Income Tax Appellate Tribunal - Kolkata
Boc India Ltd., Kolkata vs Department Of Income Tax on 16 October, 2015
1
IN THE INCOME TAX APPELLATE TRIBUNAL, BENCH 'B' KOLKATA
[Before Hon'ble Shri N.V.Vasudevan, JM & Shri M.Balaganesh, AM ]
ITA Nos.131/Kol/2010
Assessment Years : 2004-05
BOC India Ltd.. -versus- D.C.I.T., Circle-12,
Oxygen House, P-43, Kolkata
Taratala Road, Kolkata-700 088
(PAN:AAACB2528H)
(Appellant) (Respondent)
ITA Nos.372/Kol/2010
Assessment Years : 2004-05
D.C.I.T., Circle-12, BOC India Ltd..
Kolkata Oxygen House, P-43,
Kolkata Taratala Road, Kolkata-700 088
(PAN:AAACB2528H)
(Appellant) (Respondent)
For the Assessee : Shri K.R.Vasudevan., Advocate
For the Respondent : Shri Rajat Subhra Biswas CIT DR
& Shri Pinaki Mukherjee, JCIT Sr.DR.
Date of Hearing : 12.10.2015.
Date of Pronouncement :16.10.2015.
ORDER
PER N.V.VASUDEVAN, JM:
ITA No.131/Kol/2010 is an appeal by the Assessee while ITA
No.372/Kol/2010 is an appeal by the Revenue. Both these appeals are directed against the order dated 15.9.2009 of CIT(A)-XXXII, Kolkata, relating to AY 2004-05.
2. ITA No.131/Kol/2010: Assessee's Appeal:
The grounds of appeal raised by the Assessee in its appeal reads as follows:
"1. That on the facts and in the circumstances of the case, the learned CIT(Appeals) erred in confirming the action of the Assessing Officer in disallowing the claim of the appellant for deduction of a sum of Rs.4,15,63,688 representing Bad Advances written off in its profit & loss A/c for the year under appeal.
ITA No.131&372/Kol/2010 - M/s.BOC India Ltd. A.Y.2005-051 2
2. That on the facts and in the circumstances of the case, the learned CIT(A) erred in upholding the action of the Assessing Officer in disallowing the appellant's claim for deduction of a sum of Rs.2,73,866 being bad Other Current Assets written off in its profit & loss A/c for the year under consideration.
3. That on the facts and in the circumstances of the case, the learned CIT(Appeals) erred in not appreciating that the aforesaid amounts of Rs.4,15,63,688 and Rs.2,73,866 written off in its Profit & Loss A/c represent trading loss incurred by the appellant in the course of carrying on its business and are thus deductible under section 28 of the Income-tax Act, 1961 while computing its total income for the subject year.
4. That the appellant craves leave to add to and/or amend, alter, modify or rescind the grounds hereinabove before or at the hearing of the appeal."
3. The Assessee is a company engaged in the business of manufacturing and sale of various industrial and medical gases. The Assessee claimed deduction of a sum of Rs.4,15,63,688 on account of bad advances written off and another sum of Rs.2,73,866 on account of Bad other current assets written off. The Assessee explained the nature of the aforesaid sums written off in the books of accounts and claimed as a deduction as comprising of the following:
- Advances to vendors for various enclosed viz., Enclosure 27, that the amounts written & upkeep of the plant & machinery;
- Advances given to suppliers for supply of raw materials etc required in the could of manufacturing activities ;
- Routine advances to staff for various petty cash expenses for business purpose, advances to vendors for expenses, etc;
- Advances towards purchase of materials & freight charges paid in connection therewith;
- Amount recoverable from employees on account of advances granted to travel, festival, vehicle loan, etc.;
- Reimbursement towards hospitalisation expenses subsequently recoverable from the insurer;
- Advances to transporters, insurer, etc.;
- Unreconciled balance in Head office/Branch reconciliation account relating to revenue expenses incurred by HO/Branch or vice versa pending charging off in the HO/Unit's books.
