• Mar
  • 12
  • 2012

No reduction in WDV of fixed assets upon waiver of bank loan

Posted In Income Tax Case Laws | | Comments Off

DCIT Vs. Adya Oil & Chemicals Ltd , ITAT Mum­bai

The assessee had borrowed a term loan from IDBI and a working capital loan from State Bank of Hyderabad. Since the assessee was unable to re-pay the loans, both the banks entered into a one-time settlement with the assessee for full and final settlement of the loans and part of the loan amount was waived off. During AY 2006-07, the AO contended  that the loans were availed for the purpose of business and, therefore, remission of the loan liability was a benefit by way of extinguishment of liability. The AO therefore held that waiver of the loans constituted income of the assessee by virtue of Sec 28(iv) read with Sec 41(1) of the Act.

Sec 28(iv) deals with ‘the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession’ which is taxable as income from business. Sec 41(1) deals with cases where any allowance or deduction has been obtained on remission or cessation of liability, then the value of such benefit would be deemed to be profits of the business. The AO further contended that the WDV of the asset acquired by way of such loan would be reduced to the extent of the waiver of the loan amount, as the provisions of Explanation (10) to Sec 43(1).

The assessee argued that the loans were obtained from a financial institution and a bank and were repayable with interest as per the terms of the loan arrangement. The loans were not in the nature of subsidy, grant or reimbursement and hence explanation (10) to Sec 43(1) of the Act would not be applicable.

Mumbai Bench of ITAT observed that the term loan from IDBI was borrowed by the assessee for the purpose of acquiring a capital asset. Accordingly, ITAT held that the waiver of loan from IDBI was a capital receipt and not taxable u/s 28(iv) or 41(1). ITAT observed that the remission or reduction of liability, which is created on capital account, cannot to our mind result in a revenue receipt making it taxable u/s 28(iv) or 41(1) of the Act and that  the waiver of such term loan does not constitute business and the waiver can  not be held as income u/s.28(iv) or cessation of liability u/s 41(1).

Accordingly to ITAT, waiver of loan under one time settlement not to be reduced from WDV of capital assets; Waiver not in the nature of subsidy, grant or reimbursement, hence Explanation 10 to Sec 43(1) not applicable.

INCOME TAX APPELLATE TRIBUNAL, MUMBAI

ITA No. 4878/Mum/2010 Assessment Year: 2006-07

Dy. Commissioner of Income-tax Vs. Adya Oil & Chemicals Ltd.

ITA No. 4942/Mum/2010 – Assessment Year: 2006-07

Adya Oil & Chemicals Ltd. Vs Dy. Commissioner of Income-tax 

Date of Pronouncement: 08/02/2012

ORDER

PER V. DURGA RAO, J.M.:

These are the cross appeals directed against the order of CIT(A)-19, Mumbai, passed on 24/03/2010 for the assessment year 2006-07.

2. Ground No. 1(a), (b) & (c) of the- assessee and ground No. 1 revenue are same, pertaining to remission of loan made under one time settlement scheme by IDBI and State Bank of Hyderabad.

