2020 (12) TMI 307 - HC - Income Tax

Loss suffered on the sale of the Assets on which it claimed depreciation u/s 32 - assessee entitled to invoke Section 41(2) or not?- Capital asset - assessee entitlement to claim the same as the business loss incurred and reflect the same in the assessee s Income Tax returns? - HELD THAT - Tribunal has erred in disallowing the loss suffered by the Assessee on the sale of the Assets on which it claimed depreciation under Section 32 of the Act. Section 41(2) falls under Part D of Chapter IV which provides for Computation of Total Income . The provisions under Section 28 to 44DB of the Act are relating to Computation of Profits and Gains of Business or Profession . Part D of the said Chapter deals with Capital Gains and Sections 45 to 55A deals with Capital Gains . Though both these provisions talk of only deemed income and deemed Capital Gains where depreciable assets are sold by the Assessee, they do not clearly spell out the treatment of loss occurring at the stage of sale of such depreciated assets. We are of the opinion that even if these provisions talk only of taxability on the excess received by the Assessee over the written down value of the assets, it cannot exclude or ignore the minus figure or loss occurring on such sale transactions. Since the sale of those Assets of the Block of Assets, not being immovable property of the Assessee, were sold during the regular course of business, before it was wound up during the relevant previous year, the loss occurring on such sale at a figure less than the written down value of the assets should be treated as Business Loss under Section 41(2) - treatment of such losses as Capital Gains either as Short Term Capital Gains or Long Term Capital Gains would depend upon the period for which assets are held by the Assessee. In either case, Section 70 of the Act provides for Carry Forward and set off of such Business Loss or Short Term Capital Loss in the hands of the Assessee, as Section 70 clearly spells about set off of loss from one source against income from another source under the same head of income. Since in the present case, the business of the Assessee was closed during the relevant previous year itself therefore, the other situation of Carrying Forward such Business Loss is not really relevant but, such loss suffered actually by the Assessee could not have been disallowed by misconstruing both these provisions. Assessment of income in the hands of the Assessee implies Assessment of loss also and it is a question of fact depending upon the sale value realised by the Assessee on the sale of assets. Therefore, the first question deserves to be answered in favour of the Assessee and against the Revenue. Business Expenditure incurred by the Assessee in the form of Postage, Courier and Stationery Charges disallowed - HELD THAT - Incurring of those Expenditures was not doubted or disproved by the Revenue Authorities in the hands of the Assessee. No such finding of such Expenditure not having been incurred by the Assessee is available on record. Therefore, merely because the Assessee could not recover the whole or part of the said expenditure incurred in the course of business, particularly to comply with the guidelines laid down by SEBI and claim such unrecovered expenditure as deduction from its income, the same could not have been disallowed by the Authorities below. Audit of the Books of Accounts of the Limited Companies is mandatorily provided for in the Companies Act also and therefore, if the Audit Report and Audited Balance Sheet is available on the record, the expenditure in question can safely be presumed to have been verified by the Auditors as well. The Books of Accounts regularly maintained by the Assessee in the ordinary course of business have neither been rejected by the Assessing Authority in the present case nor have been otherwise disbelieved. Therefore, such Expenditure in the hands of the Assessee was required to be allowed by the Assessing Authority. The learned Tribunal also fell in error in disallowing the same. Therefore, the second question also deserves to be answered in favour of the Assessee and against the Revenue.

Summary

Issues Involved:
1. Applicability of Section 41(2) of the Income Tax Act, 1961 for calculating loss on the sale of assets.
2. Applicability of Section 50 of the Income Tax Act, 1961 concerning depreciation on capital assets.
3. Entitlement of the Income Tax Officer (ITO) to partially accept and disallow expenditure without providing reasons.

Issue-wise Detailed Analysis:

1. Applicability of Section 41(2) of the Income Tax Act, 1961 for calculating loss on the sale of assets:

The assessee claimed losses on the sale of depreciable assets, arguing that such losses should be treated as business losses under Section 41(2) of the Income Tax Act. The Tribunal, however, held that Section 41(2) is applicable only when the sale value exceeds the written down value (WDV) of the assets. Since the sale value was less than the WDV, the Tribunal ruled that the loss should be treated as arising from the transfer of short-term capital assets under Section 50 of the Act. The Tribunal's interpretation was based on the plain and unambiguous language of the statute, which mandates that realized value exceeding the WDV should be charged to income as 'business income'. The Tribunal's order was set aside on this issue.

2. Applicability of Section 50 of the Income Tax Act, 1961 concerning depreciation on capital assets:

The Tribunal noted that the assets sold were capital assets on which depreciation had been claimed. Since the sale price was less than the WDV of the block of assets, the resulting loss had to be treated as a loss from the transfer of short-term capital assets under Section 50. The Tribunal emphasized that Section 50 is a specific provision for computing capital gains in the case of depreciable assets, and the assessee's claim under Section 41(2) was not acceptable. The Tribunal's decision was based on the settled law that the language of the Act should be interpreted as it is, without any interpolation.

3. Entitlement of the Income Tax Officer (ITO) to partially accept and disallow expenditure without providing reasons:

The Tribunal addressed the issue of the ITO disallowing an expenditure of ?3,56,949 under the head "Recovery". The ITO had disallowed the expenditure due to a lack of evidence regarding the expenditure incurred and the amount recovered. The Commissioner of Income Tax (Appeals) had initially deleted the addition, reasoning that if part of the expenditure was treated as genuine, the other part could not be disallowed without a reason. However, the Tribunal found that no evidence was produced before the ITO to verify the expenditure, and thus, the disallowance was justified. The Tribunal restored the ITO's order on this issue.

Judgment Summary:

The court held that the Tribunal erred in disallowing the loss suffered by the assessee on the sale of depreciable assets. The court opined that the loss should be treated as a "Business Loss" under Section 41(2) since the sale occurred during the regular course of business before the winding up of the company. The court emphasized that the provisions of Section 41(2) and Section 50 do not exclude the treatment of loss occurring on the sale of depreciated assets. The court also highlighted Section 70, which allows for the set-off of business losses or short-term capital losses.

Regarding the unrecovered expenditure claimed by the assessee, the court found that the expenditure was incurred in the regular course of business and was verified by auditors. The court ruled that the disallowance of such expenditure by the Tribunal and the Assessing Authority was erroneous.

The court allowed the appeal, answering both questions of law in favor of the assessee and against the Revenue, and directed that the losses and expenditures claimed by the assessee should be allowed.