Advance for Land Written Off Allowed as Business Deduction | ITAT

Case Details: Mahakoshal Refractories (P.) Ltd. vs. Income-tax Officer - [2025] 175 taxmann.com 673 (Mumbai-Trib.)

Judiciary and Counsel Details

• Amit Shukla, Judicial Member & Girish Agrawal, Accountant Member
• Kantilal Gugalia, CA for the Appellant.
• Smt. Sanyogita Nagpal, CIT DR for the Respondent.

Facts of the Case

The assessee, a private limited company, was engaged in the manufacture of refractories. During the relevant assessment year, it made an advance payment for purchasing land adjacent to its existing factory premises for expansion purposes. However, the deal never went through due to family problems on the landowner’s end. The landowner did not return the advance payment, citing financial difficulties, and requested the assessee to forego the advance payment.

Accordingly, the assessee wrote off the amount in its books of account and claimed it as a bad debt/business loss under Section 37(1).

The Assessing Officer (AO) disallowed the claim, holding that it did not constitute a debtor-creditor relationship about business and that the advance was clearly for the acquisition of a capital asset. On appeal, the CIT(A) upheld the order of the AO. Aggrieved by the order, the assessee preferred an appeal to the Mumbai Tribunal.

ITAT Held

The Tribunal held that the assessee made an advance payment to acquire land adjacent to its existing factory premises for expansion. This fact was not controverted by the authorities below or the revenue by bringing any cogent material on record. The sum of the advance payment expended by the assessee to gain direct and immediate benefit to its business on the grounds of commercial expediency is expended wholly and exclusively for its business.

Even if the deduction of advance written off by the assessee during the year is not allowable as a bad debt, the same would not jeopardise the claim of the assessee for deduction of it as a business loss. The assessee demonstrated that the money advanced was for business expediency and is an allowable deduction under Section 37(1).

List of Cases Reviewed

• Mahindra and Mahindra Ltd. v. CIT [2023] 151 taxmann.com 332/456 ITR 723 (Bombay) (para 6) followed
• Pr. CIT v. Balmer and Lawrie [2023] 149 taxmann.com 286/455 ITR 198 (Calcutta) (para 9) followed

List of Cases Referred to

• Pr. CIT v. Khyati Realtors (P.) Ltd. [2022] 141 taxmann.com 461/289 Taxman 60 /447 ITR 167 (SC) (para 4.1)
• Mahindra and Mahindra Ltd. v. CIT [2023] 151 taxmann.com 332/456 ITR 723 (Bombay) (para 6)
• Harshad J. Choksi v. CIT [2012] 25 taxmann.com 567/210 Taxman 143 /349 ITR 250 (Bombay) (para 6.2)
• Badridas Daga v. CIT [1958] 34 ITR 10 (SC) (para 6.3)
• Pr. CIT v. Balmer Lawrie and Company Ltd. [2023] 149 taxmann.com 286/455 ITR 198 (Calcutta) (para 9).