Income Tax Appellate Tribunal - Cuttack
Alfa Transformers Ltd., Bhubaneswar vs Acit, Circle-2(1), Bhubaneswar on 26 April, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL,
CUTTACK BENCH, CUTTACK
BEFORE S/SHRI N.S SAINI, ACCOUNTANT MEMBER
AND KULDIP SINGH JUDICIAL MEMBER
ITA No. 35/CTK/2017
Assessment Year :2006-07
Alfa Transformers Ltd., Plot Vs. ACIT, Circle 2(1),
No.3337, Mancheswar Bhubaneswar.
Industrial Estate,
Bhubaneswar.
PAN/GIR No. AAACD 7880 L
(Appellant) .. ( Respondent)
Assessee by : Shri Prajna Raj Mohanty, AR
Revenue by : Shri A.Tigga, DR
Date of Hearing : 24/04/ 2017
Date of Pronouncement : 26 /04/ 2017
ORDER
Per N.S.Saini, AM
This is an appeal filed by the assessee against the order of CIT(A)- 1, Bhubaneswar, dated 31.10.2016, for the assessment year 2006-07.
2. The first issue involved in this appeal is that the CIT(A) is not justified in confirming the addition of Rs.35,16,541/- on account of outstanding CENVAT credit made by the Assessing Officer.
3. We have heard the rival submissions and perused the orders of lower authorities and materials available on record. The Assessing 2 ITA No. 35/CT K/ 2017 Asse ssment Year :20 06- 07 officer observed that in the audit report, an amount of Rs.35,16,680/- was shown as CENVAT credit classified as "loans and advances". He observed that the opening CENVAT credit was shown at Rs.139/- and there was increase of Rs.35,16,541/- during the financial year 2005-06. Therefore, in the original assessment under section 143(3) of the Act, this unutilized CENVAT credit was added to the income of the assessee in view of the provisions of section 145A of the Act. The Tribunal set aside the addition to the file of the Assessing Officer to decide the issue afresh by observing as under:
"There is no dispute that the assessee has been regularly following the net method of accounting in respect of duty paid on inputs, which, as per the submissions of the ld A.R. of the assessee is in accordance with the principles laid down in the guidance issued by ICAI. In the case of Hawkins Cookers vs ITO (2008), 14 dtr (Mumbai) (Trib) 206, the ITAT by following the decision of ITAT Delhi Bench in the case of Mahavir Aluminium 168 TM 27 (Del) has held that for purpose of section 145A, where an assessee follows the procedure laid down by the ICAI and the tax auditor reports in clause 12(b) of Form 3CD of the tax audit report that no adjustment is required to be made on account of section 145, the unutilized modvat credit cannot be added to income for valuation of closing stock. In the present case at hand we find that the impact of CENVAT utilized/availed by the assessee has not been examined by the AO in its proper perspective for the earlier and later years while making the assessment and so also by the CIT(A). Therefore, we set aside the impugned order of the CIT(A) and restore this issue to the file of the AO to decide the same afresh in the light of our above discussion and pass necessary consequential order as per law."
4. The Assessing Officer considered the issue afresh in pursuance to the direction of the Tribunal after taking into account the submission of the assessee and again sustained the addition in an assessment u/s.143(3)/254 of the Act.
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ITA No. 35/CT K/ 2017 Asse ssment Year :20 06- 07
5. On appeal, the CIT(A) concurred with the findings of the Assessing Officer that unutilized CENVAT credit has to be included in the closing stock of raw materials because of the mandate of section 145A and confirmed the addition.
6. Before us, ld A.R. of the assessee reiterated the submissions made before the lower authorities. He submitted that the valuation has been done in accordance with the guidance of ICAI, which are to be followed for preparing financial statement as per the Companies Act. Ld A.R. of the assessee submitted that on similar issue, the Hon'ble Gujarat High Court in the case of Voltamp Transformers Ltd vs CIT (2008) 217 CTR 254 (Guj) has held that the Assessing Officer has got very limited powers to change valuation of closing stock which is part of accounting policy. He cannot change method of accounting regularly followed by the assessee without valid reasons. He also relied on the decision of Ahmedabad Benches of the Tribunal in the case of ACITA VS. Oracle Granito Ltd in ITA No.1602/Ahd/2013 order dated 13.2.2017, wherein, the Tribunal has upheld the action of the CIT(A) in deleting the addition made on account of CENVAT credit.