- Security deposits given for electricity, telephone connections, etc. The Assessee submitted that due to lack of proper information trail, all the aforesaid amounts that were of revenue nature were lying unadjusted for a long period and had accumulated over many years. The Assessee undertook periodic reviews of the books of accounts and consequently after due diligence & discussion with the statutory ITA No.131&372/Kol/2010 - M/s.BOC India Ltd. A.Y.2005-052 3 auditors, came to the conclusion that detailed reconciliation and accounting adjustments of these advances was no longer possible due to lack of information and non-availability of old records & hence decided to make one-off provision towards doubtful advances etc. In the year ended 31/3/2000 for Rs.70,940,000/-. Out of the provision so made in the books of accounts, a sum of Rs.41,837,554/- was written off in the accounts during the year ended 31/3/2004 towards bad advances and bad other current assets out of the bulk provision made in the year 2000 (with corresponding write-back of equivalent amount of Rs.41,837,554/- from the provision made earlier - netted against fresh provisions during the year in the accounts). It was submitted that such write off of amounts towards bad advances and bad other current assets, as mentioned above, was a loss directly connected with the business operations & is incidental to the carrying on of the business by the assessee. Accordingly, it was submitted that such loss aggregating to Rs.41,837,554/- was legally to be treated as a part of the trading loss and is deductible as such under the provisions of Section 28 of the Income Tax Act in arriving at the true profits.
4. The AO did not dispute the fact that the loss in question was directly connected with the business operations and incidental to the carrying on of the business of the Assessee. According to him such losses could be allowed only when the amounts written off as loss have become irrecoverable. He was of the view that the Assessee had written off these losses in the books of accounts only for the reason of lack of information and non-availability of old records and therefore the loss in question cannot be allowed. He was of the view that the loss in question had occasioned owing to negligence of the Assessee and poor record keeping and cannot therefore be considered as incidental to the carrying on of business. The deduction claimed was not allowed by the AO.
5. On appeal by the Assessee the CIT(A) confirmed the action of the AO agreeing with the reasons given by the AO for not allowing the claim of the Assessee for deduction of the loss in question. Aggrieved by the order of the CIT(A), the Assessee is in appeal before the Tribunal.
ITA No.131&372/Kol/2010 - M/s.BOC India Ltd. A.Y.2005-053 4
6. We have heard the submissions of the learned counsel for the Assessee and the learned DR. The learned counsel for the Assessee reiterated submissions made before the AO/CIT(A). The learned DR relied on the order of the CIT(A).
7. We have considered the rival submissions. It is not in dispute that the sum of Rs.4,18,37,554 (Rs.4,15,63,688 + Rs.2,73,866) was part of a sum of Rs.7,09,40,000 which was revenue expenditure which was lying unadjusted for a long period and had accumulated over many years. The company after review of the books of accounts and after due diligence and discussion with the statutory auditors came to the conclusion that detailed reconciliation and accounting adjustments of these advances was no longer possible due to lack of information and non-availability of old records and therefore made a provision towards doubtful advances in the year ended 31.3.2000. In the previous year the Assessee decided to write of the amounts disputed in this appeal as irrecoverable advances. The fact that these sums are allowable as deduction u/s.28 of the Act as loss incidental to the business of the Assessee is not disputed by the Revenue. The only grievance of the revenue is that the Assessee has not established that these outstanding were irrecoverable. It is no doubt true as a legal requirement that the Assessee in order to claim deduction of a sum as loss incidental to business has to prove that the losses were incidental to the business and connected with the carrying of business of the Assessee and also prove that the sum claimed as loss have become irrecoverable. A copy of the details of Bad advances and bad other current assets is given as annexure to this order. A perusal of the details in annexure shows that these were advances to raw material suppliers, advances to staff for various petty cash expenses, advance to suppliers, inter branch suspense, suspense purchases, suspense-staff travel etc. As far as the sum of Rs.2,73,866 written off is concerned, the same was security deposits for electricity, telephone connection and others. The Assessee switched over in the year 1998 to new SAP System and these deposits were for period prior to 1998 which were omitted to be updated. Hence, the Assessee could not claim these deposits.
