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Income Tax Appellate Tribunal, “C” BENCH, CHENNAI
Before: HON’BLE SHRI MAHAVIR SINGH & HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM
सुनवाईकीतारीख/ : 07-09-2022 Date of Hearing घोषणाकीतारीख / : 19-10-2022 Date of Pronouncement आदेश / O R D E R Manoj Kumar Aggarwal (Accountant Member) 1. Aforesaid appeal by assessee for Assessment Year (AY) 2012-13 arises out of the order of learned Commissioner of Income Tax (Appeals)-4, Chennai [CIT(A)] dated 19.09.2017 in the matter of an assessment framed by Ld. Assessing Officer [AO] u/s. 143(3) of the Act on 30.03.2015. The grounds raised by the assessee read as under:
The appellate order dated 19-09-2017 in .2012- 13/CIT(A) 4, passed by the Commissioner of Income-tax (Appeals) 4, Chennai, is erroneous, opposed to law and facts of the appellant's case.
2. The learned Commissioner of Income-tax (Appeals) erred in confirming the disallowance made by the Assessing Officer, which represented loss on account of stocks of manufactured goods destroyed and written off in the accounts. 3. The learned Commissioner of Income-tax (Appeals) failed to note that the stock of the manufactured goods had to be destroyed and written off in the accounts because the client for whom the stocks were manufactured had refused to take delivery of the goods and called upon the appellant to destroy such stock. 4.The learned Commissioner of income-tax (Appeals) failed to appreciate that the client at whose instance the stock had been destroyed had compensated the appellant by paying an amount of Rs.1,28,47,800 during the financial year 2012-13, and the appellant had also admitted the said compensation as its income for the assessment year 2013-14. 5. The learned Commissioner of Income-tax (Appeals) erred in his observation that that the appellant's claim that the compensation received from the client had been admitted as income for the assessment year 2013-14 cannot be accepted, because the appellant had admitted NIL total income in its return of income for assessment year 2013-14 and had not paid advance-tax or self-assessment tax for that year. 6.The learned Commissioner of Income-tax (Appeals) failed to note that the NIL total income admitted for the assessment year 2013-14 was the net result of computation of total income after considering different heads and sources of income / losses, including the compensation received of Rs.1,28,47,800. 7. The learned Commissioner of Income-tax (Appeals) erred in confirming addition to the extent of Rs.56,99,784 out of the disallowance of Rs. 112,60,082 being balances written off.
As is evident, the grievance of the assessee is two-fold- (i) Disallowance of stock written-off; (ii) Disallowance of balances written-off.
The Ld. AR advanced arguments by drawing our attention to various documents as kept in the paper-book. The Ld. AR vehemently argued that the stock belonging to foreign party was destroyed which was written-off. The compensation for stock was received from the foreign entity in subsequent year and the same was offered to tax. The Ld. Sr. DR, on the other hand, submitted that only the logos were destroyed and the stock was independently disposed-off and therefore, 3 - the additions are justified. The Ld. Sr. DR also submitted that there is no evidence that any compensation was received for loss of stock and the same was offered to tax. Having heard rival submissions, our adjudication would be as under. Assessment Proceedings 3. The assessee being resident firm admitted income of Rs.134.11 Lacs which is predominantly on sale of land. The assessee is stated to be engaged in manufacturing and sale of garments but this business was closed down during the year. The land on which garment factory was located was sold during the year.
