Income Tax Appellate Tribunal - Mumbai
Sudarshan Yellaiah Pathipaka, ... vs Acit, Central Circle-3 Thane, A-Wing ... on 26 September, 2024
IN THE INCOME TAX APPELLATE TRIBUNAL,
MUMBAI BENCH "G", MUMBAI
BEFORE SHRI NARENDER KUMAR CHOUDHRY, JUDICIAL MEMBER
AND
SHRI RATNESH NANDAN SAHAY, ACCOUNTANT MEMBER
ITA No.3644/M/2024
Assessment Year: 2010-11
Sudarshan Yellaiah ACIT, Central Circle- 3
Pathipaka A-Wing, Ashar IT Park,
Office No. D-25, 6th Floor,
4th Floor, Road No. 16Z,
Prozone Trade Centre, Vs. Wagle Indl. Estate,
Chikalthana, Thane (W.)- 400604
Aurangabad- 431001
PAN: AFXPP9604D
(Appellant) (Respondent)
Present for :
Assessee by : Shri Divyesh Shah- CA
Revenue by : Shri Sujatha P. Iyangar- Sr. D.R.
Date of Hearing : 02 . 09 . 2024
Date of Pronouncement : 26 . 09 . 2024
ORDER
Per: Ratnesh Nandan Sahay, Accountant Member:
1. This appeal has been filed by the appellant against the Order of the Ld. CIT (Appeals) passed u/s. 250 of the Income Tax Act [the 'Act' in short] Page | 2 ITA No.3644/MUM/2024 Sudarshan Yellaiah Pathipaka.; A. Y.2010-11 vide DIN & Order No. ITBA/NFAC/S/250/2024-25/1065319114(1) Dated 31/05/2024 for the Assessment Year 2010-11.
2. Following grounds of appeal have been raised by the appellant:
1. "National Faceless Appeal Centre, Delhi ("NFAC") erred in passing the Order under section 250 of the Act without observing the principle of natural justice inasmuch as no sufficient opportunity of being heard had been given to the Appellant.
1.1. NFAC also erred in not giving an opportunity to the Appellant during the Appellant proceedings to submit documentary evidences to substantiate his claim 1.2. NFAC further erred in not appreciating the facts that there were unavoidable circumstances beyond control resulting in not complying with the notices of the hearing during the course of Appellant proceedings 1.3. NFAC further erred in not sending the said notices on new changed) email id so intimated by the Appellant as such the Appellant had not been aware about the said hearing notices 1.4. The Appellant prays that it be held that the said order had been passed without sufficient opportunity of being heard and that be held to be set aside by affording reasonable opportunity to the Appellant to substantiate his claim.
WITHOUT PREJUDICE TO THE ABOVE:
2. NFAC erred in conforming the order passed by the Assistant Commissioner of Income Tax, Central circle-3, Thane("the A.O.") under section 143(3) r.w.s. 147 of the Act)
2.1. NFAC also erred in not appreciating the fact that the A.O. had examined the issue of write off of advances during the course of assessment proceedings and had allowed the same.
2.2. NFAC further erred in not appreciating the fact and circumstances of the case in passing the order under section 143(3) r.w.s. 147 of the Act was unjustified and unwarranted Page | 3 ITA No.3644/MUM/2024 Sudarshan Yellaiah Pathipaka.; A. Y.2010-11 2.3. The Appellant prays that the said order passed by the A.O. be held to be ab-initio or otherwise void, bad-in- law and liable to be quashed.
3. NFAC erred in conforming the action of the A.O. in treating the amount of Rs.33,10,000/-so written off as expenses incurred on acquiring capital asset and as such not allowable under section 37 of the Act 3.1. NFAC also erred in not appreciating the fact that the said advances had been given were in connection with and in the ordinary course of the business carried on by the Appellant 3.2. NFAC also erred in not appreciating the fact that the said advances towards acquisition of lands were part of stock-in-trade or work-in-progress for the purpose of business carried on by the Appellant 3.3. The Appellant prays that the said advances so written off be allowable as business loss incidental to the business under section 28(ii) or as a business expenditure under section 37(1) pf the Act in the ordinary course of the business carried on by the Appellant.
