Shri Paresh N. Patel, Vadodara V. The Deputy Commissioner of Income Tax, Circle-1(3), Vadodara

ITA 846/AHD/2017

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 8037 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 2 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-06-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2012-2013
• Appeal Filed On: 06-04-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Bad and doubtful debts; Revenue expenditure; Capital expenditure
• Section: 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD B BENCH, AHMEDABAD [CORAM: PRAMOD KUMAR AM AND MAHAVIR PRASAD JM] ITA NO.846/AHD/2017 ASSESSMENT YEAR: 2012-13 PARESH N. PATEL , C/O. RAJESH R. SHETH. S/201, GANGOTRI APARTMENT, ANNXE, ABOVE PINKU CHILDREN HOSPITAL, OPP. SADHNA COLONY, R V DESAI ROAD, VADODARA 390 001. [PAN : ACUPP 1731 B] VS. DY. COMMISSIONER OF INCOME TAX, CIRCLE-1(3), VADODARA. APPEARANCE BY MANISH SHAH FOR THE APPELLANT SAURABH SINGH FOR THE RESPONDENT HEARING CONCLUDED ON : 26.06.2018 ORDER PRONOUNCED ON : 28.06.2018 ....APPELLANT .RESPONDENT O R D E R PER PRAMOD KUMAR, AM : 1. BY WAY OF THIS APPEAL, THE ASSESSEE-APPELLANT HA S CHALLENGED CORRECTNESS OF LEARNED CIT(A)S ORDER DATED 23.01.2017, FOR THE ASSESSMENT YEAR 2012-13, ON THE FOLLOWING GROUNDS. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AS WEL L AS IN LAW LD. CIT(A)-2, BARODA HAS ERRED IN TREATING THE BUSI NESS LOSS AS CAPITAL LOSS AND DISALLOWED RS.2,00,000/- EVEN THOUGH THE L OSS IS INCURRED DURING THE COURSE OF BUSINESS AND IT IS A BUSINESS LOSS. APPELLANT PRAYS YOUR HONOUR TO ALLOW LOSS OF RS.2,00,000/- AS BUSINESS LOSS. 2. THE ISSUE IN APPEAL LIES IN A NARROW COMPASS OF MATERIAL FACTS. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURIN G OF ORGANIC AND INORGANIC CHEMICALS. DURING THE COURSE OF SCRUTINY ASSESSMEN T PROCEEDINGS, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS CLAIMED A BAD DEBT OF RS.2,00,000/- WHICH IN ITA NO 846//AHD/2017 ASSESSMENT YEAR 2012-13 2 FACT REPRESENTED WRITE OFF OF AN ADVANCE GIVEN TO M /S.GMM PFAUDLER LTD. FOR PURCHASE OF 16,000 LITRE GLASSLINE VERTICAL TANK. T HE ASSESSING OFFICER REJECTED THE CLAIM OF THE ASSESSEE AND OBSERVED AS FOLLOWS: 5.1.2 THE CONTENTION OF THE ASSESSEE HAS BEEN CON SIDERED HOWEVER THE SAME IS NOT ACCEPTABLE, FOR THE REASON THAT AS COUL D BE SEEN FROM THE EXPLANATION THAT ASSESSEE HAD ORDERED FOR 16000 ITR S GLASSLINE VERTICAL TANK CO NO. 01030192 FOR RS.22,00,485/- TO M/S. GMM PFAUDLER LTD. FOR