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Dy. Commissioner of Income Tax, Circle 11 (1) , New Delhi Versus M/s Escorts Finance Ltd.

2016 (6) TMI 258 - ITAT DELHI

Disallowance made on account of loss on sale of repossessed assets being capital in nature - Held that:- Loss is on account of bad debts. The loss on account of sale of repossessed assets is nothing but a write off of bad debts. The nomenclature cannot change the real character of the transaction. The appellant debited the loss to revenue account as it is incidental to business. Under no stretch of imagination, this loss can be considered as capital in nature as done by the Assessing Officer. On .....

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ee - I.T.A. No. 6673/Del/2013 - Dated:- 2-6-2016 - Shri H. S. Sidhu, Judicial Member And Shri O. P. Kant, Accountant Member For the Department : Sh. T. Vasanthan, Sr. DR For the Assessee : Sh . R.M. Mehta, Adv. ORDER Per H. S. Sidhu : JM This appeal by the Revenue is directed against the Order of the Ld. Commissioner of Income Tax (Appeals)-XIII, New Delhi dated 05.9.2013 pertaining to assessment year 2007-08. 2. The following issues have been raised by the Revenue:- 1. On the facts and in the c .....

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on 27.3.2012. The assessee submitted vide its letter dated 4.4.2012 that the original return filed may be treated as return filed in response to notice u/s. 148 of the I.T. Act. Notices u/s. 142(1) were issued to the assessee. In response to notices, Ld. Authorised Representative attended the assessment proceedings and filed the written submissions. Keeping in view the details filed and after discussions, the AO assessed the total income at ₹ 34,47,210/- vide his Order dated 19/9/2012 pass .....

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e allowed by setting aside the order of the Ld. CIT(A), because the assessee had debited ₹ 1,12,28,236/- to the Profit & Loss Account on account of Loss on sale of repossessed assets and this loss being capital in nature, hence, is not an allowable expenditure. Therefore, he stated that the AO has rightly made the addition of ₹ 1,12,38,236/- which needs to be sustained. 7. On the other hand, Ld. Counsel of the Assessee has stated that the issue in dispute is squarely covered by t .....

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he case of Pallonji Leasing Private Limited vs. ACIT passed in ITA No. 5035-5036/Del/2010. iv) Bombay High Court decision in the case of Harshad J Choksi vs. CIT, Bombay in ITA No. 43 of 1997 dated 14.8.2012. 7.1 He further stated that Ld. CIT(A) in his impugned order has discussed and followed the judgments of the Hon ble High Court of Delhi and Bombay as listed above against Serial No. 7(i) & 7(iv) and has rightly held that the assesse was duly entitled to deduction of a sum of ₹ 1,1 .....

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The relevant portion of his finding is reproduced as under:- 5. The ground no. 3 has been raised in regard to loss of ₹ 1,12,38,236/- on sale of repossessed assets. 5.1 It is observed from the facts of the case that the appellant had claimed loss of ₹ 1,12,38,236/- in the books of accounts on account of loss suffered on sale of assets which were repossessed. The appellant is non banking finance company. The main activity of the company is to finance the vehicles and in return the co .....

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. The company was not in a position to recover the installments. The assets financed by the company were repossessed and sold thereafter. During the appellate proceedings the Counsel of the assessee explained that the appellant is entitled deduction of full amount either u/s 36(1)(vii) or as a business loss in computing the profits and gains of business u/s 28 of the Income Tax Act. The Hon'ble Bombay High Court in the case of Harshad J Choksi vs CIT, Bombay ITA No. 43 of 1997 dated August 1 .....

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ness loss?" 2. This reference has been made at the instance of the assessee and arises out of the order of the Tribunal dated 19.12.1994 in Income Tax Appeal No.1495/Bom/94 relating to the assessment year 1991-1992. 3. Briefly the facts leading to this reference are as under:- a) The assessee is a stock and share broker. During the assessment year 1991-1992, the assessee sought to write off an amount of ₹ 47.58 lacs as bad debts, due to breach committed by 3 members of the Bombay Stoc .....