3. Briefly the facts of the case are that the assessee is a company engaged in business of manufacturing of high value added castro oil derivatives filed its return of income, electronically, on 27/11/2006 declaring income at Rs. 65,64,206/-. Thereafter, the assessee had filed revised return of income on 28/11/2006 declaring total loss of Rs. 1,67,43,326/-, which was processed u/s 143(1) on 10/08/07. After due process, the assessment was completed u/s 143(3) of the Act. The assessee had borrowed term loan from IDBI and working capital from State Bank of Hyderabad. Since the figures are not clear in assessment order as well as in CIT(A)’s order, the same are not mentioned here. Since the assessee was unable to repay the said loans borrowed, both the said banks had come forward for One Time Settlement with the assessee. Accordingly, the assessee had entered into One Time Settlement for full and final settlement of the said loans. The AO had observed that writing off the loans payable by the assessee for one time settlement with the Banks amounting to benefit arises out of the business and, therefore, such income becomes income of the assessee by virtue of the provisions of section 28(iv) read with section 4 1(1) of the Act. He further observed that the loans were availed from the banks for the purpose of business and, therefore, when there is remission and whereby the assessee has received a benefit by way of extinguishment of liability, such benefit has arisen out of business and, hence, the same is taxable under the provisions of section 28(iv) of the Act and also attracts the provisions of section 41(1) of the Act. He, therefore, made the addition on account of the benefit by way waiver of loans & interest received by the assessee from IDBI and SBH. Aggrieved, the assessee carried the matter in appeal before the CIT(A). The CIT(A) following the decision in the case of CIT Vs. T.V. Sunderam Iyengar & Sons, [1996] 222 ITR 344 (SC) and also the decision in the case of Solid Containers Ltd. Vs. DCIT & Others, [2009] 308 ITR 417 held that loans arose on account of business carried on by the assessee and the loans were obtained during the course of carrying on the business of the assessee and, therefore, a benefit arises from the business when the said loans are waived/remission takes place. As per the facts available on record the term loans availed from IDBI were to finance the project cost of the assessee and hence, is of capital nature, the CIT(A) held that at the time when the loan was availed of, though it was in the capital filed, subsequently when part loan was waived, the receipt changed its character, when it became the assessee’s own money. In the case of loan availed from SBH is concerned, the CIT(A) held that there is no dispute that it is working capital and the same has to be taxable as revenue once waiver/remission had taken place. With the above observations, the CIT(A) confirmed the order of the AO partly, deleting the addition to the extent of Rs. 2,44,40,000/- on the ground that the assessee had reduced Rs. 2,21,79,118/- from gross block of fixed assets and Rs. 22,60,882/- from capital work in progress being interest debited and capitalized in earlier years. With regard to the loan waived by the IDBI including interest charged by the bank not claimed by the assessee in the books of account, the CIT(A) held that the assessee is not entitled to any relief. Being aggrieved by the order of the CIT(A) the assessee is in appeal against sustaining the addition and the revenue is in appeal against the deletion of addition to the extent of Rs. 2,44,40,000/-.

4. Before us, the learned counsel for the assessee submitted that the assessee has borrowed money from IDBI and State Bank of Hyderabad for the purpose of acquiring the capital and, therefore, whatever the benefit arisen out of one time settlement cannot be brought to tax u/s 28(iv) and 41(1) of the Act. In support of his contention, the learned counsel for the assessee has relied upon the decision of the Hon’ble Jurisdictional High Court in the case of  Mahindra and Mahindra Ltd. Vs. CIT, 261 ITR 501 and submitted that this case squarely applies to the case of the assessee. He also relied on the decision of the Cochin Bench of ITAT in the case of Accelerated Freez & Drying Co. Ltd., Vs. DCIT, 31 SOT 442 (Cochin.). The learned counsel submitted that the decisions relied upon by the CIT in the case of CIT Vs. T.V. Sunderam Iyengar & Sons, and in the case of Solid Containers Ltd. Vs. DCIT & Others (supra) have no application to the facts of the case.

5. On the other hand, the learned DR submitted that the facts are not clear and that the purpose for which the loans were taken and how the loans were utilized, therefore, the matter may be remitted to the file of the AO for fresh decision. He supported the orders of the authorities below.

6. We have heard both the parties, perused the record and gone through the orders of the authorities below as well as the decisions cited. The assessee had borrowed the loans from two banks namely IDBI and State Bank of Hyderabad.

7. As far as the term loan from IDBI is concerned, the assessee had borrowed the said term loan from the bank for the purpose of acquiring capital asset and it is not clear from either of the orders of the authorities below what was the capital asset acquired by the assessee. As per the facts available on record, we find that the assessee borrowed term loan from IDBI to acquire capital asset, therefore, the remission or reduction of liability, which is created on capital account, cannot to our mind result in a revenue receipt making it taxable u/s 28(iv) or 4 1(1) of the Act.

