DCIT, CIRCLE-12(1) vs. G.E. CAPITAL TRANSPORTATION FINANCIAL SERVICES LTD.,,

The ground of appeal in assessee’s appeal urged before us is as follows:-

Ground No. 1 of the assessee’s appeal is general in nature, hence not discussed. Ground No. 2(a), 2(b) and 2(c) are withdrawn by the assessee. Ground No. 3(a), 3(b), 3(c) and 3(e) are incorporated in Ground No. 3(d) to the extent of Rs. 1,04,37,525/-, as the assessee has withdrawn the amount of Rs.18,95,714/- which is classified as investment and does not fall into category of stock in trade. Ground No. 4(a) and 4(b) are also withdrawn by the assessee.

The assessee company is Non-banking Finance Company engaged in the business of leasing, hire purchase and Finance of Vehicles. During the year, total receipts were Rs.29.05 crore as against Rs.70.03 crores in preceding year. As per profit and loss account, there was a loss of Rs.6.79 crores as against loss of Rs.37.37 crore in preceding year.

As regards to Ground No. 1 of the Revenue’s appeal, the factual matrix are that the assessee has claimed deduction of Rs.1,70,83,682/- in respect of losses on re-possessed stock which were given on hire purchase, but was repossessed by the assessee because the borrowers defaulted on the installments. The Assessing Officer took the view that in light of the decision of Allahabad High Court in case of Motor and General Sales Pvt. Ltd. Vs. CIT (1997) 226 ITR 137 and for the reasons given in the assessment order of Assessment Year 95-96, the loss on repossessed hire-purchase assets is not allowable as deduction because it is basically of the nature of capital loss/business loss.

The CIT(A) held that the real business of the company is not one simply of giving loans or money lending. In the business of vehicle finance/sale on hire purchase, the business of the company takes a much larger dimension because it covers not only financing but also repossession and resale-the latter being an integral part of the business of the company. The business of the company is not only restricted to financing and the related activity of re-possession but re- sale is a part of its regular business activity. The trading profits of the company are enmeshed in the entire transaction that may be spread over a few years. Since the profits are enmeshed in the overall transaction, the re-possession and re-sale is also an integral part of the transaction. Consequently, any loss or profit on re-possession or re-sale shall be to trading account. Accordingly, the CIT(A) held that the loss on re-sale of re-possessed vehicles is a revenue loss and directed the A.O. to treat the said loss as a revenue loss in respect of the re- possessed vehicles that have been re-sold.

The DR submitted that the impugned loss cannot be treated as Revenue loss and the provisions of the Income Tax Act should be taken into account and not that of accounting practice followed. He has also relied on AO’s order at Para 5 wherein the Assessing Officer observed that the assessee has not “Elaborated upon how the estimated realizable value is being arrived at nor the method of computation of estimated value has been furnished. This implies the loss figure of Rs.1,70,83,682/- is not actual loss of the assessee but also includes notional loss claimed by the assessee who have occurred to it. Notional loss cannot be allowed as expense in the profit and loss account of the assessee as the same is not an ascertained expenditure.”

The AR submitted that the loss does not amount to capital loss as in the previous years the similar ground was decided in favour of assessee’s own case by the CIT(A) XV for the A. Ys 1992-93, 1993-94, 1994-95, 1995-96 1997-98, 1998-99. The AR further submitted that 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 assets. The loss on sale of repossessed asset occurs when the asset recovered from sale, falls short of the value of the repossessed assets. The loss on sale of repossessed stock was incidental and inherent part of the business of hire purchase. The loss incurred on disposal of repossessed hire purchase assets represents the installments, which could not be recovered from parties to whom the goods were sold on hire purchase basis less the sale proceeds recovered. Therefore, the amount written off and claimed by the company in any case was allowable as revenue expenses under the Income Tax Act. For the said submissions. The AR furnished the assessment orders of the assessee company for the Assessment Years 1995-96 & 1999-2000 wherein the claim of the assessee was allowed by the Tribunal. He also furnished the copy of Hon’ble Delhi High Court’s order in case of Commissioner of Income Tax Vs. City Corporate Multi Finance Ltd wherein the Hon’ble High Court has stated in Para 6 as under:-

After perusal of the records and the submissions of the both the Counsels, it is noticed that the claim of the assessee for the said receipts should be treated as revenue receipts is proper as re-possessed vehicles/ assets are treated as stock-in-trade throughout the earlier years and the same was accepted by the Department in the earlier years. Thus Ld. CIT(A) has taken a correct view and directed the AO to treat the said loss as revenue loss. In light of this, the A.O. is directed to treat the said loss as a revenue loss in respect of the re-possessed vehicles that have been resold.

