2016 (9) TMI 15 - AT - Income Tax

Allowable Business loss - Loss incurred by the assessee due to sale of repossessed assets - Held that - When the appellant generate income out of hire purchase transactions (on account of realisation of installments from the hirers) the same is treated as Business Income. Considering the same fact when there is a loss on account of repossession of hire purchase stock the same should be considered as a Business Loss since the main business of the company is to give assets on hire and as such any loss arising out of sale of repossessed stock is incidental and inherent part of the business of hire purchase carried on by the company. Repossessed hire purchase assets constitute stock-intrade ( current assets ) for the appellant and are classified as such in its accounts also. They are neither classified as fixed assets nor is any depreciation claimed thereon by the appellant. Stock-in-trade has been specifically excluded from the purview of Capital Assets vide clause (i) of section 2(14) of the Act. Accordingly the repossessed assets are not capital assets of the appellant. The above mentioned loss arose consequent to the repossession of assets given on hire purchase following a default by the hirer s. The shortfall of the realizable value/sale proceeds vis-a-vis the amount recoverable from the hirers constituted the loss incurred by the Appellant is a Business loss. Respectfully following decision of Hon ble Supreme Court in the case of CIT Vs Nainital Bank Ltd. (1964 (9) TMI 11 - SUPREME Court ) we hold that the loss incurred by the assessee due to sale of repossessed assets are allowable as business loss Loss on sale of debentures and Govt. Securities have been rightly claimed as business loss by the assessee.

Issues Involved:
1. Disallowance of loss on sale/disposal of repossessed hire purchase assets.
2. Restriction of assessed loss to the returned loss.
3. Disallowance of loss on sale of debentures and government securities.
4. Disallowance under Section 14A of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance of loss on sale/disposal of repossessed hire purchase assets:
The Revenue challenged the deletion of the disallowance of ?69,19,000/- made by the Assessing Officer (AO) on account of loss on sale/disposal of repossessed hire purchase assets. The AO argued that the loss included notional loss and was not an ascertained expenditure, citing the Allahabad High Court decision in Motor and General Sales (P) Ltd. Vs CIT. The assessee contended that the loss was a business loss as it was incurred in the ordinary course of business, in line with RBI directions, and that the repossessed assets were valued at the lower of agreement value net of installments received and unmatured finance charges, and the estimated realizable value. The Tribunal noted that the Revenue had accepted similar claims in previous years and found no change in the valuation method. Citing the Supreme Court decision in CIT Vs Nainital Bank Ltd., the Tribunal held that the loss on sale of repossessed assets was allowable as a business loss, dismissing the Revenue's appeal on this ground.

2. Restriction of assessed loss to the returned loss:
The Revenue also contested the CIT(A)'s quashing of the restriction of the assessed loss of ?8,01,33,086/- to the returned loss of ?7,43,29,300/-. The Tribunal upheld the CIT(A)'s decision, noting that the assessed loss could be less than the returned loss due to consequential effects of disallowances made in earlier years, as per CBDT Circular No. 772 and judicial precedents, including the Gujarat High Court's decision in Gujarat Gas Ltd. Vs JCIT. The Tribunal dismissed the Revenue's appeal on this ground as well.

3. Disallowance of loss on sale of debentures and government securities:
The assessee appealed against the disallowance of ?1,69,528/- on account of loss on sale of debentures and government securities, which the AO treated as a capital loss rather than a business loss. The assessee argued that it was a Non-Banking Financial Company (NBFC) engaged in the business of providing finance and dealing in securities, and that the investments were made in the ordinary course of business. The Tribunal, citing various judicial precedents and noting that the Revenue had accepted similar claims in earlier years, held that the loss on sale of debentures and government securities was rightly claimed as a business loss. The Tribunal allowed the assessee's appeal on this ground.

4. Disallowance under Section 14A of the Income Tax Act:
The assessee also appealed against the disallowance of ?1,567/- under Section 14A of the Act, which the CIT(A) upheld, holding that the assessee could not earn dividend income without incurring administrative expenses. However, this ground was not pressed by the assessee during the hearing, and thus, the Tribunal dismissed this ground of the assessee's appeal.

Conclusion:
The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal, holding that the loss on sale of repossessed assets and the loss on sale of debentures and government securities were allowable as business losses. The Tribunal also upheld the CIT(A)'s decision to quash the restriction of the assessed loss to the returned loss. The disallowance under Section 14A was dismissed as not pressed by the assessee.

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