2014 (10) TMI 325 - AT - Income Tax

Loss on sale of machinery disallowed u/s 14A - Whether the purchase of plant & machinery is under revenue field and therefore the loss arising from the sale of the same would constitute the revenue loss According to the assessee, he had not used the plant & machinery for his business but had sold that as scrap . - Held that - the sale of such plant & machinery which was purchased along with the building but found to be unfit for use still to be sale of capital asset and not stock in trade - the loss arising from sale of plant & machinery would constitute capital loss As the assessee has stated that the plant and machinery has never been used in the hotel right from the beginning, such plant & machinery cannot be considered as part of the block of asset of the assessee s business. The argument of the assessee that the purchases of plant & machinery alone is solitary transaction in the nature of adventure in trade cannot be accepted - The sale by the official liquidator is for the entirety of land, building and plant & machinery and all of them would constitute capital asset in the hands of the assessee in his business of running a hotel - the argument that the plant & machinery purchased would constitute stock in trade is acceptable and the loss on sale should be assessed as capital loss Decided in favour of revenue.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income-tax Act, 1961.
2. Classification of loss on sale of plant and machinery as capital loss or revenue loss.
3. Validity of assessment order due to unsigned notice under Section 156.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income-tax Act, 1961:
The main contention of the assessee was that the provisions of Section 14A were wrongly invoked by the Assessing Officer (AO). The AO had initially selected the case for scrutiny to examine disallowance under Section 14A but did not find any exempt income during the relevant assessment year. The CIT(A) agreed with the assessee, noting that there was no exempt income claimed in the return of income (ROI) for the relevant assessment year, making Section 14A inapplicable. The Tribunal upheld this view, emphasizing that the invocation of Section 14A was not justified as there was no exempt income.

2. Classification of loss on sale of plant and machinery as capital loss or revenue loss:
The primary issue revolved around whether the loss on the sale of plant and machinery should be treated as a capital loss or a revenue loss. The assessee argued that the plant and machinery were purchased as part of a strategic business decision for future expansion and diversification. The AO contended that since the plant and machinery were not brought into the books of account and were sold as scrap, the loss should be treated as a capital loss. The CIT(A) disagreed, stating that the purchase and subsequent sale of the plant and machinery were part of the assessee's business activities, making the loss a revenue loss. However, the Tribunal reversed this decision, holding that the plant and machinery were capital assets and their sale constituted a capital loss. The Tribunal emphasized that the plant and machinery were never used in the business and hence could not be considered part of the block of assets.

3. Validity of assessment order due to unsigned notice under Section 156:
The assessee also raised a ground regarding the validity of the assessment order, claiming that the notice under Section 156 was unsigned and did not mention any amount, rendering the demand unenforceable and the order void. This issue was not elaborately discussed in the Tribunal's judgment, indicating that it was not a decisive factor in the final decision.

Conclusion:
The Tribunal concluded that the loss arising from the sale of plant and machinery, which were never used in the business and were sold as scrap, constituted a capital loss and not a revenue loss. Consequently, the appeal of the Revenue was allowed, and the loss was to be treated as a capital loss. The Tribunal also upheld that the invocation of Section 14A was not justified in the absence of exempt income. The appeal of the Revenue was allowed, and the judgment was pronounced in the open court on 16th September 2014.