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Income Tax Appellate Tribunal, DELHI BENCH “D” NEW DELHI
Before: SHRI H.S. SIDHU & SHRI O.P. KANT
This appeal by the Revenue is directed against the Order of the Ld. Commissioner of Income Tax (Appeals)-XIII, New Delhi dated 05.9.2013 pertaining to assessment year 2007-08.
2. The following issues have been raised by the Revenue:-
“1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the disallowance of Rs. 1,12,38,236/- made on account of loss on sale of repossessed assets being capital in nature.
2. The appellant craves leave to add, to alter or amend any ground of appeal raised above at the time of hearing."
The brief facts of the case are that the assessee filed its return of income on 30.10.2007 showing the total loss of Rs. 8,61,40,026/-. Notice u/s. 148 of the I.T.Act was issued on 27.3.2012. The assessee submitted vide its letter dated 4.4.2012 that the original return filed may be treated as return filed in response to notice u/s. 148 of the I.T. Act. Notices u/s. 142(1) were issued to the assessee. In response to notices, Ld. Authorised Representative attended the assessment proceedings and filed the written submissions. Keeping in view the details filed and after discussions, the AO assessed the total income at Rs. 34,47,210/- vide his Order dated 19/9/2012 passed u/s. 143(3) r.w.s. 147 of the I.T. Act, 1961.
4. Against the aforesaid assessment order of the AO, assessee appealed before the CIT(A), who vide his impugned order dated 05.9.2013 has allowed the appeal of the Assessee.
5. Aggrieved with the order of the Ld. CIT(A) dated 05.9.2013, Revenue is in appeal before the Tribunal.
6. Ld. DR relied upon the order of the Assessing Officer and reiterated the contentions raised in the grounds of appeal and requested that Appeal filed by the Revenue may be allowed by setting aside the order of the Ld. CIT(A), because the assessee had debited Rs. 1,12,28,236/- to the Profit & Loss Account on account of ‘Loss on sale of repossessed assets’ and this loss being capital in nature, hence, is not an allowable expenditure.
Therefore, he stated that the AO has rightly made the addition of Rs. 1,12,38,236/- which needs to be sustained.
7. On the other hand, Ld. Counsel of the Assessee has stated that the issue in dispute is squarely covered by the several decisions of the ITAT and the Hon’ble High Courts. In this behalf, he filed a Paper Book containing pages 1 to 18 enclosing therewith the copy of the following decisions/judgments. i) CIT vs. Citicorp Maruti Finance Ltd. in & 1714/2010 dated 9.11.2010 of Delhi High Court. ii) ITAT, Delhi decision 29.4.2011 in the case of DCIT vs. Maruti Countrywide Auto Financial Services (P) Ltd. passed in ITA No. 2181 to 2183/Del/2010. iii) ITAT, Mumbai decision dated 30.8.2013 in the case of Pallonji Leasing Private Limited vs. ACIT passed in ITA No. 5035-5036/Del/2010. iv) Bombay High Court decision in the case of Harshad J Choksi vs. CIT, Bombay in ITA No. 43 of 1997 dated 14.8.2012.
7.1 He further stated that Ld. CIT(A) in his impugned order has discussed and followed the judgments of the Hon’ble High Court of Delhi and Bombay as listed above against Serial No. 7(i) & 7(iv) and has rightly held that the assesse was duly entitled to deduction of a sum of Rs. 1,12,38,236/- on account of business loss. Therefore, he stated that the order of the Ld. CIT(A) is a well reasoned order and the same may be upheld.
8. We have heard both the parties and perused the records, especially the impugned order and the case laws cited therein and the case laws cited by the Ld. Counsel of the Assessee, as aforesaid.
8.1 We find that the Ld. CIT(A) has elaborately discussed the issue in dispute in his impugned order dated 05.9.2013 vide para no. 5 to 6 at page no. 2 to 12. The relevant portion of his finding is reproduced as under:-
“ 5. The ground no. 3 has been raised in regard to loss of Rs. 1,12,38,236/- on sale of repossessed assets.
5.1 It is observed from the facts of the case that the appellant had claimed loss of Rs. 1,12,38,236/- in the books of accounts on account of loss suffered on sale of assets which were repossessed. The appellant is non banking finance company. The main activity of the company is to finance the vehicles and in return the company is charging the interest. The appellant filed the list of vehicles which were repossessed and sold thereafter resulting in loss of Rs. 1,12,38,236/-.
