D.C.I.T., CIR-12, KOLKATA vs. M/S. B O C INDIA LTD.,

4. Whether on the facts and in the circumstances of the case, the Ld. CIT(A) was justified in allowing the amount of Rs.9,38,852/- on account of earlier period electricity expenses when the assessment itself failed to collect the bills from the electricity office in due time after the closure of the factory.

Shri K.R. Vasudevan, Shri Basant Gadhyan and Shri Hardik Lakhani, Ld. Authorized Representatives are appearing on behalf of assessee and Shri Sallong Yaden, Ld. Departmental Representatives appearing on behalf of Revenue. & 669/Kol/2008 A.Y. 2003-04 DCIT Cir-12 Kol. v. M/s BOC India Ltd. Page 3 3. The issue raised by Revenue in ground no. 1 in this appeal is that ld. CIT(A) erred in deleting the addition made by the AO for an amount of Rs. 22,59,471/- on account of holding the security deposit written off as capital loss.

5. Aggrieved, assessee preferred an appeal before Ld. CIT(A) where it was submitted that security deposits were made on revenue account in the course of normal business activities. These were written off as they became irrecoverable. The assessee also relied in the decision of Hon’ble Apex Supreme Court in the case of Badridas Daga v. CIT 34 ITR 10 wherein it was held that loss other than capital loss which is really incidental to the business is allowable under section 28 of the Income Tax Act. The assessee also relied in the case of Satluj Cotton Mills Ltd. Vs. CIT 116 ITR 1 wherein it was held that the loss on account of trading assets was allowable deduction and the loss on account of capital asset was not allowable deduction. In the instant case the security deposits were classified as current assets i.e. trading assets 669/Kol/2008 A.Y. 2003-04 DCIT Cir-12 Kol. v. M/s BOC India Ltd. Page 4 as these were made in the normal course and for the effective running of business. Accordingly the learned CIT(A) deleted the addition made by the AO.

Being aggrieved by this order of Ld. CIT(A) Revenue is in appeal before us.

6.1 From the facts we find that the loss claimed by the assessee by way of writing off the security deposits was on the revenue accounts. These security deposits were made by the assessee in the normal course of business. By making the security deposit no fixed assets has come into existence. Therefore such security deposit was classified as current assets in the books of accounts of the assessee. The business expenditure which is not specifically provided in sections 30 to 36 of the Act can be allowed under section 37 of the Act. Such expenditures before qualifying for deduction, are required to be laid out or expended wholly and exclusively for the purpose of the business and profession. But expenditures in the nature of capital expenditures or personal expenses of the assessee are not admissible under 669/Kol/2008 A.Y. 2003-04 DCIT Cir-12 Kol. v. M/s BOC India Ltd. Page 5 the said section. However, we find that issue raised by the Revenue is already covered in favour of the assessee in its own case in ITA No.1085/Kol/2007 and 1692/Kol/2007 for the assessment year 2002-03 where the Tribunal “C” Bench on similar facts has held that:-

“5. Ground No. 2 of the revenue pertains to earnest money written off and ground number 3 pertains to deletion of addition of 1,24,655/- being advanced to an employee treating the same as that this expense 6. On going through the order of the ld. CIT(A), we find no reason to interfere on the same. Accordingly both the grounds of the revenue are hereby rejected and dismissed.” In addition to the above we also find numerous judgments of various courts where such losses were allowed as deduction while determining the profit under the business head. Some of them are detailed as under for the purpose of the reference.

In the case of Ramchandar Shivnarayan vs. CIT (1978) 111 ITR 263 (SC) the Apex Court affirming the order of the Hon’ble High Court of Madras has held that if there is a direct and proximate nexus between the business operation and the loss or it is incidental to it, then the loss is deductible, as, without the business operation and doing all that is incidental to it, no profit can be earned. It is in that sense that from a commercial standard such a loss is considered to be a trading one and becomes deductible from the total income. It is to be remembered that the direct and proximate connection and nexus must be between the business operation and the loss. Further, the Hon’ble Madras High Court in the case of CIT vs. Textool Co. Ltd. 135 ITR 200 (Mad) has held as follows:-

