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TMI Blog2013 (10) TMI 551X X X X Extracts X X X X X X X X Extracts X X X X ..... was damaged by the earthquake. It is further seen that the valuation report obtained was filed before the CIT(A) and the CIT(A) asked the assessee company to ascertain from the bank as to valuation of stock done at the time of settlement - CIT(A) remained uncontroverted except that that he has accepted the valuation report in contravention of Rule 46A. The findings of the learned CIT(A) are findings of fact which are given after ascertaining the factual matrix of the case - Decided against Revenue. There was no reason given by the AO as to why the income out of sale of goods was treated as income from other sources as the profit was generated out of sale of stock which was accumulated stock of the assessee out of business activity - CIT(A) was justified in holding that the income out of sale of stock as business income and rejecting the contention of the AO in reducing the value of stock - Decided against Revenue. Income from other sources - Waiver of interest - Held that:- It is not understandable as to how the amount which was waived by the bank was income from other sources as the loan was taken for the purpose of business activity only. The amount payable to various cred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st we will take up appeal of the department (i.e. ITA No.1184/M/2010), wherein the department has raised grounds No.1 to 4, which relate to deleting the addition of Rs.3,57,61,782/- by accepting the additional evidence in the shape of stock valuation by bank in contravention of Rule 46A of IT Rules. 4. During the assessment proceeding, the AO noticed that the amount of Rs.4,17,17,450/- is claimed as variation in the stock and debited to P L Account. This figure arrived at by the assessee as under :- Opening stock Rs.5,95,98,341/- Less : Closing stock Rs.1,78,80,891/- Balance Rs.4,17,17,450/- After considering the submission the AO found that the amount of Rs.5,95,98,341/- is carried forward in the balance sheet as stock in trade right from 31-3-2000 to 1-4-2005. The AO also noted that in none of the intervening years, the auditor's report or director's report, there is no mention of the status of the stock and its value. The claim of the assessee that the stock is damaged due to earthquake and this explanation of the assessee was not acceptable to the AO as in his view no credence in the absence of FIR filed with the polic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t accepting the closing stock shown by the assessee. Therefore, he deleted the addition made by the AO. 6. Learned DR firstly placed reliance on the order of AO. It was further submitted that the AO should have been allowed opportunity to examine the valuation done by the bank, therefore, the additional evidence admitted by the CIT(A) is in violation of Rule 46A of the IT Rules. 7. Learned counsel of the assessee placed reliance on the order of CIT(A). Further a copy of the written submission was also filed. 8. After considering the order of the AO, CIT(A) and submission of both the parties, we found no infirmity in the findings of the learned CIT(A). The findings of the CIT(A) have been recorded in para 5 to 5.1.3 at pages 4 to 7, which are as under :- "5. I have carefully considered the information on record. It was explained by the appellant that there was an earthquake on 26.01.2000 which had badly damaged the factory premises. It was further explained that due to dispute with the main purchaser namely RG. Holding, the appellant had to suffer serious set back in his business. Added to this due to failure to pay the bank loan, the bank authorities had kept the stock hypo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of moistures from the climate in particularly of Monsoon season and due to fungus, the stock lying in these units were not usable. However, with the help of the labour certain stock was separated and was inventorised in the list given in the report at other place. Over and above, there were other accessories like zippers; elastics, buckles, buttons, labels etc. were lying in these units. Due to climate and passage of time, these accessories were faded and the colour was totally changed and the junk was picked up by most of them. Therefore; these accessories cannot be utilized for manufacturing of the garments arid no value can be given to the same. In respect of one unit which was more or less not damaged and was in a very good condition, most of the stock was in a good condition except the stock lying on the top of the hips of the total stock: The condition of these stock was very good and were easily used for the manufacturing of garments, Considering the above facts, I give my findings are as under: a) Finished Goods. As per the statement given by the Company the finished goods were of Rs. 173 lakhs. These goods were lying in the cartoons as well as loose have no value and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -Balance stock value with assessee Rs.4,17,17,450 (59598341 - (23836459 - 5955568) 5.1.2 In summary the bank authority valued the stock at Rs.1,93,50,00/- against the valuation made by the appellant at Rs.2,38,36,459/-. In fact the valuation made by the assessee is more than the value adopted by the bank authorities prior to one time settlement. 