KAMLESH S. PATIL,MUMBAI vs. ITO 24(2)(3), MUMBAI

This appeal, filed by assessee, being is directed against appellate order dated 29.12.2016 in appeal no. CIT(A)-36/IT-117/ITO-24(2)(3)/2015-16, passed by learned Commissioner of Income Tax (Appeals)-36, Mumbai (hereinafter called “the CIT(A)”), for assessment year(AY) 2012-13, the appellate proceedings had arisen before learned CIT(A) from the assessment order dated 28.03.2015 passed by learned Assessing Officer (hereinafter called “the AO”) u/s 143(3) of the Income-tax Act, 1961 (hereinafter called “the Act”) for AY 2012-13.

The grounds of appeal

Aggrieved by an assessment order dated 28.03.2015 passed by the AO u/s 143(3) of the 1961 Act, the assessee filed an first appeal before ld. CIT(A) , wherein the additions were confirmed by learned CIT(A) and the appeal of the assessee stood dismissed , vide appellate order dated 29.12.2016 passed by learned CIT(A), by holding as under:- “5.2. MATTER HAS BEEN CONSIDERED: I have considered the facts placed in the impugned assessment order, the statement of facts by the appellant and the submission made during the appellate proceedings. On careful perusal of the material on record and the objections placed by the appellant,the following questions arise, which are required to be answered in adjudicating this ground. Firstly, the legal position on the matter. Secondly, the details of the debt which has been written off by the appellant and the reasons for transfer of the debt to other entity. Thirdly, process adopted for proving the bad debt eligible for write off, and lastly presence of any relation between the entities concerned in the transaction. Before proceeding any further, in my opinion the above four questions need to be answered. 5.2.1.The appellant has relied on the CBDT circular number 12 of 2016 dated 30.05.2016 which stipulates that in pursuance to the Hon'ble Apex Court decision in the case of TRF Ltd. in CA nos. 5292 to 5294 of 2003 wherein the Hon'ble Apex Court held that the appellant is not required to establish that the debt has become irrecoverable and it is enough that the bad debt is written off in the books of the appellant. Hence, there is no doubt that the onus of proving the bad debt to be irrecoverable does not lie on the appellant in pursuance to the Apex court's order supra. Here, one question arises, as to whether it stops the revenue to establish the authenticity of the bad debts written off and to see that no provisions of the Income tax are flouted by any means. In this regard, it will be pertinent to quote the decision of the Hon'ble Allahabad High Court in the case of CIT vs. M/s Kohli Brothers Color Lab (P) Ltd, reported in (2010) 228 CTR (All) 84, the relevant part of the same is reproduced hereunder: “........... Hon'ble Apex Court in the case of Travancore Tea Estates Co. Ltd. Vs. CIT (1999) 151 CTR (SC) 231; (1998) 233 ITR 203 (SC) has taken the view, that as to whether a debt has become bad or at what point of time it became bad, are pure question of fact. Though standard of proof of proving the same is bad debt, is not required to be adopted and is to be decided on the wisdom of the respondent-appellant and not on the wisdom of Assessing Officer, but to show that entry which had been made as bad debt there has to be some material in support of the same, giving some semblance of genuineness and truthfulness to the same in the direction of forming opinion, that said debt was arising out of trading activity, there was relationship of debtor or creditor, same was irrecoverable. Merely because entries have been made, in respect of bad debt or part thereof, writing it off, claiming deduction, the said entries can always be examined by the Assessing Officer, before proceeding to award deductions, and not by merely blindly following the same, but stand of the appellant has to be tested from the point of view of appellant, and appellant cannot come forward and say that on account of change brought in by way of amendment w.e.f. 1.4.1989, under Section 36(1)(vii) inquiry is not permissible. Thus in the present case, on the substantial question of law, posed, provision of Section 143 (2) of Income Tax Act viz-a-viz section 36(1)(vii) of the Income Tax Act, 1961 read with section 36(1) both would be harmonized to give purposeful meaning to both the 5 statutory provisions, as one extends benefit to the respondent-appellant of