2015 (10) TMI 2105 - AT - Income Tax

Short term capital loss - sale of plant & machinery as scrap - whether the assessee could not prove its motive i.e. for what purpose the plant and machinery was purchased and in which circumstances the same was sold immediately, after bearing such huge loss? - CIT(A) treating the loss as loss incidental to trade - Held that - Undisputedly the assessee is not engaged in any such business activities in which these machineries can be used. The assessee in fact was engaged in construction of building, flats, etc. Therefore, the factory building was purchased by the assessee only for construction of the building and flats. At the most, the cost of machineries can be added in the cost of land purchased for raising flats and building. The machineries never became the part of business asset of the assessee, as the assessee was never engaged in any manufacturing activity. Therefore, the alleged short term capital loss as claimed by the assessee on sale of machineries cannot be allowed, as the machineries were never purchased for its use in the business of the assessee. The total cost of land may be increased by the alleged loss suffered in sale of machineries. In the light of these facts, we do not subscribe the view of the ld. CIT(A) on this issue and accordingly we set aside his order in this regard and restore that of the Assessing Officer. - Decided against assessee. Disallowance of interest and finance charge - CIT(A) deleted disallowance - Held that - In the absence of any finding of the Assessing Officer that the borrowed funds were diverted for advancing interest free loans, no disallowance of interest payment can be made. We accordingly find no merit in the Revenue s contentions. We, therefore, confirm the order of the ld. CIT(A) in this regard.- Decided against revenue. Disallowance of repair expenses - Held that - Assessing Officer has made ad hoc disallowance of 20% of the repair expenses on the ground that repair expenditures are not open for verification, as vouchers were not produced. The disallowance was restricted to 10% by the ld. CIT(A). We find no justification to disturb the findings of the ld. CIT(A) in this regard. Accordingly, we confirm the order of the ld. CIT(A) on this issue .- Decided against revenue.

Summary

Issues:
1. Allowance of short term capital loss on sale of plant & machinery
2. Treatment of loss as incidental to trade
3. Deletion of addition of interest and finance charges paid to bank
4. Disallowance of repair expenses

Analysis:

Issue 1: Allowance of short term capital loss on sale of plant & machinery
The Revenue challenged the allowance of short term capital loss by the ld. CIT(A) on the grounds that the plant & machinery were not purchased for profit-making or operational purposes but were incidental to the purchase of land for construction activities. The Revenue contended that the loss on the sale of machinery should not be considered a business loss or short term capital loss. The ITAT held that since the assessee was not engaged in business activities requiring the use of machinery, the loss claimed on the sale of machinery could not be allowed. The ITAT reasoned that the cost of machinery could be added to the cost of land for construction purposes, as the machinery was never intended to be part of the business assets. Therefore, the ITAT set aside the CIT(A)'s order and restored that of the Assessing Officer.

Issue 2: Treatment of loss as incidental to trade
The Revenue argued that the loss should not be treated as incidental to trade based on commercial principles. The ITAT agreed with the Revenue's contention that the loss on the sale of machinery was not a legitimate business loss or short term capital loss since the machinery was not integral to the assessee's business activities. The ITAT emphasized that the machinery was akin to scrap for the assessee and was not acquired for operational purposes. Therefore, the ITAT concluded that the loss claimed on the sale of machinery could not be allowed and should be added to the cost of land for construction projects.

Issue 3: Deletion of addition of interest and finance charges paid to bank
The Revenue contested the deletion of the addition of interest and finance charges by the ld. CIT(A), arguing that the borrowed funds were diverted for non-business purposes in providing interest-free loans. However, the ITAT upheld the CIT(A)'s decision, noting that the borrowed funds were utilized for business activities, and there was no evidence of diversion for non-business purposes. The ITAT emphasized that since the assessee had sufficient reserve and surplus, interest-free loans could have been provided from those funds. Therefore, the ITAT confirmed the CIT(A)'s order in this regard.

Issue 4: Disallowance of repair expenses
The Assessing Officer had made an ad hoc disallowance of 20% of repair expenses due to lack of vouchers, which was reduced to 10% by the ld. CIT(A). The ITAT found no reason to disturb the CIT(A)'s decision on this issue and confirmed the order. Consequently, the ITAT partly allowed the Revenue's appeal, affirming the CIT(A)'s order on the disallowance of repair expenses.

In conclusion, the ITAT's judgment addressed the issues raised by the Revenue regarding the allowance of short term capital loss, treatment of loss as incidental to trade, deletion of interest and finance charges addition, and disallowance of repair expenses, providing detailed reasoning and analysis for each issue.