4. NFAC further erred in not appreciating the fact that the interest charged under section 234A, 2348 and 234C of the Act were unjustified and unwarranted 4.1. The Appellant prays that the charging of said interest be deleted 4.2. Without prejudice to the above, the Appellant prays that the said charging of interest under section 234A, 2348 and 234C of the Act be substantially reduced
5. The Appellant craves leave to add to alter or to amend or delete any of the above grounds of Appeal."
3. The facts of the case, in brief, are that the assessee filed return of income on 02/10/2010 for the assessment year 2010-11 declaring total income at Rs.41,33,397/-. The original assessment was made u/s. 143(3) on 26/03/2013 assessing the total income at Rs.55,82,400/-. Meanwhile in pursuance of the order of the Ld. CIT (A)-11, Pune dated 17/03/2015, the Page | 4 ITA No.3644/MUM/2024 Sudarshan Yellaiah Pathipaka.; A. Y.2010-11 income of the assessee was recomputed at Rs.41,33,400/- vide order dated 11/07/2016. Subsequently, it was noticed by the Ld. AO that the deposits of capital nature amounting to Rs.33,10,000/- was incorrectly written off. Since, the above sum had escaped assessment; the case was reopened u/s 147 of the Act and notice u/s.148 dated 16/03/2016 was sent to the assessee with prior approval of Ld. Pr. CIT(C), Pune. The reasons for the reopening of case was also supplied to the assessee. However, the notice was issued and served on the assessee by way of 'affixture' and served on the watchman of the building. In response to the notice issued u/s. 148, the assessee filed a letter dated 12/05/2016 and requested the Ld. AO that return filed on 02.10.2010 may be treated as return of income filed in response to the notice issued u/s. 148 of the Act.
4. The Ld. AO has noted in the assessment order dated 09/12/2016 that on perusal of the Profit & Loss A/c for the financial year ended on 31.03.2010, it was seen that the assessee has debited a sum of Rs.33,10,000/- towards deposit written off (included in the construction expenses of Rs.5.06 crores). The advances/deposits were not taken into account while computing the income of the assessee for the assessment year 2010-11. The assessee, therefore, was given a show cause notice u/s. 142(1) of the Act dated 04/10/2016 and was asked to explain why the Page | 5 ITA No.3644/MUM/2024 Sudarshan Yellaiah Pathipaka.; A. Y.2010-11 deposits of Rs.33,10,000/- being capital in nature should not be disallowed and added back to the income of assessee.
5. The reply filed by the assessee is reproduced as under:
"I had filed the income tax return on for A.Y.2010-11 dated 02.10.2010 on declaring income of Rs.41,33,397/-, During the proceedings of assessment it is found that the amount of Rs.5,06,54,538/- debited on the accounts of construction expenses in which included an amount of Rs.33,10,000/-.
The amount of Rs.33,10,000/- was paid to land owners and villagers towards advance payment for possession of land, the registration of land was not taken place for the year AY 2010-11. This amount was irrecoverable, so the amount was write off as bad debts. So, therefore I request your honour to kindly allowed the expenses of Rs.33,10,000/- as bad debt. These amounts were already reflecting in preceding year's balance sheet shown under loans & advances. However if the same rendered & recovered in future the same will be written back in books of account, but such an eventuality does not appeal to be reality in near future as the land is it really disputed."
6. The Ld. AO, after given due consideration of the submissions made as above, added this sum of Rs.33,10,000/- u/s. 37 of the Income Tax Act on the ground that the expenditure incurred on acquisition of capital asset is a capital expenditure and cannot be deducted from the income.
Page | 6 ITA No.3644/MUM/2024 Sudarshan Yellaiah Pathipaka.; A. Y.2010-11
7. Aggrieved by the order of the Ld. AO, the assessee filed appeal before the Ld. CIT (A), who, vide the impugned order confirmed the addition made by the AO by holding as under:-
"that the amount of Rs.33,10,000/- was paid to landowners and villagers towards advance payment for possession of land but the registration of land was not taken place for the assessment year 2010-11. This amount was irrecoverable, so the amount was written off as bad debts. The Ld. AO found that the deposits given were capital in nature and not routed through the profit and loss account. The advances/deposits were not taken into account while computing the income of the appellant therefore, the appellant had incorrectly written off bad debts/advances since they were not allowable as per provisions of section 37 of the I.T. Act, 1961. However the appellant has contended that though the said amount has not been routed through Profit and loss Account but the said amount has been debited to the concerned party and also through the Balance Sheet. This contention of the appellant has also been considered but it is also observed that number of opportunities have been given to the appellant during the appellate proceedings so that the appellant can also submit documentary evidence such as any registered agreements undertaken by the appellant with the villagers or the cancellation of the agreements etc to substantiate his claim In the absence of any documentary evidence to Page | 7 ITA No.3644/MUM/2024 Sudarshan Yellaiah Pathipaka.; A. Y.2010-11 further his claim, the appeal cannot be allowed. As can be seen from the table above, more than 5 opportunities have been afforded to the appellant but without any response. That the said amount was actually irrecoverable can be established by the appellant and in the absence of the same, the addition made by the AO is hereby confirmed."
