2017 (4) TMI 1010 - AT - Income Tax

Disallowing the claim of depreciation on Plant and machinery and other assets due to closure of factory - Held that - We find that the ld. Sr.DR was not able to controvert the finding given by the ld. CIT(A). The assessee s factory was closed on the account of liquidity problem and the matter was pending before the BIFR for revival of the business. The Hon ble Delhi High court in the case of CIT Vs. Laxmi Sugar Mills Ltd. 2013 (7) TMI 385 - DELHI HIGH COURT held that in intervening period, plant was ready for use throughout and same could not be used for reasons beyond control of assessee and hence, there was passive user of plant and therefore, in view of facts that above claim of assessee regarding depreciation should be allowed - Decided in favour of assessee Disallowance of writing of Sundry debtors - Held that - Writing off bad debt in the name of Nam Nam Dhaka is allowed and this ground of assessee s appeal stands allowed. See Adea International Pvt. Ltd. Vs. ACIT 2011 (2) TMI 724 - ITAT, Bangalore held that is a settled law that when the assessee arrives at a decision that certain debts have become bad and accordingly writes off the same in the books of accounts, section 36(1)(vii)of the Act provides for a deduction. Further, section 41(1) of the Act provides that if such bad debts written off is recovered during the subsequent assessment years, it shall be treated as income of that year. From the facts and circumstances of the case, we are of the considered view that the assessee is justified to claim deduction u/s. 36(1)(vii) of the Act with respect to the unrealized bills from export turnover - Decided in favour of assessee Disallowance of writing off loans and advances - This amount was written off by the BIFR - Held that - BIFR, a scheme was sanctioned for rehabilitation of the scheme. As per scheme, assets and liabilities would be limited to what was shown in the sanctioned scheme. In view of this scheme, the balance sheet for financial year 1999- 2000 was recasted. Only those items were shown in recasted balance sheet, which were taken by the new management. Only those assets and liabilities were shown, which were recoverable and payable respectively by the new management and loans and advances which are not recoverable were written off in the line of the sanctioned scheme. Considering these facts, we find merit in the pleadings of the ld AR and therefore, we allow this ground of appeal. This issue is also covered by the decision of the Hon ble Apex Court in the case of T.R.F. Limited Vs. CIT, Ranchi (2010 (2) TMI 211 - SUPREME COURT ). Disallowance of write off of fixed assets - these assets were found missing during the course of taking over of the operation of the company by the new management and the company has written off these assets - Held that - We find that these were the assets missing and the same were written off in the books of account. In our considered view, this was not the proper way to deal with these missing assets as these assets were already forming part of the block assets. There was no need to writing off the same in the books of account as these were merged in block of assets and depreciation was allowed. Since no details are filed, hence, we find no merit in the ground. Therefore, we confirm the order of the ld. CIT(A) on this issue and dismiss this ground of appeal of the assessee. Disallowance of interest amount - Held that - The loan as on 31/3/2000 from the bank was ₹ 2.00 crores as cash credit, export bills and packing credit ₹ 79.52 lacs and working capital term loan ₹ 2.38 crores. The part of the working capital loans were converted during the year as working capital term loan as per the scheme of the BIFR. Thus the total loan outstanding of bank towards the working capital was ₹ 5,17,52,067, which is verifiable from the balance sheet as on 31/3/2000. Further the assessee company has charged interest of ₹ 6.50 lacs only in the P&L account, which is a net effect of 90% of the interest payable. As per the scheme of the BIFR, the balance amount has been credited to extra ordinary income. Keeping in view of these facts and circumstances, we find no merit in this addition and direct to delete the same

Summary

Issues Involved:
1. Deletion of addition by disallowance of depreciation on plant and machinery due to factory closure.
2. Disallowance of writing off sundry debtors.
3. Disallowance of write-off of loans and advances.
4. Disallowance of write-off of fixed assets.
5. Disallowance of interest amount.
6. Admission of additional grounds regarding extraordinary income.

Detailed Analysis:

1. Deletion of Addition by Disallowance of Depreciation on Plant and Machinery due to Factory Closure:
The revenue appealed against the deletion of ?55,10,113/- added by the Assessing Officer (AO) by disallowing the depreciation claim on plant and machinery due to factory closure. The assessee's factory was closed from 03/06/1998 to 19/06/2000 due to liquidity problems, and the matter was pending before the Board for Industrial and Financial Reconstruction (BIFR) for revival. The Commissioner of Income Tax (Appeals) [CIT(A)] allowed the depreciation, citing that the assets were in passive use and referred to the Delhi High Court's judgment in CIT Vs. Laxmi Sugar Mills Ltd., which allowed depreciation during the closure period. The ITAT upheld the CIT(A)'s decision, stating that depreciation is allowable even if the factory is closed for reasons beyond control, as the assets were ready for use.

2. Disallowance of Writing Off Sundry Debtors:
The assessee appealed against the disallowance of ?58,80,646/- for writing off sundry debtors M/s Nam Nam Dhaka. The AO disallowed the write-off as the assessee did not produce RBI approval. The CIT(A) confirmed the disallowance, referencing the Supreme Court's decision that provisions made by NBFCs for NPAs are not deductible under the Income Tax Act. However, the ITAT allowed the write-off, referencing the Supreme Court's decision in T.R.F. Limited Vs CIT, which held that post-1989, it is sufficient if the bad debt is written off in the accounts. The ITAT directed that the write-off is allowable and any recovery in subsequent years should be treated as income.

3. Disallowance of Write-Off of Loans and Advances:
The assessee contested the disallowance of ?1,47,62,069/- written off as per the BIFR's rehabilitation scheme. The AO disallowed the write-off due to lack of details and efforts for recovery. The CIT(A) upheld the AO's decision. The ITAT allowed the write-off, noting that the BIFR's scheme recasted the balance sheet, showing only recoverable assets and liabilities. The ITAT found merit in the assessee's claim and allowed the write-off.

4. Disallowance of Write-Off of Fixed Assets:
The assessee appealed against the disallowance of ?13,67,295/- for writing off fixed assets found missing during the takeover by new management. The AO disallowed the write-off due to lack of FIR and insurance claims. The CIT(A) confirmed the disallowance, stating no evidence of theft or loss was provided. The ITAT upheld the CIT(A)'s decision, noting the assets were part of the block assets and depreciation was already allowed, thus dismissing the assessee's ground.

5. Disallowance of Interest Amount:
The assessee contested the disallowance of ?35,00,000/- out of a total interest of ?65,00,000/- provided as per BIFR's scheme. The AO computed hypothetical interest at 15% on ?2 crores, disallowing the excess. The CIT(A) upheld the disallowance. The ITAT found the AO's computation incorrect, noting the actual interest was on a working capital of around ?5.25 crores. The ITAT allowed the interest claim, directing deletion of the addition.

6. Admission of Additional Grounds Regarding Extraordinary Income:
The assessee sought to admit additional grounds regarding the inclusion of extraordinary income of ?6,04,98,043/- in the assessable income, arguing it was not taxable per the BIFR scheme. The ITAT admitted the additional grounds, referencing the Supreme Court's decision in NTPC, which allows raising new grounds if they pertain to the correct assessment of tax liability. The ITAT remanded the issue to the AO for verification and decision on merit.

Conclusion:
The ITAT dismissed the revenue's appeal and partly allowed the assessee's appeal, directing the AO to reassess certain issues and admitting additional grounds for statistical purposes. The order was pronounced in the open court on 11/04/2017.