Income Tax Appellate Tribunal - Ahmedabad
20 Micron Limited, Baroda vs Department Of Income Tax on 30 January, 2013
1 ITA No 2804 & 2805/Ahd/2008.
A.Yr.. 2004-05 & 2005-06
IN THE INCOME TAX APPELLATE TRIBUNAL "D "BENCH, AHMEDABAD
(BEFORE SHRI MUKUL KR.SHRAWAT JM & SHRI ANIL CHATURVEDI A.M.)
I.T.A. No. 2804 & 2805/AHD/2008.
(Assessment Year: 2004 -05 & 2005-06) )
Assistant Commissioner of Vs. M/s. 20 Micron Limited,
Income Tax, Circle-4, 307-308 Arundeep Complex,
Aayakar Bhavan, Race Course South
Near Race Course Circle, Baroda-390007
Baroda.
(Appellant) (Respondent)
PAN: AAACZ 0580 b
On behalf of Revenue : Mr. D.P. Gupta, CIT(DR) with
Mr.T.Shankar, Sr. D.R.
O behalf of Assessee : Mr. S.N. Soparkar, Sr. Adv..
आदे श)/ORDER
(आदे Date of hearing : 30-1 -2013 Date of Pronouncement : 26-04-2013 PER: SHRI ANIL CHATURVEDI, ACCOUNTANT MEMBER.
These two appeals are filed by the Revenue against two separate orders passed by Ld. CIT (A)-III, Baroda dated 29-5-2008 & 30-5-2008 for the assessment years 2004-05 and 2005-06 respectively.
2 ITA No 2804 & 2805/Ahd/2008.
A.Yr.. 2004-05 & 2005-06
2. The facts as culled out from the orders of the lower authorities are as under.
3. The assessee is a company engaged in the business of manufacturing micronised minerals. The assessee has manufacturing facilities at various places and it also has mines which are engaged in micronising various types of non-metalic minerals namely talc, calcite, china clay, barites, limestone, silica, mica etc. The assessee buys lumps, course powder from outside and grinds them to course powder and micronises to a very finer size called "microns". The assessee filed its return of income on 29-10-2004 showing total loss of Rs.7,36,79,224. Case was selected for scrutiny and thereafter the assessment was framed u/s. 143(3) vide order dated 26-12-2006 and the total loss was determined at Rs.5,78,75,272/-.
4. Aggrieved by the order of A.O. assessee carried the matter before CIT (A) and CIT (A) vide order dated 29-5-2008 partly allowed the appeal of the assessee.
5. Aggrieved by the aforesaid order of CIT (A), Revenue is now in appeal before us. Before us the Revenue has raised following two effective grounds:-
"1. On the facts and circumstances of the case, the Ld. CIT(A) erred in directing the Assessing Officer to delete Rs.72,57,271/- being diminution in value of inventory even though the assessee could not substantiate its claim and had not included the landed cost in case of talc and marble lumps.
3 ITA No 2804 & 2805/Ahd/2008.
A.Yr.. 2004-05 & 2005-06
2. The Ld. CIT (A), erred in allowing expenditure of Rs.33,44,209/- on repairs of plant and machinery, considering it as revenue nature even though in note at para 11 to the audit report it was mentioned that the expenditure on repairs of plant and machinery caused enduring benefit to the assessee."
First ground is with respect to the deletion of diminution in value of inventory of Rs. 72,57,271/-.
6. During the course of assessment proceedings on perusing the balance sheet and the Profit and loss account A.O. noticed that the assessee follows the policy of valuing the slow and non moving inventory of raw materials at net realisable value as estimated by the management. Management ascertained permanent diminution in its value amounting to Rs.2,90,29,086/- and the same was written off during the year. The assessee was asked to explain the basis for such reduction in the value of inventory along with justification. In response to the query of the A.O. Assessee submitted and explained manufacturing process. It was further submitted that the assessee had in its stock materials which were purchased 3 to 5 years back. These raw materials were accumulation of slow and non-moving stock and during the year the State Bank of India from whom the assessee enjoyed the working capital facility had appointed an independent Auditor to carry out independent stock audit of the stocks of the company lying at various locations and point out slow and nonmoving stock. The auditors carried out detailed verification of stock at various locations and pointed out slow and non moving stock. Based on the report submitted by the stock auditor assessee revalued the value in the material lying at different locations. The list of which is furnished at page 5 4 ITA No 2804 & 2805/Ahd/2008.