8. Aggrieved by the impugned order, this appeal has been filed before us. In the 'Statement of Facts' filed along with Form-36 the appellant has submitted as under:-
"A. DISALLOWANCE OF DEPOSITS WRITTEN OFF- Rs.33,10,000 (PARA 5 to 11 OF THE ORDER)
1. Ld. AO has disallowed write off of deposits given to various parties in connection with purchase/possession of land of Rs.33,10,000. Ld. AO has justified the disallowance on following grounds:
Deposits given are capital in nature and not routed through the profit and loss account;
Deposits were not taken in to account while computing income of assessee;
Expenditure incurred on acquisition of capital asset is a capital expenditure and not deductible from the income.
2. It is significant to note that appellant is engaged in the business of real-estate, developers, builders etc. For the purpose of business as builders / developers, appellants acquire various plots of lands. Lands acquired are required to be registered in appellants' name and Page | 8 ITA No.3644/MUM/2024 Sudarshan Yellaiah Pathipaka.; A. Y.2010-11 various other formalities are to be completed under the transfer of property act and other statutory provisions so that appellants acquire title of land free from any defect. Lands acquired are stock in trade and not an item of asset for appellants. In the year in question, Appellants had paid advances to land owners / villagers in connection with acquisition of lands. Somehow or other, lands could not be registered and transferred in appellants' name and advances given to various parties could not be recovered. Since advances given were not recoverable, the same were written off in the books and was claimed as expenditure in the return of income.
3.1. It is important to note that lands acquired / to be acquired were for the purpose of business of builders / developers carried on by appellants.
Expenditure on acquisition of land was not capital investment, but, was for the purpose of business carried on by appellants. In case of an assessee carrying on business of builders / developers, expenditure on acquisition of land is not a capital expenditure and, till the project is completed, cost of land is part of stock in trade or work in progress. After completion of the project and sale of units constructed on the land, sale price realized, which includes cost of land acquired, is offered for taxation as business income. Revenue has assessed income offered as business income and not as capital gains. When price Page | 9 ITA No.3644/MUM/2024 Sudarshan Yellaiah Pathipaka.; A. Y.2010-11 realized on sale of land, is assessed as business income, any expenditure incurred in connection with acquisition of land is revenue expenditure and not in capital field as alleged by Ld. AO. 3.2. Advances were given in connection with acquisition of land which was written off since they were not recoverable. At the time when advance is given, it is debited to account of party since party has yet not performed his part of obligation. If the party does not perform his obligation, advance is recoverable from him. Only after party performs his obligations as per the contract/arrangement/understanding and transactions with the party are concluded in finality that the advance account is settled. Therefore, at the time when advances are given, they are not and could not be routed through profit and loss account. Simply because advances are not routed through the profit and loss account, it could not be said that advances are capital in nature. Any advance given in connection with the business carried on by assessee is always routed through the balance sheet and not profit and loss account. This is the basic and fundamental principle of accountancy which Ld. AO has failed to understand and appreciate. Advances given in question are in the course of appellants business for the business purposes of acquisition of lands. All such advances are debts recoverable from the Page | 10 ITA No.3644/MUM/2024 Sudarshan Yellaiah Pathipaka.; A. Y.2010-11 concerned parties and form part of current assets and not of fixed assets in the books of account. All such advances are business debts recoverable by appellants from the parties. Therefore, advances given are not capital in nature as contended by Ld. AO. Even if, for argument sake, advance given is routed through profit and loss account, it does not qualify for deduction as an expenditure. Therefore, when advance is given, it cannot be taken into account while computing income of appellants either as expenditure or as income. In the circumstances, contention raised by Ld. AO that advance given is capital in nature and is not routed through the profit and loss account does not hold any force.
