M/s Sant Dyeing & Manufacturing Co., Ludhiana V. ACIT, Ludhiana

ITA 193/CHANDI/2010

• Counselvise Citation: 19321514 RSA 2010
• Duration Of Justice: 1 year(s) 10 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-01-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 27-12-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 15-02-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: N K SAINI
• Assessee Lawyers: SUDHIR SEHGAL
• Keywords: Cost of acquisition; Bad and doubtful debts; Capital expenditure
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCH A, CHANDIGARH BEFORE MS. SUSHMA CHOWLA, JUDICIAL MEMBER AND SHRI MEHAR SINGH, ACCOUNTANT MEMBER ITA NO.193/CHD/2010 (ASSESSMENT YEAR : 2006-07) M/S SANT DYEING & MANUFACTURING CO. VS. THE A.C.I .T., VILLAGE MUNDIAN KALAN ,CHANDIGARH ROAD, CIRCLE-I , LUDHIANA. LUDHIANA. (NEW ADDRESS: RAMGARH SAHNEWAL ROAD, VPO RAMGARH, LUDHIANA. PAN: AAJFS5305D (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI SUDHIR SEHGAL RESPONDENT BY : SHRI N.K.SAINI, DR DATE OF HEARING : 27.12.2011 DATE OF PRONOUNCEMENT : 12.01.2012 O R D E R PER SUSHMA CHOWLA, J.M, : THE APPEAL FILED BY THE ASSESSEE IS AGAINST THE ORD ER OF THE COMMISSIONER OF INCOME-TAX(APPEALS)-I, LUDHIANA DAT ED 20.11.2009 RELATING TO ASSESSMENT YEAR 2006-07 AGAINST THE ORD ER PASSED U/S 143(3) THE INCOME TAX ACT, 1961. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL 1. THAT THE LEARNED CIT (A)-I, LUDHIANA HAS ERRED IN UPHOLDING ADDITION OF RS.89,821/- MADE BY THE ASSESSING OFFICER IN RESPECT OF BAD DEBTS CLAIMED A S PARA NO.1 OF THE ORDER. 2. THAT THE LEARNED CIT (A)-I, LUDHIANA HAS ALSO ER RED IN UPHOLDING ADDITION OF RS.57,200/- MADE BY THE ASSESSING OFFICER UNDER THE HEAD FEES AND TAXES TAKING THE SAME AS EXPENDITURE OF CAPITAL NATURE AS PER PARA NO.3 OF THE ORDER. 3. THAT THE LEARNED CIT (A)-I, LUDHIANA HAS ALSO ER RED IN UPHOLDING ADDITION OF RS.4,07,860/- MADE BY THE ASSESSING OFFICER IN RESPECT OF INTEREST PAID ON BUILDING AND MACHINERY UNDER INSTALLATION, 2 HOLDING THE SAME AS COST OF ASSET AND EXPENDITURE O F CAPITAL NATURE. 4. THAT THE LEARNED CIT (A)-I, LUDHIANA HAS ALSO ER RED IN UPHOLDING PART OF THE ADDITION IN RESPECT OF VALUATION OF CLOSING STOCK OF ACRYLIC FIBER AND HAS ALSO ERRED IN NOT GRANTING THE RELIEF AS CLAIMED IN THE GROUNDS OF APPEAL BEFORE HIM. 3. THE ISSUE IN GROUND NO.1 IS IN RESPECT OF BAD DE BTS OF RS.89,821/-. THE BRIEF FACTS RELATING TO THE ISSUE ARE THAT DURI NG THE YEAR UNDER CONSIDERATION THE ASSESSEE HAD SOLD KNITTED CLOTH T O M/S B.K.FABRICS LUDHIANA. THE ASSESSEE HAD CLAIMED THAT THE MAIN P ERSON OF THE GROUP SHRI BITTU MALHOTRA HAD EXPIRED AND AS THE AMOUNT C OULD NOT BE RECOVERED, THE SAME WAS CLAIMED AS BAD DEBTS. THE A SSESSING OFFICER OBSERVED THAT NEITHER THE COPY OF THE ACCOUNT OF TH E