5.2 I have considered the submissions of the appellant and the assessment order passed by the AO. The main issue in contention is regarding the claim of loss on sale of repossessed assets of Rs. 1,12,38,236/-. The counsel of the appellant explained that the amount of loss has been debited to the profit and loss account during the year. The company was not in a position to recover the installments. The assets financed by the company were repossessed and sold thereafter. During the appellate proceedings the Counsel of the assessee explained that the appellant is entitled deduction of full amount either u/s 36(1)(vii) or as a business loss in computing the profits and gains of business u/s 28 of the Income Tax Act. The Hon'ble Bombay High Court in the case of Harshad J Choksi vs CIT, Bombay of 1997 dated August 14, 2012 held as under:-
"By this reference under Section 256(1) of the Income Tax Act, 1961 ('the Act'), the Income Tax Appellate Tribunal ('the Tribunal') has referred the following question of law for the opinion of this court.
Whether on the facts and in the circumstances of the case, the 'vatav kasar' of Rs.44,98,210/- which was held to be not deductible as a bad debt in view of the provisions of Section 36(2) could be considered as an - allowable business loss?
2. This reference has been made at the instance of the assessee and arises out of the order of the Tribunal dated 19.12.1994 in Income Tax Appeal No.1495/Bom/94 relating to the assessment year 1991-1992.
3. Briefly the facts leading to this reference are as under:-
a) The assessee is a stock and share broker.
During the assessment year 1991-1992, the assessee sought to write off an amount of Rs.47.58 lacs as bad debts, due to breach committed by 3 members of the Bombay Stock Exchange. The Assessing Officer on examination of the assessee's claim held that the assessee was not entitled to claim the benefit of bad debts in respect of Rs.47.58 lacs, as the assessee has not satisfied the condition precedent as provided under Section 36(2) of the Act, which requires that the amount must be offered to tax in an earlier previous year.
On Appeal, the Commissioner of Income Tax (Appeals) upheld the finding of the Assessing Officer to the extent of Rs.44.98 lacs after having allowed an amount of RS.2.60 lacs as a business loss. He also held that the amount of Rs.11.81 lacs was a speculation loss and could not be allowed as a trading loss. So far as, the balance amount of Rs.33.17 lacs was concerned the Commissioner of Income Tax (Appeals) held that the same could not be considered as a trading loss.
On appeal before the Tribunal the assessee contended that even if the deduction is not allowable as bad debts under Section 36(1)(vii) of the Act, the aforesaid amount of Rs.44.98 lacs should be allowed as a business loss in computing the profits and gains earned in carrying on a business. The Tribunal held that once an assessee has made a claim for loss on account of bad debts then unless the assessee fulfills the requirements of Section 36(2) of the Act, the benefits of the same cannot be extended to the assessee.
Further, it held that when there is a specific provision in the Act regarding allowability of bad debts as a deduction and relief is sought thereunder, the assessee is not entitled to claim relief as an allowable expenditure/deduction under any other provisions including the benefit of deduction s a business loss.
6. Mr. Sanjeev Shah, Learned Counsel appearing for the applicant submits as under: a) The issue arising in the present reference stands concluded by the order of this court in the matter of Commissioner of Income Tax v. Shreyas S. Morakhia dated 28th February, 2012 in Income Tax Appeal No. 89 of 2011 (2012-TIOL-172-HC- MUM-IT). It has been held therein that even if a part of the bad debts has been taken into account while computing the income of the assessee, and offered for tax in a earlier year, the same would be sufficient satisfaction of Section 36(2) of the Act. b) In any view of the matter, even if the amount of Rs.44.98 lacs is not allowable as a bad debt, the same should be considered as a allowable business loss in computing the profits and gains of business and profession under Section 28 of the Act. c) The Act does not provide that the deduction available from the total receipts to compute profit & gain of business are only those deductions which are listed in Section 30 to 43 of the Act.
This is because according to him the list is not exhaustive. It is his contentions that any loss which occurs in carrying on the business and is related to the business operation is entitled to be deducted to arrive at the profits and gains of a business under Section 28 of the Act. In support thereof, he relies upon the decision of this court in the matter of Commissioner of Income Tax v. R.B.
Rungta & Co. reported in 50 ITR page 233.
As against the above, Mr. Suresh Kumar appearing for the Revenue submits that: a) The decision of this court in the matter of Shreyas S. Morakhia (Supra) will not apply to the present facts, as in this case the loss arose on account of a fellow member of the stock exchange not honoring its commitment; b) The amount claimed as bad debts is specifically provided for under section 36 of the Act and in such cases it is not permissible to apply any other section of the Act to determine the allowability of the same as a deduction; c) In any view of the matter, the Commissioner of Income Tax (Appeals) has come to a conclusion that there was no trading loss to the extent of Rs. 33.17 lacs, as there was no trading done in respect thereof and the deduction was therefore not allowable. So far as, deduction to the extent of Rs.11.81 lacs is concerned, the same is on account of speculation loss and hence, cannot be allowed as deduction from the general profits and gains earned by the assesee in respect of the other income. In support of the aforesaid submission, he invited our attention to explanation (2) to Section 28 of the Act.
