2013 (12) TMI 1574 - AT - Income Tax

Disallowance of advances for purchase of capital goods written off - Held that - There is no material has been placed on record that the supplier of goods have refused to refund the advances given to them. There is no material on record as to what efforts were made by the assessee for recovering the advances. Therefore, under these circumstances, the ld.CIT(A) was not justified in treating the same as business loss and allowable u/s.37(1) of the Act. Thus, this ground of the Revenue s appeal is allowed. Disallowance in respect of parts imported for SMS project - Held that - We find that the assessee has not placed anything on record with regard to the contention that the assessee was unable to clear the parts due to inability to pay customs duties and other charges. The ld.CIT(A) has not given any finding that how much duty and other charges were payable by the assessee and how much has been paid by obtaining the parts even if it is assumed that non-clearance of parts by the assessee was resulted into business loss, then also the assessee is required to substantiate its claim by placing relevant material on record. So far the undisputed fact remains that the parts were to be utilized for commissioning of a new project, therefore, are in the nature of capital assets.The ld.CIT(A) has erred in not considering this aspect. After considering all aspects of the matter, we restore this issue back to the file of ld.CIT(A) to decide it afresh, after giving opportunity of hearing to the respective parties.

Summary

Issues Involved:
1. Deletion of disallowance of Rs. 13,29,899/- in respect of advances for purchase of capital goods written off.
2. Deletion of disallowance of Rs. 1,19,84,344/- in respect of parts imported for SMS project not put to use.

Issue-wise Detailed Analysis:

1. Deletion of disallowance of Rs. 13,29,899/- in respect of advances for purchase of capital goods written off:

The Revenue argued that the CIT(A) erred in deleting the disallowance of Rs. 13,29,899/- for advances given for purchasing machinery, which were written off due to adverse financial conditions. The Revenue contended that such advances are capital expenditures related to the acquisition of capital assets and should not be treated as business expenditure under Section 37 of the Income Tax Act. The Revenue cited case laws, including the ITAT Chennai Bench decision in Kwality Fun Foods & Restaurants (P.) Ltd. vs. Dy.CIT and the Calcutta High Court decision in Kanoria Chemicals & Industries Ltd. vs. CIT, to support their stance.

On the other hand, the assessee argued that the advances were part of the SMS project, started as an expansion of the existing business but suspended due to financial crunches. The assessee claimed that the advances, which were written off as non-recoverable, should be allowed as genuine business loss/expenditure. The CIT(A) had deleted the disallowance by following the Rajasthan High Court decision in CIT vs. Anjani Kumar Co.Ltd.

The Tribunal found that the CIT(A) wrongly applied the Rajasthan High Court decision, as there was no evidence that the suppliers refused to refund the advances or that the assessee made efforts to recover them. Thus, the Tribunal concluded that the CIT(A) was not justified in treating the write-off as a business loss allowable under Section 37(1) of the Act. Consequently, this ground of the Revenue's appeal was allowed.

2. Deletion of disallowance of Rs. 1,19,84,344/- in respect of parts imported for SMS project not put to use:

The Revenue contended that the CIT(A) failed to appreciate that the advances of Rs. 1,19,86,344/- were for acquiring capital assets for a new project, not for running machinery. The Revenue cited several case laws, including Shree Digvijay Woolen Mills Ltd. vs. CIT and CIT vs. Shri Digvijay Cement Co.Ltd., to argue that such expenditures should be treated as capital in nature.

The assessee argued that the parts were imported for the VD/VOD unit in the SMS project but were not cleared from the Port authority due to financial crises. The assessee decided to auction the parts, considering them obsolete and unworkable. The assessee claimed the expenditure as a business loss, arguing that it did not result in acquiring any capital asset or enduring benefit. The assessee cited various decisions, including Gujarat Steel Tubes Ltd. vs. CIT and Assam Bengal Cement Co.Ltd. vs. CIT, to support their claim.

The Tribunal noted that the assessee did not provide evidence of the inability to clear the parts due to financial issues. The CIT(A) did not assess the duty and charges payable for clearing the parts. The Tribunal held that the parts were intended for a new project and thus were capital assets. The Gujarat High Court in CIT vs. Gujarat Steel Tubes Ltd. ruled that even if the project is abandoned, the parts remain capital in nature. The Tribunal restored the issue to the CIT(A) for a fresh decision after providing an opportunity for hearing to the parties. Thus, this ground was allowed for statistical purposes.

Conclusion:

The appeal of the Revenue was partly allowed for statistical purposes. The deletion of disallowance of Rs. 13,29,899/- was reversed, and the issue of Rs. 1,19,86,344/- was remanded back to the CIT(A) for a fresh decision.