DCIT, NEW DELHI vs. M/S. ESCORTS FINANCE LTD., FARIDABAD

PER H.S. SIDHU : JM

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.

ITA NO.6673/DEL/2013

“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.

amend any ground of appeal raised above at the time

of hearing."

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

ITA NO.6673/DEL/2013

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.

appealed before the CIT(A), who vide his impugned order dated

05.9.2013 has allowed the appeal of the Assessee.

Revenue is in appeal before the Tribunal.

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.

ITA NO.6673/DEL/2013

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 ITA No.

1712 & 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.

ITA NO.6673/DEL/2013

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.

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.

ITA NO.6673/DEL/2013

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

ITA NO.6673/DEL/2013

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 ITA No.

43 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?"

ITA NO.6673/DEL/2013

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.

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

ITA NO.6673/DEL/2013

that the amount must be offered to tax in an

earlier previous year.

(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.

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

ITA NO.6673/DEL/2013

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.

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

ITA NO.6673/DEL/2013

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.

ITA NO.6673/DEL/2013

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.

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

ITA NO.6673/DEL/2013

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.

the submission of Mr. Shah for the assessee that

ITA NO.6673/DEL/2013

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

ITA NO.6673/DEL/2013

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.

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

ITA NO.6673/DEL/2013

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.

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

ITA NO.6673/DEL/2013

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.

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

ITA NO.6673/DEL/2013

from claiming deduction as a business loss

incurred in the course of carrying on business as

share broker.

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

ITA NO.6673/DEL/2013

revenue loss in computing profits of the business

under Section 10(1) of the Indian Income Tax Act,

1922.

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 ITA No. 1712/2010

and ITA No. 1714/2010 dated 09.11.2010 held as

under:-

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

ITA NO.6673/DEL/2013

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?"

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

ITA NO.6673/DEL/2013

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

ITA NO.6673/DEL/2013

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.

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

ITA NO.6673/DEL/2013

31.8.2010), holding that on computers and

peripherals, depreciation at the rate of 60% is

allowable.

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

ITA NO.6673/DEL/2013

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.,

339 (Del).

SOT 711 (Del)

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

ITA NO.6673/DEL/2013

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.

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

ITA NO.6673/DEL/2013

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

ITA NO.6673/DEL/2013

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

provision of law ( See case of Bur Paints India Ltd.

254 ITR 503 (CI.) and Kedar Nath Jute

Manufacturing Co. 82 ITR SC."

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-

ITA NO.6673/DEL/2013

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….”.

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.

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

ITA NO.6673/DEL/2013

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.

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

ITA NO.6673/DEL/2013

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.

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

ITA NO.6673/DEL/2013

Hon’ble High Court of Delhi in the case of CIT vs. Citicorp Maruti

Finance Ltd. in ITA No. 1712 & 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.

Order pronounced in the Open Court on 02/06/2016.

SD/- SD/- [O.P. KANT] [H.S. SIDHU] ACCOUNTANT MEMBER JUDICIAL MEMBER Date 02/06/2016

SRBHATNAGAR Copy forwarded to: - 1. Appellant 2. Respondent 3. CIT 4. CIT (A) 5. DR, ITAT TRUE COPY By Order,

Assistant Registrar, ITAT, Delhi Benches 31