2002 (9) TMI 249 - AT - Income Tax

Issues Involved:
1. Legality of the assessment order.
2. Disallowance of Rs. 11,68,159 as revenue loss.
3. Addition of Rs. 19,48,760 towards profit on account of valuation of closing stock at market price.
4. Disallowance of Rs. 8,33,139 for the purpose of relief under s. 80-IA.
5. Disallowance of Rs. 21,437 on account of loss on scrap machinery.

Detailed Analysis:

1. Legality of the Assessment Order:
The first issue concerns the legality of the assessment order. The assessee argued that the notice under s. 143(2) was invalid due to an incorrect date of the return. The original return was filed on 31st Oct., 1996, and a revised return on 23rd March, 1998, but the notice referred to a return date of 31st Dec., 1996. The Tribunal held that the mistake in the date was a curable defect under s. 292(B) of the IT Act, 1961, and did not invalidate the assessment order. The judgment of the Delhi High Court in the case of Intarcraft India vs. CIT and the J&K High Court in Rattan Lal Tiku vs. CIT were distinguished as not applicable to the facts of this case. The Tribunal upheld the CIT(A)'s order, confirming the legality of the assessment order.

2. Disallowance of Rs. 11,68,159 as Revenue Loss:
The second issue involved the disallowance of Rs. 11,68,159 claimed as a revenue loss for writing off irrecoverable advances made for machinery. The assessee argued that the amount should be treated as a revenue loss since the machinery was never acquired. The Tribunal, however, considered the expenditure as a capital loss, referencing the Supreme Court's judgment in Swadeshi Cotton Mills Co. Ltd vs. CIT. The Tribunal found that the payment was for acquiring a capital asset, and since the machinery was not taken, the loss was capital in nature and not deductible. The Tribunal confirmed the lower authorities' order on this ground.

3. Addition of Rs. 19,48,760 Towards Profit on Account of Valuation of Closing Stock at Market Price:
The third issue was the addition of Rs. 19,48,760 towards profit due to the valuation of closing stock at market price. The assessee argued that the raw materials and unfinished goods could not be sold in the open market and should not have a 43% GP addition. The Tribunal noted the absence of inventory details and balance sheet, making it difficult for the AO to ascertain the correct GP percentage. The Tribunal directed the AO to re-examine the issue in light of the balance sheet prepared on 31st Jan., 1996, and other relevant details, setting aside the lower authorities' order on this issue.

4. Disallowance of Rs. 8,33,139 for the Purpose of Relief under s. 80-IA:
The fourth issue was the disallowance of Rs. 8,33,139 for the purpose of relief under s. 80-IA. The lower authorities disallowed interest, service charges, and liabilities written back, totaling Rs. 8,33,139, as they were not derived from the industrial undertaking. The Tribunal confirmed that these amounts were not eligible for s. 80-IA benefits, upholding the lower authorities' order.

5. Disallowance of Rs. 21,437 on Account of Loss on Scrap Machinery:
The final issue was the disallowance of Rs. 21,437 for loss on scrap machinery. The assessee did not press this ground of appeal during the hearing. The Tribunal found no infirmity in the lower authorities' order and confirmed the disallowance.

Conclusion:
In conclusion, the Tribunal upheld the legality of the assessment order and confirmed the disallowances related to the capital loss and s. 80-IA relief. The issue of valuation of closing stock was remanded back to the AO for re-examination, and the disallowance for loss on scrap machinery was confirmed. The appeal was partly allowed.

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