Capital Gains derived from Sale of Property set off under current year Business Loss: ITAT upholds Disallowance of Loss on account of write-offInventory of Cotton*

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The Chennai bench of the Income Tax Appellate Tribunal (ITAT) has upheld the disallowance of loss on account of write-off inventory of cotton whenthe capital gains derived from sale of property set off under currentyear business loss.

Gem Spinners India Limited, the assessee company is in the business of manufacturing cotton yarn and knitted fabrics, filed its return of income for the assessment year 2013-14 on 22.09.2013, declaring net loss of Rs. 2,55,24,649/-. 

The case was taken up for scrutiny, and during the course of assessment proceedings, the Assessing Officer noticed that during the financial year relevant to assessment year 2013-14, the assessee is having only trading activity.

The gross receipt from trading was at Rs. 10.46 crores, as against this, the assessee claimed trading expenses of Rs. 9.93 crores.  It was further noted in addition to trading receipts, the assessee has claimed a huge amount of other expenses.

The assessee submitted that during the year, the company has written off the unusable stock of cotton valuing Rs. 16,96,24,334/-, and said cotton was purchased way back in the year 2004-05.  Since the cotton was not used for manufacturing knitted fabric or yarn, it was unusable and the management has taken a decision to write off said stock as scrap and debited it to the profit and loss account. 

The AO observed that the assessee neither furnished the necessary certificate from an expert to prove that such stock became obsolete and unusable nor filed any evidence to prove its claim that in earlier years also unusable and obsolete stock was written off. 

The AO opined that claim of the assessee that the amount debited under the headstockwrite-off is not backed by any evidence and also to offset income derived from the sale of assets computed under the head ‘Long Term Capital Gains’ (LTCG) and thus, rejected the arguments of the assessee and disallowed the claim of loss on account of written off inventory amounting to Rs. 16,96,24,334/-.  The CIT(A)sustained the additions made towards disallowance of loss on account of the written-off of inventory.

A Coram consisting of Shri V Durga Rao, Judicial Member and Shri G Manjunatha, Accountant Member observed that the assessee could not satisfactorily explain with necessary evidence the loss claimed on account of write-off inventory but is only to offset capital gain derived from the sale of property as brought out by the AO and CIT(A). 

The ITAT observed that the AO noted that the assessee showed two pieces of vacant land and computed LTCG of Rs. 21,24,10,447/- and set off LTCG against current year business loss of Rs. 23,79,35,096/-. 

The AO further noted that a substantial portion of the current year’s business loss is due to the alleged write-off of inventory amounting to Rs. 16,96,24,334/-.  It was evident that the assessee has devised a tax plan to offset capital gains derived from sale of property by claiming set off current year business loss.   While dismissing the appeal, the Tribunal upheld the findings of the CIT(A).To Read the full text of the Order CLICK HERE

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Gem Spinners India Limited vs The Assistant Commissioner of Income Tax

Counsel for Appellant:   Shri. Philip George,

Counsel for Respondent:   Shri. M. Rajan


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