2022 (8) TMI 1227 - AT - Income Tax

Allowability of c apital loss as well as the right of deferred tax assets - Disallowance of capital expenditure debited to the profit and loss account - whether CIT-A erred deleting disallowance of fixed assets without considering that since the assets are not part of the inventory which has been sold off in auction, they are a capital loss and thus cannot be written off as expenditure by the assessee? - DR submitted deferred tax write-off cannot be allowed as a deduction in any circumstances because of the reason that it is merely an entry for provision which does not impact the tax liability of the assessee at all - HELD THAT - We find that the right off the loss on transfer of capital asset cannot be allowed to the assessee as a revenue loss. The learned CIT A is incorrect in allowing such loss. Only a revenue loss which are incurred during the year are allowable as a deduction. Such loss debited by the assessee is not at all a revenue loss. Hence, we reverse the order of the learned CIT A on account of allowing the deduction of write-off of the asset to the assessee as revenue expenditure. Similarly, the deferred tax asset is not an item which can be claimed as a deduction as revenue expenditure on its right for the simple reason that it is not at all an expenditure. Further such deferred tax assets are created on account of timing difference between profits and tax profits. At the time of creation, it is not allowable as an expenditure or not chargeable as income and further when it is written off, or written back, it is not charged to tax or granted as deduction. Therefore, write-off of the deferred tax assets is not an expenditure at all. Further, it is not also deductible loss as in fact it is merely a book entry. Therefore, the learned CIT A has erred in allowing the deduction to the assessee on this account. All the decisions cited by the learned authorised representative clearly shows that only revenue loss which is incurred during the year arising out of the business being carried on by the assessee is allowable as deduction u/s 29 of the act. The loss claimed by the assessee is not at all a revenue loss. Thus the orders of the learned CIT A is reversed on both the accounts in allowing the capital loss as well as the right of deferred tax assets. Both the grounds raised by the learned assessing officer are allowed.

Summary

Issues Involved:

1. Disallowance of fixed assets claimed as a loss under the SARFAESI Act.
2. Disallowance of deferred tax assets claimed as a loss under the SARFAESI Act.

Issue-Wise Detailed Analysis:

1. Disallowance of Fixed Assets Claimed as a Loss under the SARFAESI Act:

The case involves a company engaged in construction and development activities, which faced financial difficulties leading to the auction of its assets under the SARFAESI Act by a consortium of banks led by Punjab National Bank. The company claimed a total loss of Rs. 107,50,19,645, which included Rs. 7,03,45,263 for fixed assets. The Assessing Officer (AO) disallowed this amount, arguing that these fixed assets were not part of the inventory sold off in the auction and thus represented a capital loss, not a revenue expenditure.

The Commissioner of Income-tax (Appeals) [CIT(A)] disagreed with the AO, noting that the assets were located at the project site and sold on an "as is where is" basis, meaning they did not remain with the assessee. The CIT(A) found no evidence from the AO to suggest otherwise and thus deleted the disallowance, stating that the decision of the AO lacked sufficient basis.

Upon appeal, the Tribunal reversed the CIT(A)'s decision, holding that the write-off of the loss on the transfer of capital assets could not be allowed as a revenue loss. The Tribunal emphasized that only revenue losses incurred during the year are deductible, and the loss claimed by the assessee was not a revenue loss.

2. Disallowance of Deferred Tax Assets Claimed as a Loss under the SARFAESI Act:

The company also claimed a write-off of deferred tax assets amounting to Rs. 27,00,00,000. The AO disallowed this claim, arguing that deferred tax assets, which include unabsorbed business loss, depreciation, and provision for doubtful advances, are not related to the inventory sold off in the auction and thus cannot be written off as part of the auctioned assets.

The CIT(A) again disagreed with the AO, noting that the entire business was sold, leaving no opportunity for the company to utilize the deferred tax assets. The CIT(A) found that the company, being a special purpose vehicle, ceased operations after the auction, rendering the deferred tax assets unusable. Therefore, the CIT(A) deleted the disallowance, arguing that the AO's exclusion of these assets from the overall sale was unjustified.

The Tribunal, however, reversed the CIT(A)'s decision, stating that deferred tax assets are not deductible as revenue expenditure because they are merely book entries resulting from timing differences between accounting and tax profits. The Tribunal concluded that the write-off of deferred tax assets is not an expenditure and thus cannot be claimed as a deduction.

Conclusion:

The Tribunal allowed the appeal of the AO, reversing the CIT(A)'s decision on both accounts. The Tribunal held that the write-off of fixed assets and deferred tax assets could not be allowed as revenue expenditures, as they represent capital losses and book entries, respectively. The appeal was thus decided in favor of the AO.