Section 28 r.w.s. 37(1) – Business loss – Advance payment for booking commercial space – Deal failed and could not get refund – Object clause of the assessee covered this as business activities – Allowable as deduction

7

Pr. CIT-6 vs. Khyati Realtors Pvt.
Ltd. [Income-tax Appeal No. 291 of 2017; (Bombay High Court)

Dated 30^th April, 2019]

[Khyati Realtors Pvt. Ltd.
vs. ACIT-6(2); Bench: “A”; ITA. No. 129/Mum/2014, Mum ITAT]

Dated 4^th
March, 2016;

A.Y. 2009-10.

Section
28 r.w.s. 37(1) – Business loss – Advance payment for booking commercial space
– Deal failed and could not get refund – Object clause of the assessee covered
this as business activities – Allowable as deduction

The assessee,
who is a private limited company, had advanced a sum of Rs. 10 crore to one
Bhansali Developers for booking commercial space in an upcoming construction
project. For some reason, the deal failed. The assessee, despite full efforts,
could not get refund of the said advance amount. In the return of income for
the A.Y. 2009-2010, the assessee had claimed the said sum of Rs. 10 crore as a
bad debt. The A.O. disallowed the same saying that the amount could not be
claimed by way of business loss because buying and selling commercial space was
not the business of the assessee.

On
appeal, the CIT(A) confirmed the disallowance. The assessee suggested before
the CIT(A) an alternate plea, that deduction should be allowed u/s. 37 of the
Act if the write-off of the advance did not fall u/s. 36(2) of the Act. But the
CIT(A) declined the assessee’s claim u/s. 36(2) on the plea that the assessee
did not have a money-lending licence or an NBFC licence; therefore, the
assessee was covered by explanation to section 37(1) of the Act. The CIT(A)
also declined the claim of the assessee u/s. 37 on the plea that the claim of
bad debts fell u/s. 30 to 36 of the Act.

Aggrieved
with the CIT(A) order, the assessee filed an appeal to the ITAT. The Tribunal
held that it is not in dispute that the expenditure claimed by the assessee is
not covered by any of the provisions of sections 30 to 36 of the Act and being
neither a capital nor personal expenditure, and having been incurred for the
purpose of carrying on of business, is eligible for deduction u/s. 37(1) of the
Act. The amount so advanced was not in the nature of capital expenditure or
personal expenses of the assessee, but was in the nature of advance given for
reserving / booking of commercial premises in the ordinary course of the
assessee’s business of real estate development and which could not be
recovered; therefore, there is no reason to decline the assessee’s claim as a
business loss u/s. 37(1) r.w.s. 28 of the I.T. Act. Accordingly, the claim was
allowed as a business loss.

Being
aggrieved with the ITAT order, the Revenue filed an appeal to the High Court.
The Court held that the assessee was engaged in the business of real estate and
financing. The object clause for incorporation of the company reads as under:

“1. To
carry on the business of contractors, erectors, constructors of buildings,
houses, apartments, structures for residential, office, industrial,
institutional or commercial purposes and developers of co-operative housing
societies, developers of housing schemes, townships, holiday resorts, hotels,
motels, farms, holiday homes, clubs, recreation centres and in particular
preparing of building sites, constructing, reconstructing, erecting, altering,
improving, enlarging, developing, decorating, furnishing and maintenance of
structures and other properties of any tenure and any interest therein and
purchase, sale and dealing in freehold and leasehold land to carry on business
as developers of land, buildings, immovable properties and real estate by
constructing, reconstructing, altering, improving, decorating, furnishing and
maintaining offices, flats, houses, factories, warehouses, shops, wharves,
buildings, works and conveniences and by consolidating, connecting and
sub-dividing immovable properties and by leasing and disposing off the same.”