McNally Bharat Engineering Company Limited, Kolkata V. CIT, Kolkata - 1, Kolkata, Kolkata

ITA 1256/KOL/2011

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 99673 (ITAT-KOLKATA)
• Duration Of Justice: 3 year(s) 10 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-08-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2006-2007
• Appeal Filed On: 26-09-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAVI JAIN
• Assessee Lawyers: VIJOY SHAH
• Keywords: Bad and doubtful debts; Assessment record
• Section: 143(3); 142(1); 263; 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH: KOL KATA [BEFORE SHRI MAHAVIR SINGH, JM & SHRI B. P. JAIN, AM] I.T.A NO.1256/KOL/2011 ASSESSMENT YEAR: 2006-07 MCNALLY BHARAT ENGINEERING VS. COMMISSIONER OF IN COME TAX, COMPANY LTD., 4, MANGONE LANE KOLKATA-1, AAYKAR B HAWN 7 TH FLOOR, KOLKATA-01 P-7, CHOWRINGHEE S Q. KOL- 69 (PAN: AABCM 9443R) ( APPELLANT ) ( RESPONDENT ) DATE OF HEARING: 18.06.2015 DATE OF PRONOUNCEMENT: 14.08.2015 FOR THE APPELLANT: SHRI VIJOY SHAH, FCA FOR THE RESPONDENT: SHRI RAVI JAIN, CIT-DR ORDER PER SHRI MAHAVIR SINGH, JM: THIS APPEAL BY ASSESSEE IS ARISING OUT OF THE REVIS ION ORDER OF CIT-1, KOLKATA U/S 263 OF THE INCOME-TAX ACT, 1961 (HEREINAFTER RE FERRED TO AS THE ACT) VIDE NO. CIT/KOL-1/263/MC.B.E.C.LTD./2011-12/2495-97 DATED 3 0.08.2011. ASSESSMENT WAS FRAMED BY DCIT CIRCLE-1, KOLKATA U/S.143(3) OF THE ACT FOR ASSESSMENT YEAR 2006- 07 VIDE HIS ORDER DATED 23.12.2009. 2. THE ONLY ISSUE IN THIS APPEAL OF ASSESSEE IS AGA INST THE REVISION ORDER OF CIT- 1, KOLKATA U/S 263 OF THE ACT REVISING THE ASSESSME NT FRAMED BY THE ASSESSING OFFICER. FOR THIS, ASSESSEE HAS RAISED FOLLOWING GR OUNDS:- 1.0 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE IMPUGNED ORDER PASSED US. 263 IS GROSSLY ARBITRARY AND BAD IN LAW IN RELATION TO THE ISSUES RAISED AND ADJUDICATED THEREIN AND NEEDS TO BE SUMMARILY D ELETED. 1.1 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, THE LEARNED COMMISSIONER OF INCOME TAX-1, KOLKATA (HEREIN-AFTER REFERRED TO AS LD. CIT) WAS NOT JUSTIFIED IN INITIATING PROCEEDINGS U/S. 263OF THE INCOME TAX ACT, 1961 AS THE PROCEEDINGS WERE PROMPTED WITHOUT APPLICATION OF MI ND AND IS THEREFORE BAD IN LAW. 2.0 THAT THE ASSESSMENT HAVING BEEN MADE N ACCORDAN CE WITH LAW AND AFTER DUE CONSIDERATION OF THE RELEVANT FACTS THROUGH PROPER APPLICATION OF MIND BY THE ASSESSING OFFICER IN RELATION TO THE ISSUES MENTION ED IN THE ORDER UNDER SECTION 263, THE PROCEEDINGS AND THE ORDER