We have considered the submission. So far as, the submission of Mr. Shah for the assessee that the decision of this court in the matter of Shreyas S. Morakhia(Supra) covers the issue is concerned, we are not expressing any opinion with regard to it as the same does not arise from the question referred to us. The Tribunal has considered that the amount of Rs.44.98 lacs is not deductible as bad debts in view of Section 36(2) of the Act and sought our opinion only on the question whether in such a case the assessee could claim a deduction as a business loss to arrive at his profits and gains from business.
So far as, the submission of Mr. Suresh Kumar for the Revenue that the issue with regard to the loss being a loss on account of speculation is concerned, we are not expressing any opinion on the same. This for the reason that the issue framed for our opinion is whether, when the loss is not allowed as a bad debts can it be considered for the purposes of allowing the same as a business loss. In this case, we are not called upon to decide whether or not the loss claimed satisfied the test of the business loss but our opinion is on the more restricted issue namely whether such a loss could be considered as a allowable business loss. Therefore, we are not dealing with both the above issues.
9. Our opinion is sought on the issue, whether if an amount is held to be not deductible as a bad debt, in view of non compliance of the condition precedent as provided under Section 36(2) of the Act, could the same be considered as a allowable business loss. The Tribunal in its order dated 19.12.1994 has not considered the issue, whether or not a loss claimed by the assessee is allowable as a business loss on the basis of the evidence produced by the assessee. The Tribunal proceeded on a premise that once a claim is made for deduction as bad debts, then the deduction can be granted only if the provision of Section 36 of the Act are satisfied and it is not open to an assessee to claim a deduction in the alternative under any other provision of the Act. In view of the above, we are not making any observation with regard to whether the claim of the assessee on merits is allowable as a business loss. We are only examining the issue posed for us viz. that when the claim made for bad debts is not satisfied, could it be considered as a allowable business loss.
Section 28 of the Act imposes a charge on the profits or gains of business or profession. The expression "Profits and gains of business or profession" is to be understood in its ordinary commercial meaning and the same does not mean total receipts. What has to brought to tax is the net amount earned by carrying on a profession or a business which necessarily requires deducting expenses and losses incurred in carrying on business or profession. The Supreme Court in the matter of Badridas Daga v. Commissioner of Income Tax, reported in 34 ITR page 10, has held that in assessing the amount of profits and gains liable to tax, one must necessarily have regard to the accepted commercial practice that deduction of such expenses and losses is to be allowed, if it arises in carrying on business and is incidental to it.
On the basis of the aforesaid decisions, it can be concluded that even if the deduction is not allowable as bad debts, the Tribunal ought to have considered the assessee's claim for deduction as business loss. This is particularly so as there is no bar in claiming a loss as a business loss, if the same is incidental to carrying on of a business.
The fact that condition of bad debts were not satisfied by the assessee would not prevent him from claiming deduction as a business loss incurred in the course of carrying on business as share broker.
In fact this court in the matter of Commissioner of Income Tax v. R.B. Rungta & Co.
(Supra) upheld the finding of the Tribunal that the loss could be allowed on general principles governing computation of profits under Section 10 of the Indian Income Tax Act, 1922 which is similar/identical to section 28 of the Act. The revenue in that case urged that the assessee having claimed deduction as a bad debt the benefit of the general principle of law that all expenditure incurred in carrying on the business must be deducted to arrive at a profit cannot be extended. This submission was negatived by this- court and it was held that even where the debt is not held to be allowable as bad debts yet the same would, be allowable as a deduction as a revenue loss in computing profits of the business under Section 10(1) of the Indian Income Tax Act, 1922.
In view of the above, the question as referred to us is answered in the affirmative i.e. in favour of the assesssee and against the respondent..."
The Hon'ble High Court of Delhi in the case of CIT vs. Citicorp Maruti Finance Ltd. in and ITA No. 1714/2010 dated 09.11.2010 held as under:-
1. Following questions of law are proposed in this appeal:-
“(i) Whether ITAT was correct in law in allowing loss of Rs. 1,56,04,644/- to the assessee on sale of repossessed assets u/s 36(1) (vii) r/w Section 36 (2) of the Act?