3.3. As mentioned supra, advance given is a debt recoverable from the party till the obligation for which advance is given is discharged in full by the party. Advance given forms part of current assets of the business. By no stretch of imagination, advance given forms part of total income or is required to be taken in to account while computing income of assessee. Therefore, contention raised by Ld. AO that deposits were not taken into account while computing income of assessee is devoid of any merits.
3.4. Ld. AO has not disputed the fact that advance given was in connection and in course of business carried on by appellants. Ld. AO has also Page | 11 ITA No.3644/MUM/2024 Sudarshan Yellaiah Pathipaka.; A. Y.2010-11 not disputed the fact that advances were not recoverable from the parties and, therefore, were written off. He has admitted the fact that write off is by way of credit to the concerned parties accounts. The only grievance raised by AO is that advance given is an expenditure incurred in connection with acquisition of capital assets and is not taken in to account while computing income of assessee of the previous year.
The grievance raised by AO is not sustainable in the eyes of law in the light of admitted facts as stated hereinabove and having regard to nature of business carried on by appellants. Ld. AO has utterly failed to appreciate the technicalities and nature of business carried on by appellants.
4. Write off of advance was claimed as bad debt since advance was given in connection with and in the ordinary course of the business carried on by appellants. If it is not allowed as bad debt on the ground that it was not considered as part of income in earlier years, it is still allowable as business loss u/s. 28(iv) or as business expenditure u/s.37(1) of the Act. This proposition is directly supported by following judicial pronouncements to which appellants beg to refer to and rely upon. BUSINESS LOSS - ADVANCES Page | 12 ITA No.3644/MUM/2024 Sudarshan Yellaiah Pathipaka.; A. Y.2010-11 Business loss Irrecoverable advances given to job work contractor for supply of material and labor Failure by parties of job work contractors to perform their part of job Balance irrecoverable advance written off in books of account Loss incidental to business Allowable as business loss Income tax Act, 1961.
(2016) 50 ITR (TRIB) 286 (AHD) DEPUTY CIT VS. KALPATARU POWER TRANSMISSION LTD. Business expenditure Bad debt Advances written off Advances having proximate and direct nexus with assessee's regular business operations Expenditure wholly and exclusively for business purpose Advances becoming irrecoverable and actually written off - Allowable Income tax Act, 1961, ss. 28, 37(1) -
(2014) 32 ITR (TRIB) 404 (DELHI) BAUSCH AND LOMB EYECARE (INDIA) P LTD. VS. ADDL. CIT Business Loss Real estate business Amount advanced for purchase of property Property not transferred and amount not repaid deductible Income-tax Act, 1961- Loss [2012] 345 ITR 1 (DELHI) CIT V. NEW DELHI HOTELS LTD.
BUSINESS LOSS - ADVANCES / DEPOSIT WRITE OFF Page | 13 ITA No.3644/MUM/2024 Sudarshan Yellaiah Pathipaka.; A. Y.2010-11 Bad debits Deposits / advances given in connection with business could not be allowed as bad debt but had to be considered as business loss - (2015) 152 ITD 417 (MUM.) SMITA CONDUCTORS LTD. VS. DY. CIT BUSINESS LOSS Business Difference between setting up and commencement of business Real estate business Loan taken and participation in tender for acquisition of land- Business set up - Loss incurred was business - Income tax Act, 1961- [2014] 368 ITR 680 (DELHI) CIT VS. DHOOMKETU BUILDERS AND DEVELOPMENT P LTD.
5. Even if, as contended by AO, advance given is taken as in the capital field, write off of advance is allowable as business expenditure u/s.37(1). It has been held by Hon. Delhi High Court in case of CIT VS New Delhi Hotels Ltd (Dated: March 22, 2012), reported at 2012- TIOL- 227-HC-DEL-IT, that loss arising from payment made for purchase of property but not refunded is allowable u/s.37 of the Act. Appellants beg to rely upon decision in case of New Delhi Hotels (Supra).