TRANSACTION NOR THE BILL OF THE TRANSACTION WAS SUBMITTED. AS IT WAS NOT POSSIBLE TO VERIFY AS TO WHETHER THE BAD DEBT CLAIMED WAS PART OF TOTA L INCOME IN ANY OF THE PREVIOUS YEAR, THE CLAIM OF THE ASSESSEE WAS DISALL OWED. 4. IN EXPLANATION BEFORE THE CIT (APPEALS) IT WAS E XPLAINED THAT THE SAID SALE WAS MADE VIDE BILL NO.30 DATED 14.3.2006 FOR RS.89,821/-. BECAUSE OF DEMISE OF THE SAID PERSON, NO RECOVERY C OULD BE MADE AND EVEN LEGAL HEIRS COULD NOT BE TRACED AND IN THE MAR KET EVERYBODY WAS DEMANDING MONEY. IN RESPECT OF NON-FURNISHING OF T HE COPY OF ACCOUNT BEFORE THE ASSESSING OFFICER, IT WAS EXPLAINED BY T HE ASSESSEE THAT NO COPY OF ACCOUNT WAS ASKED FOR BY THE ASSESSING OFFI CER. THE CIT (APPEALS) UPHELD THE ORDER OF THE ASSESSING OFFICER AS ACCORDING TO HIM WITHIN SHORT SPAN OF FORTNIGHT IT COULD NOT BE SAID THAT THE ASSESSEE HAD EXHAUSTED ALL EFFORTS TO RECOVER MONEY AND ALLOWANC E OF CLAIM OF BAD DEBT WAS DOUBTFUL. THE ASSESSEE IS IN APPEAL. 5. THE LEARNED A.R. FOR THE ASSESSEE HAS BEFORE US FURNISHED PAPER BOOK IN WHICH IT HAS ANNEXED THE COPY OF ACCOUNT OF M/S B.K.FABRICS IN 3 ITS BOOKS OF ACCOUNT IN WHICH THERE IS SINGLE TRANS ACTION OF SALE OF 14.3.2006 AND THE AMOUNT BEING WRITTEN OFF AS BAD D EBT ON 31.3.2006. THE ASSESSEE HAS ALSO PLACED COPY OF SALES ACCOUNT AND BILL RAISED AGAINST THE PARTIES. 6. THE LEARNED D.R. FOR THE REVENUE PLACED RELIANCE ON THE ORDERS OF ASSESSING OFFICER AND CIT (APPEALS). 7. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. AFTER THE AMENDMENT TO THE PROVISIONS OF SECTION 36(1)(VI I) OF THE INCOME TAX ACT THE CLAIM OF THE ASSESSEE IN RESPECT OF BAD DEB T IS TO BE ALLOWED ON ITS WRITE OFF IN THE BOOKS OF ACCOUNT. HOWEVER, TH E SAID WRITE OFF IS TO BE ALLOWED ONLY IN RESPECT OF SUCH OUTSTANDING, WHI CH WAS DECLARED AS PART OF THE INCOME OF THE ASSESSEE, IN LINE WITH TH E PROVISIONS OF SECTION 36(2) OF THE ACT. THE CLAIM OF THE ASSESSEE DURING THE YEAR WAS IN RESPECT OF THE SALE MADE ON 14.3.2006 FOR RS.89,821 /-. THE ASSESSING OFFICER NOTED THE ASSESSEE NOT TO HAVE FURNISHED AN Y DOCUMENT TO PROVE THAT THE SAID AMOUNT HAD BEEN DECLARED AS PART OF I TS INCOME, CONSEQUENTLY HOLDING THAT THE PROVISIONS OF SECTION 36(2) OF THE ACT HAVE NOT BEEN FULFILLED. THE CIT (APPEALS) UPHELD THE D ISALLOWANCE ON ANOTHER GROUND THAT THE CLAIM OF THE ASSESSEE WAS D OUBTFUL AS WITHIN 15 DAYS IT COULD NOT HAVE EXHAUSTED ALL ITS EFFORTS TO RECOVER THE MONEY. IN VIEW OF DIVERSITY OF THE FINDING OF THE AUTHORITIES BELOW, WE DEEM IT FIT TO RESTORE THE ISSUE TO THE FILE OF THE ASSESSING O FFICER TO VERIFY WHETHER THE ASSESSEE HAD DECLARED THE SAID AMOUNT AS PART O F ITS INCOME AND WHETHER IT SATISFIES THE PROVISIONS OF SECTION 36(2 ) OF THE ACT. ONCE THE SAID INCOME HAS BEEN DECLARED BY THE ASSESSEE, THE WRITE OFF SUCH AMOUNT IS TO BE ALLOWED AS DEDUCTION UNDER SECTION 36(1)(V II) OF THE ACT IN LINE WITH SETTLED PRINCIPLES. THE ASSESSING OFFICER IS DIRECTED TO RE-DECIDE THE ISSUE DE-NOVO IN ACCORDANCE WITH LAW AND AFTER ALLOWING REASONABLE 4 OPPORTUNITY OF HEARING TO THE ASSESSEE. GROUND NO. 1 RAISED BY THE ASSESSEE IS THUS ALLOWED FOR STATISTICAL PURPOSES. 