Loss on Sale of Raw Material 4.1 Since the assessee shut down its business, the stock of raw material and finished goods was sold during the year. The opening stock of Rs.246.79 Lacs was stated to be sold for Rs.26.49 Lacs and the assessee booked loss of Rs.220.30 Lacs. The details of fabric sold during the year been extracted in para-4.2 of the assessment order. The sale did not include sale of finished goods. Accordingly, Ld. AO held that opening stock of finished goods for Rs.61.69 Lacs has been omitted to have been credited to Profit & Loss Account and accordingly, the loss declared by the assessee was reduced to that extent. 4.2 During appellate proceedings, the assessee submitted that the finished goods were manufactured for client M/s Memo Fashions Ltd., London. Due to certain quality reasons, the goods were not cleared by the customer. The assessee claimed compensation for the cancellation of order. The customer, vide reply dated 06.02.2012, directed assessee to destroy all stocks and accordingly, the stock was destroyed. Finally, no value could be derived from finished goods and the amount was 4 - charged to account as loss. Subsequently, the customer, in full and final settlement, agreed for a compensation of Rs.128.47 Lacs during November, 2012 towards finished goods and towards damages caused to the assessee. The said sum was stated to be offered to tax during AY 2013-14 as ‘other income’. 4.3 However, the assessee failed to furnish the copy of the agreement / contract. The Ld. CIT(A) held that the assessee did not give any specific details as to how the impugned finished goods failed to pass the quality tests. The exact details could not be furnished by the assessee and the submissions were not supported by any formal agreement / contract. The assessee also could not substantiate the destruction of the goods. The claim that the compensation was offered to tax in subsequent year stood negated by the fact that the assessee reflected ‘nil’ income in that year. Accordingly, the issue was decided against the assessee. Aggrieved, the assessee is in further appeal before us. 4.4 It is the finding of Ld. CIT(A) that the claim of the assessee has remained to be substantiated. From the purchase orders, it could be seen that the order was subjected to approvals and acceptable Lab Test Results. The assessee, vide letter dated 23.03.2012, confirmed its customer that it has destroyed all the manufactured and semi- manufactured material with brand and long for zero value on 22.03.2012 by cutting them and then clearing-off the same in the dump. The same has been done in the supervision of responsible officer of the assessee. The customer has confirmed cancellation of purchase orders and made full and final settlement at GBP 161000. The same is stated to have been offered to tax in the subsequent year. All these evidences / materials lend credence to the argument of Ld. AR and we find certain strength in the same. We are of the considered opinion that if this compensation has been offered to tax in subsequent year, then nothing would remain to the added in assessee’s hand in this year. The Ld. AR has stated that income has been reduced to ‘nil’ due to set-off of losses etc. and this amount has certainly been credited in Profit & Loss Account in subsequent year. Therefore, we direct Ld. AO to verify the fact that the assessee received compensation for loss of stock and the same was offered to tax in subsequent year. If the same is found true then the impugned addition would stand deleted in this year. The assessee is directed to provide the requisite details. The corresponding grounds stand allowed for statistical purposes.
Balance Written-off 5.1 The assessee wrote-off sundry balances for Rs.183.24 Lacs each of which was examined by Ld. AO and the same has been extracted in para 5.1 of the assessment order. Some of the items were disallowed which include capital balances written-off, write-off of custom duty receivable, write-off of Income Tax and write-off of foreign debts etc. All these items aggregated to Rs.112.60 Lacs which were disallowed by Ld. AO. 5.2 Upon further appeal, Ld. CIT(A) partially allowed the ground raised
by the assessee and sustained the following additions: - No. Name Amount (Rs.) 1. SOT Garments 27,593 2. Vardhaman Yarns 525 3. AEPC Remittance (Under Protest) 16,03,253 4. ESI Remittance (Under Protest) 50,000 5. Christian 92,000 6. Ellenbaire Commercial 5,00,000 7. Gupta & Co 78,196 8. Sundaram 8,88,669
9 Business Development Expenses 9,27,071 10 Customs Duty Receivables 13,41,749 11 Deposit - Cellular 1,90,728 Total 56,99,784 Aggrieved, the assessee is in further appeal before us. 5.3 Upon perusal of material on record, it could be seen that the items appearing at serial no. 1 & 2 are supplier for the assessee to whom advances have been given. The same could not be recovered and accordingly, written-off. These advances are in the course of business and hence, allowable expenditure to the assessee. Item No.3 AEPC remittance has been disallowed on the ground that the same is penal in nature. However, we find that the same is not penal in nature but the same represent invocation of guarantee due to non-fulfillment of export obligations. These expenses are routine business expenditure and hence, allowable to the assessee. Similar is the position of ESI payment wherein the amount is payable as additional contribution and hence, allowable deduction to the assessee. Item No.5 is mere cash payment / cash receipt from the party and therefore, not allowable to the assessee. No supporting evidence is available for item No.6 and therefore, not allowable to the assessee. Item Nos.7 & 8 represent write-off of bad debts against customer and allowable u/s 36(1)(vii). The nature of item No.9 is stated to be deferred revenue expenditure. It appears that the same arises out of earlier assessment years. The Ld. AO is directed to verify the same and consider allowability of the same. The assessee has received less custom duty drawback and accordingly, the balance has been written-off. The same is in normal course of business and an allowable deduction. The write-off of deposits represent deposit given for utilities and the same are in normal course of business and hence, allowable. The corresponding ground stand partly allowed.
The appeal stands partly allowed in terms of our above order.
Order pronounced on 19th October, 2022.