8. In this connection, we refer to the judgment of the Hon’ble Jurisdictional High Court in the case of Mahindra and Mahindra Ltd. (supra) wherein it has held as under:-

“Held, (i) that there were two important facts which had been overlooked by the Assessing Officer. Firstly, the assessee continued to pay interest at 6 per cent. for a period of ten years on the loan amount. The agreement for purchase of toolings was entered into much prior to the approval of the loan arrangement given by the Reserve Bank of India. Therefore, the loan agreement, in its entirety, was not obliterated by such waiver. Secondly, the purchase consideration related to capital assets. The toolings were in the nature of dies. The assessee was a manufacturer of heavy vehicles and jeeps. It required these dies for expansion. Therefore, the import was that of plant and machinery. The consideration paid was for such import. In the circumstances, section 28(iv) was not attracted. Lastly, the principal amount of loan had been forgone as a part of takeover arrangement to which the assessee was not a party. The waiver of the principal amount was unexpected. In the circumstances, such waiver would not constitute business income. (ii) That in order to apply section 41(1), an assessee should have obtained a deduction in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee. The assessee had not obtained such allowance or deduction in respect of expenditure or trading liability. The assessee had paid interest at 6 per cent over a period of ten years on Rs.57,74,064. In respect of that interest, the assessee never got deduction under section 36(1)(iii) or section 37. In the circumstances, section 41(1) of the Act was not applicable Secondly, even assuming that the assessee had got deduction on allowance section 41(1) was not applicable because such deduction was not in respect of loss, expenditure or trading liability. Lastly the too lings constituted capital assets and not stock-in-trade. Therefore, taking into account all the above facts, section 41(1) of the Act was not applicable.

Held also, (i) that for the purposes of depreciation roads are buildings and not plant.”

9. In the present case, the term loans received by the assessee from the IDBI Bank is to acquire capital asset and, therefore, the waiver of such term loan does not constitute business and the waiver cannot be held as income u/s.28(iv) or cessation of liability u/s 4 1(1).

10. Coming to the decision of Solid Containers Ltd. (supra), the facts are entirely different and the loan therein was taken for trading  activity and ultimately on waiver of the amount was termed as business income of the assessee.

11. In this connection, the Cochin Bench of the Tribunal in the case of Accelerated Freez & Drying Co. Ltd. (supra) has considered a similar issue of waiver under one time settlement scheme and it held as follows :-

“It is a trite law that the nomenclature given by an assessee to a particular account in its books of account is not the sole test to decide the real character of that account. Therefore, the fact that the assessee had credited the loan waiver amount in its general reserve amount would not influence the process of determining the exact nature of the issue. [Para 21]

Section 28(iv) seeks to charge the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession, as profits and gains of business or profession. Therefore, what is to be examined is whether the waiver of loan would amount to a perquisite so as to be taxable, as such, under section 28. The Bombay High Court in the case of Mahindra & Mahindra Ltd. Vs. CIT [2003] 261 ITR 501/128 Taxman 394, has explained that section 28(iv) seeks to charge the value of any benefit or perquisite, meaning thereby that the benefit must be in kind; the Court further held that waiver of loan is in respect of money transaction and, therefore, would not be in nature of any benefit or perquisite as construed in section 28(iv) [Para 23]

For the purpose of section 28(iv), the loan waiver amount credited by the assessee in its general reserve account was covered by the judgment of the Bombay High Court in the case of Mahindra & Mahindra Ltd. (supra) and, therefore, the said waiver amount could not be held as taxable [Para 29]

The Supreme Court in the case of Polyflex (India) (P.) Ltd. v. CIT [2002] 257 ITR 343/124 Taxman 374 has examined the constitution of section 41(1). The Court has pointed out that section 41(1) consists of two main ingredients: (a) loss or expenditure and (b) trading liability. The two ingredients of section 41(1) have to be read independently. As the first ingredient relates to loss or expenditure and the second ingredient relates to remission or cessation of trading liability, the Court has categorically ruled that the words ‘remission or cessation thereof’ shall apply only to a trading liability. [Para 30]

There was no doubt that the term loans availed by the assessee from three banks were not in nature of trading liability but were in nature of capital liability. Therefore, waiver of loan liability was not waiver of any trading liability. The waiver of capital liability would not become income under section 41(1) on the ground of remission or cessation thereof. [Para 31]

The term loans availed by the assessee on capital account were also not in the nature of any loss or expenditure. There was no doubt in the instant case that the assessee never had the benefit of deduction of the term loans availed by it from the banks on capital account. Therefore, section 41(1) had no applicable to the facts of the instant case. [Para 32]

In the facts and circumstances of the case, the waiver amount of term loans availed by the assessee did not partake the character of assessable income either under section 28(iv) or under section 4 1(1). [Para 35]

Accordingly, the Assessing Officer was to be directed to exclude the waiver amount in computing the assessable income of the assessee. [Para 37].