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lacs after having allowed an amount of RS.2.60 lacs as a business loss. He also held that the amount of ₹ 11.81 lacs was a speculation loss and could not be allowed as a trading loss. So far as, the balance amount of ₹ 33.17 lacs was concerned the Commissioner of Income Tax (Appeals) held that the same could not be considered as a trading loss. 5. On appeal before the Tribunal the assessee contended that even if the deduction is not allowable as bad debts under Section 36(1)(vii) of .....

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duction and relief is sought thereunder, the assessee is not entitled to claim relief as an allowable expenditure/deduction under any other provisions including the benefit of deduction s a business loss. 6. Mr. Sanjeev Shah, Learned Counsel appearing for the applicant submits as under: a) The issue arising in the present reference stands concluded by the order of this court in the matter of Commissioner of Income Tax v. Shreyas S. Morakhia dated 28th February, 2012 in Income Tax Appeal No. 89 o .....

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n under Section 28 of the Act. c) The Act does not provide that the deduction available from the total receipts to compute profit & gain of business are only those deductions which are listed in Section 30 to 43 of the Act. This is because according to him the list is not exhaustive. It is his contentions that any loss which occurs in carrying on the business and is related to the business operation is entitled to be deducted to arrive at the profits and gains of a business under Section 28 .....

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as bad debts is specifically provided for under section 36 of the Act and in such cases it is not permissible to apply any other section of the Act to determine the allowability of the same as a deduction; c) In any view of the matter, the Commissioner of Income Tax (Appeals) has come to a conclusion that there was no trading loss to the extent of ₹ 33.17 lacs, as there was no trading done in respect thereof and the deduction was therefore not allowable. So far as, deduction to the extent .....

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issue is concerned, we are not expressing any opinion with regard to it as the same does not arise from the question referred to us. The Tribunal has considered that the amount of ₹ 44.98 lacs is not deductible as bad debts in view of Section 36(2) of the Act and sought our opinion only on the question whether in such a case the assessee could claim a deduction as a business loss to arrive at his profits and gains from business. So far as, the submission of Mr. Suresh Kumar for the Revenue .....

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namely whether such a loss could be considered as a allowable business loss. Therefore, we are not dealing with both the above issues. 9. Our opinion is sought on the issue, whether if an amount is held to be not deductible as a bad debt, in view of non compliance of the condition precedent as provided under Section 36(2) of the Act, could the same be considered as a allowable business loss. The Tribunal in its order dated 19.12.1994 has not considered the issue, whether or not a loss claimed by .....

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ee on merits is allowable as a business loss. We are only examining the issue posed for us viz. that when the claim made for bad debts is not satisfied, could it be considered as a allowable business loss. 10. Section 28 of the Act imposes a charge on the profits or gains of business or profession. The expression "Profits and gains of business or profession" is to be understood in its ordinary commercial meaning and the same does not mean total receipts. What has to brought to tax is t .....

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ying on business and is incidental to it. 11. On the basis of the aforesaid decisions, it can be concluded that even if the deduction is not allowable as bad debts, the Tribunal ought to have considered the assessee's claim for deduction as business loss. This is particularly so as there is no bar in claiming a loss as a business loss, if the same is incidental to carrying on of a business. The fact that condition of bad debts were not satisfied by the assessee would not prevent him from cla .....

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s a bad debt the benefit of the general principle of law that all expenditure incurred in carrying on the business must be deducted to arrive at a profit cannot be extended. This submission was negatived by thiscourt and it was held that even where the debt is not held to be allowable as bad debts yet the same would, be allowable as a deduction as a revenue loss in computing profits of the business under Section 10(1) of the Indian Income Tax Act, 1922. 13. In view of the above, the question as .....

