IDL Industries Limited , Hyderabad V. Deputy Commissioner of Income Tax (Asst), Special range-4, Hyderabad

ITA 766/Hyd/1998

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 6545 (ITAT-HYDERABAD)
• Duration Of Justice: 19 year(s) 8 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-07-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 1995-1996
• Appeal Filed On: 06-11-1998
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: K GOPALAKRISHNA
• Keywords: Capital asset; Business income; Business expenditure; Bad and doubtful debts
• Section: 143(3); 80HHC; 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES B BENCH: HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA. NO. 766 /HYD/ 1998 ASSESSMENT YEAR: 1995 - 96 GULF OIL CORPORATION LIMITED ., ( FORMERLY KNOWN AS IDL INDUSTRIES LTD ) , HYDERABAD. VS. DY. COMMISSIONER OF INCOME TAX (ASSTS), SPECIAL RANGE - 4, HYDERABAD. (APPELLANT) (RESPONDENT) FOR ASSESSEE: SHRI Y. RATNAKAR FOR REVENUE : SHRI K. GOPALA KRISHNA, DR DATE OF HEARING : 10 .0 5 .2018 DATE OF PRONOUNCEMENT : 18 .0 7 .2018 ORDER PER SMT. P. MADHAVI DEVI , JM . 1. THIS IS AN ASSESSEES APPEAL FOR THE A.Y. 1995 - 96 AGAINST THE ORDER OF CIT (A) - IV, HYDERABAD DATED 27.08.1998. THIS APPEAL WAS IN I TI ALLY HEARD AND DISPOSED OF VIDE ORDER DATED 30.12.2004. HOWEVER, ON APPEAL, THE HONBLE HIGH COURT , VIDE ORDER DATED 21.11.2017 , HAS SET - ASIDE THE ORDER AND DIRECTED THE TRIBUNAL TO ADJUDICATE THE ISSUE AFRESH, AFTER NOTICE TO BOTH THE PARTIES, BY PASSING A DETAILED SPEAKING ORDER. THAT IS HOW THE MATTER WAS AGAIN RE - FIXED FOR HEARING BEFORE THE BENCH. THE ASSESSEE HAD RAISED THE FOLLOWING GROUNDS OF APPEAL: - 1. THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) - IV, HYDERABAD DATED 27.8.1998 IS CONTRARY TO LAW AND FACTS. 2. THE LEARNED CIT ERRED IN COMING TO THE CONCLUSION THAT THE SUM OF RS. 30,70,000/ - IS NOT ALLOWABLE EXPENDITURE. IT IS CONTENDED THAT THE AMOUNT SPENT DID NOT RESULT IN CREATION OF ANY CAPITAL ASSET AND THE CONTRARY WAS SP ENT FOR THE PURPOSE OF LEGITIMATE BUSINESS 2 OF THE APPELLANT COMPANY. CONSEQUENTLY, THE SAME IS ALLOWABLE U/S 37 OF THE I.T. ACT. 3. IT IS CONTENDED THAT THE IMPLEMENTATION OF THE PROJECT WORK HAD TO BE ABANDONED TO MINIMISE YEARLY LOSS AND TO PRESERVE THE EXISTING PROFITABILITY OF THE APPELLANT COMPANY. CONSEQUENTLY, THE EXPENDITURE INCURRED UPTO TO THE ABANDONMENT IS TO BE TREATED AS BUSINESS EXPENDITURE. 4. WITHOUT PREJUDICE, IT IS FURTHER CONTENDED THAT THE SAID AMOUNT BE ALLOWED AS BAD DEBT IF NOT ALLOWABLE AS BUSINESS LOSS OR BUSINESS EXPENDITURE. 