NEEDS TO BE SET ASIDE IN FULL. 3.0 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, THE LD. CIT WAS NOT JUSTIFIED AND ERRED IN HOLDING THAT THE INVENTORIES WRITTEN OFF AMOUNTING TO 2 ITA NO.1256/K/2011 MCNALLY BHARAT ENG. CO.LTD. AY 2006-07 RS.1,14,68,302/- IN PURSUANCE OF DISCONTINUANCE OF GAJOLE HILLI PROJECT IS NOT ENTITLED TO BE ALLOWED AS DEDUCTION IN A.Y 2006-07. 3.1 THAT THE LD. CIT HAS GROSSLY ERRED IN NOT TAKIN G INTO CONSIDERATION THE ACT THAT IN ORDER TO COMPLY WITH THE ACCOUNTING STANDARD ISS UED BY ICAI AND FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING, INVENTORIES HAS TO BE WRITTEN OFF IN THE YEAR OF DISCONTINUANCE OF THE PROJECT ONLY AND NOT IN THE Y EAR IN WHICH THE ACTUAL SALE OF INVENTORIES TOOK PLACE. 4.0 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, LD. CIT WAS NOT JUSTIFIED AND ERRED IN HOLDING THAT SINCE THE ACTUAL LOSS TOO K PLACE IN AY 2007-08, THE ASSESSEE IS ENTITLED TO CLAIM THE LOSS ONLY IN A.Y 2007-08 AND NOT IN A.Y 2006-07. 3. BRIEFLY STATED FACTS ARE THAT FOR THE RELEVANT A Y 2006-07, ASSESSMENT WAS FRAMED U/S. 143(3) OF THE ACT. SUBSEQUENTLY, THE CI T-1 KOLKATA ISSUED SHOW-CAUSE NOTICE NO. CIT/KOL-1/U/S.263/2011-12/1514 DATED 05. 07.2011 FOR REVISING THE ASSESSMENT FRAMED BY THE AO FOR REASON THAT THE ASS ESSEE HAS ABANDONED THE PROJECT AND BOOKED LOSS OF RS.1,14,68,302/-, WHICH WAS WRIT TEN OFF IN AY 2006-07. THE CIT ISSUED SHOW CAUSE NOTICE (SCN) AND THE RELEVANT CONTENT OF THE NOTICE READS AS UNDER:- FROM THE ASSESSMENT RECORDS FOR THE ASSESSMENT YEA R 2006-07 IT APPEARS THAT AN AMOUNT OF RS.14,68,302/- REPRESENTING A LOSS ON SALE OF ST OCK OF AN ABANDONED PROJECT WAS ALLOWED, WHILE DISCONTINUATION OF THE PROJECT AND S UBSEQUENT SALE OF ITS STOCK TOOK PLACE ONLY IN F.Y 2006-07 RELEVANT TO AY 2007-08. ALLOWAN CE OF THIS LOSS IN AY 2006-07, THEREFORE, RENDERED THE ASSESSMENT ORDER ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE. ASSESSEE FILED REPLY BEFORE CIT AND EXPLAINED THE P OSITION BUT HE DIRECTED THE AO THAT ASSESSEES CLAIM OF LOSS ON ACCOUNT OF SALE OF INVENTORIES BE EXAMINED AND FOR THIS HE DIRECTED AS UNDER:- THE A/R OF THE ASSESSEE COMPANY IN ITS REPLY STATE D THAT DURING FY 2005-06, THE COMPANY ALREADY CAME TO KNOW ABOUT TERMINATION OF THE CONTR ACT AND DECIDED TO DISPOSE OF THE MATERIAL AND TOOLS ALREADY PURCHASED FOR THE PROJEC T. IN THE PROCESS THE COMPANY, THE A/R STATED, PROCURED A FEW MARKET QUOTATIONS ON THE BAS IS OF WHICH IT REVALUED ITS INVENTORIES ON MARKET PRICE THAT