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TMI Blog2016 (9) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... luded 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. X X X X Extracts X X X X X X X X Extracts X X X X ..... n observed in the profit and Loss account of the assessee for this year and the last so many years that no purchase of shares has been done. The loss, which has arisen, is on account of shares and government securities held for a very long time. By treating part of it as stock in Trade the assessee does not become entitled to claiming the loss on stock- in-trade. In the case of Kedarnath Jute Manufacturing 82 ITR 363 the Hon'ble Supreme Court has held that accounting entries in the books of the assessee do not decide the taxable income of the assessee. In the instant case not a single share has been purchased for last many years. There is no regular purchase and sale activity of shares by the assessee. Vide submission dated .03.2005 the assessee has submitted that the company being NBFC is engaged in the business of shares and securities, however, it is seen that there is no dealing in shares for last many years. The assessee is just showing them as stock in trade in its books but no dealing business of share is being done. The treatment of shares in the books as stock in trade does not entitled the assessee to claim the shares held by it for a very long period as business Loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted that assessee has neither disclosed regarding estimation of realizable value nor the method of computation of estimated value. Ld. D.R. submitted that the loss figure of ₹ 69,19,000/- is not actual loss of the assessee but also includes notional loss claimed by the assessee occurred to it which cannot be allowed as an expense in the profit & loss account of the assessee as the same is not an ascertained expenditure. Ld. D.R. submitted that the view taken by the Ld. A.O. is supported by the decision of Allahabad High Court in case of Motor and General Sales (P) Ltd. Vs CIT reported in (1997) 226 ITR 137. He submitted that unless the assessee elaborated on how the realizable value was estimated, the loss was a notional loss and cannot be allowed as a revenue expenditure. 7. On the contrary the Ld. A.R. submitted that the assessee company is a non-banking finance company engaged in business of providing finance to industry and as per directions issued by RBI the assessee is required to maintain the liquid assets including investment in shares, stock, government securities etc. Ld. A.R. submitted that these investments are in the ordinary course of business. 7.1 Ld. A.R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee is in the business of leasing and hire purchase. It is an accepted commercial practice to repossess the assets given on hire purchase form the defaulting hirers or when the asst is returned by the hirer after refusing to pay the remaining installments. The repossessed assets are normally disposed off at the prevailing market price, which is decided on the basis of remaining life and condition of the asset. The loss on sale of repossessed assets occurs when the recovery from sale falls short of the value of the repossessed assts. The loss on sale of repossessed stock is incidental to and is an inherent part of the business of hire purchase. 7.6 Ld. A.R. submitted that assessee is constrained to sell the asset to the defaulting hirer himself as the condition of the asset might be such that it would fetch a much lower price if sold to a third party. In some cases it has been so that the hirer wanted to cancel the sale for the reason that the condition of the asset has worsened. Ld. A.R. submitted that since in the case of second hand used assets it is difficult to find a ready market, commercial prudence requires that the assessee recovers the price from the hirer himself by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relied upon various decisions of Hon'ble Supreme Court and Hon'ble Jurisdictional High Court which are as under: i) K.L. Johar & Co. Vs DCIT (1965) 16 STC 213 (S.C.); ii) P Mohammed Meerakhan Vs CIT (1969) 73 ITR 735 (S.C.); iii) CIT Vs Basti Sugar Mills Co. Ltd. 257 ITR 88 (Del.); iv) CITVs U P Stat Industrial Corpn. (1997) 225 ITR 703 (S.C.); v) Challapalli Sugars Ltd. Vs CIT (1975) 98 ITR 167 (S.C.); vi) Kedarnath Jute Mfg. Co. Ltd. 82 ITR 363 (S.C.) 7.11 Ld. A.R. submitted that the decision relied upon by the Ld. D.R. in case of Motor & General Sales (P) Ltd. vs CIT (supra) is distinguishable as the case deals with assessment year 1968-69, which is much before the concept of hire purchase got a statutory definition under the Hire Purchase Act 1972. 8. We have perused the submissions advanced by both the side and the judgements relied upon by them. Undoubtedly, it is an admitted position that the Revenue in the past and preceding assessment years, have been accepting the claim of assessee in respect of the loss on sale of repossessed stock and there has been no change in the method of valuation adopted by the assessee in the year under consideration. 