2010 (7) TMI 662 - AT - Income Tax

Disallowance - AO wanted to verify the expenses assessee was duty bound to produce the books of accounts and other bills and vouchers for his verification - Merely because records are voluminous that cannot be a reason for non production of such records before the Assessing Authority - Decided in the favour of the assessee by way of remand Regarding bad debts - The bonafides of the assessee are further clear from the fact that in the earlier year only provision was created and no claim for bad debt was made -In any case there was a fire in the assessee s office and no further records were available to prove this point Capital loss - US-64 units had ceased to exist and in place of them and on the strength of those holdings the assessee has been allotted new tax free bonds and therefore even the extended definition of relinquishment is not applicable - Thus it is not a case of extinguishment but a simple case of conversion of one asset into another - transaction regarding surrender of US-64 units for converting the same into Unit Trust of India 6.75% tax free bonds in terms of the scheme of the Unit Trust of India which was guaranteed by the Government of India would not amount to transfer - In the result revenue s appeal is partly allowed for statistical purposes

Summary

Issues Involved:
1. Deletion of disallowance of Rs. 3.88 crores due to non-production of relevant account books, bills, and vouchers.
2. Deletion of disallowance of Rs. 87,05,400/- related to bad debts.
3. Deletion of disallowance of long-term capital loss of Rs. 37,04,987/- on conversion of UTI-64 units into UTI 6.75% Tax-Free Bonds.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance of Rs. 3.88 Crores:
During the assessment proceedings, the Assessing Officer (AO) noticed that the assessee had debited manufacturing expenses of Rs. 7763.41 lakhs in the profit and loss account. The AO requested the assessee to produce books of accounts, bills, and vouchers for verification. The assessee only provided groupings of the profit and loss account, and despite repeated requests, did not produce the required documents. Consequently, the AO made an ad-hoc disallowance of 5% amounting to Rs. 3.88 crores.

Before the Commissioner of Income Tax (Appeals) [CIT(A)], the assessee argued that the books of accounts were duly audited and maintained at three different locations, making it impractical to produce the voluminous records. The CIT(A) accepted these submissions and deleted the disallowance, stating that the AO was not justified in disallowing 5% of the expenditure without proving that the expenses were not for business purposes.

The Tribunal agreed with the AO that the assessee was duty-bound to produce the books of accounts and supporting documents for verification. However, it found merit in the assessee's argument that insufficient time was given to produce the records. Therefore, the Tribunal set aside the order of the CIT(A) and remitted the matter back to the AO, directing the AO to provide sufficient opportunity to the assessee to produce the necessary documents.

2. Deletion of Disallowance of Rs. 87,05,400/- Related to Bad Debts:
The AO observed that the assessee claimed bad debts of Rs. 72,07,735/-. The assessee explained that these were provisions for bad debts made in earlier years but not claimed then. The AO disallowed the claim, stating that the assessee failed to prove that the debts had become bad during the relevant accounting year.

Before the CIT(A), the assessee argued that the amounts were written off due to disputes over quality issues, price differences, and some debtors closing down. The CIT(A) accepted the explanation, noting that under the amended provisions of Section 36(1)(vii), the assessee is not required to furnish demonstrative proof that the debt has become bad. The CIT(A) allowed the claim, referencing the ITAT Mumbai decision in DCIT vs. Oman International Bank S.A.O.G. [100 ITD 285].

The Tribunal upheld the CIT(A)'s decision, agreeing that the assessee had written off the debts on a bona fide basis and complied with the requirement of writing off the bad debts in the books of accounts. The Tribunal found that the assessee's actions were in line with the amended Section 36(1)(vii) and confirmed the CIT(A)'s order.

3. Deletion of Disallowance of Long-Term Capital Loss of Rs. 37,04,987/-:
The AO noticed that the assessee claimed a capital loss of Rs. 37,04,987/- on converting UTI US-64 units into UTI 6.75% Tax-Free Bonds. The AO disallowed the loss, stating that the conversion did not amount to a transfer as defined under Section 2(47) of the Income Tax Act.

Before the CIT(A), the assessee argued that the term 'transfer' under Section 2(47) includes sale, exchange, or relinquishment of an asset, and thus the conversion should be considered a transfer. The CIT(A) accepted this argument and allowed the claim.

The Tribunal, however, disagreed with the CIT(A). It noted that the conversion of US-64 units into tax-free bonds did not amount to a sale, exchange, or relinquishment as the old units ceased to exist and were replaced by new bonds. The Tribunal referenced the Supreme Court decision in CIT vs. Rasiklal Maneklal [HUF] 177 ITR 198, which held that such conversions do not constitute a transfer. Therefore, the Tribunal set aside the CIT(A)'s order and restored the AO's decision, disallowing the capital loss.

Conclusion:
The Tribunal partially allowed the revenue's appeal for statistical purposes, remitting the first issue back to the AO for further verification and upholding the AO's decisions on the second and third issues.