deduction for their debt or part thereof becoming bad and other authorizes Assessing Officer to see that provision of Income Tax Act are not flouted by any means. .............” Thus, it is clear that the judicial pronouncements in the matter is not an estoppel for the revenue to investigate the matter and prove the genuineness of the bad debt written off. 5.2.2.Coming to the second question, the ledger of the M/s Maya Entertainment Studios Pvt. Ltd. submitted by the appellant for the financial year reflects closing balance of Rs.30,594/-. This figure in the ledger has been arrived after giving effect of transfer for Rs.25,94,795/- on 15.07.2010 to M/s Maya Digital Media Pvt. Ltd. and the last transactions made with M/s Maya Entertainment Studios Pvt. Ltd. are receipt of Rs.10,85,262/- on 02.07.2010 and sales made for Rs.3,23,581/- & Rs.10,65,396/- on 09.07.2010 and there are no other transactions worth mentioning for the rest of the year. The ledger of M/s Maya Entertainment Studios Pvt. Ltd. for the financial year 2011-12 pertaining to the assessment year in appeal shows the opening and closing balance of Rs.30,594/-. The appellant has submitted that the amount of Rs.25,94,795/- remaining as debt has been transferred to M/s Maya Digital Media Pvt. Ltd. on transfer of studio business of M/s. Maya Entertainment Studios Pvt. Ltd. to M/s. Maya Digital Media Pvt. Ltd. Now coming to the ledger of M/s Maya Digital Media Pvt. Ltd. for the financial year 2010-11, the ledger starts with effect from 15.07.2010 by transfer of amount Rs.25,94,795/- being payable by M/s Maya Entertainment Studios Pvt. Ltd and further sale and payment has got effected with the M/s Maya Digital Studios Pvt. Ltd. for the rest of the year. In view of the flow of transactions, it is noticed that indeed the studio business transactions have been transferred to M/s Maya Digital Media Pvt. Ltd.,the ledger of M/s Maya Digital Media Pvt. Ltd. for the financial year 2011-12 relevant to the assessment year in question reflects only two transactions i.e. 'Bad debts written off for Rs.26,81,722/- on 02.04.2011 and 'Payment received from M/s Maya Digital Media Pvt. Ltd. for Rs.1,50,000/- on 04.05.2011' and subsequently, Rs.7,43,907/- has been carried forward to the succeeding year and ultimately written off in financial year 2012-13 as claimed by the appellant. By plainly looking at the chronology of the 6 financial transactions, it is noticed that the business of the appellant was with the M/s Maya Entertainment Pvt. Ltd. and M/s Maya Digital Pvt. Ltd. for the whole of the assessment year, complimenting in parts i.e. first four months with the first entity and second eight months with second entity. Thereafter, only the bad debts have been written off in the succeeding two years. Here, it will be pertinent to note that the appellant has claimed that the studio business of M/s Maya Entertainment Studios Pvt. Ltd. was transferred to M/s Maya Digital Media Pvt. Ltd., however, the remaining debt also has been transferred by the appellant to M/s Maya Digital Media Pvt. Ltd. which raises question. Further, the appellant has claimed that the write off was made on the part of the debt on account of M/s Maya Digital Media Pvt. Ltd. but the ledger reflects altogether another theory. 5.2.3. The appellant has at first transferred the remaining amount payable by M/s Maya Entertainment Studios Pvt. Ltd. to the ledger of M/s Maya Digital Media Pvt. Ltd. then continued business for balance of the year. Subsequently, went on to write off the debt as bad debt at the very beginning of the assessment year even though the sales have effected with the M/s Maya Digital Media Pvt. Ltd. till the end of the preceding year. The appellant has also contested that out of the debt of the M/s Maya Entertainment Studios Pvt. Ltd. only Rs.1,50,000/- was written off and that too in the financial year 2012-13 and balance written off bad debt constitutes the amount payable from M/s Maya Digital Media Pvt. Ltd.. However, it is noticed that the explanation of the appellant does not hold good in the light of the transactions reflected in the ledger of M/s Maya Digital Media Pvt. Ltd.. The last of the receipt from M/s Maya Digital Media Pvt. Ltd. was on 11.03.2011 in the financial year 2010-11 and write off was effected on 02.04.2011 and another payment was received from M/s Maya Digital Media Pvt. Ltd. on 04.05.2011 i.e. after the write off made. Hence, the contention of the appellant is not sustainable as payments were received just before and after the write off entry. 