RESULTED IN A LOSS THOUGH THE ACTUAL SALE TOOK PLACE IN THE FY 2006-07. THE A/R ALSO ARGUED THAT ACTUAL LOSS SUBSEQUENT TO SALE WAS MORE THAN THE NOTIONAL LOSS BOOKED IN FY 2005-06. THE ASSESSEES ARGUMENT THAT T WAS ENTITLED TO BOOK NOTIONAL LOSS IN FY 2005-06 ON THE BASIS OF COST PRICE OR MARKET VALUE WHICHEVER IS LE SS IS NOT TENABLE. FROM THE COPIES OF RESOLUTION OF BOARD OF DIRECTORS OF THE COMPANY IT WAS CLEAR THAT THE DECISION OF SALE OF TOOLS AND RAW MATERIALS WAS TAKEN IN FY 2006-07. AC TUAL LOSS SUBSEQUENT TO SALE OF TOOLS AND RAW MATERIALS THAT TOOK PLACE IN FY 2006-07 WAS QUANTIFIED IN THE FY 2006-07 RELEVANT TO AY 2007-08. THEREFORE, THE ASSESSEE IS ENTITLED TO CLAIM THE LOSS, IF REVENUE N NATURE, ONLY IN THE AY 2007-08. AGGRIEVED, NOW ASSESSEE IS IN APPEAL BEFORE US. 3 ITA NO.1256/K/2011 MCNALLY BHARAT ENG. CO.LTD. AY 2006-07 4. WE HAVE HEARD RIVAL CONTENTIONS AND GONE THROUGH THE FACTS AND CIRCUMSTANCES OF THE CASE. WE FIND THAT ASSESSEE EN TERED INTO JOINT VENTURE AGREEMENT IN SEPTEMBER 2003 WITH ELSAMEX S.A. WHERE IN IT WAS APPOINTED AS A SUBCONTRACTOR IN A HIGHWAY PROJECT WEST BENGAL COR RIDOR DEVELOPMENT PROJECT IMPROVEMENT OF GAZOLE HILLI SECTION OF SH 10 WITH A LINK TO BALURGHAT FROM PATIRAM. HOWEVER DUE TO CONSIDERABLE DELAY IN EXEC UTING THE PROJECT, THE CONTRACT WAS TERMINATED IN JANUARY, 2006. AS A RESULT OF ABA NDONMENT OF THE PROJECT, THE AGGREGATES AND BOULDERS LYING IN THE STOCK WAS DECI DED TO BE SOLD. ON THE BASIS OF QUOTATIONS RECEIVED FROM SUPPLIERS, LOSS ON STOCK W AS ESTIMATED AT RS.1,14,68,302/- AND WAS WRITTEN OFF IN AY 2006-07. THE ASSESSEE FIL ED COMPLETE DETAIL OF INVENTORY OF WRITTEN OFF STOCK BEFORE AO VIDE LETTER DATED 17 .12.2009. BUT, ACTUAL SALE/TOTAL REALIZATION FROM SALE WAS LOWER THAN THE ESTIMATE A ND BALANCE AMOUNT WAS WRITTEN OFF IN THE AY 2007-08. COMPLETE DETAILS OF THE INVE NTORY WRITTEN OFF IN AY 2007-08 HAVE BEEN FILED BEFORE THE AO. IN VIEW OF THE ABOVE FACTS, THE ASSESSEE CLAIMED ABANDONMENT OF THE PROJECT OF GZOL HILLI IN FY 2005 -06 RELEVANT TO AY 2006-07. ACCORDINGLY, ON THE BASIS OF THE QUOTATIONS RECEIVE D, SUCH LOSS WAS ESTIMATED AND DEBITED TO THE PROFIT AND LOSS ACCOUNT IN ACCORDANC E WITH THE ACCOUNTING STANDARD. FURTHER, SINCE THE PROJECT WAS ALREADY ABANDONED IN JANUARY 2006, THE COMPANY SUFFERED LOSS ON THE INVENTORIES LYING AT THE SITE FOR THE PROJECT. HENCE, IN ORDER TO REFLECT CORRECT PROFIT FOR THE YEAR UNDER CONSIDERA TION, LOSS SUFFERED ON ACCOUNT OF ABANDONMENT OF ABOVE PROJECT