2016 (5) TMI 1010 - AT - Income Tax

Addition made on account of holding the security deposit written off as capital loss - Held that - The AO cannot step into the shoes of the assessee for defining the best possible ways of the business. Accordingly we opined that the assessee has written off the security deposits in the interest of the business organization. Therefore the question of recovery or irrecovery does not arise under the present conditions and situations. The AO in the present case has not doubted the genuineness of the loss claimed by the assessee but the loss was merely disallowed by holding them as capital loss. As the loss was arising from the writing of the trading assets which was classified as current assets in the books of accounts addition made are deleted - Decided against revenue Addition made on account of contingencies representing the sales tax paid under protest - Held that - The aforesaid loss has business connection with the assessee and is claimed on revenue accounts. Therefore we uphold the order of Ld. CIT(A) in delting the addition and dismiss this ground of appeal of the Revenue. - Decided against revenue Addition made on account of excess depreciation claimed by the assessee - Held that - here was no maintenance of the building as the factory was closed down. We also find from the valuer s report dated 8th December 2000 issued by M. Chaudhry and associates that the market value of the building near to the date of sale was at ₹ 51,09,800/-. In the instant case, assessee has declared the sale consideration higher than the market value which is ₹ 52,85,030/- being book value of the building as per accounting records. We further observed that the AO has not doubted the market value of the assessee building as per valuer s report. The learned DR has also not brought anything on record contrary to the finding of the learned CIT(A). In view of above and considering the facts of the case, we find that the market value of the building as determined by the valuer is the correct value of the sale consideration of the building. Since the building in question is very old so there is no reason to take the current cost of construction of building as sale consideration for the computation of long term capital gain. The value given in the valuation report is correct value of the building as the same has not been challenged by the AO. Accordingly in our considered view, we have no hesitation in upholding the order of learned CIT(A) in deleting the addition.- Decided against revenue Addition on account of electricity expenses pertaining to the earlier year s - failure to claim the electricity expenses due to non-receipt of the bills - Held that - Assessee failed to claim the electricity expenses due to non-receipt of the bills as the Delhi factory was closed in November 1996. We find force in the argument of the Ld. AR that these expenses were made known to the assessee and accordingly settled in the year under consideration. Therefore in our considered view these expenses were exclusively incurred in connection with the business only and eligible for deduction under section 37 of the Act. In holding, so we relied in the case of Saurashtra Cements and Chemicals Industries 1994 (10) TMI 30 - GUJARAT High Court where held that the expenses pertaining to the transactions of earlier years do not become liability payable in earlier year unless it can be said that liability was determined and crystallized in the year on the basis of maintaining account of mercantile basis. In view of above, we have no hesitation in upholding the order of learned CIT(A) in deleting the addition.- Decided against revenue Addition on account of failure on the part of the assessee to furnish details of disputed Labour cases - Held that - AO has disallowed the labour expenses by treating it as capital in nature. However we find from the facts of the case that the liability towards the labour expenses was determined and crystallized in the year under consideration so it should be allowed as deduction under section 37 of the Act. We also find that the liability towards the labour expenses was on the revenue account so holding it on capital account is not appropriate. Moreover, the decision of the Hon ble Supreme Court K. Ravindranathan Nayeras (2000 (11) TMI 3 - SUPREME Court) is entirely applicable to the facts of the assessee as the instant case also relates to the labour dispute. The learned DR also failed to bring anything on record to controvert the finding of the Ld CIT(A). Therefore taking a consistent view in the judgment of Hon ble Supreme Court and we have no hesitation in upholding the order of Ld CIT(A)n deleting the addition.- Decided against revenue Addition of port charges written off against deposits lying with Calcutta Port Trust - Held that - Any liability, though pertaining to earlier year, depends upon making a demand and its acceptance by the assessee. If such liability has actually been claimed during subsequent year, it cannot be disallowed merely on the ground that the accounts are maintained on mercantile basis and it relates to transactions pertaining to an earlier year. Further reliance is also placed on the decision of ITAT Delhi Bench in the case of Kumar Aerosoles (P) Ltd. Vs. ACIT (1995 (9) TMI 107 - ITAT DELHI-A ) wherein expenses relating to electricity, telex, typewriter rent and telephone though relating to earlier years, are allowable in the year in which the demand is raised. Any liability which may be considered to have been arisen only in a subsequent year has to be allowed as deduction even if the same may be attributable to the business conducted by the assessee in an earlier year. In view of the above we reverse the orders of the lower authorities and ground of appeal raised by the assessee is allowed. Cash discount treated as the income of the assessee - Held that - As full value of consideration as defined under section 48 of the Act cannot be said to mean apparent consideration as envisages in Chapter XXC of the Act. In view of the above we hold that the cash discount given by the assessee cannot be treated as income. Accordingly the addition made by the lower authorities stands deleted. Hence this ground of appeal of the assessee is allowed.