5.2.4. Coming to the question of relations between the entities involved in the chain of the events pertaining to these transactions. The AO observed that the appellant has been doing business with M/s Maya Digital Studios Pvt. Ltd. which is sister concern of the M/s Maya Digital Media Pvt. Ltd.. The appellant has rebutted this finding of the AO as "The learned AO erred in observing the fact M/s. Maya Digital Studios Pvt. Ltd. is a sister concern of M/s. Maya Digital Media Pvt. Ltd. when actually it is a different company owned and controlled by different directors and also located at a different place. These details are available in public domain in the website of Ministry of Company Affairs."Ongoing by the statement of the appellant, it is found that in the maze of this bad debt write off, there are total of three entities first M/s Maya Entertainment Studios Pvt. Ltd., second M/s Maya Digital Media Pvt. Ltd., third M/s Maya Digital Studios Pvt. Ltd., and before proceeding further the relation between these three entities need to be looked into. The data from the public domain and details given by the appellant has been exhausted and the outcome is tabulated as under: U92100MH2004PTC150019 U93000M H2010PTC205033 U93000MH2011PTC2I2553 CIN Company / LLP MAYA MAYA DIGITAL MAYA DIGITAL STUDIOS Name ENTERTAINMENT STUDIOS MEDIA PRIVATE LIMITED PRIVATE LIMITED PRIVATE LIMITED Date of 15/12/2004 29/06/2010 20/01/2011 Incorporation Old Address 601, Interface No. 11, 6th 601, Interface No.11 6th Floor, Behind Goregaon Floor, Behind Goregaon Sports Club, Off Link Road, Sports Club, Off Link Road, Malad (West), Mumbai-64 Malad (West), Mumbai-64 Present Address Block No. 20, 22, Bombay 2ND FLOOR, Communication Centre,Mukta Cotton Mill Compound MUKTA HOUSE,FILM CITY House, 2nd Floor, Sector II, Dattaram Lad Path, COMPLEX, OPP Film City, Goregaon Kalachowky Road Mumbai RELIANCE MEDIA, (East), Mumbai MH 400065 Mumbai City MH 400033 IN GOREGAON-EAST IN MUMBAI Mumbai City MH 400065 IN Email id prakash@pinkhem.com accounts@mayadigitalstudio info@mayadigitalstudios .com s.com _ Company status Active Active Active (for efiling) SHILPA AJAY DEEPA DEEPA SAHI Name fo the BHARTiYA AJAY BHARTIYSA SAHI KETAN KETAN MEHTA Directors MEHTA FRANK ALBERT FOSTER As can be easily observed from the table above that the M/s Maya Entertainment Studios Pvt. Ltd. and M/s Maya Digital Media Pvt. Ltd. has been working at the same address. The M/s Maya Digital Media Pvt. Ltd. and M/s Maya Digital Studios Pvt. Ltd. have same set of directors i.e. M.s Deepa Sahi and Mr. Ketan Mehta, hence, the argument of the appellant that these companies are not related does not sustain. Accordingly, it is found that M/s. Maya Digital Media Pvt. Ltd., and M/s. Maya Digital Studios Pvt. Ltd. are closely related and can be termed as sister concern. Here one more thing can be observed from the ledger of M/s Maya Digital Media Pvt. Ltd. and M/s Maya Digital Studios Pvt. Ltd. that payment made to the appellant from both these concerns are effected from the same current account i.e. 00420100024064 held with the DCB bank.AII the three entities are active as on date and there is no evidence of any financial hardship of these concerns. Hence, the objection of the appellant that there is no relation between the entities involved in this transaction does not sustain. 5.3. In view of the facts, law points and accounting observations placed in the preceding paras clearly displays that the bad debts written off by the appellant does not pass the test of authenticity and has been affected with motive to reduce the profit without making relevant efforts and taking undue advantage of legal pronouncements in the matter. Further, it can be noted that the reverse effect of bad debts write off will be cessation of liability in the books of the debtor. As it has been established by several judicial pronouncements that there shall be reasonable time elapsed before cessation of liability, hence, on the reverse, there has to be some reasonable lapse of period or bonafide evidence of the bad debts irrecoverable, which is completely absent in this case. Accordingly, I confirm the addition made on account of bad debt written off for Rs.26,81,722/-. The grounds of appeal raised are dismissed.”