“where the assessee claims a business loss, the main question to be considered is, whether the loss is incidental to the business……. The tribunal found that the assessee had to import from abroad certain component parts necessary for its manufacturing business. The assessee had to be abide by the scheme of import licences under which the assessee had to pay premiums to the Federation in advance covering the entire import entitlement. Owing to business exigencies, & 669/Kol/2008 A.Y. 2003-04 DCIT Cir-12 Kol. v. M/s BOC India Ltd. Page 6 the assessee could not fully utilize the import entitlement, resulting in a forfeiture of part of the advance deposit with the Federation. The Tribunal therefore felt no difficulty in finding that the deduction claimed by the assessee in writing off the amounts so forfeited was in the course of and incidental to the assessee’s business”. Similarly, the Bombay High Court in case of I.B.M. World Trade Corporation vs. CIT 186 ITR 412(Bom) has held as follows:-

“As the acquisition of premises on lease would not ordinarily be in the capital field, there is no hesitation in holding that the moneys advanced by the assessee in pursuance of the agreements to the landlord for the purposes of and in connection with the acquisition of the premises on lease were for the purpose of business. Naturally, therefore when such advances are lost to the assessee the loss would be a business loss and not a capital loss.” The Revenue has also raised the issue that the assessee failed to justify as to why the security deposits have become irrecoverable. In our view, it is the assessee who conducts his business affairs in the most effective beneficial manner and in the interest of the organization. The AO cannot step into the shoes of the assessee for defining the best possible ways of the business. Accordingly we opined that the assessee has written off the security deposits in the interest of the business organization. Therefore the question of recovery or irrecovery does not arise under the present conditions and situations. The AO in the present case has not doubted the genuineness of the loss claimed by the assessee but the loss was merely disallowed by holding them as capital loss. As the loss was arising from the writing of the trading assets which was classified as current assets in the books of accounts and also relying in the aforesaid decisions we uphold the order of the Ld CIT(A). Hence this ground of appeal of Revenue is dismissed.

7. Second issue raised in ground no. 2 by Revenue in this appeal is that the Ld CIT(A) erred in deleting the addition made by AO for Rs. 34,03,526/- on account of contingencies representing the sales tax paid under protest. & 669/Kol/2008 A.Y. 2003-04 DCIT Cir-12 Kol. v. M/s BOC India Ltd. Page 7 8. The assessee has made various payments to the Sales Tax Department under protest at the time of filing the appeal to higher authorities. These appeals were remanded to the lower authorities by the higher authorities but there was no progress so these appeals became time barred. Therefore the assessee has written off the payments made to the Sales Tax Department under protest. However, the AO opined that writing off contingencies for an amount of Rs.34,03,526/- is in the nature of an extra ordinary item therefore the same cannot be allowed as trading loss incurred in the ordinary course of business.

9. Aggrieved assessee preferred an appeal to Ld. CIT(A) where the assessee submitted that the amount of contingencies written off represent trade loss incurred in the ordinary course of business and as such it is an allowable deduction under Section 28 of the Act. Accordingly, Ld CIT(A) deleted the addition made by the AO.

Being aggrieved by this order of the Ld CIT(A) Revenue is in appeal before us.

10.1 We have heard the contentions of both the parties and perused the materials available on record. From the aforesaid discussion we find that the assessee has written off the payments made to the Sales Tax Department Under Protest. The AO treated the same as extraordinary item and disallowed by holding that this does not represent the trade loss arising in the ordinary course of the business. However, in our considered view, the payment made by the assessee under protest to the Sales Tax Department is very much in connection with the business although such kind of loss does not arise in the 669/Kol/2008 A.Y. 2003-04 DCIT Cir-12 Kol. v. M/s BOC India Ltd. Page 8 normal course. But at the same time we cannot ignore the business connection with the aforesaid loss. The business expenditure which is not specifically provided in sections 30 to 36 of the Act can be allowed u/s 37 of the Act. The only test is that such expenditures before qualifying for deduction are required to be laid out or expended wholly and exclusively for the purpose of the business and profession. Therefore we disagree with the view taken by the AO. Relying in the case of Mysore Sugar Company Limited 46 ITR 649 (SC), the Hon’ble Supreme Court held as under:- “To find out whether expenditure is on the capital account or on revenue, one must consider the expenditure in relation to the business. Since all payments reduce capital in the ultimate analysis one is apt to consider a loss as amounting to a loss of capital. But this is not true of all losses, because losses in the running of the business cannot be said to be of capital. The questions to consider in this connection are: for what was the money laid out? Was it to acquire an asset of an enduring nature for the benefit of the business, or was it an outgoing in the doing of the business? If money be lost in the first circumstance, it is a loss of capital, but if lost in the second circumstance it is a revenue loss. In the first, it bears the character of an investment, but in the second, to use a commonly understood phrase, it bears the character of current expenses.”