MANUFACTURING ACTIVITIES OF BUSINESS SINCE THE SE LLER DID NOT RETURN MONEY ASSESSEE HAS CLAIM RS.2 LACS AS BAD DEBTS INSTEAD O F BUSINESS LOSS U/S. 37 OF THE IT ACT. AS SUCH IT IS CLEAR THAT ASSESSEE HA D PLACED AN ORDER FOR ACQUIRING A CAPITAL ASSET, AS SUCH THE LOSS INQUIRE D IS ON ACCOUNT OF CAPITAL EXPENDITURE AND NOT A REVENUE EXPENDITURE. TO CLAIM ANY AMOUNT AS BAD DEBTS, IT IS NECESSARY THAT THE SAME SHOULD HAVE BE EN BOOKED AS INCOME IN THE PAST, HOWEVER WITH PASSESAGE OF TIME SAME BEING NOT RECOVERABLE IS BEING TREATED AS BAD DEBTS. HOWEVER IN THE CASE OF ASSESSEE SAME BEING CAPITAL EXPENDITURE, THERE WAS NO INCOME BOOKED ON THIS ACCOUNT. 5.1.3 FURTHER THE CASE CITED OF THE APEX COURT BEI NG THE JUDGMENT OF HONBLE SC IN THE CASE OF COMMISSIONER OF INCOME-TA X V. MYSORE SUGAR CO. LTD. [1962] 46 ITR 649 (SC) , THE FACTS WAS THAT THEIR THE ASSESSEE, A SUGAR COMPANY, ENTERED INTO AN AGREEMENT WITH SUGAR CANE GROWERS WHEREIN ASSESSEE ADVANCED THEM SUGARCANE SEEDLINGS, FERTILIZERS AND ALSO CASH - SUGARCANE GROWERS AGREED TO SELL SUGARCANE E XCLUSIVELY TO ASSESSEE AT CURRENT MARKET RATE AND HAVE ADVANCES A ND ADJUSTED TOWARDS PRICE OF SUGARCANE, HOWEVER DUE TO DRAUGHT SUGARCAN E GROWERS COULD NOT GROW AND DELIVER SUGARCANE HENCE ADVANCES MADE EARL IER REMAINED UNRECOVERED, THEREFORE ON RECOMMENDATION OF STATE G OVERNMENT ASSESSEE WAIVED ITS RIGHT OF CERTAIN SUM ADVANCED EARLIER TO SUGARCANE GROWERS - THIS AMOUNT WAS CLAIMED BY ASSESSEE AS A DEDUCTION. AS S UCH FROM THE FACTS IT COULD SIMPLY BE SAID THAT THE ADVANCES MADE WAS REL ATED TO PURCHASES, WHICH WOULD BE DEBITED TO MANUFACTURING/TRADING ACC OUNT AND NOT DEBITED TO A CAPITAL ASSET. AS SUCH THE FACTS OF THE CASE H AS NO RELEVANCE WITH ONE IN HAND. SIMILARLY, OTHER CASES CITED BY ASSESSEE I N FACTS, AND HENCE NO RELEVANCE OR HAS ANY IMPACT ON THE CASE OF THE ASSE SSEE. ACCORDINGLY, AN AMOUNT OF RS.2,00,000/- IS ADDED TO TOTAL INCOME. PENALTY PROCEEDINGS U/S.271(1)(C) IS SEPARATELY INITIATED FOR CONCEALIN G OF PARTICULARS OF INCOME. 3. AGGRIEVED, ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LEARNED CIT(A) AND MADE ELABORATE CONTENTIONS IN SUPPORT OF THE PR OPOSITION THAT THE SAID AMOUNT SHOULD BE ALLOWED AS BUSINESS LOSS, BUT WITHOUT ANY SUCCESS. LEARNED CIT(A) AFFIRMED THE DISALLOWANCE ON THE BASIS OF FOLLOWING REASONS. 