Being aggrieved by the appellate order dated 29.12.2016 passed by learned CIT(A), the assessee has filed second appeal with tribunal. The learned counsel for the assessee submitted before the Bench that an amount of Rs. 26,81,722/- was written off as bad debt under the head „Administrative Expenses‟ . Our attention was also drawn by learned counsel for the assessee to page no. 25 of the paper book filed with the tribunal, which is schedule annexed to and forming part of Balance Sheet of the assessee as at 31.03.2012, wherein under the head „Administrative Expenses‟, an amount of Rs. 26,81,722/- is shown as „Bad Debts Written off‟ . Our attention was also drawn to page no. 36-38 of the paper book wherein ledger account of M/s. Maya Entertainment Studios Private Ltd. in the books of accounts of the assessee is placed from 1st April 2009 to 31st March, 2012. It was submitted that on 15th July, 2010 an amount of Rs. 25,94,795/- 9 recoverable by the assessee from M/s Maya Entertainment Studios Private Limited was transferred to the account of M/s. Maya Digital Media Private Ltd as the studio business of Maya Entertainment Studios Private Limited was transferred to M/s Maya Digital Media Private Limited . Our attention was drawn to letter dated 15.07.2010 issued by Maya Entertainment Studios Private Limited in favour of the assessee wherein it is mentioned that studio business of said M/s Maya Entertainment Studios Private Limited stood transferred to M/s Maya Digital Media Private Limited w.e.f. 15th July 2010. The said letter as is produced before the Bench is placed in file. Our attention was also drawn to page no. 39 to 41 of the paper book filed with the tribunal, wherein ledger account of M/s. Maya Digital Media Private Ltd. from 1st April 2010 31st March 2013 is placed . It was submitted by learned counsel for the assessee that even after transfer of balance amount of Rs. 25,94,795/- on 15.07.2010 , sales were made by the assessee to Maya Digital Media Private Limited and the balance carried forward to the next year on 31st March , 2011 was Rs. 35,75,629/- , out of which Rs. 26,81,722/- was written off on 02.04.2011 as bad debt . Thus , it was submitted that since the assessee could not recover the aforesaid amount , it was written off as bad debts in its books of accounts to the tune of 75% of Rs. 35,75,629/-, which comes to Rs. 26,81,722/- . It was submitted that OCKAM Systems is proprietary concern of the assessee . It was submitted that in immediately next year viz. AY 2013-14, the assessment was framed by Revenue u/s 143(3) of the 1961 Act vide orders dated 14.03.2016 wherein an amount of Rs. 7,43,907/- receivable from M/s Maya Digital Media Private Limited was written off as Bad Debts in the said FY ending 31.03.2013 , which was accepted by Revenue in an assessment framed u/s 143(3) of the 1961 Act vide assessment order dated 14.03.2016 and no additions/disallowance on account of bad debts written off claimed by the assessee were made by the Revenue. The assessment order for AY 2013-14 dated 14.03.2016 passed by the AO u/s 143(3) of the 1961 Act is placed on record in the file. Our attention was also drawn to the appellate order passed by Ld. CIT(A) order . It was submitted that notices u/s 133(6) of the 1961 Act were issued to M/s Maya Digital Studios Private Limited but it did not responded which itself shows that debts have become bad . Our attention was brought by learned counsel for the assessee to the table/chart of status of all the three companies viz. Maya Entertainment Studios Private Limited, Maya Digital Media Private Limited and Maya Digital Studios Private Limited as is placed vide chart by Ld. CIT(A) in its appellate order which shows that these companies are in existence which as per learned counsel for the assessee proves as to the genuineness of the write off of Bad Debts .

