2015 (1) TMI 1251 - AT - Income Tax

Sale of depreciable cars - AR submitted that the purchase of the cars were classified by the assessee as depreciable assets forming part of the block of assets - AO has treated the sale of depreciable cars as trading transaction and taxed the same as business profit accordingly - Held that - It is the policy of the Assessee and decision of the management to treat a particular asset as part of the block of asset and vice versa. In the instant case the assessee has treated the cars as part of block of assets and sold subsequently during the year under consideration. The Assessee is at liberty to treat items which are trading asset as part of the depreciable asset also. In such cases the accounting entries in the books of accounts will be a very important and most relevant consideration for coming to a conclusion as to whether the sale of such item gives raise to Income from Business or not. We find no defect in the accounting treatment of the assessee. Hence we reverse the order of the lower authorities and ground raised by assessee is allowed. - Decided in favour of assessee Disallowance of sundry balance written off u/s. 36(ii) - Held that - AR drew our attention to the paper book where the breakup of assessee s income for an amount of ₹ 2,87,472/- was shown pertaining to the sundry balance written off. From the aforesaid discussion, we find that assessee has duly shown its income in earlier year of the balance written off in the relevant year. Ld. DR has not brought anything on record contrary to the finding of Ld. AR. On the other hand the ld. DR relied on the order of authorities below. In view of the above discussion, we reverse the order of Authorities Below and this ground raised by assessee is allowed.- Decided in favour of assessee

Issues Involved:

1. Disallowance of depreciation on motor car.
2. Treatment of profit on sale of motor car as trading profit.
3. Disallowance of traveling expenses.
4. Disallowance of sundry balance written off.
5. Disallowance of claim written off.
6. Addition on account of Short Term Capital Gain under section 50(2).

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation on Motor Car:

The assessee purchased seven new cars and one old car, classifying them as fixed assets. Four new cars were sold, and the block of assets was adjusted accordingly. The Assessing Officer (AO) treated the transactions as trading in nature, thus disallowing the depreciation of Rs. 33,470. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision. However, the Tribunal found no defect in the accounting treatment by the assessee and allowed the depreciation claim, reversing the lower authorities' decision.

2. Treatment of Profit on Sale of Motor Car as Trading Profit:

The AO treated the profit from the sale of cars as trading profit, arguing that the cars were held for a short period, no road tax or insurance was paid, and the cars were not used as fixed assets. The CIT(A) upheld this view. The Tribunal, however, noted that the assessee had classified the cars as depreciable assets and followed proper accounting practices. It concluded that the sale should be treated as part of the block of assets, not as trading profit, thus reversing the lower authorities' decision.

3. Disallowance of Traveling Expenses:

The AO disallowed traveling expenses of Rs. 28,276 incurred by the Director and his wife for a trip to Nepal, as the assessee failed to provide evidence linking the expenses to business purposes. The CIT(A) upheld this disallowance. The Tribunal confirmed the lower authorities' decision, as the assessee could not establish the business connection for the travel expenses.

4. Disallowance of Sundry Balance Written Off:

The assessee wrote off sundry balances amounting to Rs. 2,87,472. The AO disallowed this, as the assessee could not explain when the income was offered for taxation. The CIT(A) upheld the AO's decision. However, the Tribunal found that the assessee had shown the income in earlier years and reversed the lower authorities' decision, allowing the write-off.

5. Disallowance of Claim Written Off:

The assessee wrote off a claim of Rs. 27,000. The AO disallowed this, as the assessee could not justify when the income was treated in earlier years. The CIT(A) upheld the AO's decision. The Tribunal found no reason to interfere with the lower authorities' decision, as the assessee failed to provide adequate justification, thus dismissing the ground.

6. Addition on Account of Short Term Capital Gain under Section 50(2):

The AO treated the sale of cars as trading transactions, leading to an addition of Rs. 18,10,318 as Short Term Capital Gains. The CIT(A) upheld this treatment. However, the Tribunal, considering its decision on the first issue, allowed the assessee's appeal, treating the sale as part of the block of assets and not as trading transactions.

Conclusion:

The appeals were partly allowed, with the Tribunal reversing the lower authorities' decisions on the treatment of the sale of cars and the disallowance of sundry balances written off. The disallowance of traveling expenses and the claim written off were upheld. The decision on the Short Term Capital Gain was also reversed in favor of the assessee.

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