2015 (9) TMI 335 - HC - Income Tax

Claim of business loss rejected - loss comprised of deposit relatable to dealership/distributorship and the balance referable to cylinder hire charges due to fraud/cheating on him - business loss v/s capital loss - Held that - Admittedly, the assessee had not commenced its distributorship business. The deposits made by the assessee was for the purpose of acquiring profit and securing dealership/distributorship. Originally, the assessee was in the business of manufacturing handloom silk and not in the business of LPG distributorship. Hence, the purpose of entering into such a new business must be considered to be for the purpose of securing an enduring benefit of a capital nature and hence, the deposit made in that regard cannot be treated as expenditure in the course of carrying on the existing business. The deposit was made by the assessee pursuant to an agreement between the parties for getting dealership/distributorship of LPG. Hence, the deposit made by the assessee was for the purpose of acquiring a profit-making asset to carry on business in LPG. Therefore, the said deposit made should not be treated as revenue in nature and the loss thereof must not be treated as business loss. The loss thereof was a loss suffered on the capital account and could not be deducted on the basis that it was a business loss. See Hasimara Industries Ltd. v. Commissioner of Income Tax and another reported in 1997 (9) TMI 5 - SUPREME Court . - Decided against the assessee

Issues Involved:
1. Business loss claim rejection related to dealership/distributorship deposit and cylinder hire charges due to fraud/cheating.
2. Consideration of business loss with reference to the proviso to Section 3 of the Income Tax Act.
3. Disallowance of the claim of loss as capital loss.
4. Non-consideration of the alternate claim of bad debt under Section 36(2) of the Income Tax Act.

Analysis:

1. Business Loss Claim Rejection:
The primary issue revolved around whether the assessee's claim of business loss, comprising a deposit of Rs. 1,00,650 for dealership/distributorship and Rs. 8 lakhs for cylinder hire charges due to fraud/cheating, was correctly rejected by the lower authorities. The court noted that the assessee had not commenced its distributorship business and the deposits were made to acquire profit and secure dealership/distributorship. The Assessing Officer (AO) disallowed the claim, categorizing it as a capital loss rather than a business loss, and this view was upheld by the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal (ITAT). The ITAT relied on the Supreme Court's decision in Haseemara Industries Ltd. v. CIT, which established that deposits made to acquire a profit-making asset cannot be treated as revenue in nature.

2. Consideration of Business Loss with Reference to Proviso to Section 3:
The court examined whether the Appellate Tribunal erred in not considering the claim of business loss with reference to the proviso to Section 3 of the Income Tax Act. The judgment emphasized that since the distributorship business never commenced, the deposits made were for securing an enduring benefit of a capital nature. Therefore, the loss could not be treated as a business loss, aligning with the precedent set by the Supreme Court in Hasimara Industries Ltd. v. CIT.

3. Disallowance of the Claim of Loss as Capital Loss:
The court analyzed whether the Tribunal was correct in disallowing the claim of loss as a capital loss. The Commissioner of Income Tax (Appeals) had upheld the AO's decision, noting that the payment for dealership/distributorship was made to acquire a new business or capital asset, thereby classifying the loss as a capital loss. The court supported this view, reiterating that the deposit was made to secure an enduring benefit and thus could not be treated as a deductible business loss.

4. Non-Consideration of the Alternate Claim of Bad Debt:
The final issue was whether the Tribunal erred in not considering the alternate claim of bad debt under Section 36(2) of the Income Tax Act. The court noted that the conditions laid down under Section 36(2) were not fulfilled, as the business of distributorship had not commenced. Therefore, the loss could not be claimed as a bad debt. The ITAT's reliance on the Supreme Court's decision in Haseemara Industries Ltd. v. CIT further reinforced that the loss incurred was capital in nature and could not be treated as a business loss or bad debt.

Conclusion:
The court concluded that the assessee's claims were rightly disallowed by the lower authorities, as the deposits made were for acquiring a profit-making asset and securing an enduring benefit of a capital nature. The questions of law were answered against the assessee and in favor of the Revenue, leading to the dismissal of the Tax Case (Appeal) with no costs.

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