2017 (5) TMI 369 - HC - Income Tax

Allowability of loss claimed by the assessee on sale of foreign cars - Whether the Tribunal is right in holding that the foreign cars can be treated as capital asset of the assessee and any profit or loss arising of such cars can only be treated as capital gain or loss? - Held that - In the present case, the foreign cars do not form part of a block of assets and, admittedly, have not been granted depreciation in so far as depreciation was not allowable in respect of foreign cars for the relevant period. The provisions of section 50 of the Act are thus inapplicable to the present case. The assessee sold the foreign cars and the sale consideration resulted in a loss of an amount of ₹ 51,6,108/-. Such loss has been written off in the books of accounts and claimed as a business loss. The extent of depreciation that could have been claimed would be the amount, by which the sale consideration falls short of the written down value. In the present case, ₹ 51,6,108/-, the written down value as defined under section 43(6), would mean actual cost less depreciation actually allowed. In the present case, since no depreciation was allowed, the written down value would equal the actual cost. The loss suffered by the assessee on the sale of foreign is quantified at a figure of ₹ 51,6,108/-. The only question that remains is to determine the nature of loss. In view of the categoric finding of the Commissioner of Income Tax (Appeals) that has attained finality, to the effect that the foreign cars were utilized in the business of the assessee, the loss arising out of their sale would be liable to be categorized as a business loss. - Decided in favour of assessee.

Summary

Issues:
1. Nature of loss arising from the sale of foreign cars - whether capital or business loss.
2. Applicability of Section 32(1)(iii) of the Income Tax Act.
3. Interpretation of written down value and depreciation provisions.
4. Reversal of CIT(A) order by the Tribunal without discussion of relevant provisions.

Analysis:

1. The primary issue in this case was to determine the nature of the loss arising from the sale of foreign cars by the assessee - whether it should be categorized as a capital loss or a business loss. The assessing authority initially treated the loss as capital in nature, while the appellant contended that it should be considered a business loss. The CIT(A) allowed the appeal, emphasizing that the loss should be treated as a business loss, especially considering the utilization of the foreign cars in the assessee's business activities.

2. The appellant relied on Section 32(1)(iii) of the Income Tax Act to support their claim for treating the loss as a business loss. This section allows for a write-off of the loss arising from the sale of assets against the written down value of the asset. The CIT(A) referred to the definition of written down value in Section 43(6) and concluded that in cases where no depreciation was allowed, the actual cost of acquisition could be considered as the written down value. This interpretation supported the assessee's argument for claiming the loss as a business loss.

3. The interpretation of written down value and depreciation provisions played a crucial role in this judgment. The CIT(A) highlighted that since no depreciation was provided for the foreign cars in question, the written down value could be equated to the cost of acquisition. This aligns with the decision in the Guindy Machine Tools case, where it was established that in cases where no depreciation had been claimed or allowed, the cost of acquisition itself could be considered as the written down value. Therefore, the absence of depreciation allowed for the foreign cars strengthened the assessee's position in claiming the loss as a business loss.

4. The Tribunal's reversal of the CIT(A) order without a detailed discussion of relevant statutory provisions or precedents was a significant point of contention. The Tribunal failed to acknowledge the factual finding that the foreign cars were indeed used in the assessee's business, which had been established by the CIT(A) and remained unchallenged by the Revenue. This oversight led to the Tribunal's erroneous conclusion that the loss could not be treated as a business loss. Ultimately, the High Court overturned the Tribunal's decision, emphasizing the factual utilization of the cars in the assessee's business as a crucial factor in categorizing the loss as a business loss.

In conclusion, the High Court ruled in favor of the assessee, determining that the loss arising from the sale of foreign cars should be treated as a business loss based on the utilization of the cars in the business activities. The court's detailed analysis of Section 32(1)(iii), written down value interpretation, and the factual findings regarding the use of the cars supported the decision to categorize the loss as a business loss, contrary to the Tribunal's initial ruling.