8.1 Coming ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Raghuvanshi Mills Ltd. v. Commissioner of Income-tax 5. If receipt from an insurance company towards loss of stock was a trading receipt, conversely to the extent of the loss not so recouped it should be trading loss. Loss sustained by an assessee owing to destruction of the stock which the assessee was entitled to claim as a deduction: see Pohoomal Bros. v. Commissioner of Income-tax 6. Loss incurred in stock-in-trade by ravages of white ants was allowed as trading loss in computing the profit of a business: see Hira Lal Phoolchand v. Commissioner of Income-tax 7. We therefore, reach the position that cash is a stock-intrade of a banking business and its loss in the course of its business under varying circumstances is deductible as a trading loss in computing the total income of the business. But it is said that every loss of a stock-in-trade in whatsoever way it is caused is not a trading loss, but the said loss should have been caused not only in the course of the business but also should have been incidental to it. The leading case on the subject is that of this court in Badri das daga v. Commissioner of Income-tax 8. There, the appellant was the sale proprietor of a firm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epossessed 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. 8.4 Respectfully following decision of Hon'ble Supreme Court in the case of CIT Vs Nainital Bank Ltd. (supra), we hold that the loss incurred by the assessee due to sale of repossessed assets are allowable as business loss. Accordingly, Ground No.(ii) & (iii) raised by Revenue stands dismissed. B. Assessee' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as a revenue loss because the assessee is not regularly engaged in the business dealing in shares. It has been observed in the profit and loss account of, the assessee for this year and the last so many years that no purchase of shares has been done. The loss, which has arisen, is on account of shares and government securities held for a very long time. By treating part of it as stock in Trade the assessee does not become entitled to claim the loss on stock- in trade. In the case of Kedarnath Jute Manufacturing 82 ITR 363 the Hon'ble Supreme Court has held that accounting entries in the books of the assessee do not decide the taxable income of the assessee. In the instant case not a single share has been purchased for last many years. There is no regular purchase and sale activity of shares by the assessee. Vide submission dated .03.2005 the assessee has submitted that the company being NBFC is engaged in the business of shares and securities. However, it is seen that there is no dealing in shares for last many years. The assessee is just showing them as stock in trade in its books but no dealing business of share is being done. The treatment of shares in the books as stock ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hereafter, notices under sections 143( 1) and 142(2) of the Act came to be issued and the petitioner came to be assessed under section 143(3) of the Act by order dated March 31, 1999. The Assessing Officer by his order has held that though the total income of the assessee was ₹ 2,11,81,620, the assessee was liable to pay tax on the total income of ₹ 5,13,86,320 on the ground that in accordance with Circular No. 549, para. 5.12, dated October 31, 1989, the assessed income shall not be less than the returned income." Has held as under "In this case, according to us, the Assessing Officer was not bound by the said circular and yet the Assessing Officer has considered the circular and, therefore, he has not exercised powers independently. He has not exercised his own discretion. In the instant case, therefore, in paragraph 12, after rounding off the taxable income the following paragraph found in the assessment order, which reads as under, is quashed and set aside. "However, as per the Central Board of Direct Taxes, New Delhi's Circular No. 549, para. No. 5.12, dated October 31, 1989, the assessed income shall not be less than the returned income. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, but it may also include an activity which may be called quiescent." 12.3 Ld. A.R. further submitted that the assessee has been consistently following the same treatment in earlier years as well as in later years and the same being accepted by Revenue authorities. 12.4 Further, the Ld. A.R. submitted that assessee is a Further, the Company being a Non-Banking Financial Company ("NBFC"), is governed by the directions issued by the Reserve Bank of India (RBI) and every NBFC is mandatorily required to follow those directions. In terms of the directions issued by the RBI, every NBFC is required to maintain liquid assets including investment in shares, stocks, government securities, etc. and there is no option available with the appellant but a business compulsion if it has to carry its business activities. These investments, therefore, are made in the ordinary course of the business of the Appellant. 12.5 Reliance has been placed on the following judgements : i) ITO Vs J & K Bank Ltd. 95 ITD 141 (2005); ii) Josna Bank Lt. Vs CIT 97 ITR 72; iii) CIT Vs Nedungadi Bank Limited, 264 ITR 545; iv) Bank of Cochin Vs CIT 94 ITSR 93 (Ker.); v) Patnaik & Co. Ltd. Vs CIT Oris ..... X X X X Extracts X X X X X X X X Extracts X X X X
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