WAS REQUIRED TO BE TAK EN INTO CONSIDERATION. ACCORDINGLY, INVENTORIES WERE WRITTEN OFF AFTER TAK ING INTO CONSIDERATION THE ESTIMATED SALE VALUE. ACCORDINGLY, THIS LOSS OF RS. 1,14,68,302/- WAS CLAIMED AS A GENUINE LOSS REQUIRED TO BE BOOKED IN AY 2006-07. R ELIANCE BY ASSESSEE IN THIS REGARD WAS PLACED ON THE DECISION OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF ALFA LAVAL INDIA LTD. V. DCIT (2003) 133 TAXMAN 740 (BOM), WHERE IT HAS BEEN HEL D THAT THERE IS NO DISPUTE THAT THE DULY CERTIFIED AU DITORS REPORT PLACED BEFORE THE AO CLEARLY JUSTIFIED VALUATION OF OBSOLETE ITEMS AT 10 % OF COST. THERE IS NO DISPUTE THAT THE ASSESSEE IS ENTITLED TO VALUE THE CLOSING STOCK AT MARKET VALUE OR AT COST WHICHEVER IS LOWER. MOREOVER, IT IS ALSO NOT DISPUT ED THAT THE OBSOLETE ITEMS WERE IN FACT SOLD IN THE SUBSEQUENT YEAR AT A PRICE LESS TH AN 10% OF THE COST. ACCORDING TO THE ASSESSEE, UNDER THE CIRCUMSTANCES, IT COULD NOT BE SAID THAT THE VALUATION OF THE 4 ITA NO.1256/K/2011 MCNALLY BHARAT ENG. CO.LTD. AY 2006-07 OBSOLETE ITEMS DONE AND CERTIFIED BY THE AUDITORS W AS NOT PROPER OR ARBITRARY. HENCE THE CERTIFICATION OF THE ACCOUNTS BY THE AUDITOR SH OULD NOT BE DISPUTED BY THE AO. IN THE NOTICE U/S. 263 OF THE ACT DATED 05.07.2011 IT HAS BEEN STATE THAT SINCE THE DISCONTINUANCE OF THE PROJECT TOOK PLACE IN FY 2006 -07, LOSS SHOULD BE BOOKED IN AY 2007-08 AND NOT IN AY 2006-07. 5. WE FIND FROM THE FACTS OF THE CASE THAT FIRST OF ALL THE ASSESSEE HAS FILED COMPLETE DETAILS BEFORE THE AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS IN RESPONSE TO AOS QUERIES WHILE NOTICE U/S. 142(1) D ATED 10.08.2009, WHICH IS ENCLOSED IN ASSESSEES PAPER BOOK 10 TO 12, THE REL EVANT QUERY AT SL. NO. 15 READS AS UNDER: 15. DETAILED EXPLANATION OF THE ISSUES MENTIONED I N NOTE NUMBERS 10, 11 & 12 TO THE NOTE ON ACCOUNTS (VIDE SCHEDULE 23) AND THEIR I MPLICATION ON THE INCOME OF THE ASSESSEE IN THE FINANCIAL YEAR 2005-06. ASSESSEE IN RESPONSE TO THIS QUERY FILED DETAILS. FURTHER QUERY AT SL. NO. 23 ALSO READS AS UNDER: 23. DETAILS OF INVENTORY WRITTEN OFF, BAD DEBTS WR ITTEN OFF AND ADVANCES WRITTEN OFF AND DEBITED TO THE P&L A/C. WHY THE INVENTORY HAS B EEN WRITTEN OFF? IN WHICH YEAR THE BAD DEBTS WRITTEN OFF HAS BEEN DECLARED AS INCO ME OF THE ASSESSEE BEFORE WRITTEN OFF. WHY THE ADVANCE HAS BEEN WRITTEN OFF? PLEASE FURNISH THE DETAILS OF THE TRANSACTION FOR ADVANCES AND THE PURPOSES FOR WHICH SUCH ADVANCES GIVEN BY THE ASSESSEE. THE ASSESSEE REPLIED TO THE ABOVE