A.Yr.. 2004-05 & 2005-06 and 6 of the A.O's order. Considering the slow and non moving items the assessee valued the aforesaid stock at net realizable value & ascertained permanent diminution in its value of Rs.2,90,29,086/-.The submissions & justifications made by the assessee were not found acceptable to the A.O. A.O. was of the view that in the case of talc and marble lumps the value adopted by the assessee for certain locations was Rs.400/- per Mt. ton. According to the A.O. assessee could not substantiate the claim that it was landed cost. In the case of the value of finished goods the assessee was asked to explain the basis of taking conversion cost for the purpose of valuation. The valuation of the assessee was not accepted by the A.O. he therefore did not fully accept the valuation made by the assessee and thereby disallowed the claim of the assessee by 25% and accordingly made an addition of Rs.72,55,271/-.
7. Aggrieved by the order of A.O. assessee carried the matter before the CIT (A). Before CIT (A) the assessee interalia submitted that one of the major customers had informed that the material supplied by the assessee was contaminated with fungal growth which resulted in poor quality of product. The assessee also got technical report prepared and examined the possibility of removing the fungus. However, it was reported that the stockpile of calcite, china clay had deteriorated in quality to a great extent and the removal of impurity was very costly. Even after removal of impurity some fungal growth would still remain, as a result of which the usage of such contaminated raw materials would be hazardous particularly for application in plastics industry. The stock of raw materials had been hypothecated to banks and other financial institutions. This matter was brought to the notice of the bankers and the assessee company requested 5 ITA No 2804 & 2805/Ahd/2008.
A.Yr.. 2004-05 & 2005-06 the banks for restructuring of its debts. Banks with the other financial institutions agreed to undertake the verification of inventory by third party auditors and based on their report the stock was revalued. CIT (A) after considering the submissions of the assessee and placing reliance on the various decisions of High Court deleted the addition made by A.O. by holding as under:-
"3.2. I have considered the submissions of the Ld. A. R. and the facts of the case. The issue relating to revaluation of inventory has been considered by the courts. There is unanimity in judicial opinion regarding the allowability of a change in the valuation of stock provided it is done for bonafide reasons. An issue similar to the present one came up for consideration of the Delhi High Court in the case of CIT vs. Bharat Commerce & Industries Ltd., 240 ITR 256, wherein the court held that in the case of slow moving items which did not have a ready market, it was permissible for the assessee to adopt a lower value. In another case the Madras High Court observed, while permitting a lower valuation of goods, that the object is not to load the stock with a value which is higher than what is realizable (India Motor Parts & Accessories Ltd. vs. CIT 60ITR 531). Section 145A of the Act deals with the valuation of inventory for the purposes of determining the income chargeable under the head "profits and gains of business or profession". It has been prescribed that such valuation shall be in accordance with the method of accounting regularly employed by the assessee. The appellant has been following the mercantile system of accounting and valuation of stocks of raw material has been done at cost. The fact that this method has been regularly followed is not in dispute. The appellant is a company within the meaning of the Companies Act, 1956. Its books are to be maintained and accounts are to be prepared in accordance with section 209 to 211 of that Act. As per section 211 (3C), the accounting standards prescribed by the Institute of Chartered Accountants of India shall be mandatorily followed by companies till alternate standards are prescribed by the Central Government. The ICAI has, interalia, prescribed Accounting Standard-2 dealing with valuation of inventories. At paragraph 5,
6 ITA No 2804 & 2805/Ahd/2008.
A.Yr.. 2004-05 & 2005-06 under the heading "measurement of inventories", it has been provided that "inventory should be valued at the lower of cost and net realizable value". Net realizable value is nothing but the prevailing market price on the valuation date. When the appellant is bound to follow AS 2, & AS 2 prescribes adoption of the lower of the cost or market value, and this method has in fact been adopted by the appellant, there can be no issue regarding the legality of the action. At most a case could be made out that the correct net realizable value was not adopted.