7. On the other hand, ld D.R. supported the orders of lower authorities.
8. We find that on similar issue, the Ahmedabad Benches of the Tribunal in the case of Oracle Granito Ltd (supra) has upheld the decision of the CIT(A) in deleting the addition, observing as under: 4
ITA No. 35/CT K/ 2017 Asse ssment Year :20 06- 07 "11.4 We further observe that similar issue came up before the Co-ordinate Bench in the case of ACIT vs. Puneet Industries Pvt Ltd., (supra), wherein, the Co-ordinate Bench followed the judgment of Hon. Supreme Court in the case of CIT vs. Indo Nippon Chemicals Co. Ltd. (2003) 261 ITR 275 (SC) and the Bench dismissed the appeal of Revenue by observing as under :-
3. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. The issue in the present case is with respect to inclusion of unutilized CENVAT credit to the closing stock. We find that Id. CIT(A) while deleting the addition has given a finding that the assessee was following exclusive method of accounting and the CENVAT was not debited or credited to the Profit & Loss account and the aforesaid method has been consistently followed by the assessee in earlier and succeeding years. We further find that the Hon'ble Apex Court in the case of CIT vs. Indo Nippon Chemicals Co.Ltd. reported at (2003) 261 ITR 275 (SC) observed that unavailed MODVAT credit cannot be construed as income and there is no liability to pay tax on such unavailed MODVAT credit. Further, before us, Revenue has not brought any contrary binding decision in its support.
In view of the aforesaid facts, we do not see any reason to interfere with the order of the Id. CIT(A). Thus, the ground of Revenue is dismissed."
12. Respectfully following the decision of Co-ordinate Bench and in the totality of facts and circumstances of the case and our discussion in the preceding paragraph, we are of the view that no addition of Rs.31,84,930/- was called for u/s 145A of the Act by Id. Assessing Officer and we, therefore, find no reason to interfere with the order of Id. CIT(A). We uphold the same. This ground of Revenue is dismissed.""
9. It is not disputed that the assessee is regularly following the net method of accounting in respect of duty paid on inputs, which is as per the guidelines issued by ICIA. During the assessment year, the assessee has paid Rs.35,16,541/- on input purchases and earned CENVAT credit of the same which was not debited to Profit & loss account but kept as an asset by debiting the Cenvat credit account as unutilized CENVAT 5 ITA No. 35/CT K/ 2017 Asse ssment Year :20 06- 07 credit as on the last day of the accounting year, which method was consistently followed by the assessee in earlier and succeeding years. We find this issue is squarely covered by the decision of the Ahmedabad Benches of the Tribunal in the case of Oracle Granito Ltd (supra), wherein, the Tribunal has followed the decision of the Hon'ble Gujarat High Court in the case of Voltamp Transformers Ltd (supra). Hence, respectfully following the same, we set aside the orders of lower authorities and delete the addition of 35,16,541/- made on account of CENVAT credit and allow this ground of appeal of the assessee. 10 .The next ground relates to addition of Rs.4,06,590/- towards deposits written off.
11. The Assessing Officer observed that the assessee has claimed Rs.4,06,590/- as security deposits written off consisting of two components (i) deposit with Punjab State Electricity Board of Rs.3,95,390/- and (ii)amount deposited with General Manager, District Telephone, Bhubaneswar of Rs.11,200/-. The Assessing Officer disallowed the claim of the assessee on the ground that the deposits were security deposits made with Government agencies and not offered as income in any earlier year. Before the Assessing Officer, it was explained that the deposits were made with PBEB as EMD for obtaining tenders and Telephone department for obtaining new telephone connections and internet connections. Since no reasons was furnished for recovering the amount from those departments, the Assessing Officer observed that the amount cannot be claimed as deduction this 6 ITA No. 35/CT K/ 2017 Asse ssment Year :20 06- 07 year as the same was taken into credit for any earlier years in the books of account.
12. On appeal, the CIT(A) confirmed the action of the Assessing Officer observing that the EMD deposit with PSEB and the deposit for telephone connection are in the nature of capital expenditure and hence, cannot allowed u/s.37(1) of the Act.
13. Ld A.R. of the assessee reiterated the submissions made before the lower authorities.
14. On the other hand, ld D.R. supported the orders of lower authorities.
15. After hearing the rival submissions and perusing the materials available on record, we find that the assessee has written off security deposits of Rs.4,06,590/- in the profit and loss account as trading loss due to non-recovery of the same. These security deposits were made by the assessee with PSEB of Rs.3,95,390/- for obtaining tender and Rs.11,200/- towards telephone connections. The Assessing Officer treated the same as capital loss and did not allow deduction claimed by the assessee.
16. On appeal, the CIT (A) confirmed the action of the Assessing Officer.
17. We find that the assessee has disallowed the deduction as the assessee failed to furnish any reason as to why the same amount cannot be recovered. It is not disputed by the authorities below that the amounts were deposited with PSEB and Telephone department for the 7 ITA No. 35/CT K/ 2017 Asse ssment Year :20 06- 07 business of the assessee. Since the amounts were not recovered from those departments, the assessee had written off security deposits in interest of its business. The Assessing Officer has not doubted the genuineness of the loss suffered by the assessee.
