CHEMINOVA INDIA LTD. v. ASSISTANT COMMISSIONER OF INCOME TAX
[Citation -2007-LL-0704-1]

Citation 2007-LL-0704-1
Appellant Name CHEMINOVA INDIA LTD.
Respondent Name ASSISTANT COMMISSIONER OF INCOME TAX
Court ITAT
Relevant Act Income-tax
Date of Order 04/07/2007
Assessment Year 1998-99
Judgment View Judgment
Keyword Tags plant and machinery • specific provision • packing material • business loss • special bench • raw material • trading loss • written off • new project • bad debt
Bot Summary: Briefly stated, the facts of the case are that the assessee had written off a sum of Rs. 23,93,882 as bad debts under the head Project advances, i.e., the advances given to various parties for purchase of plant and machinery and other expenses relating to the new project being set up by the assessee. On appeal, the learned CIT(A) has allowed the claim of the assessee with the following observations: As regards the claim of the assessee for write off of advances for purchase of raw material as well as for purchase of Plant Machinery as well as f o r project expenses etc. The assessee has now filed MA seeking rectification of the aforesaid order on the following grounds; The assessee can claim loss on account of irrecoverability of loans and advances both under s.28/37 as also under s. 36(1)( vii) of the IT Act, in terms of the judgment in T.J. Lalvani vs. CIT 78 ITR 176. The assessee has claimed the impugned amounts as business loss under s. 28/37 of the IT Act and hence the Tribunal has committed an error in adjudicating upon the claim under s. 36(1)(vii) r/w s. 36(2) of the IT Act. The Tribunal has committed a grave error in ignoring the binding decision of jurisdictional High Court in T.J. Lalvani s case and thereby in refusing to allow the claim of the assessee under s. 28/37 of the IT Act. Is assessee s activity in the course of assessee s business and the loss arising in the course of such activity was incidental to assessee s business and is therefore allowable as trading loss. We wish to clarify that the observations made in this Order have been made for the disposal of the MA filed by the assessee and to show as to how the mistakes pointed out by the assessee are not apparent from the record.


assessee has filed present Miscellaneous application seeking rectification of order passed by this Tribunal on 31st Aug., 2006 in Department s appeal bearing ITA No. 1948/Mumbai/2003 for asst. yr. 1998-99 o n ground that said order discloses certain mistakes apparent from record which, according to assessee, need correction. Briefly stated, facts of case are that assessee had written off sum of Rs. 23,93,882 as bad debts under head "Project advances", i.e., advances given to various parties for purchase of plant and machinery and other expenses relating to new project being set up by assessee. assessee had also written back sum of Rs. 8,75,799. Thus net write off under head "Project advances" amounted to Rs. 15,18,083. It was case of assessee before AO that aforesaid amounts were given to various parties in connection with new project being set up by assessee. It was also claimed by assessee that aforesaid amounts had become irrecoverable, as they were very old and therefore they were written off in accounts. AO examined aforesaid explanation and held that aforesaid amounts were never taken into account in computing total income of assessee either in earlier years or in previous year relevant to assessment year under appeal. According to AO, aforesaid advances were admittedly given for new project that was being set up by assessee. AO therefore held that primary condition of s. 36(2) was not satisfied and therefore he disallowed claim of assessee to extent of Rs. 15,18,083. In addition to aforesaid, assessee had also claimed bad debt of Rs. 34,51,801 being amount given to parties for supply of packing materials and raw materials. assessee had written back sum of Rs. 30,07,313 being advances received which were not required to be paid. Thus net advance written off under second category was of Rs. 4,44,088. AO has disallowed aforesaid bad debt also on ground that said parties from which debts were due were solvent and that assessee had continued to make purchases from them and payments were also made to them. AO held that advances recoverable from them were not irrecoverable and hence were not eligible for deduction under s. 36(l)(vii). AO also held that assessee company had only made provision in books of account regarding amounts being of doubtful nature and for this reason also he disallowed claim of assessee. On appeal, learned CIT(A) has allowed claim of assessee with following observations: "As regards claim of assessee for write off of advances for purchase of raw material as well as for purchase of Plant & Machinery as well as f o r project expenses etc., it is clear that total amount written off is Rs. 23,93,882 towards advances for purchase of plant & machinery & projects and for purchase of raw material and packing material of Rs. 34,51,801. As against this, there are write backs of Rs. 8,75,799 and Rs. 30,07,713 from same account. In effect, net advances written off was Rs. 19,62,171 (4,44,088 + 15,18,083). It is also explained that there are some possibilities of accounting errors due to which debits and credits have not been matched properly and therefore, are appearing in two different accounts i.e., debits and credits. It is also submitted that all these advances are in normal course of business and it really does not make difference whether it is for purchase of raw