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DCIT, Cen. Circle-2 (2) , Ahmedabad Versus Kalpataru Power Transmission Ltd.

2016 (8) TMI 209 - ITAT AHMEDABAD

Nature of loss - business loss or capital loss - Held that:- As far as write off of export benefit (DEPB) we observe that ld. CIT(A) has given specific finding that he has verified the books of account of assessee and has found that the export benefit (DEPB) has been shown by the assessee as an income in the earlier years/this year. We further observe that the reason given by assessee for write off of this expenditure was that the amount of export benefit was calculated at its level and income o .....

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te off of ₹ 172402/- of Esbee Electricals, ₹ 1139020/- of R.P. Construction and ₹ 2313118/- of Sangam Construction, on perusal of records relating to ledger account of these three parties, we find that there have been regular business transactions in the form of payment through bank and by cash towards supply of material and labour, free supply of goods to the contractors for job work purposes, income-tax has been deducted at source on regular job works bills. We observe that t .....

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ve been rightly claimed as business expenditure by the assessee. We find no reason to interfere with the order of ld. CIT(A). We uphold the same - ITA No. 2077/Ahd/2011 - Dated:- 1-8-2016 - Shri R.P. Tolani, JM And Shri Manish Borad, AM Appellant by : Shri Prasoon Kabra, Sr.DR Respondent by : Shri Milin Mehta, AR ORDER Per Manish Borad, Accountant Member. This appeal by the Revenue is directed against the order of ld. CIT(A)-III, Ahmedabad dated 28/06/2011 in appeal no.CIT(A)- III/33/DCIT/CC-2(2 .....

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he order of the Assessing Officer on the above point. 2. Briefly stated facts of the case are that assessee being a limited company engaged in the manufacturing of Transmission Towers, Infrastructure and Real estate, filed its return of income for Asst. Year 2008-09 on 30.09.2008 declaring total income at ₹ 144.81 crores. The case was selected for scrutiny assessment. During the course of assessment proceedings ld. Assessing Officer observed that a sum of ₹ 45,74,134/- has been debit .....

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ssessing Officer was of the view that these irrecoverable advances are in nature of capital loss and cannot be allowed as business expenditure. Accordingly after disallowing balances written off expenditure of ₹ 45,74,134/- income was assessed at ₹ 145.27 crores. 3. Aggrieved, assessee went in appeal before ld. CIT(A) and got part relief as ld. CIT(A) deleted the disallowance except advance of ₹ 3,25,200/- by observing as below :- 3. I have considered the submissions of the app .....

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loss account. From the details of bad debts claimed by the appellant, it is noticed that the debts from the following major parties have been claimed as irrecoverable:" Export Benefit (DEPB) 149833 + 745138 Esbee Electricals 172402 Parikaj Singh 325200 R.P.Construction 1139020 Sangam Constructions 2313118 3.1. As regards the-claim of write -off of export benefit (DEPB), it is to be stated that the appellant has shown the same as its income in earlier years or the year under consideration. .....

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elete the addition on account of write off of bad debts on account of DEPB. 3.2.' As regards the claim of write off of Esbee Electricals ₹ 1,72,402/- it was stated that advance was given to this party during financial year 2005-06 for carrying out some job work. This party did not do the job work and after much persuasion the party did some job work for which bills were raised and credited to their account. Finally due to non- execution of part-work by them the appellant encashed the b .....

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ITR 174 (Cal.) High Court of Calcutta Hasimara Industries Ltd. vs. CIT Satish Chandra C.J. and Suhas Chandra Sen, J. Income-tax Reference No.683 of 1979 August 29, 1986 Judgment Suhas Chandra Sen, J.-The following question of law has been referred by the Tribunal under section 256(2) of the Income-tax Act, 1961: "Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in disallowing the loss of irrecoverable advance of Rs. twenty lakhs in comp .....

