2022 (6) TMI 62 - AT - Income Tax

Addition on account of provision for impairment of loss - Applicability of section 41 - deletion of addition by ld CIT(A) on account of loss resulting from impairment of fixed assets based on the valuation done by Government Registered approved Valuer - HELD THAT - We have perused the provisions of section 41(2) of the Act carefully and in our view the section deals with the loss arising from building, machinery, plant or furniture which are owned by the assessee and in respect of which depreciation is claimed under clause (i) of sub-section (1) of section 32; and which has been used for the purposes of business which is sold, discarded, demolished or destroyed and the moneys payable in respect of such building, machinery, plant or furniture, as the case may be, together with the amount of scrap value, if any, exceeds the written down value, then so much of the excess as does not exceed the difference between the actual cost and the written down value shall be chargeable to income-tax as income of the business of the previous year in which the money is payable for the building, machinery, plant or furniture. Thus we do not find any substance or merit in the contentions of the Ld. A.R that the assessee s case is covered by the provision of Section 41(2) of the Act as the provisions of Section 41(2) deals with the charging of income in the year in which is sold, discarded, demolished or destroyed, but not the case where the assessee continue to hold the fixed assets and loss or impairment in the value of asset is calculated on the registered valuer report. The case cited by the Ld. A.R. before us namely M/s Indowind Energy Ltd. vs. DCIT 2016 (10) TMI 1360 - ITAT CHENNAI is not applicable as the said decisions was rendered in the context of book profit u/s 115JB of the Act. Under these circumstances we are inclined to reverse the order of the Ld. CIT(A) by allowing the ground no. 1 raised by the revenue. Addition on account sundry balance written off - AO noted that the assessee has written off under the head sundry balances and charged the same to the profit and loss account - HELD THAT - We note that the substantial part of the amount represented the stock written off in respect of garment stock and stock of trims and only a small portion of the total represented sundry debtors written off. The Ld. Counsel of the assessee vehemently argued before us that this is mere claim of genuine nature made by the assessee under the wrong head which represented the business loss and should be allowed to the assessee. We note that the claim has rightly been allowed by ld CIT(A) by appreciating the facts after going through the details filed by the assessee. Having considered these facts we have no iota of doubt in our mind that even the stocks written off which are rendered unserviceable represented a business loss and has to be allowed while computing the income of the assessee though the assessee has made the claim under the head sundry balance written off. In our considered view the mistake of the assessee would not disentitle it from a lawful expenditure. Accordingly, we upheld the order of Ld. CIT(A) by dismissing the grounds raised by the revenue.

Summary

Issues:
1. Deletion of addition for provision of impairment loss.
2. Deletion of addition for sundry balance written off.

Issue 1: Deletion of addition for provision of impairment loss:
The appeal by the Revenue was against the CIT(A)'s order deleting the addition made by the AO regarding a provision for impairment loss. The AO disallowed the claim of the assessee for a provision of Rs. 7,77,70,000 on account of losses from impairment in the value of assets, stating it was not allowable under the Act unless the assets were destroyed, discarded, or sold. The CIT(A) allowed the claim based on Accounting Standard AS-28 and a valuation report by a Government Registered Valuer. However, the ITAT found that the CIT(A)'s decision was not in line with the Act. Section 41(2) of the Income Tax Act deals with losses from assets sold, discarded, or destroyed, not impairment losses on held assets based on valuation reports. The ITAT reversed the CIT(A)'s order, citing that the case law referred to was not applicable in this context, and allowed the Revenue's appeal.

Issue 2: Deletion of addition for sundry balance written off:
The Revenue challenged the deletion of an addition made by the AO for Rs. 84,56,692 regarding sundry balance written off. The AO rejected the claim, adding it to the income, as the written off amount included garment stocks, trims, and petty balances. The CIT(A) allowed the claim, noting the classification mistake by the assessee, as the written off amounts represented business losses. The ITAT upheld the CIT(A)'s decision, emphasizing that even though the claim was made under the wrong head, the written off amounts, including unserviceable stocks, were genuine business losses. The mistake in classification did not disentitle the assessee from a legitimate expenditure, and hence, the ITAT dismissed the Revenue's grounds.

In summary, the ITAT partly allowed the Revenue's appeal concerning the provision of impairment loss but dismissed the appeal regarding the sundry balance written off. The judgments were based on the interpretation of relevant provisions of the Income Tax Act and the nature of the claimed losses by the assessee.