2013 (7) TMI 1054 - AT - Income Tax

Disallowance of claim made under work-in-progress adjusted against opening reserves - Held that - Assessee has incurred expenses for developing maps under manual process and has been charging such expenditure as revenue expenditure under material consumption based on number of copies sold every year. In the year under review the assessee has switched over from manual map making process to digital map making process and the balance amount relating to manual map making process lying under work-in-progress 10 was written off against opening reserves following the guidelines issued by ICAI in AS 26. It was the finding of the Commissioner of Income Tax (Appeals) that the expenditure incurred by the assessee as a revenue expenditure which was accounting under the head material consumption in the normal course and as these expenses were incurred directly in connection with business the claim of the assessee is in order. The Department could not rebut any of these findings of the Commissioner of Income Tax (Appeals). In the circumstances we find no good reason to interfere with the findings of the Commissioner of Income Tax (Appeals) in deleting the disallowance made by the Assessing Officer. Disallowance of bad debts and non-recoverable advances - Held that - We direct the Assessing Officer to allow the claim of the assessee as these debts were written off by the assessee in its books of account. Disallowance of expenses relating to medical devices division at Waluj Aurangabad under section 37 - Held that - Merely because there was no revenue by way of sales it cannot be said that the assessee has not carried on any business in the relevant assessment year. It is not in dispute that these expenses were not incurred for the purpose of business. The only ground on which the disallowance made is that the assessee sold its medical devices division during the assessment year and there is no income from such division till its sale during the assessment year and therefore it is not allowable expenditure which in our opinion is not justified. In the circumstances we direct the Assessing Officer to delete the disallowance made. We reverse the order of the Commissioner of Income Tax (Appeals) on this issue. This ground of appeal of the assessee is allowed Not allowing the carry forward loss/depreciation relating to amalgamating company namely TTK Medical Devices Ltd. in the hands of the assessee. Addition on account of bad debts written off as these debts represent rental advance and deposits as nonrecoverable - Held that - We find that the Assessing Officer while completing the assessment has disallowed thse deposits as part of other debts. There is no finding by the Assessing Officer that these amounts written off represent rental advance and deposits written off as non-recoverable which are not eligible to be allowed as bad debts under section 36(2)(i). In the circumstances we feel that the Assessing Officer has to re-examine these debts afresh. Addition made under section 41(1) on account of cessation of liability - Held that - No valid reason to interfere with the decision of the Commissioner of Income Tax (Appeals) in deleting the addition especially when the assessee had reversed and paid these creditors in subsequent assessment years and proving that there is no cessation of liability. Expenditure incurred towards payment of logo charges is revenue in nature. Clearing and forwarding agent charges fixing rate at 3.2% on sales we find no infirmity in the order of the Commissioner of Income Tax (Appeals) in holding that the depot service charges incurred by the assessee @ 3% on sales are reasonable and not excessive. In the circumstances we affirm the order of the Commissioner of Income Tax (Appeals) on this issue. This ground of appeal of the Revenue is rejected.

Issues Involved:
1. Disallowance of set off of carry forward loss/depreciation.
2. Deletion of disallowance of claim made under work-in-progress adjusted against opening reserves.
3. Disallowance of bad debts and non-recoverable advances.
4. Disallowance of expenses relating to the medical devices division.
5. Deletion of additions on account of bad debts written off.
6. Addition under section 41(1) on account of cessation of liability.
7. Treatment of logo charges as revenue expenditure.
8. Reasonableness of depot service charges paid to TTK & Co.

Detailed Analysis:

1. Disallowance of Set Off of Carry Forward Loss/Depreciation:
The assessee's appeal regarding the disallowance of set off of carry forward loss/depreciation of the amalgamating companies was dismissed. The Tribunal followed its earlier decisions in the assessee's own cases for the assessment years 2000-01 and 2005-06, where it had held against the assessee.

2. Deletion of Disallowance of Claim Made Under Work-in-Progress Adjusted Against Opening Reserves:
The Revenue's appeal on this issue was dismissed. The Tribunal upheld the Commissioner of Income Tax (Appeals)'s decision, which allowed the assessee's claim of setting off expenditure shown under work-in-progress against opening reserves. The Commissioner had found the expenditure to be of a revenue nature and incurred in connection with the business.

3. Disallowance of Bad Debts and Non-Recoverable Advances:
The Tribunal partly allowed the assessee's appeal. It sustained the disallowance of non-recoverable deposits written off to the extent of `18,97,494/- paid as earnest money deposit to various institutions, following its earlier decision for the assessment year 2006-07. However, it directed the Assessing Officer to allow other debts written off, following the Supreme Court's decision in TRF Ltd. Vs. CIT.

4. Disallowance of Expenses Relating to the Medical Devices Division:
The Tribunal allowed the assessee's appeal, directing the deletion of the disallowance of `24,29,355/- incurred for the medical devices division. It held that these expenses were incurred in the course of business and were necessary for maintaining the factory in working condition until its sale.

5. Deletion of Additions on Account of Bad Debts Written Off:
The Tribunal restored the issue to the Assessing Officer for re-examination. The Revenue had contended that the bad debts written off represented rental advance and deposits, which are not eligible for deduction under section 36(2)(i). The Tribunal found that the Assessing Officer had not provided sufficient findings and directed a fresh examination.

6. Addition Under Section 41(1) on Account of Cessation of Liability:
The Tribunal upheld the Commissioner of Income Tax (Appeals)'s decision to delete the addition of `58,39,607/- made by the Assessing Officer. It found that there was no cessation of liability as the assessee had either reversed or paid some of these creditors in subsequent years.

7. Treatment of Logo Charges as Revenue Expenditure:
The Tribunal upheld the Commissioner of Income Tax (Appeals)'s decision that logo charges paid by the assessee were revenue expenditure. It followed the co-ordinate Bench's decision in the case of TTK LIG Ltd., a group concern of the assessee, where similar charges were treated as revenue expenditure.

8. Reasonableness of Depot Service Charges Paid to TTK & Co.:
The Tribunal upheld the Commissioner of Income Tax (Appeals)'s decision that depot service charges paid to TTK & Co. at 3% on sales were reasonable and not excessive. It noted that the charges were in conformity with the approval granted by the Regional Director, Ministry of Corporate Affairs.

Conclusion:
- The appeals of the assessee in ITA No.1897/Mds/2011 were dismissed, and ITA No.1898/Mds/2011 was partly allowed.
- The appeals of the Revenue in ITA No.2029/Mds/2011 and ITA No.1783/Mds/2012 were dismissed.
- The appeal of the Revenue in ITA No.2030/Mds/2011 was partly allowed for statistical purposes.

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