2016 (1) TMI 246 - AT - Income Tax

Disallowance of Bad Advances written off - Held that - 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. - Decided in favour of assessee Addition on excess provision - CIT(A) deleted the addition - Held that - Law is well settled that under the mercantile system of accounting it is only expenditure which has accrued to the Assessee during the previous year that can be allowed as a deduction. Originally the bill discounting charges were estimated at ₹ 90,39,137. On this basis the Assessee was justified in considering the expenditure on account of bill discounting charges at ₹ 90,39,137. However during the previous year relevant to AY 04-05 i.e., on 22.10.2003, it turned out that the actual liability towards bill discounting charges was only ₹ 10,29,375. Therefore in its books of accounts for the previous year, the Assessee ought to have reversed the excess provision for liability made. In other words the actual liability at ₹ 80,09,822 crystalized during the previous year relevant to AY 04-05 itself and the Assessee therefore could not have claimed over and above this sum as deduction in computing its income from business. It is a different issue that the Assessee offered to tax the sum of ₹ 10,29,375 in AY 05-06. We therefore restore the order of the AO in this regard. We however direct that the sum of ₹ 10,29,375 should be excluded from the taxable income of AY 05- 06, as not doing so would amount to double taxation of same income, which is impermissible in law. - Decided in favour of revenue Consideration of sale of property at Ghatkopar as a slum sale u/s 50B - CIT(A) directed not to be treated as slump sale - Held that - We have perused the agreements by which the Assessee sold the property at Ghatkopar to Kalapataru Homes Ltd. It is clear from the reading of those agreements and schedule or property transferred referred to in those agreements that what was sold was land and there was neither any plant, machinery, furniture & fixtures etc. There was neither building in existence at the time when the land was sold by the Assessee. The evidence on record clearly shows that ₹ 54,80,769/- was received from M/s. Asiad Trading & Mfg. Co. Towards sale of old scrapped & junked items of plant & machinery, furniture & fixtures and stores items that were lying in the land at Ghatkopar. The value of the building that existed at one point of time prior to the transfer of the land by the Assessee during the previous year, was not subject matter nor could be subject matter of transfer by the Assessee, as the building did not exist. The findings of the AO to the contrary are without any basis and contrary to the material on record. We therefore hold that the CIT(A) was justified in his conclusions - Decided in favour of assessee

Summary

Issues Involved:
1. Deduction of bad advances and other current assets written off.
2. Disallowance of excess provision for discounting charges.
3. Classification of sale of property as slump sale under Section 50B of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Deduction of Bad Advances and Other Current Assets Written Off:

The Assessee, a company engaged in manufacturing and selling industrial and medical gases, claimed deductions for bad advances and other current assets written off, amounting to Rs. 4,15,63,688 and Rs. 2,73,866 respectively. These sums were part of a larger provision made in the year 2000 due to the non-availability of old records and lack of information. The Assessee argued that these write-offs were trading losses deductible under Section 28 of the Income Tax Act, 1961.

The Assessing Officer (AO) did not dispute the connection of these losses with the business operations but denied the deduction, citing that the losses were due to the Assessee's negligence in record-keeping. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision.

Upon appeal, the Tribunal noted that the losses were indeed incidental to the Assessee's business. It was observed that the Assessee had switched to a new SAP system in 1998, and the discrepancies were due to the old system's data. Given the unit's closure and subsequent sale, the Tribunal concluded that the Assessee's claim should be allowed, as the losses were incidental to the business, and strict evidence of irrecoverability was not necessary. The Assessee's appeal was thus allowed.

2. Disallowance of Excess Provision for Discounting Charges:

The Assessee sold land at Ghatkopar and provided for discounting charges of Rs. 9,039,197 on a mercantile basis. However, the actual discounting charges incurred were Rs. 8,009,822, leading to an excess provision of Rs. 1,029,375. The AO disallowed this excess provision, arguing that it was not a liability during the relevant assessment year.

The CIT(A) allowed the Assessee's claim, noting that the excess provision was offered to tax in the subsequent year. However, the Tribunal disagreed, emphasizing that under the mercantile system, only actual liabilities should be deducted in the relevant year. The Tribunal restored the AO's order but directed that the excess provision should not be taxed again in the subsequent year, to avoid double taxation. The Revenue's appeal on this ground was allowed.

3. Classification of Sale of Property as Slump Sale:

The Assessee sold land at Ghatkopar to Kalpataru Homes Limited for Rs. 305,000,000. The AO classified this transaction as a slump sale under Section 50B of the Income Tax Act, which would affect the computation of capital gains. The Assessee contended that only the land was sold, and other assets like old machinery and fixtures were sold separately to another party.

The CIT(A) agreed with the Assessee, noting that the factory had been closed since 1999, and no business activity was ongoing at the time of sale. The Tribunal upheld this finding, confirming that the sale was not a slump sale, as only the land was transferred, and other assets were sold separately. The Revenue's appeal on this ground was dismissed.

Conclusion:

The Assessee's appeal regarding the deduction of bad advances and other current assets was allowed. The Revenue's appeal concerning the excess provision for discounting charges was partly allowed, with directions to avoid double taxation. The Revenue's appeal on the classification of the property sale as a slump sale was dismissed. The final order was pronounced on 16.10.2015.