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2016 (9) TMI 15

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..... assets are not capital assets of the appellant. The above mentioned loss arose consequent to the repossession of assets given on hire purchase, following a default by the hirer's. The shortfall of the realizable value/sale proceeds vis-a-vis the amount recoverable from the hirers constituted the loss incurred by the Appellant is a Business loss. Respectfully following decision of Hon'ble Supreme Court in the case of CIT Vs Nainital Bank Ltd. (1964 (9) TMI 11 - SUPREME Court ), we hold that the loss incurred by the assessee due to sale of repossessed assets are allowable as business loss Loss on sale of debentures and Govt. Securities have been rightly claimed as business loss by the assessee. - I.T.A. No.767/Del/2011, I.T.A.No. 514/Del/2011 - - - Dated:- 27-7-2016 - SHRI G. D. AGRAWAL, HON BLE VICE PRESIDENT AND SMT. BEENA A. PILLAI, JUDICIAL MEMBER For The Appellant : Shri Tushar Jarwal, Adv Shri Gautam Swarup, Adv. For The Respondent :Shri T Vasanthan, Sr. DR ORDER PER BEENA A. PILLAI, JM: The present appeals are filed by the Revenue (I.T.A.No. 767/Del/2011) and Assessee (I.T.A.No. 514/Del/2011) against the order dated 30.11.2010 passed by Ld .....

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..... d in the profit and Loss account of the assessee for this year and the last so many years that no purchase of shares has been done. The loss, which has arisen, is on account of shares and government securities held for a very long time. By treating part of it as stock in Trade the assessee does not become entitled to claiming the loss on stock- in-trade. In the case of Kedarnath Jute Manufacturing 82 ITR 363 the Hon'ble Supreme Court has held that accounting entries in the books of the assessee do not decide the taxable income of the assessee. In the instant case not a single share has been purchased for last many years. There is no regular purchase and sale activity of shares by the assessee. Vide submission dated .03.2005 the assessee has submitted that the company being NBFC is engaged in the business of shares and securities, however, it is seen that there is no dealing in shares for last many years. The assessee is just showing them as stock in trade in its books but no dealing business of share is being done. The treatment of shares in the books as stock in trade does not entitled the assessee to claim the shares held by it for a very long period as business Loss. Not eve .....

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..... i) On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the disallowance of ₹ 69,19,000/- made by the AO on account of loss on sale/disposal of repossessed hire purchase assets. iii) On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in quashing the restriction to the assessed loss of ₹ 8,01,33,086/- to the returned loss of ₹ 7,43,29,300/- made by the AO. Ground No.(i) is general in nature. Ground No.(ii) (iii): 6 Ld. D.R. submitted that assessee has neither disclosed regarding estimation of realizable value nor the method of computation of estimated value. Ld. D.R. submitted that the loss figure of ₹ 69,19,000/- is not actual loss of the assessee but also includes notional loss claimed by the assessee occurred to it which cannot be allowed as an expense in the profit loss account of the assessee as the same is not an ascertained expenditure. Ld. D.R. submitted that the view taken by the Ld. A.O. is supported by the decision of Allahabad High Court in case of Motor and General Sales (P) Ltd. Vs CIT reported in (1997) 226 ITR 137. He submitted that unless the assessee el .....

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..... ecoverable from the hirers constitutes the profit/(loss) incurred by the appellant, which is booked by ii in its books. 7.4 He further submitted that when a repossessed asset, (loss in respect of which is booked in the earlier years), is sold then the provision is reversed and the gain/loss arising from the sale is accounted. Ld. A.R. submitted that during the captioned assessment year, the assessee claimed loss on repossessed stock incurred during the year amounting to ₹ 69,19,000/-. 7.5 Further, it has been submitted that the assessee is in the business of leasing and hire purchase. It is an accepted commercial practice to repossess the assets given on hire purchase form the defaulting hirers or when the asst is returned by the hirer after refusing to pay the remaining installments. The repossessed assets are normally disposed off at the prevailing market price, which is decided on the basis of remaining life and condition of the asset. The loss on sale of repossessed assets occurs when the recovery from sale falls short of the value of the repossessed assts. The loss on sale of repossessed stock is incidental to and is an inherent part of the business of hire purchas .....

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..... et of installments received and unmatured finance charges, and the estimated realizable value of the assets concerned. Ld. A.R. submit that the Assessing Officer has noted the above note of the auditors and has found no fault with the same. He further submitted that assessee was never asked at the time of assessment to explain the mechanism for determining the market value of the repossessed assets. The assessee, however, tried to explain the basis on which the loss was computed. 7.10 Ld. A.R. in his written submission, placed in the Paper Book has relied upon various decisions of Hon'ble Supreme Court and Hon'ble Jurisdictional High Court which are as under: i) K.L. Johar Co. Vs DCIT (1965) 16 STC 213 (S.C.); ii) P Mohammed Meerakhan Vs CIT (1969) 73 ITR 735 (S.C.); iii) CIT Vs Basti Sugar Mills Co. Ltd. 257 ITR 88 (Del.); iv) CITVs U P Stat Industrial Corpn. (1997) 225 ITR 703 (S.C.); v) Challapalli Sugars Ltd. Vs CIT (1975) 98 ITR 167 (S.C.); vi) Kedarnath Jute Mfg. Co. Ltd. 82 ITR 363 (S.C.) 7.11 Ld. A.R. submitted that the decision relied upon by the Ld. D.R. in case of Motor General Sales (P) Ltd. vs CIT (supra) is distinguishable as the .....

