SPERO PROPERTY MANAGEMENT,CHENNAI vs. ACIT NON CORPORATE CIRCLE 3(1), CHENNAI

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.

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

The appeal stands partly allowed in terms of our above order.