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ksaria Cotton Mills Limited for modernisation of its plant. The assessment year involved is 1968-69 for which the previous year ended on March 31. 1968. The assessee advanced a sum of ₹ 20,00,000 to Saksaria Cotton Mills Limited in terms of clause 13 of the leave and licence agreement entered into by the assessee-company with Saksaria Cotton Mills Limited. The agreement originally was for a period of three years from April 1, 1963, to March 31, 1966. Thereafter, it was extended by mutual a .....

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ation by the licensor, the licensee will be entitled to remove and take away at the licensee's own cost such new. plant, machinery and equipment provided that the licensee will, in that event, restore the licensed premises to the condition in which .they were at the time of the commencement of the .licence and make good the damage, if any, caused to the licensed premises by removal of such new plant, machinery and equipment. In the event of any new part or parts of any of the mills machinery .....

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do so or not and on such terms as may be. agreed to at that time." There is no dispute that the amount was paid for modernisation of the mills. The loan was not repaid by Saksaria Cotton Mills Limited at the expiry of the leave and licence agreement on June 30, 1966. The Tribunal has found that with effect from July 1, 1966, Saksaria Cotton Mills Limited had its own business but suffered loss on account of labour trouble. Ultimately, the-mill was closed down on October 18, 1967, and the co .....

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factory. The said amount was not taken into consideration .in computing the income of the assessee in any assessment year. It also did not represent the money lent in the ordinary course of business. The Income-tax Officer observed that even otherwise the sum was not allowable because it had not become a bad debt in the relevant year of account. The assessee had made no effort to recover the sum. The Appellate Assistant Commissioner, held that the advance given by the assessee-company which cou .....

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cotton business and should be allowed as a deduction on ordinary commercial principles. The Tribunal, on appeal, referred to the resolutions-of the board of directors of the assessee- company in sanctioning the advance of ₹ 20,00,000. It was noted that in the resolution, it was clearly stated that the amount was to be treated as capital investment. Before the Tribunal, it was argued on behalf of the department that by making this advance of ₹ 20,00,000, the assessee had acquired an a .....

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urse of business to. get better income from the business. According to him, the advance was only incidental to the assessee's business and the loss was a business loss. The Tribunal held: "The assessee made the advances for the modernisation of the mills of Saksaria Cotton Mills Ltd. So far as Saksaria Cotton Mills Ltd. are concerned, the expenditure on modernisation resulted-in the improvement of the plant and machinery; making of the improvement in the plant and machinery was not the .....

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: Arunachalam Chettiar( Rm. Ar. Ar. Rm.) v. C/r[1936] 4 ITR 173 at p. 183 (PC): Although.the assessee did some money-lending business, this amount of ₹ 20,00,000 was not.lent to Saksa'ri'a' 'Cotton Mills Limned simply for the purpose of earning interest. Under clause 13 of the agreement, the assessee could install new plant and machinery and remove the same after the expiry of the agreement. If the assessee so desired, Saksaria Cotton Mills Limited, at its absolute discreti .....

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of the cotton mills. The assessee-company, in one way or another, was running the mills since the scheme was approved by the Bombay High Court in the winding up proceedings of Saksaria Cotton Mills Limited. Even before this -particular agreement was entered into, the assessee was running the mill either singly or in partnership since February 28, 1961. The agreement that was entered into for a period of three years with effect from April 1, 1963, to March 31, 1966, provided for installation of a .....

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e advantage of using a new and more modern profit-making apparatus. There are certain features of the loan which must also be noted. The amount of ₹ 20,00,000 was not given by way of any advance payment and was not to be adjusted against any dues payable by the assessee-company. It was not a trade debt at all. If the amount was returned, it would not have been shown in the profit and loss account. From the finding of the Tribunal, it appears that it was not a simple loan of money by the as .....

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elf is not conclusive. It has to be seen whether the transaction was on capital account or on revenue account. If there is any loss on capital account, that cannot be allowed as business loss. . , There is a line of cases where it has been held- that any loss directly connected with the business operation and incidental to the carrying on-of the business of an assessee must be allowed as business loss. This line of decisions was reviewed by the Supreme Court in the case of Ramchandar Shivnarayan .....