4. I HAVE CAREFULLY CONSIDERED THE FACTS ON RECORD S AND SUBMISSION OF THE LD. AUTHORIZED REPRESENTATIVE. UNDISPUTEDLY, TH E APPELLANT HAD PLACED AN ORDER FOR PURCHASE OF 16000 ITRS GLASSLINE VERTI CAL TANK FOR RS. 22,00,485/- FROM GMM PFAULDER LTD. AND PAID AN ADVA NCE OF RS.2,00,000/-. ITA NO 846//AHD/2017 ASSESSMENT YEAR 2012-13 3 THE GLASSLINE VERTICAL TANK IS A CAPITAL ASSET USED IN THE MANUFACTURING PROCESS OF THE APPELLANT. ACCORDINGLY, THE LOSS ON ACCOUNT OF ADVANCE GIVEN FOR PURCHASE OF CAPITAL ASSET WAS TREATED AS CAPITA L LOSS BY THE ASSESSING OFFICER. THE LD. AUTHORIZED REPRESENTATIVE HAS HEAV ILY RELIED UPON THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF MYSORE SUGAR CO. LTD. (SUPRA) AND CLAIMED THAT LOSS ON ACCOUNT OF ADVANCE GIVEN F OR PURCHASE OF ASSETS FOR THE PURPOSE OF BUSINESS SHOULD BE TREATE D AS BUSINESS LOSS ALLOWABLE U/S. 37. I FIND THAT IN THE CASE RELIED U PON BY THE LD. AUTHORIZED REPRESENTATIVE, THE ADVANCES WERE GIVEN TO THE FARM ERS FOR BUYING SEEDLINGS, AND FERTILIZERS ETC. AND WERE TO BE ADJUSTED AGAINST PRICE OF PURCHASE OF SUGARCANE. THEREFORE, IN THAT CASE THE ADVANCE WAS CONSIDERED FOR THE PURPOSE OF PURCHASE OF SUGARCANE AND WAS ALLOWED AS BUSINESS LOSS SINCE PURCHASE OF SUGARCANE WAS A REV ENUE EXPENDITURE. 4.1. ON CAREFUL CONSIDERATION OF DECISION OF HON'BL E SUPREME COURT IN THE CASE OF MYSORE SUGAR CO. LTD. (SUPRA), I FIND THAT THE HON'BLE COURT HAS MADE THE FOLLOWING OBSERVATION:- 'TO FIND OUT WHETHER AN EXPENDITURE IS ON THE CAPIT AL ACCOUNT OR ON REVENUE, ONE MUST CONSIDER THE EXPENDITURE IN RELAT ION TO THE BUSINESS. SINCE ALL PAYMENTS REDUCE CAPITAL IN THE ULTIMATE ANALYSIS, ONE IS APT TO CONSIDER A LOSS AS AMOUNTING TO A LOS S OF CAPITAL. BUT THIS IS NOT TRUE OF ALL LOSSES, BECAUSE LOSSES IN T HE RUNNING OF THE BUSINESS CANNOT BE SAID TO BE OF CAPITAL. THE QUESTIONS TO CONSIDER IN THIS CONNECTION ARE: FOR WHAT WAS THE MONEY LAID OUT? WAS IT TO ACQUIRE AN ASSET OF AN ENDURING NATURE FOR THE B ENEFIT OF THE BUSINESS, OR WAS IT AN OUTGOING IN THE DOING OF THE BUSINESS? IF MONEY BE LOST IN THE FIRST CIRCUMSTANCE, IT IS A LO SS OF CAPITAL, BUT IF LOST IN THE SECOND CIRCUMSTANCE, IT IS A REVENUE LOSS. IN THE FIRST, IT BEARS THE CHARACTER OF AN INVESTMENT, BUT IN THE SE COND, TO USE A COMMONLY UNDERSTOOD PHRASE, IT BEARS THE CHARACTER OF CURRENT EXPENSES.' THUS, FROM THE DECISION OF HON'BLE SUPREME COURT RE LIED UPON BY THE LD. AUTHORIZED REPRESENTATIVE, IT IS ALSO CLEAR THAT MO NEY PAID FOR ACQUIRING AN ASSET OF AN ENDURING NATURE IF NOT RECOVERED WOULD RESULT IN CAPITAL LOSS AND HENCE CANNOT BE ALLOWED AS REVENUE EXPENDITURE. AFT ER CONSIDERING THE ABOVE DECISION, THE