8. THE LEARNED A.R. FOR THE ASSESSEE FAIRLY ADMITTE D THAT GROUNDS OF APPEAL NOS.2 AND 3 ARE COVERED AGAINST THE ASSESSEE BY THE RATIO LAID DOWN IN CIT VS. VARDHMAN POLYTEX LTD. [299 ITR 152 (P&H)]. 9. WE FIND THAT THE SECOND ISSUE RAISED BY THE ASSE SSEE VIDE GROUND NO.2 IS IN RESPECT OF FEES AND TAXES PAID TO SIDBI. THE ASSESSING OFFICER HAD HELD THE SAID FEES PAID FOR RAISING LOA N FROM SIDBI AS ONE TIME UPFRONT FEE PAID FOR RAISING LOAN FROM THE BAN K AND HELD THE SAID EXPENDITURE TO BE IN THE NATURE OF CAPITAL EXPENDIT URE. FURTHER THE ASSESSEE HAD CLAIMED INTEREST EXPENDITURE OF RS.4,0 7,860/- IN RESPECT OF THE ADDITIONS TO THE BUILDING UNDER CONSTRUCTION AN D MACHINERY UNDER INSTALLATION. THE ASSESSEE HAD NOT CLAIMED DEPRECI ATION ON BOTH THE SAID FIXED ASSETS AND IN VIEW OF THE EXPLANATION 8 TO SE CTION 43(1) OF THE ACT, THE ASSESSING OFFICER HAD ADOPTED THE RATE OF INTER EST OF 12% ON THE FUNDS USED FOR CONSTRUCTION OF BUILDING AND MACHINE RY UNDER INSTALLATION AND DISALLOWED RS.4,07,860/-. THE ASSESSING OFFICE R HAD PLACED RELIANCE ON SERIES OF RATIOS LAID DOWN BY VARIOUS COURTS. 10. THE CIT (APPEALS) IN VIEW OF THE PROVISIONS OF SECTION 36(1)(III) OF THE ACT INSERTED BY THE FINANCE ACT 2003 W.E.F. 1.4.2004 UPHELD THE DISALLOWANCE OF INTEREST UNDER SECTION 36(1)(III) O F THE ACT. THE CIT (APPEALS) ALSO UPHELD THE UPFRONT FEES PAID TO SIDB I AS CAPITAL EXPENDITURE. 11. WE FIND THAT THE HON'BLE PUNJAB & HARYANA HIGH COURT IN CIT VS. VARDHMAN POLYTEX LTD. (SUPRA) HELD THAT WHERE THE L OAN WAS NOT RAISED FOR THE PURPOSE OF RUNNING THE BUSINESS BUT WAS UTI LIZED FOR THE PURPOSE OF CREATING SUBSTANTIAL ADDITION TO ASSETS, THE INT EREST ON LOAN WAS NOT 5 DEDUCTIBLE, IN VIEW OF THE PROVISO TO SECTION 36(1) (III) OF THE ACT AND EXPLANATION 8 TO SECTION 43(1) OF THE ACT. CONSEQ UENTLY THE ASSESSEE IS NOT ENTITLED TO CLAIM OF DEDUCTION ON ACCOUNT OF UP FRONT FEES PAID TO SIDBI FOR RAISING LOAN AMOUNTING TO RS.57,200/-. FURTHER THE DISALLOWANCE OF RS.4,07,860/- ON ACCOUNT OF INTERES T ATTRIBUTABLE TO THE ASSETS UNDER CONSTRUCTION, BEFORE START OF THE BUSI NESS IS NOT TO BE ALLOWED AS A DEDUCTION. THE GROUND NOS. 2 AND 3 R AISED BY THE ASSESSEE ARE DISMISSED. 