(ii) Whether assessee had satisfied the conditions as prescribed in Section 36(2) of the Act so as to 19 allow deduction of loss of Rs. 1.56 crore u/s 36 (1) (vii) of the Act.?
(iii) Whether loss on sale of repossessed assets is a capital loss or it is a bad debt allowable u/s 36(1) (vii) R/W Section 36 (2) of the Act?
(iv) Whether ITAT was correct in law in allowing depreciation@ 60% to the assessee on computer acce3ssories and peripherals like printers etc.?
(v) Whether order- passed by ITAT is perverse in law and on facts?"
2. These questions primarily raise two issues which can be summarized as under:-
(1) The respondent assessee is in the business of financing automobile cars/lease finance etc.
Various persons to whom this finance was given were the defaulters and the cars financed were repossessed by the assessee. After repossessing, those cars were sold to third persons. Money 20 realized on the sale. of those cars were much less the amount outstanding and payable by the debtors to whom the cars were given on lease rentals. In this way, the assessee claimed loss of Rs. 1,56,04,644/- as bad debt and allowable under Section 36 (1) (vii) of the of the Income- Tax Act. The Assessing Officer, however, refused to allow the said claim on the ground that these repossessed vehicles cannot be construed as stock-in-trade. He relied upon the judgment of Allahabad High Court in the case of Motor & General Sales Pvt. Ltd Vs. CIT, 226 ITR 137 in taking the aforesaid view. The CIT(A), however, reversed this order of the Assessing Officer holding that the claim was covered by Section 36 (1) (vii) read with Section 36 (2) of the Act. He was also of the view that it was not a case of trading loss under Section 28 of the Act. According to him, on the facts of this case, judgment of Calcutta High Court in the case of A. W. Figgies & Co. Pvt. Ltd. 254 ITR 63 was directly applicable.
The ITAT has affirmed the aforesaid view.
(2) The assessee had also claimed depreciation at the rate of 60% of computers accessories and peripherals purchased by the assessee during this year. The Assessing Officer, however, allowed the depreciation at the rate of 25%. The CIT(A) reversed this part of the order of the Assessing Officer holding that on computer accessories 60% depreciation was allowable under the Act. This order is also upheld by the Tribunal.
3. In so far as second issue is concerned, it should not be disputed by the learned Counsel for the Revenue that this issue is now settled by the judgment of this Court in the case of Commissioner of Income-Tax Vs. BSES Yamuna Powers Ltd. (ITA 1267/2010 decided on 31.8.2010), holding that on computers and peripherals, depreciation at the rate of 60% is allowable.
4. Wherein it had been held by the Court that deduction could not be allowed to the assessee, when the assessee had taken the possession of vehicles on the default committed by the borrowers and it had merely revalued such assets.
The Assessing Officer took a view that it has been held by the High Court that as the assessee remains the owner and as such there arises no question of revaluation of assets and as such an assessee is not entitled to claim the loss on mere revaluation of assets u/s 36(1) (vii) read with section 36(2) of the Act. The CIT (A), however, took the view that the facts of the instant case are distinguishable and the aforesaid judgment of Allahabad High Court has no application.
According to him, the assessee is entitled to the deduction of the amount of "bad debts written off' by it, in the year, when it became irrecoverable, since the repossessed assets were sold and was not a case of mere revaluation of the assets leased and were taken merely possession thereof.
In holding so, he relied upon the following decisions.,
CIT Vs. Morgan Securities Credit Ltd. 292 ITR 339 (Del).
Auto Meter Ltd. 210 CTR 339
3. Poysha Oxygen (P) Ltd. Vs. Asst. CIT (2008) 19 SOT 711 (Del)
5. The CIT (A) noted that, the assessee being non-banking Financial Company (NBFC) is in the business of money lending giving finance for purchase of vehicle under hire purchase Scheme.
He further noted that the owner of the vehicle is the purchaser, and appellant is the lender of money, which itself is a distinguishable factor, as the facts before the High Court of Allahabad in the case of M/s Motor General & Sales Pvt. Ltd. reported in 226 IT 137, as is relied by the Assessing Officer in his order were different. In that case the assessee had merely revalued the assets, whereas the assessee in the instant case had also sold the same and did not claim the loss on mere revaluation of repossessed assets as was the situation in the case before the Allahabad High Court.
