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Income Tax Appellate Tribunal, HYDERABAD BENCHES “B” BENCH: HYDERABAD
Before: Smt. P. MADHAVI DEVI & SHRI S. RIFAUR RAHMAN
IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES “B” BENCH: HYDERABAD BEFORE Smt. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA. No.766/Hyd/1998 Assessment Year: 1995-96 Gulf Oil Corporation vs. Dy. Commissioner of Income Limited., Tax (Assts), (Formerly known as IDL Special Range-4, Industries Ltd), Hyderabad. Hyderabad. (Appellant) (Respondent) For Assessee: Shri Y. Ratnakar For Revenue : Shri K. Gopala Krishna, DR Date of Hearing : 10.05.2018 Date of Pronouncement : 18.07.2018 ORDER PER Smt. P. MADHAVI DEVI, JM. 1. This is an assessee’s appeal for the A.Y. 1995-96 against the order of CIT (A)-IV, Hyderabad dated 27.08.1998. This appeal was initially heard and disposed of vide order dated 30.12.2004. However, on appeal, the Hon’ble High Court, vide order dated 21.11.2017, has set- aside the order and directed the Tribunal to adjudicate the issue afresh, after notice to both the parties, by passing a detailed speaking order. That is how the matter was again re-fixed for hearing before the Bench. The assessee had raised the following grounds of appeal:-
“1. The order of the Learned Commissioner of Income Tax (Appeals)- IV, Hyderabad dated 27.8.1998 is contrary to law and facts. 2. The Learned CIT erred in coming to the conclusion that the sum of Rs. 30,70,000/- is not allowable expenditure. It is contended that the amount spent did not result in creation of any capital asset and the contrary was spent for the purpose of legitimate business
of the appellant company. Consequently, the same is allowable u/s 37 of the I.T. Act. 3. It is contended that the implementation of the project work had to be abandoned to minimise yearly loss and to preserve the existing profitability of the appellant company. Consequently, the expenditure incurred upto to the abandonment is to be treated as business expenditure. 4. Without prejudice, it is further contended that the said amount be allowed as bad debt if not allowable as business loss or business expenditure. 5. It is contended that the rent received from two flats in Mumbai and the rent received from the premises left out to IDL Astra Ltd., is in the nature of business income being exploitation of commercial asset and 10% of the said amount will qualify for inclusion in the profits of the business under Explanation (baa) for computing the exempted profits u/s 80HHC of the I.T. Act. 6. The appellant carves leave to add, amend or alter any of the aforesaid grounds as the occasion may require. 7. For there and other reasons that may be urged at the time of hearting of appeal, it is prayed that the disallowance / additions made be deleted and the appeal be allowed.” 2. Brief facts relating to the issues before us are that the assessee- company, engaged in the business of manufacture and sale of Detonators, filed its return of income on 15.11.1995 admitting the taxable income of Rs. 1,28,91,230/-. Initially the return was processed u/s 143(1)(a) of the Act without any adjustments. During the assessment proceedings u/s 143(3) of the Act, the A.O. verified the assessee’s books of account and observed that during the accounting year, the assessee had debited a sum of Rs. 46.12 lakhs to the Profit & Loss Account under the head “bad debts written-off”, as shown in Schedule-16. The A.O obtained the details and observed that the same includes a sum of Rs. 16 lakhs, paid to M/s. Project Development of India Limited towards consultancy fees and, a sum of Rs. 14.70 lakhs incurred towards the cost of a project, which was abandoned in the year ending on 31.03.1994.
The A.O. observed that the assessee has paid a sum of Rs. 16 lakhs to M/s. Project Development of India Limited in connection with the Prilled Ammonium Nitrate Project / LDAN Project, accounted under
the head “capital work-in-progress” in previous years, and has been claimed as bad debt written-off in the relevant assessment year. The A.O. observed that the payment made to the Government undertaking cannot be said to be irrecoverable and the expenditure incurred does not have the characteristics of being treated as bad debt. He observed that neither income of the said debt was offered to tax in the earlier years nor there is a debtor and creditor relationship. Therefore, the A.O. disallowed the claim of bad debts. However, during the course of hearing, the assessee made an alternate claim that the same may be allowed as business loss. The A.O. observed that the expenditure incurred relates to prior years and was treated as capital work-in- progress and therefore it was a ‘capital loss’ and cannot be allowed as a ‘revenue loss’. Aggrieved, assessee preferred an appeal before the Ld. CIT(A), who confirmed the order of the A.O. and the assessee is in second appeal before us.
