Gem Spinners India Limited Vs ACIT (ITAT Chennai)
ITAT Chennai held that disallowed the claim of loss on account of written off inventory as the assessee failed to produce necessary evidence proving that such stock became obsolete and unusable.
Facts- The assessee company is in the business of manufacturing cotton yarn and knitted fabrics, filed its return of income for the assessment year 2013-14 on 22.09.2013, declaring net loss of Rs. 2,55,24,649/-. The case was taken up for scrutiny, and during the course of assessment proceedings, AO noticed that during the financial year relevant to assessment year 2013-14, the assessee is having only trading activity.
The gross receipt from trading was at Rs. 10.46 crores, as against this, the assessee claimed trading expenses of Rs. 9.93 crores. It was further noted in addition to trading receipts, the assessee has claimed a huge amount of other expenses. The assessee submitted that during the year, the company has written off the unusable stock of cotton valuing Rs. 16,96,24,334/-, and said cotton was purchased way back in the year 2004-05. Since the cotton was not used for manufacturing knitted fabric or yarn, it was unusable and the management has taken a decision to write off said stock as scrap and debited it to the profit and loss account.
AO noted that the assessee neither furnished the necessary certificate from an expert to prove that such stock became obsolete and unusable nor filed any evidence to prove its claim that in earlier years also unusable and obsolete stock was written off. Hence, AO opined that claim of the assessee that the amount debited under the headstock write-off is not backed by any evidence and also to offset income derived from the sale of assets computed under the head ‘Long Term Capital Gains’ (LTCG) and thus, rejected the arguments of the assessee and disallowed the claim of loss on account of written off inventory amounting to Rs. 16,96,24,334/-.
CIT(A) confirmed the disallowance. Being aggrieved, the present appeal is filed.
Conclusion- We are of the considered view that the assessee could not satisfactorily explain with necessary evidence the loss claimed on account of write off inventory, but is only to offset capital gain derived from sale of property as brought out by the AO and CIT(A).
It is observed that during the financial year relevant to assessment year 2013-14, the assessee shows two pieces of vacant land and computed LTCG of Rs. 21,24,10,447/- and set off LTCG against current year business loss of Rs. 23,79,35,096/-. The AO further noted that substantial portion of the current year business loss is due to alleged write off of inventory amounting to Rs. 16,96,24,334/-. Therefore, from the above, it is very clear that the assessee has devised a tax planning to offset capital gains derived from sale of property by claiming set off current year business loss.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
This appeal filed by the assessee is directed against the order passed by the learned Commissioner of Income Tax (Appeals)-6, Chennai, dated 28.12.2017 and pertains to assessment year 2013-14.
2. The assessee has raised the following grounds of appeal:
1. The Commissioner of Income Tax – Appeals has erred in confirming the addition of Rs 16,96,24,344 towards write off of inventory.
2. The Commissioner of Income Tax- Appeals ought to have deleted the addition made by the Deputy Com. of Income Tax on the facts of the case as the appellant had produced all the relevant records in support of its claim.
3. The Commissioner of Income Tax – Appeal ought to have allowed the appeal based on the material and evidences produced before him.
4. The Commissioner of Income Tax – Appeal ought to have allowed the depreciation as the appellant had temporarily suspended its’ manufacturing operations.
5. The Commissioner of Income Tax – Appeal ought to have appreciated the fact that the appellant had enough unabsorbed brought forward business / depreciation loss and adjusted the same against the income.
6. The Appellant craves leave to add, amend, alter and withdraw any of the grounds of appeal.”
3. The brief facts of the case are that, the assessee company is in the business of manufacturing of cotton yarn and knitted fabrics, filed its return of income for the assessment year 2013-14 on 22.09.2013, declaring net loss of Rs. 2,55,24,649/-. The case was taken up for scrutiny, and during the course of assessment proceedings, the Assessing Officer noticed that during the financial year relevant to assessment year 2013-14, the assessee is having only trading activity. The gross receipt from trading was at Rs. 10.46 crores, as against this, the assessee claimed trading expenses of Rs. 9.93 crores. It was further noted in addition to trading receipts, the assessee has claimed huge amount of other expenses. Therefore, called upon the assessee to furnish necessary details and nature of expenses debited under the head ‘other expenses’. In response, the assessee submitted that during the year, the company has written off unusable stock of cotton valuing Rs. 16,96,24,334/-, and said cotton was purchased way back in the year 2004-05. Since, the cotton was not used for manufacturing knitted fabric or yarn, it was unusable and thus, the management has taken a decision to write off said stock as scrap and debited to profit and loss account.
4. The AO, however was not convinced with the explanation furnished by the assessee and according to the Assessing Officer, the assessee could not satisfactorily explain how closing stock of cotton has became unusable. The assessee neither furnished necessary certificate from expert to prove that such stock became obsolete and unusable nor filed any evidences to prove its claim that in earlier year also unusable and obsolete stock was written off. The AO has analyzed the claim of the assessee in light of movement of stock of cotton right from financial years 2003-04 to 2011-12 and observed that, although the assessee claims to have written off stock which was purchased in the financial years 2004-05 & 200506, but on perusal of stock statement filed by the assessee, the closing stock of cotton as on 31.03.2006 was only at Rs. 11.34 crores, whereas the assessee had debited an amount of Rs. 16.96 crores, which means the assessee has made purchase year after year. Therefore, he opined that claim of the assessee that amount debited under the head stock write off is not backed by any evidence and also to offset income derived from sale of asset computed under the head ‘Long Term Capital Gains’ (LTCG) and thus, rejected the arguments of the assessee and disallowed the claim of loss on account of written off inventory amounting to Rs. 16,96,24,334/-. The relevant findings of the AO are as under:
2.2 The assessee’s submissions were carefully considered. The following points emanate from the annual report, financial statement and papers & submissions filed by the assessee :
