By TIOL News Service

CHENNAI, MAY 09, 2017: THE ISSUE BEFORE THE COURT IS - Whether loss suffered by a dealer on account of sale of foreign cars can be treated as capital loss, if it did not form part of block of assets and no depreciation was granted on the same. NO is the verdict.

Facts of the case:

The assessee is an individual carrying on business as a shipping agent. During the A.Ys 1999-00 and 2000-01, the assessee had sold motor cars at a cumulative loss of Rs.51,6,108/-. During assessment, the AO adopted the view that the loss would be ‘capital’ in nature liable to be set off only against capital gains. On the other hand, the stand of assessee was to the effect that the loss was ‘business’ in nature, liable to be set off against business profits. While initially a stand was taken to the effect that the assessee was also engaged in the trading of cars, it was not pursued. The assessee contended that the provisions of sub-clause (iii) of Section 32(1) permitted a write off of the loss arising from the sale of foreign cars to the extent to which such sale consideration falls short of the written down value of the asset. The AO did not agree with the said contention, applying the provisions of section 50 and concluding that the loss arising from the sale of foreign cars was a capital loss. On appeal, the CIT(A) referred to the definition of WDV u/s 43(6) and noted that the actual cost of an asset, would be the amount the asset actually cost, less depreciation actually allowed under the act. Upon examining the provisions of section 50, the CIT(A) concluded that it would not be applicable to the transaction in question. On further appeal, the ITAT reversed the order of CIT(A) by merely holding that the loss could not be treated as a business loss in view of the fact that the assessee was not a dealer in foreign cars.

On appeal, the HC held that,

++ it is to be noted that Section 50 of the Act invoked by the Revenue applies to a capital asset forming part of a block of assets, in respect of which, depreciation has been allowed. In the present case, the foreign cars do not form part of a block of assets and, admittedly, have not been granted depreciation in so far as depreciation was not allowable in respect of foreign cars for the relevant period. The provisions of section 50 of the Act are thus inapplicable to the present case;

++ the provisions of section 32(1)(iii) is applicable to the assets in question, being foreign cars used in the business of the assessee in terms of section 32 (1)(i). The assessee sold the foreign cars and the sale consideration resulted in a loss of an amount of Rs.51,6,108/-. Such loss has been written off in the books of accounts and claimed as a business loss. The extent of depreciation that could have been claimed would be the amount, by which the sale consideration falls short of the written down value. In the present case, Rs.51,6,108/-, the written down value as defined u/s 43(6), would mean actual cost less depreciation actually allowed. In the present case, since no depreciation was allowed, the written down value would equal the actual cost. The loss suffered by the assessee on the sale of foreign is quantified at a figure of Rs.51,6,108/-. The only question that remains is to determine the nature of loss. In view of the categoric finding of the Commissioner of Income Tax (Appeals) that has attained finality, to the effect that the foreign cars were utilized in the business of the assessee, the loss arising out of their sale would be liable to be categorized as a business loss.

(See 2017-TIOL-862-HC-MAD-IT)