2024 (10) TMI 868 - HC - Income Tax

Disallowance of Loss incurred in plastic division - Assessee has no actual business in the nature of purchase, manufacturing/ processing as there is no stock of finished goods at the end of each month available in the monthly summary - as argued assessee followed the mercantile system of accounting, the contracts were liable to be accounted for on an accrual basis and are thus required to be taken into consideration in the same year itself - ITAT dismissed revenue appeal - HELD THAT - Levy of tax is primarily concerned with real income and income which has the capability of being characterized as having aspects of certainty attached to it. Of equal significance is the decision of the Supreme Court in Commissioner of Income Tax v. Excel Industries Ltd. 2013 (10) TMI 324 - SUPREME COURT Laying emphasis on income tax being levied on real income as opposed to hypothetical income, the Supreme Court explained when income could be said to have accrued We note that undisputedly, the settlement agreement came to be executed after the drawing up of the balance sheet. It was the aforenoted agreement which had acknowledged the substance of the contract having disintegrated in part and as a consequence of which the assessee had lost the right to receive the full transaction value. To deal with contingencies which occur after the balance sheet date, we take into consideration the following relevant provisions which are made in Accounting Standard (AS) 4 and Accounting Standard (AS) 9. We find that the ITAT has committed no manifest error in holding in favour of the assessee. Consequently, we see no reason to interfere with the ITAT s impugned judgment

Issues Involved:

1. Justification of ITAT's dismissal of Revenue's appeal regarding loss incurred in the plastic division.
2. Justification of ITAT's dismissal of Revenue's appeal regarding trade discount treatment.
3. Justification of ITAT's dismissal of Revenue's appeal regarding shortage of closing stock.
4. Allegation of perversity in the ITAT's order.

Issue-wise Detailed Analysis:

1. Loss Incurred in Plastic Division:

The Revenue challenged the ITAT's decision, arguing that the loss claimed by the assessee in the plastic division was unjustified as there was no actual business activity, such as purchase or manufacturing, evidenced by the absence of finished goods stock at the end of each month. However, the court found that the ITAT's decision was based on factual findings that were not perverse. The court emphasized that factual findings, unless shown to be perverse, cannot be interfered with, thus upholding the ITAT's decision.

2. Trade Discount Treatment:

The Revenue contended that the trade discount allowed by the assessee should have been treated as "bad debts" instead of a "discount" once the goods were delivered and the sale accounted for. The court examined the facts, noting that the dispute arose from a sale transaction in AY 2010-11 where the buyer returned goods on quality considerations, leading to a settlement agreement. The court referred to accounting standards and legal precedents, emphasizing that income tax is concerned with real income, not hypothetical income. The court found that the settlement agreement, executed after the balance sheet date, acknowledged the disintegration of the contract, affecting the assessee's right to full transaction value. The court concluded that the ITAT did not err in its judgment, as the real income principle supported the assessee's treatment.

3. Shortage of Closing Stock:

The Revenue argued that the shortage of closing stock was not accounted for in the books and should not be allowed merely because it was disclosed by the tax auditor. The court found that this issue, like the first, was resolved by factual findings that were not perverse. The court reiterated that factual determinations, unless proven perverse, are not subject to interference, thus supporting the ITAT's decision.

4. Allegation of Perversity in ITAT's Order:

The Revenue alleged that the ITAT's order was perverse in both facts and law. The court, however, found no manifest error in the ITAT's judgment. The court emphasized that the ITAT's conclusions were based on sound legal principles and factual assessments, which were not shown to be erroneous or perverse. Consequently, the court dismissed the appeal, affirming the ITAT's judgment.

Conclusion:

The court upheld the ITAT's decision, finding no reason to interfere with its judgment. The appeal was dismissed, reinforcing the principle that income tax assessments should be based on real income and factual findings, unless shown to be perverse, are generally upheld.

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