2014 (5) TMI 75 - AT - Income Tax

Revenue loss or capital loss - Loss on account of assignment of debt - Nature of sum advanced - Letting or leasing out of premises - Whether the sum advanced by the assessee was toward a fixed or capital asset of its business or a current asset Held that - Letting would only involve placing the property in possession of another for a defined (specified) period and user for a charge, and nothing more - to even suggest that in giving a property on rent, there is a change of its masters, or that, therefore, the property becomes a circulating capital of its owner, and no longer a capital asset, is ludicrous Relying upon CIT vs. Khimline Pumps Ltd. 2002 (9) TMI 94 - BOMBAY High Court - the payment of lease premium as toward the capital cost thereof, i.e., a capital expenditure. The argument that the loss not on its write off is irrecoverable, but on its transfer to another would be to no effect, as it would not alter the character of the loss incurred, which would continue to be in the capital field - it is not known if the original agreement contains a right to transfer the sub-lease, which would need consent of the principal leaseholder as well, and for all we know the arrangement sought to be entered into may have failed for that reason - there is no assignment deed, bearing reference to the relevant clause of the agreement (or the proposed agreement), i.e., where-under the advance was made - as far as the assessee is concerned, the advance was made to acquire a capital asset - If anything, it puts the assessee s claim of the loss as a revenue loss on an even weaker footing thus, there is no infirmity in the Revenue s action in disallowing the loss as a capital loss, and not a loss arising to the assessee in the ordinary course of and in carrying out its business - the loss as only on capital account and not on revenue account thus, it was rightly disallowed in computing the assessee s business income u/s 28 of the Act Decided against Assessee.

Summary

Issues Involved:
1. Deductibility of a loss of Rs. 9 lacs incurred by the assessee-company on assignment of a debt in the computation of its business income.
2. Classification of the loss as either a capital loss or a revenue loss.

Issue-wise Detailed Analysis:

1. Deductibility of the Loss:
The primary issue in the appeal concerns whether the loss of Rs. 9 lacs incurred by the assessee-company on the assignment of a debt is deductible in the computation of its business income for the relevant previous year. The facts reveal that the assessee, engaged in finance and investment, made a deposit of Rs. 10 lacs with M/s. American Refrigerator Company Limited (ARCO) for the transfer of a sub-lease of premises. The transfer did not materialize, and the advance was not recovered. The assessee eventually sold the debt for Rs. 1 lac, resulting in the loss of Rs. 9 lacs.

The assessee claimed this loss as a business deduction under section 36(1)(vii) of the Income Tax Act, 1961. However, the Revenue rejected this claim, arguing that the loss did not arise in the ordinary course of business and was not incidental to the assessee's trading activity. The Revenue relied on the decision in A.V. Thomas and Co. Ltd. vs. CIT, distinguishing it from other cases cited by the assessee.

2. Classification of the Loss:
The tribunal examined whether the sum advanced by the assessee was toward a fixed or capital asset of its business or a current asset. If it was for acquiring a capital asset, the loss would be on capital account and not deductible as a business loss. Conversely, if it was on revenue account, it would be deductible as a business loss under section 28 of the Act. The tribunal noted that the assessee's claim under section 36(1)(vii) was not maintainable due to non-satisfaction of the essential pre-condition of section 36(2)(i).

The tribunal referred to several cases, including Mysore Sugar Co. Ltd., A.V. Thomas & Co. Ltd., and Hasimara Industries Ltd., to illustrate the distinction between capital and revenue losses. In Mysore Sugar Co. Ltd., the loss was considered a revenue loss as it arose from the failure of crops for which money was advanced for business purposes. In contrast, in A.V. Thomas & Co. Ltd. and Hasimara Industries Ltd., the losses were deemed capital losses as they were related to the acquisition of capital assets or profit-making apparatus.

The tribunal concluded that the assessee's advance of Rs. 10 lacs was intended to acquire a sub-lease, which would either be used for business or let out to generate revenue. This indicated that the assessee aimed to acquire a capital asset, a source of income. Clauses 16 and 17 of the assessee's Memorandum of Association (MOA) supported this conclusion, as they pertained to the acquisition and disposal of properties, which are ancillary objects to the company's main business.

The tribunal also addressed the assessee's reliance on its own case for earlier years, where rental income was assessed as business income. The tribunal found no correspondence between the two cases, emphasizing that the current issue was about the nature of the loss, not the head under which rental income was assessed.

Conclusion:
The tribunal held that the impugned loss was a capital loss and not deductible as a business expenditure or business loss. The assessee's appeal was dismissed, and the loss was rightly disallowed in computing the assessee's business income under section 28 of the Act. The order was pronounced in the open court on 31.12.2013.