2023 (1) TMI 442 - HC - Income Tax

Loss computed on account of diminution in value of repossessed vehicles is only a notional and unascertained loss and hence cannot be allowed as a deduction - Whether Tribunal was right in law in holding that the loss computed by the Appellant on account of diminution in value of repossessed vehicles is only a notional and unascertained loss and hence cannot be allowed as a deduction? - HELD THAT - The loss from the repossessed vehicles can be ascertained only after they are resold. Till such time loss cannot be determined. Estimated loss based on the difference between the receivable and the projected market value would not entitle the appellant to reduce the value of the asset to reduce the market value unless provided in the relevant Accounting Standard. We have also not been informed about any Accounting Standard as per which the diminution in the value is allowed. There are also no materials before us to interfere with the finding of the Tribunal in the impugned order. Further the balance amount if any will be recovered from the defaulter. Merely because there is erosion in the value based on the estimates would not ipso facto entitle diminution to claim deduction. Therefore we answer the Substantial Question of Law No.2 against the appellant. Revision u/s 263 - whether the Commissioner of Income Tax was entitled to invoke Section 263 of the Income Tax Act 1961 or not we are of the view that it has to be also answered against the appellant in view of our answer to Substantial Question of Law No.2. The appellant had wrongly debited a sum of Rs.338.92 lakhs under the headings provision and write-off as the diminution in the value of the repossessed stock. It was not allowable expenditure. Thus it is evident that the order passed by the Assessing Officer was not only erroneous but also prejudicial to the interest of the revenue. Therefore Substantial Questions of Law raised in this appeal are answered against the appellant. Thus the assessment made on 31.05.2005 under Section 143(3) of the Income Tax Act 1961 was not only erroneous but had also passed in a manner which was prejudicial to the interest of the revenue. Therefore the Commissioner of Income Tax Act 1961 correctly invoked the power under Section 263 of the Income Tax Act 1961. Tax Case Appeal is liable to be dismissed

Summary

Issues Involved:
1. Jurisdiction of the Commissioner of Income Tax under Section 263 of the Income Tax Act, 1961.
2. Deductibility of diminution in value of repossessed vehicles as a loss.

Issue-Wise Detailed Analysis:

1. Jurisdiction of the Commissioner of Income Tax under Section 263 of the Income Tax Act, 1961:

The appellant, a leasing company, filed its return of income for the Assessment Year 2002-2003, which was processed under Section 143(1) and later scrutinized under Section 143(3) of the Income Tax Act, 1961. The Commissioner of Income Tax invoked Section 263 and issued a Show Cause Notice on the ground that Rs.338.92 Lakhs was wrongly debited as diminution in value of repossessed stock, which was not an allowable expenditure. The appellant's contention was rejected, and the Assessing Officer was directed to revise the assessment by adding back the amount debited towards diminution in value. The Tribunal upheld this decision, and the appellant appealed to the High Court.

The court held that the appellant had wrongly debited the sum under 'provision and write-off' as diminution in the value of repossessed stock, which was not allowable expenditure. Consequently, the assessment made under Section 143(3) was erroneous and prejudicial to the interest of revenue. Therefore, the Commissioner of Income Tax correctly invoked Section 263, and the Substantial Question of Law No.1 was answered against the appellant.

2. Deductibility of diminution in value of repossessed vehicles as a loss:

The appellant repossessed vehicles from defaulting lessees and treated the amount due as "receivable" in its books. The appellant reduced this amount based on the prevailing market value of the seized vehicle, transferring the reduced value to its profit and loss account. This method allowed the appellant to reduce the value of the asset and the income tax payable. The appellant claimed a deduction under Section 36 based on the estimated market value at the time of repossession.

Section 36(1)(vii) allows deduction of bad debt written off as irrecoverable, subject to Section 36(2). The Income Tax Department clarified that a debt written off as irrecoverable is admissible if it fulfills the conditions in Section 36(2). The Supreme Court in T.R.F. Ltd. clarified that post-1.4.1989, it is enough if bad debt is written off as irrecoverable in the books.

In this case, the appellant did not write off the receivables as bad debt but reduced the amount from receivables as diminution in value based on projected market value. The RBI Circular and Accounting Standards (AS 19) were referenced, but the appellant did not provide an explanation in line with these standards. The court noted that loss from repossessed vehicles can only be ascertained after resale, and estimated loss based on projected market value does not entitle the appellant to reduce the asset value.

The court found no material to interfere with the Tribunal's finding and held that erosion in value based on estimates does not entitle the appellant to claim deduction. Therefore, Substantial Question of Law No.2 was answered against the appellant.

Conclusion:

The court concluded that the appellant had wrongly debited the sum under 'provision and write-off' as diminution in value of repossessed stock, which was not allowable expenditure. The assessment made was erroneous and prejudicial to the interest of revenue. The Commissioner of Income Tax correctly invoked Section 263, and the appeal was dismissed.