Page | 14 ITA No.3644/MUM/2024 Sudarshan Yellaiah Pathipaka.; A. Y.2010-11
6. IN THE FACTS OF THE CASE, claim of write off of advances written off be directed to be allowed as bad debt OR alternatively, as business loss u/s.28(iv) or as business expenditure u/s.37(1) of the Act. III. REOPENING OF THE ASSESSMENT
1. Appellants filed return of income for the year in question u/s. 139 of the Act declaring total income at Rs.41,33,397. Ld. AO passed regular scrutiny assessment order u/s.143(3), dated 26.3.2013, assessing at Rs.55,82,400. Scrutiny assessment was made after calling for host of information, details and other relevant documents and materials. Appellants had also submitted audited balance sheet and profit and loss account along with the return of income. Balance sheet and profit and loss account disclosed all material particulars of assets, liabilities, incomes, expenses etc. Appellants have also maintained regular books of account wherein all the business transactions have been duly recorded. Books of account were also produced during the course of scrutiny assessment proceedings and were thoroughly scrutinized by Ld. AO. Various queries were raised by Ld. AO calling for explanation in respect of various items of expense including write off of advances given in question. Appellants had furnished all the required explanation and clarifications as sought for by Ld. AO Page | 15 ITA No.3644/MUM/2024 Sudarshan Yellaiah Pathipaka.; A. Y.2010-11 including in respect of write off of advances given in question. All such queries by Ld. AO and explanations by appellants were oral communications during the course of assessment proceedings. Ld. AO may not have noted such queries raised by him and explanations furnished by appellants in the order sheet, but, that does not mean that Ld. AO has not examined the issue of write off of advances and has not formed the opinion that it is allowable. Ld. AO has turned around and has changed his opinion and has reopened the assessment for disallowing the claim of write off of advances. It is no longer a matter of reintegrate that reopening of the assessment on the basis of change of opinion is not permissible. Even otherwise, there is no suppression or mis-declaration of any material particulars of income by appellants and there is no satisfaction or findings recorded with documentary evidences establishing such suppression or mis-declaration by Ld. AO either in impugned order or in the notice u/s. 148 dated 16.3.2016 issued by him. Therefore, reopening the assessment and revising the assessment made u/s. 143(3) vide impugned order is bad in law and without any authority under the Act.
2. IN THE FACTS OF THE CASE, reassessment made u/s.143(3) r.w.s. 147 vide order dated 9.12.2016 be set aside and quashed."
Page | 16 ITA No.3644/MUM/2024 Sudarshan Yellaiah Pathipaka.; A. Y.2010-11
9. We have considered the facts of the case and submissions made as above. During the appellate proceedings before us, it was contended by the appellant sufficient opportunity have not been given to explain its case before the Ld. CIT (A) despite the fact that the appellant had submitted all details and all relevant documents including books of account and audited balance sheet during the course of scrutiny assessment proceedings before AO and all clarifications/explanations were also offered before the Ld. AO at the time of making assessment u/s 143 (3) of the Act which was not noted by him. However, despite the submissions made during the original assessment proceedings, the notice u/s. 148 of the Act dated 16.03.2016 was issued to him and therefore, the reopening and revisiting of the assessment u/s 147 of the Act is barred in law and without any authority of the Act. It was also argued before us that the Ld. CIT (A) has also not given a sufficient opportunity of being heard to the appellant to explain its case and has wrongly recorded in the impugned order that number of opportunities were given to the appellant during the appellate proceedings. Had he given sufficient opportunities the appellant could submit all documentary evidence, such as, registered agreements undertaken by the appellant with the villagers or the cancellation of the agreement, etc. to substantiate his claim.
Page | 17 ITA No.3644/MUM/2024 Sudarshan Yellaiah Pathipaka.; A. Y.2010-11
10. We have given due consideration to the facts of the case, submissions made by the appellant and the impugned order. As we could see that more than five opportunities have been afforded to the appellant by the Ld. CIT (A) and no response was given by the appellant without any response. We therefore, find it proper to set aside the order of the Ld. CIT (A) and remand the matter back to his file to decide the issue afresh after taking into consideration the details filed by the appellant and also to afford adequate opportunity of being heard to the appellant to substantiate its claim. The appellant is also directed to make necessary compliance before the Ld. CIT (A) to explain his case.
11.In the result, the appeal is allowed for statistical purpose. Order pronounced in the open court on 26.09.2024.
Sd/- Sd/-
NARENDER KUMAR CHOUDHRY RATNESH NANDAN SAHAY
JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai, Dated: 26.09.2024.
Snehal C. Ayare, Stenographer
Copy to:The Appellant
The Respondent
The CIT, Concerned, Mumbai
The DR Concerned Bench
//True Copy//
Page | 18
ITA No.3644/MUM/2024
Sudarshan Yellaiah Pathipaka.; A. Y.2010-11 By Order Dy/Asstt. Registrar, ITAT, Mumbai.