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loan. For claiming an irrecoverable loan as business loss, it must be established that the loan was not given on capital account. There are some cases where deduction was allowed where money was lent in the usual course of business by managing agencies to managed companies. But those cases are of no relevance for the purpose of the instant case. Here, the assessee-company was: .not managing Saksaria Cotton Mills Limited. It had merely taken the-mills of the company on lease or on leave and lice .....

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circumstances and especially in view of the resolution passed by the board of directors of the assessee-company at the time of granting the loan to treat the loan as on capital account, in my judgment, the Tribunal was entitled to come to the conclusion that the loan that was given was on capital account and could not be allowed as deduction in computing the assessee's CGrr.rf.ercial profit. . The question is, therefore, answered in the affirmative and in favour of the Revenue. There will be .....

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8 TAXMAN 352 (SC) SUPREME COURT OF INDIA Hasimara Industries Ltd. v. Commissioner of Income-tax MRS. SUJATA V. MANOHAR AND S. RAJENDRA BABU, JJ. CIVIL APPEAL NO. 4766 OF I989 MAY 13, 1998 Section 28(i) of the Income-tax Act, 1961 -Business loss - Allowability of- Assessee-company in business of manufacture and sale of tea acquired operating rights of a cotton miH under leave and . licence agreement and advanced ₹ 20 lakhs for its modernisation - This was claimed as business loss when it be .....

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S' for modernisation of its machinery. After expiry of the period of-agreement as 'S' was unable to repay the. advance and the advance became irrecoverable, the assessee-company claimed the amount as business loss. The Assessing Officer disallowed the claim. On appeal, the AAC reversed- the order of the Assessing Officer and allowed the claim as revenue expenditure. On the revenue's appeal, the Tribunal disallowed the claim holding the amount as capital loss. On reference, the Hi .....

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e profit-making apparatus for a duration of three years or a little more; that the business of running a cotton mill was not its own,- but was only operating the said mill under leave and licence agreement; that the amount of advance in a sum of ₹ 20 lakhs was given not for its own purpose by way of business expenditure for modernising the mill, but as capital to the lessor who in-turn had to modernise the mill. In the resolutions made by the board of directors, it was clear that the trans .....

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ure under section 36 or 28 or 29 of the Income" Tax Act since the loss is a capital loss. Whereas, the judgments cited by the AR of the appellant, clearly says that if the advances has been given for the purpose of its business and not for acquiring any capital asset,, then the write off of such advances are allowable under section 28 or 29 of the Income Tax Act. In view of this broad principle, it is clear that if the loans and advances have been given by the appellant incurred for setting .....

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is party with material and against the order the company had given advances to the party and also supplied the material. The party could not compete the work in time which was got completed from another party and the charges were debited to the party account that is R.P. Construction. However party is squandered from- the site by leaving behind the labours and could not be again contacted. Since the permanent address of the-party was changed the company could not file the suit for recovery of- m .....

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ompleted from another- party and the charges were debited to the party account. However this party also absconded from the site by leaving behind the labours and could not be contacted again by the appellant. Therefore the balance amount was written off and debited to the profit and loss account of the appellant. In both the cases since the amounts were written off by the appellant from the parties to whom the appellant has given job work and these parties either could not complete the job work .....

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and all such advances/expenses have been incurred by the appellant for the purpose of its business. Further it is also seen that many credit .entries are also shown by the [appellant has its income in the same account. 4. In short, out of the addition of ₹ 45,74,134/- made by the AO, the addition of ₹ 3,25,200/- only is sustained. In other words, the appeal of the appellant is partly allowed. 4. Aggrieved, Revenue is now in appeal before the Tribunal. 5. Ld. DR supported the order of .....

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placed before the Assessing Officer in support of the claim that advances given were to the parties with whom regular business transactions were being carried out and they were mostly contractors and after making necessary efforts also these debit balances were impossible to be recovered and the same were written off. As far as the write off of balances relating to DEPB of ₹ 7,45,138/- and export benefit (DEPB) of ₹ 1,49,833/- that these two amounts were shown as income in the earli .....

