2018 (2) TMI 168 - AT - Income Tax

Allowability of busniss loss - machinery has been imported by the assessee but before it could be transported to the assessee s premises at Hyderabad and installed and thereafter put to use, the machinery got damaged - Held that - In the case before us, since the machinery has not been installed and put to use by the assessee, the assessee cannot capitalize the same and the depreciation thereon cannot be allowed. An expense is capitalized when it is recorded as an asset, due to its future value on the balance sheet, rather than as an expense in the income statement. Since the machinery got damaged even before it reached the assessee s premises, and it had no future value, it was an expense. CIT(A) has, in fact accepted that this amount is allowable to the assessee but in the year of crystalization. The reason for confirming the disallowance is that the loss has not crystalized during the year, as the appeal by the assessee against the insurance company is still pending before the Hon ble High Court of Madras. We agree with the assessee, that the business loss has occurred and is allowable to the assessee in the relevant assessment year and as and when the compensation is finalized by the Hon ble High Court of Madras, and the assessee receives it, it would have to offer the same to taxation in such assessment year of receipt. The finding of the CIT(A) has not been challenged by the revenue and therefore it has become final.- Decided in favour of assessee

Summary

Issues:
1. Dismissal of appeal by CIT(A) without proper reasons.
2. Treatment of loss on destruction of machinery as capital in nature.
3. Allowability of loss on destruction of machinery as a deduction in the relevant assessment year.
4. Consideration of legal issues based on case laws.
5. Classification of loss on destruction of machinery as a capital loss.
6. Ascertainability of loss on destruction of machinery for deduction.
7. Timing of allowance of loss on destruction of machinery pending crystallization.

Analysis:

Issue 1:
The assessee appealed against the CIT(A)'s order for the A.Y 2014-15, citing dismissal without proper reasons, both legal and factual. The grounds of appeal included contentions regarding the justification for dismissal and the acceptance of the value of machinery to be allowed in the year of final settlement with the insurance company.

Issue 2:
The Assessing Officer (A.O) considered the loss on destruction of machinery as capital in nature due to the machinery being imported for modernization purposes. The A.O's stance was that the loss cannot be allowed as it pertains to a capital asset, leading to a dispute with the assessee.

Issue 3:
The CIT(A) observed that the machinery's loss cannot be allowed in advance pending crystallization, as the machinery was not put to use and the liability amount was yet to be determined. The CIT(A) directed that the loss could be allowed when crystallized in the future, leading to the assessee's appeal against this decision.

Issue 4:
The assessee argued for the allowance of the loss on destruction of machinery in the year of incurring the loss, citing various case laws to support the contention that the loss is allowable when incurred, and any compensation received later would be taxable income in the year of receipt under the IT Act.

Issue 5:
The Ld. DR supported the authorities' decision that the loss was capital in nature and therefore not allowable from business profits. The disagreement centered on the characterization of the loss and its treatment as a capital loss.

Issue 6:
The ITAT Hyderabad analyzed the case, noting that the machinery was intended for business purposes to increase profit earning capacity. The tribunal referred to legal precedents to support the allowance of business losses incurred during the relevant assessment year, emphasizing the need for the loss to be allowed unless expressly prohibited.

Issue 7:
Ultimately, the ITAT Hyderabad allowed the assessee's appeal, directing the A.O to allow the business loss during the relevant assessment year. The tribunal upheld the CIT(A)'s decision that the loss was allowable but required crystallization for allowance, emphasizing that the business loss occurred and should be allowed in the relevant assessment year.

This detailed analysis of the judgment highlights the key issues, arguments presented, and the final decision rendered by the ITAT Hyderabad regarding the treatment and allowance of the loss on destruction of machinery for the A.Y 2014-15.