Learned Counsel for the Assessee reiterated the submissions made by the assessee before the authorities below and submitted that the assessee, being in the business of manufacture and sale of Detonators, had set-up a unit for manufacture of Nitrate, the raw material and the loss incurred by the assessee on setting up of the said project (which was subsequently abandoned) is a business loss. He placed reliance upon the decision of the Hon’ble Supreme Court of India in the case of Dr. T.A. Quereshi vs. CIT (287 ITR 547) (SC) for the proposition that business loss has to be allowed irrespective of it being in connection with illegal activity. He tried to draw the distinction between the business expenditure and business loss as brought out by the Hon’ble Supreme Court in the above case in para 17 of its order (supra).
The Learned Departmental Representative, on the other hand, supported the orders of the authorities below and placed reliance upon the decision of the Hon’ble Madras High Court in the case of E.I.D. Parry (India) Ltd. vs. CIT and the Hon’ble Calcutta High Court in the case of Kanoria Chemicals & Industries Ltd vs. CIT (1995) 78 Taxman 455 (Cal.). The copies of the orders are filed before us.
Having regard to the rival contentions and the material on record, we find that the only question to be decided is, whether the cost incurred by the assessee on the project, which was capitalised in the books of account and is subsequently abandoned, is a capital loss or revenue loss? Admittedly, the assessee has treated the cost in the prior years as a capital work-in-progress and since it has abandoned the project during the relevant financial year, it has claimed the same as bad debt / business loss. In the decisions relied upon by the Learned Departmental Representative, i.e., in the case of Kanoria Chemicals & Industries Ltd vs. CIT (supra), the assessee had incurred expenditure in connection with a new project which was ultimately abandoned and, in the case of E.I.D. Parry (India) Ltd. vs. CIT, the Hon’ble Madras High Court observed that the assessee therein had incurred the expenditure for the purpose of setting up a new project for the manufacture of “methanol” and in the said case, the assessee was engaged in the manufacture of other products and wanted to manufacture a new product and for that purpose, the assessee had incurred expenditure by way of entering into a collaboration agreement for the purchase of machinery but had abandoned the same. In these circumstances, the Hon’ble High Court held that the loss is capital in nature and not a revenue loss. But, in the case before us, the assessee had tried to set- up a manufacturing unit of the raw material (which the assessee was earlier buying from the open market) which is required for manufacture of Ammonium Nitrate. As seen from the written submissions of the
assessee which are reproduced by the CIT (A), the project had become unviable due to escalation in cost and had to be abandoned in the year ending on 31.03.1994. The manufacturing of raw material is only backward integration of the process and is very much part of the existing business of the assessee and therefore related to the business carried on by the assessee. The Hon’ble Supreme Court of India in the case of Dr. T.A. Quereshi vs. CIT (supra) held that the business loss was allowable on ordinary commercial principles in computing the profits and the loss of stock-in-trade has to be treated as a trading loss. In the case before us, the assessee was procuring the raw material from the open market earlier to undertaking the setting up of the unit, and was thus, for manufacture of stock-in-trade and the business nexus is clearly established. Therefore, though it cannot be treated as bad debt as initially claimed by the assessee, we are inclined to accept the alternate contention that it is a business loss and should be allowed in the ordinary commercial principles, as held by the Hon’ble Supreme Court of India in the case of Dr. T.A. Quereshi (supra) . Accordingly, grounds of appeal no. 2 to 4 are allowed.
At the time of hearing, Learned Counsel for the Assessee submitted that due to smallness of the amount, the assessee does not want to press the Ground no.5 and the same is accordingly rejected. Grounds no.1, 6 and 7 are general in nature and therefore they need no adjudication.
In the result, appeal of the assessee is partly allowed. Order pronounced in the open court on 18th July, 2018.
Sd/- Sd/- (S. RIFAUR RAHMAN) (Smt. P. MADHAVI DEVI) ACCOUNTANT MEMBER JUDICIAL MEMBER
Hyderabad, Dated: 18th July, 2018. OKK, Sr.PS
Copy to
Senior Manager (Finance), IDL Industries Limited, IDL Industries Ltd., P.O.B. No.1, Sanath Nagar (PO), Hyderabad. 2. DCIT (Assts), Spl. Range-4, Hyderabad. 3. CIT (A)-IV, Hyderabad. 4. Pr. CIT-IV, Hyderabad. 5. DR, ITAT, Hyderabad. 6. Guard File