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48,934/- out of ₹ 45,74,134/-, holding it as a business loss instead of capital loss. We observe that assessee has claimed ₹ 45,74,134,/- as balances written off for expenses which comprises of debit balances of Rs, 52,06,169/- and credit balance of ₹ 6,32,035/- net effect of the same comes to ₹ 45,74,134/-. In the list of debit balance written off most of the balances were below ₹ 1 lacs in respect of various parties totals to ₹ 3,61,448/- which have been con .....

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72402 3. Parikaj Singh 325200 4. R.P.Construction 1139020 5. Sangam Constructions 2313118 9. We observe that except the debit balances written off relating to export benefit (DEPB) of ₹ 8,94,971/-, the remaining amounts relate to advances given to contractors for material and labour. Further we also observe that ld. Assessing Officer has made the impugned disallowance by treating the advances given as capital loss. ld. AR has referred and relied on the judgment of Hon. Jurisdictional High .....

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principal from his funds and then he is reimbursed by his principal on supply of such goods. A commission agent, therefore, has got to advance amounts from time to time according to the nature of his business. It may be a short-term advance if he is a commission agent for purchase of goods or it may be a long-term advance if it is for sale of goods. We have, therefore, not been able to appreciate as to how the Tribunal approached the problem as if the financial lending which is involved in the .....

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this commission agency business for purchase of the goods carried on by the assessee-firm known as "sarafi account". It is, however, in out opinion, the interference of the Tribunal from these two sets of accounts of M/s. Mohmad Peer Mohmad of Nasik that these were two different businesses, which is not justified. It is no doubt true that in the present case before us the bad debt which has been claimed by the assessee-firm was in respect of advance made to the principal, M/s. Gokaldas .....

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usiness. The general lien granted, inter alia, to the factors who are the commission agents for sale of goods under s. 171 and of agents under s. 221 of the Indian Contract Act extends to the general balance of account of their principal which would, therefore, necessarily include the advances made apart from strictly in the course of the business as factors or commission agents for purchase and supply of goods. It is a matter of surprise how the Tribunal lost sight of the finding made by the IT .....

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n our opinion, necessarily requires the advances to be made. We should not be, however, understood to subscribe to the view that if in a given case a trader doing commission agency business makes advances or lends money to an unknown outsider or to a complete stranger, it would be a part of his commission agency business. In the present case, however, the ITO has not only found that the assessee-firm was making such advances in the course of commission agency business but the ITO, Rajkot, has al .....

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Sangli from whom M/s. Mohmad Peer Mohmad of Nasik had purchased the goods were not prepared to wait for their dues and as the latter enjoyed better credit facility with the assessee-firm they approached them for paying off the dues to the Sangli party. In answer to question No. 17 as to when they post entries for interest in the books, the deponent stated that in the accounts of their constituents they make entries at the end of the accounting period while in the case of other advances, the ent .....

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Sangli. The Tribunal has overlooked these statements of the assessee and the debtor-firm where it has been clearly stated that these advances were asked for and made in fact having regard to the commercial relations were admittedly of principal and commission agents. In our opinion, therefore, the Tribunal was not justified on the facts and in the circumstances of the case to hold that the advance to M/s. Mohmad Peer Mohmad of Nasik was not in the ordinary course of business of the assessee-firm .....

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C)]. In that view of the matter, therefore, for the reasons stated in this order, we are of the opinion that the said loss being a bad debt is allowable as trading loss under s. 28 of the I.T. Act, 1961, and, therefore, for the reasons stated hereinabove, the answer to the question referred to us is in the affirmative, that is, in favour of the assessee and against the revenue. 8 The question referred to us at the behest of the assessee, therefore, need not to be answered as conceded by the lear .....

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Jurisdicitional High Court in the above referred case. 11. As far as write off of export benefit (DEPB) of ₹ 8,94,971/- we observe that ld. CIT(A) has given specific finding that he has verified the books of account of assessee and has found that the export benefit (DEPB) has been shown by the assessee as an income in the earlier years/this year. We further observe that the reason given by assessee for write off of this expenditure was that the amount of export benefit was calculated at i .....

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