2004 (11) TMI 48 - HC - Income Tax

Tribunal confirming disallowance of capital loss in respect of an amount advanced by the assessee to M/s. Fort William Company Limited Calcutta and written off in the accounts relevant to the AY 1989-90 on account of the borrower-company being declared a sick industry - we are of the opinion that the Tribunal rightly reversed the order of the Commissioner of Income-tax (Appeals) by holding that there is no extinguishment of the capital asset during the previous year relevant to the assessment year 1990-91. Even though we have not seen a copy of the Board for Industrial and Financial Reconstruction order going by the operative portion of the order of the Board for Industrial and Financial Reconstruction we are convinced that under the rehabilitation scheme debts due to creditors from the sick industry rehabilitated are kept intact. We therefore find no merit in the appeal. The appeal is dismissed.

Summary

Issues:
1. Disallowance of capital loss in relation to debt written off by the assessee due from a sick industry under rehabilitation.

Analysis:
The judgment pertains to an appeal filed by the assessee against the disallowance of capital loss in respect of a debt written off by the assessee, which was due from a sick industry under rehabilitation. The primary issue to be decided was whether there existed a capital loss in such a scenario. The assessee had advanced an amount to a company, which later became sick and was referred for rehabilitation. The assessee claimed the amount written off as a capital loss for the subsequent assessment year. The Assessing Officer initially disallowed the claim, stating that there was no transfer of a capital asset. However, the Commissioner of Income-tax (Appeals) allowed the claim, considering the extinguishment of the right to recover the debt due from the sick industry as a transfer of capital asset. The Department appealed against this decision, and the Tribunal sided with the Department, stating that there was no transfer of capital asset in this case.

Moving on to the arguments presented during the hearing, the Department initially conceded that the debt due from the sick industry was a capital asset, but later contended that this was a mistake. The counsel for the assessee argued that there was a transfer of capital asset due to the extinguishment of the right to recover the loan amount following the rehabilitation order. However, the court noted that there was no provision in the rehabilitation scheme for repayment of the amounts by the sick industry, leading to the loss for the assessee. The court referenced a Supreme Court decision regarding extinguishment of transfer of assets in a different context but found it not directly applicable to the present case. The court ultimately agreed with the Tribunal's decision that there was no extinguishment of the capital asset during the relevant period, as the rehabilitation scheme maintained debts due to creditors from the sick industry. Consequently, the appeal was dismissed.

In conclusion, the judgment delves into the intricacies of determining capital loss in the context of a debt written off by the assessee from a sick industry under rehabilitation. The court analyzed the arguments put forth by both parties, considered relevant legal precedents, and ultimately upheld the Tribunal's decision that no extinguishment of the capital asset occurred during the relevant period, leading to the dismissal of the appeal.