Case Law Details

Case Name : DCIT Vs M/s Linde India Ltd. (ITAT Kolkata)
Appeal Number : ITA No.323/Kol/2014
Date of Judgement/Order : 03/05/2017
Related Assessment Year : 2006-07
Courts : All ITAT (4213) ITAT Kolkata (264)

Ghatkopar unit of the Assessee was sold during the previous year due to several problems including labor problems and the advances and expenses written off related to this unit and this unit remained closed for a long time prior to its closure. We are satisfied that on the facts as pleaded by the Assessee before the AO which were not controverted by the AO/CIT(A), the loss in question was incidental to the business of the Assessee.

The reason assigned by the AO was that there was negligence on the part of the Assessee in not keeping proper records and this fact influenced his decision in not allowing the claim of the Assessee. In our view once the fact that the loss is incidental to Assessee’s business is accepted than the strict evidence of irrecoverability of the losses in question cannot be insisted upon. The circumstances of the case show that the Assessee made a provision in the books of accounts in the year 2000 and claimed the loss only in the year 2004.

The company after review of the books of accounts and after due diligence and discussion with the statutory auditors came to the conclusion that detailed reconciliation and accounting adjustments of these advances was no longer possible due to lack of information and non-availability of old records in the year 2000 itself but waited for 4 years before writing off the loss in the year 2004-05. We are of the view in the given facts and circumstances of the case, the deduction claimed ought to have been allowed.

Relevant Extract of the ITAT Order

7. Next issue raised by Revenue in this appeal is that Ld. CIT(A) erred in deleting the addition made by AO for ₹ 36.99 lakh on account of advance written off.

8. The assessee, in the year under consideration has written off advance for ₹95,76,604/- in its profit and loss a/c. During the course of assessment proceedings, AO observed that out of the said advance a sum of ₹36.99 lacs consist of small amount which were provided as advance to the suppliers, employees, security deposits etc. It was also observed that these advances were written off on the ground that the recoveries or adjustment were not made due to lack of information. Thus the AO found that these were written off due to negligence of the assessee and they did not become irrecoverable in a normal course of business. Therefore, the AO disallowed a sum of ₹36.99 lakh and added to the total income of assessee.

9. Aggrieved, assessee preferred an appeal before Ld . CIT(A). The assessee before Ld. CIT(A) submitted that all the items of advance were directly connected with the business operation and therefore they were incidental to the business. Ld. CIT(A) after considering the submission of assessee deleted the addition made by AO by observing as under:-

“5.2.4 Decision:

Now, the case of the Assessing Officer is that the first item is only trade advance, whereas the balance represented by small items which were written off because collection or adjustment could not be made due to lack of information/persuasion, and, therefore, the same were not allowable as business loss. The case of the appellant. On the other hand is that the first item was business loss because the bank guarantee provided as security was en-cashed by the seller, whereas the second item represented by advances of smaller amounts all the advances given were of revenue nature and were lying unadjusted in the books of account for a reasonably long period, either because the advances could not be recovered on subsequent follow-ups or because of non-adjustments of accounting entries thereof in the books. From the facts, it is apparent that the Assessing Officer has not appreciated the facts in its entirety. The forfeiture of security deposit of Rs. 20,36,160/- given to National Fertilizers Limited is clearly a trading loss in view of the explanation offered. Similarly, most of the advances to suppliers, employees, security deposits for electricity and telephones, etc. Related to the closed business units. In the case of Travancore Tea Estates Co. Ltd. V. CIT [19792] 197 ITR 528 (Ker), it has been held that under sec. 28, a bad debt which cannot be written off may be allowed as a trading loss, provided the loss is incurred wholly and exclusively for the purpose of the business of the assessee. In the case of CIT v. Inden Biselers [1989] 47 Taxman 225 [1990] 181 ITR 69 (Mad), it has been held that ‘even though the expenditure is not admissible for the computation of the total income either as a bad debt or as an expenditure wholly incurred for the purpose of business, still, it can be allowed as an expenditure as a trading loss if it arises directly from carrying on the business and is incidental to the business. The facts of the reported cases are similar to those of the appellant’s case. Therefore, I am of the view that the Assessing Officer was not justified in disallowing the claim of loss of bad advances written off as a trading loss. Therefore, the addition of Rs.36,99,359/- is deleted.”

The Revenue, being aggrieved, is in appeal before us on the following ground:-

“2. That on the facts and in the circumstances of the case and as per law ld. CIT(A) erred in deleting the addition made by the AO amounting Rs.36,99,359/- on account of bad advance.”

10. Before us both the parties relied on the order of Authorities Below as favorable to them.

11. We have carefully considered the entire material on record and the rival submissions. From the details furnished by the assessee in the paper book it is found that the assessee had given full details of each item of the advances. The amounts represented advances given to the parties for the purchase of raw materials, advance to employees, security deposited with the landlord, electricity and telephones etc. The advances were given during the course of business. The amount became irrecoverable from the parties to whom the advances were made. Thus, the advances were totally connected with the business activities of the assessee. The learned CIT (Appeals) was justified in observing that the amount of advance was a trading loss. After seeing the details of amounts, it is observed that the assessee was not required to take a lengthy litigation for recovering the small amounts. In our opinion, therefore, the approach of the learned CIT (Appeals) is justified. In this connection we also rely in the order of assessee’s own case in ITA No. 131/Kol/2010 for A.Y. 2004-05 dated 16.10.2015 wherein the relevant extract is reproduced below:-

“8. The learned counsel for the Assessee has also submitted before us in the course of hearing that the Ghatkopar unit of the Assessee was sold during the previous year due to several problems including labor problems and the advances and expenses written off related to this unit and this unit remained closed for a long time prior to its closure. We are satisfied that on the facts as pleaded by the Assessee before the AO which were not controverted by the AO/CIT(A), the loss in question was incidental to the business of the Assessee. The reason assigned by the AO was that there was negligence on the part of the Assessee in not keeping proper records and this fact influenced his decision in not allowing the claim of the Assessee. In our view once the fact that the loss is incidental to Assessee’s business is accepted than the strict evidence of irrecoverability of the losses in question cannot be insisted upon. The circumstances of the case show that the Assessee made a provision in the books of accounts in the year 2000 and claimed the loss only in the year 2004. The company after review of the books of accounts and after due diligence and discussion with the statutory auditors came to the conclusion that detailed reconciliation and accounting adjustments of these advances was no longer possible due to lack of information and non-availability of old records in the year 2000 itself but waited for 4 years before writing off the loss in the year 2004-05. We are of the view in the given facts and circumstances of the case, the deduction claimed ought to have been allowed. We hold and direct accordingly. The grounds raised by the Assessee are accordingly accepted.”

In view of the above proposition, we are concur with the view the ld CIT(A) and therefore set aside the order of AO. In our considered opinion, the claim of deduction is allowable as trading loss u/s 37 of the Act. AO is directed accordingly. Ground taken by the Revenue is, therefore, dismissed.

12. In the result, Revenue’s appeal stands dismissed.

Order pronounced in the open court 03/05/2017.

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Category : Income Tax (24908)
Type : Judiciary (9823)
Tags : ITAT Judgments (4392) Section 37 (44)

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