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2016 (9) TMI 15 - ITAT DELHI

2016 (9) TMI 15 - ITAT DELHI - TMI - Allowable Business loss - Loss incurred by the assessee due to sale of repossessed assets - Held that:- 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 .....

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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 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 Sup .....

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r 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. CIT(A) XV, New Delhi for the Assessment Year 2002-03. 2. The brief facts of the case are as under: 2.1 GE CAPITAL TRANSPORTATION FINANCIAL SERVICES LTD. ("the assessee") is a Non banking Financial Company ('NBFC .....

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e of ₹ 6,49,930/-. 3. The Assessing Officer observed as under: Assessee has not furnished the basis of arriving at the market value of the loss of the repossessed stock still in possession of the assessee at the end of the previous year relevant to the assessment year. He submitted that no other disclosure has also been made in the accounting policies attached with the annual accounts as Scherdule-14. The auditors have only commented that repossessed stock is valued at the lower of agreeme .....

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apital 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 .....

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- 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, .....

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the business of the company is dealing ion shares. What has to be seen is whether the activity of sale and purchase of shares for earning business profits has been done or not, The assessee company fails this test. 3.2 The assessment was completed u/s 143(3) of the Act by the Ld. Deputy Commissioner of' Income Tax, Circle 12(1), New Delhi ( the A.O. ) vide his order dated March 14, 2005, wherein the assessee was assessed at a loss of ₹ 8,01,33,086/- on account of the following disallow .....

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43,29,300/- 4. Aggrieved by the assessment order, the assessee preferred appeal before the Ld. CIT(A). Ld. CIT(A) deleted the addition made by the Assessing Officer on account of loss on sale of reprocessed stock and confirmed the addition in respect of loss on sale of investments. He further made certain disallowances in respect of Section14A. 5. Aggrieved by the order of Ld. CIT(A), the Revenue as well as assessee are in appeal before us on the following grounds: Revenue s Appeal; ITA No. 767/ .....

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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 assesse .....

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penditure. 7. On the contrary the Ld. A.R. submitted that the assessee company is a non-banking finance company engaged in business of providing finance to industry and as per directions issued by RBI the assessee is required to maintain the liquid assets including investment in shares, stock, government securities etc. Ld. A.R. submitted that these investments are in the ordinary course of business. 7.1 Ld. A.R. submitted that during the previous year, as part of its business, the assessee has .....

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n the same in the computation of income for the F.Y. 2001- 02. 7.2 He submitted that under the Hire Purchase agreements, in case hirer makes a default in the payment of certain member of installments, the company has the right to repossess the stock given under the hire purchase transaction. He submitted that in case of hirers who do not pay/agree to pay the overdue installments, the company repossesses the hired assets. Since the repossessed assets are already used ones, i.e., they attain the c .....

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ted that difference between the agreement value (net of installments received and immatured finance charges) and the estimated realizable value is provided as a gain/loss. When a repossessed asset is sold, the excess/shortfall of the sale proceeds visa- vis the amount recoverable 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 yea .....

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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 purchase. 7.6 Ld. A.R. submitted that asses .....

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imself by making an offer that recovers the price from the hirer himself. He submitted that there may not be any avenues available for recovering the amount payable by the hirer other than contracted litigation, which may not be worthwhile, considering the time and cost involved. 7.7 The practice of repossessing hire purchase assets from defaulting hirers and disposing of the same at the prevailing market price is an accepted commercial practice in the business of hire purchase. Losses incurred .....

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rable from the hire purchaser' constitute business trade and the loss there of is allowable as business loss as' assessee is engaged into the business of money lending. He submitted that the loss incurred on disposal of repossessed hire purchase assets represents the installments, which could not be recovered from the hirers, less the sale proceeds recovered. The Ld. A.R. submitted that the amount written of and claimed by the assesses should be allowed under the Act as trading / busines .....

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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 Cou .....

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a) is distinguishable as the case deals with assessment year 1968-69, which is much before the concept of hire purchase got a statutory definition under the Hire Purchase Act 1972. 8. We have perused the submissions advanced by both the side and the judgements relied upon by them. Undoubtedly, it is an admitted position that the Revenue in the past and preceding assessment years, have been accepting the claim of assessee in respect of the loss on sale of repossessed stock and there has been no c .....