3.2.1. In the instant case, the assessee has adduced convincing documentary evidence in support of the averments made as above. The correspondence with M/s. ICI Ltd. clearly brings out the fact that the fungal growth in assessee's stockpile of raw material was brought to notice and adverse consequences flowed therefrom. Secondly, the laboratory report shows fungal microbacterial growth in stock of raw materials. Thirdly, a report from an independent expert Dr. Dhanjay Sant, consultant and geologist, also brings out the fact that the stockpile of raw materials had become unfit for use as raw material by the assessee company due to fungal growth. Fourthly, the other important stake-holders in the company, viz. SBI, Exim Bank of India, IDBI and SIDBI had a joint meeting under the chairmanship of the lead manager of the consortium (IDBI). As per minutes of the meeting dated 26-3-2004 of the Corporate Debt Restructuring Cell, IDBI, it has been recorded that all the banks/financial institutions have agreed to reduce the rate of interest to 10.25% from 17.74 (IDBI), from 15% (Exim Bank) and from 17% (GSFC). Further, repayment of principal amount was also rescheduled and allowed to be repaid in 24 equal quarterly installments ending in April, 2013. Further, the cash credit limit was converted into term loan and some interest was also waived. Altogether IDBI, Exim Bank and GSFC waived interest amounting to Rs.511 lacs,Rs. 82 lacs and Rs.32 lacs respectively.
3.3.2. From the above, it is clear that the contamination of the stock of raw materials represented a serious threat to the business. This was recognized not only by the assessee company but also its bankers. Looking to the potential loss in profitability resulting from the revaluation of its useless stock, the bank and other financial 7 ITA No 2804 & 2805/Ahd/2008.
A.Yr.. 2004-05 & 2005-06 institutions agreed to undertake a debt restructuring and rescheduling exercise. In terms of the exercise the bankers provided some respite to the assessee in order to enable it to tide over the crisis. It is thus apparent that the revaluation of its stock of raw material was not a unilateral arbitrary act on the part of the assessee. The decision was taken after proper auditor, technical evaluation and with the agreement of its bankers. I am therefore of the opinion that there were sufficient and sound reasons, both technical and commercial, for the assessee to revalue its inventory of raw materials, as a result of which the reduction in value thereof was to the tune of Rs.2,90,29,086/-. Provision for deterioration in stock value has been held to be allowable business expenditure [South Eastern Coalfields Ltd. vs. CIT, 260 ITR (IT) (Nag,) ]. Similarly, the Mumbai Bench of ITAT has held, in ACIT vs. Rishiroop Polymers Ltd. 286 ITR (AT) 54, that where stocks have become obsolescent and written off in the accounts, there was no justification for disallowing 50% thereof on an adhoc basis. Accordingly, following the rational of the cases cited, it is held that the A.O., was not justified in disallowing 25% thereof, i.e. Rs.72,57,271/-, which is directed to be deleted."
8. Aggrieved by the aforesaid decision of CIT (A), the Revenue is now in appeal before us.
9. Before us the Ld. D.R. submitted that the rejection in value of the inventory considered by the assessee in some of the cases and the rates adopted by the assessee could not be substantiated. The Ld. D.R. pointed out to the reply of assessee to its Banker which is at page No.178 of the paper book wherein it was submitted that the raw materials were of non perishable nature and can be used even after substantial lapse of time. The Ld. D.R. further submitted that this submission of the Managing Director was at variance with the submission made before the CIT (A) wherein it has been stated that the raw materials cannot be used for manufacturing process. He further submitted that though the exercise for analyzing the 8 ITA No 2804 & 2805/Ahd/2008.
A.Yr.. 2004-05 & 2005-06 stock has been carried out the purpose of Bank, valuation adopted by the Bank cannot be adopted for the purpose of Income Tax. He further submitted that the review made by the bank was for the limited purpose of review of the credit facilities only. He further submitted that the assessee has written off the amounts in two years i.e. A. Y. 2004-05 and 2005-06. He further submitted that the valuation report of the Chartered Accountant was received after the close of the year. Further the C.A. is not a Registered Valuer and therefore the Valuation Report submitted by him cannot be relied upon. He thus supported the order of A.O.
