2014 (2) TMI 504 - AT - Income Tax

Tribunal partially allows appeal, directs fresh assessment on expense disallowance & loan addition under Section 68

The Tribunal partly allowed the appeal, setting aside the CIT(A) order on the disallowance of expenses and the addition on account of loans under section ... Disallowance of expenses – there was no permanent closure of the business - Held that:- Similar disallowance on the ground of no business activity had been made by AO in assessment year 2004-05 of the expenses claimed - the expenditure was not capital in nature and since there was no permanent closure of the business and business was under rehabilitation scheme/ revival scheme due to financial difficulties, the expenses had to be allowed - the assessee was doing its best to restart the production activity as was clear from the renewal of factory license - even if the assessee was not able to restart the business there will be no use of any such loss carried forward – thus, the claim of the assessee allowed – the order of the CIT(A) set aside – Decided in favour of Assessee. Addition on account of loans u/s 68 of the Act – Held that:- The assessment order has been passed by AO ex-parte - The assessee was a sick company and was under rehabilitation scheme by BIFR – thus, in such a situation the difficulty faced by the assessee in filing the confirmation and other evidence before AO has to be appreciated and these additional evidences were required to be considered by CIT(A) as the same were useful in deciding the issue - the additional evidences admitted in the form of loan confirmations as done by the Tribunal in assessment year 2004-05 – the order of the CIT(A) set aside and the matter remitted back to the AO for fresh adjudication – Decided in favour of Assessee. Income received from scrap treated as income from other sources – Held that:- The assessee has claimed that the income had arisen from sale of scrap – the nature of receipt has not been examined by the authorities properly – thus, the matter is remitted back to the AO for fresh adjudication – Decided partly in favour of Assessee. Issues:1. Disallowance of expenses claimed by the assessee.2. Addition on account of loans u/s 68 of the IT Act.3. Treatment of income received from the sale of scrap.Issue 1: Disallowance of Expenses:The appeal was against the CIT(A) order for the assessment year 2004-05, concerning the disallowance of expenses and addition on account of loans u/s 68 of the IT Act. The AO noted that the assessee claimed business expenses of Rs. 3,693,669 but had not carried out any business activity during the year. The AO allowed only Rs. 100,000 as necessary expenses and disallowed the rest. The assessee argued that the company was under lockout and had incurred expenses for the revival of the business, which should be considered as business income. The CIT(A) upheld the disallowance, stating the expenses were not incurred for business purposes and could be categorized as capital expenditure. The Tribunal, considering a similar case in the past, allowed the claim, as there was no permanent closure of the business and the expenses were necessary for revival.Issue 2: Addition on Account of Loans u/s 68 of the IT Act:The AO added a sum under section 68 of the IT Act due to the increase in unsecured loans during the year, as the assessee failed to provide evidence of the creditors' identity and creditworthiness. The CIT(A) did not admit additional evidence of confirmations submitted after the hearing date, affirming the addition. The Tribunal, acknowledging the difficulties faced by the sick company in filing confirmations, admitted the additional evidence for further examination by the AO, setting aside the CIT(A) order on this issue for a fresh assessment.Issue 3: Treatment of Income from Sale of Scrap:The assessee raised an additional ground regarding the treatment of income from the sale of scrap as income from other sources. The nature of the receipt had not been adequately examined by the authorities below. The Tribunal admitted this additional ground and directed the AO to reexamine the issue and pass a fresh order after due examination and providing an opportunity for the assessee to be heard.In conclusion, the Tribunal partly allowed the appeal, setting aside the CIT(A) order on both the disallowance of expenses and the addition on account of loans, directing a fresh assessment on these issues. Additionally, the Tribunal admitted the additional ground regarding the treatment of income from the sale of scrap for further examination by the AO.