By TIOL News Service

AHMEDABAD, APR 25, 2016: THE issue is - Whether when chances of recovery of advances made in connection with business are slender, assessee tends to lose right to claim foreseeable business loss as bad debt. NO is the answer.

Facts of the case

The assessee was engaged in the trading of gold jewellery, land and shares for the year under consideration. It had filed the return claiming bad debts amounting to Rs.5,24,59,472/-. The AO allowed the bad debts in respect of A. P. Sayona Trade Association amounting to Rs.9,06,980/- and the balance amount of Rs.5,15,52,492/- was added to the total income observing that they were not incidental to the regular business activity of the company as the assessee’s regular business was of purchase and sale of land, gold and shares. On appeal, the CIT(AA) granted relief to the extent of Rs.4,95,02,105/-.

Having heard the parties, the High Court held that,

++ the facts as emerging from the record reveal that the assessee had claimed that certain debts had become bad in respect of seven parties. The AO declined the claim in respect of six parties and allowed the bad debt deduction in respect of A. P. Sayona Trade Association. In respect of two of the parties, namely, Sakar Overseas Pvt. Ltd. and Shree Ram Trading Co., the AO noted that these advances were not debts which have been taken into account in the computation of income and that as the assessee had filed cases against these entities and as judgment on these court cases are yet to be delivered, bad debts were not allowed at that stage. The Tribunal, after considering the material on record, found that it was an undisputed position that the assessee did in fact trade in processed agricultural produce, in connection with which the advances in question were made, and it was in the course of this trading that, the business loss of making unrecoverable advances was incurred. The Tribunal found, as a matter of fact, that the losses were wholly incidental to the business carried on by the assessee. It further noted that there may not be any trading transactions of these products in the current year, but the business of the assessee has not come to a halt. No doubt, the criminal complaints filed by the assessee had not reached finality and the persons who allegedly and fraudulently obtained these advances were on bail granted by the High Court, however, the remote possibilities of recovery did not take away assessee’s right to claim reasonably foreseeable business loss. Thus, the Tribunal has recorded concurrent findings of fact to the effect that advances given by the assessee had become actually bad and such findings had remained uncontroverted.In the aforesaid premises, the conclusion arrived at by the Tribunal does not give rise to a substantial question of law, warranting interference.

(See 2016-TIOL-820-HC-AHM-IT)