10. The Ld. A.R. on the other hand submitted that the assessee had considered the current market rate for the purposes of valuation. Assessee had submitted various purchase bills and also the current purchase prices in the form of bills as evidence to support the price. The Ld. A.R. further submitted that the valuation of stock has been done in line with Accounting Standard-2 on Valuation of Inventory prescribed by the Institute of Chartered Accountants of India (ICAI). He further pointed out that the A.O. has not fully accepted the justification offered by the assessee meaning thereby that the justification could not be fully ignored. The Ld. A.R. further pointed out that the revaluation/reduction in value of various materials had been listed at pages 501 & 502 of the paper book. From the aforesaid table he pointed out to the fact that in many of the cases the goods were lying beyond 2000. He also pointed out to the notices, reports placed at page No.16 to 34 of the paper book in respect of various raw materials wherein it has been stated that the material was not qualitatively approved for use. It was also submitted that even after the write off the assessee had losses and therefore the motive of assessee to write off the stock to reduce the 9 ITA No 2804 & 2805/Ahd/2008.
A.Yr.. 2004-05 & 2005-06 losses cannot be doubted. He further relied on the decision in the case of Alfa Laval India Ltd. v/s. DCIT Bombay High Court (2004) 266 ITR 418 which was confirmed by Hon'ble Apex Court and reported at 294 ITR 451 He also passed order relying on the decision in the case of CIT VS. Bharat Commerce & Industries 240 ITR 256 (Del), South Eastern Coalfields Ltd. vs. CIT 260 ITR (IT) (Nag.), Mumbai Bench ITAT in the case of ACIT vs. Rishiroop Polymers Ltd. 286 ITR (AT) 54. He thus urged that the order of CIT (A) be upheld
11. We have heard the rival submissions and perused the material on record. It is an undisputed fact that the assessee had carried the revaluation exercise with respect to its stock of materials as per the directions of its bankers and based on the audit report submitted by the auditors, the assessee had written down the value of stock. Before CIT(A) it was submitted by the Assessee that one of the major customers had informed that the material supplied by the Assessee was contaminated due to fungal growth which resulted in poor quality of final product. The Assessee had explored the possibility of removing the fungus so that it could be used but the cost of removal of impurity was very costly and further it was not possible to completely remove fungal growth. CIT (A) apart from considering the aforesaid submission and also considering the documentary evidence like lab report, correspondence from customers, report of independent expert has given a finding that the stock was contaminated by fungal microbacterial growth which necessitated for revaluation of stock duly supported by sound technical and commercial reasons. The aforesaid finding of CIT(A) could not be controverted by Revenue by bringing any contrary material on record. Thus considering the totality of the aforesaid facts and relying on the aforesaid decisions of Hon. 10 ITA No 2804 & 2805/Ahd/2008.
A.Yr.. 2004-05 & 2005-06 High Court find no reason to interfere with the order of CIT(A) and thus uphold his order on this ground. thus this ground of Revenue is dismissed.
Second ground is with respect to expenditure of Rs.33,44,209/- on repairs of plant and machinery.
12. Assessing Officer observed that assessee had debited expenses of Rs.33,44,209/- as an Extra ordinary items in its profit and loss account. The assessee submitted that the aforesaid expenses were incurred for repairs of plant and machinery at its Bhuj plant as it was damaged during the earthquake at Bhuj. Assessee submitted that the plant and machinery at its Bhuj was damaged at the time of earthquake on 26-1-2001. After carrying out inspection of the damaged plant a team of engineers opined that it was not possible to repair the machines in India and can be repaired at its plant in UK. The assessee further submitted that the assessee had claimed an insurance from the insurance company and the claim of Rs.16,04,401/- which was received by the assessee was accounted as other income in F.Y. 2004-05 and offered to tax. The assessee had also received subsidy of Rs.31,80,000/- through Government of Gujarat which was credited to the expenses account. Thus the net amount of Rs.33,44,209/- was accounted as an extra ordinary item and claimed as an expenditure. A.O. did not accept the contention of the assessee for the reason that in notes to accounts. It was stated that the equipment was sent for refurbishment to its original overseas suppliers and after repairs it is expected to have increase in capacity and its useful life. He further observed that the expenditure incurred was booked as capital work in 11 ITA No 2804 & 2805/Ahd/2008.
