2016 (9) TMI 447 - AT - Income Tax

Revenue loss or business loss - Held that - As rightly pointed out by the assessee as well as by the Ld. CIT(A) the assessee has been wholly and exclusively engaged in the business of running hotels, boarding and lodging for the past two decades and the scrap, if any, generated out of the main line of activity was sold. The material presented before us nowhere indicate that the assessee was carrying on the activity of purchasing plant and machinery with a view to re-sale the same. The assessee participated in the tender for purchase of land and building and plant and machinery with the main purpose of acquiring the land which is a capital asset and in fact it was shown in the balance sheet as acquisition. Such being the case, plant and machinery cannot be said to have been purchased for the purpose of carrying on the business of purchase and sale of scrap since it is not even remotely connected to the main line of activity. Assessee has nowhere specified as to what is the price quoted towards plant and machinery at the time of offering its tender. On the contrary, the facts indicate that the dominant object was to purchase the capital assets and in fact the assessee has merely quoted the lumpsum price which was accepted by the Official Liquidator. The land and machinery was kept idle for more than one year but the assessee did not choose to obtain any report from the registered valuer with regard to the value of such plant and machinery which also indicate that the price now sought to be fixed at ₹ 294 lakhs is only an imaginary value so as to claim deduction from the business income overlooking the fact that it was purchased as an asset and reflected in the balance sheet as such. In our considered opinion, the Ld. CIT(A) has not given any reasons to accept the contention of the assessee despite the fact that not even an iota of evidence is placed to support such contention. On the other hand, the circumstances, categorically indicate that there is no nexus between purchase of land, building and plant and machinery on one hand and the hotel business being carried on by the assessee for the past two decades. On a conspectus of the matter, we of the firm view that the order passed by the Ld. CIT(A) is contrary to law and facts of the present case and therefore, deserves to be set aside and we direct accordingly. In the result, we set aside the order passed by the Ld. CIT(A) and uphold the view taken by the A.O, since the loss claimed by the assessee cannot be treated as revenue loss or business loss.

Issues Involved:
1. Whether the loss on the sale of plant and machinery can be treated as a business loss.
2. Whether the purchase and sale of plant and machinery have any nexus with the assessee's hotel business.
3. Whether the plant and machinery should be considered as stock-in-trade or capital assets.
4. Applicability of section 14A of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Treatment of Loss on Sale of Plant and Machinery as Business Loss:
The assessee claimed a loss of ?1.22 crores on the sale of plant and machinery, arguing it should be treated as a business loss. The CIT(A) supported this claim, stating that the plant and machinery were scrap and the differential amount between the purchase cost and sale consideration should be treated as a business loss. However, the Tribunal concluded that the plant and machinery were not connected to the assessee's hotel business and were instead capital assets. Therefore, any loss arising from their sale should be treated as a capital loss, not a business loss.

2. Nexus with the Hotel Business:
The assessee contended that the purchase of plant and machinery was incidental to its hotel business, as selling scrap is a common ancillary activity in the hotel industry. The CIT(A) agreed, noting that the sale of scrap from the hotel business is an ordinary activity. However, the Tribunal found no evidence that the plant and machinery were ever used in the hotel business or that their purchase was related to the hotel operations. The Tribunal emphasized that the primary purpose of the purchase was to acquire land, a capital asset, and not for business operations.

3. Plant and Machinery as Stock-in-Trade or Capital Assets:
The CIT(A) treated the plant and machinery as stock-in-trade, supporting the assessee's claim that the loss should be treated as a business loss. However, the Tribunal observed that the plant and machinery were shown in the balance sheet under fixed assets and not as stock-in-trade. The Tribunal concluded that the plant and machinery were capital assets and not part of the assessee's regular business operations.

4. Applicability of Section 14A:
The assessee argued that the provisions of section 14A were not applicable as there was no exempt income during the relevant assessment year. The CIT(A) supported this view, noting that the Assessing Officer (A.O.) had incorrectly invoked section 14A. The Tribunal did not specifically address this issue in its final ruling, as the primary focus was on the treatment of the loss on the sale of plant and machinery.

Conclusion:
The Tribunal set aside the order of the CIT(A) and upheld the view of the A.O., concluding that the loss claimed by the assessee could not be treated as a business loss. The Tribunal emphasized that the plant and machinery were capital assets with no nexus to the assessee's hotel business, and the loss on their sale should be treated accordingly. The appeal of the Revenue was allowed, and the order pronounced in the open court on 27.06.2016.

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