6. We find from the order of CIT (A) that there is a detailed discussion on this aspect in para 1.3 of his order where following admitted facts are taken note of:-
i) There is no dispute that the appellant is a NBFC and is in the business of money lending giving finance for purchase of vehicle under hire purchase scheme. The owner of the vehicle is the purchaser and appellant is only lender of money. ii) I have gone through the modus-operandi of transaction and the model of entries passed in connection with the transaction starting with the finance and its logical end. From perusal of the entries it is abundantly clear that it is clearly cut case of write off of Bad Debts. Although the appellant company has used the nomenclature as Loss on Sale of Reprocessed Assets" as provided under NBFC norms but the fact of the matter is that it is a "write off of bad debts". When the customer makes default in payment of loan the vehicle is reprocessed and sold. The amount realized on sale is credited to the customer a/c and balance left in the account of customer is written off as "Loss on Sale of Reprocessed Assets" which is nothing a write off f Bad Debts.
Nomenclature does not change the real character of the transaction. The court have invariably held that nomenclature given to the transaction and the treatment given to expenditure in particulars manner or the accounting entries does not change the real character of transaction and are not determinative and decisive for tax purpose. The claim of the assessee should be decided as per 254 ITR 503 (CI.) and Kedar Nath Jute Manufacturing Co. 82 ITR SC."
7. The CIT (A) thereafter applied the provisions of Section 36 (1) (vii) and 36 (2) of the Act on the aforesaid facts. The case was fully covered by these provisions. Relevant portion of section 36 (2) of the Act provides as under:-
"in making any deduction for a bad debt or part thereof, the following provisions shall apply- i)"No such deduction shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year n which the amount of such debt or part thereof is written off or of an earlier previous year, or represents money lent in the ordinary course of the business of banking or money- lending which is carried on by the assessee….”.
8. From the aforesaid it becomes clear that the CIT (A) was right in his conclusion. We are also of the view that the CIT (A) as well as ITAT rightly held that the judgment of Allahabad High Court in Motor & General Sales Pvt. Ltd (supra) was not applicable to the facts of this case.
9. On the other hand, the facts were identical in A.
W.Figgies case (supra) and the judgment passed by the Calcutta High Court in that case is applicable here. In that case the Court held that the amount advanced by the assessee during the course of business could not be recovered would be treated as bad debt allowable under Section 36 (2) of the Act.
10. We thus are of the opinion that no question of law arises for determination and this appeal is dismissed accordingly."
The expression "profits and gains of business or profession" is to be understood in its ordinary commercial meaning. What has to be brought to tax is the net amount earned by carrying on a profession or a business which necessarily requires deducting expenses and losses incurred in carrying on business or profession. The Hon'ble Apex Court in the case of Badridas Daga v. Commissioner of Income Tax, reported in 34 ITR 10, has held that in assessing the amount of profits and gains liable to tax, one must necessarily have regard to the accepted commercial practice that deduction of such expenses and losses is to be allowed, if it arises in carrying on business and is incidental to it. There is no dispute that the appellant is a NBFC and is in the business of money lending giving finance for purchase of vehicles under hire purchase scheme. The owner of the vehicle is the purchaser and the appellant is the lender. From the perusal of books entries, it is clear that the loss is on account of bad debts. The loss on account of sale of repossessed assets is nothing but a write off of bad debts. The nomenclature cannot change the real character of the transaction. The appellant debited the loss to revenue account as it is incidental to business. Under no stretch of imagination, this loss can be considered as capital in nature as done by the Assessing Officer. On the basis of the aforesaid decisions, it can be concluded that loss on sale of repossessed assets can be considered for deduction as business loss. This is particularly so as there is no bar in claiming a loss as a business loss, if the same is incidental to carrying on of a business. Under the circumstances, it is held that the assessee was duly entitled to deduction of a sum of Rs. 1,12,38,236/- on account of business loss.
In the result, the appeal of the appellant is allowed.”
8.2 After going through the aforesaid findings, we are of the considered opinion that the issue in dispute is squarely covered by the decisions of the Hon’ble High Court of Delhi as well as Hon’ble High Court of Bombay as detailed in Ld. CIT(A)’s order.
Therefore, respectfully following the said precedents of the Hon’ble High Court of Delhi in the case of CIT vs. Citicorp Maruti Finance Ltd. in & 1714/2010 dated 9.11.2010 and Hon’ble Bombay High Court decision in the case of Harshad J Choksi vs. CIT, Bombay passed in ITA No. 43 of 1997 dated 14.8.2012, we do not find any infirmity, illegality or any other valid reason to interfere with the well reasoned order passed by the Ld. CIT(A), hence, we uphold the same and dismiss the Appeal filed by the Revenue.
In the result, the appeal filed by the Revenue stands dismissed.
Order pronounced in the Open Court on 02/06/2016.