The Ld. DR on the other submitted that the genuineness of the bad debt written off is not proved. It was submitted by learned DR that self serving documents were produced. It was submitted that all three companies namely Maya Entertainment Studios Private Limited, Maya Digital Media Private Limited and Maya Digital Studios Private Limited are sister/associated concerns as is brought out by learned CIT(A) in its appellate order at page 20. It was submitted by learned DR that the assessee still has dealing with entity of the same group/associated concerns namely Maya Digital Studios Private Limited and there is no justification/reasoning for write off of debts which was done to suppress profits and evade taxes with a view to defraud revenue. It was submitted by learned DR that genuineness of write off of bad debt could not be proved. It was submitted that notices were issued by the AO u/s 133(6) to Maya Digital Media Private Limited, which returned un-served. The assessee did not produce the aforesaid party M/s Maya Digital Studios Private Limited before the authorities below nor confirmation from the parties was submitted. It was submitted that principles of res-judicata are not applicable to income-tax proceedings and next year selection of the case of the assessee for framing scrutiny assessment was under CASS which cannot be taken as basis to contend that the bad debts written off were allowed in that AY will lead to inference that the same should be allowed in this year also.

We have heard rival contentions and perused the material on record. We have observed that the assessee is engaged in the business of dealing in computers and its peripherals , repairs and maintenance services and income from other sources. We have observed that the assessee had claimed that it had earlier dealings with M/s. Maya Entertainment Studios Private Ltd. for renting of computers, repairs and maintenance. The ledger accounts of the said concern M/s Maya Entertainment Studios Private Limited in assessee‟s books of accounts from 01.04.2009 to 31.03.2012 are placed in paper book/page 36-38. Perusal of the said ledger accounts of M/s Maya Entertainment Studios Private Limited reveals that an amount of Rs. 25,94,795/- was transferred to its sister concern M/s. Maya Digital Studio Private Ltd. on 15.07.2010 . On perusal of the ledger account of Ms/. Maya Entertainment Studios Private Ltd. for the year ending 31.0.2011 and 31.03.2012 , it is observed that there is no further business dealing of the assessee with afore-said M/s Maya Entertainment Studios Private Ltd. , post 15.07.2010 . The assessee has produced letter dated 15.07.2010 for the first time before us wherein Maya Entertainment Studios Private Limited has written to the assessee that its studio business stood transferred to M/s Maya Digital Media Private Limited with effect from 15.07.2010 and henceforth all obligations/liabilities and business dealings connected with studio business shall be undertaken by M/s Maya Digital Media Private Limited . The assessee at first instance took a stand before the AO that the said M/s Maya Entertainment Studios Private Limited incurred huge losses in its most ambitious home production animation movies „Ramyana-The Epic‟ which miserably flopped which made its financial condition in a very bad shape and considering this 75% of the outstanding amount of Rs. 35,75,629/- was treated as bad for recovery and consequently bad debts were written off in books of accounts at Rs. 26,81,722/- on 1st April 2011 but later it changed its stance before learned CIT(A) and contentions were made that so far as dues receivable from M/s Maya Entertainment Studios Private Limited are concerned , the same stood received by the assessee which are reflected in the ledger account of M/s Maya Digital Media Private Limited . It is now claimed that an amount of Rs. 24,44,795/- out of total debt outstanding of Rs. 25,94,795/- was received in the financial year 2010-11 and 2011-12, while only Rs. 1,50,000/- remained outstanding which was written off by the assessee in AY 2013-14 as bad debts written off and all these recoveries related to the debt outstanding of Maya Entertainment Studios Private Limited . Once again before us , the assessee has reverted to its initial contentions that the write off of debts as bad debts related to the recoverable from Maya Entertainment Studios Private Limited. So, the assessee is changing its stance time and again. It is pertinent to mention that it is admitted by the assessee that both the concerns namely M/s Maya Entertainment Studios Private Limited and M/s Maya Digital Media Private Limited are sister/associated concerns. The assessee‟s dealing with M/s Maya Entertainment Studios Private Limited ended on 09.07.2010 and w.e.f. 15.07.2010 it is claimed that studio business of M/s Maya Entertainment Studios Private Limited stood transferred to M/s Maya Digital Media Private Limited. The assessee‟s dealing with M/s Maya Digital Media Private Limited ended on 04.05.2011 when the last payment of Rs. 1,50,000/- was received by the assessee as is reflected in ledger account which is placed in the paper book. The assessee had