2013 (10) TMI 551 - AT - Income Tax

Tribunal decision on stock valuation, interest income, carry forward losses, term loan verification, and unsupported advance payments.

The Tribunal dismissed the department's appeal and partially allowed the assessee's appeal, confirming the CIT(A)'s findings on various issues including ... Valuation of stock - Stock damaged due to Earthquake - Factory was closed for few years - Therefore, CIT deleted addition of valuation of stock - Held that:- The valuation adopted by the assessee is on higher side, therefore, it cannot be said that the valuation adopted by the assessee, which is on higher side than the valuation adopted by the valuation officer KFTZ, which was obtained by the bank directly. It is further noted that after earthquake business of the assessee was closed down and due to dispute between bank and assessee, the entire factory was under the lock and key of the bank. After settlement between the assessee and bank then only the factory was opened and valuation report was obtained by the bank. Thereafter after negotiation certain amount was waived of by the bank. It is further seen that whatever the receipts were received on account of sale of stocks to the sister concern, that was taken by the bank. It is a matter of fact that the stock was lying in the premises from assessment year 2001-02 to assessment year 2005-06 and the said stock was lying in premises which was damaged by the earthquake. It is further seen that the valuation report obtained was filed before the CIT(A) and the CIT(A) asked the assessee company to ascertain from the bank as to valuation of stock done at the time of settlement - CIT(A) remained uncontroverted except that that he has accepted the valuation report in contravention of Rule 46A. The findings of the learned CIT(A) are findings of fact which are given after ascertaining the factual matrix of the case - Decided against Revenue. There was no reason given by the AO as to why the income out of sale of goods was treated as income from other sources as the profit was generated out of sale of stock which was accumulated stock of the assessee out of business activity - CIT(A) was justified in holding that the income out of sale of stock as business income and rejecting the contention of the AO in reducing the value of stock - Decided against Revenue. Income from other sources - Waiver of interest - Held that:- It is not understandable as to how the amount which was waived by the bank was income from other sources as the loan was taken for the purpose of business activity only. The amount payable to various creditor were also on account of business activity. These amounts were offered under Section 41(1), therefore, there was no question of treating the same as income from other sources - Decided against Revenue. Carry forward loss - Provision for bad debts - No business for the last 5 years - Held that:- assessee has sold its old stocks and the profit has been shown as business income. On account of old stock sold; the income has to be assessed as business income. No doubt, there was no use of machinery etc. in the year under consideration and, therefore, the depreciation of the year under consideration is not allowable, however, quantified brought forward business loss and unabsorbed depreciation can be set off against the business income as the business income shown by the assessee is on account of same business activity carried out in earlier years - Decided against Revenue. Capital or Revenue receipt - Written off bank loan - Held that:- if the waiver of term loan is on account of capital asset then the amount of loan, which was waived, was capital asset and, therefore, cannot be brought to tax - Following decision of Mahindra & Mahindra Ltd. Vs. CIT [2003 (1) TMI 71 - BOMBAY High Court] - Decided against Revenue. Loan taken for trading activity (business purposes) and upon waiver amount retained in business - Assessee claimed that the said loan was the capital receipt and has not been claimed as deduction from the taxable income as expenses and therefore, did not come under section 41(1) - Held that amount had become the income of assessee; and hence assessable as business income of assessee – Following decision of SOLID CONTAINERS LTD. Versus DEPUTY COMMISSIONER OF INCOME-TAX AND ANOTHER [2008 (8) TMI 156 - BOMBAY HIGH COURT] - Decided in favour of Revenue. Issues Involved:1. Deletion of addition by accepting additional evidence in contravention of Rule 46A.2. Valuation of stock at Rs.59,55,568/-.3. Waiver of interest from the bank and creditors written off as income from business and profession.4. Set off of income against carry forward loss of earlier years.5. Treatment of bank loan written off as income instead of capital receipts.6. Addition towards advance against purchases written off.Issue-wise Detailed Analysis:1. Deletion of Addition by Accepting Additional Evidence in Contravention of Rule 46A:The department raised concerns regarding the deletion of an addition of Rs.3,57,61,782/- by accepting additional evidence in the form of stock valuation by the bank, allegedly in contravention of Rule 46A of IT Rules. The AO had added back Rs.3,63,88,695/- to the return of income, questioning the arbitrary valuation of closing stock at Rs.1,78,80,891/- and the absence of documentary evidence supporting the stock's damage due to an earthquake. The CIT(A) deleted the addition, accepting the bank's valuation and the assessee's explanation of the stock's damage and subsequent sale due to the earthquake. The Tribunal found no infirmity in CIT(A)'s findings, noting that the valuation adopted by the assessee was higher than the bank's valuation and that the stock was indeed damaged and unsellable in the general market.2. Valuation of Stock at Rs.59,55,568/-:The AO did not accept the cost of goods sold by the assessee at Rs.59,55,568/-, estimating it instead at Rs.53,28,755/- without providing reasons. The CIT(A) accepted the assessee's valuation after examining the details and found that the payments were received directly by the bank from the sister concern. The Tribunal upheld the CIT(A)'s findings, noting the lack of reasons provided by the AO for the reduced valuation and confirming that the income from the sale of stock should be treated as business income.3. Waiver of Interest from the Bank and Creditors Written Off as Income from Business and Profession:The AO treated the waiver of loan (Rs.3,59,66,419/-) and sundry creditors (Rs.1,87,91,414/-) as income from other sources. The CIT(A) disagreed, holding that these amounts, related to business transactions and offered to tax under Section 41, should be considered business income. The Tribunal found no infirmity in this finding, confirming that the waived amounts were business receipts and assessable under business income.4. Set Off of Income Against Carry Forward Loss of Earlier Years:The AO denied the set off of brought forward losses and unabsorbed depreciation, citing a lack of business activity in the previous 5 years. The CIT(A) allowed the set off, noting that the profit from the sale of stock to the sister concern was treated as business income. The Tribunal upheld this decision, distinguishing the present case from cited precedents and confirming that the carry forward losses and unabsorbed depreciation should be set off against the business income.5. Treatment of Bank Loan Written Off as Income Instead of Capital Receipts:The assessee contested the treatment of a bank loan write-off (Rs.3,59,66,419/-) as income. The CIT(A) noted that the assessee had shown this amount as income under Section 41(1) and that the loan was for business purposes, not for acquiring capital assets. The Tribunal partially allowed the assessee's appeal, directing the AO to verify if the term loan of Rs.21,83,773/- was for capital assets and to treat it accordingly. The remaining loan amount was confirmed as business income, following the jurisdictional High Court's decision in Solid Container.6. Addition Towards Advance Against Purchases Written Off:The AO disallowed Rs.7,74,286/- shown as advance payments to contractors and suppliers, citing a lack of evidence. The CIT(A) confirmed this addition, noting the absence of supporting documents. The Tribunal upheld this decision, agreeing that there was no merit in the assessee's arguments due to the lack of documentary evidence.Conclusion:The Tribunal dismissed the department's appeal and allowed the assessee's appeal in part, confirming the CIT(A)'s findings on most issues while directing verification of the term loan's nature for partial relief.