ITA No.131&372/Kol/2010 - M/s.BOC India Ltd. A.Y.2005-054 5
8. The learned counsel for the Assessee has also submitted before us in the course of hearing that the Ghatkopar unit of the Assessee was sold during the previous year due to several problems including labour problems and the advances and expenses written off related to this unit and this unit remained closed for a long time prior to its closure. We are satisfied that on the facts as pleaded by the Assessee before the AO which were not controverted by the AO/CIT(A), the loss in question was incidental to the business of the Assessee. The reason assigned by the AO was that there was negligence on the part of the Assessee in not keeping proper records and this fact influenced his decision in not allowing the claim of the Assessee. In our view once the fact that the loss is incidental to Assessee's business is accepted than the strict evidence of irrecoverability of the losses in question cannot be insisted upon. The circumstances of the case show that the Assessee made a provision in the books of accounts in the year 2000 and claimed the loss only in the year 2004. The company after review of the books of accounts and after due diligence and discussion with the statutory auditors came to the conclusion that detailed reconciliation and accounting adjustments of these advances was no longer possible due to lack of information and non-availability of old records in the year 2000 itself but waited for 4 years before writing off the loss in the year 2004-05. We are of the view in the given facts and circumstances of the case, the deduction claimed ought to have been allowed. We hold and direct accordingly. The grounds raised by the Assessee are accordingly accepted.
9. In the result, the appeal by the Assessee is allowed.
10. ITA No. 372/Kol/2010: Revenue's Appeal:
The first ground of appeal of the Revenue reads as follows:
"1. On the facts and in the circumstances of the case, Ld. CIT(A) has erred in deleting the excess provision of Rs.10,29,375/- though the assesee was following Mercantile system of accounting."
11. The Assessee during the previous year sold land at Ghatkopar, Mumbai during the previous year to one Kalpataru Homes Limited. Out of total consideration of ITA No.131&372/Kol/2010 - M/s.BOC India Ltd. A.Y.2005-055 6 Rs.305,00,000/- towards sale of Ghatkopal land, Rs.167,750,000/- was received on execution of the contract & the balance consideration aggregating to Rs.137,250,000/- was receivable in instalments on dates mentioned below (in terms of clause 5(a) of the Agreement for Development dated 31/10/2003 between the Assessee and Kalpataru Homes Limited):
1) Rs.30,500,000 receivable on or before 1/4/2004
2) Rs.61,000,000 receivable on or before 1/10/2004
3) Rs.45,750,000 receivable on or before 1/4/2005 Rs.137,250,000 The Assessee decided to encash the aforesaid receivables aggregating to Rs.137,250,000/- with recourse at a discount & approached Citi Bank NA in this connection. For the purpose, an amount of Rs.9,039,197/- was provided in the books on a mercantile basis towards discounting charges during the relevant year ended 31/3/2004, which was claimed by the Assessee as an allowable expenditure u/s 37(1) of the Income tax Act. In due course, the discounting was carried out with Citi Bank NA on 22/10/2003 and an amount of Rs.8,009,822 was actually incurred towards discounting charges. Thus, an amount of Rs.1,029,375/- (Rs.9,039,197/- minus Rs.8,009,822) being in excess of the liability actually incurred towards discounting charges of the receivables and no longer required, was written back & credited in the books of accounts during the subsequent financial year ended 31/3/2005 by adjusting/netting with 'General Charges A/c', thus in effect offering to tax the amount of Rs.1,029,375/- in the subsequent financial year."
12. On the above facts, the question before the AO was as to whether the sum of Rs.10,29,375 which was excess liability claimed in the present Assessment year can be allowed as a deduction. The AO was of the view that the amount of Rs.10,29,375 was not a liability of the Assessee during the previous year relevant to AY 04-05 and therefore ought not to have been claimed as a deduction in AY 04-05. The discounting with Citi Bank NA took place on 22.10.2003 and as on that date the Assessee ought to have written back the sum of Rs.10,29,375 which was liability ITA No.131&372/Kol/2010 - M/s.BOC India Ltd. A.Y.2005-056 7 provided in excess in the books of accounts. He therefore disallowed a sum of Rs.10,29,375.