A.Yr.. 2004-05 & 2005-06 progress by the assessee. He thus concluded that the entire expenditure incurred by the assessee was in the nature of capital nature which give benefit of enduring nature to the assessee. He thus held that the expenditure cannot be allowed as a Revenue expenditure and accordingly disallowed Rs. 33,44,209/-. Aggrieved by the action of A.O. the assessee carried the matter before the CIT (A).
13. CIT (A) after considering the submissions of the assessee deleted the addition by holding as under:-
"4.2. I have considered the submissions of the Ld. A.R. and the facts of the case. Judicial decisions abound laying down the proposition that replacement of any single machine in a group of machines (even if that machine is replaced in its entirety) may not be capital expenditure for the reason that the product such machine generates is not the end product sold by the assessee but is, in turn, used for further processing. In Ambica Cotton Mills Ltd. vs. JCIT 86 ITD 240, the Madras Bench of the ITAT held that where the mill contains several items of machinery and each of them are linked together for carrying on various processes in sequence, replacement of any one or more of the machines ion the link would result only in replacement of part of the whole plant and hence it is in the nature of revenue expenses. The expenditure incurred in replacement is not of material consideration but what is material is the nature of the machine which is replaced. If the machine is part of the plant, though it may be capable of carrying on independent activity yet it might still be part of the whole plant. The test is the end product. If the machine replaced gives the end product and is the only process that is involved, the expenditure incurred would definitely be a capital expenditure. However, in the reverse situation, it would constitute revenue expenditure. Similarly, Madras High Court has held in CIT vs. Tanjavore Textile Mills, 253 ITR 138 that expenditure on replacement of worn out parts of machinery is expenditure of revenue character as it is meant to keep the business without break-down of machinery and not expenditure incurred for starting a new business. Here, what 12 ITA No 2804 & 2805/Ahd/2008.
A.Yr.. 2004-05 & 2005-06 was replaced was only a part of the whole plant. That part was not capable of producing the end product which was sold but only facilitated in its manufacture. Hence, in my opinion the A.O. was not correct in treating the expenditure of Rs.33,44,209/- as capital expenditiure.
4.2.1 Coming to the aspect regarding the machinery taken out from the gross block to capital work-in-progress in the earlier year, and reinstatement of the same in the gross block by taking out from the capital work-in-progress, it would be relevant to reproduce the Accounting Standard-10 for case of reference.
"14. Retirements and Disposals 14.1. An item of fixed asset is eliminated from the financial statements on disposal.
14.2. Item of fixed assets that have been retired from active use and are held for disposal are stated at the lower of their net book value and net realizable value and are shown separately in the financial statements. Any expected loss is recognized immediately in the profit and loss statement.
14.3. In historical cost financial statements, gains or losses arising on disposal are generally recognized in the profit and loss statement.
14.4. On disposal of a previously revalued item of fixed asset, the difference between net disposal proceeds and the net book value is normally charged or credited to the profit and loss statement except that, to the extent such a loss is related to an increase which was previously recorded as a credit to revaluation reserve and which has not been subsequently reversed or utilized, it is charged directly to that account. The amount standing in revaluation reserve following the retirement or disposal of an asset which relates to that asset may be transferred to general reserve."
4.2.2 In the instant case, the assessee had repaired the machine reinstalled the same in this year. The same was not disposed off but merely held for possible future use after repairs. Accordingly, the 13 ITA No 2804 & 2805/Ahd/2008.
A.Yr.. 2004-05 & 2005-06 assessee was correct in following the Accounting Standard prescribed and treating the same was capital work-in-progress. Once the same machine as reintroduced into the gross block the nature of the expenditure incurred thereon could not be said to be different from any other repairs merely because of the fact that the repairs took more than 2 years to be completed. Accordingly, the addition of Rs.31,44,209/- is directed to be deleted."
14. Aggrieved by the aforesaid order of CIT (A) the Revenue is now in appeal before us.
15. Before us the Ld. D.R. submitted that the company in its notes to accounts has very clearly stated that on refurbishment, machinery capacity would increase and its useful life and performance of the machine was also likely to improve substantially. He thus submitted that when the assessee itself was of the view that the expenditure would increase the capacity and useful life, the expenses therefore cannot be considered to be of Revenue in nature. He however, submitted that CIT (A) has relied on the decision of Madras High Court in the case of CIT vs. Tanjavore Textile Mills 253 ITR 138 which was decided prior to insertion of Explanation-3 to Sec.31 and therefore not applicable to the facts of the present case. He thus submitted that the expenses were in the nature of capital and therefore, the action of the A.O. be upheld.