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the Act? (ii) Whether assessee had satisfied the conditions as prescribed in Section 36(2) of the Act so as to allow deduction of loss of ₹ 1.56 crore u/s 36 (1) (vii) of the Act.? (iii) Whether loss on sale of repossessed assets is a capital loss or it is a bad debt allowable u/s 36(1) (vii) R/W Section 36 (2) of the Act? (iv) Whether ITAT was correct in law in allowing depreciation@ 60% to the assessee on computer acce3ssories and peripherals like printers etc.? (v) Whether order- passed .....

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the debtors to whom the cars were given on lease rentals. In this way, the assessee claimed loss of ₹ 1,56,04,644/- as bad debt and allowable under Section 36 (1) (vii) of the of the Income- Tax Act. The Assessing Officer, however, refused to allow the said claim on the ground that these repossessed vehicles cannot be construed as stock-in-trade. He relied upon the judgment of Allahabad High Court in the case of Motor & General Sales Pvt. Ltd Vs. CIT, 226 ITR 137 in taking the aforesa .....

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depreciation at the rate of 60% of computers accessories and peripherals purchased by the assessee during this year. The Assessing Officer, however, allowed the depreciation at the rate of 25%. The CIT(A) reversed this part of the order of the Assessing Officer holding that on computer accessories 60% depreciation was allowable under the Act. This order is also upheld by the Tribunal. 3. In so far as second issue is concerned, it should not be disputed by the learned Counsel for the Revenue tha .....

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Officer took a view that it has been held by the High Court that as the assessee remains the owner and as such there arises no question of revaluation of assets and as such an assessee is not entitled to claim the loss on mere revaluation of assets u/s 36(1) (vii) read with section 36(2) of the Act. The CIT (A), however, took the view that the facts of the instant case are distinguishable and the aforesaid judgment of Allahabad High Court has no application. According to him, the assessee is ent .....

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, the assessee being non-banking Financial Company (NBFC) is in the business of money lending giving finance for purchase of vehicle under hire purchase Scheme. He further noted that the owner of the vehicle is the purchaser, and appellant is the lender of money, which itself is a distinguishable factor, as the facts before the High Court of Allahabad in the case of M/s Motor General & Sales Pvt. Ltd. reported in 226 IT 137, as is relied by the Assessing Officer in his order were different. .....

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s of money lending giving finance for purchase of vehicle under hire purchase scheme. The owner of the vehicle is the purchaser and appellant is only lender of money. ii) I have gone through the modus-operandi of transaction and the model of entries passed in connection with the transaction starting with the finance and its logical end. From perusal of the entries it is abundantly clear that it is clearly cut case of write off of Bad Debts. Although the appellant company has used the nomenclatur .....

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racter of the transaction. The court have invariably held that nomenclature given to the transaction and the treatment given to expenditure in particulars manner or the accounting entries does not change the real character of transaction and are not determinative and decisive for tax purpose. The claim of the assessee should be decided as per provision of law ( See case of Bur Paints India Ltd. 254 ITR 503 (CI.) and Kedar Nath Jute Manufacturing Co. 82 ITR SC." 7. The CIT (A) thereafter app .....

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or part thereof is written off or of an earlier previous year, or represents money lent in the ordinary course of the business of banking or moneylending which is carried on by the assessee…. . 8. From the aforesaid it becomes clear that the CIT (A) was right in his conclusion. We are also of the view that the CIT (A) as well as ITAT rightly held that the judgment of Allahabad High Court in Motor & General Sales Pvt. Ltd (supra) was not applicable to the facts of this case. 9. On the .....

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s and gains of business or profession" is to be understood in its ordinary commercial meaning. What has to be brought to tax is the net amount earned by carrying on a profession or a business which necessarily requires deducting expenses and losses incurred in carrying on business or profession. The Hon'ble Apex Court in the case of Badridas Daga v. Commissioner of Income Tax, reported in 34 ITR 10, has held that in assessing the amount of profits and gains liable to tax, one must neces .....

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