however continued to deal with another company namely M/s Maya Digital Studios Private Limited , which as per Revenue dealing continued even after last of the alleged bad debts of Rs. 7,43,907/- was written off by the assessee as bad debt on 31.03.2013. The assessee has not placed ledger account of the said concern M/s Maya Digital Studios Private Limited in its books of accounts, in the paper book filed with the tribunal. Rather, the assessee has claimed that this concern namely M/s Maya Digital Studios Private Limited is an independent entity altogether and is not associated/connected with either of the two entities namely M/s Maya Entertainment Studios Private Limited or M/s Maya Digital Media Private Limited but however , the learned CIT(A) has made verifications from the web-site of MCA etc. and has brought on record cogent evidences to prove that all three entities namely Maya Entertainment Studios Private Limited, Maya Digital Media Private Limited and Maya Digital Studios Private Limited are associated/connected entities. The assessee has admitted that M/s Maya Entertainment Studios Private Limited and Maya Digital Media Private Limited are sister concerns while evidence brought on record by learned CIT(A) clearly reveals that Directors of M/s Maya Digital Media Private Limited and M/s Maya Digital Studios Private Limited are same and even their web addresses are also same, which conclusively proves that all these entities belongs to same group and are undisputedly associated/connected entities. The learned CIT(A) also observed that the payment received by the assessee from M/s Maya Digital Media Private Limited and M/s Maya Digital Studios Private Limited were effected from same bank account 00420100024064 held with DCB Bank. The aforesaid findings of learned CIT(A) could not be demolished by the assessee even before us. The chart showing that all three entities had common thread running through them as presented by learned CIT(A) in its appellate order, is reproduced hereunder:

The second issue relates to Profit on sale of fixed assets of Rs. 12,39,137/-. The assessee had transferred fixed assets to trading account an amount of Rs. 10,71,991/- and has shown profit on sale of fixed assets of Rs. 12,39,137/- as the sale price of fixed assets was fixed at Rs. 23,11,128/- . The assessee did not produced before the AO the original buying price of the said assets, its year of acquisition, copies of the invoices etc. It could also not be explained by the assessee before the AO whether the said assets were capital assets as defined in Section 2(14) of the 1961 Act. The assessee also failed to co- relate the actual sale of these so called assets and its sale price. The AO was of the view that provisions of Section 45(2) of the 1961 Act are not applicable in the instant case and the assesssee had tried to reduce its profits on sale of assets transferred to stock by showing profit on sale of fixed assets of Rs. 12,39,137/- and reducing the same from Block of Assets. The AO held it as a trading receipt and the same was added to the income of the assessee as business profit , vide assessment order dated 28.03.2015 passed by the AO u/s 143(3) of the 1961 Act.

Aggrieved by an assessment framed by AO u/s 143(3) of the 1961 Act vide assessment order dated 28.03.2015, the assessee filed first appeal with learned CIT(A). The assessee had contended before learned CIT(A) that the assessee has given Computers as well high end Computer Servers with their Peripherals on hire in big quantities. The assessee had claimed these assets as capital assets forming part of Block of Assets on which depreciation @ 60% was claimed by the assessee. The assessee contended that it has provided complete details of w.d.v. of each item of the fixed assets sold and also details of each of the item of fixed assets sold. It was submitted that complete records of these computers and high end computer servers with peripherals are maintained by the assessee. It was also claimed that the said computers and high end computer servers with peripherals are fixed assets of the assessee which are given on hire in bulk quantities to clients. It was explained that these computers and high end computer servers with peripherals are received back from the clients after end of contract period of hire and then again these computers and high end computer servers with peripherals are given on hire to other parties . It was claimed that on sale of these computers and high end computer servers along with peripherals, the accounting entries were passed in a particular manner in books of accounts maintained by the assessee which has no bearing on the computation of income within mandate of the 1961 Act, as these capital assets were never converted into stock-in-trade and these capital assets formed part of block of assets on which depreciation at prescribed rate @60% was claimed under the 1961 Act. It was claimed that on sale of these capital assets which formed part of block of assets, the relevant and applicable provision is clause (iii) to Sub- section (1) to Section 32 of the 1961 Act and the sale price is to be reduced from w.d.v. as is stipulated therein and