In the result, the appeal filed by the assessee was to be allowed. [Para 38]“

12. The order of Cochin Bench in the case of Accelerated Freez & Dying Company Ltd. (supra) squarely applies to the facts of the case under consideration. The judgment in the case of T.V.Sundaram Iyengar and Sons Ltd. (supra) also does not apply to the facts of the case as in that case deposits were received in the course of carrying on of trading and business of the assessee.

13. Coming to section 28(iv), it is a general section, and all receipts cannot be considered as profits and gain of business. If that was the case, there was no necessity of incorporating section 28(iv), section 4 1(1) etc. When a receipt does not fall under any of the specific sub¬section, it cannot by default be brought under the general section. In any event it is a remission of a capital liability and hence not income, much less a revenue receipt.

14. In view of the above discussion, it can be held that the reduction of the liability on account of term loan payable to the bank under one time settlement scheme, does not result into income to the assessee either u/s 28(iv) or u/s 4 1(1) of the Act. However, it is not clear from the orders of the authorities below what was the capital asset acquired by the assessee from the said term loan. We, therefore, set aside the order of CIT(A) for a limited to ascertain the nature of the capital asset acquired by the assessee and the price for which it was acquired and, accordingly, allow the claim of the assessee.

15. In so far as working capital received from SBH is concerned, neither the AO nor the CIT(A) discussed the facts. The learned CIT(A) gave a finding that working capital was utilized for the purpose of trading activities. In our opinion, it needs verification of the facts and, therefore, we direct the AO to verify the same and decide in accordance with law.

16. In so far as the ground No. 1(b) raised by the assessee regarding claim of interest is concerned, the interest amount charged by the bank but not recorded by the assessee in the books of account. According to the assessee, the said amount of interest has not been provided for in its books of account and the same shall not be treated as income u/s 28(iv) read with section 41(1) of the Act. The explanation of the assessee was neither accepted by the AO nor by CIT(A). After hearing both the sides, we find that the interest income charged by the bank was not paid by the assessee, therefore, it was not recorded in the books of the assessee. Once the assessee not claimed the interest payable by the assessee as an expenditure, subsequently, if any waiver received from the bank, in our opinion, is neither income u/s 28(iv) nor cessation of liability u/s 41(1). However, the facts are not clear from the record, therefore, we direct the AO to examine the facts and decide the issue in the light of our above observations.

17. As regards ground No. 2 raised by the assessee in respect of the addition of Rs. 2,00,000/-on account of bad debts u/s 36(vii) of the Act, the AO disallowed the claim of the assessee on the ground that the assessee had not established that the debt have become bad and that the amount claimed as bad debts had not been offered to tax in the earlier years. On appeal, before the CIT(A) the learned AR of the assessee contended that the bad debts written off were included in the sales of earlier years and offered to tax. He further submitted that the matter was remanded to the AO for verification and in his remand report dated 17/03/10, after considering the ledger a/c of the respective debtors and the respective sales invoices, the AO had reported that the bad debts written off were in fact offered to tax in earlier years. It was submitted that however the AO had raised an objection that out of Rs. 28,98,326/-, amount of Rs. 2 lakhs was paid on account of tender deposit and that no evidence or confirmation letter had been filed to evidence the said claim. After considering the submissions of the assessee and the remand report of the AO as well as the decision of the Hon’ble High Court of Mumbai in the case of CIT Vs. Star Chemicals Ltd., 220 CTR 319, the CIT(A) held that the claim of bad debts to the extent of Rs. 26,98,3266/- is directed to be accepted and the disallowance to the said extent deleted. As regards the sum of Rs. 2, lakh, the assessee submitted before the CIT(A) that the said sum represents tender deposits in a sum of Rs. 1 lakh each given to M/s Balmer Lawrie ltd and Co. and Indian Oil Co. due to non-fulfillment of tender commitments and since the above amounts were forfeited by the said PSUs , the same were written off. The CIT(A) rejecting the said submission of the assessee sustained the said disallowance of Rs. 2.00 lakh on the ground that the assessee is not in the business of financing or money lending therefore treating the said sum as business loss does not arise. Aggrieved, the assessee is in appeal before us.