16. The Ld. A.R. on other hand submitted that the assessee has debited the net amount of Rs.33,44,209/- to Profit and loss account. He further submitted that the insurance claim that was received in subsequent year has been offered as income. In the alternate he submitted that if the 14 ITA No 2804 & 2805/Ahd/2008.
A.Yr.. 2004-05 & 2005-06 expenditure are treated as capital expenditure, the assessee should be granted depreciation.
17. We have heard the rival submissions and perused the material on record. It is an undisputed fact that the machinery was damaged due to earthquake and expenses were incurred for its repairs. It is also a fact that no new asset have come into existence. In the present case what was replaced was only a part of the machinery and not the entire machinery. Nothing has been brought on record by the Revenue to prove that the entire machinery was replaced and the replacement was not a part of the existing machinery. In the case of CIT vs. Tanjavore Textile Mills 253 ITR 138 (Mad.) it has been held as under:-
Expenditure on replacement of worn out parts of machinery is expenditure of revenue character as it is meant to keep the business without break down of machinery and not expenditure incurred for starting a new business. Held accordingly that,Tribunal was right in allowing the assessee's claim to deduction of expenditure towards replacement of certain items of machinery and no question of law arose from its order." CIT vs. Sri Hari Mills Pvt. Ltd., (1999) 237 ITR 188 (Mad) followed."
18. Considering the totality of the facts and relying on the aforesaid decision of the Hon'ble Madras High Court we are of the view that no interference is called for in the order of CIT (A). Thus this ground of the Revenue is dismissed.
19. In the result, the appeal of the Revenue is dismissed.
I.T.A. No.2805/AHD/2008 (A.Y. 2005-06).
15 ITA No 2804 & 2805/Ahd/2008.
A.Yr.. 2004-05 & 2005-06
20. In this appeal Revenue has raised following grounds of appeal:
"1. On the facts and circumstances of the case, the Ld. CIT (A) erred in directing the Assessing Officer to delete Rs4,81,44,087/- being diminution in value of inventory even though, the assessee could not substantiate its claim and had not included the landed cost in case of talc and marble lumps.
2. On the facts and in the circumstances of the case, the Ld. CIT (A) erred in law and on facts in directing the assessing officer, to delete the addition of Rs.61,77,200/-, disallowed as bad debts, though assessee failed to prove that it had made any efforts for the recovery and also ignoring the underlying principles laid down by the Gujarat High Court in the case of Dhall Enterprises & Engineers Pvt.
Ltd. vs. CIT 295 ITR 481 (Guj.)."
21. Since both the parties have agreed that no new facts are there this issue may be decided in line with ground No.1 of ITA No.2804/Ahd/2008.
22. We have heard both the parties. It is an undisputed fact that the facts of the case in the year under appeal are identical to that of A.Y. 2004-05. CIT (A) also while deciding the issue held that the facts and issue of the present appeal are identical to that of A.Y. 2004-05 and therefore followed his own order. We also for the reasons spelt out in para-11 hereinabove decide the issue in favour of assessee and dismiss the ground of Revenue. Thus this ground of Revenue is dismissed.
We first take up second ground with respect to deletion of addition of Rs.61,77,200/-.
23. Assessing Officer observed that the assessee had written off slow /non-moving stock worth Rs.6.59 crores, which consists of Rs.4,81,44,087/-
16 ITA No 2804 & 2805/Ahd/2008.
A.Yr.. 2004-05 & 2005-06 lying at various sites of the assessee and stock of Rs.1,78,28,557/-being the material rejected by the customers and abandoned at the site of customers. The assessee was asked to submit its justification and substantiate its claim. Assessee interalia submitted that the material lying at the customers site was rejected by the customers as the material was found to be unacceptable. Further it was not commercially viable proposition to bring back the material to Bhuj as the freight charges were very high and further the cost of reimbursement was also high. Under these circumstances, the amount was written off from the books of accounts. The A.O. did not accept the contention of the assessee. He was of the view that the goods were not even rejected in the earlier years and the assessee had given the credit for the same during the year under assessment. Since the assessee was following the mercantile system, the same could be accounted in respect of assessee. He thus disallowed the claim of the assessee. Aggrieved by the order of A.O. assessee carried the matter before the CIT (A).
