2021 (6) TMI 615 - AT - Income Tax

Tribunal allows assessee's appeal on write-offs and investments, dismisses revenue's appeals for disallowances.

The tribunal condoned a minor delay in the assessee's appeal and proceeded with adjudication. For the AY 2011-12, the tribunal dismissed the revenue's ... Inventories written off - expired goods could not be sold thus destroyed - HELD THAT:- Assessee, in the rejoinder, submitted that sufficient documentary evidences were submitted and the amounts written-off were in accordance with the report of M/s Grant Thornton with respect to inventories. The assessee reiterated that the expired goods could not be sold as per FDA guidelines and there was no option except to destroy the same. CIT(A), after considering assessee’s documents / submissions as well as remand report, similarly observed that there was no dispute that the stock had already expired and the claim was backed by sufficient documentary evidences. The waste disposal management company confirmed collection of expired goods from the assessee. The expired pharmaceuticals products could not even be sold as scrap and they have to be destroyed as per FDA guidelines. Therefore, the claim was justified. Aggrieved, the revenue is in further appeal before us. As well as issue is quite identical to issue in AY 2011-12. The assessee, in our considered opinion, was successful in substantiating its claim of write-off of inventories. Bad Debts written-off - debts written-off were taken into account in relevant previous year or earlier previous years while computing the income of the assessee - Since the assessee furnished the details of debts written-off along with copies of sales invoices, the said fact was established and therefore, the claim could not be denied.HELD THAT:- We find that this issue has been clinched in correct perspective in the impugned order. The assessee had filed complete list of debtors along with the copies of sales invoices which established that the conditions of Sec.36(2) were duly fulfilled by the assessee to make a valid claim u/s 36(1)(vii). Undisputedly, the debts have been written-off by the assessee in the books of accounts. Therefore, the conditions of Sec. 36(1)(vii) r.w.s. 36(2) were duly fulfilled and the claim was allowable in terms of CBDT Circular No.12/2016 dated 30/05/2016 which has been issued after considering Hon’ble Apex Court’s decision in TRF Limited [2010 (2) TMI 211 - SUPREME COURT]. Therefore finding no infirmity in impugned order on this issue, we dismiss this ground of revenue’s appeal. Investments written-off - as assessee made certain advances to an entity and wrote-off the outstanding amount during the year which was claimed as deduction but assessee could not sufficiently explain the same during assessment proceedings, the same was disallowed by Ld. AO in terms of Section 36(1)(vii) r.w.s 36(2) - HELD THAT:- We find that the assessee had given certain advance to M/s LMPL pursuant to an understanding in normal course of its business so as to acquire limited right to use and exploit the know-how for manufacturing of six drug formulations. However, the assessee was already in the business of manufacturing pharmaceutical products and the technical know-how was only in respect of six drug formulations and to get technical information which would have enabled the assessee to set up new product lines to the existing business. Nevertheless, no new manufacturing unit would have come into existence and no new asset was proposed to be acquired by the assessee. The advances were given in the normal course of business out of commercial expediency which would have improved the profit-making apparatus without disturbing the capital setup of the assessee. There is no dispute that the said advances became irrecoverable and accordingly, the same were written-off in the books of accounts. Thus advances lost during the course of business would be business losses and hence, an allowable deduction. Respectfully following the same, we direct Ld. AO to grant the deduction of amount so written-off by the assessee. This ground of assessee’s appeal stands allowed. Issues Involved:1. Delay in Assessee’s Appeal2. Revenue’s Appeal for AY 2011-12: Disallowance of Expired-Goods Written-Off3. Cross-Appeals for AY 2012-13:- Inventories Written-Off- Bad Debts Written-Off- Investments Written-Off- Advances Written-OffDetailed Analysis:1. Delay in Assessee’s Appeal:The registry noted a minor delay of 3 days in the assessee’s appeal. The tribunal condoned the delay considering it minor and proceeded with the adjudication on merits.2. Revenue’s Appeal for AY 2011-12: Disallowance of Expired-Goods Written-Off:The assessee claimed the loss of expired goods written off as per FDA norms. The Assessing Officer (AO) denied deduction due to lack of requisite details during assessment. During appellate proceedings, the assessee provided complete details and documentary evidence, which were remanded to the AO. The Commissioner of Income Tax (Appeals) [CIT(A)] observed that the expired goods were identified and destroyed as per the report by M/s Grant Thornton. The waste disposal entity confirmed the collection and disposal of these goods. The tribunal found the claim substantiated and dismissed the revenue’s appeal.3. Cross-Appeals for AY 2012-13:Inventories Written-Off:The AO denied the claim due to insufficient item-wise details. During appellate proceedings, the assessee provided additional evidence similar to AY 2011-12. The CIT(A) found no dispute regarding the expiry of the stock and justified the claim. The tribunal, finding the issue identical to AY 2011-12, dismissed the revenue’s appeal.Bad Debts Written-Off:The assessee wrote off bad debts and claimed deduction under Section 36(1)(vii). The AO denied the deduction due to inadequate details. The assessee provided additional evidence, including debtor details and sale invoices. The CIT(A) concurred that proving efforts to recover bad debts was unnecessary and allowed the claim. The tribunal upheld this decision, noting the conditions of Section 36(1)(vii) r.w.s. 36(2) were fulfilled.Investments Written-Off:The assessee wrote off investments in two overseas subsidiaries, claiming them as business losses. The AO treated these as capital investments and denied the deduction under Section 37(1). The CIT(A) allowed the write-off for investments in M/s Svizera Holdings B.V. Netherlands (SHBV), noting the business nexus, but disallowed it for M/s Lasa Industria Farmaceutica, Brazil (LASA), citing lack of direct business nexus. The tribunal found the investments were made out of commercial expediency and in furtherance of business objectives, thus allowable as business losses. The tribunal confirmed the CIT(A)’s decision for SHBV and reversed the disallowance for LASA.Advances Written-Off:The assessee wrote off advances to M/s Lilac Medicine Private Ltd. (LMPL) for technical know-how, which were disallowed by the AO. The CIT(A) confirmed the disallowance, treating the advances as non-trade. The tribunal found the advances were given in the normal course of business and were revenue in nature. Citing various judicial decisions, the tribunal directed the AO to allow the deduction.Conclusion:The revenue’s appeals for AYs 2011-12 and 2012-13 were dismissed. The assessee’s appeal for AY 2012-13 was allowed.Order pronounced on 17th June, 2021.