18. The learned Counsel for the assessee has submitted that the amount of Rs.2,00,000 represents tender deposits given to M/s.Balmer Lawrie Ltd. and Company and Indian Oil Corporation for the purpose of the business and therefore it has to be allowed as a business loss. On the other hand, the learned D.R. supported the order passed by the authorities below.

19. We have heard both the sides and perused the orders of the authorities below. The assessee has given a tender deposit of Rs.1,00,000 each to M/s.Balmer Lawrie Ltd. and Company and Indian Oil Corporation. Due to non-fulfillment of tender commitments the above amounts were forfeited by both the companies. The assessee has written off the amounts forfeited by the above companies as a bad debt alternatively claimed as a business loss. The above facts are not disputed by the CIT(A). The CIT(A) disallowed the claim of the assessee on the ground that the assessee is not in the business of financing and money lending. The assessee neither financed nor money was lended. The assessee deposited the aforesaid amount in connection with the business of the assessee therefore, the above finding of the CIT(A) is not sustainable. We accordingly allow the claim of the assessee. This ground of appeal raised by the assessee is allowed.

20. Now the revenue grounds are left for adjudication. Ground No. 2 raised by the revenue reads as under:-

“On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in directing the AO not to reduce the WDV of the assets by the principal amount of loan waived without appreciating the facts that the AO had rightly reduced the principal amount of loan written offofRs. 4,91,16,833/-from the WDV of building, plant and machinery by invoking explanation (1) to section 43(1) of the Act.”

21. The AO reduced the principal amount of loan written off of Rs. 4,91,16,833/- from WDV of building, Plant & Machinery and thereby arriving at the closing WDV at Rs. Nil by invoking explanation (10) to s. 43(1) of the Act, observing that cost of assets is reimbursed by IDBI and SBH to the extent of the waiver of the loan amount. On appeal, before the CIT(A) the learned AR of the assessee submitted that it had obtained loan from financial institution and bank which are repayable with interest as per the terms of such loan arrangement. He further submitted that these loans are neither a subsidy nor a grant nor a reimbursement and hence explanation (10) to s. 43(1) of the Act, is not applicable. It was submitted that reimbursement of such loan liability under an agreed scheme/arrangement could not be termed as subsidy or grant meant for meeting cost of part of plant & machinery. The learned AR relied upon the judgment of the Hon’ble High Court of Kerala in CIT Vs. Kochin Co. P. Ltd., 184 ITR 230 (Ker.) and also that of the ITAT, Ahmedabad in the case of Steelco Gujarat Ltd. Vs. ACIT, 33 SOT 407. After considering the submissions of the assessee, the CIT(A) held as under:-

“5.2 I have considered the submissions and also the judgments as relied upon. Explanation (10) to s. 43(1) provides that a actual cost means the actual cost of the assets to the assessee, reduced by the portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority”. Thus, the said section has application only if the cost of assets is met directly or indirectly at the time of the purchase of capital assets. The waiver of loan is not equivalent to reimbursement or a grant or a subsidy. Hence, it is held that the waiver does not fall within the ambit of explanation (10) to section 43(1) or proviso thereof. Therefore, following the judgment of Hon’ble High Court of Kerala in the case of CIT Vs. Kochin Co. P. Ltd., it is held that explanation (10) to s. 43(1) does not apply to the facts of the case and therefore, WDV of assets is not to be reduced by the amount of loan waived by the banks. This ground is decided in favour of the assessee.”

Aggrieved, the revenue is in appeal before us.