12. THE ISSUE IN GROUND NO.4 RAISED BY THE ASSESSEE IS IN RESPECT OF VALUATION OF CLOSING STOCK OF ACRYLIC FIBRE. THE A SSESSEE FURNISHED DETAILS OF VALUATION OF CLOSING STOCK ALONGWITH EVI DENCE BEFORE THE ASSESSING OFFICER AND FROM THE DETAILS IT WAS NOTED THAT THE VALUE OF ACRYLIC FIBRE IN THE CLOSING STOCK AS ON 31.3.2006 HAD BEEN TAKEN AT RS.37.40. FROM THE EXAMINATION OF PURCHASE BILLS T HE ASSESSING OFFICER NOTED THAT THE PURCHASE VALUE OF ACRYLIC FIBRE WAS @ RS.110/- VIDE BILL DATED 28.1.2006. IN THE ABSENCE OF ANY REASONABLE REPLY GIVEN BY THE ASSESSEE, THE ASSESSING OFFICER HELD THE ASSESSEE T O HAVE UNDER-VALUED ITS STOCK AND ACCORDINGLY ADOPTING RATE OF RS.110/- TO THE QUANTITY DECLARED BY THE ASSESSEE OF ACRYLIC FIBRE, DIFFEREN CE IN VALUE OF STOCK WAS DETERMINED AT RS.12,32,018/- AND ADDITION OF TH E SAME WAS MADE TO THE INCOME OF THE ASSESSEE. 13. THE WRITTEN SUBMISSIONS OF THE ASSESSEE BEFORE THE CIT (APPEALS) ARE INCORPORATED UNDER PARA 5 AT PAGES 11 TO 13 OF THE APPELLATE ORDER. THE CIT (APPEALS) NOTED THE SUBMISSIONS OF THE ASSE SSEE THAT PART OF ACRYLIC FIBRE WAS DAMAGED IN HEAVY RAINS I.E. 4122 KG OF FIBRE, WHICH WAS SOLD ON 27.3.2007 VIDE BILL NO.137 FOR TOTAL CO NSIDERATION OF RS.1,23,672/-. THE CIT (APPEALS) OBSERVED THAT THE QUANTITY OF FIBRE WHICH WAS SOLD @ RS.30/- PER KG. WAS DAMAGED AND AC CORDINGLY THE 6 ASSESSING OFFICER WAS DIRECTED TO REWORK THE ADDITI ON IN RESPECT OF REST OF THE FIBRE DECLARED IN THE CLOSING STOCK, AFTER E XCLUDING ACRYLIC FIBRE OF 4122 KG. 14. THE ASSESSEE IS IN APPEAL AGAINST THE ORDER OF THE CIT (APPEALS). THE LEARNED A.R. FOR THE ASSESSEE POINTED OUT THAT THE CLOSING STOCK WAS VALUED AT COST OR MARKET VALUE, WHICHEVER WAS LESS. OUR ATTENTION WAS DRAWN TO THE PURCHASE BILLS PLACED AT PAGES 30 TO 3 2 OF THE PAPER BOOK AND IT WAS POINTED OUT THAT THE ASSESSEE WAS PURCHA SING THE SAID FIBRE AT THE RATES VARYING FROM RS.38 TO RS.110/-. AS PER T HE ASSESSEE, THE SAID STOCK WAS VALUED AT RS.35/- PER KG ON PHYSICAL INSP ECTION. THE LEARNED A.R. FOR THE ASSESSEE FAIRLY ADMITTED THAT THE CIT (APPEALS) HAD GIVEN BENEFIT FOR PART OF THE STOCK. 15. THE LEARNED D.R. FOR THE REVENUE POINTED OUT TH AT THE ASSESSEE WAS PURCHASING TWO TYPES OF ITEMS I.E. POLYESTER AND AC RYLIC FIBRE. OUR ATTENTION WAS DRAWN TO THE BILLS PLACED AT PAGES 30 TO 32 OF THE PAPER BOOK AND IT WAS EXPLAINED THAT THE BILLS AT PAGES 3 0 AND 31 OF THE PAPER BOOK ARE IN RESPECT OF POLYESTER FIBRE PURCHASED AT RS.46/- OR RS.38/- AND THE BILL AT PAGE 32 WAS IN RESPECT OF ACRYLIC F IBRE OF 6052.900 KG., PURCHASED @ RS.110/-. 16. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE DISPUTE IN THE PRESENT CASE IS IN RESPECT OF VALUAT ION OF CLOSING STOCK OF ACRYLIC FIBRE. THE ASSESSEE HAD DECLARED THE QUANT ITY AT 16969.400 AND VALUE OF THE SAME @ RS.37.40. THE ASSESSING OFFICE R REVALUED THE STOCK @ RS.110/- RESULTING IN ADDITION OF RS.12,32,018/-. THE CIT (APPEALS) HAD ALLOWED RELIEF IN RESPECT OF 4122 KG. OF FIBRE, ACCEPTING THE PLEA OF THE ASSESSEE THAT THE SAME WAS DAMAGED AND WAS SOLD AT LESSER PRICE ON 7 27.3.2007. ACCORDINGLY, THE SAID STOCK OF RS.4122 KG. WAS DIRECTED TO BE VALUED @ RS.30 PER KG. BY THE CIT (APPEALS). 