its Book of Account to conclusively express its intention not to claim anything back from the land owner only could have been a reasonable conclusion of such expenditure being claimed as Compensation or a business expenditure under section 37. Developer of a building could claim it as an expenditure in the year in which such expenditure is actually incurred or the advance is written off and its right to claim the refund of such security is completely waived off. Nothing of this sort happened in instant case and merely by making a book entry for creating a provision for future expenditure or compensation, the assessee could not be permitted to claim deduction under section 36 or 37.

REFERRED : TRF Ltd. v. CIT (2010) 323 ITR 397 (SC) : 2010 TaxPub(DT) 1481 (SC), Allu Aravind Babu v. Asstt. CIT [ITA. A.No.1253 & 1254 /Mds./2015, dt. 15-7-2016].

FAVOUR : Against the assessee.

A.Y. : 2006-07 & 2007-08



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