By TIOL News Service

AHMEDABAD, NOV 16, 2018: THE ISSUE IS - Whether a manufacturer can claim loss incurred on discarded machinery as business deduction, if it has written off the machinery on notional basis without actually selling the same. NO is the answer.

The assessee company had filed its return declaring loss of Rs. 14,64,777/-. In its return, the assessee had claimed Rs. 73,43,678/- loss on sale/ write off of the fixed assets of capital work in progress. The assessee had explained that assets were put to use only for its business purpose for some time and due to problem of pollution, the entire technology had to be changed. Thereafter, the alternative use of the said machinery could not be worked and the machinery were scraped. The AO however rejected these submissions and treated the same as capital expenditure and did not allow as business deduction.

On appeal, the CIT(A) confirmed the additions made by AO. However, in the meanwhile, the Coordinate Bench of the ITAT vide their order ITA No. 666 and 667/Ahd/2011, had set aside the issue to the file of AO to verify when the discarded machinery was purchased, what was the actual cost of machinery and whether the said machinery was sold during the year as scrap by the assessee or not. During the course of assessment u/s 143(3) r.w.s. 254, the AO stated that assessee had not furnished any material evidences such bills/vouchers of purchases, bills and vouchers of sales and other relevant documents as per the direction of the ITAT. Therefore, the submission of assessee was not co-ordinated with the direction of the ITAT. Consequently, the claim of assessee to the amount of Rs. 73,43,678/- debited to the P&L A/c was disallowed by the AO. The assessee again approached the CIT(A), but in vain.

On appeal, the ITAT held that,

++ it is seen that the AO has disallowed the claim of the assessee for lack of supporting evidences and nature of written off assets were capital of nature. The CIT(A) has sustained the disallowance stating that assessee has provided only notional loss in the books of account and assessee has not sold these assets during the year under consideration. It is found that the assessee has furnished only annexure pertaining to plant and machinery as to when the machinery in question was purchased and what was the actual cost of the machinery. It is also clear that the assessee has written off the machinery on notional basis without actually selling the machinery. After perusal of the material on record, it is clear that the machinery in question was not sold by the assessee as scrap during the year under consideration and it has failed to furnish the relevant evidences showing purchase of the discarded machinery. After considering these facts, this Tribunal is inclined with the findings of the CIT(A) that no actual loss had been taken place during the year as the machinery was not actually sold during the year. Considering these facts including non-furnishing of the document as per the direction of the co-ordinate bench, there is no error in the decision of CIT(A).

(See 2018-TIOL-2132-ITAT-AHM)