Advance Write-offs Allowed as Business Loss When Linked to Commercial Purpose: Analysis of ITAT Delhi in Unison Hotels Pvt. Ltd. Vs ACIT

The decision in Unison Hotels Pvt. Ltd. Vs ACIT (ITAT Delhi) deals with an important and recurring controversy: when can advances written off be treated as deductible business losses, even if they do not qualify as bad debts under Section 36(1)(vii) of the Income Tax Act 1961?

The assessee, a company operating a 5-star hotel under the brand “The Grand” at New Delhi, had written off substantial advances in its books and claimed deduction in the profit and loss account. The Assessing Officer (AO) disallowed the entire claim, and the NFAC / CIT(A) upheld the disallowance. On further appeal, the ITAT Delhi examined each item of write-off separately and gave a split verdict—allowing some and sustaining others.

This order is significant because it clearly demarcates:

  • When advances, security deposits or earnest money linked with business contracts can be claimed as business loss under Section 28 or Section 37(1), even if they fail as bad debts under Section 36, and
  • When such payments are treated as capital in nature or personal / friendly loans, and hence not allowable.

Below is a structured analysis of the Tribunal’s findings.

Background of Assessment and Dispute

The assessee filed its return of income for AY 2014-15 declaring income of Rs. 7,21,35,196/-. The case was initially picked for limited scrutiny under CASS and later converted into complete scrutiny with approval of the competent authority. During assessment under Section 143(3), the AO examined Note 27 – Operating and general expenses, and noticed a debit of Rs. 4,90,65,185/- as “advances written off”.

On being called upon to justify this claim, the assessee explained that:

  • These were inter-corporate deposits (ICDs) and business advances given in earlier years,
  • Despite best recovery efforts, they had become irrecoverable,
  • Management therefore resolved to write them off in the books during the relevant year.

The broad break-up of advances written off was:

  1. Rs. 3,27,56,000/- – deposit / advance to M/s Gomti Foods & Spices Pvt. Ltd.
  2. Rs. 1,50,00,000/- – advance / ICD to Mr. O.P. Parasrampuria
  3. Rs. 11,06,860/- – earnest money deposit in connection with gas supply bidding through M/s Sankalp Oil & Natural Resources Pvt. Ltd.

The AO examined the claim under Section 36(1)(vii) read with Section 36(2) dealing with bad debts, and concluded that the conditions of those provisions were not met. Specifically, the AO held:

  • The assessee was in the hotel business, not in money-lending,
  • No business income had been disclosed in prior years relatable to these advances as “debts taken into account”,
  • Some advances were linked to capital assets / capital transactions.

Consequently, the entire amount of Rs. 4,90,65,185/- claimed as “advance written off” was disallowed.

The assessee’s appeal before the CIT(A) failed. On further appeal, the assessee chose not to press the jurisdictional / technical grounds and argued only on merits, specifically on the disallowance of the three major components of advances written off.

The AO and the Tribunal both examined the issue primarily under:

  • Section 36(1)(vii) – deduction of bad debts
  • Section 36(2) – conditions for allowance of bad debts
  • Section 28 – profits and gains of business or profession, and scope of business loss
  • Section 37(1) – residual deduction for business expenditure not covered by specific sections

The settled legal tests summarized by the AO for claiming bad debts were:

  1. There must be a debt;
  2. The debt must be revenue in nature;
  3. It should be incidental to the business of the assessee;
  4. It must have been taken into account in computing income of the assessee in the year of write-off or earlier years, or must represent money lent in the ordinary course of banking / money-lending business.

However, the Tribunal went beyond the narrow confines of Section 36 and examined whether irrecoverable advances could still be allowed as business loss under Section 28/Section 37(1) if they arose from commercial expediency and were connected with the assessee’s business operations.

Issue 1: Write-off of Rs. 3,27,56,000/- – Deposit with M/s Gomti Foods & Spices Pvt. Ltd.

Factual Matrix

The assessee had entered into an agreement dated 15.11.2007 with M/s Gomti Foods & Spices Pvt. Ltd.. Under this agreement:

  • The assessee was granted exclusive rights to renovate, redevelop and use a 2200 sq. ft. property at 4, Regal Building, Parliament Street, New Delhi as a fine dining restaurant.

  • The tenure of rights was 20 years.

  • The assessee was required to:

    • Pay Rs. 4,00,00,000/- as a refundable security deposit, and
    • Pay monthly rental at 1% of monthly gross sales from the restaurant.

  • The agreement contemplated that development would be completed within one year and the restaurant would become operational by 31.12.2008.

  • In case the assessee failed to complete development and put the premises to use within the stipulated time, Gomti Foods could treat the agreement as terminated and forfeit the deposit.

Soon after this arrangement, a major fire broke out on 26.01.2008 in the basement kitchen of the assessee’s hotel, severely impacting operations. Evidence such as media reports and the Delhi Fire Service report were produced.

Due to this unforeseen disaster: