DCIT 8(3), MUMBAI V. SYNOVATE INDIA P. LTD, MUMBAI

ITA 7257/MUM/2008

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 4039 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 10 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-10-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I
• Next Hearing Date: 19-08-2010
• Assessment Year: 2004-2005
• Appeal Filed On: 24-12-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset converted into stock in trade; Proportionate interest; Bad and doubtful debts; Onus to prove
• Section: 15

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES I, MUMBAI BEFORE SHRI S.V. MEHROTRA (A.M.) AND SHRI VIJAY PAL RAO (J.M.) I.T.A. NO. 7257/MUM/2008 ASSESSMENT YEAR : 2004-2005 DY. COMMISSIONER OF INCOME TAX 8(3), R.NO.204, 2 ND FLOOR, AAYAKAR BHAVAN, M.K. ROAD MUMBAI VS. M/S.SYNOVATE INDIA P. LTD. AVION HOATE, OPP. DOMESTIC AIRPORT VILE PARLE (E), MUMBAI-400 057 P.A.NO: AACCB0907A (APPELLANT) (RESPONDENT) AND I.T.A. NO. 7334/MUM/2008 ASSESSMENT YEAR : 2005-2006 INCOME TAX OFFICER 8(3)(2) R.NO.201, 2 ND FLOOR, AAYAKAR BHAVAN, M.K. ROAD MUMBAI M/S.SYNOVATE INDIA P. LTD. AVION HOATE, OPP. DOMESTIC AIRPORT VILE PARLE (E), MUMBAI-400 057 P.A.NO: AACCB0907A (APPELLANT) VS. (RESPONDENT) APPELLANT BY: SHRI SHRAVAN KUMAR RESPONDED BY : SHRI DEEPAK TRALSHAWALA O R D E R PER S.V. MEHROTRA (A.M.) I.T.A. NO. 7257/MUM/2008 THIS APPEAL PREFERRED BY THE REVENUE IS DIRECTED AGAIN ST THE ORDER DATED 23.10.2008 OF COMMISSIONER OF INCOME TAX ( APPEALS)-XXIX, MUMBAI FOR THE ASSESSMENT YEAR 2004-05. 2 2. THE ASSESSEE-COMPANY IN THE RELEVANT ASSESSMENT YEAR CARR IED ON THE BUSINESS OF MARKET RESEARCH. IT FILED ITS RETURN O F INCOME DECLARING A LOSS OF RS.76,20,687/-. THE ASSESSING OFFICER NOTICED THAT T HE ASSESSEE HAD PAID AN INTEREST OF RS.19,13,139/- ON TOTAL LOANS OF R S.2,65,02,903/-, BUT HE ALSO NOTED THAT IN ASSESSMENT YEAR 2002-03 INTEREST PR OPORTION ON WORK IN PROGRESS HAD BEEN DISALLOWED BY TAKING THE RATE OF INTEREST ON LOAN AT 8.69%. HE NOTED THAT THE CLOSING STOCK OF WIP WAS RS.83,72 ,789/- AND, THEREFORE, ON THE SAID AMOUNT HE DISALLOWED THE PROPO RTIONATE INTEREST RS.7,27,595/- CALCULATED AT 8.69% . 3. THE LEARNED CIT(APPEALS) DELETED THE ADDITION TA KING NOTE OF THE FACT THAT THE VALUATION OF WORK IN PROGRESS HAD BE EN DONE AS PER AS-2 ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDI A AND, ACCORDINGLY, THERE WAS NO QUESTION OF INCLUDING THE INTEREST COMPONE NT IN VALUATION OF CLOSING STOCK. 4. THE LEARNED COUNSEL FOR THE ASSESSEE, SHRI. DEEPAK TRALSHAWALA, SUBMITTED THAT THE ASSESSING OFFICER HAD NOT IONALLY ADDED INTEREST COMPONENT IN THE VALUATION OF WORK IN PROGRE SS. HE REFERRED TO ACCOUNTING STANDARD ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA DEALING WITH VALUATION OF INVENTORIES. HE REFE RRED TO PARA 12 OF THE SAID STATEMENT WHICH READS AS UNDER:- 12. INTEREST AND OTHER BORROWING COSTS ARE USUALLY CONSIDERED AS NOT RELATING TO BRINGING THE INVENTORIES TO THEIR PRESENT LOCATION AND CONDITION AND ARE, THEREFORE, USUA LLY NOT INCLUDED IN THE COST OF INVENTORIES. HE FURTHER REFERRED TO PARA 6 OF THE SAID STATEMENT WH ICH READS AS UNDER:- 6. THE COST OF INVENTORIES SHOULD COMPRISE ALL COSTS OF PURCHASE, COSTS OF CONVERSION AND OTHER COSTS INCURRED IN 3 BRINGING THE INVENTORIES TO THEIR PRESENT LOCATION AND CONDITION. HE FURTHER REFERRED TO PARA 14 OF THE SAID STATEMENT W HICH READS AS UNDER:- 14. THE COST OF INVENTORIES OF ITEMS THAT ARE NOT ORDINARILY INTERCHANGEABLE AND GOODS OR SERVICES PRODUCED AND SEGREGATED FOR SPECIFIC PROJECTS SHOULD BE ASSIGNED BY SPE CIFIC IDENTIFICATION OF THEIR INDIVIDUAL COSTS. 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE RECORDS OF THE CASE. THE ASSESSEE COMPANY WAS IN THE BUSINESS O F MARKET RESEARCH, AND IT IS NOT THE CASE OF DEPARTMENT THAT THE WORK IN PROGRESS AS SHOWN BY THE ASSESSEE WAS INCURRED IN RELATION TO CONSTRUCTIO N ACTIVITIES. THEREFORE, ACCOUNTING STANDARD-2 IS APPLICABLE IN THE P RESENT CASE AND NOT THE ACCOUNTING STANDARD-7, DEALING WITH ACCOUNTING OF CO NSTRUCTION CONTRACTS. THE ASSESSEE HAD FILED ITS OPENING AND CLOSING WIP BASED ON DIRECT COST. THE INTEREST WAS NOT INCLUDED IN THE VALUAT ION OF WIP. 6. FROM PARA 12 OF THE ACCOUNTING STANDARD-2 DEALING WITH VALUATION OF INVENTORIES, IT IS EVIDENT THAT INTEREST AND OTHER BORROWING COSTS ARE NOT REQUIRED TO BE INCLUDED IN THE VALUATION OF INVENTORIES. THEREFORE, SINCE, THE VALUATION HAD BEEN DONE AS PER A CCOUNTING STANDARD- 2, THE SAME WAS REQUIRED TO BE ACCEPTED IN VIEW OF THE PROVISIONS OF SECTION 145(2), WHEREIN ACCOUNTING STANDARD-2 HAS BEEN N OTIFIED TO BE FOLLOWED. 7. WE, ACCORDINGLY, CONFIRM THE ORDER OF LEARNED CIT( APPEALS). 4 I.T.A. NO. 7334/MUM/2008 8. THE ASSESSEE HAD FILED ITS RETURN OF INCOME DECLARING NIL INCOME. THE ASSESSMENT WAS COMPLETED AT TOTAL INCOME OF RS.8 8,23,640 /-, INTER ALIA , MAKING THE FOLLOWING DISALLOWANCES :- 1. BAD DEBTS WRITTEN OFF RS.17,34,958/-. 2. INTEREST ON WORK IN PROGRESS RS.5,97,412/-. 9. THE LEARNED CIT(APPEALS) DELETED THE ADDITION ON BOTH THE COUNTS. BEING AGGRIEVED, THE DEPARTMENT IS IN APPEAL BEFORE US AND HAS TAKEN FOLLOWING 2 GROUNDS OF APPEAL:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND I N LAW, THE LD. CIT(A) ERRED IN DELETING DISALLOWANCE OF RS.17 ,34,958/- ON ACCOUNT OF BAD DEBTS WITHOUT APPRECIATING THE FACTS AND CIRCUMSTANCES OF THE CASE. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) ERRED IN DELETING DISALLOWANCE MADE BY THE A.O. AMOUNTING TO RS.5,97,412/- ON ACCOUNT OF PROPORTIONATE INTEREST EXPENSES WITHOUT APPRECIATING THE FACTS AND CIRCUMSTANCES OF THE CASE. 10. APROPOS GROUND NO.1, THE ASSESSING OFFICER NOTICED FR OM THE PROFIT & LOSS A/C. THAT THE ASSESSEE HAD CLAIMED A SUM OF R S.17,34,958/- AS BAD DEBTS. THE ASSESSEE ITSELF STATED BEFORE THE ASSESSING OFFICER THAT INSPITE OF SEVERAL REMINDERS AND TELEPHONIC FOLLOW UP, NO PAYMENTS WERE RECEIVED AND THE ONLY OPTION WAS TO WRITE OFF THE AMO UNT. THE ASSESSING OFFICER DID NOT ACCEPT THE ASSESSEES CONTENTION AND MADE A DDITION OF RS.17,34,958/-, INTER ALIA, OBSERVING THAT THE ASSESSEE COULD NOT JUSTIFY ITS CLAIM OF BAD DEBTS BY FURNISHING RELEVANT DOCUMENTS, EF FORTS TAKEN FOR RECOVERY OF THE SAID SUM ETC. 5 11. HE FURTHER OBSERVED THAT THE BURDEN OF PROOF IS O N THE ASSESSEE THAT THE DEBTS WHICH IT HAD CLAIMED AS BAD DEBTS HAD I NDEED BECOME BAD. THE LEARNED CIT(APPEALS), FOLLOWING THE DECISION OF ASSE SSMENT YEAR 2004- 05 IN ASSESSEES OWN CASE, DELETED THE ADDITION. WE FIND T HAT THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE HO NBLE SUPREME COURT IN TRF LIMITED VS ACIT (2010 TIOL 15 SC IT), W HEREIN, THEIR LORDSHIPS HAVE OBSERVED THUS THIS POSITION IN LAW IS WELL-SETTLED. AFTER 1ST APRIL, 1989, IT IS NOT NECESSARY FOR THE ASSESSEE TO ESTABLI SH THAT THE DEBT, IN FACT, HAS BECOME IRRECOVERABLE. IT IS ENOUGH IF THE BAD DEBT IS WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE. THERE IS NO DISPUTE ABOUT THE AMOUNT HAVING BEEN ACTUALLY WRITTEN OFF. IN THIS VIEW OF THE MATTER, WE DECLINE TO INTERFERE IN THE ORDER OF THE LEARNED CIT (A) AND DISMISS THE GROUND OF APPEAL RAISED BY THE REVENUE. 12. IN GROUND NO.2, THE LD. CIT(APPEAL) ERRED IN DE LETING DISALLOWANCE MADE BY THE ASSESSING OFFICER AMOUNTING TO RS.5,97,412/ ON ACCOUNT OF PROPORTIONATE INTEREST EXPENSES WITHOUT APPRECIATING TH E FACTS AND CIRCUMSTANCES OF THE CASE. THIS ISSUE HAS ALREADY BEEN CONSIDE RED BY US IN ASSESSMENT YEAR 2004-05 VIDE ITA NO.7257/MUM/2008 AND F OR THE REASONS CONTAINED THEREIN, WE DISMISS THIS GROUND OF APPEA L. 13. IN THE RESULT, APPEALS FILED BY THE DEPARTMENT F OR A.Y.S 2004- 05 AND 2005-06 ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 27.10.2010 SD/- SD/- (VIJAY PAL RAO) ( S.V. MEHROTRA ) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 27/10/2010. 6 COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR I BENCH //TRUE COPY// BY ORDER ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI ROSHANI