18. We also find that similar issue had come up for consideration before the Kolkata Benches of the Tribunal in the case of DCIT vs. BOC India Ltd & Anr, (2016) 46 CCH 0493 (Kol Trib), wherein, the Tribunal deleted the addition by observing as under:
"".1 From the facts we find that the loss claimed by the assessee by way of writing off the security deposits was on the revenue accounts. These deposits were made by the assessee in the normal course of business. By making the security deposit no fixed assets has come into existence. Therefore such deposit was classified as current assets in the books of accounts of the assessee. The business expenditure which is not specifically provided in sections 30 to 36 of the Act can be allowed under section 37 of the Act. Such expenditures before qualifying for deduction, are required to be laid out or expended wholly and exclusively for the purpose of the business and profession. But expenditures in the nature of capital expenditures or personal expenses of the assessee are not admissible under the said section. However, we find that issue raised by the Revenue is already covered in favour of the assessee in its own case in ITA No.l085/Kol/2007 and 1692/Kol/2007 for the assessment year 2002-03 where the Tribunal "C" Bench on similar facts has held that:-
"5. Ground No. 2 of the revenue pertains to earnest money written off and ground number 3 pertains to deletion of addition of 1,24,655/- being advanced to an employee treating the same as that this expense
6. On going through the order of the Id. CIT(A), we find no reason to interfere on the same. Accordingly both the grounds of the revenue are hereby rejected and dismissed."
In addition to the above we also find numerous judgments of various courts where such losses were allowed as deduction while determining the profit under the business head. Some of them are detailed as under
for the purpose of the reference.
In the case of Ramchandar Shivnarayan vs. CIT (1978) 111 ITR 263 (SC) the Apex Court affirming the order of the Hon'ble High Court of Madras has held that if there is a direct and proximate nexus between the business operation and the loss or it is incidental to it, then the loss 8 ITA No. 35/CT K/ 2017 Asse ssment Year :20 06- 07 is deductible, as, without the business operation and doing all that is incidental to it, no profit can be earned. It is in that sense that from a commercial standard such a loss is considered to be a trading one and becomes deductible from the total income. It is to be remembered that the direct and proximate connection and nexus must be between the business operation and the loss. Further, the Hon'ble Madras High Court in the case of CIT vs. Textool Co. Ltd. 135 ITR 200 (Mad) has held as follows:-
"where the assessee claims a business loss, the main question to be considered is, whether the loss is incidental to the business....... The tribunal found that the assessee had to import from abroad certain component parts necessary for its manufacturing business. The assessee had to be abide by the scheme of import licences under which the assessee had to pay premiums to the Federation in advance covering the entire import entitlement. Owing to business exigencies, the assessee could not fully utilize the import entitlement, resulting in a forfeiture of part of the advance deposit with the Federation. The Tribunal therefore felt no difficulty in finding that the deduction claimed by the assessee in writing off the amounts so forfeited was in the course of and incidental to the assessee's business".
Similarly, the Bombay High Court in case of I.B.M. World Trade Corporation vs. CIT 186 ITR 412 (Bom) has held as follows:-
"As the acquisition of premises on lease would not ordinarily be in the capital field, there is no hesitation in holding that the moneys advanced by the assessee in pursuance of the agreements to the landlord for the purposes of and in connection with the acquisition of the premises on lease were for the purpose of business. Naturally, therefore when such advances are lost to the assessee the loss would be a business loss and not a capital loss."
The Revenue has also raised the issue that the assessee failed to justify as to why the sec. deposits have become irrecoverable. In our view, it is the assessee who conducts his business affairs in the most effective beneficial manner and in the interest of the organization. The AO cannot step into the shoes of the assessee for defining the best possible ways of the business. Accordingly we opined that the assessee has written off the security deposits in the interest of the business organization. Therefore the question of recovery or irrecovery does not arise under the present conditions and situations. The AO in the present case has not doubted the genuineness of the loss claimed by the assessee but the loss was merely disallowed by holding them as capital loss. As the loss was arising from the writing of the trading assets which was classified as current assets in the books of accounts and also relying in the aforesaid decisions we uphold the order of the Ld CIT(A). Hence this ground of appeal of Revenue is dismissed.'
19. Respectfully following the decision of the Kolkata Benches of the Tribunal in the case of BOC India Ltd (supra), we set aside the orders 9 ITA No. 35/CT K/ 2017 Asse ssment Year :20 06- 07 of lower authorities and delete the addition of Rs.4,06,590/- and allow this ground of appeal of the assessee.
20. In the result, appeal filed by the assessee is allowed.
Order pronounced in the open court on 26 /04/2017 in the presence of parties.
Sd/- sd/-
(Kuldip Singh) (N.S Saini)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Cuttack; Dated 26 /04/2017
B.K.Parida, SPS
Copy of the Order forwarded to :
1. The Appellant : Alfa Transformers Ltd., Plot No.3337, Mancheswar Industrial Estate, Bhubaneswar.
2. The Respondent. ACIT, Circle 2(1), Bhubaneswar.
3. The CIT(A)-1, Bhubaneswar
4. Pr.CIT-1 Bhubaneswar.,
5. DR, ITAT, Cuttack
6. Guard file. BY ORDER, //True Copy// SR.PRIVATE SECRETARY ITAT, Cuttack