Summary

Issues Involved:
1. Security deposits written off as capital loss.
2. Contingencies written off representing sales tax paid under protest.
3. Excess depreciation claimed on the building.
4. Electricity expenses pertaining to earlier years.
5. Labour expenses related to out-of-court settlements.
6. Port charges written off against deposits.
7. Computation of long-term capital gains on the sale of Delhi property.

Issue-wise Detailed Analysis:

1. Security Deposits Written Off as Capital Loss:
The primary issue was whether the security deposits written off by the assessee could be considered a capital loss. The assessee, a limited company engaged in manufacturing and selling various industrial and medical gases, had written off security deposits amounting to ?22,59,471/- as trading loss due to non-recovery. These deposits were made with various departments for commercial contracts. The Assessing Officer (AO) treated these as capital losses and disallowed the deduction. However, the Commissioner of Income Tax (Appeals) [CIT(A)] allowed the deduction, treating the deposits as trading assets. The Tribunal upheld the CIT(A)’s decision, emphasizing that the deposits were made in the normal course of business and classified as current assets, thus qualifying as a business expenditure under Section 37 of the Income Tax Act.

2. Contingencies Written Off Representing Sales Tax Paid Under Protest:
The second issue was the disallowance of ?34,03,526/- paid as sales tax under protest. The AO treated this as an extraordinary item, not allowable as a trading loss. The CIT(A), however, allowed the deduction, considering it a trade loss incurred in the ordinary course of business. The Tribunal upheld the CIT(A)’s decision, stating that the payment made under protest was connected to the business and thus allowable under Section 37 of the Act.

3. Excess Depreciation Claimed on the Building:
The third issue was the disallowance of ?17,98,092/- claimed as excess depreciation on a building sold by the assessee. The AO considered the current cost of construction as the sale consideration, which was significantly higher than the book value. The CIT(A) disagreed with this approach, noting that the building was old and had not been maintained. The Tribunal upheld the CIT(A)’s decision, stating that the market value as per the valuer’s report was the correct sale consideration, not the current cost of construction.

4. Electricity Expenses Pertaining to Earlier Years:
The fourth issue was the disallowance of ?9,38,852/- claimed as electricity expenses for earlier years. The AO disallowed these expenses, stating that they should have been accounted for in the respective financial years as the assessee followed the mercantile system of accounting. The CIT(A) allowed the deduction, and the Tribunal upheld this decision, noting that the expenses were determined and crystallized in the year under consideration and were thus allowable under Section 37 of the Act.

5. Labour Expenses Related to Out-of-Court Settlements:
The fifth issue was the disallowance of ?16,05,000/- paid to labourers as part of out-of-court settlements. The AO treated these expenses as capital in nature and disallowed them. The CIT(A) allowed the deduction, citing a Supreme Court decision that such expenses were allowable as business expenditure. The Tribunal upheld the CIT(A)’s decision, noting that the expenses were on revenue account and related to labour disputes.

6. Port Charges Written Off Against Deposits:
The first issue in the assessee’s appeal was the disallowance of ?9,49,461/- written off as port charges against deposits with the Calcutta Port Trust. The AO and CIT(A) treated these as capital in nature. The Tribunal reversed this decision, stating that the expenses were determined and crystallized in the year under consideration and were thus allowable under Section 37 of the Act.

7. Computation of Long-Term Capital Gains on the Sale of Delhi Property:
The second issue in the assessee’s appeal involved various disallowances related to the computation of long-term capital gains on the sale of a property in Delhi. The AO and CIT(A) had disallowed expenses related to vacating the property, other connected expenses, and had arbitrarily reduced the fair market value of the land as of 01/04/1981. The Tribunal restored the matter to the CIT(A) for fresh adjudication, emphasizing the need to consider the actual expenses incurred and the correct valuation of the property. The Tribunal also allowed the reduction of ?47,50,000/- from the sale consideration, treating it as a cash discount given on account of prepayment by the buyer.

Conclusion:
The Tribunal upheld the CIT(A)’s decisions on most issues, allowing deductions for security deposits, sales tax paid under protest, excess depreciation, electricity expenses, and labour expenses. It reversed the disallowance of port charges and remanded the issue of long-term capital gains computation for fresh adjudication. The Tribunal emphasized the need to consider actual business expenses and correct valuations in determining taxable income.