13. On appeal by the Assessee, the CIT(A) allowed the claim of the Assessee observing as follows:
"I have gone through the documents submitted by the appellant in regard to the reversal made in the books in the subsequent financial year of the excess amount of Rs.10,29,375/- provided. I have also perused the assessment order of the subsequent assessment year, i.e. 2005-06 and found that the amount of Rs.10,29,375/- has been offered to tax by the appellant in that assessment year. Since the assessee is following the mercantile system of accounting and the said amount of Rs.10,29,375/- has been offered to tax in the subsequent assessment year, the A.O. is directed to allow the disallowance of Rs.10,29,375/- made by him for the year under consideration. Thus, the ground is, therefore, allowed."
14. We have heard the rival submissions. The CIT(A) has allowed relief to the Assessee only on the basis that the difference in discounting charges actually incurred by the Assessee and that provided in the books of accounts for AY 04-05 were offered to tax by the Assessee in AY 05-06. This cannot be a sound basis to allow relief to the Assessee. The Assessee is following mercantile system of accounting. Law is well settled that under the mercantile system of accounting it is only expenditure which has accrued to the Assessee during the previous year that can be allowed as a deduction. Originally the bill discounting charges were estimated at Rs.90,39,137. On this basis the Assessee was justified in considering the expenditure on account of bill discounting charges at Rs.90,39,137. However during the previous year relevant to AY 04-05 i.e., on 22.10.2003, it turned out that the actual liability towards bill discounting charges was only Rs10,29,375. Therefore in its books of accounts for the previous year, the Assessee ought to have reversed the excess provision for liability made. In other words the actual liability at Rs.80,09,822 crystalized during the previous year relevant to AY 04-05 itself and the Assessee therefore could not have claimed over and above this sum as deduction in computing its income from business. It is a different issue that the Assessee offered to tax the sum of Rs.10,29,375 in AY 05-06. We therefore restore the order of the AO in this regard. We however direct that the sum of Rs.10,29,375 should be excluded from the taxable income of AY 05- ITA No.131&372/Kol/2010 - M/s.BOC India Ltd. A.Y.2005-057 8 06, as not doing so would amount to double taxation of same income, which is impermissible in law. We hold and direct accordingly and allow ground no.1 raised by the Revenue.
15. As far as ground no.2 raised by the revenue is concerned, the same reads as follows:
"2. That on the facts and circumstances of the case, Ld. CIT(A) erred in directing not to consider the sale of property at Ghatkopar as a slum sale u/s 50B without appreciating the facts."
16. The facts relevant for decision on ground no.2 are the Assessee had a factory at Ghatkopar which was situated at Lal Bahadur Shastri Marg, Ghatkopar, Greater Mumbai. This was closed down on 1/4/1999. There was no ongoing business activity & the factory was not in operation. Subsequently the Assessee decided to sell the Ghatkopar land to Kalpataru Homes Ltd and entered into an Agreement for Development dated 31st October 2003 whereby the land at Ghatkopar was transferred to Kalpataru Homes Limited for a total consideration of Rs.305,000,000/- (Rupees Thirty crores fifty lacs only). No other assets or liabilities of the erstwhile Ghatkopar factory were transferred to them. The old scrqapped and junded plant & machinery, furniture & fixtures & stores items lying in the said Ghatkopar property were removed & disposed off for a consideration of Rs.5,480,769/- to M/s Asiad Trading & Mfg. Co., Santacruz, Mumbai. This amount was grouped, together with sale of various scrap materials (other than relating ot Ghatkopar property) and considered as income aggregating to Rs.5,486,966/- under the head 'Miscellaneous Income' in the accounts and offered to tax also. According to the Assessee it sold only land with irrevocable rights and marketable title to the developers for the development of the said property by constructing thereon new buildings & structures, with a covenant for ultimate transfer thereof, in favour of nominees of the developers (refer para E of the Agreement for Development dated 31/10/2003). Hence, no consideration for buildings was realised from the buyer. The existing buildings & structures were of no use to the buyer, who were to develop the land for making new constructions on the land. Although an amount of Rs.7,189,140/- was appearing in the books as net book value ITA No.131&372/Kol/2010 - M/s.BOC India Ltd. A.Y.2005-058 9 in regard to buildings at the time of sale yet nothing was realised towards building & hence the whole consideration was considered towards the sale of land, in accordance with the agreement dated 30/10/2003, while computing the taxable capital gains from sale of Ghatkopar property.