17. THE ASSESSEE DURING THE YEAR UNDER CONSIDERATIO N HAD PURCHASED ACRYLIC AND POLYESTER FIBRE AT DIFFERENT RATES. TH E PURCHASE COST OF ACRYLIC FIBRE ON 28.2.2006 WAS @ RS.110/- PER KG., QUANTITY PURCHASED BEING 6052.900 KG. THE SAME IS EVIDENT FROM THE PU RCHASE BILL PLACED AT PAGE 32 OF THE PAPER BOOK. FURTHER THE ASSESSEE HA D PURCHASED POLYESTER FIBRE OF 5500 KG. @ RS.38 PER KG. VIDE BILL DATED 2 8.1.2006 AND 2192 KG @ RS.46/- PER KG ON 18.3.2006. COPIES OF THE SAID BILLS ARE PLACED AT PAGES 30 AND 31 OF THE PAPER BOOK. THE DETAILS OF CLOSING STOCK AS ON 31.3.2006 ARE PLACED AT PAGE 29 OF THE PAPER BOOK I N WHICH THE ASSESSEE HAD DECLARED THE STOCK OF ACRYLIC FIBRE AND POLYEST ER FIBER QUANTITY 16969.400 KG. @ RS.37.40. ON THE SAID SHEET THE AS SESSEE HAS ALSO DECLARED THE STOCK OF POLYESTER FIBRE AT 7692 KG. A ND ACRYLIC FIBRE AT 9277.400 KG. THE SAID ACRYLIC STOCK WAS PURCHASED I.E. ONE ON 16.9.2006 @ RS.99/-, SECOND ON 20.9.2006 @ RS.98.66 AND THE B ALANCE ON 28.01.2006 @ RS.110/- (6052.900KG.). THE ASSESSEE HAS ALSO VIDE NOTES ON THE SAID SHEET, EXPLAINED THAT DUE TO HE AVY RAINS, THE STOCK OF ACRYLIC FIBRE OF 9277.400 KG. WAS DEFECTED AND STOC K OF 4122.400 KG. WAS SOLD @ RS.30/- PER KG. VIDE BILL DATED 27.3.2007 AN D THE BALANCE QUANTITY OF ACRYLIC FIBRE WAS 5155 KG., WHICH WAS PART OF CL OSING STOCK. THE CIT (APPEALS) HAD ALLOWED RELIEF TO THE ASSESSEE VIS-- VIS VALUATION OF DAMAGED STOCK AT 4122.400 KG. BY DIRECTING THE ASSE SSING OFFICER TO VALUE THE SAME AT RS.30 PER KG. THE ASSESSEE CLAIM ED THAT THE BALANCE STOCK OF 5155 KG. WAS USED IN ITS PRODUCTION IN THE NEXT YEAR AFTER MANUAL SHORTAGE AND PROCESSING. HOWEVER, WE FIND N O MERIT IN THE CLAIM OF THE ASSESSEE FOR VALUING THE SAME AT RS.35/- PER KG AS AGAINST ITS PURCHASE, THE RATES OF SAID ITEMS VARY BETWEEN RS.9 9/- TO RS.110/- PER 8 KG. THE BALANCE STOCK AVAILABLE WITH THE ASSESSEE IS 5155 KG. AND THE LAST PURCHASE MADE BY THE ASSESSEE WAS 6052.900 KG. UPHOLDING THE ORDER OF THE CIT (APPEALS) WE ARE IN AGREEMENT THAT THE SAID STOCK IS TO BE VALUED @ RS.110/- PER KG., IN THE ABSENCE OF THE ASSESSEE HAVING BROUGHT ON RECORD ANY EVIDENCE TO PROVE ITS CLAIM T HAT THE SAID STOCK HAS BEEN DAMAGED ESPECIALLY, WHERE THE CIT (APPEALS) HA S ALREADY ALLOWED THE CLAIM IN RESPECT OF DAMAGED STOCK. GROUND NO.4 RAISED BY THE ASSESSEE IS THUS DISMISSED. 18. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 12 TH DAY OF JANUARY, 2012. SD/- SD/- (MEHAR SINGH) (SUSHMA CHOWLA) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 12 TH JANUARY, 2012 *RATI* COPY TO: THE APPELLANT/THE RESPONDENT/THE CIT(A)/TH E CIT/THE DR. TRUE COPY BY ORDER ASSISTANT REGISTRAR, ITAT, CHANDIGARH