5. IT IS CONTENDED THAT THE RENT RECEIVED FROM TWO FLATS IN MUMBAI AND THE RENT RECEIVED FROM THE PREMISES LEFT OUT TO IDL ASTRA LTD., IS IN THE NATURE OF BUSINESS INCOME BEING EXPLOITATION OF COMMERCIAL ASSET AND 10% OF THE SAID AMOUNT WILL QUALIFY FOR INCLUSION IN THE PROFITS OF THE BUSINESS UNDER EXPLANATION (BAA) FOR COMPUTING THE EXEMPTED PROFITS U/S 80HHC OF THE I.T. ACT. 6. THE APPELLANT CARVES LEAVE TO ADD, AMEND OR ALTER ANY OF THE AFOR ESAID GROUNDS AS THE OCCASION MAY REQUIRE. 7. FOR THERE AND OTHER REASONS THAT MAY BE URGED AT THE TIME OF HEARTING OF APPEAL, IT IS PRAYED THAT THE DISALLOWANCE / ADDITIONS MADE BE DELETED AND THE APPEAL BE ALLOWED. 2. BRIEF FACTS RELATING TO THE ISSUE S BEFORE US ARE THAT THE ASSESSEE - COMPANY, ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF DETONATORS, FILED ITS RETURN OF INCOME ON 15.11.1995 ADMITTING THE TAXABLE INCOME OF RS. 1,28,91,230/ - . INITIALLY THE RETURN WAS PROCESSED U/S 143(1)(A) OF THE A CT WITHOUT ANY ADJUSTMENTS. DURING THE ASSESSMENT PROCEEDINGS U/S 143(3) OF THE ACT, THE A.O. VERIFIED THE ASSESSEES BOOKS OF ACCOUNT AND OBSERVED THAT DURING THE ACCOUNTING YEAR, THE ASSESSEE HAD DEBITED A SUM OF RS. 46.12 LAKHS TO THE PROFIT & LOSS ACCO UNT UNDER THE HEAD BAD DEBTS WRITTEN - OFF , AS SHOW N IN SCHEDULE - 16. THE A.O OBTAINED THE DETAILS AND OBSERVED THAT THE SAME INCLUDES A SUM OF RS. 16 LAKHS , PAID TO M/S. PROJECT DEVELOPMENT OF INDIA LIMITED TOWARDS CONSULTANCY FEES AND , A SUM OF RS. 14.70 LAKHS INCURRED TOWARDS THE COST OF A PROJECT , WHICH WAS ABANDONED IN THE YEAR ENDING ON 31.03.1994. 3. THE A.O. OBSERVED THAT THE ASSESSEE HAS PAID A SUM OF RS. 16 LAKHS TO M/S. PROJECT DEVELOPMENT OF INDIA LIMITED IN CONNECTION WITH THE PRILLED AMMONIUM NITRATE PROJECT / LDAN PROJECT , ACCOUNTED UNDER 3 THE HEAD CAPITAL WORK - IN - PROGRESS IN PREVIOUS YEARS , AND HAS BEEN CLAIMED AS BAD DEBT WRITTEN - OF F IN THE RELEVANT ASSESSMENT YEAR. THE A.O. OBSERVED THAT THE PAYMENT MADE TO THE GOVERNMENT UNDERT AKING CANNOT BE SAID TO BE IRRECOVERABLE AND THE EXPENDITURE INCURRED DOES NOT HAVE THE CHARACTERISTICS OF BEING TREATED AS BAD DEBT. HE OBSERVED THAT NEITHER INCOME OF THE SAID DEBT WAS OFFERED TO TAX IN THE EARLIER YEARS NOR THERE IS A DEBTOR AND CREDIT OR RELATIONSHIP. THEREFORE, THE A.O. DISALLOWED THE CLAIM OF BAD DEBTS. HOWEVER, DURING THE COURSE OF HEARING, THE ASSESSEE MADE AN ALTERNATE CLAIM THAT THE SAME MAY BE ALLOWED AS BUSINESS LOSS. THE A.O. OBSERVED THAT THE EXPENDITURE INCURRED RELATES TO PRIOR YEARS AND WAS TREATED AS CAPITAL WORK - IN - PROGRESS