22. The learned DR strongly relied upon the order of the AO and submitted that the AO has rightly reduced the principal amount of loan written off of Rs. 4,91,16,833/- from the WDV of building, plant and machinery by invoking explanation (10) to section 43(1) of the Act, but, the CIT(A) was wrong in directing the AO not to reduce the  WDV of the assets by the principal amount of loan waived. The learned DR further submitted that the decision relied upon by the CIT(A) in the case of Cochin Company Ltd. (supra) prayer to insertion of explanation 10 to section 43(1) of the Act. Therefore, he contended that the order of CIT(A) may be set aside and that of the AO restored.

23. The learned counsel for the asesssee, on the other hand, relied upon the order of the CIT(A).

24. We have heard the parties and perused the record as well as gone through the orders of the authorities below. It is observed that the finding of the CIT(A) that explanation (10) to s. 43(1) does not apply to the facts of the case and therefore WDV of assets is not to be reduced by the amount of loan waived by the banks., is in consonance with the judgment of the Hon’ble High Court of Kerala in the case of CIT Vs. Kochin Co. P. Ltd. (supra). The relevant portion of the said judgment is extracted below:

“The short question that arises for consideration I whether, on the facts of this case, section 43(1) of the Income Tax Act is attracted. The said section provides that ‘actual cost’ means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority. Counsel for the Revenue stressed the fact that when Atlanta Corporation wrote off the amounts due from the assessee, which included at least a portion of the liability of the assessee, towards the purchase of the machinery in 1968, it should be considered that Atlanta Corporation met either directly or indirectly the cost of such machinery and so the ITO was justified in his view that in working out the written down value for the assessment year, he should reduce from the original cost the sum of Rs. 2,56,757 and also the depreciation actually allowed to the assessee in the past. We are unable to accept the submission. The Appellate Tribunal has categorically found that Atlanta Corporation is only a financier and when Atlanta Corporation wrote off the liability of the assessee, it cannot be said in retrospect that the cost to the assessee of any part of the machinery purchased in 1968, was met by Atlanta Corporation. The Appellate Tribunal held that the remission of liability by Atlanta Corporation long after the liability was incurred cannot be relied on to hold that Atlanta Corporation met directly or indirectly, part of the cost of the machinery of the assessee purchased as early as 1968. As per section 43(1) of the Act, if the cost of the asset is met directly or indirectly, at the time of purchase of the machinery, by  any other person or authority, to that extent, the actual cost of the asset to the assessee will stand reduced. But it is a far cry to state that though at the time of purchase of the machinery, no person met the cost either directly or indirectly, if, long thereafter a debt incurred in that connection is written off, it could be equated to a position that the financier met part of the cost of the asset to the assessee. We are unable to accept the plea that the remission of liability by Atlanta Corporation can, in any way, be said to be one, where the Corporation met directly or indirectly the cost of the asset to the assessee. In this view of the matter, we are of the view that the remission by Atlanta Corporation could not be reduced from the cost of the machinery of the assessee for the purpose of income-tax”.

25. The principle laid down by the Hon’ble Kerala High Court in the said case is squarely applicable to the facts of the case under consideration.

26. In so far as Explanation 10 to section 43(1) is concerned, the same is extracted below:

“Where a portion of the cost of an asset acquired by the assessee has been met directly or indirectly by the Central Government or a State Government or any authority established under any law or by any other person, in the form of a subsidy or grant or reimbursement (by whatever name called), then, so much of the cost as is relatable to such subsidy or grant or reimbursement shall not be included in the actual cost of the asset to the assessee “.

27. On plain reading of the above Explanation, it is clear that the assessee not received any subsidy or grant or reimbursement, therefore, the above Explanation is not applicable to the case of the asssesee. In view of the above, we do not find any infirmity in the order of the CIT(A) and the same is hereby upheld and the ground of revenue is dismissed.

28. Ground No. 3 is of the revenue is directed against the action of the CIT(A) in directing the AO to delete the disallowance of Rs. 1,93,28,886/-.

