2019 (10) TMI 1124 - AT - Income Tax

Tribunal Upholds CIT(A) Decisions on Stock Loss, Depreciation, and Business Expenses

The Tribunal upheld the CIT(A)'s decisions in a case involving deletion of addition on account of loss of sales of stock, allowance of depreciation ... Addition on account of loss of sales of stock - assessee did not submit any stock statement and the bank considered the stock of the company as Nil - HELD THAT:- Assessee had physical stocks which has been carried forward from earlier years. The department has accepted the book results in the past. The assessee has enclosed annual accounts for the year ending March 2009, 2010, 2011, 2012 and 2013 wherein the stocks have been reflected constantly. AO failed to appreciate that the quantity details have been mentioned in the annual accounts from year to years that scrap salvage is always sold by weight and not by meters. That the stocks were hypothecated to bank as per the stocks statement for the month of December 2008 and no stocks statement could be furnished for the subsequent period due to closure of the factory premises. AO failed to summon the scrap dealer to verify the genuineness of sale made by the assessee. If he had done so his doubts would have been cleared and the conclusion would have been different. The AO has made the addition without rejecting the books of accounts as envisaged in section 145 of the Act. Moreover, the assessee has engaged the services of a technical expert to evaluate the status of stocks in the given situation. The expert has given his exhaustive report and concluded that stocks after 4 1/2 years will deteriorate and will hardly have any value. CIT(A) has rightly allowed the claim of the assessee and there is no reason to interfere with the same, hence, we dismiss this issue of Revenue’s appeal and affirm the order of CIT(A). Claim of depreciation - business not continuing because of illegal strike by the workers - HELD THAT:- Assessee has not close down the business but it is not going on because of illegal strike by the workers and therefore manufacturing has been stopped temporarily. It is not the case that the assets are not in use or the intention of the assessee is not to use the same. Another factor is that once, assets is forming part of block of assets and in earlier years depreciation is allowed and due to certain risks in this year, assessee is unable to carry out the manufacturing activities, depreciation cannot be disallowed. Hence, we affirm the order of CIT(A) and this issue of Revenue’s appeal is dismissed. Disallowance of various expenses for the reason that there was no manufacturing or business activity carried out by the assessee in earlier years - HELD THAT:- CIT(A) allowed the claim of the assessee on the premises that the assessee did not carry on the business because the workers of the company are went on illegal strike and therefore, the assessee business was stopped including manufacturing activity. He stated that actually, the assessee’s business is very much in place and assessee has not close down its business. It can be called a temporarily lull in the business activity and none of the expenses are in the category of disallowable items rather the same are for business expenditure. It is not the case of the AO that the expenses are not genuine or not related to business. We have gone through the facts in entirety and noted that the assessee has placed on record that the assessee has sold closing stock of goods as scrap sale in AY 2013-14. This justifies that the assessee’s business was not close down. We find that the CIT(A) has rightly allowed the claim of the assessee and we confirm the order of CIT(A). Issues Involved:1. Deletion of addition on account of loss of sales of stock.2. Allowance of depreciation despite no manufacturing activity.3. Deletion of disallowance of various expenses due to lack of business activity.Issue-wise Detailed Analysis:1. Deletion of Addition on Account of Loss of Sales of Stock:The Revenue challenged the CIT(A)'s decision to delete the addition of Rs. 40,35,22,309/- made by the AO due to the assessee not submitting any stock statement and the bank considering the stock as nil. The AO noted that the assessee's factory was closed due to a strike since December 2008, leading to the stock being damaged and sold as scrap for Rs. 32,46,632/-. The AO believed this created a fictitious loss to offset the capital loan waiver of Rs. 47,91,16,254/- and disallowed the loss claim. However, the CIT(A) reversed this, noting that the factory closure led to stock damage, and the stock was genuinely sold as scrap. The CIT(A) accepted the technical expert's report on the stock's condition and allowed the loss claim. The Tribunal upheld the CIT(A)'s decision, noting that the assessee provided detailed evidence of the stock and its sale as scrap, and the AO did not reject the books of accounts or summon the scrap dealers to verify the sale.2. Allowance of Depreciation Despite No Manufacturing Activity:The AO disallowed the depreciation claim of Rs. 76,10,671/- on the grounds that the assets were not put to use due to the factory's closure. The CIT(A) allowed the depreciation, stating that the assets were part of the block of assets, and depreciation was allowed in earlier years. The Tribunal upheld the CIT(A)'s decision, noting that the business was not closed but temporarily halted due to an illegal strike, and the intention to use the assets remained. Thus, depreciation could not be disallowed.3. Deletion of Disallowance of Various Expenses Due to Lack of Business Activity:The AO disallowed various expenses amounting to Rs. 70,12,999/- on the basis that there was no business or manufacturing activity. The CIT(A) allowed the expenses, stating that the business was temporarily halted due to the strike, but the business was not closed. The expenses were considered genuine and related to the business. The Tribunal upheld the CIT(A)'s decision, confirming that the business was not closed, and the expenses were justifiable.Conclusion:The Tribunal dismissed all the appeals of the Revenue, affirming the CIT(A)'s decisions on all issues. The stock loss was genuine, depreciation was allowable despite the temporary halt in manufacturing, and the business expenses were legitimate. The Tribunal emphasized the need for the AO to provide concrete evidence and not rely on assumptions.