Advance paid for booking commercial space in ordinary course of business, which becomes irrecoverable, is allowable as deduction

Facts of the Case

The assessee, a private limited company, had advanced a sum of Rs. 10 crores to Bhansali Developers for booking commercial space in an upcoming construction project.  For some reason, the deal failed. The assessee, despite full efforts, could not get the refund of the said advance amount.

In its the return of income for AY 2009-2010, the assessee claimed the said advance payment as a bad debt.  The AO disallowed the same saying that the amount could not be claimed by way of business loss because buying and selling commercial space was not the business of the assessee.

On appeal, the Tribunal observed that the advance was given in the ordinary course of business, which could not be recovered.  The Tribunal allowed the deduction under section 37 of the Act.  

Revenue filed appeal to High Court.

Decision of High Court

The Court held that the assessee was engaged in the business of real estate and financing.  The object clause of the company reads as under:

“1. To carry on the business of contractors, erectors, constructors of buildings, houses, apartments, structures for residential, office, industrial, institutional or commercial purposes and developers of co-operative housing societies, developers of housing schemes, townships, holiday resorts, hotels, motels, farms, holiday homes, clubs, recreation centres and in particular preparing of building sites, constructing, reconstructing, erecting, altering, improving, enlarging, developing, decorating, furnishing and maintenance of structures and other properties of any tenure and any interest therein and purchase, sale and dealing in freehold and leasehold land to carry on business as developers of land, buildings, immovable properties and real estate by constructing, reconstructing, altering, improving, decorating, furnishing and maintaining offices, flats, houses, factories, warehouses, shops, wharves, buildings, works and conveniences and by consolidating, connecting and sub-dividing immovable properties and by leasing and disposing off the same.”

The HC observed that this clause is widely worded and would cover within its fold a range of activities such as erection, construction of buildings and houses, as also purchase, sale and dealing in freehold and leasehold land to carry on business as developers of land, buildings, and immovable properties.  The HC observed that it was in furtherance of such an object that the assessee had entered into a commercial venture by booking commercial space with a developer in the upcoming construction of the commercial building and advance for the booking was made.  The sum was not refunded.  The HC held that it is clearly a business loss. The HC further observed that later when, due to continued efforts, the assessee recovered a part of the said sum, the same was offered as business income.

The Revenue’s appeal was dismissed.


It is very important that the business activities are in sync with the object clause to ensure that an activity can be claimed to be part of ordinary course of business.

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