2015 (10) TMI 391 - AT - Income Tax

Treatment to loss on account of repossessed vehicles as revenue loss - Held that - The claim of the assessee for the said receipts should be treated as revenue receipts is proper as re-possessed vehicles/ assets are treated as stock-in-trade throughout the earlier years and the same was accepted by the Department in the earlier years. Thus Ld. CIT(A) has taken a correct view and directed the AO to treat the said loss as revenue loss. In light of this, the A.O. is directed to treat the said loss as a revenue loss in respect of the re-possessed vehicles that have been resold. - Decided against revenue. Treatment to loss - set-off of loss - whether CIT(A) erred in not appreciating that the shares, sale whereof had given rise to a loss, had been held as stock in trade of the appellant and hence the loss on that account had to be treated as a business loss? - Held that - It can be seen that the contentions of the DR in respect of Section 73 of the Act cannot be sustained as the same stand was not taken by the Assessing Officer while passing the Assessment Order and the said plea was not raised before the CIT(A) as well. The Hon ble Supreme Court in case of Cocanada Radheswami Bank Ltd. (1965 (4) TMI 11 - SUPREME Court) clearly held that the income from the securities which formed part of the assessee s trading assets was part of its income derived from the business and, therefore, the loss incurred in the business in the earlier year could be set off against that income in the succeeding year. As per guidelines issued by the RBI, every NBFC is required to maintain liquid assets including investment in shares, stocks, government securities etc. and thus the assessee has made these investments in the ordinary course of its business. Therefore, loss in the said investment relates to the business. - Decided in favour of assessee.

Summary

Issues Involved:
1. Treatment of loss on repossessed vehicles as revenue loss.
2. Treatment of loss on sale of shares held as stock-in-trade as business loss.

Issue-wise Detailed Analysis:

1. Treatment of loss on repossessed vehicles as revenue loss:

The Revenue's appeal challenged the CIT(A)'s decision to treat a loss of Rs. 1,70,83,682 on repossessed vehicles as a revenue loss. The Assessing Officer (AO) had previously categorized this loss as a capital loss/business loss, referencing the Allahabad High Court decision in Motor and General Sales Pvt. Ltd. Vs. CIT (1997) 226 ITR 137. The AO argued that the loss included notional losses and was not actual, as the method of computing the estimated realizable value was not elaborated.

The CIT(A) countered by emphasizing that the company's business involved not just financing but also repossession and resale, making these activities integral to the business. Therefore, any profit or loss from repossession and resale should be considered part of the trading account. This view was supported by historical acceptance of similar claims by the Department in previous years.

The Tribunal agreed with the CIT(A), noting that the assessee's treatment of repossessed vehicles as stock-in-trade had been consistently accepted in earlier years. Consequently, the Tribunal directed the AO to treat the loss as a revenue loss, dismissing the Revenue's appeal on this ground.

2. Treatment of loss on sale of shares held as stock-in-trade as business loss:

The Assessee's appeal contended that the loss of Rs. 1,04,37,529 from the sale of shares held as stock-in-trade should be treated as a business loss. The AO had treated this loss as a capital loss, arguing that the shares constituted a capital asset, and thus, the loss could not be deducted in the profit and loss account.

The CIT(A) upheld the AO's decision, stating that each assessment year requires a fresh application of the law, allowing for different conclusions on similar facts.

During arguments, the Assessee's Representative (AR) clarified that the disputed loss pertained to securities and other instruments shown as stock-in-trade. The AR argued that as a Non-Banking Finance Company (NBFC), the assessee was mandated by RBI directions to maintain investments in shares and securities, making these investments part of ordinary business activities. The AR cited several legal precedents, including CIT Vs. Nedungadi Bank Ltd. and Bank of Cochin Vs. CIT, which supported the treatment of such investments as stock-in-trade.

The Tribunal found that the AO had not raised the issue of speculative loss under Section 73 of the Income Tax Act during the assessment or before the CIT(A). The Tribunal referenced the Supreme Court's decision in Cocanada Radheswami Bank Ltd., which allowed the set-off of business losses against income from trading assets. It concluded that the investments were made in the ordinary course of business, and thus, the loss should be treated as a business loss. Therefore, the Tribunal allowed the assessee's appeal on this ground.

Conclusion:

The Tribunal dismissed the Revenue's appeal and allowed the Assessee's appeal, directing the AO to treat the loss on repossessed vehicles as a revenue loss and the loss on sale of shares held as stock-in-trade as a business loss. The order was pronounced in the open court on 23rd September 2015.