A deduction u/s 37 is sustainable only if it is made for the purposes of the business or even incidental to the business: Delhi High Court

Matter: M/s Pragati Constructions Co. v. Dy.CIT, decided on 31 May, 2011

Assessment Year: 1989-90

Relevant Facts:

1. The assessee was was carrying on the business of construction, purchase and sale of flats. In a bid for construction of flats for the DDA, the assessee lent some money to a sister concern, Pragati Construction Co. Pvt. Ltd.(“PCL”) to the tune of Rs. 44,00,000. This money was forwarded to the DDA.

2. This money was forfeited by the DDA for non-payment of rest of the money and non construction of the flats. PCL adjusted Rs. 36,00,000 towards certain previous amounts due. A payment of Rs. 5,00,000 was effected by PCL to the assessee.

3. Finally, Rs. 31,00,000 was shown as outstanding amount in the assessees books after settlement and payment of certain amount by the DDA. The amount was written off as bad debts by the assessee on the receipt of a certain letter 14.12.1988 that it would not be able to return the money.

4. The AO held that the amount was never a debt but infact an advance, and therefore the same could not be written off u/s 36(1)(vii) of the Income Tax Act, 1961. The CIT(A) and Tribunal ruled in favour of the department

Question of law made under a reference:

1. Whether, on the facts and in the circumstances of the case the ITAT has erred in law in disallowing the loss of Rs 31.05 lakhs claimed by the assessee as a trading loss in its business of purchase and sale of flats?

Dismissing the appeal of the Assessee, the Hon’ble Court held that:

1. The condition, required to be fulfilled to sustain a deduction under Section 37 of the I.T. Act that the expense should be incurred for the purpose or should be incidental to the business of the assessee is not fulfilled in the instant case.

The decision is available here.