1994 (2) TMI 84 - AT - Income Tax

Assessment Year Business Loss Capital Asset Capital Loss Deduction In Respect Earnest Money

Summary

Issues:
1. Disallowance of claim of loss of Rs. 80,000
2. Disallowance of Rs. 8,212 on account of sales tax liabilities under section 43B of the Act

Analysis:

Issue 1: Disallowance of claim of loss of Rs. 80,000
The assessee, a firm engaged in manufacturing, claimed a loss of Rs. 80,000 as capital loss on machinery cancellation. The ACIT disallowed the claim, stating it was neither a business loss nor a short-term capital loss. The CIT (Appeals) upheld this decision. The assessee argued that the loss should be allowed as a business loss or capital loss under section 71(3). However, the tribunal held that the contract with the supplier did not create a capital asset, as it did not result in any property interest. The tribunal emphasized that for a capital gain/loss, there must be a transfer of a capital asset, which did not occur in this case. The tribunal also rejected the claim for business loss under section 37, stating that canceling a contract and claiming damages is not a normal business activity. The tribunal concluded that the assessee was not entitled to the deduction of Rs. 80,000 as either business or capital loss.

Issue 2: Disallowance of Rs. 8,212 on account of sales tax liabilities
The second ground of appeal related to the disallowance of Rs. 8,212 for sales tax liabilities under section 43B of the Act. During the hearing, the assessee did not pursue this ground, leading to its dismissal by the tribunal.

In summary, the tribunal upheld the disallowance of the Rs. 80,000 loss claimed by the assessee as it did not meet the criteria for either business or capital loss deductions. Additionally, the second ground regarding the disallowance of sales tax liabilities was dismissed as the assessee did not press the issue during the hearing.