Hence, the ground No. 1 of the Department’s appeal is dismissed.

In respect of second issue that is Ground 3 (d) of the assessee’s appeal, the facts in brief are that the assessee company is also engaged in bills discounting activity, dealing in all kinds of securities including shares, the debentures, commercial papers, Government Securities. Vide Clause III (B) (3) of the Memorandum of Association of the company the object of the company is to undertake the activity relating to dealing of shares and securities. The assessing officer observed that in the profit and loss account of the assessee, loss on sale of investment amounting to Rs.1,23,33,239/- has been claimed by the assessee. The assessee’s investment constitute capital asset, therefore, any loss on account of sale of capital asset cannot be claimed as a deduction in the profit and loss account of the assessee. The assessee has submitted the details of the loss on sale of investment which includes Rs.18,95,714/- as investment loss and raised as loss on securities and other investment shown as stock-in- trade in the books of the assessee. The assessee has relied upon the decision of Hon’ble Supreme Court in the case of Investment Ltd. Vs. CIT 77 ITR 533, 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 Assessing Officer further held that loss which has arisen is on account of shares and that on the government securities held for a very long time by treating part of it as stock-in-trade, the assessee was not entitled to claim the loss on stock- in-trade.

The Ld. CIT(A) held that each year to be considered separately, the assessment process requires fresh application of the individual’s mind to each year as he/she interprets the law. Therefore, it is always possible that two A.O.’s would come to different conclusions on the same set of facts and accordingly the CIT(A) uphold the orders of the A.O.

At the time of the arguments, the AR submitted that investment loss of Rs.18,95,714/- is not by the assessee as the same amount to two portfolios, therefore, he vested his argument only to the extent of loss on securities and other instruments shown as stock-in-trade in the books of the assessee amounting to Rs. 2,04,37,525/-. The AR further stated that the company is a non-banking finance company (NBFC) and is governed by the directions issued by the RBI and every NBFC is mandatorily required to follow those directions, in the term of the directions issued by the RBI, every NBFC is required to maintain liquid assets including investment in shares, stocks, government securities etc. These investments, therefore, are made in the ordinary course of the business of the assessee. The AR relied upon the following decisions:-

The assessee also relied upon the case of ACIT VS. Shri Ram Transport Finance Company (2011) 9 ITR (Tri.) 543 (Chennai), wherein the same issue has been raised and the Hon’ble Tribunal hold that the RBI notifies the percentage of the outstanding deposit which has to be invested in approved securities from time to time. The percentage notified is 15 per cent. Regulations regarding custody of securities etc. are incorporated in NBFC Public Deposits (RBI) Directions-1998. It is thus clear that investment in securities is a statutory direction which has to be necessarily complied with by the assessee, as it has public deposits. It is immaterial that they are shown under the classification “investment”. True nature of the investment be taken into consideration. The decision of the Hon’ble Supreme Court in the case of CIT VS. Cocanada Radheswami Bank Ltd. [1965] 57 ITR 306 (SC) and the other decisions are also in support of the said view that the assessee is entitled to the claim of diminution in the value of securities which are held for the purpose of its business.

The Ld. DR submitted that para 6 of the AO’s order clearly mentions that two portfolios has been kept by the assessee company and the business loss should be taken into account in respect of Section 73 of the Income Tax Act because it is speculative loss.

After perusal of the records and the arguments of both the sides it can be seen that the contentions of the DR in respect of Section 73 of the Act cannot be sustained as the same stand was not taken by the Assessing Officer while passing the Assessment Order and the said plea was not raised before the CIT(A) as well. The Hon’ble Supreme Court in case of Cocanada Radheswami Bank Ltd. (supra) clearly held that the income from the securities which formed part of the assessee’s trading assets was part of its income derived from the business and, therefore, the loss incurred in the business in the earlier year could be set off against that income in the succeeding year. As per guidelines issued by the RBI, every NBFC is required to maintain liquid assets including investment in shares, stocks, government securities etc. and thus the assessee has made these investments in the ordinary course of its business. Therefore, loss in the said investment relates to the business. Thus, the ground no. 3(d) of the assessee’s appeal is allowed.

In result, appeals are disposed off accordingly.