I-T - Whether when assessee purchases development rights for construction project and writes off certain payments as bad debt for extra land space detected after five years, and that too without making a claim, same is to be allowed u/s 36(1)(ii) - NO: ITAT

 THE issues before the Bench are - Whether when assessee purchases development rights for a construction project and writes off certain payments as bad debts for extra land space detected after five years, and that too without filing any claim, the same is to be allowed u/s 36(1)(iii); Whether such payment can be allowed as business expenditure as an alternative claim and whether disallowance of notional interest is permissible where there is a nexus between the interest bearing funds and their interest free advancement. And the answer goes against the assessee.

Facts of the case

The assessee, engaged in construction activities, purchased development rights from M/s Hiranandani Associates for its projects known as Gangotri & Yamnotri. Payments were made in this respect. Against the outstanding credit balance of Rs 90,165/- as on 1.4.2004, the payment of Rs 9 lacs was made on the ground that the excess land space utilized for the aforesaid project was required to be adjusted. In view of utilization of the land space which was very negligible, the excess amount of Rs 8,09,835/- to Hiranandani associates was written off being non-recoverable with the understanding that it was on account of the cost of extra land space utilization for the aforesaid project. The profitability in respect of the aforesaid project was already offered for taxation in the earlier years. Therefore, the assessee claimed the aforesaid payments to Hiranandani associates as bad debts. It was nothing but payments in the nature of utilization of the excess area for the construction in the aforesaid project.

After examining the details, AO was of the opinion that for making a claim of bad debt u/s 36[1][vii] the requirement was that such debt either should have been taken into account while computing the income of the assessee in the previous year or it should be the money lent in the ordinary course of the business. Since the above conditions prescribed u/s.36[2] were not fulfilled, AO disallowed this sum. The AO also disallowed proportionate interest from the interest paid on the ground that the assessee had transferred interest bearing funds to its sister concerns without charging any interset - Before CIT(A) assessee failed on both issues.

On appeal, the ITAT held that,

++ the amount has been correctly disallowed as bad debt because the conditions prescribed u/s.36[2] that either such amount should have been considered for computing the income or the amount could have been lent in the ordinary course of business, are not fulfilled. Even if assuming that assessee can raise an alternative plea before us, we find no force in the same, because no evidence has been brought on record to show that assessee had used extra space in the completed projects. No agreement for payment of such amount has been filed and it was merely stated that an oral mutual understanding was reached in this regard. We fail to understand as to how the extra space was detected after five years and that too without any claim being lodged by M/s Hiranandani Associates. Since no evidence is there for this claim, we reject this alternate contention also;

++ the AO has made his case very clear that a specific amount was borrowed for the purpose of Narsonar Bala project and the loan proceeds were deposited in Kotak Mahindra Bank. Admittedly, the money has been given out of such loan to the sister concern. Therefore, there is a direct nexus between the interest bearing loan and the interest free advances granted to the sister concern. The Ld. Counsel for the assessee made a general submission that in Narsonar Bala project funds of more than Rs.10 crores were used but he has not given any source of such funds or any evidence that assessee was having some interest free funds which were used in this project. Therefore, we find nothing wrong in the order of the ld. CIT(A) and confirm the same.