QUERIES VIDE LETT ER DATED 17.12.2009 AND THE RELEVANT EXPLANATION READS AS UNDER: 1. INVENTORY WRITTEN OFF: THE ASSESSEE ENTERED INTO AN AGREEMENT WITH ELSAME X S. A. WHERE IT WAS APPOINTED AS A SUBCONTRACTOR IN WEST BENGAL CORRID OR DEVELOPMENT PROJECT- IMPROVEMENT OF GAZOLE HILLI SECTION OF SH 10 WITH A LINK TO BALURGHAT FROM PATIRAM. HOWEVER, DUE TO CONSIDERABLE DELAY IN EXE CUTION OF THE PROJECT, THE CONTRACT WAS TERMINATED ON JANUARY, 2006. DETAILS REGARDING THE ABOVE MATTER HAS BEEN DISCLOSED VIDE NOTE NO. 10 OF NOTES TO ACCOUNT S MENTIONED IN SCHEDULE 23. A DETAILED EXPLANATION OF THE ISSUE HAS BEEN SUBMITTE D BEFORE YOUR GOODSELF VIDE LETTER DATED 13.11.2009. AS A RESULT OF THE DISCONTINUANCE OF THE PROJECT, THE INVENTORIES USED AT THE SITE WERE DISPOSED OFF DURING THE YEAR. SINCE THE LOSS ON DISPOSAL OF SUCH INVENTORY WAS DIRECTLY RELATED TO THE OPERATION OF THE BUSINE SS AND SINCE IT HAS PROXIMATE NEXUS WITH THE CARRYING OF THE BUSINESS, THE LOSS I NCURRED IN DISPOSING OFF THE INVENTORIES WAS DEBITED TO PROFIT & LOSS ACCOUNT UN DER THE HEAD INVENTORY WRITTEN OFF. DETAILS OF INVENTORIES WRITTEN OFF DURING TH E YEAR UNDER CONSIDERATION IS ENCLOSED HEREWITH AND MARKED AS ANNEXURE-7. COPY O F THE MINUTES OF THE MEETING 5 ITA NO.1256/K/2011 MCNALLY BHARAT ENG. CO.LTD. AY 2006-07 EVIDENCING AUTHORIZATION OF SUCH WRITTEN OFF BY THE BOARD OF DIRECTORS IS ENCLOSED HEREWITH AND MARKED AS ANNEXURE-8. FROM THE ABOVE IT IS CLEAR THAT THE AO HAS EXAMINED THE ISSUE AND ALLOWED THE CLAIM OF THE ASSESSEE. ON MERITS, THE ASSESSEES CLAIM I S EVEN OTHERWISE ALLOWABLE AS THE MERITS ARE DISCUSSED ABOVE. BUT EVEN IF THIS IS A DEBATABLE ISSUE THE ASSESSMENT CANNOT BE REVISED BY INVOKING THE PROVISIONS OF SEC TION 263 OF THE ACT IN VIEW OF THE DECISION OF HON'BLE SUPREME COURT IN THE CASE O F MALABAR INDUSTRIAL CO. LTD. VS. CIT (2000) 243 ITR 83 (SC). ACCORDINGLY, WE QU ASH THE REVISION ORDER OF CIT AND ALLOW THE APPEAL OF THE ASSESSEE. 6. IN THE RESULT, APPEAL OF ASSESSEE IS ALLOWED. 7. ORDER IS PRONOUNCED IN THE OPEN COURT ON _14.08. 2015 SD/- SD/- (B. P. JAIN) 10/08/2015 (MAHA VIR SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 14 TH AUGUST, 2015 *DKP-P.S COPY OF THE ORDER FORWARDED TO: 1 . APPELLANT MCNALLY BAHRAT ENGINEERING CO. LTD. 4,MA NGOE LANE, 7 TH FLOOR, KOLKATA-700001. 2 RESPONDENT CIT-1, AAYKAR BHAWAN, P-7, CHOWRINGHEE SQ. KOLKATA-69. 3 . THE CIT(A), KOLKATA 4. 5. CIT KOLKATA DR, KOLKATA BENCHES, KOLKATA / TRUE COPY, BY ORDER, ASSTT. REGISTRAR .