Further reliance can also be placed on the decision of jurisdictional High Court in the case of CIT vs. Gillanders Arbuthnot & Co. Ltd. 138 ITR 763 (Cal), wherein the Hon’ble High Court held the followings:- “Even if the amount cannot be treated as a bad debt in the sense that it was not an advance in the course of money-lending business, it can certainly be allowed as a trading loss incurred by the assessee in the course of its business.”

Taking a consistent view of various Hon'ble High Courts, we opined that the aforesaid loss has business connection with the assessee and is claimed on revenue accounts. Therefore we uphold the order of Ld. CIT(A) and dismiss this ground of appeal of the Revenue. & 669/Kol/2008 A.Y. 2003-04 DCIT Cir-12 Kol. v. M/s BOC India Ltd. Page 9

11. Third issue raised by Revenue in ground number 3 is that learned CIT(A) erred in deleting the addition made by the AO for an amount of Rs. 17,98,092/- on account of excess depreciation claimed by the assessee.

Being aggrieved by this order of the Ld. CIT(A) the revenue is in appeal before us.

16. Fourth issue raised by Revenue ground number 4 in this appeal is that the Ld.CIT(A) erred in deleting the addition made by the AO for Rs. 9,38,852/- on account of electricity expenses pertaining to the earlier year’s.

17. The assessee has made the payment of arrears of electricity dues in respect of the property located in Delhi and claimed the same as deduction in the year under consideration. The assessee also claimed that it was not aware for the outstanding arrears of electricity charges as the factory was closed down. The assessee came to know for the same when the property was sold therefore the electricity expenses were determined and crystallized in the year under consideration. However the AO disregarded the claim of the assessee on the ground that as per the tax audit report the assessee was 669/Kol/2008 A.Y. 2003-04 DCIT Cir-12 Kol. v. M/s BOC India Ltd. Page 12 following the mercantile system of accounting. So the expenses pertaining to earlier years should have been accounted for in the respective financial years also. The expenses of the earlier years cannot be claimed as deduction in the year under consideration. Accordingly the AO disallowed the electricity expenses and added to the total income of the assessee.

18. Aggrieved, assessee preferred an appeal to Ld. CIT(A) who has deleted the addition made by the AO.

Being aggrieved by this order of the Ld. CIT(A) Revenue is in appeal before us.

We have heard the contentions of both the parties and perused the materials available on record. From the aforesaid discussion we find that the factory of the assessee which was located in Delhi was closed down in November 1996. The assessee after the closure of the factory did not book any electricity expense in its books of accounts on the ground of non-receipt of electricity bills although the assessee was following mercantile system of accounting. The assessee claimed all the bills of electricity dues in the year under consideration as deduction on the ground that these dues came to its notice in this year only and same were settled accordingly. However the AO disagreed with the view of the assessee and held these expenses as prior period expenses so he disallowed. But at the appellate stage Ld CIT(A) reversed the order of the AO.