on the balance amount remaining, depreciation shall be allowable. Thus, it was claimed that the assessee has very rightly followed the relevant provisions of the 1961 Act. The Ld. CIT(A) directed the AO to rework profit on sale of the fixed assets from the block of assets as Short Term Capital Gains by following provisions of Section 50 of the 1961 Act, vide appellate order dated 29.12.2016 passed by learned CIT(A) , by holding as under: 7.2. MATTER HAS BEEN CONSIDERED: I have considered the facts placed in the assessment order, the statement of facts by the appellant and the submission made during the appellate proceedings. On careful perusal of the material on record and the objections placed by the appellant the following questions arise, which are required to be answered in adjudicating this ground. Firstly, provisions of the Act governing the sale of depreciable assets. Secondly, the details of the transaction in the process of sale of the asset and the details of income arrived in the transaction and whether this income has been offered for taxation. Before proceeding further, in my opinion the answers to the above questions are required to be derived. 7.2.1. In the process of the sale of the fixed assets, there are four sections in the Act which govern the end result of the transactions i.e. section 2(14), section 32(1)(iii), section 45(2) and section 50 of the Act. The provisions of section 2(14) of the Act are helpful in determining the nature of asset i.e. capital or not. (I) Since, there is no doubt that the depreciable assets are covered under the provisions of section 2(14) of the Act, as held by plethora of judicial pronouncements, hence, this issue is not discussed upon. (II) Further, the first section of the Act coming into the play is section 32(1)(iii) and the same is reproduced hereunder: 32. (1) In respect of depreciation of— (i) buildings, machinery, plant or furniture, being tangible assets; (ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, owned, wholly or partly, by the appellant and used for the purposes of the business or profession, the following deductions shall be allowed ........................................ (iii) in the case of any building, machinery, plant or furniture in respect of which depreciation is claimed and allowed under clause (i) and which is sold, discarded, demolished or destroyed in the previous year (other than the previous year in which it is first brought into use), the amount by which the moneys payable in respect of such building, machinery, plant or furniture, together with the amount of scrap value, if any, fall short of the written down value thereof: 19 Provided that such deficiency is actually written off in the books of the appellant" Here, it is clear that this provision comes into play when the sale proceeds are less than the WDV of the fixed asset, hence, the contention of the appellant that he has followed the provisions of section 32(1)(iii) of the Act in reporting this transaction does not sustain. (III) Now coming to the other provisions of the Act that comes into play in this matter i.e. section 45(2) of the Act, which reads as under: - (2) Notwithstanding anything contained in sub- section (1), the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade of a business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset." It is clear from the provisions of the section 45(2) of the Act, in case of the profits arising from transfer of the fixed assets to the stock-in-trade, the fair market value of the asset will be the full value of consideration received or accrued on transfer of the particular asset. However, this section is also ruled out as the appellant has denied having transferred the fixed asset to the stock-in-trade.(IV) Further, the provisions of section 50 of the Act governs the nature of receipts on sale of depreciable asset. The provisions of section 50 are as under: . . . "50. Notwithstanding anything contained in clause (42A) of section 2, where the capital asset is an asset forming part of a block of assets in respect of which depreciation has been allowed under this Act or under the Indian Income-tax Act, 1922 (11 of 1922), the provisions of sections 48 and 49 shall be subject to the following modifications:— "(1) where the full value of the consideration received or accruing as a result of the transfer of the asset together with the full value of such consideration received or accruing as a result of the transfer of any other capital asset falling within the block of the assets during the previous year, exceeds the aggregate of the following amounts, namely:— (i) expenditure incurred wholly and exclusively in connection with such transfer or transfers; (ii) the written down value of the block of assets at the beginning of the previous year; and (iii) the actual cost of any asset falling within the block of assets acquired during the previous year, such excess shall be deemed to be the capital gains arising from the transfer of short-term capital assets; (2) where any block of assets ceases to exist as such, for the reason that all the assets in that block are transferred during the previous year, the cost of acquisition of the block of assets shall be the written down value of the block of assets at the beginning of the previous year, as increased by the actual cost of any asset falling within that block of assets, acquired by the appellant during the previous year and the income received or accruing as a result of such transfer or transfers shall be deemed to be the capital gains arising from the transfer of short- term capital assets." From the above, it is seen that since the previous two sections have been ruled out in the case of the appellant, hence, the provisions of section 50 of the Act is squarely applicable in the case of the appellant. 