ACIT CENTRAL CIRCLE-2(1), HYDERABAD vs. GOCL CORPORATION LIMITED,, HYDERABAD

Per Shri Laliet Kumar, J.M. This is appeal filed by the Revenue, feeling aggrieved by the order passed by the Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, dated 15.11.2021 for the AY 2019-20, on the following two grounds

2 ITA 51/Hyd/2022 “Disallowance of Irrecoverable advances written off: It is observed from the statement of computation of total income, that the assessee claimed a deduction amounting to Rs.3,63,41,000/- under the head "provision no longer required reversed - doubtful debts, loans and advances" from the profits of the company. However, on verification of the Profit & Loss account for the year, it is noted that the assessee did not debit the said write off therein.

In this connection, the assessee was requested to furnish details of doubtful debts, loans and advances and justify the allowability of deduction claimed to the tune of Rs.3,63,41,0001- for the purpose of Normal tax provisions as well as MAT provisions. This is in addition to another amount of Rs.29,98,732/- reduced from profits as 'provision for bad abd doubtful debts write back'. In response, the assessee company produced a copy of writeup submitted to CPC at the time of processing of 143(1) and requested to consider the same. In that, the assessee stated as under: reversal of provision of Rs. 3,63,41,000/- against provision made in financial year 2008-09 for investment in subsidiaries by debiting revaluation reserve as no loner required. Since, above said provision made by debiting to the revaluation reserve, company has not claim as expenditure in any earlier hence removed from income from business.

In light of the above, it is manifestly clear that the assessee M/s.GOCL Corporation Limited has rendered Capital advances (or investments) to its subsidiaries. These Advances were not trading advances and were not related to its business. Since, the advances given to the subsidiary were considered as no longer required, the assessee had not only written off the same. but also claimed it as a deduction from its taxable income for the year. After a careful consideration of the facts it is apparent that the aforesaid deduction claimed is unacceptable for the following reasons:

1) The advances given to its subsidiary is not business or trading advances for running its business and, therefore, the same were Capital advances. Accordingly, these were not eligible for a tax deduction. In hasimara Industries Ltd. vs. Commissioner of Income Tax & Anr. [1998] reported in 231 ITR 842, the Hon’ble Supreme Court held that capital loss cannot be deducted from an asessee’s income as a business loss.

2) As mentioned it is noteworthy that the assessee for some reason, has not chosen to debit the irrecoverable advance in its Profit& Loss account for the year. Rather , it had opted to make a claim subsequently in the computation of income for tax purposes.

In the case of CIT, Bangalore vs Mis Epsilon Advisers pvl Ltd (ITA No.23 of 2006 dated 13.06.2012). the Hon'ble Karnataka High Court held and observed that where the business of the assessee was not money lending or advancing money, the sum advanced to a sister concern to 3 ITA 51/Hyd/2022 enable it to tide over new competition from rivals, could not be claimed as a deduction on the grounds that the same had become irrecoverable. 3) The amount so deducted from current years profit was never routed through profit and loss account, this implies that these monies were capital In nature Advancing monies in the form of investments and claiming them as deduction from profits in subsequent years by the assessee is not in conformity with accounting standards and cannot be allowed. By merely debiting to the revaluation account and claiming that as an expenditure in the computation is also not acceptable on the part of the assessee, In light of the discussion made above, reversal of advances/ Investment in subsidiaries amounting to Rs.3,63,41.000/- and claimed as a deduction from the Net profit in computation of total income. is disallowed and added back to the total income/loss of the assessee.”

5.7 Contrary to the appellant's expectation, IDL Buildware Ltd. started making profits and the appellant company felt that there was no need to make a provision and it would be in a position to get back its capital. Consequently, the provision made in the Assessment Year 2009-10 was reversed in the Assessment Year 2017-18. The entry for reversal of provision was routed through the profit & loss account. The fact remained that it was not income and no deduction was ever claimed in the Assessment Year 2009-10 when the provision was first made. Hence in the computation of income this item was deleted and was not shown as 4 ITA 51/Hyd/2022 income. It was submitted before the Assessing Officer that the sum of Rs.3,63,41 ,000 could not be assessed as income.

5.8 Appellant's submissions were carefully considered. The provision made in the Assessment Year 2009-10, the sum of Rs. 3,60,41 ,000/-was debited to the revaluation reserve account. The provision was not claimed as an expenditure in the profit and loss account at any time as this was treated as a balance sheet item.

5.9 While reversing the provision in the Assessment Year 2017-18, appellant routed it through the profit and loss account. The fact is that the appetent that had not claimed the said amount as deduction in the Assessment Year 2009-10 when provision was first made. Since no deduction was claimed when the provision was made in the Assessment Year 2009-10. the same cannot be treated as income now when the reversal of provision is being made in the Assessment Year 2017 -18 . 5.10 Assessing Officer observed that the appellant made capital advances to the subsidiaries. Appellant had written off the capital advances made to the subsidiaries in the Assessment Year 2017 18 and claimed that provision as a deduction from the taxable income. On this ground. Assessing Officer disallowed the provision. The Assessing Officer's observations are not factually correct. First of all, the amount of Rs. 3.63,41,000/-was not written off ill tile Assessment Year 2017-18. This was a mere reversal of the provisions originally made in the Assessment Year 2009-10 and debited in the Revaluation reserve account. The reversal of the provision was routed through the profit and loss account in the Assessment Year 2017-18. Appellant is correct In claiming that the since it had not claimed the original provision made in the Assessment Year 2009-10 as deduction in that year, the reversal of the same in the current year, i.e 2017-18, cannot be treated as income in this year. Assessing Officer is directed to delete the addition made of Rs. 3,63,41,000/-. Appeal on this ground is allowed.

5 ITA 51/Hyd/2022 approved by the Hon’ble High Court of Andhra Pradesh was produced. It was submitted that the entire action of the ld.CIT(A) was not based on actual facts and therefore, it was submitted that the order passed by the ld.CIT(A) is required to be modified/cancel.

a) whether the assessee has claimed deduction in the AY 2009-10 for the amount in dispute and b) whether this re-valuation / diminution of the value of the long term investment was made pursuant to the direction of the High Court or pursuant to the approval of the scheme by the High Court and c) whether this amount of Rs. 3,63,41,000/- was forming part of the re-valuation of reserve account or not.

6 ITA 51/Hyd/2022 9. In the light of the above, we deem it appropriate to remand the matter to the file of the AO with the direction to de novo examine this issue in the light of the above said observation. It is expected from the assessee to produce all the relevant documents including the financials for the AY 2009-10, scheme of arrangement approved by the High Court and the details of provision made on diminution in value of the long term investment. The ld. AO is directed to decide the issue after following the principle of natural justice and after affording the opportunities of being heard to the assessee. In light of the above the appeal of the revenue is allowed for statistical purposes.

Order pronounced in the Open Court on 22nd June, 2022.