21. Fifth issue raised by Revenue in ground no. 5 in this appeal is that learned CIT(A) erred in deleting the addition made by AO for Rs.16.05 lacs on account of failure on the part of the assessee to furnish details of disputed Labour cases. The assessee had paid a sum of Rs.16.05 lacs to its ex- workers of its Delhi Factory out of Court settlement with the labourers and claimed deduction under section 37 of the Act. The assessee for claiming such deduction has relied in the decision of Hon’ble Supreme Court in the case of K. Ravindranathan Nair Vs. CIT 247 ITR 178 (SC) wherein it was held that the expenditure incurred in connection with the settlement of labour disputes was allowed for deduction as business expenditure. However the AO disregarded the claim of the assessee by holding that the facts of the above case were different from the instant case. In the present case the factory was closed down on account of pollution problems and not on account of labour disputes. Therefore the expenses incurred on labour disputes out of court settlement cannot be allowed as deduction by treating the same as revenue expenditure. The AO treated the same expenditure as capital in nature. The AO also recorded that the details of the labour disputes were not furnished at the time of assessment. Accordingly the AO disallowed the expenses and added to the total income of assessee. & 669/Kol/2008 A.Y. 2003-04 DCIT Cir-12 Kol. v. M/s BOC India Ltd. Page 14 22. Aggrieved, assessee preferred an appeal to learned CIT(A) who deleted the addition made by the AO holding that the decision of Hon’ble Supreme Court in the case of K. Ravindranathan Nair (Supra) is entirely applicable to the case of the assessee. Being aggrieved by this order of the Ld.CIT(A) Revenue is in appeal before us.

by assessee are as under:- “1(a) That on the facts and in the circumstances of the case, the CIT(Appeals)erred in upholding the action of the Assessing Officer in disallowing Rs.9,49,461/-, being amount written off in the Profit & Loss Account during the year under appeal on account of adjustment of Port charges against deposits lying with Calcutta Port Trust. & 669/Kol/2008 A.Y. 2003

04. DCIT Cir

12. Kol. v. M/s BOC India Ltd. Page 15 1(b). That on the facts and in the circumstances of the case, the CIT(Appeals) erred in holding that the write off of Rs.949,461/- is capital in nature.

2(a) That on the facts and circumstances of the case, the CIT(Appeals)erred in not adjudicating entire issues, as raised by the appellant, relating to the computation of long term capital gain attributable to sale of Delhi property.

2(b). That on the facts and circumstances of the case, the CIT(Appeals) erred in not adjudicating ground nos. 3(g) and 3 (h) of the grounds of appeal taken by the appellant before the CIT(Appeals) .

2(c). That on the facts and circumstances of the case, the CIT(Appeals) erred in not adjudicating and thereby upholding the action of the Assessing Officer in not allowing deduction of Rs.11,88,098/- and Rs.3,45,777/- being expenses incurred towards vacating Delhi property & other expenses relating to sale of Delhi Property while computing the long term capital gains arising from the sale of Delhi property.

2(d) That on the facts and circumstances of the case, the CIT(Appeals)erred in not adjudicating and thereby upholding the action of the Assessing Officer in rejecting the Valuer’s Report for considering the fair market value of land as on 01/04/1981 at Delhi and inserted arbitrarily taking the fair market value of land at 2/3rd of the value determined by the valuer while computing the long term capital gains arising from the sale of Delhi land.

2(e) That on the facts & circumstances of the case, the CIT(Appeals) failed to appreciate that the Assessing Officer has rejected the valuer’s report arbitrarily & the value adopted by the Assessing Officer has no basis whatsoever.

2(f). That on the facts and circumstances of the case, the CIT(Appeals) erred in upholding the action of the Assessing Officer in not reducing the amount of Rs.47,50,000/- while computing the long term capital gains arising from the sale of Delhi property.”

