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Pr. Commissioner of Income Tax 6 vs Khyati Realtors Pvt. Ltd.

Not available · 2022 INSC 864Decided 25 Aug 2022
Not available
Uday Umesh Lalit · S. Ravindra Bhat · Sudhanshu Dhulia

Background

A real estate company had advanced Rs. 10 crore in 2007 to another builder as booking money for commercial premises in an upcoming project. When the project made no progress and the builder failed to return the money, the company's board wrote off the Rs. 10 crore as a "bad debt" in its 2009 accounts and claimed it as a tax deduction. The tax officer disallowed the claim, but the Income Tax Appellate Tribunal and the Bombay High Court both ruled in the company's favour, prompting the tax department to appeal to the Supreme Court.

Decision Breakdown

The Supreme Court allowed the Revenue's appeal and set aside the rulings of the ITAT and High Court. It held that a "bad debt" deduction under Section 36(1)(vii)/36(2) of the Income Tax Act requires the amount to actually be a business debt that was taken into account in computing income and genuinely written off in the accounts, not merely an advance for buying property that was never returned, which is capital in nature. The Court found the company had produced no material to show the terms of the alleged advance/loan, and since the money was meant to acquire immovable property, it was a capital expenditure, not a business debt or business expense; it therefore also could not fall back on the general business-expenditure deduction under Section 37, since Section 37 does not apply once a claim is specifically excluded under Section 36.

Lesson Learnt

Money paid as an advance to acquire property (rather than money lent or owed in the ordinary course of business) cannot be written off as a "bad debt" for tax purposes merely because it was never recovered: taxpayers must maintain proper documentation showing the true nature of a transaction before claiming such deductions.

Official source (sci.gov.in)View Judgment (PDF)

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