The main legal point established in the judgment is the interpretation of the provisions of Section 36(1)(vii) and Section 36(2) of the Income Tax Act, 1961, and the conditions for claiming a deduction for bad debts. The court also emphasized the conditions for claiming a deduction under Section 37 for an expenditure laid out or spent exclusively for the purpose of business.

JUDGMENT :

S. RAVINDRA BHAT, J.

1. Special leave granted. With consent of the counsels for the parties, the appeal was heard finally. The Revenue has appealed a decision of the Bombay High Court¹[In ITA No. 291 of 2017, decided on 30.04.2019.] which affirmed an order²[In ITA No.129/Mum/2014, decided on 04.03.2016.] of the Income Tax Appellate Tribunal (hereinafter, “ITAT”) which had upheld a claim by the respondent (hereinafter, “assessee”) for writing off Rs. 10 crores as a bad debt.

2. The assessee carries on real estate development business, trading in transferable development rights (TDR) and finance. In respect of its return for the assessment year 2009-2010, the Assessment Officer (hereinafter, “AO”) issued a notice under Section 143(2) of the Income Tax Act 1961 (hereinafter “Act” or “IT Act”) on 18.08.2010, and also under Section 142(1) of the Act, calling for various details. The assessee filed its response thereto. The scrutiny assessment was completed by the AO under Section 143(3) on 30.12.2011, determining the total income of the assessee at Rs. 87,880/-. The assessee contended that an amount of Rs. 10 crores was deposited with one M/s C. Bhansali Developers Pvt. Ltd. towards acquisition of commercial premises two years prior to the assessment year in question (i.e., in 2007). It was contended that the project did not appear to make any progress, and consequently, the assessee sought return of the amounts from the builder. However, the latter did not respond. As a result, the assessee’s Board of Directors resolved to write off the amount as a bad debt in 2009. It was also contended that the amount could also be construed as a loan, since the assessee had ‘financing’ as one of its objects. In a letter dated 26.12.2011 to the AO, the assessee inter alia contended as follows:

“We submit that as per provisions of Section 36(2), in respect of monies advanced in the ordinary course of business, the same allowable as bad debts even if the amount has not been taken into account in computing the total income. This is well accepted position in respect of write off of advances given in the lending business. The present case fully falls within the provisions of sec. 36(2) hence the write off of advances is allowable u/s. 36(1)(vii).”

3. The AO disallowed the sum of Rs. 10 crores claimed as a bad debt in determining its income under “Profits and Gains of Business or Profession”. Aggrieved, the assessee appealed. Before the appellate Commissioner (hereinafter, “CIT (A)”) the assessee reiterated the contents of a letter dated 05.12.2011 written to the AO as follows:

“As part of our regular business activity, the company in order to purchase certain commercial premises had made reservation by way of bookings in the upcoming project at Old Mumbai Pune Highway, Khapoli, which was to be developed by M/s C. Bhansali Developers Pvt Ltd. In order to confirm the reservation/booking of said commercial premises, builder insisted for advance of Rs 10 crores. Accordingly, the company had advanced Rs 10 crores on 06.03.2007 towards reserving/booking of the commercial premises in the said project ... Since the said advance was for purchase of commercial property, there was no question of charging interest thereon...However, further development about the said project of the builder is that the builder after taking advances from us did not proceed in this matter and possibly siphoned the money for other purposes. On coming to know about their non-proceeding in the development of the said project, we had a number of meetings with the directors of M/s C. Bhansali Developers Pvt Ltd. They did not listen to our request for returning the money…”

4. The CIT(A) confirmed the disallowance on account of bad debts and interest. A further appeal was preferred to the ITAT, which allowed the assessee’s plea. The Revenue sought an appeal to the Bombay High Court under Section 260A of the IT Act. The Bombay High Court ruled that no question of law requiring a