2016 (8) TMI 209 - AT - Income Tax

Nature of loss - business loss or capital loss - Held that - As far as write off of export benefit (DEPB) we observe that ld. CIT(A) has given specific finding that he has verified the books of account of assessee and has found that the export benefit (DEPB) has been shown by the assessee as an income in the earlier years/this year. We further observe that the reason given by assessee for write off of this expenditure was that the amount of export benefit was calculated at its level and income of ₹ 8,94,971/- was booked and the same was shown receivable from the Government department but thereafter on account of recalculation it was found that this impugned amount of ₹ 8,94,971/- has been booked excessively as income and which is not receivable and the same was transferred to balance written off account. On going through these facts, we are of the view that assessee has rightly claimed ₹ 8,94,971/- as business expenditure. Moving ahead to examine the balance write off of ₹ 172402/- of Esbee Electricals, ₹ 1139020/- of R.P. Construction and ₹ 2313118/- of Sangam Construction, on perusal of records relating to ledger account of these three parties, we find that there have been regular business transactions in the form of payment through bank and by cash towards supply of material and labour, free supply of goods to the contractors for job work purposes, income-tax has been deducted at source on regular job works bills. We observe that there have been continuous business transactions with a bona fide belief of consistency of business relation with these three parties. However, at one point of time when these three parties were not traceable even after necessary efforts last resort left with the assessee was to transfer these irrecoverable amounts as business loss. We, therefore, are of the view that these advances of ₹ 36,24,540/- (Rs.172402 ₹ 1139020/- ₹ 2313118/-) being irrecoverable business advances have been rightly claimed as business expenditure by the assessee. We find no reason to interfere with the order of ld. CIT(A). We uphold the same

Summary

Issues Involved:
1. Deletion of addition of ?42,48,934 out of ?45,74,134 holding it as business loss instead of capital loss.
2. Whether the CIT(A) ought to have upheld the order of the Assessing Officer.

Issue-wise Detailed Analysis:

1. Deletion of Addition of ?42,48,934:

The Revenue's appeal challenges the CIT(A)'s decision to delete the addition of ?42,48,934 out of ?45,74,134, which was initially disallowed by the Assessing Officer (AO) as a capital loss. The AO had observed that the assessee, a limited company engaged in manufacturing transmission towers, infrastructure, and real estate, had written off ?45,74,134 as business expenditure. This amount primarily included irrecoverable advances given to job work contractors for supply of material and labor. The AO considered these advances as capital losses and disallowed them as business expenditure, thus assessing the income at ?145.27 crores.

Upon appeal, the CIT(A) provided partial relief by deleting the disallowance except for an advance of ?3,25,200. The CIT(A) noted that the assessee had awarded a contract for pipeline laying and associated works, and some job work contractors failed to perform their part, leading to the write-off of their accounts. The CIT(A) allowed the write-off of export benefits (DEPB) and other advances as business expenditure, citing that they were shown as income in earlier years and were irrecoverable.

The CIT(A) referenced the High Court and Supreme Court judgments, particularly the case of Hasimara Industries Ltd., to distinguish between capital and revenue losses. The CIT(A) concluded that the advances given for business purposes, not for acquiring capital assets, were allowable as business expenditure under sections 28/29 of the Income Tax Act.

2. Whether the CIT(A) Ought to Have Upheld the AO's Order:

The CIT(A) analyzed the nature of the advances and the purpose for which they were given. The CIT(A) found that the advances to Esbee Electricals, R.P. Construction, and Sangam Constructions were for business purposes, and their write-off was justified as business expenditure. The CIT(A) also noted that the AO had disallowed the claim based on the judgment in Hasimara Industries Ltd., which was not entirely applicable to the assessee's case. The CIT(A) observed that the advances were not for acquiring capital assets but were part of regular business transactions, thus qualifying as business expenditure.

The Tribunal, upon reviewing the CIT(A)'s order and the arguments presented, upheld the CIT(A)'s decision. The Tribunal confirmed that the write-off of ?8,94,971 related to export benefits (DEPB) and ?36,24,540 related to advances to contractors were rightly claimed as business expenditure by the assessee. The Tribunal found no reason to interfere with the CIT(A)'s order and dismissed the Revenue's appeal.

Conclusion:

The Tribunal dismissed the Revenue's appeal, confirming the CIT(A)'s decision to treat the write-off of ?42,48,934 as business loss instead of capital loss. The Tribunal upheld that the advances given for business purposes and shown as income in earlier years were allowable as business expenditure under sections 28/29 of the Income Tax Act.