By TIOL News Service

PUNE, JUNE 11, 2015: THE issue before the Bench is - Whether breakage loss arising from an item which can be recyled and reused, is to be disallowed merely on ground that assessee had not claimed such loss in preceding AY. NO is the answer.

Facts of the case

The assessee is a company engaged in the business of manufacturing of figured and wired glass at Nashik. It had filed its return of income on 31-10-2005 declaring total income of Rs.65,09,170/-. During assessment, AO observed that the assessee had claimed a sum of Rs.54,80,239/- on account of breakage and observed that in the immediately preceding AY, there was no such claim on this account. AO therefore asked the assessee to justify the claim. In response to the same, assessee filed a note and submitted that the glass tendency used was breakable and it was very likely to break at any point of handling. The breakage allowed represents the breakage incurred during transportation. It was nominal breakage about 1.62% of the total sales. Since the assessee according to the AO failed to furnish party wise details of breakage made by them and since in the immediately preceding AY no such expenditure was claimed on this account, the AO held that the breakage claimed at 1.62% was excessive. Further, the AO was of the opinion that this was such an item which could be recycled and reused for making glass. AO therefore allowed breakage to the extent of 1% of the turnover. Thus, AO disallowed the balance amount of Rs.21,01,279/-.

On appeal, CIT(A) called for a remand report from AO who reiterated the same reasons for disallowance as stated in the assessment order. After considering the remand report of the AO and the response of the assessee to such remand report the CIT(A) deleted the disallowance by observing that AO had not been able to appreciate the facts relating to breakage completely. CIT(A) had not appreciated the difference between breakages due to handling losses during transit and in the show rooms of dealers with the breakage losses incurred in manufacturing process. It was not uncommon to find 'recall' of goods in the manufacturing sector due to defects in manufacturing process. It need not be a regular phenomenon. Such can be a one time affair. Further, the high number of dealers making breakage claims itself evidences the business necessity of such loss for survival in the market. Confirmation of credit notes by dealers of assessee also supports the breakage claim of assessee. The AR of assessee has rightly pointed out that - in the case of Sheo Narain Dulichand v/s CIT 2003-TIOL-440-HC-ALL-IT it is held that "There is no presumption that witness appearing for an assessee come forward to give false evidence to oblige the assessee". Further, no contrary evidence is brought on record by A.O. to justify disallowance of breakage loss at Rs. 21,01,279/-. AR was also right in pointing out that the deduction is otherwise also allowable u/s 36(1)(vii), in view of SC decision in the case of TRF Ltd. v/s CIT 2010-TIOL-15-SC-IT, since the receivable on account of breakage is written off in the books of accounts of assessee. Hence, I allow the second ground of appeal in favour of assessee.

Having heard the matter, the Tribunal held that,

++ the only dispute to be decided in the impugned appeal is regarding the allowability of the breakage loss disallowed by the AO at Rs.21,01,279/-. On perusal of the record, we find the AO disallowed the breakage loss of Rs.21,01,279/- out of Rs.54,80,239/- claimed by the assessee on the ground that assessee did not furnish party wise details of breakage/claim made or offered, that no such claim was made in the preceding year and that this is such an item which can be recycled and reused for making glass. He therefore restricted the breakage loss at 1% of the turnover thus allowing an amount of Rs.33,78,960/- out of the breakage loss claimed at Rs.54,80,239/- and made disallowance of Rs.21,01,279/-. From the various details furnished by the assessee in the paper book, we find the assessee has furnished the party wise details giving the credit note number and the amount allowed towards such breakage loss. The AO has not disputed the fact of filing of party wise details during the course of assessment proceedings in the remand proceedings. Therefore, the first objection by the AO that the assessee has not furnished the party wise details is not existing. Further, the basis of allowing 1% of the turnover towards breakage charges by the AO is not understood. If the AO was not satisfied due to the reasons mentioned by him, he could have disallowed the entire amount. However, he has not done so and allowed 1% of the turnover towards breakage. This otherwise indicates that he also accepts that there would be breakages. Merely because the assessee has not claimed such breakage loss in the preceding assessment year, the same in our opinion cannot be a ground to deny a legitimate claim made by the assessee in the impugned assessment year especially when the assessee has furnished the list of dealers to whom such credit notes were issued towards breakage loss and sample confirmations from such parties were also filed. In this view of the matter and in view of the detailed reasoning given by the CIT(A) on this issue while deleting the disallowance of breakage loss of Rs.21,01,279/-, we find no infirmity in his order. Accordingly, the same is upheld. The ground raised by the revenue is accordingly dismissed. In the result, the appeal filed by the Revenue is dismissed.

(See 2015-TIOL-731-ITAT-PUNE)