2015 (6) TMI 936 - AT - Income Tax

Disallowance of breakage loss - assessee did not furnish party wise details of breakage/claim made or offered, that no such claim was made in the preceding year and that this is such an item which can be recycled and reused for making glass - CIT(A) deleted the disallowance - Held that - From the various details furnished by the assessee in the paper book, we find the assessee has furnished the party wise details giving the credit note number and the amount allowed towards such breakage loss. The AO has not disputed the fact of filing of party wise details during the course of assessment proceedings in the remand proceedings. Therefore, the first objection by the AO that the assessee has not furnished the party wise details is not existing. Further, the basis of allowing 1% of the turnover towards breakage charges by the AO is not understood. If the AO was not satisfied due to the reasons mentioned by him, he could have disallowed the entire amount. However, he has not done so and allowed 1% of the turnover towards breakage. This otherwise indicates that he also accepts that there would be breakages. Merely because the assessee has not claimed such breakage loss in the preceding assessment year, the same in our opinion cannot be a ground to deny a legitimate claim made by the assessee in the impugned assessment year especially when the assessee has furnished the list of dealers to whom such credit notes were issued towards breakage loss and sample confirmations from such parties were also filed. - Decided in favour of assessee.

Summary

Issues Involved:
Deletion of disallowance of breakage loss

Analysis:
The appeal was filed by the Revenue against the order of the CIT(A)-II, Nashik for Assessment Year 2005-06, specifically challenging the deletion of disallowance of breakage loss amounting to Rs. 21,01,279. The primary contention raised by the Revenue was related to the justification of the breakage claim made by the assessee during the assessment proceedings. The AO disallowed the balance amount of Rs. 21,01,279 out of the total claim of Rs. 54,80,239 on the grounds that party wise details were not furnished, and the breakage claimed at 1.62% was deemed excessive. The AO allowed breakage to the extent of 1% of the turnover, leading to the disallowance.

The assessee, in response, provided detailed explanations for the breakage loss, attributing it to factors such as erratic supply of raw materials, quality issues with suppliers, and power supply interruptions resulting in uneven glass thickness and breakages. The assessee also highlighted the unique nature of the problem faced during the assessment year, supported by sample confirmations from parties confirming the credits allowed against breakage claims. Reference was made to legal precedents to justify the claim and argued against the AO's contentions.

The CIT(A), after considering the submissions and a remand report from the AO, deleted the disallowance. The CIT(A) observed that the AO failed to appreciate the difference between breakages in transit/showrooms and those in the manufacturing process. The CIT(A) emphasized the business necessity of such losses for survival in the market, citing the high number of dealers making breakage claims and confirming credit notes. Legal provisions under section 36(1)(vii) were invoked to support the allowability of the deduction, and the CIT(A) found no justification for the disallowance.

Upon further appeal, the Tribunal upheld the CIT(A)'s decision, emphasizing that the AO's objections regarding party wise details and the basis for allowing 1% breakage were unfounded. The Tribunal noted that the assessee had indeed provided the required details, and the AO's partial allowance of breakage indicated acceptance of the claim. The Tribunal found no merit in the Revenue's grounds for appeal and dismissed the appeal, affirming the deletion of the disallowance of breakage loss.

In conclusion, the judgment delves into the intricacies of justifying a breakage loss claim, highlighting the importance of providing detailed explanations and supporting documentation. Legal precedents and statutory provisions were crucial in establishing the legitimacy of the claim, ultimately leading to the deletion of the disallowance and upholding the assessee's position.