5.1.3 The report of bank authorities clearly indicates that the entire finished and semi finished goods have only scrap value. He also held that except for the raw material to the tune of Rs.1.92 crores, the rest of the items, finished goods and semi finished goods are infected with fungus, faded in colour, there is no strength in cloth and are practically unfit for sale. It is also pertinent to mention that the appellant could not prevent the damage to the stock as the same was in the custody of the bank. In view of the above discussion the addition made by the AO on the ground that nothing is mentioned in the audit report or in the director's report and no police complaint was given are materially unimportant. Taking into account the totality of the fact that there was an earthquake in 2000, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... who found that the valuation officer has given valued at Rs.1.93 crores or odd against which the valuation of stock shown by the assessee at Rs.2.38 crores or odd, was much higher than the valuation adopted by the valuation officer. Therefore, the CIT(A) found that disturbing the valuation adopted by the assessee at the end of the AO was not justified. It will be futile exercise if the matter is sent back to the file of the AO to considering the valuation report filed before the CIT(A) as the learned CIT(A) has examined the report in detail, who has co-terminus power. 9. We further noted that the findings of the learned CIT(A) remained uncontroverted except that that he has accepted the valuation report in contravention of Rule 46A. The findings of the learned CIT(A) are findings of fact which are given after ascertaining the factual matrix of the case, therefore, we see no reason to interfere in the findings of the learned CIT(A). Accordingly, we confirm the findings of the learned CIT(A) on the issue involved. 10. Next ground i.e. ground No.5 relates to allowing the valuation of stock at Rs.59,55,568/- as against determined by the AO to Rs.53,28,755/-. The AO did not accept ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amounts payable to the creditors was written off which also has arisen due to the business transactions carried out in earlier years. Since both the transactions are directly related to the business activity of the assessee and moreover these amounts are offered to tax under Section 41, which is a part of computation of income under the head 'profits and gains of business', such income written off/waived, has to be considered as income from business only and not the income from other sources. 14. Learned CIT(A) was in agreement with the explanation of the assessee. Accordingly, he allowed the ground of the assessee by holding that the waiver of loan and the amount written off by assessee payable to various creditors was assessable under the head business income. 15. After considering the submission, we found no infirmity in the finding of the learned CIT(A). We are not understandable that how the amount which was waived by the bank was income from other sources as the loan was taken for the purpose of business activity only. The amount payable to various creditor were also on account of business activity. These amounts were offered under Section 41(1), therefore, there was no q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on facts. In case of Hindustan Chemical Works Ltd.(supra), we noted that in that case the business of that assessee was closed down and assessee leased out a part of business premises as the entire factory was dismantled and the factory was ceased to exist as such. Thereafter after certain years, the assessee tried to start business by developing the property. In these circumstances, the Hon'ble High Court held that depreciation or unabsorbed depreciation cannot be set off against lease rental as there was no business activity of the assessee. In the present case, the assessee has sold its old stocks and the profit has been shown as business income. We have accepted the contention of the assessee that on account of old stock sold; the income has to be assessed as business income. No doubt, there was no use of machinery etc. in the year under consideration and, therefore, the depreciation of the year under consideration is not allowable, however, quantified brought forward business loss and unabsorbed depreciation can be set off against the business income as the business income shown by the assessee is on account of same business activity carried out in earlier years. Therefore, we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submission placed on record. 27. On the other hand, learned DR placed reliance on the order of learned CIT(A). 28. After considering the submission and perusing the material on record, we find that the assessee deserves to succeed in these grounds in part. 29. Regarding the term loan of Rs.21,83,773/-, which was taken for capital assessee, we find that this issue is covered by the decision of the Tribunal in the case of M/s King Prawns Limited(supra). The Tribunal has decided the issue following the decision of the jurisdictional High Court in the case of Mahindra Mahindra Ltd. Vs. CIT, reported in (2003) 261 ITR 501 (Bom), by which it was held that if the waiver of loan is on account of capital asset then the amount of loan, which was waived, was capital asset and, therefore, cannot be brought to tax. Accordingly, we direct the AO to allow this issue in favour of the assessee, if the amount of term loan of Rs.21,83,773/- was taken for the purchase of capital asset. The AO will verify and then rectify his order accordingly. 30. Regarding the remaining loan, we find that the decision of the Tribunal in case of M/s King Prawns Limited (supra), does not help the assessee. I ..... X X X X Extracts X X X X X X X X Extracts X X X X
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