17. The AO however held that what was sold by the Assessee was the land, plant and machinery and other assets of the closed Ghatkopar factory and therefore the sale in question was a slump sale within the meaning of Sec.50B of the Act. The AO accordingly computed capital gain at Rs.28,89,06,665 u/s.50B of the Act, as against the claim of Assessee that the capital gain in question was a long term capital gain computed by the Assessee at Rs.13,44,33,876.
18. There is a difference in computation of capital gain u/s.45 r.w.s.48 of the Act and the computation of capital gain in the case of slum sale. In the case of slump sale computation of capital gain has to be done in accordance with Sec.50B(2) of the Act. The definition of slum sale is given in Sec.2(42C) of the Act and the method of computation of capital gain on slump sale is given in Sec.50B of the Act. Those provisions read thus:
"Sec.2 (42C) "slump sale" means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales.
Explanation 1 : For the purposes of this clause, "undertaking" shall have the meaning assigned to it in Explanation 1 to clause (19AA).
Explanation 2 : For the removal of doubts, it is hereby declared that the determination of the value of an asset or liability for the sole purpose of payment of stamp duty, registration fees or other similar taxes or fees shall not be regarded as assignment of values to individual assets or liabilities."
"50B: Special provision for computation of capital gains in case of slump sale.
(1) Any profits or gains arising from the slump sale effected in the previous year shall be chargeable to income-tax as capital gains arising from the transfer of long-term capital assets and shall be deemed to be the income of the previous year in which the transfer took place :
ITA No.131&372/Kol/2010 - M/s.BOC India Ltd. A.Y.2005-059 10 Provided that any profits or gains arising from the transfer under the slump sale of any capital asset being one or more undertakings owned and held by an assessee for not more than thirty-six months immediately preceding the date of its transfer shall be deemed to be the capital gains arising from the transfer of short-term capital assets.
(2) In relation to capital assets being an undertaking or division transferred by way of such sale, the "net worth" of the undertaking or the division, as the case may be, shall be deemed to be the cost of acquisition and the cost of improvement for the purposes of sections 48 and 49 and no regard shall be given to the provisions contained in the second proviso to section 48.
(3) Every assessee, in the case of slump sale, shall furnish in the prescribed form along with the return of income, a report of an accountant as defined in the Explanation below sub-section (2) of section 288 indicating the computation of the net worth of the undertaking or division, as the case may be, and certifying that the net worth of the undertaking or division, as the case may be, has been correctly arrived at in accordance with the provisions of this section.
Explanation 1 : For the purposes of this section, "net worth" shall be the aggregate value of total assets of the undertaking or division as reduced by the value of liabilities of such undertaking or division as appearing in its books of account :
Provided that any change in the value of assets on account of revaluation of assets shall be ignored for the purposes of computing the net worth.
Explanation 2 : For computing the net worth, the aggregate value of total assets shall be,--
(a) in the case of depreciable assets, the written down value of the block of assets determined in accordance with the provisions contained in sub-item (C) of item (i) of sub-clause (c) of clause (6) of section 43;
(b) in the case of capital assets in respect of which the whole of the expenditure has been allowed or is allowable as a deduction under section 35AD, nil; and
(c) in the case of other assets, the book value of such assets.
19. The question therefore before the CIT(A) was as to whether the sale of the land by the Assessee at Ghatkopar was a slump sale or not. The CIT(A) on this issue held as follows:
" I have gone through the rival contentions. The basic test which one must apply to ascertain whether there existed a slump sale or not is the continuity of business. The question to be asked is whether there was transfer of business as a whole. Whether there was a transfer of land, building, plant and machinery as a whole or whether there was a transfer of land, building or plant and machinery separately and individually? For that ITA No.131&372/Kol/2010 - M/s.BOC India Ltd. A.Y.2005-0510 11 purpose, one has to read the terms and conditions of the entire arrangement and understand & ascertain the true intention of the parties.
