Kwality Fun Foods and Restaurants (P.) Ltd. vs Deputy Commissioner of Income Tax

N. Paul Vasanthakumar, J.—This tax case appeal is preferred by the assessee, challenging the order of the income tax Appellate Tribunal made in I. T. A. No. 283 of 2003 dated June 7, 2006--since reported as (2007) 109 TTJ 112 , confirming the order passed by the Commissioner of income tax (Appeals), dated December 16, 2002, pertaining to the assessee for the assessment year 1998-99. This tax case (appeal) was admitted by this court on February 13, 2007, on the following substantial questions of law :

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that when an amount advanced to a contractor for execution of work for the purpose of business becomes irrecoverable, the same is not allowable as bad debt?

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that an irrecoverable advance given in the course of business, is not allowable as a business/trading loss?

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the amount advanced was incurred towards the cost of acquiring the profit earning apparatus and, hence, not allowable as revenue loss?

During the course of arguments, the learned counsel appearing for the assessee submitted that he is not pressing the first issue and he is advancing the arguments only with regard to substantial questions of law 2 and 3 alone. The said submission is recorded.

The case of the assessee is that the Assessing Officer disallowed a sum of Rs. 5,89,500 being the advance written off as irrecoverable. The assessee is an ice cream manufacturing concern. On February 3, 1996, the assessee concern placed an order with M/s. Alps Engineering Services Pvt. Ltd., for construction of a cold storage plant at its factory at Coimbatore and advanced a sum of Rs. 7,89,500. The said Alps Engineering Services Pvt. Ltd., did not commence the work due to their financial strain. A sum of Rs. 2 lakhs was recovered from the advance already paid and the balance was claimed as deduction from the total income under the heading "Business loss", as the amount was not recovered. The same was disallowed by the Assessing Officer.

The assessee filed an appeal against the order of assessment and the Commissioner of income tax (Appeals) dismissed the appeal by holding that the advance made to the contractor was for the purpose of securing an enduring benefit in the form of cold storage system and, therefore, the advance made was to acquire assets of capital nature.

The assessee preferred a second appeal before the income tax Appellate Tribunal in I. T. A. No. 283 of 2003 raising the very same contention regarding business loss, which was dismissed by the Tribunal by following the judgment of the hon''ble Supreme Court reported in Empire Jute Co. Ltd. Vs. Commissioner of Income Tax, . Against the said order assessee has filed the present appeal.

The learned counsel appearing for the appellant-assessee reiterated the contentions advanced before the Assessing Officer, the Commissioner of income tax (Appeals), and before the income tax Appellate Tribunal and prayed for setting aside the order of assessment as the advance amount paid to the tune of Rs. 5,89,500, was unable to be recovered as the company in whose favour contract was given has become defunct and the said amount may be treated as business loss.

The learned counsel appearing for the Revenue on the other hand relied on the judgment of the hon''ble Supreme Court reported in M/s. Hasimara Industries Ltd. Vs. Commissioner of Income Tax West Bengal-IX and Another, and contended that a similar issue was already considered in the said decision and the Supreme Court answered the point against the assessee.

The learned counsel for the assessee was neither able to distinguish the said decision nor was in a position to show any other decision in support of his claim.

In the decision reported in M/s. Hasimara Industries Ltd. Vs. Commissioner of Income Tax West Bengal-IX and Another, it is held that if the assessee sustains business loss during the enlargement of the business, the same should be treated as capital investment and deduction can be made towards tax. In view of the said decision of the Supreme Court the'' questions of law raised in this tax case appeal are answered against the assessee and the tax case appeal is dismissed. No costs.