24. CIT (A) after considering the submissions of the assessee deleted the addition by holding as under:-
"6.2.3. It is not in dispute that the debt had become bad. What the A.O. has disputed is only the year in which the debt turned bad Section 37(1)(iii) is very clear on this point. The debt is allowed to be written off in that year in which "any bad debt or part thereof is written off as irrecoverable in the accounts for the previous year." As a general rule, the write-off is admissible in the year in which the debt is actually written off by the assessee. Thus, the proposition laid down in Oman International Bank has been qualified by the Gujarat High Court in Dhall's case. The High Court has pointed out that where evidence was available to show that the assessee himself was making efforts for recovery, it would not be said that the debt was irrecoverable. However, the question as to whether a particular debt was recoverable or irrecoverable has to be decided with reference to 17 ITA No 2804 & 2805/Ahd/2008.
A.Yr.. 2004-05 & 2005-06 the facts of a particular case. In this background, I am of the opinion that looking to the long over-due nature of the receivables and difficulties associated with their recovery; the assessee reasonably concluded that there was no option left but to write off the amount. There is no evidence to show that there was any possibility of recovery, or that the assessee still harboured any hopes of recovery. Looking to the facts and circumstances, it is held that the A.O. held that the A.O. was not justified in disallowing the writing off of bad debt amounting to Rs.1,78,28,557/-. The disallowance is directed to be deleted."
25. Before us the Ld. D.R. submitted that though it has been stated to be written off of bad debts but it was in the nature of write off of stock. He pointed out to note No.1 to the Annual Accounts which forms part of the paper book wherein it was stated that the write off in stock include credit of stock abandoned at customers end. It was also submitted that since the assessee has not been able to prove the write off of its debts, assessee's claim cannot be allowed.
26. On the other hand, the Ld. A.R. submitted that the assessee had supplied the materials to its customers and the same was rejected by the customers. The cost of transportation of goods from the customers place would have been much more and therefore the assessee took the decision in bringing the material back but in turn gave credit of the material to the customers. He further submitted that since the assessee has written off the amount it was covered by the decision of Hon'ble Supreme Court in the case of TRF Ltd., vs. CIT (2010) [323 ITR 397]. He thus supported the order of CIT (A).
27. We have heard the rival submissions and perused the material on record. CIT (A) while deleting the addition has held that the debt had become bad. He has further held that considering the nature of the 18 ITA No 2804 & 2805/Ahd/2008.
A.Yr.. 2004-05 & 2005-06 receivable which was long overdue and the difficulties associated with the recovery, the assessee was reasonable in concluding that the amount was not realizable and therefore, it was written off. CIT (A) has also placed reliance on the decision of Tribunal in the case of Oman International Bank Ltd. 100 ITD 285 (Mum.) (SB). These findings of CIT (A) could not be controverted by bringing any contrary evidence on record. CIT (A) has also considered the principles laid down in the case of Dhall Engineers Enterprise as reported in 294 ITR 481 (Guj.) and deleted the addition. This could not be controverted by the Revenue. We thus find no reason to interfere with the order of CIT (A) and thus uphold the action of the CIT (A) in deleting the addition. We dismiss this ground of the Revenue.
28. In the result, appeals of the Revenue are dismissed.
Order pronounced in Open Court on 26 -04- 2013.
Sd/- Sd/-
(MUKUL KUMAR SHRAWAT) (ANIL CHATURVEDI)
JUDICIAL MEMBER ACCOUNTANT MEMBER
True Copy
Ahmedabad.
S.A.Patki.
Copy of the Order forwarded to:-
1. The Appellant.
2. The Respondent.
3. The CIT (Appeals)-III, Baroda.
4. The CIT concerned.
5. The DR., ITAT, Ahmedabad.
6. Guard File.
By ORDER
Deputy/Asstt.Registrar
ITAT,Ahmedabad.