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rt has held that the amount recoverable from the hirer, do constitute stock in trade. Relevant paras from the decision of Hon'ble Supreme Court in CIT Vs Nainital Bank Ltd. (supra) of the decision are reproduced herein below: It is settled law, and indeed it is not disputed, that cash is the stock in tad of a banking company. In Arunachalam Chettiar Vs CIT, the Judicial committee was considering the basis of the right of an assessee to deduct irrecoverable loans before arriving at the profit .....

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ing or money-lending business .... allowance for bad and doubtful debts was given for the reason that all the moneys embarked in the money-lending business and lent out for interest were in the nature of stock-in-trade of the banker or moneylender and the bad and doubtful debts represented so much loss of the stock-in-trade. Losses in respect of the stock-in-trade have always been regarded as trade losses and allowed to be set off against the receipts. " The same view was expressed by the F .....

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nd 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 prof .....

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lso should have been incidental to it. The leading case on the subject is that of this court in Badri das daga v. Commissioner of Income-tax 8. There, the appellant was the sale proprietor of a firm which carried on the business of money-lending. The agent of firm withdrew large amounts from the firm's bank account and applied them in satisfaction of his personal debts. In the firm's account the balance of the amount not recovered from the agent was written off at the end of the accounti .....

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will depend on whether, having regard to accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business and to be incidental to it. If that is established, then the deduction must be allowed, provided of course there is no prohibition against it, express or implied, in the Act." 8.2 Applying the principles laid down by Hon ble Apex Court to the present case, the assessee was carrying on the business of hire purchase / money lending activ .....

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itions 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 busin .....

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d 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 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. 8.4 Respectfully following .....

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CIT(A)"] is erroneous and bad in law to the extent the same confirms the disallowances made in the assessment order. 2 That on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in confirming disallowance of ₹ 1,69,528/-, on account of loss on sale of debentures and government securities, by upholding the same as capital loss as against business loss claimed by the Appellant. 2.1 Without prejudice to above, the Ld. CIT(A) has erred in not treating the same .....

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red loss on sale of investments aggregating to ₹ 1,69,528/-. During the assessment proceedings, the Ld. A.O. asked for an explanation as to why the loss on sale of investments claimed as Revenue expenses , be not disallowed? The Ld. A.O. held as under: I have considered the submissions of the assessee. The assessee may be governed by the statutory bodies regulating; it's conduct in ordinary course of business but the income has to be computed strictly in accordance with the provision o .....

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rade 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 secur .....

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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 even .....

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ade by Ld. A.O. by holding as under: I have considered the submissions of the appellant, the findings of the AO and the facts on record. Perusal of the facts on record show that reduction in assessed income compared to returned income is not on account of any claim preferred by the appellant but due to consequential effect of disallowances made in the earlier year. As per Circular No. 772 issued by Hon'ble CBDT in keeping with the Finance Act, 1998 it is seen that the Act has amended sub sec .....

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sessee has claimed deduction of deprecation in computation of income. Reading of the above makes is very clear that in case a person has not claimed depreciation, 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 .....

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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 Assessing Officer was not bound by the said circular and yet the Assessing Officer has considered the circular and, therefore, he has no .....

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ill be RS.5,13,86,320." In view of the findings above and judicial precedents this ground of appeal is allowed in favor of the appellant. 12. We have perused the submissions and arguments advanced by both the parties. We have perused the records / Paper Book placed before us. 12.1 Ld. A.R. submitted that assessee is a Non Banking Finance Company("NBFC") engaged in the business of providing finance to industry, trade, etc. through hire purchase, lease and loan products. It is also .....

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on is invited to the fact that the appellant is carrying on the activities of sale and purchase of securities regularly in contrast to what has been alleged by the AO. The profit and/or loss arising out of such activity has always been treated by the appellant as business income/business loss and assessed as such by the Department. The complete details of sale of shares affected by the Appellant and accepted by the AO are given hereunder: In this connection, reliance is placed on the decision of .....

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ity, 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 followi .....

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