material or plant and machinery etc. In this respect, reliance is placed by appellant s representative on ratio laid down of T.J. Lalvani (supra). I have considered submissions and I am in agreement with submissions made by appellant s representative. For reasons mentioned in previous para, I allow write off of these net amounts of Rs. 19,62,171 as business loss under s. 28 r/w s. 37 and direct AO to allow deduction." aforesaid order of CIT(A) was agitated by Department in its appeal bearing ITA No. 1948/Mum./2003 for asst. yr. 1998-99 filed before this Tribunal. Tribunal considered aforesaid order of CIT(A) restored matter to his file for fresh decision with following observations: "8. As regards other claim of assessee seeking to write off Rs. 19,62,171 being advances for purchase of raw materials, plant and machinery n d for meeting project expenses, etc. we find that learned CIT(A) has allowed claim of assessee on ground that mere writing off of advances is sufficient for claiming deduction. We find that similar issue has recently come up for consideration before Hon ble Madras High Court in South India Surgical Co. Ltd. vs. ACIT (Judgment dt. 6th Jan., 2006 in Tax Case No. 40 of 2002 in appeal No. 17 of 2002 for asst. yr. 1996-97). In aforesaid case also assessee had supplied goods to reputed hospitals but did not receive payments and therefore had written off amount. It was found that assessee in that case was carrying on business with all those debtors and receiving payments. Hon ble High Court held that unilateral act on part of assessee to write off amounts as bad debts was not sufficient without there being any material on record to show that amounts were not recoverable. In our view, issue under consideration needs to be decided in light of aforesaid principles. Besides, it is also mentioned by learned CIT(A) that advances so written off related not only to raw materials but also to plant and machinery and project expenses. In our humble view, debt can be written off only when it is in Revenue field, as specifically spelt out in s. 36(2) of IT Act. This aspect of matter also seems to have escaped attention of learned CIT(A). amounts so written off by assessee cannot be allowed under general provisions of s. 37 when there is specific provision in this behalf in s. 36(l)(vii) r/w s. 36(2) of IT Act. In this view of matter, order of learned CIT(A) is set aside and matter is restored to his file for fresh decision with regard to claim of assessee for write off of Rs. 19,62,171 in accordance with law. Ground No. 2(f) is partly allowed." assessee has now filed MA seeking rectification of aforesaid order on following grounds; (a) assessee can claim loss on account of irrecoverability of loans and advances both under s.28/37 as also under s. 36(1)( vii) of IT Act, in terms of judgment in T.J. Lalvani vs. CIT (1970) 78 ITR 176 (Bom). assessee has claimed impugned amounts as business loss under s. 28/37 of IT Act and hence Tribunal has committed error in adjudicating upon claim under s. 36(1)(vii) r/w s. 36(2) of IT Act. (b) Tribunal has committed grave error in ignoring binding decision of jurisdictional High Court in T.J. Lalvani s case (supra) and thereby in refusing to allow claim of assessee under s. 28/37 of IT Act. (c) decision in South India Surgical Co. Ltd. vs. Asstt. CIT(2006) 287 ITR 62 (Mad.) relied upon by Tribunal in its order is not applicable to facts of case of assessee. It is further submitted that aforesaid judgment of Hon ble Madras High Court cannot be applied in view of decision of Special Bench of this Tribunal in Dy. CIT vs. Oman International Bank Saog* (2006) 102 TTJ (Mumbai)(SB) 207: (2006) 100 ITD 285 (Mumbai)(SB) and other orders of Tribunal. It is claimed by assessee that order passed by this Tribunal on 31st Aug., 2006 suffers from aforesaid mistakes and therefore order should be amended and claim of assessee allowed. In reply, learned Departmental Representative submitted that mistakes pointed out by assessee were not at all apparent from record. According to him, assessee was seeking review of Tribunal s order, which is not permissible under s. 254(2) of IT Act. He supported his submissions by reference to decision of Hon ble Bombay High Court in CIT vs. Ramesh Electric And Trading Co. (1993) 203 ITR 497 (Bom). We have heard parties. first submission of assessee in MA is that it has claimed impugned loss as trading loss under ss. 28 & 37 and hence Tribunal was not justified in considering claim of assessee under s. 36(l)(vii)/36(2) of IT Act. In this connection, Tribunal has stated in para 8 of its order dt. 31st Aug., 2006 that impugned "amounts written off by assessee cannot be allowed under general provisions of s. 37 when there is specific provision in this behalf in s. 36(l)(vii) r/w s. 36(2) of IT Act." In Ramchandar Shivnarayan vs. CIT (1978) 1978 CTR (SC) 5: (1978) 111 ITR 263 (SC) Hon ble Supreme Court has held that trading loss of business is deductible in computing profits earned by business even though there is no specific provision for allowances thereof. In case before us there is specific provision, namely, s. 36(l)(vii)/36(2) dealing with writing off of bad debts and it is in this background that Tribunal has made aforesaid observations. In any case, mistake alleged by assessee is not patent or apparent mistake. Be whatever it may, two propositions clearly emerge from aforesaid judgment: (1) claim of trading loss can be admitted under s. 27/37 when there is no special provision relating to allowance of that expenditure/loss