Sale of scrap reduced from WIP upheld. Scrap held inextricably linked with main activity

Sale of scrap reduced from WIP upheld. Scrap held inextricably linked with construction / developmental activity 

ABCAUS Case Law Citation:
ABCAUS 3179 (2019) (10) ITAT

Important case law relied upon by the parties:
Bokaro Steel Ltd. 236 ITR 315

In The instant case, the assessee had challenged the order passed by the CIT(A) in confirming addition for sale of scrap treating it as chargeable to tax.

The assessee was engaged as Builder and was assessed u/s 143(3) r.w.s. 153C of the Income Tax Act, 1961 (the Act) against Nil return filed by the assessee by inter alia making the said addition.

The assessee had obtained loans from various concerns and utilized the same mainly for advancing loans to partners and other group concerns and towards creation of work-in-progress (WIP). During the relevant year, the amount of WIP increased by Rs. 80 lacs. The assessee submitted that since there was no taxable income from projects, no return of income was ever filed for all the years.

Upon perusal of cash book, it transpired that the assessee was in receipt of Rs. 10 Lacs in cash from sale of scrap. It was submitted that the said amount was reduced from WIP.

The Assessing Officer (AO) was of the view that the sale of scrap, could not be co-related to the WIP and the expenses debited to Profit & Loss Account could not be considered as incurred for earning the income from sale of scarp. Accordingly, the said income of Rs.10 Lacs was brought to tax as Business Income.

Before the CIT(A) the assessee placing reliance on the decision of Hon’ble Supreme Court, submitted that scrap was in the form of residual construction material, gunny bags, waste pieces of steel bars etc. and generated in the course of development activity and inextricably linked to development activity carried out by the assessee. Therefore, these receipts would go on to reduce the cost of project and therefore, the same had rightly been deducted from WIP account. However, the said submissions could not find favor with CIT(A) who upheld the action of Ld. AO in treating the scrap sale as business income.

The Tribunal observed that the assessee was undertaking development of certain project and sole activity being carried out by the assessee was construction activity. It was also undisputed fact that the assessee was following project completion method of accounting to offer income under the project.

The Tribunal opined that therefore, the scrap generated out of construction / development activity, was inextricably linked with assessee’s main activity and therefore, the same would rightly go on to reduce WIP. Therefore, this addition would not be sustainable in law. The assessee had rightly deducted the same from WIP.

Accordingly AO was directed to reduce the said disallowance from WIP account and the ground was allowed.

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