HON'BLE ITAT, IN THE CASE OF ACIT VS. KHODAY INDIA LTD. (2009) 33 SOT 178 (BANGALORE) HAS HELD THAT LOSS ON ACCOUNT OF WRITE OFF OF ADVANCES GIVEN FOR ACQUIRING CAPITAL ASSETS CANNOT BE TREATED AS REVENUE EXPENDITURE. SIMILARLY, HON'BLE DELHI HIGH COURT IN THE CASE OF DISTILLERS' TRADING CORPORATION LTD. VS. CIT (2001) 252 ITR 795 (DEL.) HAS HELD THAT ADVANCES GIVEN TO BE ADJUSTED AGAINST PRICE OF PVC PLANT MACHINERY, IF NOT RECOVERED HAVE TO BE TREATED AS C APITAL LOSS. THEREFORE, IN VIEW OF THE ABOVE FACTUAL AND LEGAL POSITION, IT IS CRYSTAL CLEAR THAT LOSS CLAIMED BY THE APPELLANT WAS IN THE NATURE OF CAPIT AL LOSS AS THE ADVANCE WAS GIVEN FOR ACQUIRING A CAPITAL ASSET OF ENDURING NATURE. ITA NO 846//AHD/2017 ASSESSMENT YEAR 2012-13 4 4.1.1. IN OTHER DECISIONS RELIED UPON BY THE LD. AU THORIZED REPRESENTATIVE, THE ADVANCES WERE GIVEN ON TRADING ACCOUNT AND NOT FOR ACQUISITION OF CAPITAL ASSETS OF ENDURING NATURE AND HENCE THE SAM E ARE DISTINGUISHABLE ON FACTS. 4.1.2. IN VIEW OF THE ABOVE DISCUSSION AND LEGAL PO SITION, THUS I HOLD THAT THE ASSESSING OFFICER HAS RIGHTLY DISALLOWED THE CL AIM OF APPELLANT AT RS.2,00,000/- BEING CAPITAL LOSS. HENCE GROUNDS RAI SED BY THE APPELLANT ARE DISMISSED. 4. THE ASSESSEE IS NOT SATISFIED WITH THE STAND SO TAKEN BY THE LEARNED CIT(A) AND IS IN FURTHER APPEAL BEFORE US. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTS OF THE CASE IN THE LIGHT OF T HE APPLICABLE LEGAL POSITION. 6. AS LEARNED COUNSEL RIGHTLY POINT OUT THE ISSUE I S NOW COVERED BY AN ORDER OF THE TRIBUNAL, WHICH HAS BEEN APPROVED BY HONBLE JU RISDICTIONAL HIGH COURT IN THE CASE OF CIT VS GUJARAT MINERAL DEVELOPMENT CORP. LT D. (314 ITR 322), WHICH HAS GONE BY THE NEXUS BETWEEN BUSINESS OPERATIONS AND L OSS BEING INCIDENTAL TO THE SAME. THERE IS NO DISPUTE ON THIS ASPECT IN THE PRE SENT CASE. THE MACHINERY ADVANCE WAS GIVEN IN THE COURSE OF BUSINESS AND AS SUCH LOSS WAS INCIDENTAL THERETO. IN THIS VIEW OF THE MATTER, WE UPHOLD THE PLEA OF THE ASSESSEE AND DIRECT THE ASSESSING OFFICER TO DELETE THE IMPUGNED DISALL OWANCE OF RS.2,00,000/-. THE ASSESSEE GETS THE RELIEF ACCORDINGLY. 7. IN THE RESULT, THE APPEAL IS ALLOWED. PRONOUNCE D IN THE OPEN COURT ON THIS 28 TH DAY OF JUNE, 2018. SD/- SD/- MAHAVIR PRASAD PRAM OD KUMAR (JUDICIAL MEMBER) (A CCOUNTANT MEMBER) DATED: 28 TH JUNE, 2018. PBN/* COPIES TO: (1) THE APPELLANT (2) THE RESPONDE NT (3) CIT (4) CIT(A) (5) DR (6) GUARD FILE BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCHES, AHMEDABAD