29. The AO observed that the assessee had written of stock of finished goods of Rs. 1,93,28,886/-. The AO had referred to the  technical report furnished by the assessee as per its letter dated 11/11/2008 wherein it was reported that trial production of high value added caster oil was of substandard quality with respect to its colour content. The AO held that the defect appears to be nearly one of colour therefore the assessee could have very well sold the goods at discounted rates. He also held that no evidence was furnished to prove that the said goods had been rejected by customers. Therefore, on the ground that the stock of goods had been written off on its own volition and that the said goods cannot be treated as unsaleable for the reasons as mentioned, the AO declined to allow the write off of the said finished products valued t Rs. 1,93,28,886/-. Aggrieved, the assessee carried the matter in appeal before the CIT(A).

30. Before the CIT(A), it was the submission of the assessee that the said goods were manufactured during trial run production in the F.Y. 2003-04. These were substandard products but the said substandard products were being utilized by adding it to regular production. But on account of the fact that there was a shutdown of 6 months due to IDBI injunction, the material became totally unsaleable. The technical report from the plant director also recommended that said products not to be added to regular production. According to the assessee, it is engaged in producing goods which are used by pharma/cosmetic industries. The assessee deals with overseas customes who are conscious about the quality of goods used and under the said circumstances, the entire substandard production valued at Rs. 1.93 crore was written off by charging to the P&L A/c. He, therefore, submitted that finished goods written off be allowed as deduction. After considering the submissions of the assessee, the CIT(A) reproduced the technical report of the Plant Director dated 27/03/06 at pages 12 & 13 of his order and after considering the same, the CIT(A) held as under:-

“6.4 From a reading of the above report, it is observed that the technical director had informed the management that the entire material produced during the trial was unusable. The fact that the said goods were produced during the trial run has not been  disputed. There is also no dispute that the entire stock has been written off. As regards the query of the AO that the goods could have been sold in the open market, it was pointed out by the appellant during the course of hearing of the appeal that some of these trial run products were sold in the market but were rejected by the buyers as a result of which appellant had to written off sundry debtors of Rs. 28,98,326/-, which during the course of remand proceeding had been verified by the AO with reference to the books of account maintained. Thus the main issue to be considered is whether the finished products were really unusable and unsaleable. In this regard, it is worthwhile to refer to the report of the technical director who had informed the management that the material produced during the trial run is unusable. This is corroborated by the fact that the said products were rejected by the buyers thereby running up a bad debt of Rs. 28,98,326/-. These facts prove that the goods are not of required quality and standard. Under the circumstances, it is held that the appellant was compelled by commercial considerations to write off the stock of Rs. 1.93 crore and therefore, the addition made of Rs. 1.93,28,886/- on account of finished goods written off is hereby deleted. This ground is allowed”.

Aggrieved, the revenue is in appeal before us.

31. Before us, the learned DR besides relying on the order of AO submitted that before the AO the assessee has not filed any evidence to prove that the goods has been rejected by customers. He, therefore, submitted that the AO has rightly made the addition.

32. The learned counsel for the assessee, on the other hand, relied upon the order of the CIT(A).

33. After considering the submissions of the parties and perusing the record, we find that the CIT(A) before deleting the addition examined the facts of the issue on record and considered the technical report of the director submitted by the assessee and held that “it is worthwhile to refer to the report of the technical director who had informed the management that the material produced during the trial run is unusable. This is corroborated by the fact that the said products were rejected by the buyers thereby running up a bad debt of Rs. 28,98,326/-. These facts prove that the goods are not of required quality and standard.”. Therefore, the assessee has rightly written off  the amount of Rs. 1,93,28,886/- on account of finished goods in its books of account, which was properly considered by the CIT(A). Therefore, we uphold the order of the CIT(A) and dismiss the ground raised by the revenue.

34. Ground No. 4 is directed against the action of the CIT(A) in directing the AO to allow to set off the brought forward losses of Rs. 1,96,71,721/-.