7.2.2. Now coming to the second observation, it is noticed that the appellant claimed that when the fixed assets was sold as per accounting policy and practice the WDV of computers or parts sold were transferred to "Goods Transferred from FA to Trading account" only for the sake of convenience and to arrive at Profit & Loss on sale of fixed assets. Similarly, Sale Price of Fixed Assets which was initially posted to Sales Account (since entry for sale of fixed assets has to be passed through "Sales Module" to take care of VAT effects as well as effect on inventory which gets updated upon sale entry) were then transferred to account viz. "Sale of Goods Trf From Fixed Assets". The net amount of above two accounts i.e. Sale Price and WDV represents "Profit or Loss on sale of Fixed Assets" This Profit or Loss on Fixed Assets was then shown in Profit & Loss account as a separate item. Hence, in monetary terms, he sold fixed assets for consideration of Rs.23,11,127/-.The WDV in relation to fixed assets sold came to Rs.10,71,990/-. Thus in books of accounts the Profit on sale of Fixed Assets was credited at Rs.12,39,136/-. (Rs.23,11,127/- sale price minus WDV Rs. 10,71,990/-). Then the appellant deducted Rs. 12,39,136/- from Net Profit as per Profit & Loss A/c. in the Computation of Total Income, since it was already added to Net Profit as per Profit & Loss Account. The appellant also added back depreciation of Rs.62,54,851 as per Profit & Loss A/c. The appellant also deducted an amount of Rs.23,11,128/- which represented sale price of fixed assets sold from Block of Assets for assets carrying rate of depreciation of 60%. Hence, it is found that the appellant sold the asset, calculated the profit element and reflected in the profit loss account and then reduced it while computing the income for the purposes of the Income Tax. He also reduced the amount of sale proceeds from the block of assets to work out the revised value of depreciation. But here one thing appears to be missing is that the amount of profit on transfer of the fixed asset was not carried forward to the head Capital Gain as is required under the provisions of section 50 of the Act. Further, it is observed that while calculating the business income in the computation of income the appellant has shown, " Less: Items allowable/considered separately" and has reduced the amount of depreciation and profit on sale of fixed asset. Subsequently, it is noticed that the appellant has already added the amount of depreciation claimed in the P&L account and thus after reducing it, again the profit remains unchanged to the extent of allowable depreciation. However, in the case of the profit on sale of fixed assets, it is noticed that this profit has been nowhere accounted in calculating the taxable income in the computation of income. Hence, it is clear that the profit for Rs.12,39,137/- on sale of fixed asset has escaped from being part of the computation of the income. 7.3. In view of the facts, law points and accounting observations placed in the preceding paras clearly displays that the amount of profit on sale of fixed asset has escaped the inclusion in the taxable income of the appellant. The appellant has been reiterating that the effect of the sale of the fixed asset has been given in the block of assets by reducing the value of block of asset which will go on to reduce the value of depreciation, hence, he is not liable to offer the profit on sale of fixed asset separately." On the other hand, the AO has added this amount as receipts from the trade of the appellant. After considering all the aspects of the transaction and the provisions of the Act, I find that the AO as well as the appellant has erred in treating the head of the income on sale of the fixed asset and taking into account for taxation of this income, I hold that the profit on sale of fixed asset which was included in the block of asset has to be arrived as per the provisions of the section 50 of the Act and accommodated in the head "Short Term Capital Gain". Accordingly, I direct the AO to rework the profit on sale of the fixed asset from the block of assets as Short Term Capital Gains. The grounds of appeal

In the result, appeal of the assessee is allowed for statistical purposes as indicated above. Order pronounced in the open court on 15.03.2019. आदेश की घोषणा खुऱे न्यायाऱय में ददनांकः 15.03.2019 को की गई Sd/- Sd/- (RAVISH SOOD) (RAMIT KOCHAR) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, dated: 15.03.2019 Nishant Verma Sr. Private Secretary