2017 (7) TMI 1042 - AT - Income Tax

Best judgment assessment - addition on account of fall in GP rate - Held that - The closing stock of the assessee included two types of stock i.e. i) which had been sold up to the date of signing of audit report measuring 305287 metres and; ii) which was still unsold measuring 252864 metres. It has been contended by the Ld. AR that the Ld. CIT (A) applied the differential rate in valuation @Rs. 5/- per metre on the entire stock instead of the stock remaining unsold i.e. 2526784 metres. This contention of the assessee appears logical to us and we are of the considered opinion that the assessee should be allowed benefit of the same. Therefore, while rejecting the department s grounds, we partly allow ground no. 1 of the assessee s C.O. by restricting the addition to ₹ 15,26,435/- (305287 mtrs. x ₹ 5/-). Thus, ground no. 1 of the department s appeal stands dismissed whereas ground no. 1 of the assessee s C.O. stands allowed. Bad debts written off - Held that - We find that the amounts have been shown as interest income receivable during earlier assessment years and as such, the assessee has already paid tax on the same. Therefore, for the purposes of section 36(2), the conditions laid down therein have duly been met by the assessee. Therefore, there is no reason as to why these amounts should not be allowed as bad debt. We accordingly set aside the order of the Ld. CIT(A) on this issue and direct the Assessing Officer to delete this addition of ₹ 18,18,058/- also. In the result, ground no.2 of the department s appeal is dismissed and whereas ground no. 2 in assessee s C.O. is allowed. Depreciation on boiler - boiler Falls under item no. 8(ix) under the head energy saving devices in the chart prescribing the rates of depreciation under the Income Tax Rules - Held that - CIT (A) has noted that it is an admitted fact that as per Certificate dated 8.12.2009 issued by supplier of the boiler and submitted before the Assessing Officer along with letter filed on 22.12.2009, the assessee had purchased Fluidized Bed Combustion Boiler which is specifically covered under item (ix) Energy Saving Devices of the depreciation schedule under the heading (A)(a) as Ignifluid/Fluidised Bed Boilers eligible for depreciation @80%. In the proceedings before us, the department could not negate the fact that the boilers were in fact eligible for depreciation @80% and the only cause of grievance was that the assessee did not file a revised return. Considering the overall factual matrix, we are of the considered opinion that the Ld. CIT (A) has not committed any error in allowing depreciation at the correct rate even though the assessee had claimed depreciation at a lesser rate in the return filed. Therefore, we find no reason to interfere on this issue and we dismiss ground no. 3 of the department s appeal. Disallowance on account of short term capital loss - Held that - As already allowed depreciation on boiler @80% and the motor cars fall under different block of assets, although rate of depreciation is 15% as applicable to machinery and plant other than those covered by sub items (2), (3) and 8 below the table and sub item (2) being motor cars, other than those used in business of running them on hire. Consequently, the disallowance of short term capital loss of ₹ 1,48,76,639/- made by the AO is deleted as the block of plant and machineries other than motor car, computer and boiler ceased to exist. The AO is directed to withdraw depreciation of ₹ 13,22,785/- allowed in the order.

Summary

Issues Involved:
1. Invocation of Section 144 for best judgment assessment.
2. Addition on account of gross loss.
3. Disallowance of bad debts.
4. Depreciation rate on boiler.
5. Disallowance of short-term capital loss on sale of plant and machinery.

Detailed Analysis:

1. Invocation of Section 144 for Best Judgment Assessment:
The Assessing Officer (AO) invoked Section 144 of the Income Tax Act, 1961, due to the assessee's alleged failure to produce books of accounts. However, the Commissioner of Income Tax (Appeals) [CIT(A)] found that the books were produced and compliances were made during the assessment proceedings. The CIT(A) held that the AO was unjustified in invoking Section 144 and should have based the best judgment assessment on available material. The Tribunal noted that the AO did not provide specific reasons for rejecting the gross loss rate declared by the assessee and instead arbitrarily adopted a 20% loss rate.

2. Addition on Account of Gross Loss:
The AO added ?1,56,86,871/- due to a fall in the gross profit (GP) rate, which the assessee attributed to business closure and sale of old stock. The CIT(A) restricted this addition to ?30 lakh, estimating the difference in stock valuation at ?5 per meter. The Tribunal agreed with the CIT(A) that the valuation of closing stock lacked specific quality or brand identification, making it unverifiable. However, the Tribunal adjusted the addition to ?15,26,435/- based on the stock that remained unsold.

3. Disallowance of Bad Debts:
The AO disallowed ?1,43,72,485/- claimed as bad debts, stating the assessee failed to prove the debts had become bad. The CIT(A) reduced this disallowance to ?18,18,058/-. The Tribunal upheld the CIT(A)'s decision, citing the Supreme Court's ruling in TRF Limited vs CIT, which states that post-1st April 1989, it is sufficient for bad debts to be written off in the books of accounts. The Tribunal also allowed the assessee's claim for the ?18,18,058/-, noting it was previously booked as income and met the conditions of Section 36(2).

4. Depreciation Rate on Boiler:
The AO allowed depreciation at 15% instead of the claimed 80%, arguing the assessee did not substantiate the higher rate. The CIT(A) allowed the 80% depreciation based on the revised tax audit report and supporting evidence from the supplier. The Tribunal upheld this, noting that the boiler qualified as an "Energy Saving Device" eligible for 80% depreciation under the Income Tax Rules, despite the assessee not filing a revised return.

5. Disallowance of Short-Term Capital Loss on Sale of Plant and Machinery:
The AO disallowed ?1,48,76,639/- claimed as short-term capital loss, arguing the block of assets did not cease to exist. The CIT(A) found that the plant and machinery were sold, and the block ceased to exist, allowing the claim. The Tribunal upheld the CIT(A)'s decision, noting the separate depreciation rates for different blocks of assets and confirming the sale and cessation of the block.

Conclusion:
The Tribunal dismissed the department's appeal and allowed the assessee's cross-objections, confirming the CIT(A)'s findings on the issues of gross loss addition, bad debts, depreciation rate, and short-term capital loss. The Tribunal emphasized the need for reasonable estimates and adherence to legal provisions in assessments.