AND THEREFORE IT WAS A CAPITAL LOSS AND CANNOT BE ALLOWED AS A REVENUE LOSS . AGGRIEVED, ASSESSEE PREFERRED AN APPEAL BEFORE THE LD. CIT(A), WHO CONFIRMED THE ORDER OF THE A.O. AND THE ASSESSEE I S IN SECOND APPEAL BEFORE US. 4. LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BY THE ASSESSEE BEFORE THE AUTHORITIES BELOW AND SUBMITTED THAT THE ASSESSEE , BEING IN THE BUSINESS OF MANUFACTURE AND SALE OF DETONATORS , HAD SET - UP A UNIT FOR MANUFACTURE OF NITRATE, THE RAW MATERIAL AND THE LOSS INCURRED BY THE ASSESSEE O N SETTING UP OF THE SAID PRO JECT ( WHICH WAS SUBSEQUENTLY ABANDONED ) IS A BUSINESS LOSS. HE PLACED RELIANCE UPON THE DECISION OF THE HONBLE SUPREME COURT OF INDIA IN THE CASE OF DR. T.A. Q UERESHI VS. CIT (287 ITR 547) (SC) FOR THE PROPOSITION THAT BUSINESS LOSS HAS TO BE ALLOWED IRRESPECTIVE OF IT BEING IN CONNECTION WITH ILLEGAL ACTIVITY. HE TRIED TO DRAW THE DISTINCTION BETWEEN THE BUSINESS EXPENDITURE AND BUSINESS LOSS AS BROUGHT OUT BY THE HONBLE SUPREME COURT IN THE ABOVE CASE IN PARA 17 OF ITS ORDER (SUPRA). 4 5. THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER HAND, SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW AND PLACED RELIANCE UPON THE DECISION OF THE HONB LE MADRAS HIGH COURT IN THE CASE OF E.I.D. PARRY (INDIA) LTD. VS. CIT AND THE HONBLE CALCUTTA HIGH COURT IN THE CASE OF KANORIA CHEMICALS & INDUSTRIES LTD VS. CIT (1995) 78 TAXMAN 455 (CAL.). THE COPIES OF THE ORDERS ARE FI LED BEFORE US. 6. HAVING REGAR D TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT THE ONLY QUESTION TO BE DECIDED IS , WHETHER THE COST INCURRED BY THE ASSESSEE ON THE PROJECT, WHICH WAS CAPITALISED IN THE BOOKS OF ACCOUNT AND IS SUBSEQUENTLY ABANDONED , IS A CAPITAL LOSS OR REVENUE LOSS ? ADMITTEDLY, THE ASSESSEE HAS TREATED THE COST IN THE PRIOR YEARS AS A CAPITAL WORK - IN - PROGRESS AND SINCE IT HAS ABANDONED THE PROJECT DURING THE RELEVANT F INANCIAL Y EAR, IT HAS CLAIMED TH E SAME AS BAD DEBT / BUSINESS LOSS. IN THE DECISION S RELIED UPON BY THE LEARNED DEPARTMENTAL REPRESENTATIVE, I.E., IN THE CASE OF KANORIA CHEMICALS & INDUSTRIES LTD VS. CIT (SUPRA) , THE ASSESSEE HAD INCURRED EXPENDITURE IN CONNECTION WITH A NEW PROJECT WHICH WAS ULTIMATELY ABANDONED AND, IN THE CAS E OF E.I.D. PARRY (INDIA) LTD. VS. CIT , THE HONBLE MADRAS HIGH COURT OBSERVED THAT THE ASSESSEE THEREIN HAD INCURRED THE EXPENDITURE FOR THE PURPOSE OF SETTING UP A NEW PROJECT FOR THE MANUFACTURE OF METHANOL AND IN THE SAID CASE , THE ASSESSEE WAS ENGAG ED IN THE MANUFACTURE OF OTHER PRODUCTS AND WANTED TO MANUFACTURE A