35. The AO did not allow unabsorbed business loss of Rs. 1,96,61,721/- of AY 2005-06. In the remand report, the AO stated that in the original return of income filed in respect of AY 2005-06, the assessee had claimed carried forward loss of Rs. 1,96,61,721/- but the said claim was not made when the return of income was revised. The relevant extract of the remand report is extracted below:-

“While completing the assessment, the AO had not allowed set off of brought forward losses of Rs. 1,96,61,721/- incurred by the assessee in assessment year 2005-06. During the course of remand proceedings, the assessee’s representative had stated before your honour that the loss of Rs. 1,96,61,721/- remained to be set off against the assessed income. The assessee’s representative filed the copy of computation of income and acknowledgment of the return filed for AY 2005-06 wherein the said loss of Rs. 1,96,61,721/- is carried forward for set off for subsequent years. The assessee’s representative also filed the copy of original e-return for AY 2006-07 filed on 27 November, 2006 wherein the said loss of Rs. 1,96,61,721/- has been shown as carried forward losses. However, subsequently on 19 December 2006, the assessee filed revised return of income wherein the claim of brought forward losses have been withdrawn as can be seen from Schedule 8 of the revised return of income. Hence, the claim of set off of brought forward loss is not allowed. This is in conformity with the Supreme Court’s decision in the case of M/s Goetz India ltd. 284 ITR 323 (SC) wherein it was held that the AO cannot entertain the assessee’s new claim otherwise than revised return of income”.

36. Before the CIT(A), the AR of the assessee submitted that the assessee had filed its return income for AY 2005-06 on 27/11/2006 and claimed carry forward of losses for set off in subsequent years. On the very next day i.e. on 28/11/06, the assessee had filed revised  return of income and that the reasons for revising the return had been discussed and communicated to the AO during the assessment proceedings vide its letter dated 11/11/2008. He contended that the AO had refused to given set off of brought forward losses on the decision of Hon’ble Supreme Court in the case of Goetz India Ltd. in support of the refusal to allow the set off of brought forward losses. The learned AR submitted that the assessee had claimed brought forward losses in the original return of income filed and, therefore, the set off of brought forward losses or unabsorbed depreciation has to be allowed as per assessment records irrespective of the assessee’s claim in the return of income since it is consequential in nature. After considering the submissions of the assessee, the CIT(A) held as under:-

“8.3 I have considered the submissions, the remand report of the AO and rejoinder to the remand report. I find merit the contention of the appellant. Once return of loss has been filed, within the statutory time limit and the loss has been determined by the AO in the assessment, the same should be allowed to be set off in subsequent year. Moreover in this case, in the original return of income as filed, the appellant had in fact claimed brought forward losses. It is only in the revised return that it was omitted to be claimed. It has to be stated that an omission should not be taken to mean that the claim of brought forward loss has been withdrawn. In fact set off of brought forward loss is consequential in nature and once determined, has to be allowed and in this case, on facts the claim had actually been made in the original return and was omitted to be made in the revised return. The omission will not disentitle the appellant to the claim of set off of business loss/depreciation as determined and allowed to be carried forward. The AO is therefore directed to allow set off of brought forward loss as determined against the income of the appellant for the year under consideration and/or to carry forward the same as per law. This issued decided in favour of the appellant”.

Aggrieved the revenue is in appeal before us.

37. The learned DR has strongly relied on the order of the AO and the learned counsel for the assessee placed reliance on the order of the CIT(A).

38. We have heard the parties, perused the record and gone through the orders of the authorities below. The AO disallowed the assessee’s claim of brought forward losses for set off in subsequent years on the ground that the assessee claimed the said brought forward losses in the original return of income, but, in the revised return the said claim was not made. Therefore, the AO disallowed the claim of the Assessee. The CIT(A), on the other hand, held that “in fact set off of brought forward loss is consequential in nature and once determined, has to be allowed and in this case, on facts the claim had actually been made in the original return and was omitted to be made in the revised return. The omission will not disentitle the appellant to the claim of set off of business loss/depreciation as determined and allowed to be carried forward”. Therefore, set of brought forward losses is consequential in nature, once claimed in the original return of income has to be allowed even if the same is omitted the revised return of income. Thus, we do not find reason to interfere with the order of the CIT(A) in directing the AO to allow the set off of brought forward loss as determined against the income of the assessee in the year under consideration and the same is hereby upheld. Accordingly, this ground of appeal of the revenue is dismissed.

39. In the result, both the appeals of the assessee and revenue are partly allowed for statistical purposes.

Pronounced on this 08th day of February, 2012.

Sandeep Kanoi

Comments are closed.

GET FREE TAX UPDATES VIA EMAIL