By Ajay R. Singh, Advocate

1. S. 28(i): Business loss - The claim of loss arises out of write-off of obsolete stock as a business loss - was incidental to its regular business – Allowable

The assessee company is engaged in the business of manufacturing and service of flame arresters and industrial safety valves. The AO during the course of the assessment proceedings observed that the assessee had written-off stock of ₹ 52,43,318/-. However, the AO was not persuaded to accept the contention of the assessee that the actual stock write-off of material used in manufacturing and trading activity was to be taken as a revenue loss while computing the income of the assessee as per the normal provisions. The AO holding a conviction that the write-off of the stock was an item of the balance sheet, therefore, added the same to the total income of the assessee.

Aggrieved, the assessee assailed the aforesaid addition made by the AO in appeal before the CIT(A). The CIT(A) observed that the assessee on being queried as regards its claim of stock written-off amount had submitted that being in the business of manufacturing of safety valves and flame filters etc., the stock was written off, as the same had become redundant due to change in the engineering designs of the devices. The AO had also not disputed that the assessee had sold some materials which were spoiled by rusting and had offered such scrap sales to tax under the head ‘Other income’. The CIT(A) concluded that the claim of the assessee of loss arising out of write-off of obsolete stock as a business loss was incidental to its regular business.

The Tribunal held that the view taken by the CIT(A) that now when the AO had duly accepted the fact that actual stock write-off was because of the redundancy of the stock of castings due to change in the engineering design of the devices and rusting of the materials therefore, there was no justifiable reason on his part for disallowing the claim of the assessee. The observation of the AO that as the stock was a balance sheet item, therefore, its writing-off as a revenue expenditure was not called for. The stock in question was produced during the business operation, thus any loss arising due to diminution in its value, as had been accepted by the revenue in the past, had to be allowed as a deduction.

ACIT vs. M/s. Protego India Pvt. Ltd., ITA No.1268/Mum/2016, AY 2012-13 dated 23-5-2018 (Mum.)(Trib.)

M/s. Protego India Pvt. Ltd.

2. S. 153C : Assessment – Search – No incriminating material or evidence was found in the course of search / survey - Addition merely based on the disclosure made by Co-owner – And statement of third person – Held no addition can be made [S. 132]

The assessee is an individual. A search u/s. 132(1) of the Act was conducted, in case of a third group. On the basis of the seized documents a survey under section 133A of the Act was carried out at the business premises of the assessee, on 5-1-2007. Consequent to the survey proceedings, the assessee was summoned under section 131 of the Act and a statement was recorded by him on 13-2-2007. During the recording of statement, when the assessee was called upon to explain the alleged discrepancies found on the basis of materials seized/impounded, he offered an amount of ₹ 75 lakh towards cash receipts on sale of shops in a project developed by him with another party viz., M/s. Guru Prerna Enterprises. In the return of income filed for the impugned assessment year in response to the notice issue u/s. 153C of the Act, the assessee also offered the amount of ₹ 75 lakh as undisclosed business income.

The AO on the basis of the statement recorded from third party and also the fact that the co-developer has offered undisclosed income in the ratio of 60% in case of sale of shops and 40% in case of flats, the AO proceeded to work out the undisclosed income derived by the assessee from sale of shops and flats at ₹ 2,80,25,655 and added back to the income of the assessee.

The learned CIT(A) also found that no incriminating material or evidence was found in the course of search/survey either from the premises of Guru Prerna Enterprises or the assessee regarding receipt of cash on sale of flats and shops. He also observed that the other witness also never stated that the assessee received any cash on sale of flats and shops. It is the assessee who had accepted receipt of some unaccounted cash on sale of shops and specifically denied of having received any cash on sale of flats. Further, out of 67 shops, assessee had already sold 65 shops through other brokers. He, therefore, held that by placing too much reliance on the statement of third party, no addition could have been made. More so, when no evidence of receipt of cash was found at the time of search/survey.

The CIT(A), however, proceeded to estimate the total cash receipt on sale of shops/flats at ₹ 1 crore, the assessee having already offered an amount of ₹ 75 lakh, the learned CIT(A) sustained the addition of further amount of ₹ 25 lakh.

The ITAT dismissed the department appeal and also allowed the cross appeal of the assessee on the basis of the fact that CIT(A) having found that there is no evidence to indicate that the assessee has received any cash over and above what has been declared by him, even the addition made of ₹ 25 lakh purely on estimate basis cannot be sustained. Therefore, the entire addition made by the Assessing Officer in the instant case was deleted.

DCIT vs. Umesh H. Gandhi, ITA No. 2745/Mum/2016 & CO. No 289/Mum/2017, AY 2007-08 dated 28-2-2018 (Mum)

Umesh H. Gandhi

3. S.153A : Assessment – Search – Noting on loose papers – Additions cannot be made as undisclosed income

A search and seizure action was initiated against the assessee, wherein, certain loose papers were seized. Statement was also recorded. The seized documents were rough profit & loss account. The assessee was asked to reconcile the same with audited financial statements. The ld. AO added the difference as unaccounted income of the assessee (i.e., difference in profit & loss account).

The assessee, contended that the assessee is merely entitled for commission out of the travelling business. The seized documents are loose papers and are merely dump documents.

The learned CIT(A) considered the factual matrix and deleted the addition.

The Tribunal noted that as per audited books of account, the total income of the assessee was ₹ 2,24,21,235/-, which is more than the seized rough profit & loss account of ₹ 1,39,36,342/-, meaning thereby, the assessee has offered more income compared to the rough noting mentioned in the seized profit & loss account. The assessee is merely entitled to commission in the business of travelling. The assessee justifiably explained the factual matrix. The figures explained by the assessee are matching with the audited books of accounts. In view of this factual matrix, Tribunal upheld the CIT (A) order, thus, the appeal of the Revenue was dismissed.

ACT vs. Zaireen Travel Services, ITA Nos. 1145 & 1146/Mum/2015, (Mum.)(Trib.)

Zaireen Travel Services

Note: The Whole decisions can be downloaded from the CTC website under Knowledge Centre.

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