I have gone through the facts and submissions made by the appellant thoroughly. On perusal of the Agreement it is clear that only sale of land is covered with irrevocable rights and marketable title to the developers. It is also evident on review of the documents submitted by the appellant, that the old scrapped & junked items of plant & machinery, furniture & fixtures and stores items of the erstwhile Ghatkopar unit were sold to a third party and not to Kalpataru Homes Limited. Accordingly, the consideration of Rs.30,50,00,000 does not include amount of Rs.54,80,769/- received from M/s. Asiad Trading & Mfg. Co. Towards sale of old scrapped & junked items of plant & machinery, furniture & fixtures and stores items, as held by A.O. The action of the appellant in not reducing such sale proceeds of Rs.54,80,769/- from the W.D.V. of the block of capital assets is not detrimental to revenue, as the appellant ahs offered the entire sale proceeds of Rs.54,80,769/- to tax under 'business income'. More importantly, from the facts of the appellant's case it is abundantly clear that no business activity was carried on at the Ghatkopar premises at the time of sale in October 2003. The factory was closed w.e.f. 1/4/99 and the appellant was not claiming any income-tax depreciation also on the capital assets thereafter. Based on the facts & circumstances of the appellant's case, the A.O. was not correct in considering the sale of Land to Kalpataru Homes Limited, as per the Agreement dated 31/10/2003, as a slump sale u/s 50B of the Income Tax Act. The treatment effected by the appellant in regard to the taxability of capital gains from sale of land located at Ghatkopar is in accordance with the provisions of the Income-tax Act. Thus, the ground is allowed and the A.O. is directed to allow relief to the appellant by considering the amount of long-term gains computed by the appellant at Rs.13,44,33,876/-."
20. Aggrieved by the order of the CIT(A), the revenue has raised ground no.2 before the Tribunal.
21. We have heard the rival submissions. The learned DR relied on the order of the AO. The learned counsel for the Assessee relied on the order of the CIT(A).
22. We have given a careful consideration to the rival submissions. We have perused the agreements by which the Assessee sold the property at Ghatkopar to Kalapataru Homes Ltd. It is clear from the reading of those agreements and schedule or property transferred referred to in those agreements that what was sold was land and there was neither any plant, machinery, furniture & fixtures etc. There was neither building in existence at the time when the land was sold by the Assessee. The evidence on record clearly shows that Rs.54,80,769/- was received from M/s. Asiad Trading & Mfg. Co. Towards sale of old scrapped & junked items of plant & machinery, furniture & ITA No.131&372/Kol/2010 - M/s.BOC India Ltd. A.Y.2005-0511 12 fixtures and stores items that were lying in the land at Ghatkopar. The value of the building that existed at one point of time prior to the transfer of the land by the Assessee during the previous year, was not subject matter nor could be subject matter of transfer by the Assessee, as the building did not exist. The findings of the AO to the contrary are without any basis and contrary to the material on record. We therefore hold that the CIT(A) was justified in his conclusions. Accordingly, ground No.2 raised by the revenue is dismissed.
23. In the result, the appeal by the Assessee is allowed and that by the revenue is partly allowed.
Order pronounced in the Court on 16.10.2015.
Sd/- Sd/-
[ M.Balaganesh ] [ N.V.Vasudevan ]
Accountant Member Judicial Member
Dated : 16.10.2015.
[RG PS]
Copy of the order forwarded to:
1.M/s.BOC India Ltd., Oxygen House, P-43, Taratala Road, Kolkata-700088.
2. D.C.I.T., Circle-12, Kolkata.
3. CIT(A)-XXXII, Kolkata
4. CIT-Central-IV, Kolkata.
5. CIT(DR), Kolkata Benches, Kolkata.
True Copy By order, Deputy /Asst. Registrar, ITAT, Kolkata Benches ITA No.131&372/Kol/2010 - M/s.BOC India Ltd. A.Y.2005-0512 13 ITA No.131&372/Kol/2010 - M/s.BOC India Ltd. A.Y.2005-0513