29.1 We have heard the contentions of both the parties and perused the materials available on record. From the aforesaid discussion we find that the assessee has imported the goods in the earlier years which were booked as expenditure in the year of import but the assessee did not book the port expenses incurred in connection with the import as the bills for port charges were not provided by CPT. However the assessee was depositing the money with the CPT in connection with the import of the goods and the same was classified under the head current assets in the books of accounts. These bills were provided in the year under consideration by CPT and the assessee accounted for the same in the books of accounts in the year under consideration on the ground that these expenses were determined and crystallized in the year under consideration. However, the lower authorities have disallowed by the treating the same as prior period expenses and holding that these expenses should have been claimed as deduction in the year of import of the goods. However in the instant case, the facts revealed that the assessee failed to claim the expenses due to non-availability of the bills from the CPT but the assessee kept paying the money to the CPT in the form of deposits. The bills were determined and crystallized in the year under consideration so in our considered view these expenses are very much in connection with the business and entitled for deduction under section 37 of & 669/Kol/2008 A.Y. 2003-04 DCIT Cir-12 Kol. v. M/s BOC India Ltd. Page 18 the Act. In holding so we are putting our reliance in Hon'ble Gujarat Hon'ble High Court in the case of Saurashtra Cement & Chemical Industries Ltd. Vs. CIT 23 ITR 523 (Guj), wherein the Hon'ble Gujarat High Court at page 531 has observed “… such items without investigation in to the facts about the crystallization of such dues could not be disallowed merely on the ground that they related to transactions pertaining to an earlier accounting year” In this context it is also submitted that merely because an expense relates to an earlier year, it does not become the liability payable in that particular year. Any liability, though pertaining to earlier year, depends upon making a demand and its acceptance by the assessee. If such liability has actually been claimed during subsequent year, it cannot be disallowed merely on the ground that the accounts are maintained on mercantile basis and it relates to transactions pertaining to an earlier year. Further reliance is also placed on the decision of ITAT Delhi Bench in the case of Kumar Aerosoles (P) Ltd. Vs. ACIT 55 TTJ 385 (Del) wherein expenses relating to electricity, telex, typewriter rent and telephone though relating to earlier years, are allowable in the year in which the demand is raised. Again, in the case of ITO v. Infratex Eng. Co. 38 TTJ 551 (Del), the ITAT Delhi has held that even though the assessee has maintained books of account on mercantile basis, the assessee could not claim liability in the earlier year when the same had not accrued. It is now well settled that even under mercantile system of accounting the liability is allowable in the year of accrual even if it relates to an earlier year. Further in the case of United bank of India vs. DCIT (1999) 68 ITD 332 (Cal) it has been held that any liability which may be considered to have been arisen only in a subsequent year has to be allowed as deduction even if the same may be attributable to the business conducted by the assessee in an earlier year. In view of the above we reverse the orders of the lower authorities and ground of appeal raised by the assessee is allowed. & 669/Kol/2008 A.Y. 2003-04 DCIT Cir-12 Kol. v. M/s BOC India Ltd. Page 19

30. Second issue raised by the assessee in ground number 2 in this appeal is that ld. CIT(A) erred in confirming the order of AO on account of various disallowances .

Expenses for vacating property The assessee at the time of assessment submitted that for getting the property vacated certain expenses were incurred. These expenses relate to the payment made by the company to certain persons as detailed below : & 669/Kol/2008 A.Y. 2003-04 DCIT Cir-12 Kol. v. M/s BOC India Ltd. Page 20 1. Laxman Singh Rawat Rs. 5.80 lacs paid on 21.01.2002 2. Sardarilal Sharma Rs. 5 lacs paid on 07.02.2002 3. Kamal Sharma Rs.3.25 lacs paid on 07.02.2002 However, the AO observed that the difference in the expenses claimed in the return of income by the assessee and in the submission of the assessee. in the return the expenses were claimed for Rs. 11,88,098.00 but in the in the assessment proceedings the expenses were claimed for rs. 14,05,000.00. The AO also observed that factory was lying idle. Accordingly the AO opined that the explanation of the assessee regarding the expenses incurred in connection with the getting the property vacated is not reliable. Therefore the plea of the assessee was disregarded by the AO.

Other connected expenses At the time of assessment proceedings the assessee failed to furnish the details of the above said expenses therefore these expenses were disallowed by the AO.

Valuation as on 1.4.1981 The assessee has taken a valuation report of the land as on 1.4.1981 which was valued at Rs.146.20 Lacs. The valuer while valuing the property has solely relied on a book with the title “ Guide to House Tax in Delhi 2001–02” written by Nabhi. So the AO opined that the valuer has not valued the property independently and in scientific manner. Accordingly the AO rejected the valuation of the property and has taken two-third of the amount of Rs.146.20 lacs as the fair market value as on 1.4.1981.

For the disallowance of Rs.47.50 Lacs the learned AR has submitted that it is well settled law to tax the real income. In the instant case the assessee had given a cash discount and the same cannot be treated as income of the assessee. On the other hand the learned the ld. DR vehemently relied on the order of authorities below.