NEW PRODUCT AND FOR THAT PURPOSE , THE ASSESSEE HAD INCURRED EXPENDITURE BY WAY OF ENTERING INTO A COLLABORATION AGREEMENT FOR THE PURCHASE OF MACHINERY BUT HAD ABANDONED THE SAME. IN THES E CIRCUMSTANCES, THE HONBLE HIGH COURT HELD THAT THE LOSS IS CAPITAL IN NATURE AND NOT A REVENUE LOSS. BUT , IN THE CASE BEFORE US, THE ASSESSEE HAD TRIED TO SET - UP A MANUFACTURING UNIT OF THE RAW MATERIAL ( WHICH THE ASSESSEE WAS EARLIER BUYING FROM THE O PEN MARKET ) WHICH IS REQUIRED FOR MANUFACTURE OF AMMONIUM NITRATE . AS SEEN FROM THE W RITTEN SUBMISSIONS OF THE 5 ASSESSEE WHICH ARE REPRODUCED BY THE CIT (A), THE PROJECT HAD BECOME UNVIABLE DUE TO ESCALATION IN COST AND HAD TO BE ABANDONED IN THE YEAR ENDI NG ON 31.03.1994. THE MANUFACTURING OF RAW MATERIAL IS ONLY BACK WARD INTEGRATION OF THE PROCESS AND IS VERY MUCH PART OF THE EXISTING BUSINESS OF THE ASSESSEE AND THEREFORE RELATED TO THE BUSINESS CARRIED ON BY THE ASSESSEE. THE HONBLE SUPREME COURT OF INDIA IN THE CASE OF DR. T.A. QUERESHI VS. CIT (SUPRA) HELD THAT THE BUSINESS LOSS WAS ALLOWABLE ON ORD INARY COMMERCIAL PRINCIPLES IN COMPUTING THE PROFITS AND THE LOSS OF STOCK - IN - TRADE HAS TO BE TREATED AS A TRADING LOSS. IN THE CASE BEFORE US , THE ASSESSEE WAS PROCURING THE RAW MATERIAL FROM THE OPEN MARKET EARLIER TO UNDERTAKING THE SETTING UP OF THE U NIT, AND WAS THUS, FOR MANUFACTURE OF STOCK - IN - TRADE AND THE BUSINESS NEXUS IS CLEARLY ESTABLISHED. THEREFORE, THOUGH IT CANNOT BE TREATED AS BAD DEBT AS INITIALLY CLAIMED BY THE ASSESSEE, WE ARE INCLINED TO ACCEPT THE ALTERNATE CONTENTION THAT IT IS A BU SINESS LOSS AND SHOULD BE ALLOWED IN THE ORDINARY COMMERCIAL PRINCIPLES , AS HELD BY THE HONBLE SUPREME COURT OF INDIA IN THE CASE OF DR. T.A. QUERESHI (SUPRA) . ACCORDINGLY, GROUNDS OF APPEAL NO. 2 TO 4 ARE ALLOWED. 7. AT THE TIME OF HEARING , LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT DUE TO SMALLNESS OF THE AMOUNT, THE ASSESSEE DOES NOT WANT TO PRESS THE GROUND NO.5 AND THE SAME IS ACCORDINGLY REJECTED. GROUNDS NO.1, 6 AND 7 ARE GENERAL IN NATURE AND THEREFORE THEY NEED NO ADJUDICATION. 8. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 18 TH JULY, 2018. SD/ - SD/ - (S. RIFAUR RAHMAN) ( SMT. P. MADHAVI DEVI ) ACCOUNTANT MEMBER JUDICIAL MEMBER 6 HYDERABAD, DATED: 18 TH JULY , 2018. OKK, SR.PS COPY TO 1. SENIOR MANAGER (FINANCE), IDL INDUSTRIES LIMITED, IDL INDUSTRIES LTD., P.O.B. NO.1, SANATH NAGAR (PO), HYDERABAD. 2. DCIT (ASSTS), SPL. RANGE - 4, HYDERABAD. 3. CIT (A) - IV, HYDERABAD. 4. PR. CIT - IV, HYDERABAD. 5. DR, ITAT, HYDERABAD. 6. GUARD FILE