Thursday, 23 July 2015

Whether an amount advanced for purchase of machinery but later being converted into guarantee is to be treated as revenue loss if deal fails to materialise - NO: ITAT

THE issue before the bench is - Whether an amount advanced for purchase of machinery but later being converted into guarantee is to be treated as revenue loss if the deal fails to materialise. NO is the answer.
Facts of the case
The assessee is a company which is engaged in the business of manufacturing and sale of Beer. It filed return for relevant AY. The assessee company had issued a letter of intent to M/s. Alfa Laval (India) Ltd., for purchase of brewery equipment. Subsequently, the assessee company decided to purchase equipment of lesser value from M/s Alfa Laval (India) Ltd. as against the letter of intent issued for higher amount. One sister concern of the asessee ‘M/s Vindale Distilleries Ltd.’ was also considering the proposal for purchase of equipment from M/s Alfa Laval (India) Ltd. The assessee company asked M/s. Alfa Laval (India) Ltd. to appropriate the balance amount towards M/s Vindale. M/s Alfa Laval (India) Ltd. accepted this proposal put forth by the assessee company subject to the condition that in the case of default of balance payment against purchase of equipments by ‘M/s Vindale Distilleries Ltd’, the assessee company would be liable to make good the said default. After acceptance of this condition by the assessee company, part of the advance amount paid by the assessee company was appropriated by M/s Alfa Laval (India) Ltd. towards advance payable by M/s Vindale against its letter of intent. M/s Vindale was subsequently declared as a sick unit by BIFR. It therefore wanted the assessee company to make good the outstanding dues receivable from Vindale. Due to unfortunate twist of events, the management of Vindale went in the hands of a hostile group and the bankers of Vindale dishonored the hundis issued in favour of Alfa Laval (I) Ltd. The payment made by the assessee company to M/s Alfa Laval (I) Ltd. on behalf of Vindale against the transaction therefore was forfeited by M/s Alfa Laval (I) Ltd. and the resultant loss suffered by it on this count was claimed by the assessee company after having written off the said amount. AO, disallowed this deduction claimed by the assessee company on account of bad debts holding that the conditions stipulated in the relevant provisions of Act were not satisfied. The matter was carried before the CIT(A), who allowed the said expenditure as business loss u/s.28 and 29 of Act. Aggrieved by the order of the CIT(A), the Revenue preferred an appeal before the Tribunal who restored the matter back to the file of the CIT(A). The case was heard afresh by the CIT(A). A remand report was also called upon from the AO. After considering the remand report and submissions of the assessee, the CIT(A), held that though the amount was initially given for the purchase of machinery but it had changed its character to guaranty/surety given on behalf of Vinedale Distilleries Limited. He, thereafter relying upon the decision of the Bombay High Court in the case of CIT vs. Dempo and Company Limited (206 ITR 291) held that the amount written off was allowable as business loss. Aggrieved by the order of CIT(A). The revenue preferred appeal before Tribunal.
The assessee filed cross appeal to Tribunal. Ground No.1 was relating to the action of the CIT(A) in declining to consider the claim of deduction on account of consumption of containers. During the assessment proceedings, the assessee made a revised claim of deduction on account of consumption of containers. However, since the same was not claimed in the return of income, the AO rejected the same. In appeal, the CIT(A) also rejected the claim of the assessee on the ground that if the said claim is allowed it would have the effect of increasing the returned loss. He held that assessment u/s 143(3) of the Act could not be framed below the return of income. He therefore disallowed the claim of the assessee.
After hearing both parties, Tribunal held that,
++ The CIT(A) has simply observed that earlier the assessee had paid the amount as an advance with purchase of machinery but later on the same was converted as guaranty for purchase of machinery by M/s. Vinedale Ltd. and thereafter without giving any reasoning treated the same as revenue loss. The CIT(A) even has not considered that the amount of advance paid to M/s. Alfa Laval (India) Ltd. which was initially treated as advance on behalf of M/s. Vinedale Ltd. was only Rs.81.30 lakhs. The said amount has never changed its character as a guaranty rather was advance for the purchase of machinery on behalf of M/s. Vinedale Ltd. The remaining amount was paid by the assessee for settlement of the accounts of M/s. Vinedale Ltd. which were on account of outstanding dues for the purchase of machinery by M/s. Vinedale Ltd. The assessee has paid the said amount on behalf of M/s. Vinedale Ltd. being its guarantor/surety which was not relating to any business or trading activity of the assessee in any manner. We therefore do not find any merit in the order of the CIT(A) and the same is therefore set aside. The action of the AO disallowing the said loss is confirmed.
++ CIT(A) ought to have considered the claim of the assessee in exercise of his appellate jurisdiction under section 250 of the Act. Moreover, if the assessee is, otherwise, entitled to a claim of deduction but due to his ignorance or for some other reason could not claim the same in the return of income, but has raised his claim before the appellate authority, the appellate authority should have looked into the same. The assessee cannot be burdened with the taxes which he otherwise is not liable to pay under the law. We, accordingly, restore this issue to the file of the CIT(A) to consider the claim of the assessee on merits and pass a reasoned order, irrespective of the returned loss/ income of the assessee. The CIT(A) will be at liberty to call the views/remand report of the AO on this issue and to decide the issue in accordance with law.

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