in IT Act; and (2) loss eligible for allowance under s. 28/37 is only trading loss and not capital loss. Tribunal has recorded conscious finding that s. 36(l)(vii)/36(2) being special provision will apply to case of assessee and not general provisions of s. 37. This is more so as s. 29 of IT Act provides, in particular, that income referred to in s. 28 shall be computed in accordance with provisions contained in ss. 30 to 43D. Likewise s. 37 of IT Act provides that any expenditure, not being expenditure of nature referred to in s.s 30 to 36, shall be eligible for deduction upon fulfilment of conditions laid down in s. 37. Both aforesaid provisions make it absolutely clear that when there are special provisions, like one in s. 36(l)(vii)/36(2) regarding allowance of bad debt, general provisions of s. 28/37 will not apply to aforesaid extent. We shall now turn to second aspect as to whether any kind of loss can be allowed under s. 28/37 or only trading loss not covered by specific provisions of ss. 30 to 43D which alone can be considered for deduction under s. 28 of IT Act. In this case, major portion of expenditure was incurred on procurement of plant and machinery etc. for new project being set up by assessee. Departmental authorities did not examine as to whether mere writing off of advances given for purchase of plant and machinery for setting up new project would at all be eligible for treatment as trading loss. Second submissions of assessee is that this Tribunal has committed grave error in preferring judgment of Hon ble Madras High Court in South India Surgical Co. Ltd. s case (supra) over decision of Special Bench of this Tribunal in Oman International Bank SAOG s case (supra). According to him, decision of Special Bench of this Tribunal will prevail over judgment of Hon ble Madras High Court in South India Surgical Co. Ltd. s case (supra). plea taken by assessee can better be answered by reference to judgment of Hon ble Supreme Court in Asst. CCE vs. Dunlop India Ltd. & Ors. (1985) 154 ITR 172 (SC) in which it has been held that better wisdom of Court below must yield to higher wisdom of Court above. Hon ble Supreme Court has further observed that in hierarchical system of Courts, which exists in our country, it is necessary for each lower tier to accept loyally decision of higher tiers. It can be nobody s case that High Courts are not superior Courts as compared to Tribunals. In face of such clear enunciation of law by highest Court of land, we are unable to hold as universal proposition of law that decisions of this Tribunal will always and necessarily prevail over judgments of superior Courts like High Courts. It is well appreciated that judgments of non-jurisdictional High Courts do not carry same weight and authority as those of jurisdictional High Court but this proposition cannot be stretched to further contend that orders of Tribunals should be preferred over judgments of High Courts. assessee has referred to judgment of Hon ble Bombay High Court in T.J. Lalvani s case (supra) which was rendered in context of provisions in old IT Act of 1922. In that case also Hon ble High Court has held that in order to claim business loss, it is not necessary that loss must be necessarily referable to any specific or direct transaction in course of carrying on of financier s business and that activity of financing by assessee of business of others in import of goods, etc., is assessee s activity in course of assessee s business and loss arising in course of such activity was incidental to assessee s business and is therefore allowable as trading loss. factual matrix in case before us is altogether different. Here assessee has written off certain amounts, which were advanced for procurement of plant and machinery and for meeting such expenses in connection with new project that was being set up by assessee. relevant question, in terms of aforesaid decision also, is as to whether alleged loss on account of writing off of advances given for supply of plant and machinery and for meeting other expenses in connection with new project can at all be said to be trading loss. Besides, judgment in that case had proceeded on basis of law existing then. issues on basis of which assessee has sought rectification of order of Tribunal are matters of debate and require elaborate reasoning and hence they cannot be taken up in petition under s. 254(2) of IT Act. Tribunal has already restored matter to file of CIT(A) for fresh decision. assessee shall be free to make all its submissions when matter comes up for hearing before him. learned CIT(A) is directed to consider them comes up for hearing before him. learned CIT(A) is directed to consider them while passing his appellate order. Both parties are directed to supply copy of this order to learned CIT(A) well before matter comes up for hearing before him. We are well aware of fact that issue under consideration has been restored to file of CIT(A) for fresh decision and that CIT(A) may be influenced by observations made in this Order. We wish to clarify that observations made in this Order have been made for disposal of MA filed by assessee and to show as to how mistakes pointed out by assessee are not apparent from record. While deciding issue afresh, CIT(A) shall independently examine all relevant aspects of case uninfluenced by observations made in this Order. In view of foregoing, MA filed by assessee is dismissed. *** CHEMINOVA INDIA LTD. v. ASSISTANT COMMISSIONER OF INCOME TAX
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