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..... to be set off against the receipts. The same view was expressed by the Full Bench of the Madras High Court in Ramaswami Chettiar v. Commissioner of Income-tax and by the Patna High Court in Motipur Sugar Factory Ltd. v. Commissioner of Income-tax. Under section 10(1) of the Act loss of stock-in-trade is certainly an admissible deduction in computing the profits. Payment received from an insurance company for stock destroyed by fire was taken into account as a trading receipt in computing the profits assessable to income tax: see Green v. J. Gliksten Son Ltd. and Raghuvanshi Mills Ltd. v. Commissioner of Income-tax 5. If receipt from an insurance company towards loss of stock was a trading receipt, conversely to the extent of the loss not so recouped it should be trading loss. Loss sustained by an assessee owing to destruction of the stock which the assessee was entitled to claim as a deduction: see Pohoomal Bros. v. Commissioner of Income-tax 6. Loss incurred in stock-in-trade by ravages of white ants was allowed as trading loss in computing the profit of a business: see Hira Lal Phoolchand v. Commissioner of Income-tax 7. We therefore, reach the position that cash .....

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..... ositions under Hire Purchase agreement and the ratio laid down by Hon'ble Supreme Court in case of Nainital Bank (supra), the following consequences emerge: - When the appellant generate income out of hire purchase transactions, (on account of realisation of installments from the hirers) the same is treated as Business Income. Considering the same fact, when there is a loss on account of .repossession of hire purchase stock, the same should be considered as a Business Loss since the main business of the company is to give assets on hire and as such, any loss arising out of sale of repossessed stock is incidental and inherent part of the business of hire purchase carried on by the company. Repossessed hire purchase assets constitute stock-intrade ( current assets ) for the appellant and are classified as such in its accounts also. They are neither classified as fixed assets nor is any depreciation claimed thereon by the appellant. Stock-in-trade has been specifically excluded from the purview of 'Capital Assets' vide clause (i) of section 2(14) of the Act. Accordingly, the repossessed assets are not capital assets of the appellant. The above mentioned loss arose .....

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..... l asset in the hands of the assessee, therefore any loss on account of sale of capital asset cannot be claimed as a deduction in the profit and loss account of the assessee. The assessee has relied upon the decision of Hon'ble Supreme Court in the case of Investment Ltd Vs CIT -77 ITR 533 wherein it was held that nomenclature of a particular item does not decide it's nature. A tax payer is free to employ for the purpose of his trade his own method of keeping accounts. In that case the assessee involved was a dealer of shares. Applying the same logic the loss claimed on stock in Trade cannot be treated as a revenue loss because the assessee is not regularly engaged in the business dealing in shares. It has been observed in the profit and loss account of, the assessee for this year and the last so many years that no purchase of shares has been done. The loss, which has arisen, is on account of shares and government securities held for a very long time. By treating part of it as stock in Trade the assessee does not become entitled to claim the loss on stock- in trade. In the case of Kedarnath Jute Manufacturing 82 ITR 363 the Hon'ble Supreme Court has held that accounting .....

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..... ciation, the AO is duty bound to allow depreciation which will in turn result in making the assessed income below the returned income. The Hon'ble Gujarat High Court in the case of Gujarat Gas Ltd. Vs JCIT 245 ITR 84, on the following facts: Facts: In this case, we are concerned with the assessment year 1996-97. The assessee has filed return on November 30, 1996, showing taxable income of ₹ 5,13,86,320. The return was processed under section 143(1 )(a) of the Income-tax Act, 1961 (hereinafter referred to as the Act ), after making some prima facie adjustment on October 7, 1997. Thereafter, notices under sections 143( 1) and 142(2) of the Act came to be issued and the petitioner came to be assessed under section 143(3) of the Act by order dated March 31, 1999. The Assessing Officer by his order has held that though the total income of the assessee was ₹ 2,11,81,620, the assessee was liable to pay tax on the total income of ₹ 5,13,86,320 on the ground that in accordance with Circular No. 549, para. 5.12, dated October 31, 1989, the assessed income shall not be less than the returned income. Has held as under In this case, according to us, the Ass .....

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..... or any adventure or concern in the nature of trade commerce or manufacture. Even though the words are wide, but underlying each of them is the fundamental idea of the continued exercise of an activity. The frequency or repetition of an activity, though at times a decisive factor, is by no means an unfailable test, and a transaction, though repeated, may not amount to a trade or an adventure in the nature of trade. Conversely an isolated adventure may fall within the definition of business. Ordinarily, business implied a continuous activity in carrying on a particular trade or a vocation, but it may also include an activity which may be called quiescent. 12.3 Ld. A.R. further submitted that the assessee has been consistently following the same treatment in earlier years as well as in later years and the same being accepted by Revenue authorities. 12.4 Further, the Ld. A.R. submitted that assessee is a Further, the Company being a Non-Banking Financial Company ( NBFC ), is governed by the directions issued by the Reserve Bank of India (RBI) and every NBFC is mandatorily required to follow those directions. In terms of the directions issued by the RBI, every NBFC is required .....

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